A call option on Juniper Corp. stock with an exercise price of $75 and an expiration
date 1 year from now is worth $3 today. A put option on Juniper Corp. stock with an
exercise price of $75 and an expiration date 1 year from now is worth $2.50 today. The
risk-free rate of return is 8%, and Juniper Corp. pays no dividends. The stock should be
worth __________
today.
A. $69.73
B. $71.69
C. $73.12
D. $77.25
The current stock price of National Paper is $69, and the stock does not pay dividends.
The instantaneous risk-free rate of return is 10%. The instantaneous standard deviation
of National Paper’s stock is 25%. You want to purchase a put option on this stock with
an exercise price of $70 and an expiration date 73 days from now.
Using the Black-Scholes, the put option should be worth __________ today.
A. $1.50
B. $2.88
C. $2.55
D. $3.00
If the risk-free interest rate is rf and equals the fund’s benchmark, the portfolio’s net
asset value is S0, and the hedge fund manager incentive fee is 20% of profit beyond
that, the incentive fee is equivalent to receiving ______ call(s) with exercise price
________.
A. 2; S0
B. 1; S0(1 + rf)
C. 1.2; S0
D. .2; S0(1 + rf)
Many defined benefit pension plans have a target rate of return on investment that is
equal to the ____________.
A. firm’s return on equity
B. plan’s assumed actuarial rate of return
C. economic inflation rate because wages often increase with inflation
D. estimated stock market return
If you plan for a bequest for your children, your grandchildren, their children, and so
on, your planning horizon becomes _____.
A. equal to the life span of your children
B. 100 years, or your lifetime, whichever ends first
C. infinite
D. double what it would have been without the bequest
An investor can design a risky portfolio based on two stocks, A and B. The standard
deviation of return on stock A is 20%, while the standard deviation on stock B is 15%.
The correlation coefficient between the returns on A and B is 0%. The rate of return for
stocks A and B is 20 and 10 respectively. The expected return on the minimum-variance
portfolio is approximately _________.
A. 10%
B. 13.6%
C. 15%
D. 19.41%
A collateral trust bond is _______.
A. secured by other securities held by the firm
B. secured by equipment owned by the firm
C. secured by property owned by the firm
D. unsecured
You manage a hedge fund with $400 million in assets. Your fee structure provides for a
1% annual management fee with a 20% incentive on returns over an 8% benchmark. If
the fund value is $445 million at the end of the year, what is your fee?
A. $2,600,000
B. $4,000,000
C. $6,600,000
D. $8,400,000
Interior Airline is expected to pay a dividend of $3 in the upcoming year. Dividends are
expected to grow at the rate of 10% per year. The risk-free rate of return is 4%, and the
expected return on the market portfolio is 13%. The stock of Interior Airline has a beta
of 4. Using the constant-growth DDM, the intrinsic value of the stock is _________.
A. $10
B. $22.73
C. $27.78
D. $41.67
An investor has an effective tax rate on all items of 30%, and he decides to put $8,000
into a 401k. The future value of the investment that results from the deferral of taxes
over 30 years at an 8% return equals _____________.
A. $2,400
B. $8,000
C. $10,400
D. $24,150
A portfolio manager indexes part of a portfolio and actively manages the rest of the
portfolio. This is called a _________ strategy.
A. passive-aggressive
B. passive core
C. passively active
D. balanced fund
The information ratio is equal to the stock’s ____ divided by its ______.
A. diversifiable risk; beta
B. beta; alpha
C. alpha; beta
D. alpha; diversifiable risk
Which of the following provides the profit to a long position at contract maturity?
A. original futures price – Spot price at maturity
B. spot price at maturity – Original futures price
C. zero
D. basis
You have the following rates of return for a risky portfolio for several recent years.
Assume that the stock pays no dividends.
What is the dollar-weighted return over
the entire time period?
A. 2.87%
B..74%
C. 2.6%
D. 2.21%
You sell short 200 shares of Doggie Treats Inc. that are currently selling at $25 per
share. You post the 50% margin required on the short sale. If your broker requires a
30% maintenance margin, at what stock price will you get a margin call? (You earn no
interest on the funds in your margin account, and the firm does not pay any dividends.)
