Archives: Quiz

We all learn values from sources such as family, religion, and school. Why might these sources of individual values not prove very helpful when making complex business decisions? Which two developing countries are expected to generate some of the largest […]

In today’s world, investor’s time horizons have lengthened. At a given point in time the SML dictates that a security with a beta of 1.10 should require a return of 18 percent. Analysts determine that a particular stock with an […]

Who benefits from a futures contract, a call contract, and a put contract, if prices fall? Regardless of its maturity date, it is very unusual for a coupon-paying bond to have duration greater than: a. 3 years. b. 5 years. […]

Survivorship bias occurs when mutual funds are merged or liquidated and only surviving funds’ performance is reported. With the introduction of risk-free borrowing and lending changes the nature of the original Markowitz efficient frontier by turning the efficient frontier into […]

Nonmarketable investments would include savings accounts at banks and Treasury bills. Portfolio diversification often focuses on cross-industry diversification to pick up correlation coefficients and risk-expected return characteristics that create the portfolio effect. Suggest a realignment of “industry” classifications to reflect […]

The CML indicates the required return for each portfolio risk level. Under the weak form of the EMH, technical analysis relying on the history of price information is of no value in trying to outperform the future market. Answer: T […]

Explain the characteristic line in excess return form for the Jensen alpha measure. The characteristic line is the regression fitting total returns for a stock against total returns for the market, and is sometimes calculated using excess returns. Answer: T […]

An investor who believes in the strong form of the EMH should be an active investor. Calendar market anomalies include day-of-the-week, turn-of-the-month, day preceding a holiday effect. Answer: T What is the difference between the insurance offered by the Securities […]

What is the advance-decline line? What does it tell the technician? Should an investor seek companies with low P/Es or high P/Es? Answer: Investors differ in their philosophies. Investors who seek low P/E companies are “value” investors. They think that […]

The geometric mean for the S&P 500 for the period 1920-2005 was between 15 and 20 percent. Calculate the future value of $100,000 at the end of 64 years given an interest rate of 10.38 percent. Answer: Future Value = […]

Some companies, for example Apple, tend to provide low guidance, contributing toward consistently positive earnings surprises. Charles Schwab, Fidelity and Vanguard are examples of premium discount brokers. Answer: T The single index model requires (3n+2) total pieces of data to […]

Unlike the CAPM, the APT does not assume borrowing and lending at the risk-free rate. Why have dividends historically been important in the valuation of common stock? Answer: Dividends are the only cash payments a stockholder receives directly from a […]

Portfolio risk can be reduced by reducing portfolio weights for assets with positive correlations. The two basic spreads are the: time spread and price spreadput spread and call spreadtime spread and money spreadmoney spread and rate spread Answer: c Based […]

An investor has the alternative of buying 100 shares of XYZ at $50 per share or investing the same amount of money in XYZ 6-month calls priced at $5. Calculate the profit or loss from each strategy if the price […]

What is the difference between a price-weighted index and a market-value index? Using the separation theorem, it is necessary to match each investor’s indifference curves with a particular efficient portfolio. Answer: F The use of stock certificates, compared to book-entry […]

Unlike discounted cash flow techniques, relative valuation does not require comparatively strong assumptions about the inputs that lead to an estimate of stock value. S&P’s Outlook reports intrinsic value for stocks based on a combination of relative valuation and discounted […]

How does the prudent man rule affect asset allocation? As a measure of market risk, the beta for the S&P 500 is generally considered to be: a. -1.0 b. 1.0 c. 0 d. impossible to determine Answer: b The par […]

An investor using the buy-and-hold strategy will receive dividends to reinvest. What dividend option do many companies offer that would make this strategy even more passive? Value investing implies investors should always buy stocks with the lowest P/E ratios. Answer: […]

An earnings announcement effect would not be considered a good test of the weak form of the EMH. If a preferred stock issue is cumulative, this means: a . unpaid preferred stock dividends are paid at the end of the […]

Most investors should keep a watch on the Federal Reserve because of the effect of the money supply on interest rates. What impact does the increasing amount of institutional investing have on securities markets today and what role do you […]

The consolidation phase of the life cycle begins when the investor reaches retirement. In order to determine the expected return of a portfolio, all of the following must be known, except: probabilities of expected returns of individual assetsweight of each […]

The standard option contract is for: 10 shares of stock50 shares of stock100 shares of stock1 share of stock In the case of a corporate bankruptcy, bondholders are paid before any distributions are paid to preferred or common stockholders. Answer: […]

What is the best measure of risk for returns of a sole proprietorship? Compare the obligation entered into in a futures contract to the obligation in an options contract. Answer: The buyer in an options contract has the choice of […]

Which of the following statements regarding duration is INCORRECT? a. Yield to Maturity is inversely related to duration, holding coupon and maturity constant. b. Coupon is inversely related to duration, holding maturity and YTM constant. c. For all coupon-paying bonds, […]

A company’s founders, friends and family are typically the main investors in the pioneering stage of any company. A well diversified portfolio will typically consist of a mix of small, mid and large cap stocks, both U.S. and foreign, as […]

