The ____________ provides an unequivocal statement on the expected return-beta
relationship for all assets, whereas the _____________ implies that this relationship
holds for all but perhaps a small number of securities.
A. APT; CAPM
B. APT; OPM
C. CAPM; APT
D. CAPM; OPM
Two firms, C and D, both produce coat hangers. The price of coat hangers is $1.20
each. Firm C has total fixed costs of $750,000 and variable costs of 30 per coat hanger.
Firm D has total fixed costs of $400,000 and variable costs of 50 per coat hanger. The
corporate tax rate is 40%. If the economy is strong, each firm will sell 2,000,000 coat
hangers. If the economy enters a recession, each firm will sell 1,400,000 coat hangers.
If the economy is strong, the before-tax profit of firm C will be
A. $1,680,000.
B.-$1,050,000.
C. $510,000.
D. $204,000.
Investors can ______ invest in an industry with the highest expected return by
purchasing ______.
A.-most easily; industry-specific iShares
B. not; industry-specific iShares
C. most easily; industry-specific ADRs
D. not; individual stocks
E. None of the options are correct.
Which statement is not true regarding the market portfolio?
A. It includes all publicly-traded financial assets.
B. It lies on the efficient frontier.
C. All securities in the market portfolio are held in proportion to their market values.
D. It is the tangency point between the capital market line and the indifference curve.
E. All of the options are true.
The objectives of personal trusts normally are __________ in scope than those of
individual investors, and personal trust managers typically are __________ than
individual investors.
A. broader; more risk averse
B. broader; less risk averse
C. more limited; more risk averse
D. more limited; less risk averse
Work by Amihud and Mendelson (1986, 1991)
A. argues that investors will demand a rate of return premium to invest in less liquid
stocks.
B. may help explain the small firm effect.
C. may be related to the neglected firm effect.
D. may help explain the small firm effect and may be related to the neglected firm
effect.
E. All of the options are correct.
______ is a measure of what the firm would have earned if it didn’t have any
obligations to creditors or tax authorities.
A. Net Sales
B. Operating Income
C. Net Income
D. Non-operating Income
E. Earnings before interest and taxes
What is the yield to maturity of a 2-year bond?
A. 4.6%
B. 4.9%
C. 5.2%
D. 4.7%
E. 5.8%
Using local currency returns, the S&P 500 has the highest correlation with
A. Euronext.
B. FTSE.
C. Nikkei.
D. Toronto.
When a company sets up a defined contribution pension plan, the __________ bears all
the risk, and the __________ receives all the return from the plan’s assets.
A. employee; employee
B. employee; employer
C. employer; employee
D. employer; employer
E. Cannot determine; depends on the economic environment.
Which one of the following stock index futures has a multiplier of $50 times the index
value?
A. Mini-Russell 2000
B. FTSE 100
C. S&P Mid-Cap
D. DAX-30
E. Russell 2000 and S&P Mid-Cap
Assume that stock market returns do not resemble a single-index structure. An
investment fund analyzes 132 stocks in order to construct a mean-variance efficient
portfolio constrained by 132 investments. They will need to calculate ____________
covariances.
A. 100
B. 132
C. 4,950
D. 8,646
__________ effects can help explain momentum in stock prices.
A. Conservatism
B. Regret avoidance
C. Prospect theory
D. Mental accounting
E. Model risk
A swap
A. obligates two counterparties to exchange cash flows at one or more future dates.
B. allows participants to restructure their balance sheets.
C. allows a firm to convert outstanding fixed rate debt to floating rate debt.
D. obligates two counterparties to exchange cash flows at one or more future dates and
allows participants to restructure their balance sheets.
E. All of the options are correct.
Which of the following is a (are) result(s) of the Fama and French (2002) study of the
equity premium puzzle?
I) Average realized returns during 1950 1999 exceeded the internal rate of return (IRR)
for corporate investments.
II) The statistical precision of average historical returns is far higher than the precision
of estimates from the dividend discount model (DDM).
III) The reward to variability ratio (Sharpe) derived from the DDM is far more stable
than that derived from realized returns.
IV) There is no difference between DDM estimates and actual returns with regard to
IRR, statistical precision, or the Sharpe measure.