A. $28.85
B. $35.71
C. $31.50
D. $32.25
What is the geometric average return over 1 year if the quarterly returns are 8%, 9%,
5%, and 12%?
A. 8%
B. 8.33 %
C. 8.47%
D. 8.5 %
A firm’s earnings per share increased from $10 to $12, its dividends increased from $4
to $4.40, and its share price increased from $80 to $100. Given this information, it
follows that _________.
A. the stock experienced a drop in its P/E ratio
B. the company had a decrease in its dividend payout ratio
C. both earnings and share price increased by 20%
D. the required rate of return increased
The M2 measure is a variant of ________________.
A. the Sharpe measure
B. the Treynor measure
C. Jensen’s alpha
D. the appraisal ratio
Under the provisions of a typical defined benefit pension plan, the employer is
responsible for _____________.
A. investing in conservative fixed-income assets
B. paying benefits to retired employees
C. counseling employees in the selection of asset classes
D. paying employees the market rate of return on employee contributions
Portfolio performance is often decomposed into various subcomponents, such as the
return due to:
I. Broad asset allocation across security classes
II. Sector weightings within equity markets
III. Security selection with a given sector
The one decision that contributes most to the fund performance is _____.
A. I
B. II
C. III
D. All contribute equally to fund performance.
A mortgage bond is _______.
A. secured by other securities held by the firm
B. secured by equipment owned by the firm
C. secured by property owned by the firm
D. unsecured
If you are promised a nominal return of 12% on a 1-year investment, and you expect the
rate of inflation to be 3%, what real rate do you expect to earn?
A. 5.48%
B. 8.74%
C. 9%
D. 12%
You have an investment that in today’s dollars returns 15% of your investment in year 1,
12% in year 2, 9% in year 3, and the remainder in year 4. What is the duration of this
investment?
A. 4 years
B. 3.5 years
C. 3.22 years
D. 2.95 years
The CAPM _______.
A. predicts the relationship between risk and expected return of an asset
B. provides a benchmark rate of return for evaluating possible investments
C. helps us make an educated guess as to expected return on assets that have not yet
traded in the marketplace
D. All of the options.
TIPS are an example of _______________.
A. Eurobonds
B. convertible bonds
C. indexed bonds
D. catastrophe bonds
Bond portfolio immunization techniques balance ________ and ________ risk.
A. price; reinvestment
B. price; liquidity
C. credit; reinvestment
D. credit; liquidity
Hedge ratios for long call positions are __________, and hedge ratios for long put
positions are ____________.
A. negative; negative
B. negative; positive
C. positive; negative
D. positive; positive
The most widely used monetary policy tool is _________.
A. altering the discount rate
B. altering reserve requirements
C. open market operations
D. increasing the budget deficit
What is the value of a $2,500 deposit into a retirement plan if the investment earns 12%
per year for 15 years?
A. $12,174
B. $13,684
C. $14,652
D. $15,523
Convexity implies that duration predictions:
I. Underestimate the percentage increase in bond price when the yield falls.
II. Underestimate the percentage decrease in bond price when the yield rises.
III. Overestimate the percentage increase in bond price when the yield falls.
IV. Overestimate the percentage decrease in bond price when the yield rises.
A. I and III only
B. II and IV only
C. I and IV only
D. II and III only
Statman, Fisher, and Anginer (2008) found that stocks ranked high in Fortune’s Survey
of Most Admired Companies tended to have lower average risk-adjusted returns than
the least admired firms. This could be attributed to
A. framing
B. mental accounting
C. affect
D. prospect theory
In a particular year, Lost Hope Mutual Fund made the following investments in asset
classes:
The return on a bogey portfolio was 12%, based on the following:
The total extra return on the
managed portfolio was
__________.
A. 1%
B. 2%
C. 3%
D. 4%
Which of the following affects a firm’s sensitivity of its earnings to the business cycle?
I. Financial leverage
II. Operating leverage
III. Type of product
A. II only
B. I and II only
C. I and III only
D. I, II, and III
The major asset most people have during their early working years is their ________.
A. home
B. stock portfolio
C. earning power derived from their skills
D. bond portfolio
The maximum maturity on commercial paper is _____.
A. 270 days
B. 180 days
C. 90 days
D. 30 days