1) In classical immunization the effect of a change in interest rates is effectively
neutralized because
a. Price risk and reinvestment risk offset each other.
b. Price risk and maturity risk offset each other.
c. Reinvestment risk and credit risk offset each other.
d. Reinvestment risk and maturity risk offset each other.
e. None of the above.
2) The creation of the CBOE led to all the following innovations in options except
a. The creation of a central marketplace.
b. The introduction of a clearing corporation.
c. The standardization of expiration dates.
d. The creation of a primary market.
e. The creation of a secondary market.
3) Which of the following is not a major rating agency for bonds?
a. Moody’s
b. Standard & Poor’s
c. Fitch Investor Services
d. Value Line
e. Duff and Phelps
4) Exhibit 14.8
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
At the end of the year 2010 the CKL Corporation had operating free cash flow (OFCF)
of $300,000 and shares outstanding of 100,000. Total debt is currently $10,000,000.
The company projects the following annual growth rates in OFCF
From year 2019 onward growth in OFCF is expected to remain constant at 5% per year.
The stock has a beta of 1.1 and the current market price is $80. Currently the yield on
10-year Treasury notes is 5% and the equity risk premium is 4%. The firm can raise
debt at a pre-tax cost of 9%. The tax rate is 25%. The proportion of equity is 55% and
the proportion of debt is 45%.
Calculate the intrinsic value of the stock now (Year 2010).
a. $155.55
b. $173.27
c. $196.44
d. $207.79
e. $108.30
5) An investor wishes to construct a portfolio consisting of a 70% allocation to a stock
index and a 30% allocation to a risk free asset. The return on the risk-free asset is 4.5%
and the expected return on the stock index is 12%. Calculate the expected return on the
portfolio.
a. 8.25%
b. 16.50%
c. 17.50%
d. 9.75%
e. 14.38%
6) A stock currently sells for $75 per share. A put option on the stock with an exercise
price $70 currently sells for $0.50. The put option is
a. At-the-money.
b. In-the-money.
c. Out-of-the-money.
d. At breakeven.
e. None of the above.
7) Exhibit 22.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
A stock currently trades for $130 per share. Options on the stock are available with a
strike price of $125. The options expire in 10 days. The risk free rate is 3% over this
time period, and the expected volatility is 0.35.
Use the Black-Scholes option pricing model to calculate the price of a call option.
a. $5.19
b. $4.35
c. $3.93
d. $6.19
e. $8.17
8) Which of the following is considered a strategy for timing the market and adding
value to actively managed portfolios?
a. Time the markets by shifting between different types of securities based on market
forecasts and estimated risk premiums.
b. Shift funds between the various equity sectors, industries, investment styles, etc., in
order to take advantage of the “hot” concept before the remainder of the market does.
c. Individual stockpicking in order to buy low and sell high.
d. Choices a and b only
e. All of the above
9) Exhibit 10.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
What was Star’s return on equity in 2004?
a. 5.8%
b. 6.3%
c. 6.8%
d. 7.2%
e. 8.1%
10) Exhibit 8.4
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Refer to Exhibit 8.4. Which of the following statements is correct?
a. Stocks X, Y, and Z are undervalued.
b. Stocks X, Y and Z are overvalued.
c. Stocks X and Y are overvalued and stock Z is undervalued.
d. Stocks X and Y are undervalued and stock Z is overvalued.
e. Stocks X, Y, and Z are all properly valued.
11) The five major classes of ratios include the following, except
a. Internal liquidity.
b. Risk analysis.
c. Growth analysis.
d. Market performance.
e. Operating performance.
12) A 1971 study by Finkel and Tuttle hypothesizes that all of the following variables
affect the aggregate profit margin except
a. Capacity utilization rate
b. Unit labor costs
c. Variable labor costs
d. Rate of inflation
e. Foreign competition
13) A “runs test” on successive stock price changes which supports the efficient market
hypothesis would show the actual number of runs
a.Falls into the range expected of a random series.
b.Falls into the range expected of a dependent series.
c.Is small.
d.Is large.
e.Would approximate N/2.
14) Yields on money market funds are often lower than yields available to individuals
investing in CD’s because of the fees involved.
15) A riskless stock index arbitrage profit is possible if the following condition holds:
F0,T= S0(1 + rf– d)T, where spot price now is S0, value now of a futures contract
expiring at time T is (F0,T), rfis the risk free rate and d is the dividend.
16) Two major classes of technicians include the contrarians and those who “follow the
smart money”.
17) Input-output analysis would be useful to indicate the long run relationship between
industries.
18) The most common manner of evaluating portfolio managers is a peer group
comparison.
19) Altman-Nammacher (1987) create a modified Z-score model using a multiple
regression analysis technique.
20) A corporation wishing to raise funds will normally want the investment banker to
use a “best efforts” arrangement rather than a negotiated basis.
21) When considering inputs, you would evaluate an industry’s prospects based on
those of its raw material suppliers, labor force, etc.