The major problem with Markowitz diversification model is that it requires a full set of ________________________ between the returns of all securities being considered in order to calculate portfolio variance. The ———– is 1 plus the total return. arithmetic meanreturn […]

Which of the following types of funds tends to keep 25% of its assets in the securities of U.S. companies?. emerging markets fundssingle-country fundsinternational fundsglobal funds A belief in the size-effect anomaly should encourage investors to buy large-firm stocks. Answer: […]

Portfolio performance evaluation is an important determinant of your success in financial planning. What is a hedge ratio? Answer: The hedge ratio for a call is N(d1) from the Black-Scholes model. It is commonly called delta. It shows the change […]

If a mutual fund holds a substantial amount of Treasury bills, it is probably a tax-exempt fund.conservative bond fund.bond income fundmoney market mutual fund. Betas of individual securities are unstable over time. What are some characteristics that could cause a […]

An efficiently diversified portfolio still has _____________________ risk. Most short sales are executed by the broker acting as the ‘lender’ of the security sold. Answer: T Under new SEC rules adopted in 2002, price targets for stocks are to be […]

Explain what is efficient about the efficient frontier. In the expansion stage, products become more standardized. Answer: F When should companies in cyclical industries be bought? Answer: An investor would like to buy cyclical stocks in a recession when earnings […]

Open orders, if not cancelled or renewed, remain in effect for: a. one week. b. one month. c. six months d. twelve months. Jensen’s measure of performance is based on the CAPM. Answer: T The major attraction of municipal bonds […]

Standard & Poor’s industry analysis has been shown to be less accurate in predicting expected performance than the Value Line Investment Survey. Which of the following is a characteristic of the short interest ratio: It is: a. calculated daily as […]

The S&P 500 comprises approximately ________________ percent of the market capitalization of all U.S. publicly traded companies. What are the implications of the article “Overcoming the Bear Market Blues” for investors? Answer: Two points emerge: The first is that the […]

You calculate the intrinsic value of a stock to be $27. You check The Wall Street Journal and find the actual price to be $30. What could differ in your analysis and the market’s valuation? If you are confident about […]

A portfolio is said to be immunized if: a. the present value of the cashflows equals the principal. b. the duration of the portfolio is equal to the term. c. the present value of the cashflows is greater than the […]

The P/E ratio can be expected to change as the expected dividend payout ratio changes. One of the major benefits of employing a buy and hold strategy is the savings on trading costs. Answer: T Standard deviation, beta and coefficient […]

An environmentally-friendly balanced mutual fund began the year with a net asset value (NAV) of $12.25 per share. During the year it received $00 dividend and interest income, $0.25 in realized capital gains, and $0.50 in unrealized capital gains. Ninety […]

How does the increased globalization of business and finance affect business cycles and the leading, lagging, and coincident economic indicators? Spreads are used to: a. increase the return potential b. circumvent option commissions c. reduce risk in an option position. […]

The CML states that all investors should invest in the same portfolio of risky assets. When returns are perfectly positively correlated, the risk of the portfolio is: zerothe weighted average of the individual securities riskequal to the correlation coefficient between […]

Index funds tend to have lower expenses than other funds because they don ‘t incur the costs of professional portfolio management. Which of the following is NOT true regarding bond maturities? a. Short maturities sacrifice price appreciation opportunities. b. Longer […]

The dollar-weighted rate of return is equivalent to the internal rate of return. Orders on Nasdaq come from market makers, ECNs and on-line brokers. Answer: T Calendar market anomalies include the neglected firm effect, which means few analysts follow the […]

Most full-service stockbrokers derive over 80% of their income from customer commissions. You invested $10,000 10 years ago into Fly-By-Night Fund which has reported performance (average annual total return) of 11.12% over this 10-year period. What would your ending wealth […]

A filter rule specifies a breakpoint for a stock or average and trades are made when the price is greater than the filter. Buying Treasury securities through the Treasury Direct Program eliminates all brokerage commissions and other fees. Answer: F […]

The Markowitz Model does not depend on the assumption of normally distributed security returns. Present value is based on the concept of: compoundingsystematic riskdurationdiscounting Answer: d A 25-year old college graduate is participating in a 401(k) retirement plan and wishes […]

Give several examples of government effects on industries. What makes the risk-expected return profile attractive to speculators who purchase put and call options? What is the risk-expected return profile for writers of naked put and call options? Answer: Put and […]

In the model P/E = (D1/E1)/(k – g), the P/E should increase if the dividend payout rate increases, other things the same. If the payout rate was intentionally increased by the board of directors, other things are likely not to […]

The expected value is the: inverse of the standard deviationcorrelation between a security’s risk and return.weighted average of all possible outcomes.same as the discrete probability distribution. What is the major drawback of the total return measure? Why is it the […]

Time-weighted as opposed to dollar-weighted return captures rate of return actually earned by the portfolio manager. None of the asset-pricing models assume that the market is perfect. Answer: F All asset management accounts offer automatic reinvestment of credit balances in […]

If the risk free lending rate is lower than the borrowing rate, what would the shape of the CML and efficient frontier look like? Answer: The CML would go from the risk-free rate on the Y intercept to the point […]