The interest rate on a 1-year Canadian security is 8%. The current exchange rate is C$ =
US $0.78. The 1-year forward rate is C$ = US $0.76. The return (denominated in U.S.
$) that a U.S. investor can earn by investing in the Canadian security is
A. 3.59%.
B. 4.00%.
C. 5.23%.
D. 8.46%.
E. None of the options are correct.
The price that the buyer of a call option pays to acquire the option is called the
A. strike price.
B. exercise price.
C. execution price.
D. acquisition price.
E. premium.
Elias is a risk-averse investor. David is a less risk-averse investor than Elias. Therefore,
A. for the same risk, David requires a higher rate of return than Elias.
B. for the same return, Elias tolerates higher risk than David.
C. for the same risk, Elias requires a lower rate of return than David.
D. for the same return, David tolerates higher risk than Elias.
E. Cannot be determined.
Consider the following $1,000-par-value zero-coupon bonds:
The yield to maturity on bond C is
A. 10%.
B. 11%.
C. 12%.
D. 14%.
E. None of the options are correct.
A coupon bond that pays interest semi-annually has a par value of $1,000, matures in
seven years, and has a yield to maturity of 11%. The intrinsic value of the bond today
will be __________ if the coupon rate is 8.8%.
A. $922.78
B. $894.51
C. $1,075.80
D. $1,077.20
E. None of the options are correct.
Binary options
A. are based on two possible outcomes— yes or no.
B. may make a payoff of a fixed amount if a specified event happens.
C. may make a payoff of a fixed amount if a specified event does not happen.
D. may make a payoff of a fixed amount if a specified event happens and are based on
two possible outcomes— yes or no.
E.All of the options are correct.
High Tech Chip Company is expected to have EPS in the coming year of $2.50. The
expected ROE is 12.5%. An appropriate required return on the stock is 11%. If the firm
has a plowback ratio of 70%, the growth rate of dividends should be
A. 5.00%.
B. 6.25%.
C. 6.60%.
D. 7.50%.
E. 8.75%.
Before expiration, the time value of an at-the-money call option is usually
A. positive.
B. equal to zero.
C. negative.
D. equal to the stock price minus the exercise price.
E. None of the options are correct.
In words, the real rate of interest is approximately equal to
A. the nominal rate minus the inflation rate.
B. the inflation rate minus the nominal rate.
C. the nominal rate times the inflation rate.
D. the inflation rate divided by the nominal rate.
E. the nominal rate plus the inflation rate.
A sale by IBM of new stock to the public would be a(n)
A. short sale.
B. seasoned equity offering.
C. private placement.
D. secondary-market transaction.
E. initial public offering.
Which one of the following statements is true?
A. The maintenance margin is the amount of money you post with your broker when
you buy or sell a futures contract.
B. If the value of the margin account falls below the maintenance-margin requirement,
the holder of the contract will receive a margin call.
C. A margin deposit can only be met with cash.
D. All futures contracts require the same margin deposit.
E. The maintenance margin is set by the producer of the underlying asset.
An analyst has determined that the intrinsic value of Dell stock is $34 per share using
the capitalized earnings model. If the typical P/E ratio in the computer industry is 27,
then it would be reasonable to assume the expected EPS of Dell in the coming year will
be
A. $3.63.
B. $4.44.
C. $14.40.
D. $1.26.
Sure Tool Company is expected to pay a dividend of $2 in the upcoming year. The
risk-free rate of return is 4%, and the expected return on the market portfolio is 14%.
Analysts expect the price of Sure Tool Company shares to be $22 a year from now. The
beta of Sure Tool Company’s stock is 1.25.
The market’s required rate of return on Sure’s stock is
A. 14.0%.
B. 17.5%.
C. 16.5%.
D. 15.25%.
E. None of the options are correct.
DeBondt and Thaler believe that high P/E result from investors’
A. earnings expectations that are too extreme.
B. earnings expectations that are not extreme enough.
C. stock price expectations that are too extreme.
D. stock price expectations that are not extreme enough.
You want to evaluate three mutual funds using the Sharpe measure for performance
evaluation. The risk-free return during the sample period is 5%. The average returns,
standard deviations, and betas for the three funds are given below, as are the data for the
S&P 500 Index.
The investment with the highest Sharpe measure is
A. Fund A.
B. Fund B.
C. Fund C.
D. the index.
E. Funds A and C (tied for highest).
Suppose you purchase one share of the stock of Cereal Correlation Company at the
beginning of year 1 for
$50. At the end of year 1, you receive a $1 dividend and buy one more share for $72. At
the end of year 2, you receive total dividends of $2 (i.e., $1 for each share) and sell the
shares for $67.20 each. The time-weighted return on your investment is
A. 10.0%.
B. 8.7%.
C. 19.7%.
D. 17.6%.
Tests of market efficiency have focused on
A. the mean variance efficiency of the selected market proxy.
B. strategies that would have provided superior risk adjusted returns.
C. results of actual investments of professional managers.
D. strategies that would have provided superior risk adjusted returns and results of
actual investments of professional managers.
E. the mean variance efficiency of the selected market proxy and strategies that would
have provided superior risk adjusted returns.
An investor purchases one municipal and one corporate bond that pay rates of return of
8% and 10%, respectively. If the investor is in the 20% marginal tax bracket, his or her
after-tax rates of return on the
municipal and corporate bonds would be ________ and ______, respectively.
