Finance 37710 | Course Paper

Unlock access to all the studying documents.

View Full Document

At the end of July, the average yields on 10 top-rated corporate bonds and 10

intermediate-grade bonds were 7.65% and 8.42%, respectively. At the end of August,

the average yields on 10 top-rated corporate bonds and 10 intermediate-grade bonds

were 6% and 6.71%, respectively. The confidence index _________ during August, and

bond technical analysts are likely to be ________.

A. increased; bullish

B. increased; bearish

C. decreased; bullish

D. decreased; bearish

Stone Harbor Products takes out a bank loan. It receives $100,000 and signs a

promissory note to pay back the loan over 5 years. In this transaction, _____ .

A. a new financial asset was created

B. a financial asset was traded for a real asset

C. a financial asset was destroyed

D. a real asset was created

Increases in the money supply will cause demand for investment and consumption

goods to __________ in the short run and may cause prices to __________ in the long

run.

A. increase; increase

B. increase; decrease

C. decrease; increase

D. decrease; decrease

When assessing the sustainability of a firm’s cash flows, analysts will prefer to see cash

growth generated from which of the following sources?

A. cash flow from investment activities

B. cash flow from operating activities

C. cash flow from financing

D. cash flow from extraordinary events

A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of

return of 35%, while stock B has a standard deviation of return of 15%. The correlation

coefficient between the returns on A and B is .45. Stock A comprises 40% of the

portfolio, while stock B comprises 60% of the portfolio. The standard deviation of the

return on this portfolio is _________.

A. 23%

B. 19.76%

C. 18.45%

D. 17.67%

Diversification is most effective when security returns are _________.

A. high

B. negatively correlated

C. positively correlated

D. uncorrelated

If the coupon rate on a bond is 4.5% and the bond is selling at a premium, which of the

following is the most likely yield to maturity on the bond?

A. 4.3%

B. 4.5%

C. 5.2%

D. 5.5%

_____________ are likely to close their positions before the expiration date, while

____________ are likely to make or take delivery.

A. Investors; regulators

B. Hedgers; speculators

C. Speculators; hedgers

D. Regulators; investors

In technical analysis, __________ is a value below which the market is relatively

unlikely to fall.

A. book value

B. resistance level

C. support level

D. the Dow line

The Treynor-Black model combines an actively managed portfolio with an efficiently

diversified portfolio in order to:

I. Improve the diversification of the overall portfolio

II. Improve the overall portfolio’s Sharpe ratio

III. Reach a higher CAL than would otherwise be possible

A. I only

B. I and II only

C. II and III only

D. I, II, and III

Which one of the following is the ticker symbol for the CBOE option contract on the

S&P 100 Index?

A. SPX

B. DJX

C. CME

D. OEX

The efficient frontier represents a set of portfolios that

A. maximize expected return for a given level of risk.

B. minimize expected return for a given level of risk.

C. maximize risk for a given level of return.

D. None of the options.

______________________ are often called mutual funds.

A. Unit investment trusts

B. Open-end investment companies

C. Closed-end investment companies

D. REITs

A convertible bond has a par value of $1,000, but its current market price is $95. The

current price of the issuing company’s stock is $26, and the conversion ratio is 34

shares. The bond’s market conversion value is _________.

A. $1,000

B. $884

C. $933

D. $980

The dollar-per-euro spot rate is 1.4457 and the 1-yr forward rate is 1.4194. If inflation

in Germany is forecasted at 4.5% this year, what is the forecasted inflation rate in the

United States?

A. 1.9%

B. 2.6%

C. 4.5%

D. 5.3%

If you choose a zero-coupon bond with a maturity that matches your investment

horizon, which of the following statements is (are) correct?

I. You will have no interest rate risk on this bond.

II. In the absence of default, you can be sure you will earn the promised yield rate.

III. The duration of your bond is less than the time to your investment horizon.

A. I only

B. I and II only

C. II and III only

D. I, II, and III

An investor wants to retire when she has $3,000,000 in savings, after taxes. Given a

20% tax rate at retirement, how much money, per year, must she save in order to retire

in 30 years, given an 11% annual return? Assume she uses a traditional IRA and

liquidates the entire portfolio at retirement.

