Tilting your retirement savings plan toward your later years should only be done by
investors _____________.
A. who are sufficiently risk averse
B. who are more tolerant of risk
C. who are unsure if their income growth will keep up with inflation
D. who want to retire early
The spot price for gold is $1,550 per ounce. The dividend yield on the S&P 500 is
2.5%. The risk-free interest rate is 3.5%. The futures price for gold for a 6-month
contract on gold should be __________.
A. $1,504.99
B. $1,569.08
C. $1,554.04
D. $1,557.73
In the Treynor-Black model, the contribution of individual security to the active
portfolio should be based primarily on the stock’s _________.
A. alpha
B. beta
C. residual variance
D. information ratio
Diversification can reduce or eliminate __________ risk.
A. all
B. systematic
C. nonsystematic
D. only an insignificant
The greatest percentage of mutual fund assets are invested in ________.
A. bond funds
B. equity funds
C. hybrid funds
D. money market funds
Which of the following typically employ significant amounts of leverage?
I. Hedge funds
II. REITs
III. Money market funds
IV. Equity mutual funds
A. I and II only
B. II and III only
C. III and IV only
D. I, II, and III only
A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of
return of 24%, while stock B has a standard deviation of return of 18%. Stock A
comprises 60% of the portfolio, while stock B comprises 40% of the portfolio. If the
variance of return on the portfolio is
.0380, the correlation coefficient between the returns on A and B is _________.
A. .583
B. .225
C. .327
D. .128
The risk that a downturn in the market may substantially reduce your investment
principal is called _______.
A. purchasing power risk
B. interest rate risk
C. market risk
D. liquidity risk
Firms with higher expected growth rates tend to have P/E ratios that are ___________
the P/E ratios of firms with lower expected growth rates.
A. higher than
B. equal to
C. lower than
D. There is not necessarily any linkage between risk and P/E ratios.
Which of the following would result in a cash inflow under the heading “Cash flow
from investing” in the statement of cash flows?
A. purchase of capital equipment
B. payments to suppliers for inventory
C. collections on receivables
D. sale of production machinery
As the typical investor ages, the composition of his wealth usually switches from
primarily _______ to primarily _______.
A. human capital; financial capital
B. financial capital; human capital
C. intellectual capital; physical capital
D. investable capital; noninvestable capital
The calculation of a standard annuity, using the PMY function of Excel or a financial
calculator, will produce an insufficient income because that approach fails to consider
_______.
A. variable interest rates
B. retiree income needs
C. market volatility
D. inflation
An American call option gives the buyer the right to _________.
A. buy the underlying asset at the exercise price on or before the expiration date
B. buy the underlying asset at the exercise price only at the expiration date
C. sell the underlying asset at the exercise price on or before the expiration date
D. sell the underlying asset at the exercise price only at the expiration date
If you want to know the portfolio standard deviation for a three-stock portfolio, you will
have to ______.
A. calculate two covariances and one trivariance
B. calculate only two covariances
C. calculate three covariances
D. average the variances of the individual stocks
A stock index spot price is $1,287. The zero coupon interest rate is 3.8%. What is the
potential arbitrage profit if the 6-month futures contract on the index is priced at
$1,350?
A. $19.50
B. $31.50
C. $63.00
D. $39.00
Barnegat Light sold 200,000 shares in an initial public offering. The underwriter’s
explicit fees were $90,000. The offering price for the shares was $35, but immediately
upon issue, the share price jumped to $43. What is the best estimate of the total cost to
Barnegat Light of the equity issue?
A. $90,000
B. $1,290,000
C. $2,390,000
D. $1,690,000
Two assets have the following expected returns and standard deviations when the
risk-free rate is 5%: Asset A E(rA) = 10% σA= 20%
Asset B E(rB) = 15% σB = 27%
An investor with a risk aversion of A = 3 would find that _________________ on a
risk-return basis.
A. only asset A is acceptable
B. only asset B is acceptable
C. neither asset A nor asset B is acceptable
D. both asset A and asset B are acceptable
An increase in a bond’s yield to maturity results in a price decline that is ________ the
price increase resulting from a decrease in yield of equal magnitude.
A. greater than
B. equivalent to
C. smaller than
D. The answer cannot be determined.
The financial statements of Burnaby Mountain Trading Company are shown below.
Note: The common shares are trading in the stock market for $27 each.
