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Which of the following factors affect the price of a stock option?

The risk-free rate, riskiness of the stock, and time to expiration

Which of the following is true regarding private placements of primary security offerings?

The shares are sold directly to a small group of institutional or wealthy investors.

Consider the following three stocks: Stock Price Number of shares outstanding Stock A $ 40 200 Stock B $ 70 500 Stock C $ 10 600 The value-weighted index constructed with the three stocks using a divisor of 100 is

The sum of the value of the three stocks divided by 100 is 490: [($40 × 200) + ($70 × 500) + ($10 × 600)]/100 = 490

Which of the following portfolio construction methods starts with asset allocation?

Top Down

Which statement about portfolio diversification is correct?

Typically, as more securities are added to a portfolio, total risk would be expected to decrease at a decreasing rate.

________ is a risk measure that indicates vulnerability to extreme negative returns.

Value at risk and lower partial standard deviation

You have been given this probability distribution for the holding-period return for GM stock: Stock of the Economy Probability HPR Boom 0.40 30 % Normal growth 0.40 11 % Recession 0.20 -10 % What is the expected variance for GM stock?

Variance = [0.40 (30 - 14.4)^2 + 0.40 (11 - 14.4)^2 + 0.20 (-10 - 14.4)^2] = 221.04%.

The first major step in asset allocation is

assessing risk tolerance.

Suppose you purchase one WFM May 100 call contract at $5 and write one WFM May 105 call contract at $2. If, at expiration, the price of a share of WFM stock is $103, your profit would be

$103 − $100 = $3 − ($5 − $2) = 0 $0 × 100 = $0.

You purchased one corn future contract at $2.29 per bushel. What would be your profit (loss) at maturity if the corn spot price at that time were $2.10 per bushel? Assume the contract size is 5,000 bushels and there are no transactions costs.

$2.10 − $2.29 = −$0.19 × 5,000 = −$950.

Highpoint had a FCFE of $246M last year and has 123M shares outstanding. Highpoint's required return on equity is 10%, and WACC is 9%. If FCFE is expected to grow at 8.0% forever, the intrinsic value of Highpoint's shares is

$246M/123M = $2.00 FCFE per share 2.00 × 1.08 = 2.16 2.16/(.10 - .08) = 108.

Certificates of deposit are insured for up to ____________ in the event of bank insolvency.

$250,000 The Federal Deposit Insurance Corporation (FDIC) insures saving deposits for up to $100,000.

If an investment provides a 3% return semi-annually, its effective annual rate is

(1.03)^2 - 1 = 6.09%.

_______ are examples of financial intermediaries.

- Commercial banks - Insurance companies - Investment companies - Credit unions ALL OF THE ABOVE

Investment bankers perform which of the following role(s)?

- Market new stock and bond issues for firms - Provide advice to the firms as to market conditions, price, etc. - Design securities with desirable properties

The put-call parity theorem

- allows for arbitrage opportunities if violated. - may be violated by small amounts, but not enough to earn arbitrage profits, once transaction costs are considered. - represents the proper relationship between put and call prices.

Financial intermediaries exist because small investors cannot efficiently

- diversify their portfolios. - assess credit risk of borrowers. - advertise for needed investments. - diversify their portfolios and assess credit risk of borrowers. ALL OF THE ABOVE

You sold a futures contract on oats at a futures price of 233.75, and at the time of expiration, the price was 261.25. What was your profit or loss?

-$1,375 There are 5,000 bushels per contract and prices are quoted in cents per bushel. Thus, your loss was ($2.3375 - $2.6125) = -$0.275 per bushel, or - $0.275 × 5,000 = -$1,375.

You sold a futures contract on corn at a futures price of 350, and at the time of expiration, the price was 352. What was your profit or loss?

-$100 There are 5,000 bushels per contract and prices are quoted in cents per bushel. Thus, your loss was ($3.50 - 3.52) = $0.02 per bushel, or -$0.02 × 5,000 = -$100

You purchase one September 50 put contract for a put premium of $2. What is the maximum profit that you could gain from this strategy?

-$200 + $5,000 = $4,800 (if the stock falls to zero).

You sold short 150 shares of common stock at $27 per share. The initial margin is 45%. Your initial investment was

150 shares × $27/share × 0.45 = $4,050 × 0.45 = $1,822.50.

A firm has a return on equity of 20% and a dividend-payout ratio of 30%. The firm's anticipated growth rate is

20% × 0.70 = 14%. ROE x (1-Div Payout Ratio) =

You invest $1,000 in a risky asset with an expected rate of return of 0.17 and a standard deviation of 0.40 and a T-bill with a rate of return of 0.04. What percentages of your money must be invested in the risk-free asset and the risky asset, respectively, to form a portfolio with a standard deviation of 0.20?

50% and 50% 0.20 = x(0.40) x = 50% in risky asset.

Sunshine Corporation is expected to pay a dividend of $1.50 in the upcoming year. Dividends are expected to grow at the rate of 6% per year. The risk-free rate of return is 6%, and the expected return on the market portfolio is 14%. The stock of Sunshine Corporation has a beta of 0.75. The intrinsic value of the stock is

6% + 0.75(14% - 6%) = 12% P = 1.50/(.12 - .06) = $25.

If a Treasury note has a bid price of $975, the quoted bid price in the Wall Street Journal would be

97:16 Treasuries are quoted as a percent of $1,000 and in 1/32s

The value of a futures contract for storable commodities can be determined by the _______, and the model __________ consistent with parity relationships.

CAPM and APT; will be

Security X has expected return of 14% and standard deviation of 22%. Security Y has expected return of 16% and standard deviation of 28%. If the two securities have a correlation coefficient of 0.8, what is their covariance?

Cov(rX, rY) = (0.8)(0.22)(0.28) = 0.04928. Cov(rX,rY) = (correlation coefficient)x(Std Dev1)x(StdDev2)

________ are, in essence, an insurance contract against the default of one or more borrowers.

Credit default swaps

Which one of the following stock index futures has a multiplier of 25 euros times the index?

DAX-30

Consider the following probability distribution for stocks A and B: State Probability Return Stock A Return Stock B 1 0.10 10 % 8 % 2 0.20 13 % 7 % 3 0.20 12 % 6 % 4 0.30 14 % 9 % 5 0.20 15 % 8 % The expected rates of return of stocks A and B are _____ and _____, respectively.

E(RA) = 0.1(10%) + 0.2(13%) + 0.2(12%) + 0.3(14%) + 0.2(15%) = 13.2% E(RA) = Prob(ReturnState1) + Prob(ReturnState2) + .. E(RB) = 0.1(8%) + 0.2(7%) + 0.2(6%) + 0.3(9%) + 0.2(8%) = 7.7%.

Consider the following probability distribution for stocks A and B: State Prob . Return Stock A Return on Stock B 1 0.15 8 % 8 % 2 0.20 13 % 7 % 3 0.15 12 % 6 % 4 0.30 14 % 9 % 5 0.20 16 % 11 % The expected rates of return of stocks A and B are _____ and _____, respectively.

E(RA) = 0.15(8%) + 0.2(13%) + 0.15(12%) + 0.3(14%) + 0.2(16%) = 13% E(RB) = 0.15(8%) + 0.2(7%) + 0.15(6%) + 0.3(9%) + 0.2(11%) = 8.4%.

An investor invests 35% of his wealth in a risky asset with an expected rate of return of 0.18 and a variance of 0.10 and 65% in a T-bill that pays 4%. His portfolio's expected return and standard deviation are __________ and __________, respectively.

E(rP) = 0.35(18%) + 0.65(4%) = 8.9% sP = 0.35(0.10)^1/2 = 11.07%.

Given a stock index with a value of $1,000, an anticipated dividend of $30, and a risk-free rate of 6%, what should be the value of one futures contract on the index?

F = 1,000 × (1.06) − 30 F = 1,030.00. Future = Stock Index Value x (1+Rfr) - Div

The required rate of return on equity is the most appropriate discount rate to use when applying a ______ valuation model.

FCFE

WACC is the most appropriate discount rate to use when applying a ______ valuation model.

FCFF

Stingy Corporation is expected have EBIT of $1.2M this year. Stingy Corporation is in the 30% tax bracket, will report $133,000 in depreciation, will make $76,000 in capital expenditures, and will have a $24,000 increase in net working capital this year. What is Stingy's FCFF?

FCFF = EBIT(1 - T) + depreciation - capital expenditures - increase in NWC 1,200,000(.7) + 133,000 - 76,000 - 24,000 = 873,000.

Lamm Corporation is expected have EBIT of $6.2M this year. Lamm Corporation is in the 40% tax bracket, will report $1.2M in depreciation, will make $1.4M in capital expenditures, and will have a $160,000 increase in net working capital this year. What is Lamm's FCFF?

FCFF = EBIT(1 - T) + depreciation - capital expenditures - increase in NWC 6,200,000(.6) + 1,200,000 - 1,400,000 - 160,000 = 3,360,000.

A coupon bond that pays interest semi-annually has a par value of $1,000, matures in six years, and has a yield to maturity of 9%. The intrinsic value of the bond today will be __________ if the coupon rate is 9%.

FV = 1,000 PMT = 45 n = 12 i = 4.5 PV = 1,000.00.

Which of the following items is not specified in a futures contract? I) The contract size II) The maximum acceptable price range during the life of the contract III) The acceptable grade of the commodity on which the contract is held IV) The market price at expiration V) The settlement price

II and IV

As the number of securities in a portfolio is increased, what happens to the average portfolio standard deviation?

It decreases at a decreasing rate.

Which of the following is true of the Dow Jones Industrial Average?

It is a price-weighted average of 30 large industrial stocks, and the divisor must be adjusted for stock splits.

The most common short-term interest rate used in the swap market is

LIBOR.

Who popularized the dividend discount model, which is sometimes referred to by his name?

Myron Gordon

________ is a risk measure that indicates vulnerability to extreme negative returns.

NONE OF THE OPTIONS

On January 1, the listed spot and futures prices of a Treasury bond were 95.4 and 95.6. You sold $100,000 par value Treasury bonds and purchased one Treasury bond futures contract. One month later, the listed spot price and futures prices were 95 and 94.4, respectively. If you were to liquidate your position, your profits would be a

On bonds: $95,125 − $95,000 = $125 On futures: $94,125.00 − $95,187.50 = −$1,062.50 Net profits: $125 − $1,062.50 = −$937.50.

