On Monday morning you sell one June T-bond futures contract at 97:27, that is, for
$97,843.75. The contract’s face value is $100,000. The initial margin requirement is
$2,700, and the maintenance margin requirement is $2,000 per contract. Use the
following price data to answer the following questions.
The cumulative
rate of return on
your investment
after Wednesday
is a ____.
A. 79.9% loss
B. 2.6% loss
C. 33% gain
D. 53.9% loss
Both investors and gamblers take on risk. The difference between an investor and a
gambler is that an investor _______.
A. is normally risk neutral
B. requires a risk premium to take on the risk
C. knows he or she will not lose money
D. knows the outcomes at the beginning of the holding period
A passive benchmark portfolio is:
I. A portfolio in which the asset allocation across broad asset classes is neutral and not
determined by forecasts of performance of the different asset classes II. One in which
an indexed portfolio is held within each asset class
III. Often called the bogey
A. I only
B. I and III only
C. II and III only
D. I, II, and III
Purchases of new issues of stock take place _________.
A. at the desk of the Fed
B. in the primary market
C. in the secondary market
D. in the money markets
Contributions to a traditional retirement plan are __________, and contributions to a
Roth retirement plan are ____________.
A. not tax deductible; not tax deductible
B. tax deductible; tax deductible
C. tax deductible; not tax deductible
D. not tax deductible; tax deductible
In the context of a futures contract, the basis is defined as ______________.
A. the futures price minus the spot price
B. the spot price minus the futures price
C. the futures price minus the initial margin
D. the profit on the futures contract
Cash cows are typically found in the _________ stage of the industry life cycle.
A. start-up
B. consolidation
C. maturity
D. relative decline
Which of the following mortgage scenarios will benefit the homeowner the most?
A. adjustable rate mortgage when interest rate increases.
B. fixed rate mortgage when interest rates falls.
C. fixed rate mortgage when interest rate rises.
D. None of these options, as the banker’s interest will always be protected.
New manufacturers continue to enter the market.
Characteristics ____ would be typical of an industry that is in the consolidation stage.
A. 6 and 7
B. 1 and 4
C. 5 and 6
D. 2 and 8
Disadvantages of ETFs include all of the following except
A. investors incur a bid-ask spread when purchasing.
B. investors must pay a broker fee when purchasing.
C. prices are only quoted once each day.
D. prices can depart from NAV at times.
A __________ is a private investment pool open only to wealthy or institutional
investors that is exempt from SEC regulation and can therefore pursue more speculative
policies than mutual funds.
A. commingled pool
B. unit trust
C. hedge fund
D. money market fund
Which of the following are true concerning short sales of exchange-listed stocks?
I. Proceeds from the short sale must be kept on deposit with the broker.
II. Short-sellers must post margin with their broker to cover potential losses on the
position.
III. The short-seller earns interest on any cash deposited with the broker that is used to
meet the margin requirement.
A. I only
B. I and III only
C. I and II only
D. I, II, and III
A U.S. insurance firm must pay €75,000 in 6 months. The spot exchange rate is $1.32
per euro, and in 6 months the exchange rate is expected to be $1.35. The 6-month
forward rate is currently $1.36 per euro. If the insurer’s goal is to limit its risk, should
the insurer hedge this transaction? If so how?
A. The insurer need not hedge because the expected exchange rate move will be
favorable.
B. The insurer should hedge by buying the euro forward even though this will cost more
than the expected cost of not hedging.
C. The insurer should hedge by selling the euro forward because this will cost less than
the expected cost of not hedging.
D. The insurer should hedge by buying the euro forward even though this will cost less
than the expected cost of not hedging.
Consider the following limit order book of a specialist. The last trade in the stock
occurred at a price of $40. If a market buy order for 100 shares comes in, at what price
will it be filled?
A. $39.75
B. $40.25
C. $40.375
D. $40.25 or less
Another term for EVA is ______.
A. net income
B. operating income
C. residual income
D. market-based income
Which type of insurance product gives policyholders a fixed death benefit and a
selection of investment alternatives?
A. term
B. variable life
C. universal life
D. whole life
Firm A has a stock price of $35, and 60% of the value of the stock is in the form of
PVGO. Firm B also has a stock price of $35, but only 20% of the value of stock B is in
the form of PVGO. We know that:
I. Stock A will give us a higher return than Stock B.
II. An investment in stock A is probably riskier than an investment in stock B.
III. Stock A has higher forecast earnings growth than stock B.
A. I only
B. I and II only
C. II and III only
D. I, II, and III
Each of two stocks, A and B, is expected to pay a dividend of $7 in the upcoming year.
The expected growth rate of dividends is 6% for both stocks. You require a return of
10% on stock A and a return of 12% on stock B. Using the constant-growth DDM, the
intrinsic value of stock A _________.
