If the expected ROE on reinvested earnings is equal to k, the multistage DDM reduces
to
A. V0 = (Expected dividend yield in year 1)/k.
B. V0 = (Expected EPS in year 1)/k.
C. V0 = (Treasury bond yield in year 1)/k.
D. V0 = (Market return in year 1)/k.
Historical records regarding return on stocks, Treasury bonds, and Treasury bills
between 1926 and 2015 show
That
A. stocks offered investors greater rates of return than bonds and bills.
B. stock returns were less volatile than those of bonds and bills.
C. bonds offered investors greater rates of return than stocks and bills.
D. bills outperformed stocks and bonds.
E. Treasury bills always offered a rate of return greater than inflation.
You hold one long corn futures contract that expires in April. To close your position in
corn futures before the delivery date you must
A. buy one May corn futures contract.
B. buy two April corn futures contract.
C. sell one April corn futures contract.
D. sell one May corn futures contract.
A purely passive strategy
A.uses only index funds.
B. uses weights that change in response to market conditions.
C. uses only risk-free assets.
D. is best if there is “noise” in realized returns.
E. is useless if abnormal returns are available.
Consider a one-year maturity call option and a one-year put option on the same stock,
both with striking price$45. If the risk-free rate is 4%, the stock price is $48, and the
put sells for $1.50, what should be the price of the call?
A. $4.38
B. $5.60
C.$6.23
D. $12.26
E. None of the options.
The interplay between interest rate differentials and exchange rates, such that each
adjusts until the foreign exchange market and the money market reach equilibrium, is
called the
A. Purchasing Power Parity Theory.
B. Balance of Payments.
C. Interest Rate Parity Theory.
D. None of the options are correct.
Assume that stock market returns do not resemble a single-index structure. An
investment fund analyzes 125 stocks in order to construct a mean-variance efficient
portfolio constrained by 125 investments. They will need to calculate _____________
expected returns and ___________ variances of returns.
A. 125; 125
B. 125; 15,625
C. 15,625; 125
D. 15,625; 15,625
E. None of the options are correct.
Buyers of put options anticipate the value of the underlying asset will __________, and
sellers of call options anticipate the value of the underlying asset will ________.
A. increase; increase
B. decrease; increase
C. increase; decrease
D.decrease; decrease
E. Cannot tell without further information
The following is a list of prices for zero-coupon bonds with different maturities and par
values of $1,000.
What is the price of a 4-year maturity bond with a 10% coupon rate paid annually? (Par
values = $1,000.)
A. $742.09
B. $1,222.09
C. $1,035.66
D. $1,141.84
The exploitation of security mispricing in such a way that risk-free economic profits
may be earned is called
A. arbitrage.
B. capital-asset pricing.
C. factoring.
D. fundamental analysis.
E. None of the options are correct.
. Your opinion is that security C has an expected rate of return of 0.106. It has a beta of
1.1. 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.
Information processing errors consist of
I) forecasting errors.
II) overconfidence.
III) conservatism.
IV) framing.
A. I and II
B. I and III
C. III and IV
D. IV only
E. I, II, and III
At expiration, the time value of an in-the-money put option is always
A. equal to zero.
B. negative.
C. positive.
D. equal to the stock price minus the exercise price.
E. None of the options are correct.
Delivery of stock index futures
A.is never made.
B. is made by a cash settlement based on the index value.
C. requires delivery of 1 share of each stock in the index.
D. is made by delivering 100 shares of each stock in the index.
E. is made by delivering a value-weighted basket of stocks.
Of the following types of ETFs, an investor who wishes to invest in a diversified
portfolio that tracks the Nasdaq 100 should choose
A. SPY.
B. DIA.
C. QQQ.
D. IWM.
E. VTI.
Immunization through duration matching of assets and liabilities may be ineffective or
inappropriate because
A. conventional duration strategies assume a flat yield curve.
B. duration matching can only immunize portfolios from parallel shifts in the yield
curve.
C. immunization only protects the nominal value of terminal liabilities and does not
allow for inflation adjustment.
D conventional duration strategies assume a flat yield curve, and immunization only
protects the nominal value . of terminal liabilities and does not allow for inflation
adjustment.
E. All of the options are correct.
Suppose you own two stocks, A and B. In year 1, stock A earns a 2% return and stock B
earns a 9% return. In year 2, stock A earns an 18% return and stock B earns an 11%
return. Which stock has the higher geometric average return?
A. Stock A
B. Stock B
C. The two stocks have the same geometric average return.
D. At least three periods are needed to calculate the geometric average return.
GAAP allows
A. no leeway to manage earnings.
B. minimal leeway to manage earnings.
C. considerable leeway to manage earnings.
D. earnings management if it is beneficial in increasing stock price.
E. None of the options are correct.
Conservatism implies that investors are too __________ in updating their beliefs in
response to new evidence and that they initially __________ to news.
