A hedge ratio of 0.70 implies that a hedged portfolio should consist of
A. long 0.70 calls for each short stock.
B. short 0.70 calls for each long stock.
C. long 0.70 shares for each short call.
D. long 0.70 shares for each long call.
E. None of the options are correct.
Which one of the following statements regarding closed-end mutual funds is false?
A. The funds always trade at a discount from NAV.
B. The funds redeem shares at their net asset value.
C. The funds offer investors professional management.
D. The funds always trade at a discount from NAV and redeem shares at their net asset
value.
E. None of the options are correct.
Which of the following are false about the interest-rate sensitivity of bonds?
I) Bond prices and yields are inversely related.
II) Prices of long-term bonds tend to be more sensitive to interest-rate changes than
prices of short-term bonds.
III) Interest-rate risk is correlated with the bond’s coupon rate.
IV) The sensitivity of a bond’s price to a change in its yield to maturity is inversely
related to the yield to maturity at which the bond is currently selling.
A. I
B. III
C. I, II, and IV
D. II, III, and IV
E. I, II, III, and IV
If the value of a Treasury bond was lower than the value of the sum of its parts
(STRIPPED cash flows), you could
A. profit by buying the stripped cash flows and reconstituting the bond.
B. not profit by buying the stripped cash flows and reconstituting the bond.
C. profit by buying the bond and creating STRIPS.
D. not profit by buying the stripped cash flows and reconstituting the bond and profit by
buying the bond and creating STRIPS.
E. None of the options are correct.
If a firm has a required rate of return equal to the ROE,
A. the firm can increase market price and P/E by retaining more earnings.
B. the firm can increase market price and P/E by increasing the growth rate.
C. the amount of earnings retained by the firm does not affect market price or the P/E.
D. the firm can increase market price and P/E by retaining more earnings and increasing
the growth rate.
E. None of the options are correct.
The bond market
A. can be quite “thin.”
B. primarily consists of a network of bond dealers in the over-the-counter market.
C. consists of many investors on any given day.
D. can be quite “thin” and primarily consists of a network of bond dealers in the
over-the-counter market.
E. primarily consists of a network of bond dealers in the over-the-counter market and
consists of many investors on any given day.
Agricultural futures contracts are actively traded on
A. milk.
B. orange juice.
C. lumber.
D. milk and orange juice.
E. All of the options are correct.
The financial statements of Black Barn Company are given below.
Note: The common shares are trading in the stock market for $40 each.
Refer to the financial statements of Black Barn Company. The firm’s times interest
earned ratio for 2009 is
A. 8.86.
B. 7.17.
C. 9.66.
D. 6.86.
E. None of the options are correct.
A convertible bond has a par value of $1,000 and a current market price of $1,105. The
current price of the issuing firm’s stock is $20, and the conversion ratio is 35 shares.
The bond’s market conversion value is
A. $700.
B. $810.
C. $870.
D. $1,000.
Markets would be inefficient if irrational investors __________ and actions of
arbitragers were __________.
A. existed; unlimited
B. did not exist; unlimited
C. existed; limited
D. did not exist; limited
Other things equal, the price of a stock put option is negatively correlated with which of
the following factors?
A. The stock price
B. The time to expiration
C. The stock volatility
D. The exercise price
E. The time to expiration, stock volatility, and exercise price
You invest $100 in a risky asset with an expected rate of return of 0.11 and a standard
deviation of 0.21 and a
T-bill with a rate of return of 0.045.
A portfolio that has an expected outcome of $114 is formed by
A. investing $100 in the risky asset.
B. investing $80 in the risky asset and $20 in the risk-free asset.
C. borrowing $46 at the risk-free rate and investing the total amount ($146) in the risky
asset.
D. investing $43 in the risky asset and $57 in the risk-free asset.
E. Such a portfolio cannot be formed.
You have been given this probability distribution for the holding-period return for GM
stock:
What is the expected holding-period return for GM stock?
A. 10.4%
B. 11.4%
C. 12.4%
D. 13.4%
E. 14.4%
During the period between 2000 and 2002, a large number of scandals were uncovered.
Most of these scandals were related to
I) manipulation of financial data to misrepresent the actual condition of the firm.
II) misleading and overly optimistic research reports produced by analysts.
III) allocating IPOs to executives as a quid pro quo for personal favors.
IV) greenmail.
A. II, III, and IV
B. I, II, and IV
C. II and IV
D. I, III, and IV
E. I, II, and III
A bond will sell at a discount when
A. the coupon rate is greater than the current yield, and the current yield is greater than
yield to maturity.
B. the coupon rate is greater than yield to maturity.
C. the coupon rate is less than the current yield, and the current yield is greater than the
yield to maturity.
D. the coupon rate is less than the current yield, and the current yield is less than yield
to maturity.
