The decline in the value of the dollar relative to the yen will have what impact on the
purchase of U.S. goods in Japan?
A. U.S. goods will increase in cost, and Japan will import more.
B. U.S. goods will increase in cost, and Japan will import less.
C. U.S. goods will decrease in cost, and Japan will import more.
D. U.S. goods will increase in cost, and Japan will export less.
__________ portfolio managers experience streaks of abnormal returns that are hard to
label as lucky outcomes, and _________ anomalies in realized returns have been
sufficiently persistent that portfolio managers could use them to beat a passive strategy
over prolonged periods.
A. No; no
B. No; some
C. Some; no
D. Some; some
Which of the following correlation coefficients will produce the least diversification
benefit?
A. -.6
B. -.3
C. 0
D. .8
In a simple CAPM world which of the following statements is (are) correct?
I. All investors will choose to hold the market portfolio, which includes all risky assets
in the world.
II. Investors’ complete portfolio will vary depending on their risk aversion.
III. The return per unit of risk will be identical for all individual assets.
IV. The market portfolio will be on the efficient frontier, and it will be the optimal risky
portfolio.
A. I, II, and III only
B. II, III, and IV only
C. I, III, and IV only
D. I, II, III, and IV
A mutual fund has $50 million in assets at the beginning of the year and 1 million
shares outstanding throughout the year. Throughout the year assets grow at 12%. The
fund imposes a 12b-1 fee on all shares equal to 1%. The fee is imposed on year-end
asset values. If there are no distributions, what is the end-of-year NAV for the fund?
A. $50
B. $55.44
C. $56.12
D. $54.55
You find that the annual Sharpe ratio for stock A returns is equal to 1.8. For a 3-year
holding period, the Sharpe ratio would equal _______.
A. 1.8
B. 2.48
C. 3.12
D. 5.49
An investor invests 70% of her wealth in a risky asset with an expected rate of return of
15% and a variance of 5%, and she puts 30% in a Treasury bill that pays 5%. Her
portfolio’s expected rate of return and standard deviation are __________ and
__________ respectively.
A. 10%; 6.7%
B. 12%; 22.4%
C. 12%; 15.7%
D. 10%; 35%
Market economists all predict a rise in interest rates. An astute bond manager wishing to
maximize her capital gain might employ which strategy?
A. Switch from low-duration to high-duration bonds.
B. Switch from high-duration to low-duration bonds.
C. Switch from high-grade to low-grade bonds.
D. Switch from low-coupon to high-coupon bonds.
One of the main problems with the arbitrage pricing theory is __________.
A. its use of several factors instead of a single market index to explain the risk-return
relationship
B. the introduction of nonsystematic risk as a key factor in the risk-return relationship
C. that the APT requires an even larger number of unrealistic assumptions than does the
CAPM
D. the model fails to identify the key macroeconomic variables in the risk-return
relationship
Suppose the 1-year risk-free rate of return in the United States is 5% and the 1-year
risk-free rate of return in Britain is 8%. The current exchange rate is $1 = ₤.50. A 1-year
future exchange rate of __________ would make a U.S. investor indifferent between
investing in the U.S. security and investing in the British security.
A. ₤.5150
B. ₤.5142
C. ₤.5123
D. ₤.4859
Suppose the 6-month risk-free rate of return in the United States is 5%. The current
exchange rate is 1 pound = US$2.05. The 6-month forward rate is 1 pound = US$2. The
minimum yield on a 6-month risk-free security in Britain that would induce a U.S.
investor to invest in the British security is
________.
A. 5.06%
B. 6.74%
C. 8.48%
D. 10.13%
A T-bill quote sheet has 90-day T-bill quotes with a 4.92 bid and a 4.86 ask. If the bill
has a $10,000 face value, an investor could buy this bill for
_____.
A. $10,000
B. $9,878.50
C. $9,877
D. $9,880.16
A measure of the riskiness of an asset held in isolation is ____________.
A. beta
B. standard deviation
C. covariance
D. alpha
If the simple CAPM is valid and all portfolios are priced correctly, which of the
situations below is possible? Consider each situation independently, and assume the
risk-free rate is 5%.
A. Option A
B. Option B
C. Option C
D. Option D
Calculate the price of a European call option
using the Black Scholes model and the
following data: stock price = $56.80, exercise
price = $55, time to expiration = 15 days,
risk-free rate = 2.5%, standard deviation =
22%, dividend yield = 8%.
A. $1.49
B. $1.79
C. $2.04
D. $2.19
A family will retire in a few years. They have a high tax bracket and are concerned
about their after-tax rate of return. A meeting with their financial planner reveals that
they are primarily focused on safety of principal and will need a 6% to 8% average rate
of return on their portfolio. They desire a diversified portfolio, and liquidity is likely to
be a concern due to health reasons. Which of the following asset allocations seems to
best fit this family’s situation?