Which of the following is not a source of systematic risk?

Personnel changes

Assume you sell short 100 shares of common stock at $30 per share, with initial margin at 50%. What would be your rate of return if you repurchase the stock at $35 per share? The stock paid no dividends during the period, and you did not remove any money from the account before making the offsetting transaction.

Profit on stock = ($30 - $35)(100) = -500 initial investment = ($30)(100)(0.5) = $1,500 return = $500/$1,500 = -33.33%.

Assume you sell short 1,000 shares of common stock at $35 per share, with initial margin at 50%. What would be your rate of return if you repurchase the stock at $25 per share? The stock paid no dividends during the period, and you did not remove any money from the account before making the offsetting transaction.

Profit on stock = ($35 - $25)(1,000) = $10,000 initial investment = ($35)(1,000)(0.5) = $17,500 return = $10,000/$17,500 = 57.14%.

The ____ is an example of a U.S. index of small firms.

Russell 2000

Given an optimal risky portfolio with expected return of 13%, standard deviation of 26%, and a risk free rate of 5%, what is the slope of the best feasible CAL?

Slope = (13 - 5)/26 = 0.31

Given an optimal risky portfolio with expected return of 20%, standard deviation of 24%, and a risk free rate of 7%, what is the slope of the best feasible CAL?

Slope = (20 - 7)/24 = .5417

The spread between the LIBOR and the Treasury-bill rate is called the

TED spread.

Which of the following is true about profits from futures contracts?

The amount that the holder of the long position gains must equal the amount that the holder of the short position loses.

Music Doctors has a beta of 2.25. The annualized market return yesterday was 12%, and the risk-free rate is currently 4%. You observe that Music Doctors had an annualized return yesterday of 15%. Assuming that markets are efficient, this suggests that

bad news about Music Doctors was announced yesterday. AR = 15% − (4% + 2.25 (8%)) = −7.0% A negative abnormal return suggests that there was firm-specific bad news.

In 2016, ____________ was(were) the least significant liability(ies) of U.S. nonfinancial businesses in terms of total value.

bank loans

An increase in the basis will __________ a long hedger and __________ a short hedger.

benefit; hurt

Covered interest arbitrage

ensures that currency futures prices are set correctly.

When assessing tail risk by looking at the 5% worst-case scenario, the most realistic view of downside exposure would be

expected shortfall and conditional tail expectation.

Foreign exchange futures markets are __________, and the foreign exchange forward markets are __________.

formal; informal

Google has a beta of 1.0. The annualized market return yesterday was 11%, and the risk-free rate is currently 5%. You observe that Google had an annualized return yesterday of 14%. Assuming that markets are efficient, this suggests that

good news about Google was announced yesterday AR = 14% − (5% + 1.0 (6%)) = +3.0%. A positive abnormal return suggests that there was firm-specific good news.

TIPS are

government bonds with par value linked to the general level of prices.

Suppose the price of a share of Google stock is $500. An April call option on Google stock has a premium of $5 and an exercise price of $500. Ignoring commissions, the holder of the call option will earn a profit if the price of the share

increases to $506. $500 + $5 = $505 (breakeven). The price of the stock must increase to above $505 for the option holder to earn a profit.

According to proponents of the efficient-market hypothesis, the best strategy for a small investor with a portfolio worth $40,000 is probably to

invest in mutual funds.

Nicholas Manufacturing just announced yesterday that its fourth quarter earnings will be 10% higher than last year's fourth quarter. Nicholas had an abnormal return of -1.2% yesterday. This suggests that

investors expected the earnings increase to be larger than what was actually announced.

LJP Corporation just announced yesterday that it would undertake an international joint venture. You observe that LJP had an abnormal return of 3% yesterday. This suggests that

investors view the international joint venture as good news

Delivery of stock index futures

is made by a cash settlement based on the index value.

The variance of a portfolio of risky securities

is the weighted sum of the securities' variances and covariances.

Risk Metrics Company is expected to pay a dividend of $3.50 in the coming year. Dividends are expected to grow at a rate of 10% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 13%. The stock is trading in the market today at a price of $90.00. What is the approximate beta of Risk Metrics's stock?

k = 13.9% 13.9 = 5% + b(13% - 5%) b = 1.11.

In 2016, ____________ was(were) the most significant financial asset(s) of U.S. commercial banks in terms of total value.

loans and leases

In 2016, ____________ was(were) the least significant financial asset(s) of U.S. nonfinancial businesses in terms of total value.

marketable securities

When assessing tail risk by looking at the 5% worst-case scenario, the VaR is the

most optimistic, as it takes the highest return (smallest loss) of all the cases.

QQAG has a beta of 1.7. The annualized market return yesterday was 13%, and the risk-free rate is currently 3%. You observe that QQAG had an annualized return yesterday of 20%. Assuming that markets are efficient, this suggests that

no significant news about QQAG was announced yesterday AR = 20% − (3% + 1.7 (10%)) = 0.0% A positive abnormal return suggests that there was firm-specific good news and a negative abnormal return suggests that there was firm-specific bad news.

Sehun (1986) finds that the practice of monitoring insider trade disclosures, and trading on that information, would be

not sufficiently profitable to cover trading costs.

Trading in stock index futures

now exceeds buying and selling of shares in most markets. increases leverage as compared to trading in stocks. generally results in faster execution than trading in stocks. reduces transactions costs as compared to trading in stocks.

Open interest includes

only long or short positions but not both.

Most corporate bonds are traded

over the counter by bond dealers linked by a computer quotation system.

If stock prices follow a random walk,

price changes are random

An investor purchases one municipal and one corporate bond that pay rates of return of 8% and 10%, respectively. If the investor is in the 20% marginal tax bracket, his or her after-tax rates of return on the municipal and corporate bonds would be ________ and ______, respectively.

rc = 0.10(1 - 0.20) = 0.08, or 8% rm = 0.08(1 - 0) = 8%. *no tax on muni's

The preliminary prospectus is referred to as a

red herring

The process of retiring high-coupon debt and issuing new bonds at a lower coupon to reduce interest payments is called

refunding.

A version of earnings management that became common in the 1990s was

reported "pro forma earnings."

The most appropriate discount rate to use when applying a FCFE valuation model is the

required rate of return on equity.

The unsystematic risk of a specific security

results from factors unique to the firm.

A municipal bond issued to finance an airport, hospital, turnpike, or port authority is typically a

revenue bond

Consider the following probability distribution for stocks A and B: State Probability Return Stock A Return Stock B 1 0.15 8 % 8 % 2 0.20 13 % 7 % 3 0.15 12 % 6 % 4 0.30 14 % 9 % 5 0.20 16 % 11 % The standard deviations of stocks A and B are _____ and _____, respectively.

sA = [0.15(8% - 13%)^2 + 0.2(13% - 13%)^2 + 0.15(12% - 13%)^2 + 0.3(14% - 13%)^2 + 0.2(16% - 13%)^2]^1/2 = 2.449% sB = [0.15(8% - 8.4%)^2 + 0.2(7% - 8.4%)^2 + 0.15(6% - 8.4%)^2 + 0.3(9% - 8.4%)^2 + 0.2(11% - 8.4%)^2]^1/2 = 1.655%.

The largest component of the money market is are

savings deposits.

Investors trade previously issued securities in the ________ market(s).

secondary

If a stock index futures contract is overpriced, you would exploit this situation by

selling the stock index futures and simultaneously buying the stocks in the index.

A trader who has a __________ position in gold futures wants the price of gold to __________ in the future.

short; decrease

The measure of risk in a Markowitz efficient frontier is

standard deviation of returns.

When a distribution is positively skewed,

standard deviation overestimates risk.

When a distribution is negatively skewed,

standard deviation underestimates risk.

Chartists practice

technical analysis.

Financial futures contracts are actively traded on the following indices except

the CAC 40 Index. the All ordinary index. the DAX 30 Index. the Toronto 35 Index.

Before expiration, the time value of a call option is equal to

the actual call price minus the intrinsic value of the call.

The Food and Drug Administration (FDA) just announced yesterday that they would approve a new cancer-fighting drug from King. You observe that King had an abnormal return of 0% yesterday. This suggests that

the approval was already anticipated by the market.

According to the put-call parity theorem, the value of a European put option on a nondividend paying stock is equal to

the call value plus the present value of the exercise price minus the stock price.

In the mean-standard deviation graph, the line that connects the risk-free rate and the optimal risky portfolio, P, is called

the capital allocation line.

A hedge ratio can be computed as

the change in value of the unprotected position for a given change in the exchange rate divided by the profit derived from one futures position for the same exchange rate.

Portfolio theory as described by Markowitz is most concerned with

the effect of diversification on portfolio risk.

According to Peter Lynch, a rough rule of thumb for security analysis is that

the growth rate should be equal to the P/E ratio.

The capital allocation line provided by a risk-free security and N risky securities is

the line tangent to the efficient frontier of risky securities drawn from the risk-free rate.

The individual investor's optimal portfolio is designated by

the point of tangency with the indifference curve and the capital allocation line.

When two risky securities that are positively correlated but not perfectly correlated are held in a portfolio,

the portfolio standard deviation will be less than the weighted average of the individual security standard deviations.

The standard deviation of a portfolio of risky securities is

the square root of the weighted sum of the securities' variances and covariances.

A firm's earnings per share increased from $10 to $12, dividends increased from $4.00 to $4.80, and the share price increased from $80 to $90. Given this information, it follows that

the stock experienced a drop in the P/E ratio. $80/$10 = 8 $90/$12 = 7.5

The value of a stock put option is positively related to the following factors except

the stock price.

The value of a stock put option is positively related to

the time to expiration and the striking price.

One reason swaps are desirable is that

they offer participants easy ways to restructure their balance sheets.

Speculators may use futures markets rather than spot markets because

transaction costs are lower in futures markets, and futures markets provide leverage.

A reward-to-volatility ratio is useful in

understanding how returns increase relative to risk increases.

Diversifiable risk is also referred to as

unique risk or firm-specific risk.

The potential loss for a writer of a naked call option on a stock is

unlimited.

The most common measure of loss associated with extremely negative returns is

value at risk.

In an efficient market the correlation coefficient between stock returns for two non-overlapping time periods should be

zero

You purchase one IBM March 200 put contract for a put premium of $6. What is the maximum profit that you could gain from this strategy?

