1) Banz and Reinganum found that small firms consistently outperformed large firms.
This anomaly is referred to as the
a.Large firm effect.
b.Size effect.
c.Small firm effect.
d.PIE effect.
e.None of the above.
2) Exhibit 22.6
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The following information is provided in the context of a two period (two six month
periods) binomial option pricing model. A stock currently trades at $60 per share, a call
option on the stock has an exercise price of $65. The stock is equally likely to rise by
15% or fall by 15% during each six month period. The one-year risk free rate is 3%.
Calculate the possible prices of the stock at the end of one year.
a. $69, $51, $79.35
b. $51, $79.35, $58.65
c. $79.35, $58.65, $43.35
d. $58.65, $43.35, $14.35
e. None of the above
3) Exhibit 23.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Darden Industries has decided to borrow $25,000,000.00 for six months in two
three-month issues. As the Treasurer, you are concerned that interest rates will rise over
the next three months and the rate upon which the second payment will be based will be
undesirable. (The amount of Darden’s first payment will be known at origination.) To
reduce the company’s interest rate exposure, you decide to purchase a 3 – 6 FRA
whereby you pay the dealer’s quoted fixed rate of 4.5% in exchange for receiving
3-month LIBOR at the settlement date. In order to hedge her exposure, the dealer buys
LIBOR from McIntire Industries at its bid rate of 4%. (Assume a notional principal of
$25,000,000.00 and that there are 60 days between month 3 and month 6.)
Refer to Exhibit 23.2. Assuming that 3-month LIBOR is 5.00% on the rate
determination day, and the contract specified settlement in advance, describe the
transaction that occurs between the dealer and McIntire.
a. The dealer is obligated to pay McIntire $61,728.40.
b. The dealer is obligated to pay McIntire $56,389.16.
c. McIntire is obligated to pay the dealer $56,389.16.
d. McIntire is obligated to pay the dealer $61,728.40.
e. None of the above
4) An individual with only $10,000 to invest is most likely better off investing in:
a.Mutual funds to increase the expected return
b.ETFs to increase the diversification
c.Individual equities to increase portfolio efficiency
d.Individual bonds and individual equities to increase efficiency
e.All of the above are rational choices
5) Which of the following statements regarding the closed-end investment company’s
net asset value (NAV) is false?
a. NAV is computed throughout the day based on prevailing market prices for the
portfolio of securities
b. The market price of the shares is determined by how they trade on the exchange
c. NAV and market price of a closed-end fund are almost never the same
d. No new investment dollars are available for the investment company unless it makes
another public sale of securities
e. All of the above are true
6) The annual rate of inflation is 2.5%
Refer to Exhibit 3.2. What is the T-bill nominal return?
a.3.56%
b.5.37%
c.6.19%
d.9.16%
e.11.32%
7) Assume that as a portfolio manager the beta of your portfolio is 1.3 and that your
performance is exactly on target with the SML data under condition 1. If the true SML
data is given by condition 2, how much does your performance differ from the true
SML?
a. 4.2% lower
b. 3.6% lower
c. 3.8% lower
d. 4.2% higher
e. 3.6% higher
8) A pure auction market is one in which
a.Dealers provide liquidity by buying and selling shares of stock for themselves.
b.Dealers compete against each other to provide the highest bid and lowest asking
prices.
c.Buyers submit bid prices to sellers.
d.Sellers submit ask prices to buyers.
e.Buyers and sellers submit bid and ask prices to a central location to be matched.
9) Which of the following statements is true?
a. If Duration > Investment Horizon, the investor faces Net Reinvestment Risk.
b. If Duration < Investment Horizon, the investor faces Net Price Risk.
c. If Duration = Investment Horizon, the investor is immunized.
d. All of the above statements are true.
e. None of the above statements are true.
10) Consider a stock that is currently trading at $65. Calculate the intrinsic value for a
put option that has an exercise price of $55.
a. $10
b. $50
c. $55
d. -$10
e. $0
11) What is the implied growth duration of Freed Industries given the following:
a. 1.8 years
b. 1.3 years
c. 5.0 years
d. 4.5 years
e. 3.5 years
12) Autocorrelation and runs tests are used to test the
a.Weak-form efficient market hypothesis (EMH).
b.Semistrong-form efficient market hypothesis (EMH).
c.Strong-form efficient market hypothesis (EMH).
d.Both a and b.
e.All of the above.
13) Exhibit 21.8
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider a portfolio manager with a $20,500,000 equity portfolio under management.
The manager wishes to hedge against a decline in share values using stock index
futures. Currently a stock index future is priced at 1250 and has a multiplier of 250. The
portfolio beta is 1.25.
Calculate the number of contract required to hedge the risk exposure and indicate
whether the manager should be short or long.
a. 100 contracts long.
b. 82 contracts short.
c. 82 contracts long.
d. 100 contract short.
e. None of the above.
14) Which set of conditions will result in a bond with the greatest volatility?
a. A high coupon and a short maturity
b. A high coupon and a long maturity
c. A low coupon and a short maturity
d. A low coupon and a long maturity
e. A deferred call feature and a sinking fund.
15) The CBOE brought numerous innovations to the option market, which of the
following is not such an innovation?
a. Creation of a central marketplace
b. Creation of a non-liquid secondary option market
c. Introduction of a Clearing Corporation
d. Standardization of all expiration dates
e. Standardization of all exercise prices
16) Futures contracts are similar to forward contracts in that they both
a. Have volatile price movements and strong interest from buyers and sellers.
b. Give the holder the option to make a transaction in the future.
c. Have similar liquidity.
d. Have similar credit risk.
e. None of the above.
17) A portfolio manager is considering adding another security to his portfolio. The
correlations of the 5 alternatives available are listed below. Which security would
enable the highest level of risk diversification?
a. 0.0
b. 0.25
c. –0.25
d. –0.75
e. 1.0
18) A portfolio management strategy that overweights a particular industry, relative to
the benchmark portfolio, based on the next expected phase of the business cycle is
called
a. Tactical asset allocation.
b. Indexing.
c. Sector rotation.
d. Contrarian investing.
e. Bottom up investing.
19) If, for the S&P Industrials Index, the profit margin was 0.20 and the equity turnover
ratio was 13, the ROE would be:
a. 0.026%
b. 2.600%
c. 6.500%
d. 26.00%
e. 65.00%
20) The underlying stock price and the value of the put option are factors that impact
the value of an American call option.
21) The set of portfolios with the maximum rate of return for every given risk level is
known as the optimal frontier.
22) An interest rate is the price of loanable funds.
23) An open-end investment company functions like any other public firm.
24) The gifting phase is similar to, and may be concurrent with, the spending phase.