Suppose you purchase one WFM May 100 call contract at $5 and write one WFM May
105 call contract at $2. The maximum potential profit of your strategy is ________, if
both options are exercised.
A. $600
B. $500
C.$200
D. $300
E. $100
The ____________ refers to the potential conflict between management and
shareholders.
A. agency problem
B. diversification problem
C. liquidity problem
D. solvency problem
E. regulatory problem
You purchase one September 50 put contract for a put premium of $2. What is the
maximum profit that you could gain from this strategy?
A.$4,800
B.$200
C. $5,000
D. $5,200
E. None of the options are correct.
When an investment advisor attempts to determine an investor’s risk tolerance, which
factor would they be
least likely to assess?
A. The investor’s prior investing experience
B. The investor’s degree of financial security
C. The investor’s tendency to make risky or conservative choices
D. The level of return the investor prefers
E. The investor’s feelings about loss
The Profitability Fund had NAV per share of $17.50 on January 1, 2016. On December
31 of the same year, the fund’s NAV was $19.47. Income distributions were $0.75, and
the fund had capital gain distributions of $1.00. Without considering taxes and
transactions costs, what rate of return did an investor receive on the Profitability Fund
last year?
A. 11.26%
B. 15.54%
C. 16.97%
D. 21.26%
E. 9.83%
An investor purchases one municipal and one corporate bond that pay rates of return of
7.5% and 10.3%, respectively. If the investor is in the 25% marginal tax bracket, his or
her after-tax rates of return on the municipal and corporate bonds would be ________
and ______, respectively.
A. 7.5%; 10.3%
B. 7.5%; 7.73%
C. 5.63%; 7.73%
D. 5.63%; 10.3%
E. 10%; 10%
A disadvantage of using stock options to compensate managers is that
A. it encourages managers to undertake projects that will increase stock price.
B. it encourages managers to engage in empire building.
C. it can create an incentive for managers to manipulate information to prop up a stock
price temporarily, giving them a chance to cash out before the price returns to a level
reflective of the firm’s true prospects.
D. All of the above.
Proceeds from a company’s sale of stock to the public are included in
A. par value.
B. additional paid-in capital.
C. retained earnings.
D. par value and additional paid-in capital.
E. All of the options are correct.
The bond indenture includes
A. the coupon rate of the bond.
B. the par value of the bond.
C. the maturity date of the bond.
D. All of the options are correct.
E. None of the options are correct.
The measure of risk in a Markowitz efficient frontier is
A. specific risk.
B. standard deviation of returns.
C. reinvestment risk.
D. beta.
In the context of the Capital Asset Pricing Model (CAPM), the relevant risk is
A. unique risk.
B. market risk.
C. standard deviation of returns.
D. variance of returns.
Consider two bonds, A and B. Both bonds presently are selling at their par value of
$1,000. Each pays interest of $120 annually. Bond A will mature in five years, while
bond B will mature in six years. If the yields to maturity on the two bonds change from
12% to 10%,
A. both bonds will increase in value, but bond A will increase more than bond B.
B. both bonds will increase in value, but bond B will increase more than bond A.
C. both bonds will decrease in value, but bond A will decrease more than bond B.
D. both bonds will decrease in value, but bond B will decrease more than bond A.
E. None of the options are correct.
Ceteris paribus, the price and yield on a bond are
A. positively related.
B. negatively related.
C. sometimes positively and sometimes negatively related.
D. not related.
E. indefinitely related.
A coupon bond is a bond that
A. pays interest on a regular basis (typically every six months).
B. does not pay interest on a regular basis but pays a lump sum at maturity.
C. can always be converted into a specific number of shares of common stock in the
issuing company.
D. always sells at par value.
E. None of the options are correct.
The ______ is a common term for the market consensus value of the required return on
a stock.
A. dividend payout ratio
B. intrinsic value
C. market capitalization rate
D. plowback rate
E. None of the options are correct.
If a market proxy portfolio consistently beats all professionally managed portfolios on a
risk adjusted basis, it may be concluded that
A. the CAPM is valid.
B. the market proxy is mean/variance efficient.
C. the CAPM is invalid.
D. the CAPM is valid and the market proxy is mean/variance efficient.
E. the market proxy is mean/variance efficient and the CAPM is invalid.
If the index model is valid, _________ would be helpful in determining the covariance
between assets GM and GE.
