1) both a wife and her husband work in the airline industry. they are in their 40s, and
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
long-term capital gains and will need at least a 9% to 11% average rate of return to meet
their retirement goals. they desire a diversified portfolio, and liquidity is not currently a
major concern. which of the following asset allocations seems to best fit their situation?
a.10% money market; 40% long-term bonds; 10% commodities; 40%
high-dividend-paying stocks
b.0% money market; 60% long-term bonds; 40% stocks
c.10% money market; 30% long-term bonds; 10% commodities; 50%
high-dividend-paying stocks
d.5% money market; 30% long-term bonds; 5% commodities; 60% stocks, most with
low dividends and high growth prospects
2) an investor puts up $5,000 but borrows an equal amount of money from his broker to
double the amount invested to $10,000. the broker charges 7% on the loan. the stock
was originally purchased at $25 per share, and in 1 year the investor sells the stock for
$28. the investor’s rate of return was ____.
a.17%
b.12%
c.14%
d.19%
3) the expected return on the market is the risk-free rate plus the _____________.
a.diversified returns
b.equilibrium risk premium
c.historical market return
d.unsystematic return
4) 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
5) a passive asset allocation strategy involves _________.
a.investing in the stock of companies that are price takers
b.maintaining approximately the same proportions of a portfolio in each asset class over
time
c.varying the proportions of a portfolio in each asset class in response to changing
market conditions
d.selecting individual securities in different sectors that are believed to be undervalued
6) a writer of a call option will want the value of the underlying asset to __________,
and a buyer of a put option will want the value of the underlying asset to _________.
a.decrease; decrease
b.decrease; increase
c.increase; decrease
d.increase; increase
7) 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
8) a red herring becomes a prospectus when ____.
a.the preliminary registration statement is approved by the sec
b.the ipo is complete
c.the offering is seasoned
d.the lockup period expires
9) a.are registered market makers.
b.can post bid and ask prices.
c.have the fastest execution of trades.
d.all of these options.
10) at year-end, taxes on a futures position _______________.
a.must be paid if the position has been closed out
b.must be paid if the position has not been closed out
c.must be paid regardless of whether the position has been closed out or not
d.need not be paid if the position supports a hedge
11) the current stock price of johnson & johnson is $64, and the stock does not pay
dividends. the instantaneous risk-free rate of return is 5%. the instantaneous standard
deviation of j&j’s stock is 20%. you want to purchase a call option on this stock with an
exercise price of $55 and an expiration date 73 days from now.
using the black-scholes opm, the call option should be worth __________ today.
a.$.01
b.$.08
c.$9.26
d.$9.62
12) which one of the following measures time-weighted returns and allows for
compounding?
a.geometric average return
b.arithmetic average return
c.dollar-weighted return
d.historical average return
13) if you have an extremely “bullish” outlook on the stock market, you could attempt
to maximize your rate of return by ________________.
a.purchasing out-of-the-money call options
b.purchasing at-the-money bull spreads
c.purchasing in-the-money call options
d.purchasing at-the-money call options
14) under sec rules, the managers of certain funds are allowed to deduct charges for
advertising, brokerage commissions, and other sales expenses directly from the fund
assets rather than billing investors. these fees are known as ____________.
a.direct operating expenses
b.back-end loads
c.12b-1 charges
d.front-end loads
15) you manage a $15 million hedge fund portfolio with beta = 1.2 and alpha = 2% per
quarter. assume the risk-free rate is 2% per quarter and the current value of the s&p 500
index is 1,200. you want to exploit the positive alpha, but you are afraid that the stock
market may fall and you want to hedge your portfolio by selling 3-month s&p 500
future contracts. the s&p contract multiplier is $250.
how much is the portfolio expected to be worth 3 months from now?
a.$15,000,000
b.$15,450,000
c.$15,600,000
d.$16,000,000
16) 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%
17) a quanto provides its holder with the right to ______________.
a.participate in the payoffs from a portfolio of gambling casino stocks
b.exchange a fixed amount of a foreign currency for dollars at a specified exchange rate
c.participate in the investment performance of a foreign security
d.exchange the payoff from a foreign investment for dollars at a fixed exchange rate