Low Tech Company has an expected ROE of 10%. The dividend growth rate will be
________ if the firm follows a policy of paying 40% of earnings in the form of
dividends.
A. 6.0%
B. 4.8%
C. 7.2%
D. 3.0%
You purchased 100 shares of IBM common stock on margin at $70 per share. Assume
the initial margin is 50%, and the maintenance margin is 30%. Below what stock price
level would you get a margin call? Assume the stock pays no dividend; ignore interest
on margin.
A. $21
B. $50
C. $49
D. $80
A CDO is a
A. command duty officer.
B. collateralized debt obligation.
C. commercial debt originator.
D. collateralized debenture originator.
E. common debt officer.
The financial statements of Snapit Company are given below.
Note: The common shares are trading in the stock market for $100 each.
Refer to the financial statements of Snapit Company. The firm’s quick ratio for 2009 is
A. 1.68.
B. 1.12.
C. 0.72.
D.1.92.
E. None of the options are correct.
Sadka (2010) shows that exposure to unexpected declines in ________ is an important
determinant of average hedge fund returns, and that the spreads in average returns
across funds with the highest and lowest ________ may be as much as 6% annually.
A. market risk; systematic risk
B. market liquidity; liquidity risk
C. unsystematic risk; unique risk
D. default risk; default risk
Common size financial statements make it easier to compare firms
A. of different sizes.
B. in different industries.
C. with different degrees of leverage.
D. that use different inventory valuation methods (FIFO vs. LIFO).
Security X has expected return of 9% and standard deviation of 18%. Security Y has
expected return of
12% and standard deviation of 21%. If the two securities have a correlation coefficient
of 0.4, what is their
covariance?
A. 0.0388
B. 0.0706
C. 0.0184
D. –0.0133
E. –0.0151
According to the duration concept,
A. only coupon payments matter.
B. only maturity value matters.
C. the coupon payments made prior to maturity make the effective maturity of the bond
greater than its actual time to maturity.
D. the coupon payments made prior to maturity make the effective maturity of the bond
less than its actual time to maturity.
E. coupon rates don’t matter.
A support level is the price range at which a technical analyst would expect the
A. supply of a stock to increase dramatically.
B. supply of a stock to decrease substantially.
C. demand for a stock to increase substantially.
D. demand for a stock to decrease substantially.
E. price of a stock to fall.
The growth in dividends of Music Doctors, Inc. is expected to be 8% per year for the
next two years, followed by a growth rate of 4% per year for three years. After this
five-year period, the growth in dividends is expected to be 3% per year, indefinitely.
The required rate of return on Music Doctors, Inc. is 11%. Last year’s dividends per
share were $2.75. What should the stock sell for today?
A. $8.99
B. $25.21
C. $39.71
D. $110.00
E. None of the options are correct.
Consider two perfectly negatively correlated risky securities A and B. A has an expected
rate of return of 10%
and a standard deviation of 16%. B has an expected rate of return of 8% and a standard
deviation of 12%.
The weights of A and B in the global minimum variance portfolio are _____ and _____,
respectively.
A. 0.24; 0.76
B. 0.50; 0.50
C. 0.57; 0.43
D. 0.43; 0.57
E. 0.76; 0.24
The capital allocation line can be described as the
A. investment opportunity set formed with a risky asset and a risk-free asset.
B. investment opportunity set formed with two risky assets.
C. line on which lie all portfolios that offer the same utility to a particular investor.
D. line on which lie all portfolios with the same expected rate of return and different
standard deviations.
Which of the following is true about mortgage-backed securities?
I) They aggregate individual home mortgages into homogeneous pools.
II) The purchaser receives monthly interest and principal payments received from
payments made on the pool.
III) The banks that originated the mortgages maintain ownership of them.
IV) The banks that originated the mortgages may continue to service them.
A. II, III, and IV
B. I, II, and IV
C. II and IV
D. I, III, and IV
E. I, II, III, and IV
Suppose you held a well-diversified portfolio with a very large number of securities,
and that the single index model holds. If the σ of your portfolio was 0.18 and σM was
0.22, the β of the portfolio would be approximately
A. 0.64.
B. 1.19.
C. 0.82.
D. 1.56.
What should the purchase price of a 2-year zero-coupon bond be if it is purchased at the
beginning of year 2 and has face value of $1,000?
A. $877.54
B. $888.33
C. $883.32
D. $894.21
E. $871.80
In developing their test of a multifactor model, Chen, Roll, and Ross hypothesized that
__________ might be a proxy for systematic factors.
A. the monthly growth rate in industrial production
B. unexpected inflation
C. expected inflation
D. the monthly growth rate in industrial production and unexpected inflation
E. the monthly growth rate in industrial production, unexpected inflation, and expected
inflation
Hedge fund incentive fees are essentially
A. put options on the portfolio with a strike price equal to the current portfolio value.
B. put options on the portfolio with a strike price equal to the expected future portfolio
value.
C. call options on the portfolio with a strike price equal to the expected future portfolio
value.
D. call options on the portfolio with a strike price equal to the current portfolio value
times one plus the benchmark return.
E. straddles.
Three years ago, you purchased a bond for $974.69. The bond had three years to
maturity, a coupon rate of 8%, paid annually, and a face value of $1,000. Each year, you
reinvested all coupon interest at the prevailing reinvestment rate shown in the table
below. Today is the bond’s maturity date. What is your realized compound yield on the
bond?
