The expected rate of return of a portfolio of risky securities is _________.
A. the sum of the securities’ covariance
B. the sum of the securities’ variance
C. the weighted sum of the securities’ expected returns
D. the weighted sum of the securities’ variance
A time spread may be executed by _____.
A. selling an option with one exercise price and buying a similar one with a different
exercise price
B. buying two options that have the same expiration dates but different strike prices
C. selling two options that have the same expiration dates but different strike prices
D. selling an option with one expiration date and buying a similar option with a
different expiration date
The risk-free interest rate in the United States is 4%, while the risk-free interest rate in
the United Kingdom is 9%. If the British pound is worth $2 in the spot market, a 1-year
futures rate on the British pound should be worth __________.
A. $1.83
B. $1.91
C. $2.08
D. $2.18
Which of the following is the least likely to be included in the portfolio management
process?
A. monitoring market conditions and relative values
B. monitoring investor circumstances
C. identifying investor constraints and preferences
D. organizing the investment management process itself
The term hedge refers to an investment that is used ________________.
A. primarily for tax-loss selling purposes
B. to mitigate specific financial risks
C. to conceal one’s true investment strategy from other market participants
D. primarily to defer capital losses
A portfolio manager sells Treasury bonds and buys corporate bonds because the spread
between corporate- and Treasury-bond yields is higher than its historical average. This
is an example of __________ swap.
A. a pure yield pickup
B. a rate anticipation
C. a substitution
D. an intermarket spread
The two most important factors in describing an individual’s or organization’s
investment objectives are ________________.
A. income level and age
B. income level and risk tolerance
C. age and risk tolerance
D. return requirement and risk tolerance
Based on the example used in the book, a perfect market timer would have made
_______ by 2008 on a $1 investment made in 1926.
A. $100
B. $1,626
C. $1.5 million
D. $36.7 billion
The intrinsic value of an out-of-the-money call option ___________.
A. is negative
B. is positive
C. is zero
D. cannot be determined
An investor can earn a 6% nominal rate of return, but inflation is expected to be 3%. If
the individual invests $2,000 per year for 20 years, the real future value of this
investment is ________. (All investments occur at year-end).
A. $73,571
B. $66,334
C. $53,251
D. $48,732
The holding-period return on a stock was 32%. Its beginning price was $25, and its cash
dividend was $1.50. Its ending price must have been
_________.
A. $28.50
B. $33.20
C. $31.50
D. $29.75
You find that a firm that uses debt has a compound leverage factor less than 1. This tells
you that ________.
A. the firm’s use of financial leverage is positively contributing to ROE
B. the firm’s use of financial leverage is negatively contributing to ROE
C. the firm’s use of operating leverage is positively contributing to ROE
D. the firm’s use of operating leverage is negatively contributing to ROE
If you start saving for retirement only in your later years and your income growth from
that point is rapid, then ________________________.
A. a traditional retirement plan is probably a better choice than a Roth retirement plan
B. a Roth retirement plan is probably a better choice than a traditional retirement plan
C. a SEP is probably a better choice than Medicare
D. a 401k is probably a better choice than a 403b
In a defined contribution pension plan, the _____ bears all of the fund’s investment
performance risk.
A. employer
B. employee
C. fund manager
D. government
Two investment advisers are comparing performance. Adviser A averaged a 20% return
with a portfolio beta of 1.5, and adviser B averaged a 15% return with a portfolio beta
of 1.2. If the T-bill rate was 5% and the market return during the period was 13%,
which adviser was the better stock picker?
A. Advisor A was better because he generated a larger alpha.
B. Advisor B was better because she generated a larger alpha.
C. Advisor A was better because he generated a higher return.
D. Advisor B was better because she achieved a good return with a lower beta.
Whenever OPEC attempts to influence the price of oil by significantly altering
production, economists refer to this type of event as a ______________.
A. demand shock
B. equilibrium event
C. expanding commodity event
D. supply shock
When dividend-paying assets are involved, the spot-futures parity relationship can be
stated as _________________.