A. will be higher than the intrinsic value of stock B
B. will be the same as the intrinsic value of stock B
C. will be less than the intrinsic value of stock B
D. The answer cannot be determined from the information given.
You consider buying a share of stock at a price of $25. The stock is expected to pay a
dividend of $1.50 next year, and your advisory service tells you that you can expect to
sell the stock in 1 year for $28. The stock’s beta is 1.1, rf is 6%, and E[rm] = 16%. What
is the stock’s abnormal return?
A. 1%
B. 2%
C. -1%
D. -2%
Caribou Gold Mining Corporation is expected to pay a dividend of $4 in the upcoming
year. Dividends are expected to decline at the rate of 3% per year. The risk-free rate of
return is 5%, and the expected return on the market portfolio is 13%. The stock of
Caribou Gold Mining Corporation has a beta of .5. Using the CAPM, the return you
should require on the stock is _________.
A. 2%
B. 5%
C. 8%
D. 9%
According to the 2014 Mutual Fund Fact Book, _______ of total assets were in taxable
money market funds and _______ were tax-exempt money market funds.
A. 35%; 14%
B. 12.3%; 75%
C. 16.3%; 1.8%
D. 5%; 47%
To create a portfolio with a duration of 4 years using a 5-year zero-coupon bond and a
3-year 8% annual coupon bond with a yield to maturity of 10%, one would have to
invest ________ of the portfolio value in the zero-coupon bond.
A. 50%
B. 55%
C. 60%
D. 75%
Given a stock price of $18, an exercise price of $20, and an interest rate of 7%, what are
the intrinsic values which will occur for a one-period binomial option model if the stock
price goes up to $23 or down to $16?
A.$3 and $0
B.$3 and -$4
C.$4 and $3
D.$4 and $2
Consider the liquidity preference theory of the term structure of interest rates. On
average, one would expect investors to require _________.
A. a higher yield on short-term bonds than on long-term bonds
B. a higher yield on long-term bonds than on short-term bonds
C. the same yield on both short-term bonds and long-term bonds
D. none of these options (The liquidity preference theory cannot be used to make any of
the other statements.)
Which of the following is not a characteristic of a money market instrument?
A. liquidity
B. marketability
C. low risk
D. maturity greater than 1 year
What is the expected return for a portfolio
with a beta of .5?
A. 5%
B. 7.5%
C. 12.5%
D. 15%
Which of the following reforms were not included in 2014 regulations regarding money
market funds?
A. Institutional funds will “float” the prices of their shares.
B. Funds can limit redemptions or impose a 2% fee if assets fall by more than 30%.
C. increased disclosure of assets’ values and liquidity
D. All of the options were included.
Total capitalization of corporate equity in the United States in 2011 was about _______
trillion.
A. $13.9
B. $23.4
C. $30.2
D. $45.5
A stock is trading at $50. You believe there is a 60% chance the price of the stock will
increase by 10% over the next 3 months. You believe there is a 30% chance the stock
will drop by 5%, and you think there is only a 10% chance of a major drop in price of
20%. At-the-money 3-month puts are available at a cost of $650 per contract. What is
the expected dollar profit for a writer of a naked put at the end of 3 months?
A. $300
B. $200
C. $475
D. $0
Suppose you purchase one Texas Insurance August 75 call contract quoted at $8.50 and
write one Texas Insurance August 80 call contract quoted at $6. If, at expiration, the
price of a share of Texas Instruments stock is $79, your profit would be _________.
A. $150
B. $400
C. $600
D. $1,850
The
cumulative
breadth for
the first 2
days is ___.
A. -240
B. -50
C. 110
D. 250
A 1-year oil futures contract is selling for $74.50. Spot oil prices are $68, and the 1-year
risk-free rate is 3.25%.
The arbitrage profit implied by these prices is _____________.
A. $6.50
B. $5.44
C. $4.29
D. $3.25
The present exchange rate is C$1 = US$.77. The 1-year futures rate is C$1 = US$.73.
The yield on a 1-year U.S. bill is 4%. A yield of __________ on a 1-year Canadian bill
will make investors indifferent between investing in the U.S. bill and the Canadian bill.
A. 9.7%
B. 2.9%
C. 2.8%
D. 2%
Which one of the following is a true statement?
A. Dividends on preferred stocks are tax-deductible to individual investors but not to
corporate investors.
B. Common dividends cannot be paid if preferred dividends are in arrears on
cumulative preferred stock.
C. Preferred stockholders have voting power.
D. Investors can sue managers for nonpayment of preferred dividends.
A short hedge is a simultaneous __________ position in the spot market and a
__________ position in the futures market.
A. long; long
B. long; short
C. short; long
D. short; short