−$600 + $20,000 = $19,400 (if the stock falls to zero).

See Candy had a FCFE of $6.1M last year and has 2.32M shares outstanding. See's required return on equity is 10.6%, and WACC is 9.3%. If FCFE is expected to grow at 6.5% forever, the intrinsic value of See's shares is

$6.1M/2.32M = $2.6293 FCFE per share 2.6293 × 1.065 = 2.800 2.80/(.106 - .065) = 68.30.

Suppose that the risk-free rates in the United States and in Canada are 3% and 5%, respectively. The spot exchange rate between the dollar and the Canadian dollar (C$) is $0.80/C$. What should the futures price of the C$ for a one-year contract be to prevent arbitrage opportunities, ignoring transactions costs.

$0.80(1.03/1.05) = $0.78/C$.

You have just purchased a 12-year zero-coupon bond with a yield to maturity of 9% and a par value of $1,000. What would your rate of return at the end of the year be if you sell the bond? Assume the yield to maturity on the bond is 10% at the time you sell.

$1,000/(1.09)^12 = $355.53 $1,000/(1.10)^11 = $350.49 par/(1+ytm)^yr ($350.49 − $355.53)/$355.53 = −1.4%. RR = (yr11 - yr12)/yr12 *uses 11 because after one year, thats whats left on the bond

Consider a $1,000-par-value 20-year zero-coupon bond issued at a yield to maturity of 10%. If you buy that bond when it is issued and continue to hold the bond as yields decline to 9%, the imputed interest income for the first year of that bond is

$1,000/(1.10)20 = $148.64 $1,000/(1.10)19 = $163.51 $163.51- $148.64 = $14.87.

A zero-coupon bond has a yield to maturity of 11% and a par value of $1,000. If the bond matures in 27 years, the bond should sell for a price of _______ today.

$1,000/(1.11)^27 = $59.74.

You have just purchased a 7-year zero-coupon bond with a yield to maturity of 11% and a par value of $1,000. What would your rate of return at the end of the year be if you sell the bond? Assume the yield to maturity on the bond is 9% at the time you sell.

$1,000/(1.11)^7 = $481.66 $1,000/(1.09)^6 = $596.27 ($596.27 − $481.66)/$481.66 = 23.8%.

A zero-coupon bond has a yield to maturity of 12% and a par value of $1,000. If the bond matures in 18 years, the bond should sell for a price of _______ today.

$1,000/(1.12)18 = $130.04. par/(1+ytm)^yr

A convertible bond has a par value of $1,000 and a current market value of $1,150. The current price of the issuing firm's stock is $65, and the conversion ratio is 15 shares. The bond's conversion premium is

$1,150 − $975 = $175. Market - (Current Price x Conversion Ratio)

You purchased a futures contract on oats at a futures price of 233.75, and at the time of expiration, the price was 261.25. What was your profit or loss?

$1,375 There are 5,000 bushels per contract and prices are quoted in cents per bushel. Thus, your profit was (2.6125 - 2.3375) = $0.275 per bushel, or $0.275 × 5,000 = $1,375.

On January 1, you sold one April S&P 500 Index futures contract at a futures price of 1,420. If, on February 1, the April futures price was 1,430, what would be your profit (loss) if you closed your position (without considering transactions costs)?

$1,420 − $1,430 = −$10 × 250 = −$2,500.

On January 1, you bought one April S&P 500 index futures contract at a futures price of 1,420. If, on February 1, the April futures price was 1,430, what would be your profit (loss) if you closed your position (without considering transactions costs)?

$1,430 − $1,420 = $10 × 250 = $2,500.

On April 1, you bought one S&P 500 Index futures contract at a futures price of 1,550. If, on June 15, the futures price was 1,612, what would be your profit (loss) if you closed your position (without considering transactions costs)?

$1,612 − $1,550 = $62 × 250 = $15,500.

Suppose that the risk-free rates in the United States and in the United Kingdom are 4% and 6%, respectively. The spot exchange rate between the dollar and the pound is $1.60/BP. What should the futures price of the pound for a one-year contract be to prevent arbitrage opportunities, ignoring transactions costs?

$1.60(1.04/1.06) = $1.57/BP.

Siri had a FCFE of $1.6M last year and has 3.2M shares outstanding. Siri's required return on equity is 12%, and WACC is 9.8%. If FCFE is expected to grow at 9% forever, the intrinsic value of Siri's shares is

$1.6M/3.2M = $0.50 FCFE per share FCFE/Shares Outstanding = FCFE per Share .50 × 1.09 = .545 FCFE per Share x (1 + Growth rate) = x .545/(.12 - .09) = 18.17. X / (ROE - Growth Rate) = Intrinsic Value

You purchased a futures contract on corn at a futures price of 350, and at the time of expiration, the price was 352. What was your profit or loss?

$100. There are 5,000 bushels per contract and prices are quoted in cents per bushel. Thus, your profit was (3.52 - 3.50) = $0.02 per bushel, or $0.02 × 5,000 = $100

SI International had a FCFE of $122.1M last year and has 12.43M shares outstanding. SI's required return on equity is 11.3%, and WACC is 9.8%. If FCFE is expected to grow at 7.0% forever, the intrinsic value of SI's shares is

$122.1M/12.43M = $9.823 FCFE per share 9.823 × 1.07 = 10.51 10.51/(.113 - .07) = 244.43.

You purchased a futures contract on corn at a futures price of 331, and at the time of expiration, the price was 343. What was your profit or loss?

$600 There are 5,000 bushels per contract and prices are quoted in cents per bushel. Thus, your profit was (3.43 - 3.31) = $0.12 per bushel, or $0.12 × 5,000 = $600.

On April 1, you sold one S&P 500 Index futures contract at a futures price of 1,550. If, on June 15, the futures price was 1,612, what would be your profit (loss) if you closed your position (without considering transactions costs)?

$1550 − $1612 = −$62 × 250 = −$15,500.

You sold one corn future contract at $2.29 per bushel. What would be your profit (loss) at maturity if the corn spot price at that time were $2.10 per bushel? Assume the contract size is 5,000 bushels and there are no transactions costs.

$2.29 − $2.10 = $0.19 × 5,000 = $950.

You purchased one wheat future contract at $3.04 per bushel. What would be your profit (loss) at maturity if the wheat spot price at that time were $2.98 per bushel? Assume the contract size is 5,000 bushels and there are no transactions costs.

$2.98 − $3.04 = −$0.06 × 5,000 = -$300.

Suppose the price of a share of IBM stock is $200. An April call option on IBM stock has a premium of $5 and an exercise price of $200. Ignoring commissions, the holder of the call option will earn a profit if the price of the share

$200 + $5 = $205 (breakeven) The price of the stock must increase to above $205 for the option holder to earn a profit.

Assume you sold short 100 shares of common stock at $70 per share. The initial margin is 50%. What would be the maintenance margin if a margin call is made at a stock price of $85?

$7,000 × 1.5 = $10,500 [$10,500 - 100($85)]/100($85) = 23.5%.

You purchased one oil future contract at $70 per barrel. What would be your profit (loss) at maturity if the oil spot price at that time is $73.12 per barrel? Assume the contract size is 1,000 barrels and there are no transactions costs.

$73.12 − $70.00 = $3.12 × 1,000 = $3,120.

An analyst has determined that the intrinsic value of IBM stock is $80 per share using the capitalized earnings model. If the typical P/E ratio in the computer industry is 22, then it would be reasonable to assume the expected EPS of IBM in the coming year is

$80(1/22) = $3.64. Stock Price(1/PE ratio)

A convertible bond has a par value of $1,000 and a current market value of $950. The current price of the issuing firm's stock is $22, and the conversion ratio is 40 shares. The bond's conversion premium is

$950 − $880 = $70. Market - (Current Stock Price x Conversion ratio)

If you took a short position in three S&P 500 futures contracts at a price of 900 and closed the position when the index futures was 885, you incurred

($900 − $885) = $15 × 250 × 3 = $11,250.

If you sold an S&P 500 Index futures contract at a price of 950 and closed your position when the index futures was 947, you incurred

($950 − $947) = $3 × 250 = $750.

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

$3.2M/3.2M = $1.00 FCFE per share 1.00 × 1.085 = 1.085 1.085/(.13 - .085) = 24.11.

An analyst has determined that the intrinsic value of Dell stock is $34 per share using the capitalized earnings model. If the typical P/E ratio in the computer industry is 27, then it would be reasonable to assume the expected EPS of Dell in the coming year will be

$34(1/27) = $1.26.

Assume you sold short 100 shares of common stock at $40 per share. The initial margin is 50%. What would be the maintenance margin if a margin call is made at a stock price of $50?

$4,000 × 1.5 = $6,000 [$6,000 - 100($50)]/100($50) = 20%.

You purchased one silver future contract at $3 per ounce. What would be your profit (loss) at maturity if the silver spot price at that time is $4.10 per ounce? Assume the contract size is 5,000 ounces and there are no transactions costs.

$4.10 − $3.00 = $1.10 × 5,000 = $5,500.

Zero had a FCFE of $4.5M last year and has 2.25M shares outstanding. Zero's required return on equity is 10%, and WACC is 8.2%. If FCFE is expected to grow at 8% forever, the intrinsic value of Zero's shares is

$4.5M/2.25M = $2.00 FCFE per share 2.00 × 1.08 = 2.16 2.16/(.10 - .08) = 108.

Seaman had a FCFE of $4.6B last year and has 113.2M shares outstanding. Seaman's required return on equity is 11.6%, and WACC is 10.4%. If FCFE is expected to grow at 5% forever, the intrinsic value of Seaman's shares is

$4.6B/113.2M = $40.636 FCFE per share 40.636 × 1.05 = 42.6678 42.6678/(.116 - .05) = 646.48.

You sold one soybean future contract at $5.13 per bushel. What would be your profit (loss) at maturity if the wheat spot price at that time were $5.26 per bushel? Assume the contract size is 5,000 bushels and there are no transactions costs.

$5.13 − $5.26 = −$0.13 × 5,000 = −$650.

You bought one soybean future contract at $5.13 per bushel. What would be your profit (loss) at maturity if the wheat spot price at that time were $5.26 per bushel? Assume the contract size is 5,000 bushels and there are no transactions costs.

$5.26 − $5.13 = $0.13 × 5,000 = $650.