A. I, II, and III
B. I and III
C. I and II
D. II and III
E. IV
A firm has a return on equity of 20% and a dividend-payout ratio of 30%. The firm’s
anticipated growth rate is
A. 6%.
B. 10%.
C. 14%.
D. 20%.
If a firm follows a low-investment-rate plan (applies a low plowback ratio), its
dividends will be _______ now and _______ in the future than a firm that follows a
high-reinvestment-rate plan.
A. higher; higher
B. lower; lower
C. lower; higher
D. higher; lower
E. It is not possible to tell.
When an investor adds international stocks to his or her U.S. stock portfolio,
A. it will raise his or her risk relative to the risk he or she would face just holding U.S.
stocks.
B. he or she can reduce the risk of his or her portfolio.
C. he or she will increase his or her expected return but must also take on more risk.
D. it will have no impact on either the risk or the return of his or her portfolio.
E. he or she needs to seek professional management because he or she doesn’t have
access to international investments on his or her own.
You buy 300 shares of Qualitycorp for $30 per share and deposit initial margin of 50%.
The next day, Qualitycorp’s price drops to $25 per share. What is your actual margin?
A. 50%
B. 40%
C. 33%
D. 60%
E. 25%
If interest rate parity holds,
A. covered interest arbitrage opportunities will exist.
B. covered interest arbitrage opportunities will not exist.
C. arbitragers will be able to make risk-free profits.
D. covered interest arbitrage opportunities will exist, and arbitragers will be able to
make risk-free profits.
E. covered interest arbitrage opportunities will not exist, and arbitragers will be able to
make risk-free profits. If interest rate parity holds, covered interest arbitrage
opportunities will not exist.
A put option has an intrinsic value of zero if the option is
A. at the money.
B. out of the money.
C. in the money.
D. at the money and in the money.
E. at the money or out of the money.
According to the CFA Institute Standards of Professional Conduct, CFA Institute
members have responsibilities to all of the following, except
A. the government.
B. the profession.
C. the public.
D. the employer.
E. clients and prospective clients.
Pension funds
I) accept contributions from employers, which are tax deductible.
II) pay distributions that are taxed as ordinary income.
III) pay benefits only from the income component of the fund.
IV) accept contributions from employees, which are not tax deductible.
A. I and IV
B. II and III
C. I and II
D. I, II, and IV
E. I, II, III, and IV
Your opinion is that CSCO has an expected rate of return of 0.13. It has a beta of 1.3.
The risk-free rate is 0.04
and the market expected rate of return is 0.115. According to the Capital Asset Pricing
Model, this security is
A. underpriced.
B. overpriced.
C. fairly priced.
D. Cannot be determined from data provided.
SIVs are
A. structured investment vehicles.
B. structured interest rate vehicles.
C. semi-annual investment vehicles.
D. riskless investments.
E. structured insured variable rate instruments. SIVs are structured investment vehicles.
Suppose two portfolios have the same average return and the same standard deviation
of returns, but Aggie Fund has a higher beta than Raider Fund. According to the
Treynor measure, the performance of Aggie Fund
A. is better than the performance of Raider Fund.
B. is the same as the performance of Raider Fund.
C. is poorer than the performance of Raider Fund.
D. cannot be measured as there are no data on the alpha of the portfolio.
Theoretically, takeovers should result in
A. improved management.
B. increased stock price.
C. increased benefits to existing management of the taken-over firm.
D. improved management and increased stock price.
E. All of the options.
Kurtosis is a measure of
A. how fat the tails of a distribution are.
B. the downside risk of a distribution.
C. the normality of a distribution.
D. the dividend yield of the distribution.
E. how fat the tails of a distribution are.
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 time-weighted return on your
investment is
A. –1.75%.
B. 4.08%.
C. 6.74%.
D. 11.46%.
E. 12.35%.
Consider these two investment strategies:
Strategy __________ is the dominant strategy because __________.
A. 1; it is riskless
B. 1; it has the highest reward/risk ratio
C.2; its return is greater than or equal to the return of Strategy 1
D. 2; it has the highest reward/risk ratio
E. Both strategies are equally preferred.
Your opinion is that security A has an expected rate of return of 0.145. It has a beta of
1.5. The risk-free rate is
0.04, and the market expected rate of return is 0.11. According to the Capital Asset
Pricing Model, this security
Is
A. underpriced.
B. overpriced.
C. fairly priced.
D. Cannot be determined from data provided.