The risk that can be diversified away in a portfolio is referred to as ___________.
I) diversifiable risk
II) unique risk
III) systematic risk
IV) firm-specific risk
A. I, III, and IV
B. II, III, and IV
C. III and IV
D. I, II, and IV
E. I, II, III, and IV
Dynamic hedging is
A. the volatility level for the stock that the option price implies.
B. the continued updating of the hedge ratio as time passes.
C. the percentage change in the stock call-option price divided by the percentage
change in the stock price.
D. the sensitivity of the delta to the stock price.
The CAPM is not testable unless
A. the exact composition of the true market portfolio is known and used in the tests.
B. all individual assets are included in the market proxy.
C. the market proxy and the true market portfolio are highly negatively correlated.
D. the exact composition of the true market portfolio is known and used in the tests, and
all individual assets are included in the market proxy.
E. all individual assets are included in the market proxy and the market proxy, and the
true market portfolio are highly negatively correlated.
You purchase one IBM 200 call option for a premium of $6. Ignoring transaction costs,
the break-even price of the position is
A. $194.
B. $228.
C.$206.
D. $211.
The capital allocation line provided by a risk-free security and N risky securities is
A. the line that connects the risk-free rate and the global minimum-variance portfolio of
the risky securities.
B. the line that connects the risk-free rate and the portfolio of the risky securities that
has the highest expected
return on the efficient frontier.
C. the line tangent to the efficient frontier of risky securities drawn from the risk-free
rate.
D. the horizontal line drawn from the risk-free rate.
Two bonds are selling at par value, and each has 17 years to maturity. The first bond has
a coupon rate of 6%, and the second bond has a coupon rate of 13%. Which of the
following is true about the durations of these bonds?
A. The duration of the higher coupon bond will be higher.
B. The duration of the lower coupon bond will be higher.
C. The duration of the higher coupon bond will equal the duration of the lower coupon
bond.
D. There is no consistent statement that can be made about the durations of the bonds.
E. The bond’s durations cannot be determined without knowing the prices of the bonds.
The comparison universe is not
A. a concept found only in astronomy.
B. the set of all mutual funds in the world.
C. the set of all mutual funds in the U.S.
D. a set of mutual funds with similar risk characteristics to your mutual fund.
E. a concept found only in astronomy, the set of all mutual funds in the world, or the set
of all mutual funds in the U.S.
Forecasting errors are potentially important because
A. research suggests that people underweight recent information.
B. research suggests that people overweight recent information.
C. research suggests that people correctly weight recent information.
D. research suggests that people either underweight recent information or overweight
recent information depending on whether the information was good or bad.
E. None of the options are correct.
__________ is a summary of the profitability of the firm over a period of time, such as
a year.
A. The balance sheet
B. The income statement
C. The statement of cash flows
D. The audit report
E. None of the options are correct.
Assume the U.S. government was to decide to increase the budget field. Holding all
else constant, this will cause ______ to increase.
A. interest rates
B. government borrowing
C. unemployment
D.-interest rates and government borrowing
E. None of the options are correct.
The comparison universe is
A. a concept found only in astronomy.
B. the set of all mutual funds in the world.
C. the set of all mutual funds in the U.S.
D. a set of mutual funds with similar risk characteristics to your mutual fund.
E. None of the options are correct.
Suppose an investor is considering a corporate bond with a 7.17% before-tax yield and
a municipal bond with a 5.93% before-tax yield. At what marginal tax rate would the
investor be indifferent between investing in the corporate and investing in the muni?
A. 15.4%
B. 23.7%
C. 39.5%
D. 17.3%
E. 12.4%
According to Michael Porter, there are five determinants of competition. An example of
_____ is the threat new competitors pose to existing competitors in an industry.
A.-threat of entry
B. rivalry between existing competitors
C. pressure from substitute products
D. bargaining power of buyers
E. bargaining power of suppliers
In a factor model, the return on a stock in a particular period will be related to
A. firm-specific events.
B. macroeconomic events.
C. the error term.
D. both firm-specific events and macroeconomic events.
E. neither firm-specific events nor macroeconomic events.
The financial statements of Snapit Company are given below.
Note: The common shares are trading in the stock market for $100 each.
Refer to the financial statements of Snapit Company. The firm’s market-to-book value
for 2009 is
A. 0.7256.
B. 1.5294.
C. 2.9400.
D. 3.6142.
The risk-free rate and the expected market rate of return are 0.06 and 0.12, respectively.