A. 8%; 10%
B. 8%; 8%
C. 6.4%; 8%
D. 6.4%; 10%
E. 10%; 10%
Your opinion is that Boeing has an expected rate of return of 0.08. It has a beta of 0.92.
The risk-free rate is
0.04 and the market expected rate of return is 0.10. According to the Capital Asset
Pricing Model, this security
Is
A. underpriced.
B. overpriced.
C. fairly priced.
D. Cannot be determined from data provided.
A firm has an ROE of 2%, a debt/equity ratio of 1.0, a tax rate of 0%, and an interest
rate on debt of 10%. The firm’s ROA is
A. 2%.
B. 4%.
C. 6%.
D. 8%.
E. None of the options are correct.
Suppose two portfolios have the same average return and the same standard deviation
of returns, but Buckeye Fund has a higher beta than Gator Fund. According to the
Sharpe measure, the performance of Buckeye Fund
A. is better than the performance of Gator Fund.
B. is the same as the performance of Gator Fund.
C. is poorer than the performance of Gator Fund.
D. cannot be measured as there are no data on the alpha of the portfolio.
If the value of a Treasury bond was higher than the value of the sum of its parts
(STRIPPED cash flows),
A. arbitrage would probably occur.
B. arbitrage would probably not occur.
C. the FED would adjust interest rates.
D. None of the options are correct.
Which of the following is false about profits from futures contracts?
I) The person with the long position gets to decide whether to exercise the futures
contract and will only do so if there is a profit to be made.
II) It is possible for both the holder of the long position and the holder of the short
position to earn a profit.
III) The clearinghouse makes most of the profit.
IV) The amount that the holder of the long position gains must equal the amount that
the holder of the short position loses.
A. I only
B. II only
C. III only
D. IV only
E. I, II, and III
Alan Barnett is 43 years old and has accumulated $78,000 in his selfdirected defined
contribution pension plan. Each year he contributes $1,500 to the plan, and his
employer contributes an equal amount. Alan thinks he will retire at age 60 and figures
he will live to age 83. The plan allows for two types of investments. One offers a 4%
riskfree real rate of return. The other offers an expected return of 10% and has a
standard deviation of 34%. Alan now has 40% of his money in the riskfree investment
and 60% in the risky investment. He plans to continue saving at the same rate and keep
the same proportions invested in each of the investments. His salary will grow at the
same rate as inflation. How much can Alan be sure of having in the safe account at
retirement?
A. $59,473
B. $62,557
C. $78,943
D. $89,211
E. $104,632
In the empirical study of a multifactor model by Chen, Roll, and Ross, a factor (the
factors) that appeared to have significant explanatory power in explaining security
returns was (were)
A. the change in the expected rate of inflation.
B. the risk premium on corporate bonds.
C. the unexpected change in the rate of inflation.
D. industrial production.
E. the risk premium on corporate bonds, the unexpected change in the rate of inflation,
and industrial production.
The CAPM applies to
A. portfolios of securities only.
B. individual securities only.
C. efficient portfolios of securities only.
D. efficient portfolios and efficient individual securities only.
E. all portfolios and individual securities.
Asian options differ from American and European options in that
A. they are only sold in Asian financial markets.
B. they never expire.
C.their payoff is based on the average price of the underlying asset.
D. they are only sold in Asian financial markets and they never expire.
E. they are only sold in Asian financial markets and their payoff is based on the average
price of the underlying asset.
Which of the following is true of the Dow Jones Industrial Average?
A. It is a value-weighted average of 30 large industrial stocks.
B. It is a price-weighted average of 30 large industrial stocks.
C. The divisor must be adjusted for stock splits.
D. It is a value-weighted average of 30 large industrial stocks, and the divisor must be
adjusted for stock splits.
E. It is a price-weighted average of 30 large industrial stocks, and the divisor must be
adjusted for stock splits. The Dow Jones Industrial Average is a price-weighted index of
30 large industrial firms, and the divisor must be adjusted when any of the stocks on the
index split.
One year ago, you purchased a newly-issued TIPS bond that has a 5% coupon rate, five
years to maturity, and a par value of $1,000. The average inflation rate over the year
was 3.2%. What is the amount of the coupon payment you will receive, and what is the
current face value of the bond?
A. $50.00, $1,000
B. $32.00, $1,032
C. $50.00, $1,032
D. $32.00, $1,050
E. $51.60, $1,032
In the results of the earliest estimations of the security market line by Lintner (1965)
and by Miller and Scholes (1972), it was found that the average difference between a
stock’s return and the risk free rate was ________ to its nonsystematic risk.
A. positively related
B. negatively related
C. unrelated
D. related in a nonlinear fashion
E. None of the options are correct.
Which of the following is(are) example(s) of interest rate futures contracts?
A. Corporate bonds
B. Treasury bonds
C. Eurodollars
D. Treasury bonds and Eurodollars
E. Corporate bonds and Treasury bonds
Assume newly-issued 30-year on-the-run bonds sell at higher yields (lower prices) than
29-year bonds with a nearly identical duration. A hedge fund that sells 29-year bonds
and buys 30-year bonds is taking a
A. market neutral position.
B. conservative position.
C. bullish position.
D. bearish position.