A. $12,827

B. $13,903

C. $15,074

D. $18,842

A pension fund must pay out $1 million next year, $2 million the following year, and

then $3 million the year after that. If the discount rate is 8%, what is the duration of this

set of payments?

A. 2 years

B. 2.15 years

C. 2.29 years

D. 2.53 years

Consider the theory of active portfolio management. Stocks A and B have the same

positive alpha and the same nonsystematic risk. Stock A has a higher beta than stock B.

You should want __________ in your active portfolio.

A. equal proportions of stocks A and B

B. more of stock A than stock B

C. more of stock B than stock A

D. The answer cannot be determined from the information given.

The price of a stock fluctuates over a period of 10 days. The movement of the stock

price below the 10-day minimum price of $25 triggers a rash of selling. The $25 price

might now be considered the _______________.

A. congestion area

B. penetration point

C. resistance level

D. support level

Benjamin Graham thought that the benefits from detailed analysis of a firm’s financial

statements had _________ over his long professional life.

A. increased greatly

B. increased slightly

C. remained constant

D. decreased

Compute the duration of an 8%, 5-year corporate bond with a par value of $1,000 and

yield to maturity of 10%.

A. 3.92

B. 4.28

C. 4.55

D. 5

Hedge funds are typically set up as _______________.

A. limited liability partnerships

B. corporations

C. REITs

D. mutual funds

A pension fund will owe $10 million to retirees in 6 years. An actuary assumes an 8%

rate of return on the funds invested in the pension plan. If the pension plan receives

annual contributions from the company sponsor, how much must the company pay each

year to fully fund the pension liability?

A. $1,212,587

B. $1,363,154

C. $1,533,333

D. $1,666,667

The New York Stock Exchange is a good example of _________.

A. an auction market

B. a brokered market

C. a dealer market

D. a direct search market

In a private defined benefit pension plan the ___________ bears the investment risk,

and in a private defined contribution plan the ____________ bears the investment risk.

A. plan sponsor; employee

B. employee; plan sponsor

C. U.S. government; plan sponsor

D. plan sponsor; U.S. government

Which of the following transactions will result in a decrease in cash flow from

investments?

A. acquisition of another business

B. capital gain from sale of a subsidiary

C. decrease in net investments

D. sale of equipment

An investor with high risk aversion will likely prefer which of the following risk and

return combinations?

A. expected return = 12%, historical standard deviation = 17%

B. expected return = 14%, historical standard deviation = 19%

C. expected return = 16%, historical standard deviation = 21%

D. expected return = 18%, historical standard deviation = 23%

A hog farmer decides to sell hog futures. This is an example of __________ to limit

risk.

A. cross-hedging

B. short hedging

C. spreading

D. speculating

Suppose that over the same time period two portfolios have the same average return and

the same standard deviation of return, but portfolio A has a higher beta than portfolio B.

According to the Sharpe ratio, the performance of portfolio A __________.

A. is better than the performance of portfolio B

B. is the same as the performance of portfolio B

C. is poorer than the performance of portfolio B

D. cannot be measured since there is no data on the alpha of the portfolio

Which one of the following exploits differences between actual future prices and their

theoretically correct parity values?

A. index arbitrage

B. marking to market

C. reversing trades

D. settlement transactions

Which of the following analysts focus more on past price movements of a firm’s stock

than on the underlying determinants of its future profitability?

A. credit analysts

B. fundamental analysts

C. systems analysts

D. technical analysts

June call and put options on King Books Inc. are available with exercise prices of $30,

$35, and $40. Among the different exercise prices, the call option with the _____

exercise price and the put option with the _____ exercise price will have the greatest

value.

A. $40; $30

B. $30; $40

C. $35; $35

D. $40; $40

The offer price of an open-end fund is $18 and the fund is sold with a front-end load of

5%. What is the fund’s NAV?

A. $18.74

B. $17.10

C. $15.40

D. $16.57