A. βGM
B. βGE
C. σM
D. all of the options
E. None of the options are correct.
In the 1972 empirical study by Black, Jensen, and Scholes, they found that the risk
adjusted returns of high beta portfolios were _____________ the risk adjusted returns
of low beta portfolios.
A. greater than
B. equal to
C. less than
D. unrelated to
E. More information is necessary to answer this question.
During which stage of the industry life cycle would a firm experience stable growth in
sales?
A.-Consolidation
B. Relative decline
C. Maturity
D. Start-up
E. Stabilization
Which of the following is true about profits from futures contracts?
A. 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.
B. It is possible for both the holder of the long position and the holder of the short
position to earn a profit.
C. The clearinghouse makes most of the profit.
D. The amount that the holder of the long position gains must equal the amount that the
holder of the short position loses.
E. Holders of short positions can recognize profits by making delivery early.
The current market price of a share of JNJ stock is $60. If a put option on this stock has
a strike price of $55, the put
A. is in the money.
B. is out of the money.
C. sells for a lower price than if the market price of JNJ stock is $50.
D. is in the money and sells for a lower price than if the market price of JNJ stock is
$50.
E.is out of the money and sells for a lower price than if the market price of JNJ stock is
$50.
Alex Goh is 39 years old and has accumulated $128,000 in his selfdirected defined
contribution pension plan. Each year he contributes $2,500 to the plan, and his
employer contributes an equal amount. Alex thinks he will retire at age 62 and figures
he will live to age 86. The plan allows for two types of investments. One offers a 4%
riskfree real rate of return. The other offers an expected return of 11% and has a
standard deviation of 37%. Alex now has 25% of his money in the riskfree investment
and 75% 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 does Alex currently have in the safe account; how
much in the risky account?
A. $31,200; $46,800
B. $39,000; $39,000
C. $32,000; $96,000
D. $45,300; $32,700
E. $64,000; $14,000
A company whose stock is selling at a P/E ratio greater than the P/E ratio of a market
index most likely has
A. an anticipated earnings growth rate which is less than that of the average firm.
B. a dividend yield which is less than that of the average firm.
C. less predictable earnings growth than that of the average firm.
D. greater cyclicality of earnings growth than that of the average firm.
Deferral of capital gains tax does not
I) mean that the investor doesn’t need to pay taxes until the investment is sold.
II) allow the investment to grow at a faster rate.
III) mean that you might escape the capital gains tax if you live long enough.
IV) provide a tax shelter for investors.
A. III
B. II
C. I, II, and V
D. II, III, and IV
The current market price of a share of AT&T stock is $50. If a put option on this stock
has a strike price of $45, the put
A. is out of the money.
B. is in the money.
C. sells for a lower price than if the market price of AT&T stock is $40.
D.is out of the money and sells for a lower price than if the market price of AT&T stock
is $40.
E. is in the money and sells for a lower price than if the market price of AT&T stock is
$40.
The “normal” range of price-earnings ratios for the S&P 500 Index is
A. between 2 and 10.
B. between 5 and 15.
C. less than 8.
D.-between 12 and 25.
E. greater than 20.
Who guarantees that a futures contract will be fulfilled?
A. The buyer
B. The seller
C. The broker
D. The clearinghouse
E. Nobody
You are considering investing $1,000 in a T-bill that pays 0.05 and a risky portfolio, P,
constructed with two
risky securities, X and Y. The weights of X and Y in P are 0.60 and 0.40, respectively. X
has an expected rate
of return of 0.14 and variance of 0.01, and Y has an expected rate of return of 0.10 and a
variance of 0.0081.
What would be the dollar values of your positions in X and Y, respectively, if you
decide to hold 40% of your
money in the risky portfolio and 60% in T-bills?
A. $240; $360
B. $360; $240
C. $100; $240
D. $240; $160
E. Cannot be determined.
If the economy is growing, firms with low operating leverage will experience
A. higher increases in profits than firms with high operating leverage.
B. similar increases in profits as firms with high operating leverage.
C.-smaller increases in profits than firms with high operating leverage.
D. no change in profits.
The duration of a bond normally increases with an increase in
A. term to maturity.
B. yield to maturity.
C. coupon rate.
D. All of the options are correct.
E. None of the options are correct.
Endowment funds are held by
A. charitable organizations.
B. educational institutions.
C. forprofit firms.
D. charitable organizations and educational institutions.
E. educational institutions and forprofit firms.