FIN 401 Final Study Guide

You purchased 200 shares of ABC common stock on margin at $50 per share. Assume the initial margin is 50% and the maintenance margin is 30%. You will get a margin call if the stock drops below ________. (Assume the stock pays no dividends, and ignore interest on the margin loan.)

$35.71

You sold short 300 shares of common stock at $30 per share. The initial margin is 50%. You must put up _________.

$4,500

You invest $1,000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 16% and a standard deviation of 20% and a Treasury bill with a rate of return of 6%. The slope of the capital allocation line formed with the risky asset and the risk-free asset is approximately _________.

.50

The return on the risky portfolio is 15%. The risk-free rate, as well as the investor'sIf the standard deviation on the complete portfolio is 25%, the expected return on the complete portfolio is _________.borrowing rate, is 10%. The standard deviation of return on the risky portfolio is 20%

16.25%

The margin requirement on a stock purchase is 25%. You fully use the margin allowed to purchase 100 shares of MSFT at $25. If the price drops to $22, what is your percentage loss?

48%

An investor purchases one municipal bond and one corporate bond that pay rates of return of 5% and 6.4%, respectively. If the investor is in the 15% tax bracket, his after- tax rates of return on the municipal and corporate bonds would be, respectively, _____.

5% and 5.44%

The geometric average of -12%, 20%, and 25% is _________.

9.7%

Which of the following arguments supporting passive investment strategies is (are) correct? I. Active trading strategies may not guarantee higher returns but guarantee higher costs. II. Passive investors can free-ride on the activity of knowledge investors whose trades force prices to reflect currently available information. III. Passive investors are guaranteed to earn higher rates of return than active investors over sufficiently long time horizons.

I and II only

An example of a real asset is: I. A college education II. Customer goodwill III. A patent

I, II, and III

Restrictions on trading involving insider information apply to: I. Corporate officers and directors II. Major stockholders III. Relatives of corporate directors and officers

I, II, and III

Which of the following are financial assets? I. Debt securities II. Equity securities III. Derivative securities

I, II, and III

Which of the following indexes are market value-weighted? I. The NYSE Composite II. The S&P 500 III.The Wilshire 5000

I, II, and III

Which of the following is not an example of a financial intermediary?

IBM

Which one of the following statements about IPOs is not true?

IPOs generally provide superior long-term performance as compared to other stocks.

Which one of the following would be considered a risk-free asset in real terms as opposed to nominal?

U.S. T-bill whose return was indexed to inflation

The systemic risk that led to the financial crisis of 2008 was increased by _____ .

all of the options

__________ are examples of financial intermediaries.

all of the options

Which of the following is an example of an agency problem?

all of the options are examples of agency problems

Financial markets allow for all but which one of the following?

allow most participants to routinely earn high returns with low risk

The ______ measure of returns ignores compounding.

arithmetic average

After considering current market conditions, an investor decides to place 60% of her funds in equities and the rest in bonds. This is an example of _____ .

asset allocation

An investor in a T-bill earns interest by _________.

buying the bill at a discount from the face value to be received at maturity

The ________ the ratio of municipal bond yields to corporate bond yields, the _________ the cutoff tax bracket at which more individuals will prefer to hold municipal debt.

higher; lower

Purchases of new issues of stock take place _________.

in the primary market

Underwriting is one of the services provided by _____.

investment bankers

Firms that specialize in helping companies raise capital by selling securities to the public are called _________.

investment banks

Which one of the following is a true statement regarding the Dow Jones Industrial Average?

it is a price-weighted average of 30 large industrial stocks.

During the 1926-2013 period the Sharpe ratio was greatest for which of the following asset classes?

large U.S. stocks

Commercial paper is a short-term security issued by __________ to raise funds.

large well-known companies

Market signals will help to allocate capital efficiently only if investors are acting _____ .

on accurate information

__________ is (are) real assets.

production equipment

__________ assets generate net income to the economy, and __________ assets define allocation of income among investors.

real, financial

Surf City Software Company develops new surf forecasting software. It sells the software to Microsoft in exchange for 1,000 shares of Microsoft common stock. Surf City Software has exchanged a _____ asset for a _____ asset in this transaction.

real; financial

A major cause of the mortgage market meltdown in 2007 and 2008 was linked to ________.

securitization

Historically, small-firm stocks have earned higher returns than large-firm stocks. When viewed in the context of an efficient market, this suggests that ___________

small firms are riskier than large firms

The reward-to-volatility ratio is given by _________.

the slope of the capital allocation line

The most marketable money market security is _____.

treasury bills

_____ is a mechanism for mitigating potential agency problems.

tying income of managers to success of the firm

You short-sell 200 shares of Tuckerton Trading Co., now selling for $50 per share. What is your maximum possible loss?

unlimited