In his 1970 study, Malkiel found that mutual funds that do well in one period have an
approximately ________ chance of doing well in the subsequent-year period.
A. 33%
B. 52%
C. 65%
D. 85%
In a 2011 study, Agarwal, Daniel, and Naik documented that hedge funds tend to report
average returns in ____________ that are __________ than their average returns in
other months.
A. September; lower
B. January; higher
C. January; lower
D. December; higher
Firm A is high-risk, and Firm B is low-risk. Everything else equal, which firm would
you expect to have a higher P/E ratio?
A. Firm A
B. Firm B
C. Both would have the same P/E if they were in the same industry.
D. There is not necessarily any linkage between risk and P/E ratios.
When a short-selling hedge fund advertises in a prospectus that it is a 120/20 fund, this
means that the fund may sell short up to ______ for every $100 in net assets and
increase the long position to
__________ of net assets.
A. $120; $20
B. $20; $120
C. $20; $20
D. $120; $120
The risk-free rate is 4%. The expected market rate of return is 11%. If you expect stock
X with a beta of .8 to offer a rate of return of 12%, then you should _________.
A. buy stock X because it is overpriced
B. buy stock X because it is underpriced
C. sell short stock X because it is overpriced
D. sell short stock X because it is underpriced
A fund that invests in securities worldwide, including the United States, is called
______.
A. an international fund
B. an emerging market fund
C. a global fund
D. a regional fund
The Treynor-Black model is a model that shows how an investment manager can use
security analysis and statistics to construct __________.
A. a market portfolio
B. a passive portfolio
C. an active portfolio
D. an index portfolio
Which of the following provides the profit to a short position at contract maturity?
A. original futures price – Spot price at maturity
B. spot price at maturity – Original futures price
C. zero
D. basis
Personal trusts are typically allowed to engage in which of the following investment
activities?
I. Buying and selling futures contracts.
II. Short-selling securities.
III. Purchasing and writing options.
IV. Buying stock on margin.
A. I only
B. II and III only
C. II and IV only
D. None of the given activities are allowed.
If the Black-Scholes formula is solved to find the standard deviation consistent with the
current market call premium, that standard deviation would be called the _______.
A. variability
B. volatility
C. implied volatility
D. deviance
You are constructing a scatter plot of excess returns for stock A versus the market index.
If the correlation coefficient between stock A and the index is -1, you will find that the
points of the scatter diagram ___________ and the line of best fit has a
______________.
A. all fall on the line of best fit; positive slope
B. all fall on the line of best fit; negative slope
C. are widely scattered around the line; positive slope
D. are widely scattered around the line; negative slope
The free cash flow to the firm is reported as $405 million. The interest expense to the
firm is $76 million. If the tax rate is 35% and the net debt of the firm increased by $50
million, what is the free cash flow to the equity holders of the firm?
A. $405.6 million
B. $454.2 million
C. $505.8 million
D. $553.5 million
You buy a call option on Summit Corp. with an exercise price of $40 and an expiration
date in September, and you write a call option on Summit Corp. with an exercise price
of $40 and an expiration date in October. This strategy is called a _________.
A. time spread
B. long straddle
C. short straddle
D. money spread
A(n) _______________ hedge fund attempts to profit from situations such as mergers,
acquisitions, restructuring, bankruptcy, or reorganization.
A. multistrategy
B. managed futures
C. dedicated short bias
D. event-driven
Suppose you pay $9,700 for a $10,000 par Treasury bill maturing in 3 months. What is
the holding-period return for this investment?
A. 3.01%
B. 3.09%
C. 12.42%
D. 16.71%
During 2004 China increased its use of global oil by 40%. This followed a 100%
increase during the previous 5 years. How do economists refer to this kind of economic
event?
A. demand shock
B. equilibrium event
C. expanding commodity event
D. supply shock
You believe that the spread between the September S&P 500 future and the S&P 500
Index is too large and will soon correct. This is an example of ______________.
