You are cautiously bullish on the common stock of the Wildwood Corporation over the
next several months. The current price of the stock is $50 per share. You want to
establish a bullish money spread to help limit the cost of your option position. You find
the following option quotes:
To establish a bull money spread with calls, you would _______________.
A. buy the 55 call and sell the 45 call
B. buy the 45 call and buy the 55 call
C. buy the 45 call and sell the 55 call
D. sell the 45 call and sell the 55 call
You are considering purchasing a call option with a strike price of $35. The price of the
underlying stock is currently $27. Without any further information, you would expect
the hedge ratio for this option to be _______________.
A. negative and near 0
B. negative and near -1
C. positive and near 0
D. positive and near 1
An investor can design a risky portfolio based on two stocks, A and B. Stock A has an
expected return of 21% and a standard deviation of return of 39%. Stock B has an
expected return of 14% and a standard deviation of return of 20%. The correlation
coefficient between the returns of A and B is .4. The risk-free rate of return is 5%. The
standard deviation of returns on the optimal risky portfolio is _________.
A. 25.5%
B. 22.3%
C. 21.4%
D. 20.7%
Research has revealed that regardless of what the current estimate of a firm’s beta is,
beta will tend to move closer to ______ over time.
A. 1
B. 0
C. -1
D. .5
Preferred stock is like long-term debt in that ___________.
A. it gives the holder voting power regarding the firm’s management
B. it promises to pay to its holder a fixed stream of income each year
C. the preferred dividend is a tax-deductible expense for the firm
D. in the event of bankruptcy preferred stock has equal status with debt
The market value weighted-average beta of firms included in the market index will
always be _____________.
A. 0
B. between 0 and 1
C. 1
D. none of these options (There is no particular rule concerning the average beta of
firms included in the market index.)
You manage a hedge fund with $300 million in assets. Your fee structure provides for a
1% annual management fee with a 20% incentive on returns over a 12% benchmark. If
the fund value, before fees, is $345 million at the end of the year, what is the net return
to the investors?
A. 13.33%
B. 13.40%
C. 14.00%
D. 14.42%
Capital goods industries such as industrial equipment, transportation, and construction
would be good investments during the _____ stage of the business cycle.
A. peak
B. contraction
C. trough
D. expansion
In a world where the CAPM holds, which one of the following is not a true statement
regarding the capital market line?
A. The capital market line always has a positive slope.
B. The capital market line is also called the security market line.
C. The capital market line is the best-attainable capital allocation line.
D. The capital market line is the line from the risk-free rate through the market
portfolio.
An investor purchases shares of an index fund. The investor could take on the same
level of risk by taking out a loan and purchasing a higher-risk specialty fund. The
Sharpe ratio on this complete portfolio is higher than her existing investment. What
behavioral concept prevents the investor from taking out the loan and investing in the
index fund?
A. Framing bias
B. Excessive volatility
C. Loss aversion
D. Mental accounting
A saver who expects to have a higher tax rate after retirement would prefer a ______.
A. Roth retirement plan
B. traditional retirement plan
C. 401k plan
D. 403b plan
The figures below show plots of monthly excess returns for two stocks plotted against
excess returns for a market index.
Which stock is riskier to a nondiversified investor who puts all his money in only one
of these stocks?
A. Stock A is riskier.
B. Stock B is riskier.
C. Both stocks are equally risky.
D. The answer cannot be determined from the information given.
Mutual fund returns may be granted pass-through status if _________________.
A. virtually all income is distributed to shareholders
B. the fund qualifies for pass-through status according to the U.S. tax code
C. the fund is sufficiently diversified
D. All of these options (All of the answers must be true for pass-through status to be
granted.)
A corporation in a 34% tax bracket invests in the preferred stock of another company
and earns a 6% pretax rate of return. An individual investor in a 15% tax bracket invests
in the same preferred stock and earns the same pretax return. The after-tax return to the
corporation is _______, and the after-tax return to the individual investor is _______.
A. 3.96%; 5.1%
B. 5.39%; 5.1%
C. 6%; 6%
D.
You are considering investing $1,000 in a complete portfolio. The complete portfolio is
composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two
risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40%,
respectively. X has an expected rate of return of 14%, and Y has an expected rate of
return of 10%. If you decide to hold 25% of your complete portfolio in the risky
portfolio and 75% in the Treasury bills, then the dollar values of your positions in X and
Y, respectively, would be __________ and _________.