A. F1=S0(1 +rf)
B. F0=S0(1 +rf–d)T
C. F0=S0(1 +rf+d)T
D. F0=S0(1 +rf)T
Asset A has an expected return of 20% and a standard deviation of 25%. The risk-free
rate is 10%. What is the reward-to-variability ratio?
A. .40
B. .50
C. .75
D. .80
Which of the following provides the best example of a systematic-risk event?
A. A strike by union workers hurts a firm’s quarterly earnings.
B. Mad Cow disease in Montana hurts local ranchers and buyers of beef.
C. The Federal Reserve increases interest rates 50 basis points.
D. A senior executive at a firm embezzles $10 million and escapes to South America.
If a stock is correctly priced, then you know that ____________.
A. the dividend payout ratio is optimal
B. the stock’s required return is equal to the growth rate in earnings and dividends
C. the sum of the stock’s expected capital gain and dividend yield is equal to the stock’s
required rate of return
D. the present value of growth opportunities is equal to the value of assets in place
The __________ was established to protect investors from losses if their brokerage
firms fail.
A. CFTC
B. SEC
C. SIPC
D. AIMR
An investment earns 10% the first year, earns 15% the second year, and loses 12% the
third year. The total compound return over the 3 years was ______.
A. 41.68%
B. 11.32%
C. 3.64%
D. 13%
The quick ratio is a measure of a firm’s __________.
A. asset turnover
B. market valuation
C. liquidity
D. interest burden
Consider the one-factor APT. The variance of the return on the factor portfolio is .08.
The beta of a well-diversified portfolio on the factor is 1.2. The variance of the return
on the well-diversified portfolio is approximately _________.
A. .1152
B. .1270
C. .1521
D. .1342
Which of the following typically strives to earn a return on their investments that
exceeds the actuarially determined rate of return?
A. banks
B. thrifts
C. mutual funds
D. pension funds
Testing many different trading rules until you find one that would have worked in the
past is called _______.
A. data mining
B. perceived patterning
C. pattern searching
D. behavioral analysis
The portfolio with the lowest standard deviation for any risk premium is called
the_______.
A. CAL portfolio
B. efficient frontier portfolio
C. global minimum variance portfolio
D. optimal risky portfolio
Use the following cash flow data of Haven Hardware for the year ended December 31,
2015.
What is the net
cash provided
by operating
activities of
Haven
Hardware?
A. −$30,000
B. $220,000
C. $320,000
D. $780,000
An option with a payoff that depends on the average price of the underlying asset
during at least some portion of the life of the option is called ______ option.
A. an American
B. a European
C. an Asian
D. an Australian
As of 2014, approximately _____ of mutual fund assets were invested in equity funds.
A. 5%
B. 52%
C. 30%
D. 12%
A 6% coupon U.S. Treasury note pays interest on May 31 and November 30 and is
traded for settlement on August 10. The accrued interest on the $100,000 face amount
of this note is _________.
A. $581.9
B. $1,163.93
C. $2,32.8
D. $3,000
The commission, or front-end load, paid when you purchase shares in mutual funds
may not exceed __________.
A. 3.5%
B. 6%
C. 8.5%
D. 10%
Rank the following from highest average historical return to lowest average historical
return from 1926 to 2013.
I. Small stocks
II. Long-term bonds
III. Large stocks
IV. T-bills
A. I, II, III, IV
B. III, IV, II, I
C. I, III, II, IV
D. III, I, II, IV
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:
Ignoring commissions, the cost to establish the bull money spread with calls would be
_______.
A. $1,050
B. $650
C. $400
D. $400 income rather than cost
You can earn abnormal returns on your investments via macro forecasting ______.
A. if you can forecast the economy at all
B. if you can forecast the economy as well as the average forecaster
C. if you can forecast the economy better than the average forecaster
D. only if you can forecast the economy with perfect accuracy