A. 10% money market; 50% intermediate-term bonds; 40% blue chip stocks, many with
high dividend yields
B. 0% money market; 60% intermediate-term bonds; 40% stocks
C. 10% money market; 30% intermediate-term bonds; 60% high-dividend-paying
stocks
D. 5% money market; 35% intermediate-term bonds; 60% stocks, most with low
dividends
A big increase in government spending is an example of a _________.
A. positive demand shock
B. positive supply shock
C. negative demand shock
D. negative supply shock
Just 2 months after you put money into an investment, its price falls 25%. Assuming
that none of the investment fundamentals have changed, which of the following actions
would evidence the greatest risk tolerance?
A. You sell to avoid further worry and buy something else.
B. You do nothing and wait for the investment to come back.
C. You buy more, thinking that if it was a good investment before, now it’s not only
good but cheap too.
D. You sue your financial adviser.
A speculator will often prefer to buy a futures contract rather than the underlying asset
because:
I. Gains in futures contracts can be larger due to leverage.
II. Transaction costs in futures are typically lower than those in spot markets.
III. Futures markets are often more liquid than the markets of the underlying
commodities.
A. I and II only
B. II and III only
C. I and III only
D. I, II, and III
Rose Hill Trading Company is expected to have EPS in the upcoming year of $8. The
expected ROE is 18%. An appropriate required return on the stock is 14%. If the firm
has a plowback ratio of 70%, its dividend in the upcoming year should be _________.
A. $1.12
B. $1.44
C. $2.40
D. $5.60
Security selection refers to _________.
A. choosing specific securities within each asset class
B. deciding how much to invest in each asset class
C. deciding how much to invest in the market portfolio versus the riskless asset
D. deciding how much to hedge
A convertible bond is deep in the money. This means the bond price will closely track
the __________.
A. straight debt value of the bond
B. conversion value of the bond
C. straight debt value of the bond minus the conversion value
D. straight debt value of the bond plus the conversion value
The capital asset pricing model was developed by _________.
A. Kenneth French
B. Stephen Ross
C. William Sharpe
D. Eugene Fama
If an investor does not diversify his portfolio and instead puts all of his money in one
stock, the appropriate measure of security risk for that investor is the ________.
A. stock’s standard deviation
B. variance of the market
C. stock’s beta
D. covariance with the market index
An order to buy or sell a security at the current price is a ______________.
A. limit order
B. market order
C. stop-loss order
D. stop-buy order
A portfolio generates an annual return of 13%, a beta of .7, and a standard deviation of
17%. The market index return is 14% and has a standard deviation of 21%. What is the
Treynor measure of the portfolio if the risk-free rate is 5%?
A. .1143
B. .1233
C. .1354
D. .1477
The correct measure of timing ability is ____________ for a portfolio manager who
correctly forecasts 55% of bull markets and 55% of bear markets.
A. -5%
B. 5%
C. 10%
D. 95%
Lifecycle Motorcycle Company is expected to pay a dividend in year 1 of $2, a
dividend in year 2 of $3, and a dividend in year 3 of $4. After year 3, dividends are
expected to grow at the rate of 7% per year. An appropriate required return for the stock
is 12%. Using the multistage DDM, the stock should be worth __________ today.
A. $63.80
B. $65.13
C. $67.95
D. $85.60
Currently, the Dow Jones Industrial Average is computed by _________.
A. adding the prices of 30 large “blue-chip” stocks and dividing by 30
B. calculating the total market value of the 30 firms in the index and dividing by 30
C. measuring the current total market value of the 30 stocks in the index relative to the
total value on the previous day
D. adding the prices of 30 large “blue-chip” stocks and dividing by a divisor adjusted
for stock splits and large stock dividends
Stock prices are _____ measures of firm value.
A. backward-looking
B. forward-looking
C. coincident
D. lagging
The NYSE Hybrid Market allows _____.
A. individuals to send orders directly to a specialist
B. individuals to send orders directly to an electronic system
C. brokers to send orders directly to a specialist
D. brokers to send orders either to an electronic system or to a specialist
TIPS offer investors inflation protection by ______________ by the inflation rate each
year.
A. increasing only the coupon rate
B. increasing only the par value
C. increasing both the par value and the coupon payment
D. increasing the promised yield to maturity
The U.S. income tax code is generally _____.
A. regressive
B. progressive
C. flat
D. peaked
Sharon decides to put $5,000 into her retirement plan at the age of 25. She will continue
to invest the same amount for a total of 6 years and then stop contributing. Assume 10%
annual return.
How much money will Sharon have in her retirement plan after 6 years?
A. $30,000
B. $35,575
C. $38,578
D. $41,451