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1) Studies strongly suggest that the CAPM be abandoned and replaced with the APT.
2) Which of the following is not considered an asset allocation strategy?
a. Integrated asset allocation
b. Strategic asset allocation
c. Tactical asset allocation
d. Insured asset allocation
e. None of the above (that is, all are asset allocation strategies)
3) Exhibit 4.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Heidi Talbott has a margin account with a balance of $50,000. The initial margin
deposit is 50 percent, and RC Industries is currently selling at $50 per share.
Refer to Exhibit 4.2. How many shares of RC can Heidi buy?
a.2,500
b.2,000
c.1,000
d.500
e.None of the above
4) Exhibit 18.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Talmart Corporation bonds have a $1,000 face value and will mature in 4 years. The
bonds have a 7% coupon rate. Interest is paid annually and the required rate of return is
6 percent for these bonds.
What is the Modified duration of the Talmart corporate bonds?
a. 3.43
b. 3.64
c. 3.76
d. 3.85
e. 4.11
5) Exhibit 21.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
As a relationship officer for a money-center commercial bank, one of your corporate
accounts has just approached you about a one-year loan for $3,000,000. The customer
would pay a quarterly interest expense based on the prevailing level of LIBOR at the
beginning of each quarter. As is the bank's convention on all such loans, the amount of
the interest payment would then be paid at the end of the quarterly cycle when the new
rate for the next cycle is determined. You observe the following LIBOR yield curve in
the cash market:
What is the implied 90-day forward rate at the beginning of the third quarter?
a. 5.10%
b. 5.47%
c. 4.70%
d. 4.85%
e. None of the above
6) Exhibit 21.5
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The S&P 500 stock index is at 1100. The annualized interest rate is 3.5% and the
annualized dividend is 2%.
If the futures contract was currently available for 1050, indicate the appropriate strategy
that would earn an arbitrage profit.
a. Long futures, and short the index.
b. Short futures and long the index.
c. Long futures and long the index.
d. Short futures and short the index.
e. None of the above.
7) A ____ stock possesses a high probability of low or negative rates of return and a
low probability of normal or high rates of return.
a. Growth
b. Defensive
c. Cyclical
d. Speculative
e. Value
8) Exhibit 16.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
A portfolio manager is trying to establish a strategic asset allocation for two different
clients, Bob Bowman and Tom Luck. Bob Bowman has a risk tolerance factor of 22 and
Tom Luck has a risk tolerance factor of 6. The characteristics of the three model
portfolios under consideration are provided in the table below.
The recommended portfolio for Tom Luck is
a. Portfolio A because it has expected utility of 9.95
b. Portfolio A because it has expected utility of 4.5
c. Portfolio B because it has expected utility of 5.33
d. Portfolio B because it has expected utility of 7.27
e. Portfolio C because it has expected utility of 6.75
9) In 2004, Montpelier Inc. issued a $100 par value preferred stock that pays a 9 percent
annual dividend. Due to changes in the overall economy and in the company's financial
condition investors are now requiring a 10 percent return. What price would you be
willing to pay for a share of the preferred if you receive your first dividend one year
from now?
a. $100
b. $110
c. $75
d. $90
e. $85
10) Exhibit 8.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Refer to Exhibit 8.3. The covariance between Radtron and the proxy index is
a. 57.30
b. 86.50
c. 88.00
d. 92.50
e. 107.90
11) The gross return of closed-end investments companies has typically been
a. 10-20 percent less than their NAV.
b. 10-15 percent less than their NAV.
c. Less than the net return.
d. About the same as the net return.
e. None of the above
12) Which of the following is not a component of return on equity (ROE)?
a. Net income/sales
b. Total assets/equity
c. Equity/sales
d. Sales/total assets
e. Net Profit Margin
13) The forward rate agreement is the most complicated of the OTC interest rate
contracts.
14) Risk measures for different industries remain fairly constant over time so historical
risk analysis can be useful when estimating future risk.
15) A bond portfolio is immunized from interest rate risk if the modified duration of the
portfolio is always equal to the desired investment horizon.
16) Non-life insurance companies have somewhat unpredictable cash outflows and are
therefore faced with different investment constraints than life insurance companies.
17) Empirical analysis suggests that trigger points for trading rules are relatively stable
over time.
18) Interest rate anticipation is one of the matched funding techniques that matches
anticipated interest rates with the required rates on a portfolio.
19) The weak-form efficient market hypothesis assumes all publicly available
information is reflected in current stock prices.
20) The NYSE has dominated the other U.S. exchanges in trading volume.
21) Interest rate spread, 10-year Treasury bonds less federal funds, is listed as a lagging
indicator in the National Bureau of Economic Research (NBER).
22) The APT assumes that capital markets are perfectly competitive.