A. 6.43%
B. 7.96%
C. 8.23%
D. 8.97%
E. 9.13%
The confidence index is computed from ____________, and higher values are
considered ____________ signals.
A. bond yields; bearish
B. odd lot trades; bearish
C. odd lot trades; bullish
D. put/call ratios; bullish
E. bond yields; bullish
Assuming continued inflation, a firm that uses LIFO will tend to have a(n)
________current ratio than a firm using FIFO, and the difference will tend to
__________ as time passes.
A. higher; increase
B. higher; decrease
C. lower; decrease
D. lower; increase
E. identical; remain the same
There are three stocks: A, B, and C. You can either invest in these stocks or short sell
them. There are three possible states of nature for economic growth in the upcoming
year (each equally likely to occur); economic growth may be strong, moderate, or weak.
The returns for the upcoming year on stocks A, B, and C for each of these states of
nature are given below:
If you invested in an equally-weighted portfolio of stocks A and C, your portfolio return
would be ____________ if economic growth was strong.
A. 17.0%
B. 22.5%
C. 30.0%
D. 30.5%
Assume you sell short 100 shares of common stock at $30 per share, with initial margin
at 50%. What would be your rate of return if you repurchase the stock at $35 per share?
The stock paid no dividends during the period, and you did not remove any money from
the account before making the offsetting transaction.
A. –33.33%
B. –25.63%
C. –57.14%
D. –77.23%
Financial assets permit all of the following except
A. consumption timing.
B. allocation of risk.
C. separation of ownership and control.
D. elimination of risk.
An example of a derivative security is
A. a common share of Microsoft.
B. a call option on Intel stock.
C. a commodity futures contract.
D. a call option on Intel stock and a commodity futures contract.
E. a common share of Microsoft and a call option on Intel stock.
The establishment of a futures market in a commodity should not have a major impact
on spot prices because
A. the futures market is small relative to the spot market.
B. the futures market is illiquid.
C. futures are a zero-sum game.
D. the futures market is large relative to the spot market.
E. most futures contracts do not take delivery.
The financial statements of Snapit Company are given below.
Note: The common shares are trading in the stock market for $100 each.
Refer to the financial statements of Snapit Company. The firm’s asset turnover ratio for
2009 is
A. 1.60.
B. 3.16.
C. 3.31.
D. 4.64.
Each of two stocks, C and D, are expected to pay a dividend of $3 in the upcoming
year. The expected growth rate of dividends is 9% for both stocks. You require a rate of
return of 10% on stock C and a return of 13% on stock D. The intrinsic value of stock C
A. will be greater than the intrinsic value of stock D.
B. will be the same as the intrinsic value of stock D.
C. will be less than the intrinsic value of stock D.
D. cannot be calculated without knowing the market rate of return.
Which of the following are used by fundamental analysts to determine proper stock
prices? I) Trendlines
II) Earnings
III) Dividend prospects
IV) Expectations of future interest rates
V) Resistance levels
A. I, IV, and V
B. I, II, and III
C. II, III, and IV
D. II, IV, and V
E. All of the items are used by fundamental analysts.
The risk-free rate is 4%. The expected market rate of return is 12%. If you expect stock
X with a beta of 1.0 to
offer a rate of return of 10%, you should
A. buy stock X because it is overpriced.
B. sell short stock X because it is overpriced.
C. sell short stock X because it is underpriced.
D. buy stock X because it is underpriced.
E. None of the options, as the stock is fairly priced.
A Treasury bill with a par value of $100,000 due three months from now is selling
today for $97,087 with an effective annual yield of
A. 12.40%.
B. 12.55%.
C. 12.62%.
D. 12.68%.
E. None of the options are correct.
Genny Webb is 27 years old and has accumulated $7,500 in her selfdirected defined
contribution pension plan. Each year she contributes $2,000 to the plan, and her
employer contributes an equal amount. Genny thinks she will retire at age 63 and
figures she will live to age 90. The plan allows for two types of investments. One offers
a 3% riskfree real rate of return. The other offers an expected return of 12% and has a
standard deviation of 39%. Genny now has 20% of her money in the riskfree
investment and 80% in the risky investment. She plans to continue saving at the same
rate and keep the same proportions invested in each of the investments. Her salary will
grow at the same rate as inflation. How much does Genny currently have in the safe
account; how much in the risky account?
A. $1,500; $6,000
B. $3,000; $4,500
C. $2,000; $5,500
D. $4,800; $2,700
E. $3,500; $3,500
Which of the following statements is(are) false?
I) Risk-averse investors reject investments that are fair games.
II) Risk-neutral investors judge risky investments only by the expected returns.
III) Risk-averse investors judge investments only by their riskiness.
IV) Risk-loving investors will not engage in fair games.
A. I only
B. II only
C. I and II only
D. II and III only
E. III and IV only
Assume that at retirement you have accumulated $750,000 in a variable annuity
contract. The assumed investment return is 9%, and your life expectancy is 25 years. If
the first year’s actual investment return is 9%, what is the starting benefit payment?
A. $30,000.00
B. $33,333.33
C. $76,354.69
D. $52,452.73
E. The answer cannot be determined from the information provided.
If you took a short position in three S&P 500 futures contracts at a price of 900 and
closed the position when the index futures was 885, you incurred
A. a gain of $11,250.
B. a loss of $11,250.
C. a loss of $8,000.
D. a gain of $8,000.
E. None of the options are correct.