A. quick; overreact
B. quick; under react
C. slow; overreact
D. slow; under react
__________ can be used to create a perfect inflation hedge.
A. Gold
B. Real estate
C. TIPS
D. The S&P 500 Index
E. None of the options are correct.
The risk premium on the market portfolio will be proportional to
A. the average degree of risk aversion of the investor population.
B. the risk of the market portfolio as measured by its variance.
C. the risk of the market portfolio as measured by its beta.
D. the average degree of risk aversion of the investor population and the risk of the
market portfolio as
measured by its variance.
E. the average degree of risk aversion of the investor population and the risk of the
market portfolio as
measured by its beta.
Which of the following items is specified in a futures contract?
I) The contract size
II) The maximum acceptable price range during the life of the contract
III) The acceptable grade of the commodity on which the contract is held
IV) The market price at expiration
V) The settlement price
A. I, II, and IV
B. I, III, and V
C. I and V
D. I, IV, and V
E. I, II, III, IV, and V
The price that the writer of a put option receives for the underlying asset if the option is
exercised is called the
A. strike price.
B. exercise price.
C. execution price.
D. strike price or exercise price.
E. None of the options are correct.
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 does Alan currently have in the safe account; how
much in the risky account?
A. $31,200; $46,800
B. $39,000; $39,000
C. $15,900; $62,100
D. $45,300; $32,700
E. $64,000; $14,000
Before expiration, the time value of an in-the-money call option is always
A. equal to zero.
B. positive.
C. negative.
D. equal to the stock price minus the exercise price.
E. None of the options are correct.
A hedge fund pursuing a ______ strategy is trying to exploit relative mispricing within
a market but is hedged to avoid taking a stance on the direction of the broad market.
A. directional
B. nondirectional
C. market neutral
D. arbitrage or speculation
E. nondirectional and market neutral
Differences between hedge funds and mutual funds are that
A. hedge funds are only subject to minimal SEC regulation.
B. hedge funds are typically open only to wealthy or institutional investors.
C. hedge fund managers can pursue strategies not available to mutual funds, such as
short selling, heavy use of derivatives, and leverage.
D. hedge funds are commonly structured as private partnerships.
E. All of the options.
In the APT model, what is the nonsystematic standard deviation of an equally-weighted
portfolio that has an
average value of σ(ei ) equal to 25% and 50 securities?
A. 12.5%
B. 625%
C. 0.5%
D. 3.54%
E. 14.59%
The debate over whether markets are efficient will probably never be resolved because
of
A. the lucky event issue.
B. the magnitude issue.
C. the selection bias issue.
D. All of the options are correct.
E. None of the options are correct.
Bond stripping and bond reconstitution offer opportunities for ______, which can occur
if the _________ is violated.
A. arbitrage; law of one price
B. arbitrage; restrictive covenants
C. huge losses; law of one price
D. huge losses; restrictive covenants
The following data are available relating to the performance of Long Horn Stock Fund
and the market portfolio:
The risk-free return during the sample period was 6%.
Calculate the Jensen measure of performance evaluation for Long Horn Stock Fund.
A. 1.33%
B. 4.00%
C. 8.67%
D. 31.43%
E. 37.14%
Treasury Inflation-Protected Securities (TIPS)
A. pay a fixed interest rate for life.
B. pay a variable interest rate that is indexed to inflation but maintain a constant
principal.
C. provide a constant stream of income in real (inflation-adjusted) dollars.
D. have their principal adjusted in proportion to the Consumer Price Index.
E. provide a constant stream of income in real (inflation-adjusted) dollars and have their
principal adjusted in proportion to the Consumer Price Index.
On January 1, you bought one April S&P 500 index futures contract at a futures price of
1,420. If, on February 1, the April futures price was 1,430, what would be your profit
(loss) if you closed your position (without considering transactions costs)?
A. $2,500 loss
B. $10 loss
C.$2,500 profit
D. $10 profit
You purchased one silver future contract at $3 per ounce. What would be your profit
(loss) at maturity if the silver spot price at that time is $4.10 per ounce?
Assume the contract size is 5,000 ounces and there are no transactions costs.
A. $5.50 profit
B. $5,500 profit
C. $5.50 loss
D. $5,500 loss
On January 1, the listed spot and futures prices of a Treasury bond were 93.8 and 93.13.
You purchased $100,000 par value Treasury bonds and sold one Treasury bond futures
contract. One month later, the listed spot price and futures prices were 94 and 94.09,
respectively. If you were to liquidate your position, your profits would be a
A. $125 loss.
B. $125 profit.
C. $12.50 loss.
D. $1,250 loss.
E. None of the options are correct.
You bought one soybean future contract at $5.13 per bushel. What would be your profit
(loss) at maturity if the wheat spot price at that time were $5.26 per bushel?
Assume the contract size is 5,000 bushels and there are no transactions costs.
A. $65 profit
B. $650 profit
C. $650 loss
D. $65 loss
Consider the following:
If the futures market price is 1.63 A$/$, how could you arbitrage?