You invest $100 in a risky asset with an expected rate of return of 0.11 and a standard deviation of 0.20 and a T-bill with a rate of return of 0.03. The slope of the capital allocation line formed with the risky asset and the risk-free asset is equal to

(0.11 - 0.03)/0.20 = 0.40.

ou 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. The slope of the capital allocation line formed with the risky asset and the risk-free asset is equal to

(0.11 - 0.045)/0.21 = 0.3095.

You invest $1,000 in a risky asset with an expected rate of return of 0.17 and a standard deviation of 0.40 and a T-bill with a rate of return of 0.04. The slope of the capital allocation line formed with the risky asset and the risk-free asset is equal to

(0.17 - 0.04)/0.40 = 0.325.

If an investment provides a 0.78% return monthly, its effective annual rate is

(1.0078)^12 - 1 = 9.77%.

If an investment provides a 1.25% return quarterly, its effective annual rate is

(1.0125)^4 - 1 = 5.09%.

If an investment provides a 2% return semi-annually, its effective annual rate is

(1.02)^2 - 1 = 4.04%.

If an investment provides a 2.1% return quarterly, its effective annual rate is

(1.021)^4 - 1 = 8.67%.

If a portfolio had a return of 12%, the risk-free asset return was 4%, and the standard deviation of the portfolio's excess returns was 25%, the Sharpe measure would be

(12 - 4)/25 = 0.32.

If a portfolio had a return of 15%, the risk-free asset return was 5%, and the standard deviation of the portfolio's excess returns was 30%, the Sharpe measure would be

(15 - 5)/30 = 0.33.

If a portfolio had a return of 8%, the risk-free asset return was 3%, and the standard deviation of the portfolio's excess returns was 20%, the Sharpe measure would be

(8 - 3)/20 = 0.25. ^ Sharpe Measure ^

A company whose stock is selling at a P/E ratio greater than the P/E ratio of a market index most likely has

a dividend yield which is less than that of the average firm.

If you took a short position in two S&P 500 futures contracts at a price of 1,510 and closed the position when the index futures was 1,492, you incurred

a gain of 9,000 ($1,510 − $1,492) × 250 × 2 = $9,000.

You sold a futures contract on corn at a futures price of 331, and at the time of expiration, the price was 343. What was your profit or loss?

-$600 There are 5,000 bushels per contract and prices are quoted in cents per bushel. Thus, your profit was (3.31 - 3.43) = -$0.12 per bushel, or -$0.12 × 5,000 = -$600.

The global minimum variance portfolio formed from two risky securities will be riskless when the correlation coefficient between the two securities is

-1.0.

For a two-stock portfolio, what would be the preferred correlation coefficient between the two stocks?

-1.00

A protective put strategy is

a long put plus a long position in the underlying asset.

You buy one Home Depot June 60 call contract and one June 60 put contract. The call premium is $5 and the put premium is $3. Your strategy is called

a long straddle.

You purchased one AT&T March 50 call and sold one AT&T March 55 call. Your strategy is known as

a money spread.

Bubba Gumm Company has an expected ROE of 9%. The dividend growth rate will be _______ if the firm follows a policy of plowing back 10% of earnings.

0.9 9% × 0.10 = 0.9%.

You purchased 1000 shares of CSCO common stock on margin at $19 per share. Assume the initial margin is 50%, and the maintenance margin is 30%. Below what stock price level would you get a margin call? Assume the stock pays no dividend; ignore interest on margin.

1,000 shares × $19 × 0.5 = $19,000 × 0.5 = $9,500 (loan amount) 0.30 = (1,000P - $9,500)/1,000P 300P = 1,000P - $9,500 -700P = -$9,500 P = $13.57.

You purchased 1,000 shares of common stock on margin at $30 per share. Assume the initial margin is 50%, and the stock pays no dividend. What would the maintenance margin be if a margin call is made at a stock price of $24? Ignore interest on margin.

1,000 shares × $30/share × 0.5 = $30,000 × 0.5 = $15,000 (loan amount) X = [1,000($24) - $15,000]/1,000($24) X = 0.375.

According to James Tobin, the long-run value of Tobin's Q should move toward

Consider the following: CF Now Risk-free rate in the United States 0.04/year Risk-free rate in Australia 0.03/year Spot exchange rate 1.67 A$/$ What should be the proper futures price for a 1-year contract?

1.03/1.04(1.67 A$/$) = 1.654 A$/$. (1+RfrUS)/(1+RfrAU)xSpot Rate

Patell and Woflson (1984) report that most of the stock-price response to corporate dividend or earnings announcements occurs within ____________ of the announcement.

10 minutes

Low Tech Company has an expected ROE of 10%. The dividend growth rate will be ________ if the firm follows a policy of paying 40% of earnings in the form of dividends.

10% × 0.60 = 6.0%. ROE x (1 - % of Earning Div's)

You purchased 100 shares of common stock on margin at $40 per share. Assume the initial margin is 50%, and the stock pays no dividend. What would the maintenance margin be if a margin call is made at a stock price of $25? Ignore interest on margin.

100 shares × $40/share × 0.5 = $4,000 × 0.5 = $2,000 (loan amount) X = [100($25) - $2,000]/100($25) X = 0.20.

You sold short 100 shares of common stock at $45 per share. The initial margin is 50%. Your initial investment was

100 shares × $45/share × 0.50 = $4,500 × 0.50 = $2,250.

A callable bond should be priced the same as

a straight bond plus a call option.

You purchased one AT&T March 50 put and sold one AT&T April 50 put. Your strategy is known as

a time spread.

You purchased 100 shares of XON common stock on margin at $60 per share. Assume the initial margin is 50%, and the maintenance margin is 30%. Below what stock price level would you get a margin call? Assume the stock pays no dividend; ignore interest on margin.

100 shares × $60 × 0.5 = $6,000 × 0.5 = $3,000 (loan amount) 0.30 = (100P $3,000)/100P 30 - P = 100P - $3,000 -70P = -$3,000 P = $42.86.

You purchased 100 shares of common stock on margin for $35 per share. The initial margin is 50%, and the stock pays no dividend. What would your rate of return be if you sell the stock at $42 per share? Ignore interest on margin.

100($35)(0.50) = $1,750 investment gain on stock sale = (42 - 35)(100) = $700 Return = ($700/$1,750) = 40%.

You purchased 100 shares of common stock on margin for $50 per share. The initial margin is 50%, and the stock pays no dividend. What would your rate of return be if you sell the stock at $56 per share? Ignore interest on margin.

100($50)(0.50) = $2,500 investment gain on stock sale = (56 - 50)(100) = $600 Return = ($600/$2,500) = 24%.

If a portfolio had a return of 12%, the risk-free asset return was 4%, and the standard deviation of the portfolio's excess returns was 25%, the risk premium would be

12 - 4 = 8%.

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. What percentages of your money must be invested in the risky asset and the risk-free asset, respectively, to form a portfolio with an expected return of 0.13?

130.77% and -30.77% 13% = w1(11%) + (1 - w1)(4.5%) 13% = 11%w1 + 4.5% - 4.5%w1 8.5% = 6.5%w1 w1 = 1.3077 1 - w1 = -0.3077 1.308(11%) + (-0.3077)(4.5%) = 13.00%.

Music Doctors Company has an expected ROE of 14%. The dividend growth rate will be ________ if the firm follows a policy of paying 60% of earnings in the form of dividends.

14% × 0.40 = 5.6%.

You purchase one IBM 200 call option for a premium of $6. Ignoring transaction costs, the break-even price of the position is

200 + $6 = $206

You want to purchase GM stock at $40 from your broker using as little of your own money as possible. If initial margin is 50% and you have $4,000 to invest, how many shares can you buy?

200 shares You can buy ($4,000/$40) = 100 shares outright and you can borrow $4,000 to buy another 100 shares.

Think Tank Company has an expected ROE of 26%. The dividend growth rate will be _______ if the firm follows a policy of plowing back 90% of earnings.

26% × 0.90 = 23.4%. Div Growth rate = ROE x Plowback

The following price quotations were taken from the Wall Street Journal. Stock Price Strike Price February 917/8 85 73/8 917/8 90 31/8 917/8 95 5/8 The premium on one February 90 call contract is

3 1/8 = $3.125 × 100 = $312.50 Price quotations are per share however, option contracts are standardized for 100 shares of the underlying stock thus, the quoted premiums must be multiplied by 100.

The following price quotations on WFM were taken from the Wall Street Journal. Stock Price Strike Price February 927/8 85 87/8 927/8 90 41/8 927/8 95 15/8 The premium on one WFM February 90 call contract is

4 1/8 = $4.125 × 100 = $412.50 Price quotations are per share however, option contracts are standardized for 100 shares of the underlying stock thus, the quoted premiums must be multiplied by 100.

Consider the following three stocks: Stock Price Number of shares outstanding Stock A $ 40 200 Stock B $ 70 500 Stock C $ 10 600 Assume at these prices that the value-weighted index constructed with the three stocks is 490. What would the index be if stock B is split 2 for 1 and stock C 4 for 1?

490 Value-weighted indexes are not affected by stock splits.

A firm has a return on equity of 14% and a dividend-payout ratio of 60%. The firm's anticipated growth rate is

5.6%. 14% × 0.40 = 5.6%.

You want to purchase IBM stock at $80 from your broker using as little of your own money as possible. If initial margin is 50% and you have $2,000 to invest, how many shares can you buy?

50 You can buy ($2,000/$80) = 25 shares outright and you can borrow $2,000 to buy another 25 shares.

You invest $1,000 in a risky asset with an expected rate of return of 0.17 and a standard deviation of 0.40 and a T-bill with a rate of return of 0.04. What percentages of your money must be invested in the risky asset and the risk-free asset, respectively, to form a portfolio with an expected return of 0.11?

53.8% and 46.2% 11% = w1(17%) + (1 - w1)(4%) 11% = 17%w1 + 4% - 4%w1 7% = 13%w1 w1 = 0.538 1 - w1 = 0.462 0.538(17%) + 0.462(4%) = 11.0%.

Practitioners often use a ________% VaR, meaning that ________% of returns will exceed the VaR, and ________% will be worse.

5; 95; 5

Low Fly Airline is expected to pay a dividend of $7 in the coming year. Dividends are expected to grow at the rate of 15% per year. The risk-free rate of return is 6%, and the expected return on the market portfolio is 14%. The stock of Low Fly Airline has a beta of 3.00. The intrinsic value of the stock is

6% + 3(14% - 6%) = 30% P = 7/(.30 - .15) = $46.67.