Refer to the financial statements of Burnaby Mountain Trading Company. The firm’s
times-interest-earned ratio for 2015 is _________.
A. 2.8
B. 6
C. 9
D. 11.11
The ______ measure of returns ignores compounding.
A. geometric average
B. arithmetic average
C. IRR
D. dollar-weighted
Which one of the following statements correctly describes the weights used in the
Macaulay duration calculation? The weight in year t is equal to
____________.
A. the dollar amount of the investment received in year t
B. the percentage of the future value of the investment received in year t
C. the present value of the dollar amount of the investment received in year t
D. the percentage of the total present value of the investment received in year t
In calculating the Dow Jones Industrial Average, the adjustment for a stock split occurs
_________.
A. automatically
B. by adjusting the divisor
C. by adjusting the numerator
D. by adjusting the market value weights
You purchase one MBI July 125 call contract (equaling 100 shares) for a premium of
$5. You hold the option until the expiration date, when MBI stock sells for $123 per
share. You will realize a ______ on the investment.
A. $200 profit
B. $200 loss
C. $500 profit
D. $500 loss
The bonds of Elbow Grease Dishwashing Company have received a rating of C by
Moody’s. The C rating indicates that the bonds are
_________.
A. high grade
B. intermediate grade
C. investment grade
D. junk bonds
A coupon bond that pays interest annually has a par value of $1,000, matures in 5 years,
and has a yield to maturity of 12%. If the coupon rate is 9%, the intrinsic value of the
bond today will be _________.
A. $856.04
B. $891.86
C. $926.4
D. $1,000
Westsyde Tool Company is expected to pay a dividend of $2 in the upcoming year. The
risk-free rate of return is 6%, and the expected return on the market portfolio is 12%.
Analysts expect the price of Westsyde Tool Company shares to be $29 a year from now.
The beta of Westsyde Tool Company’s stock is 1.2. Using a one-period valuation model,
the intrinsic value of Westsyde Tool Company stock today is _________.
A. $24.29
B. $27.39
C. $31.13
D. $34.52
What combination of variables is likely to lead to the lowest time value?
A.short time to expiration and low volatility
B.long time to expiration and high volatility
C.short time to expiration and high volatility
D.long time to expiration and low volatility
You purchase a call option on a stock. The profit at contract maturity of the option
position is ___________, where X equals the option’s strike price, ST is the stock price
at contract expiration, and C0 is the original purchase price of the option.
A. max (-C0, ST – X – C0)
B. min (-C0, ST – X – C0)
C. max (C0, ST – X + C0)
D. max (0, ST – X – C0)
The financial statements of Flathead Lake Manufacturing Company are shown below.
Note: The common shares are trading in the stock market for $15 per share.
Refer to the financial statements of Flathead Lake Manufacturing Company. The firm’s
inventory turnover ratio is _________. (Please keep in mind that when a ratio involves
both income statement and balance sheet numbers, the balance sheet numbers for the
beginning and end of the year must be averaged.)
A. 11.6
B. 10.2
C. 9.5
D. 7.7
Individuals may find it more advantageous to purchase claims from a financial
intermediary rather than directly purchasing claims in capital markets because:
I. Intermediaries are better diversified than most individuals.
II. Intermediaries can exploit economies of scale in investing that individual investors
cannot.
III. Intermediated investments usually offer higher rates of return than direct capital
market claims.
A. I only
B. I and II only
C. II and III only
D. I, II, and III
In a market economy, capital resources are primarily allocated by ____________.
A. governments
B. corporation CEOs
C. financial markets
D. investment bankers
The value of a derivative security _________.
A. depends on the value of another related security
B. affects the value of a related security
C. is unrelated to the value of a related security
D. can be integrated only by calculus professors
A coupon bond that pays interest of $60 annually has a par value of $1,000, matures in
5 years, and is selling today at an $84.52 discount from par value. The yield to maturity
on this bond is _________.
A. 6%
B. .23%
C. 8.12%
D. 9.45%
A one-dollar increase in a stock’s price would result in __________ in the call option’s
value of __________ than one dollar.
A. a decrease; less
B. a decrease; more
C. an increase; less
D. an increase; more
Consider a mutual fund with $300 million in assets at the start of the year and 12
million shares outstanding. If the gross return on assets is 18% and the total expense
ratio is 2% of the year-end value, what is the rate of return on the fund?
A. 15.64%
B. 16%
C. 17.25%
D. 17.5%