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1) Which of the following is not considered a favorable attribute of firms by Peter
Lynch?
a. Firm's product is not faddish
b. Firm has a sustainable comparative competitive advantage over its rivals
c. Firm's industry or product has market stability
d. Firm can benefit from cost reductions
e. All of the above are considered favorable attributes by Peter Lynch
2) If you expected interest rates to rise, you would prefer to own bonds with
a. short maturities and low coupons.
b. long maturities and high coupons .
c. long maturities and low coupons.
d. short maturities and high coupons.
e. none of the above.
3) The P/E ratio for BMI Corporation is 21, and the P/S ratio is 5.2. The industry P/E
ratio is 35 and the industry P/S ratio is 7.5. Based on relative valuation, BMI is
a. undervalued on the basis of relative P/E and relative P/S.
b. overvalued on the basis of relative P/E and undervalued on the basis of relative P/S.
c. undervalued on the basis of relative P/E and overvalued on the basis of relative P/S.
d. overvalued on the basis of relative P/E and relative P/S.
e. none of the above.
4) If you are considering investing in German stocks as a means to reduce the risk of
your portfolio, the initial factor that you should examine is:
a.The average rate of return of the portfolio when you combine U.S. and German
stocks.
b.The standard deviation of the German stocks.
c.The standard deviation of the German stocks compared to the standard deviation of
U.S. stocks.
d.The correlation between the rates of return for German stocks and U.S. stocks.
e.The coefficient of variation (CV) of rates of return for German stocks versus the CV
of rates of return for U.S. stocks.
5) A contrarian investment strategy is based on the belief that
a. Stock returns are mean reverting.
b. The best time to buy is when other investors are bullish.
c. Rising stocks will continue to rise.
d. Passive management is preferred to active management.
e. A long/short portfolio will outperform a long only portfolio.
6) ____ measures the expected rate of return of a bond assuming that you sell it prior to
its maturity.
a. Yield to maturity
b. Current yield
c. Realized yield
d. Coupon rate
e. None of the above
7) Under the following conditions, what are the expected returns for stocks X and Y?
a. 14.1% and 12.9%
b. 12.5% and 19.5%
c. 19.5% and 18.5%
d. 21.2% and 18.5%
e. None of the above
8) Which of the fundamental factors was not used in the Fundamental Index created by
Research Affiliates, Inc.?
a.Sales
b.Profits (cash flow)
c.Leverage (debt/equity)
d.Net assets (book value)
e.Dividends
9) Exhibit 23.4
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Black Gold Industries (BGI) is an independent oil producer with production capacity of
500,000 barrels per month. Due to the cost structure of the business, BGI needs to
receive $56.50 per barrel in order to remain solvent. On the other side of this situation
is Petrochemicals Unlimited (PU) which uses an average of 500,000 barrels of West
Texas crude oil in its normal production operations. The nature of PU's business is such
that they will financially suffer if they have to pay more than an average of $57.80 per
barrel for oil over the next six years. To hedge against their exposure to volatile oil
prices, BI and PU contact a swap dealer to arrange the six-year oil swap described
below:
Describe the transaction that occurs between BGI and the swap dealer if the monthly
average oil futures settlement price is $58.45.
a. BGI pays the swap dealer $725,000.
b. The swap dealer pays BGI $725,000.
c. BGI pays the swap dealer $675,000.
d. The swap dealer pays BGI $675,000.
e. None of the above.
10) As the number of securities in a portfolio increases, the amount of systematic risk
a. Remains constant.
b. Decreases.
c. Increases.
d. Changes.
e. None of the above
11) Exhibit 10.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
What was Star's quick ratio for 2004?
a. 0.11
b. 0.44
c. 0.38
d. 0.74
e. 0.98
12) The legal document setting forth the obligations of a bond's issuer is called
a.A debenture.
b.A warrant.
c.An indenture.
d.The preemptive right.
e.A trustee deed.
13) Evidence that a firm has high business risk would be provided by its volatile ____.
a. Fixed costs.
b. Profit after taxes.
c. Operating profit.
d. Sales.
e. Employee turnover.
14) What is the implied growth duration of Howard Industries given the following:
a. 11.5 years
b. 16.8 years
c. 22.6 years
d. 18.4 years
e. 20.6 years
15) A 15-year bond, purchased 5 years ago, has a $1,000 par value bond, a 10 percent
coupon and a yield to maturity of 12%. Interest is paid annually. The bond's price is
a. $864
b. $887
c. $1152
d. $1123
e. None of the above
16) Which of the following assumptions imply capital markets will be efficient?
a.A large number of independent profit-maximizing participants analyze securities.
b.New information regarding securities comes to the market in a random fashion.
c.Investors adjust security prices rapidly to reflect the effect of new information.
d.Both b and c only.
e.All of the above are assumptions that imply a market will be efficient.
17) A common-size balance sheet expresses all balance sheet items
a. As a percentage of Current Assets.
b. As a percentage of Fixed Assets.
c. As a percentage of Total Assets.
d. As a percentage of Net Income.
e. As a percentage of Sales.
18) All of the following are normal characteristics of a convertible bond, except
a. Conversion at the option of the issuer.
b. Conversion into a fixed number of shares of common stock.
c. A conversion price initially above the market price of the common stock.
d. An interest rate lower than that on straight debentures.
e. Subordination.
19) In order to diversify risk an investor must have investments that have correlations
with other investments in the portfolio that are
a.low positive
b.zero
c.negative
d.any of the above
e.none of the above