You invest $100 in a risky asset with an expected rate of return of 0.11 and a standard deviation of 0.20 and a T-bill with a rate of return of 0.03. What percentages of your money must be invested in the risk-free asset and the risky asset, respectively, to form a portfolio with a standard deviation of 0.08?

60% and 40% 0.08 = x(0.20) x = 40% in risky asset.

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. What percentages of your money must be invested in the risk-free asset and the risky asset, respectively, to form a portfolio with a standard deviation of 0.08?

61.9% and 38.1% 0.08 = x(0.21) x = 38.1% in risky asset.

You invest $100 in a risky asset with an expected rate of return of 0.11 and a standard deviation of 0.20 and a T-bill with a rate of return of 0.03. What percentages of your money must be invested in the risky asset and the risk-free asset, respectively, to form a portfolio with an expected return of 0.08?

62.5% and 37.5% 8% = w1(11%) + (1 - w1)(3%) 8% = 11%w1 + 3% - 3%w1 5% = 8%w1 w1 = 0.625 1 - w1 = 0.375 0.625(11%) + 0.375(3%) = 8.0%.

Corporations can exclude ____________% of the dividends received from preferred stock from taxes.

8 7/8 = $8.875 × 100 = $887.50 Price quotations are per share however, option contracts are standardized for 100 shares of the underlying stock thus, the quoted premiums must be multiplied by 100.

Which one of the following statements regarding "basis" is not true?

A short hedger suffers losses when the basis decreases.

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?

AM = [300 ($25) - 0.5(300) ($30)]/[300 ($25)] = 0.40.

Which of the following is used extensively in foreign trade when the creditworthiness of one trader is unknown to the trading partner?

Banker's Acceptance

Which of the following portfolio construction methods starts with security analysis?

Bottom-up

Consider a one-year maturity call option and a one-year put option on the same stock, both with striking price $100. If the risk-free rate is 5%, the stock price is $103, and the put sells for $7.50, what should be the price of the call?

C = 103 − [100/(1.05)] + 7.50; C = $15.26. Call = StockPrice - [Strike/(1+Rfr)] + Put

Consider a one-year maturity call option and a one-year put option on the same stock, both with striking price $45. If the risk-free rate is 4%, the stock price is $48, and the put sells for $1.50, what should be the price of the call?

C = 48 − [45/(1.04)] + 1.50 Call = Price - [Strike/(1+Rfr)] + Put C = $6.23.

You buy one Home Depot June 60 call contract and one June 60 put contract. The call premium is $5 and the put premium is $3. At expiration, you break even if the stock price is equal to

Call: −$60 + (−$5) + $3 = $68 (break even) Put: −$3 + $60 + (−$5) = $52 (break even) thus, if price increases above $68 or decreases below $52, a profit is realized.

________ were designed to concentrate the credit risk of a bundle of loans on one class of investor, leaving the other investors in the pool relatively protected from that risk.

Collateralized debt obligations

One year ago, you purchased a newly-issued TIPS bond that has a 4% coupon rate, five years to maturity, and a par value of $1,000. The average inflation rate over the year was 3.6%. What is the amount of the coupon payment you will receive, and what is the current face value of the bond?

Coupon = $41.44 Face = $1,036 The bond price, which is indexed to the inflation rate, becomes $1,000 × 1.036 = $1,036. The interest payment is based on the coupon rate and the new face value. The interest amount equals $1,036 × .04 = $41.44.

One year ago, you purchased a newly-issued TIPS bond that has a 5% coupon rate, five years to maturity, and a par value of $1,000. The average inflation rate over the year was 3.2%. What is the amount of the coupon payment you will receive, and what is the current face value of the bond?

Coupon = $51.60 Current Value = $1,032 The bond price, which is indexed to the inflation rate, becomes $1,000 × 1.032 = $1,032. The interest payment is based on the coupon rate and the new face value. The interest amount equals $1,032 × .05 = $51.60.

One year ago, you purchased a newly-issued TIPS bond that has a 6% coupon rate, five years to maturity, and a par value of $1,000. The average inflation rate over the year was 4.2%. What is the amount of the coupon payment you will receive, and what is the current face value of the bond?

Coupon = $62.52 Current value $1,042 The bond price, which is indexed to the inflation rate, becomes $1,000 × 1.042 = $1,042. The interest payment is based on the coupon rate and the new face value. The interest amount equals $1,042 × .06 = $62.52.

Security X has expected return of 9% and standard deviation of 18%. Security Y has expected return of 12% and standard deviation of 21%. If the two securities have a correlation coefficient of -0.4, what is their covariance?

Cov(rX, rY) = (-0.4)(0.18)(0.21) = -0.0151.

Security X has expected return of 7% and standard deviation of 14%. Security Y has expected return of 11% and standard deviation of 22%. If the two securities have a correlation coefficient of -0.45, what is their covariance?

Cov(rX, rY) = (-0.45)(0.14)(0.22) = -.01386. Cov(rX,rY) = (Corr. Coefficient)(StdDevX)(StdDevY)

Security X has expected return of 12% and standard deviation of 18%. Security Y has expected return of 15% and standard deviation of 26%. If the two securities have a correlation coefficient of 0.7, what is their covariance?

Cov(rX, rY) = (0.7)(0.18)(0.26) = 0.0327

Security M has expected return of 17% and standard deviation of 32%. Security S has expected return of 13% and standard deviation of 19%. If the two securities have a correlation coefficient of 0.78, what is their covariance?

Cov(rX, rY) = (0.78)(0.32)(0.19) = 0.0474. Cov(rX,rY) = (Corr. Coefficient)(StdDevX)(StdDevY)

The ____ is an example of a U.S. index of large firms.

DJIA

Consider the following probability distribution for stocks C and D: State Prob Return on Stock C Return on Stock D 1 0.30 7 % - 9 % 2 0.50 11 % 14 % 3 0.20 - 16 % 26 % The expected rates of return of stocks C and D are _____ and _____, respectively.

E(RC) = 0.30(7%) + 0.5(11%) + 0.20(-16%) = 4.4% E(RD) = 0.30(-9%) + 0.5(14%) + 0.20(26%) = 9.5%.

Your client, Bo Regard, holds a complete portfolio that consists of a portfolio of risky assets (P) and T-Bills. The information below refers to these assets. E(Rp) 12.00 % Standard Deviation of P 7.20 % T-Bill rate 3.60 % Proportion of Complete Portfolio in P 80 % Proportion of Complete Portfolio in T-Bills 20 % Composition of P: Stock A 40.00 % Stock B 25.00 % Stock C 35.00 % Total 100.00 % What is the expected return on Bo's complete portfolio?

E(rC) = 0.8 × 12.00% + 0.2 × 3.6% = 10.32%.

E(rC) = 3.6 + 1.167 × Standard Deviation of C The intercept is the risk-free rate (3.60%) and the slope is (12.00% - 3.60%)/7.20% = 1.167.

An investor invests 30% of his wealth in a risky asset with an expected rate of return of 0.11 and a variance of 0.12 and 70% in a T-bill that pays 3%. His portfolio's expected return and standard deviation are __________ and __________, respectively.

E(rP) = 0.3(11%) + 0.7(3%) = 5.4% sP = 0.3(0.12)^1/2 = 10.4%.

You sold short 100 shares of common stock at $45 per share. The initial margin is 50%. At what stock price would you receive a margin call if the maintenance margin is 35%?

Equity = 100($45) × 1.5 = $6,750 0.35 = ($6,750 - 100P)/100P 35P = $6,750 - 100P 135P = $6,750 P = $50.00

You sold short 100 shares of common stock at $75 per share. The initial margin is 50%. At what stock price would you receive a margin call if the maintenance margin is 30%?

Equity = 100($75) × 1.5 = $11,250 0.30 = ($11,250 - 100P)/100P 30P = $11,250 - 100P 130P = $11,250 P = $86.54.

A U.S. dollar-denominated bond that is sold in Singapore is a

Eurobond

Given a stock index with a value of $1,100, an anticipated dividend of $27, and a risk-free rate of 3%, what should be the value of one futures contract on the index?

F = 1,100 × (1.03) − 27 F = 1,106.00.

Given a stock index with a value of $1,125, an anticipated dividend of $33, and a risk-free rate of 4%, what should be the value of one futures contract on the index?

F = 1,125 × (1.04) − 33 F = 1,137.00.

Given a stock index with a value of $1,200, an anticipated dividend of $45, and a risk-free rate of 6%, what should be the value of one futures contract on the index?

F = 1,200 × (1.06) − 45 F = 1,227.00.

Given a stock index with a value of $1,500, an anticipated dividend of $62 and a risk-free rate of 5.75%, what should be the value of one futures contract on the index?

F = 1,500 × (1 + .0575) − 62 F = 1,524.25.

Rome Corporation is expected have EBIT of $2.3M this year. Rome Corporation is in the 30% tax bracket, will report $175,000 in depreciation, will make $175,000 in capital expenditures, and will have no change in net working capital this year. What is Rome's FCFF?

FCFF = EBIT(1 - T) + depreciation - capital expenditures - increase in NWC 2,300,000(.7) + 175,000 - 175,000 - 0 = 1,610,000.

Fly Boy Corporation is expected have EBIT of $800k this year. Fly Boy Corporation is in the 30% tax bracket, will report $52,000 in depreciation, will make $86,000 in capital expenditures, and will have a $16,000 increase in net working capital this year. What is Fly Boy's FCFF?

FCFF = EBIT(1 - T) + depreciation - capital expenditures - increase in NWC 800,000(.7) + 52,000 - 86,000 - 16,000 = 510,000.

Certificates of deposit are insured by the

FDIC

Mortgage-backed securities were created when ________ began buying mortgage loans from originators and bundling them into large pools that could be traded like any other financial asset.

FNMA and FHLMC

You purchased an annual interest coupon bond one year ago that had nine years remaining to maturity at that time. The coupon interest rate was 10%, and the par value was $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 yield to maturity continued to be 8%, your annual total rate of return on holding the bond for that year would have been

FV = 1,000 PMT = 100 n = 9 i = 8, PV = 1,124.94 FV = 1000 PMT = 100 n = 8 i = 8 PV = 1,114.93 HPR = (1,114.93 − 1,124.94 + 100)/1,124.94 = 8%.