E. None of the options are true.
Suppose you purchase one share of the stock of Volatile Engineering Corporation at the
beginning of year 1 for $36. At the end of year 1, you receive a $2 dividend and buy
one more share for $30. At the end of year 2, you receive total dividends of $4 (i.e., $2
for each share) and sell the shares for $36.45 each. The dollar-weighted return on your
investment is
A. –1.75%.
B. 4.08%.
C. 8.53%.
D. 8.00%.
E. 12.35%.
In developing the APT, Ross assumed that uncertainty in asset returns was a result of
A. a common macroeconomic factor.
B. firm-specific factors.
C. pricing error.
D. a common macroeconomic factor and firm-specific factors.
Buyers of call options __________ required to post margin deposits, and sellers of put
options __________
required to post margin deposits.
A. are; are not
B. are; are
C.are not; are
D. are not; are not
E. are always; are sometimes
For a two-stock portfolio, what would be the preferred correlation coefficient between
the two stocks?
A. +1.00
B. +0.50
C. 0.00
D. –1.00
E. None of the options are correct.
The financial statements of Midwest Tours are given below.
Note: The common shares are trading in the stock market for $36 each.
Refer to the financial statements of Midwest Tours. The firm’s average collection period
for 2009 is
A. 69.35.
B. 69.73.
C. 68.53.
D. 67.77.
E. 68.52.
The most widely used monetary tool is
A. altering the discount rate.
B. altering the reserve requirements.
C.-open-market operations.
D. altering marginal tax rates.
E. None of the options are correct.
Of the following types of mutual funds, an investor who wishes to invest in a
diversified portfolio of foreign stocks (excluding the U.S.) should choose
A. international funds.
B. global funds.
C. regional funds.
D. emerging-market funds.
Consider the Treynor-Black model. The alpha of an active portfolio is 2%. The
expected return on the market
index is 16%. The variance of return on the market portfolio is 4%. The nonsystematic
variance of the active
portfolio is 1%. The risk-free rate of return is 8%. The beta of the active portfolio is 1.
The optimal proportion to
invest in the active portfolio is
A. 0%.
B. 25%.
C. 50%.
D.100%.
You purchased an annual-interest coupon bond one year ago with six years remaining to
maturity at the time of purchase. The coupon interest rate is 10%, and par value is
$1,000. At the time you purchased the bond, the yield to maturity was 8%. If you sold
the bond after receiving the first interest payment and the bond’s yield to maturity had
changed to 7%, your annual total rate of return on holding the bond for that year would
have been
A. 7.00%.
B. 8.00%.
C. 9.95%.
D. 11.95%.
E. None of the options are correct.
Consider the one-factor APT. Assume that two portfolios, A and B, are well diversified.
The betas of portfolios A and B are 1.0 and 1.5, respectively. The expected returns on
portfolios A and B are 19% and 24%, respectively. Assuming no arbitrage opportunities
exist, the risk-free rate of return must be
A. 4.0%.
B. 9.0%.
C. 14.0%.
D. 16.5%.
Investment bankers perform which of the following role(s)?
A. Market new stock and bond issues for firms
B. Provide advice to the firms as to market conditions, price, etc.
C. Design securities with desirable properties
D. All of the options
E. None of the options
Assume that the Federal Reserve decreases the money supply. This action will cause
________ to decrease.
A. interest rates
B. the unemployment rate
C.-investment in the economy
D. trade balance
Low P/E ratios tend to indicate that a company will _______, ceteris paribus.
A. grow quickly
B. grow at the same speed as the average company
C. grow slowly
D. P/E ratios are unrelated to growth.
E. None of the options are correct.
Other things equal, the price of a stock call option is positively correlated with which of
the following factors?
A. The stock price
B. The time to expiration
C. The stock volatility
D. The exercise price
E. The stock price, time to expiration, and stock volatility
Suppose two portfolios have the same average return and the same standard deviation
of returns, but portfolio A has a higher beta than portfolio B. According to the Sharpe
measure, 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 as there are no data on the alpha of the portfolio.
E. None of the options are correct.
The present value of growth opportunities (PVGO) is equal to
I) the difference between a stock’s price and its no-growth value per share.
II) the stock’s price.
III) zero if its return on equity equals the discount rate.
IV) the net present value of favorable investment opportunities.
A. I and IV
B. II and IV
C. I, III, and IV
D. II, III, and IV
E. III and IV
SGA Consulting had a FCFE of $3.2M last year and has 3.2M shares outstanding.
SGA’s required return on equity is 13%, and WACC is 11.5%. If FCFE is expected to
grow at 8.5% forever, the intrinsic value of SGA’s shares is
A. $21.60.
B. $26.56.
C. $244.42.
D. $24.11.
What is the yield to maturity on a 3-year zero-coupon bond?
The following is a list of prices for zero-coupon bonds with different maturities and par
values of $1,000.
A. 6.37%
B. 9.00%
C. 7.33%
D. 8.24%
An investor will take as large a position as possible when an equilibrium-price
relationship is violated. This is an example of
A. a dominance argument.
B. the mean-variance efficiency frontier.
C. a risk-free arbitrage.
D. the capital asset pricing model.
