1) Consider two securities, A and B. Security A and B have a correlation coefficient of
0.65. Security A has standard deviation of 12, and security B has standard deviation of
25. Calculate the covariance between these two securities.
a. 300
b. 461.54
c. 261.54
d. 195
e. 200
2) Exhibit 22.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
If XYZ were trading at $90/share and you formed a bull money spread, what is your
profit if XYZ is trading at $110 at expiration?
a. $912.50 loss
b. $87.50 gain
c. $87.50 loss
d. $1,000.00 gain
e. $1,000.00 loss
3) The value of a corporate bond can be derived by calculating the present value of the
interest payments and the present value of the face value at the bond’s
a. Current yield.
b. Coupon rate.
c. Required rate of return.
d. Effective rate.
e. Prime rate.
4) Exhibit 20.7
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The current stock price of Zanco Corporation is $50. Zanco Corporation has the
following put and call option prices with exercise prices at $45 and $50.
The intrinsic value for the put option with a $50 exercise price is
a. $0.00
b. $1.50
c. $2.25
d. $3.75
e. $8.75
5) The original maturity of a United States Treasury note is
a.Zero years to five years.
b.Six months to ten years.
c.One year or less.
d.One year to ten years.
e.Over ten years.
6) Which of the following economic variables does not have an impact on industry
analysis?
a. Inflation
b. Interest rates
c. International economics
d. Consumer sentiment
e. None of the above (that is, all of the above economic variables have at least some
impact on industry analysis)
7) Exhibit 25.10
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider the following information for a portfolio manager:
Calculate the percentage return that can be attributed to the security selection decision.
a. 0.105%
b. 0.925%
c. 0.20%
d. 0.96%
e. 0.94%
8) Which of the following statements regarding financial risk and business risk is true?
a. The acceptable level of financial risk for a firm depends on its business risk.
b. A firm with a greater degree of business risk has the ability to take on more debt.
c. A firm with a greater degree of financial risk typically takes on less business risk.
d. Financial risk and business risk are both important but they are not related in any
way.
e. Financial risk is more important for small firms and business risk is more important
for large firms.
9) Exhibit 19.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The following information is given concerning a pure yield pick-up swap: You currently
hold a 20 year, Aa 8 percent coupon bond priced to yield 10 percent. As a swap
candidate you are considering a 20 year, Aa 10 percent coupon bond priced to yield
10.75 percent. Assume a reinvestment rate of 12.00 percent, semiannual compounding,
and a one-year workout period.
The interest on one coupon for the candidate bond is
a. $2.40
b. $2.75
c. $9.60
d. $11.00
e. $50.00
10) According to the segmented-market hypothesis a downward sloping yield curve
indicates that
a. demand for long term bonds has fallen and demand for short term bonds has fallen.
b. demand for long term bonds has risen and demand for short term bonds has fallen.
c. demand for long term bonds has fallen and demand for short term bonds has risen.
d. demand for long term bonds has risen and demand for short term bonds has risen.
e. none of the above.
11) Interest rate risk is comprised of which of the following risks?
a. Price risk.
b. Coupon reinvestment risk.
c. Default risk.
d. Both a and b only.
e. All of the above.
12) When alternative assets of investors are pooled together into a single pool of assets
a. The collection of assets is formed as a limited partnership.
b. One or more general partners are responsible for running the organization.
c. The limited partners are only liable to the extent of their investments.
d. Both a and c.
e. All of the above.
13) Exhibit 22.5
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The information provided is relevant in the context of a one period (one year) binomial
option pricing model. A stock currently trades at $50 per share, a call option on the
stock has an exercise price of $45. The stock is equally likely to rise by 25% or fall by
25%. The one-year risk free rate is 2%.
Estimate n, the number of call options that must be written.
a. -1.4286
b. -2.9286
c. -2.8571
d. -2.5714
e. -1.1111
14) Suppose NBT Mutual Fund has no liabilities and owns only three stocks with the
following number of shares and respective market prices.
The fund originated by selling $500,000 of stock at $100.00 per share. What is its
current NAV?
a. $0.72
b. $14.33
c. $15.21
d. $71.66
e. None of the above
15) An investment vehicle that acts like a mutual fund of hedge funds, and allows
investors access to managers that might otherwise be unavailable is known as
a. Managed futures funds
b. Long-short equity funds
c. Fund of funds
d. Private equity funds
e. Leveraged Buyouts (LBOs)
16) Exhibit 5.5
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Stocks W and X had 2 for 1 splits after the close on Dec 31, 2003.
Refer to Exhibit 5.5. Calculate the price weighted series for Dec 31, 2004.
a.121.25
b.119.25
c.100.0
d.72.5
e.81.69
17) In the Black-Scholes option pricing model, an increase in exercise price (X) will
cause
a. An increase in call value and an increase in put value
b. An increase in call value and a decrease in put value
c. A decrease in call value and an increase in put value
d. A decrease in call value and a decrease in put value
e. An increase in call value and an increase or decrease in put value
18) Exhibit 13.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
At the end of the year 2004 the Office Equipment Industry had free cash flow to equity
(FCFE) of $2.50 per share. The following annual growth rates in FCFE are projected:
From year 2013 onward growth in FCFE is expected to remain constant at 5% per year.
The industry has a beta of 0.90 and the current industry price is $105. Currently the
yield on 10-year Treasury notes is 5% and the equity risk premium is 4%
Calculate the required rate of return on equity.
a. 5%
b. 9.2%
c. 8.6%
d. 10%
e. 4.3%