A coupon bond that pays interest of $40 semi-annually has a par value of $1,000, matures in four years, and is selling today at a $36 discount from par value. The yield to maturity on this bond is

FV = 1,000 PMT = 40 n = 8 PV = −964 i = 9.09%.

A coupon bond that pays interest semi-annually has a par value of $1,000, matures in seven years, and has a yield to maturity of 11%. The intrinsic value of the bond today will be __________ if the coupon rate is 8.8%.

FV = 1,000 PMT = 44, n = 14 i = 5.5 PV = 894.51.

A coupon bond that pays interest annually has a par value of $1,000, matures in eight years, and has a yield to maturity of 9%. The intrinsic value of the bond today will be ______ if the coupon rate is 6%.

FV = 1,000 PMT = 60 n = 8 i = 9 PV = 833.96.

A coupon bond that pays interest annually has a par value of $1,000, matures in six years, and has a yield to maturity of 11%. The intrinsic value of the bond today will be ______ if the coupon rate is 7.5%.

FV = 1,000 PMT = 75 n = 6 i = 11 PV = 851.93.

A coupon bond that pays interest of $90 annually has a par value of $1,000, matures in nine years, and is selling today at a $66 discount from par value. The yield to maturity on this bond is

FV = 1,000 PMT = 90 n = 9 PV = −934 i = 10.15%.

You purchased an annual interest coupon bond one year ago that now has 18 years remaining until maturity. The coupon rate of interest was 11%, and par value was $1,000. At the time you purchased the bond, the yield to maturity was 10%. The amount you paid for this bond one year ago was

FV = 1,000 PMT = 110 n = 19 i = 10 PV = 1,083.65.

The risk that can be diversified away is

Firm Specific

Until 1999, the ________ Act(s) prohibited banks in the United States from both accepting deposits and underwriting securities.

Glass-Steagall

You purchase a share of CAT stock for $90. One year later, after receiving a dividend of $4, you sell the stock for $97. What was your holding-period return?

HPR = ([97 - 90] + 4)/90 = 12.22%.

Which of the following statement(s) is(are) false regarding the variance of a portfolio of two risky securities? I) The higher the coefficient of correlation between securities, the greater the reduction in the portfolio variance. II) There is a linear relationship between the securities' coefficient of correlation and the portfolio variance. III) The degree to which the portfolio variance is reduced depends on the degree of correlation between securities.

I and II

Which of the following are investment superstars who have consistently shown superior performance? I) Warren Buffet II) Phoebe Buffet III) Peter Lynch IV) Merrill Lynch V) Jimmy Buffet

I and III

Which of the following are used by technical analysts to determine proper stock prices? I) Trendlines II) Earnings III) Dividend prospects IV) Expectations of future interest rates V) Resistance levels

I and V

Which of the following statement(s) is(are) FALSE regarding the selection of a portfolio from those that lie on the capital allocation line? I) Less risk-averse investors will invest more in the risk-free security and less in the optimal risky portfolio than more risk-averse investors. II) More risk-averse investors will invest less in the optimal risky portfolio and more in the risk-free security than less risk-averse investors. III) Investors choose the portfolio that maximizes their expected utility.

I only

he capital market line I) is a special case of the capital allocation line. II) represents the opportunity set of a passive investment strategy. III) has the one-month T-Bill rate as its intercept. IV) uses a broad index of common stocks as its risky portfolio.

I, II, III, and IV

In a typical underwriting arrangement, the investment-banking firm I) sells shares to the public via an underwriting syndicate. II) purchases the securities from the issuing company. III) assumes the full risk that the shares may not be sold at the offering price. IV) agrees to help the firm sell the issue to the public but does not actually purchase the securities.

I, II, and III

The securities act of 1933 I) requires full disclosure of relevant information relating to the issue of new securities. II) requires registration of new securities. III) requires issuance of a prospectus detailing financial prospects of the firm. IV) established the SEC. V) requires periodic disclosure of relevant financial information. VI) empowers SEC to regulate exchanges, OTC trading, brokers, and dealers.

I, II, and III

Which of the following is false about profits from futures contracts? I) The person with the long position gets to decide whether to exercise the futures contract and will only do so if there is a profit to be made. II) It is possible for both the holder of the long position and the holder of the short position to earn a profit. III) The clearinghouse makes most of the profit. IV) The amount that the holder of the long position gains must equal the amount that the holder of the short position loses.

I, II, and III

The risk that can be diversified away in a portfolio is referred to as ___________. I) diversifiable risk II) unique risk III) systematic risk IV) firm-specific risk

I, II, and IV

Which of the following is true about mortgage-backed securities? I) They aggregate individual home mortgages into homogeneous pools. II) The purchaser receives monthly interest and principal payments received from payments made on the pool. III) The banks that originated the mortgages maintain ownership of them. IV) The banks that originated the mortgages continue to service them.

I, II, and IV

Which one of the following statements regarding "basis" is true? I) The basis is the difference between the futures price and the spot price. II) The basis risk is borne by the hedger. III) A short hedger suffers losses when the basis decreases. IV) The basis increases when the futures price increases by more than the spot price.

I, II, and IV.

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.

I, III, and IV

Which one of the following statements about convertibles are false? I) The longer the call protection on a convertible, the less the security is worth. II) The more volatile the underlying stock, the greater the value of the conversion feature. III) The smaller the spread between the dividend yield on the stock and the yield-to-maturity on the bond, the more the convertible is worth. IV) The collateral that is used to secure a convertible bond is one reason convertibles are more attractive than the underlying stock.

I, III, and IV

Which of the following items is specified in a futures contract? I) The contract size II) The maximum acceptable price range during the life of the contract III) The acceptable grade of the commodity on which the contract is held IV) The market price at expiration V) The settlement price

I, III, and V

Which of the following statement(s) is(are) true regarding the selection of a portfolio from those that lie on the capital allocation line? I) Less risk-averse investors will invest more in the risk-free security and less in the optimal risky portfolio than more risk-averse investors. II) More risk-averse investors will invest less in the optimal risky portfolio and more in the risk-free security than less risk-averse investors. III) Investors choose the portfolio that maximizes their expected utility.

II and III

Which of the following are used by fundamental analysts to determine proper stock prices? I) Trendlines II) Earnings III) Dividend prospects IV) Expectations of future interest rates V) Resistance levels

II, III, and IV

Which of the following statement(s) is(are) true regarding the variance of a portfolio of two risky securities? I) The higher the coefficient of correlation between securities, the greater the reduction in the portfolio variance. II) There is a linear relationship between the securities' coefficient of correlation and the portfolio variance. III) The degree to which the portfolio variance is reduced depends on the degree of correlation between securities.

III only

The Securities Act of 1934 I) requires full disclosure of relevant information relating to the issue of new securities. II) requires registration of new securities. III) requires issuance of a prospectus detailing financial prospects of the firm. IV) established the SEC. V) requires periodic disclosure of relevant financial information. VI) empowers SEC to regulate exchanges, OTC trading, brokers, and dealers.

IV, V, and VI

Let RUS be the annual risk-free rate in the United States, RJ be the risk-free rate in Japan, F be the futures price of $/yen for a 1-year contract, and E the spot exchange rate of $/yen. Which one of the following is true?

If RUS > RJ, then E < F.

Let RUS be the annual risk-free rate in the United States, RUK be the risk-free rate in the United Kingdom, F be the futures price of $/BP for a 1-year contract, and E the spot exchange rate of $/BP. Which one of the following is true?

If RUS > RUK, then E < F.

In 2016, ____________ was(were) the least significant real asset(s) of U.S. nonfinancial businesses in terms of total value.

Inventory

________ specialize in helping companies raise capital by selling securities.

Investment bankers

If a distribution has "fat tails," it exhibits

Kurtosis

Which of the following is the best measure of the floor for a stock price?

Liquidation Value

On January 1, the listed spot and futures prices of a Treasury bond were 93.8 and 93.13. You purchased $100,000 par value Treasury bonds and sold one Treasury bond futures contract. One month later, the listed spot price and futures prices were 94 and 94.09, respectively. If you were to liquidate your position, your profits would be a

On bonds: $94,000 − $93,250 = $750 On futures: $93,406.25 − $94,281.25 = −$875 Net profits: $750 − $875 = −$125.

Which one of the following portfolios cannot lie on the efficient frontier as described by Markowitz? Portfolio Expected Ret. Standard Deviation W 9 % 21 % X 5 % 7 % Y 15 % 36% Z 12 % 15 %

Only portfolio D cannot lie on the efficient frontier. When plotting the above portfolios, only D lies below the efficient frontier as described by Markowitz. It has a higher standard deviation than C with a lower expected return.

Which one of the following portfolios cannot lie on the efficient frontier as described by Markowitz? Portfolio Expected Return Standard Deviation W 9 % 21 % X 5 % 7 % Y 15 % 36 % Z 12 % 15 %

Only portfolio W cannot lie on the efficient frontier When plotting the above portfolios, only W lies below the efficient frontier as described by Markowitz. It has a higher standard deviation than Z with a lower expected return.

Top Flight Stock currently sells for $53. A one-year call option with strike price of $58 sells for $10, and the risk-free interest rate is 5.5%. What is the price of a one-year put with strike price of $58?

P = 10 − 53 + 58/(1.055) P = 11.98

ING Stock currently sells for $38. A one-year call option with strike price of $45 sells for $9, and the risk-free interest rate is 4%. What is the price of a one-year put with strike price of $45?

P = 9 − 38 + 45/(1.04); P = 14.27.

HighFlyer Stock currently sells for $48. A one-year call option with strike price of $55 sells for $9, and the risk-free interest rate is 6%. What is the price of a one-year put with strike price of $55?

P = 9 − 48 + 55/(1.06) Put = Option Price - Current Price + Strike/(1+Rfr) P = 12.89.

Which of the following is true regarding a firm's securities?

Preferred dividends are usually cumulative.

New issues of securities are sold in the ________ market(s).

Primary

Proportion in A = 0.8 × 40% = 32% Proportion in B = 0.8 × 25% = 20% Proportion in C = 0.8 × 35% = 28%.

In 2016, ____________ was(were) the most significant real asset(s) of U.S. nonfinancial businesses in terms of total value.

Real Estate

In the dividend discount model, which of the following are not incorporated into the discount rate?