A. pairs trading
B. convergence play
C. statistical arbitrage
D. a long-short equity hedge
A point and figure chart:
I. Gives a sell signal when the stock price penetrates previous lows II. Tracks
significant upward or downward movements
III. Has no time dimension
IV. Indicates congestion areas
A. I and II only
B. II and III only
C. I, III, and IV only
D. I, II, III, and IV
On May 21, 2012, you could have purchased a futures contract from Intrade for a price
of $5.70 that would pay you $10 if Barack Obama won the 2012 presidential election.
This tells you _____.
A. that the market believed that Obama had a 57% chance of winning
B. that the market believed that Obama would not win the election
C. nothing about the market’s belief concerning the odds of Obama winning
D. that the market believed Obama’s chances of winning were about 43%
Stockholders of Dogs R Us Pet Supply expect a 12% rate of return on their stock.
Management has consistently been generating an ROE of 15% over the last 5 years but
now believes that ROE will be 12% for the next 5 years. Given this, the firm’s optimal
dividend payout ratio is now ______.
A. 0%
B. 100%
C. between 0% and 50%
D. between 50% and 100%
A “bet” option is also called a ____ option.
A. barrier
B. lookback
C. digital
D. foreign exchange
According to the capital asset pricing model, fairly priced securities have _________.
A. negative betas
B. positive alphas
C. positive betas
D. zero alphas
The Student Loan Marketing Association (SLMA) has short-term student loans funded
by long-term debt. To hedge out this interest rate risk, SLMA could:
I. Engage in a swap to pay fixed and receive variable interest payments
II. Engage in a swap to pay variable and receive fixed interest payments
III. Buy T-bond futures
IV. Sell T-bond futures
A. I and II only
B. I and IV only
C. II and III only
D. II and IV only
It is very hard to statistically verify abnormal fund performance because of all of the
following except which one?
A. Inevitably, some fund managers experience streaks of good performance that may
just be due to luck.
B. The noise in realized rates of return is so large as to make it hard to identify
abnormal performance in competitive markets.
C. Portfolio composition is rarely stable long enough to identify abnormal performance.
D. Even if successful, there is really not much value to be added by active strategies
such as market timing.
What economic variable is most closely associated with increasing corporate profits?
A. exchange rates
B. inflation
C. gross domestic product
D. budget deficits
An investor can design a risky portfolio based on two stocks, A and B. The standard
deviation of return on stock A is 20%, while the standard deviation on stock B is 15%.
The correlation coefficient between the returns on A and B is 0%. The standard
deviation of return on the minimum-variance portfolio is _________.
A. 0%
B. 6%
C. 12%
D. 17%
Portfolio A has a beta of 1.3 and an expected return of 21%. Portfolio B has a beta of .7
and an expected return of 17%. The risk-free rate of return is 9%. If a hedge fund
manager wants to take advantage of an arbitrage opportunity, she should take a short
position in portfolio __________ and a long position in portfolio __________.
A. A; A
B. A; B
C. B; A
D. B; B
Consider the single factor APT. Portfolio A has a beta of .2 and an expected return of
13%. Portfolio B has a beta of .4 and an expected return of 15%. The risk-free rate of
return is 10%. If you wanted to take advantage of an arbitrage opportunity, you should
take a short position in portfolio
__________ and a long position in portfolio _________.
A. A; A
B. A; B
C. B; A
D. B; B
It would be costly to provide wage insurance because of the ___________ problem.
A. moral hazard
B. adverse selection
C. Texas hedge
D. actuarial error
One-, two-, and three-year maturity, default-free, zero-coupon bonds have yields to
maturity of %, 8%, and 9%, respectively. What is the implied 1-year forward rate 1 year
from today?
A. 2.0%
B. 8.03%
C. 9.01%
D. 11.12%
More than ______ of all trading is believed to be initiated by computer algorithms.
A. 25%
B. 40%
C. 50%
D. 75%
Under SEC rules, the managers of certain funds are allowed to deduct charges for
advertising, brokerage commissions, and other sales expenses directly from the fund
assets rather than billing investors. These fees are known as ____________.
A. direct operating expenses
B. back-end loads
C. 12b-1 charges
D. front-end loads