According to the capital asset pricing model (CAPM), the expected rate of return on
security X with a beta of 1.2 is equal to
A. 0.06.
B. 0.144.
C. 0.12.
D. 0.132.
E. 0.18.
The index model has been estimated for stocks A and B with the following results:
RA = 0.01 + 0.8RM + eA.
RB = 0.02 + 1.2RM + eB.
σM = 0.20; σ(eA) = 0.20; σ(eB) = 0.10.
The standard deviation for stock A is
A. 0.0656.
B. 0.0676.
C. 0.2561.
D. 0.2600.
The stocks on the Dow Jones Industrial Average
A. have remained unchanged since the creation of the index.
B. include most of the stocks traded on the NYSE.
C. are changed occasionally as circumstances dictate.
D. consist of stocks on which the investor cannot lose money.
E. include most of the stocks traded on the NYSE and are changed occasionally as
circumstances dictate. The stocks on the DJIA are only a small sample of the entire
market and have been changed occasionally since the creation of the index; one can
lose money on any stock.
Lookback options have payoffs that
A.depend in part on the minimum or maximum price of the underlying asset during the
life of the option.
B. only depend on the minimum price of the underlying asset during the life of the
option.
C. only depend on the maximum price of the underlying asset during the life of the
option.
D. are known in advance.
Many stock analysts assume that a mispriced stock will
A. immediately return to its intrinsic value.
B. return to its intrinsic value within a few days.
C. never return to its intrinsic value.
D. gradually approach its intrinsic value over several years.
E. None of the options are correct.
Comparability problems arise because
A. firms may use different generally accepted accounting principles.
B. inflation may affect firms differently due to accounting conventions used.
C. financial analysts do not know how to compare financial statements.
D. firms may use different generally accepted accounting principles, and inflation may
affect firms differently due to accounting conventions used.
E. firms may use different generally accepted accounting principles, and financial
analysts do not know how to compare financial statements.
As the underlying stock’s price increased, the call option valuation function’s slope
approaches
A. zero.
B. one.
C. two times the value of the stock.
D. one-half the value of the stock.
E. infinity.
The longest time horizons are likely to be set by
A. banks.
B. property and casualty insurance companies.
C. pension funds.
D. banks and pension funds.
E. property and casualty insurance companies and pension funds.
A firm has an ROA of 14%, a debt/equity ratio of 0.8, a tax rate of 35%, and the interest
rate on the debt is 10%. The firm’s ROE is
A. 11.18%.
B. 8.97%.
C. 11.54%.
D. 12.62%.
If an investment provides a 2% return semi-annually, its effective annual rate is
A. 2%.
B. 4%.
C. 4.02%.
D. 4.04%.
E. None of the options are correct.
The Black-Scholes formula assumes that
I) the risk-free interest rate is constant over the life of the option.
II) the stock price volatility is constant over the life of the option.
III) the expected rate of return on the stock is constant over the life of the option.
IV) there will be no sudden extreme jumps in stock prices.
A. I and II
B. I and III
C. II and II
D. I, II, and IV
E. I, II, III, and IV
Torque Corporation is expected to pay a dividend of $1.00 in the upcoming year.
Dividends are expected to grow at the rate of 6% per year. The risk-free rate of return is
5%, and the expected return on the market portfolio is 13%. The stock of Torque
Corporation has a beta of 1.2.
What is the intrinsic value of Torque’s stock?
A. $14.29
B. $14.60
C. $12.33
D. $11.62
A hedge ratio for a call is always
A. equal to one.
B. greater than one.
C. between zero and one.
D. between negative one and zero.
E. of no restricted value.
Duration is important in bond portfolio management because
I) it can be used in immunization strategies.
II) it provides a gauge of the effective average maturity of the portfolio.
III) it is related to the interest rate sensitivity of the portfolio.
IV) it is a good predictor of interest-rate changes.
A. I and II
B. I and III
C. III and IV
D. I, II, and III
E. I, II, III, and IV
A mutual fund had NAV per share of $37.12 on January 1, 2016. On December 31 of
the same year, the fund’s rate of return for the year was 11.0%. Income distributions
were $2.26, and the fund had capital gain distributions of $1.64. Without considering
taxes and transactions costs, what ending NAV would you calculate?
A. $37.93
B. $34.52
C. $37.30
D. $47.25
E. $36.28