Return on assets

A specialist on the AMEX Stock Exchange is offering to buy a security for $37.50. A broker in Oklahoma City wants to sell the security for his client. The Intermarket Trading System shows a bid price of $37.375 on the NYSE. What should the broker do?

Route the order to the AMEX Stock Exchange. The broker should try to obtain the best price for his client. Since the client wants to sell shares and the bid price is higher on the AMEX, he should route the order there.

When a firm markets new securities, a preliminary registration statement must be filed with

SEC

Given an optimal risky portfolio with expected return of 12%, standard deviation of 26%, and a risk free rate of 3%, what is the slope of the best feasible CAL?

Slope = (12 - 3)/26 = 0.346.

Given an optimal risky portfolio with expected return of 12%, standard deviation of 26%, and a risk free rate of 5%, what is the slope of the best feasible CAL?

Slope = (12 - 5)/26 = 0.2692 Slope = (Er - Rfr)/Std Dev

Given an optimal risky portfolio with expected return of 16%, standard deviation of 20%, and a risk-free rate of 4%, what is the slope of the best feasible CAL?

Slope = (16 - 4)/20 = .6.

Given an optimal risky portfolio with expected return of 6%, standard deviation of 23%, and a risk free rate of 3%, what is the slope of the best feasible CAL?

Slope = (6 - 3)/23 = 0.1304

Std. Dev. of C = 0.8 × 7.20% = 5.76%.

Financial futures contracts are actively traded on which of the following indices?

The CAC 40 Index The All ordinary index The Toronto 35 Index The DAX 30 Index

Which one of the following statements regarding "basis" is true?

The basis is the difference between the futures price and the spot price, basis risk is borne by the hedger, and basis increases when the futures price increases by more than the spot price.

You are given the following information about a portfolio you are to manage. For the long term, you are bullish, but you think the market may fall over the next month. Portfolio Value $1 million Portfolio's Beta 0.60 Current S&P500 Value 1400 Anticipated S&P500 Value 1200 If the anticipated market value materializes, what will be your expected loss on the portfolio?

The change would represent a drop of (1,200 − 1,400)/1,400 = 14.3% in the index. Given the portfolio's beta, your portfolio would be expected to lose 0.6 × 14.3% = 8.57%.

You are given the following information about a portfolio you are to manage. For the long term, you are bullish, but you think the market may fall over the next month. Portfolio Value $1million Portfolio's Beta 0.86 Current S&P500 Value 990 Anticipated S&P500 Value 915 What is the dollar value of your expected loss?

The dollar value equals the loss of 6.52% times the $1 million portfolio value = $65,200.

Explanation Item 105 Item 105 0 of 1 points awarded Item Scored You are given the following information about a portfolio you are to manage. For the long term, you are bullish, but you think the market may fall over the next month. Portfolio Value $1million Portfolio's Beta 0.60 Current S&P500 Value 1400 Anticipated S&P500 Value 1200 What is the dollar value of your expected loss?

The dollar value equals the loss of 8.57% times the $1 million portfolio value = $85,700.

Three years ago, you purchased a bond for $974.69. The bond had three years to maturity, a coupon rate of 8%, paid annually, and a face value of $1,000. Each year, you reinvested all coupon interest at the prevailing reinvestment rate shown in the table below. Today is the bond's maturity date. What is your realized compound yield on the bond? Time Prevailing Reinvestment Rate 0 (purchase date) 6.0 % 1 7.2 % 2 9.4 % 3 (maturity date) 8.2 %

The investment grows to a total future value of $80 × (1.072) × (1.094) + $80 × (1.094) + $1,080 = $1,261.34 over the three-year period. The realized compound yield is the yield that will compound the original investment to yield the same future value: $974.69 × (1 + rcy)3 = $1,261.34, (1 + rcy)3 = 1.29409 1 + rcy = 1.0897 rcy = 8.97% rcy = Realized Compound Yield

Which one of the following statements about convertibles is true?

The more volatile the underlying stock, the greater the value of the conversion feature.

What is the relationship between the price of a straight bond and the price of a callable bond?

The straight bond's price will be higher than the callable bond's price for low interest rates.

The most appropriate discount rate to use when applying a FCFF valuation model is the

WACC.

Suppose that you purchased a call option on the S&P 100 Index. The option has an exercise price of 1,680, and the index is now at 1,720. What will happen when you exercise the option?

You will receive $4,000. When an index option is exercised, the writer of the option pays cash to the option holder. The amount of cash equals the difference between the exercise price of the option and the value of the index. In this case, you will receive 1,720 - 1,680 = 40 times the $100 multiplier, or $4,000. In other words, you are implicitly buying the index for 1,680 and selling it to the call writer for 1,720.

Suppose that you purchased a call option on the S&P 100 Index. The option has an exercise price of 1,700, and the index is now at 1,760. What will happen when you exercise the option?

You will receive $6,000. When an index option is exercised, the writer of the option pays cash to the option holder. The amount of cash equals the difference between the exercise price of the option and the value of the index. In this case, you will receive 1,760 - 1,700 = 60 times the $100 multiplier, or $6,000. In other words, you are implicitly buying the index for 1,700 and selling it to the call writer for 1,760.

A swap

allows participants to restructure their balance sheets. allows a firm to convert outstanding fixed rate debt to floating rate debt. obligates two counterparties to exchange cash flows at one or more future dates and allows participants to restructure their balance sheets. obligates two counterparties to exchange cash flows at one or more future dates.

Buyers of call options __________ required to post margin deposits, and sellers of put options __________ required to post margin deposits.

are not; are

Which of the following statements is not true? a.The value of an American call option has a positive relation with the stock price. b. The value of an American put option has a negative relation with the exercise price. c.The value of an American put option has a positive relation with the stock volatility. d. The value of an American call option has a negative relation with the exercise price. e.The value of an American call option has a positive relation with the stock volatility.

b. The value of an American put option has a negative relation with the exercise price Value of put option = Exercise price - stock price. As you can see from the formula, there is a positive relation between value of an American put option and exercise price. Higher the exercise price, higher will be the value of put option.

When a bond indenture includes a sinking fund provision,

bondholders may lose because their bonds can be repurchased by the corporation at below-market prices.

In terms of total value, the most significant liability(ies) of U.S. nonfinancial businesses in 2016 was(were)

bonds and mortgages.

An investor who wishes to form a portfolio that lies to the right of the optimal risky portfolio on the capital allocation line must

borrow some money at the risk-free rate, invest in the optimal risky portfolio, and invest only in risky securities

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

borrowing $46 at the risk-free rate and investing the total amount ($146) in the risky asset. For $100: (114 - 100)/100 = 14% 0.14 = w1(0.11) + (1 - w1)(0.045) 0.14 = 0.11w1 + 0.045 - 0.045w1 0.095 = 0.065w1 w1 = 1.46($100) = $146 (1 - w1)$100 = -$46.

The change from a straight to a kinked capital allocation line is a result of

borrowing rate exceeding lending rate.

Consider two bonds, F and G. Both bonds presently are selling at their par value of $1,000. Each pays interest of $90 annually. Bond F will mature in 15 years while bond G will mature in 26 years. If the yields to maturity on the two bonds change from 9% to 10%,

both bonds will decrease in value, but bond G will decrease more than bond F. *The longer the maturity, the greater the price changes when interest rates change*

Del Guerico and Reuter (2014) report that the average underperformance of actively-managed mutual funds is driven largely by

broker-sold funds.

If you determine that the DAX-30 Index futures is underpriced relative to the spot DAX-30 Index, you could make an arbitrage profit by

buying DAX-30 Index futures and selling all the stocks in the DAX-30.

A bond that can be retired prior to maturity by the issuer is a(an) ____________ bond.

callable

Because the DDM requires multiple estimates, investors should

carefully examine inputs to the model and perform sensitivity analysis on price estimates.

To build an indifference curve, we can first find the utility of a portfolio with 100% in the risk-free asset, then

change the standard deviation of the portfolio and find the expected return the investor would require to maintain the same utility level.

Security selection refers to

choosing which securities to hold based on their valuation.

GAAP allows

considerable leeway to manage earnings.

Commodity futures pricing

converges to spot prices at maturity. includes cost of carry. must be related to spot prices.

Metals and energy currency futures contracts are actively traded on

copper and platinum. platinum. copper. weather.

A statistic that measures how the returns of two risky assets move together is:

covariance and correlation.

If interest rate parity does not hold,

covered interest arbitrage opportunities will exist, and arbitragers will be able to make risk-free profits.

If interest rate parity holds,

covered interest arbitrage opportunities will not exist.

Call options on IBM-listed stock options are

created by investors and traded on various exchanges.

Hedging one commodity by using a futures contract on another commodity is called

cross hedging.

Buyers of put options anticipate the value of the underlying asset will __________, and sellers of call options anticipate the value of the underlying asset will ________.

decrease; decrease

In 2016, ____________ was(were) the most significant liability(ies) of U.S. commercial banks in terms of total value.

deposits

Unique risk is also referred to as

diversifiable risk or firm-specific risk.

Firm-specific risk is also referred to as

diversifiable risk or unique risk.

Nonsystematic risk is also referred to as

diversifiable risk or unique risk.

Other things being equal, a low ________ would be most consistent with a relatively high growth rate of firm earnings.

dividend-payout ratio

The weather report says that a devastating and unexpected freeze is expected to hit Florida tonight during the peak of the citrus harvest. In an efficient market, one would expect the price of Florida Orange's stock to

drop immediately.

When comparing investments with different horizons, the ____________ provides the more accurate comparison.

effective annual rate

A zero-coupon bond is one that

effectively has a zero-percent coupon rate.

Unsecured bonds are called

either debentures or subordinated debentures.

Commercial banks differ from other businesses in that both their assets and their liabilities are mostly

financial

Dividend discount models and P/E ratios are used by __________ to try to find mispriced securities.

fundamental analysts

The establishment of a futures market in a commodity should not have a major impact on spot prices because

futures are a zero-sum game.

Sales Company paid a $1.00 dividend per share last year and is expected to continue to pay out 40% of earnings as dividends for the foreseeable future. If the firm is expected to generate a 10% return on equity in the future, and if you require a 12% return on the stock, the value of the stock is

g = 10% × 0.6 = 6%; P = 1 (1.06)/(.12 - .06) = $17.67.