A. $300; $450
B. $150; $100
C. $100; $150
D. $450; $300
The tax burden of the firm is .4, the interest burden is .65, the return on sales is .05, the
asset turnover is .90, and the leverage ratio is 1.35. What is the ROE of the firm?
A. 1.58%
B. 5.68%
C. 12.2%
D. 13.33%
Security selection refers to the ________.
A. allocation of the investment portfolio across broad asset classes
B. analysis of the value of securities
C. choice of specific securities within each asset class
D. top-down method of investing
A firm has an ROA of 8% and a debt/equity ratio of .5; its ROE is _________.
A. 4%
B. 6%
C. 8%
D. 12%
The two principal types of REITs are equity trusts, which _______________, and
mortgage trusts, which _______________.
A. invest directly in real estate; invest in mortgage and construction loans
B. invest in mortgage and construction loans; invest directly in real estate
C. use extensive leverage; distribute less than 95% of income to shareholders
D. distribute less than 95% of income to shareholders; use extensive leverage
A portfolio generates an annual return of 13%, a beta of .7, and a standard deviation of
17%. The market index return is 14% and has a standard deviation of 21%. What is the
M2 measure of the portfolio if the risk-free rate is 5%?
A. .58%
B. .68%
C. .78%
D. .88%
The historical yield spread between the AA bond and the AAA bond has been 25 basis
points. Currently the spread is only 9 basis points. If you believe the spread will soon
return to its historical levels, you should ________________________.
A. buy the AA and short the AAA
B. buy both the AA and the AAA
C. buy the AAA and short the AA
D. short both the AA and the AAA
A top-down analysis of a firm’s prospects starts with an analysis of the ____.
A. firm’s position in its industry
B. U.S. economy or even the global economy
C. industry
D. specific firm under consideration
Which one of the following statements about returns reported by mutual funds is not
correct?
A. Reported returns are net of management expenses.
B. Reported returns are net of 12b-1 fees.
C. Reported returns are net of brokerage fees paid on the fund’s trading activity.
D. None of these options. (All of the items are included in reported returns.)
Which one of the following statements about IPOs is not true?
A. IPOs generally have been poor long-term investments.
B. IPOs often provide very good initial returns to investors.
C. IPOs generally provide superior long-term performance as compared to other stocks.
D. Shares in IPOs are often primarily allocated to institutional investors.
If all ______ are ______ in the Treynor-Black model, there would be no reason to
depart from the passive portfolio.
A. alphas; zero
B. alphas; positive
C. betas; positive
D. standard deviations; positive
Accounting scandals can often be attributed to a particular concept in the study of
finance known as the _____ .
A. agency problem
B. risk-return trade-off
C. allocation of risk
D. securitization
By 2008, over 100 countries had adopted financial reporting standards that are in
conformance with ________.
A. GAAP
B. IFRS
C. FASB
D. GASB
Assume that you have just purchased some shares in an investment company reporting
$500 million in assets, $50 million in liabilities, and 50 million shares outstanding.
What is the net asset value (NAV) of these shares?
A. $12
B. $9
C. $10
D. $1
Which of the following funds is most likely to have a debt ratio of 70% or higher?
A. bond fund
B. commingled fund
C. mortgage-backed securities
D. REIT
An investor can design a risky portfolio based on two stocks, A and B. Stock A has an
expected return of 21% and a standard deviation of return of 39%. Stock B has an
expected return of 14% and a standard deviation of return of 20%. The correlation
coefficient between the returns of A and B is .4. The risk-free rate of return is 5%. The
expected return on the optimal risky portfolio is approximately _________. (Hint: Find
weights first.)
A. 14%
B. 16%
C. 18%
D. 19%
Consider a hedge fund with $400 million in assets, $60 million in debt, and 16 million
shares at the start of the year and with $500 million in assets, $40 million in debt, and
20 million shares at the end of the year. During the year, investors have received an
income dividend of $.75 per share. Assuming that the total expense ratio is 2.75%, what
is the rate of return on the fund?
A. 6.45%
B. 8.52%
C. 8.95%
D. 9.46%