Convertible bonds

give their holders the ability to share in price appreciation of the underlying stock and offer lower coupon rates than similar nonconvertible bonds.

Matthews Corporation has a beta of 1.2. The annualized market return yesterday was 13%, and the risk-free rate is currently 5%. You observe that Matthews had an annualized return yesterday of 17%. Assuming that markets are efficient, this suggests that

good news about Matthews was announced yesterday AR = 17% − (5% + 1.2 (8%)) = +2.4% A positive abnormal return suggests that there was firm-specific good news.

Many stock analysts assume that a mispriced stock will

gradually approach its intrinsic value over several years.

Low P/E ratios tend to indicate that a company will _______, ceteris paribus.

grow slowly

Efficient portfolios of N risky securities are portfolios that

have the highest rates of return for a given level of risk.

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.

higher; lower

Kurtosis is a measure of

how fat the tails of a distribution are and the normality of a distribution.

Trading in "exotic options" takes place primarily

in the over-the-counter market.

The dividend discount model

includes capital gains implicitly.

If covered interest arbitrage opportunities exist,

interest rate parity does not hold, and arbitragers will be able to make risk-free profits.

If covered interest arbitrage opportunities do not exist,

interest rate parity holds.

Bond analysts might be more interested in a bond's yield to call if

interest rates are expected to fall.

QQAG just announced yesterday that its fourth quarter earnings will be 35% higher than last year's fourth quarter. You observe that QQAG had an abnormal return of -1.7% yesterday. This suggests that

investors expected the earnings increase to be larger than what was actually announced.

Music Doctors just announced yesterday that its first quarter sales were 35% higher than last year's first quarter. You observe that Music Doctors had an abnormal return of -2% yesterday. This suggests that

investors expected the sales increase to be larger than what was actually announced.

Based on their relative degrees of risk tolerance,

investors will hold varying amounts of the risky asset and varying amounts of the risk-free asset in their portfolios.

The expected return of a portfolio of risky securities

is a weighted average of the securities' returns.

Credit risk in the swap market

is limited to the difference between the values of the fixed rate and floating rate obligations.

k = 3.50/90 + .10 k = Div/Price + Growth Rate k = 13.9%.

A trader who has a __________ position in oil futures believes the price of oil will __________ in the future.

long; increase

The risk that cannot be diversified away is

market risk

Systematic risk is also referred to as

market risk or nondiversifiable risk.

p = 11.98

The line representing all combinations of portfolio expected returns and standard deviations that can be constructed from two available assets is called the

portfolio opportunity set.

You have been given this probability distribution for the holding-period return for GM stock: Stock of the Economy Probability HPR Boom 0.40 30% Normal growth 0.40 11% Recession 0.20 -10% What is the expected standard deviation for GM stock?

s = [0.40 (30 - 14.4)^2 + 0.40 (11 - 14.4)^2 + 0.20 (-10 - 14.4)2]^1/2 = 14.87%.

Consider the following probability distribution for stocks A and B: State Probability Return Stock A ReturnStock B 1 0.10 10 % 8 % 2 0.20 13 % 7 % 3 0.20 12 % 6 % 4 0.30 14 % 9 % 5 0.20 15 % 8 % The standard deviations of stocks A and B are _____ and _____, respectively.

sA = [0.1(10% - 13.2%)^2 + 0.2(13% - 13.2%)^2 + 0.2(12% - 13.2%)^2 + 0.3(14% - 13.2%)^2 + 0.2(15% - 13.2%)^2]^1/2 = 1.5% sB = [0.1(8% - 7.7%)2 + 0.2(7% - 7.7%)2 + 0.2(6% - 7.7%)2 + 0.3(9% - 7.7%)2 + 0.2(8% - 7.7%)2]1/2 = 1.1%.

Consider the following probability distribution for stocks C and D: State Prob Return on Stock C Return on Stock D 1 0.30 7 % -9 % 2 0.50 11 % 14 % 3 0.20 -16 % 26 % The standard deviations of stocks C and D are _____ and _____, respectively.

sC = [0.30(7% - 4.4%)^2 + 0.5(11% - 4.4%)^2 + 0.20(-16% - 4.4%)^2]^1/2 = 10.35% sD = [0.30(-9% - 9.5%)^2 + 0.50(14% - 9.5%)^2 + 0.20(26% - 9.5%)^2]^1/2 = 12.93%. ****

Other things equal, diversification is most effective when

securities' returns are negatively correlated.

The sale of a mortgage portfolio by setting up mortgage pass-through securities is an example of

securitization.

Your professor finds a stock-trading rule that generates excess risk-adjusted returns. Instead of publishing the results, she keeps the trading rule to herself. This is most closely associated with

selection bias.

You hold one long oil futures contract that expires in April. To close your position in oil futures before the delivery date, you must

sell one April oil futures contract.

If you believe in the reversal effect, you should

sell stocks this period that performed well last period.

If you determine that the DAX-30 Index futures is overpriced relative to the spot DAX-30 Index, you could make an arbitrage profit by

selling DAX-30 Index futures and buying all the stocks in the DAX-30.

If you determine that the S&P 500 Index futures is overpriced relative to the spot S&P 500 Index, you could make an arbitrage profit by

selling S&P 500 Index futures and buying all the stocks in the S&P 500.

Annual percentage rates (APRs) are computed using

simple interest.

Nondiversifiable risk is also referred to as

systematic risk or market risk.

Market risk is also referred to as

systematic risk or nondiversifiable risk.

Asset allocation refers to

the allocation of assets into broad asset classes.

If a firm has a required rate of return equal to the ROE,

the amount of earnings retained by the firm does not affect market price or the P/E.

A two-asset portfolio with a standard deviation of zero can be formed when

the assets have a correlation coefficient equal to negative one.

The standard deviation of a two-asset portfolio is a linear function of the assets' weights when

the assets have a correlation coefficient equal to one.

If a trader holding a long position in corn futures fails to meet the obligations of a futures contract, the party that is hurt by the failure is

the clearinghouse.

If a trader holding a long position in oil futures fails to meet the obligations of a futures contract, the party that is hurt by the failure is

the clearinghouse.

Asset allocation may involve

the decision as to the allocation between a risk-free asset and a risky asset and the decision as to the allocation among different risky assets.

The main difference between the three forms of market efficiency is that

the definition of information differs - The main difference is that weak form encompasses only historical data - semistrong form encompasses historical data and current public information - strong form encompasses historical data, current public information, and inside information - All of the other definitions remain the same.

The Option Clearing Corporation is owned by

the exchanges on which stock options are traded.

All of the following factors affect the price of a stock option except

the expected rate of return on the stock.

At freshman orientation, 1,500 students are asked to flip a coin 20 times. One student is crowned the winner (tossed 20 heads). This is most closely associated with

the lucky event issue.

Skewness is a measure of

the normality of a distribution.

The efficient frontier of risky assets is

the portion of the investment opportunity set that lies above the global minimum variance portfolio.

Earnings management is

the practice of using flexible accounting rules to improve the apparent profitability of the firm.

A covered call position is

the purchase of a share of stock with a simultaneous sale of a call on that stock.

In the equation Profits = a + b × ($/₤ exchange rate), b is a measure of

the sensitivity of profits to the exchange rate.

Treasury bills are commonly viewed as risk-free assets because

their short-term nature makes their values insensitive to interest rate fluctuations, and the inflation uncertainty over their time to maturity is negligible.

When Maurice Kendall first examined stock price patterns in 1953, he found that

there were no predictable patterns in stock prices.

Consider the following probability distribution for stocks A and B: State Prob . Return on Stock A Return on Stock B 1 0.10 10 % 8 % 2 0.20 13 % 7 % 3 0.20 12 % 6 % 4 0.30 14 % 9 % 5 0.20 15 % 8 % The variances of stocks A and B are _____ and _____, respectively.

varA = [0.1(10% - 13.2%)^2 + 0.2(13% - 13.2%)^2 + 0.2(12% - 13.2%)^2 + 0.3(14% - 13.2%)^2 + 0.2(15% - 13.2%)^2] = 2.16% varB = [0.1(8% - 7.7%)^2 + 0.2(7% - 7.7%)^2 + 0.2(6% - 7.7%)^2 + 0.3(9% - 7.7%)^2 + 0.2(8% - 7.7%)^2] = 1.21%.

Consider two perfectly negatively correlated risky securities A and B. A has an expected rate of return of 10% and a standard deviation of 16%. B has an expected rate of return of 8% and a standard deviation of 12%. The weights of A and B in the global minimum variance portfolio are _____ and _____, respectively.

wA = 12/(16 + 12) = 0.4286 wA = StdDevB/(StdDevA+StdDevB) wB = 1 - 0.4286 = 0.5714. wB = 1 - wA

Consider two perfectly negatively correlated risky securities A and B. A has an expected rate of return of 12% and a standard deviation of 17%. B has an expected rate of return of 9% and a standard deviation of 14%. The weights of A and B in the global minimum variance portfolio are _____ and _____, respectively.

wA = 14/(17 + 14) = 0.45 wB = 1 - 0.45 = 0.55.

Consider two perfectly negatively correlated risky securities, K and L. K has an expected rate of return of 13% and a standard deviation of 19%. L has an expected rate of return of 10% and a standard deviation of 16%. The weights of K and L in the global minimum variance portfolio are _____ and _____, respectively.

wL = 19/(19 + 16) = 0.54. wK = 1 - 0.54 = 0.46

Investors want high plowback ratios

whenever ROE > k.

The goal of fundamental analysts is to find securities

whose intrinsic value exceeds market price.

Each of two stocks, A and B, are expected to pay a dividend of $5 in the upcoming year. The expected growth rate of dividends is 10% for both stocks. You require a rate of return of 11% on stock A and a return of 20% on stock B. The intrinsic value of stock A

will be greater than the intrinsic value of stock B. PV0 = D1/(k - g) given that dividends are equal, the stock with the larger required return will have the lower value.

Suppose you purchase one WFM May 100 call contract at $5 and write one WFM May 105 call contract at $2. What is the lowest stock price at which you can break even?

x = $100 + $5 − $2 x = $103.

Suppose you purchase one WFM May 100 call contract at $5 and write one WFM May 105 call contract at $2. The maximum potential profit of your strategy is ________, if both options are exercised.

−$100 - $5 = −$105 -105 + $2 + $105 = $107 $2 × 100 = $200.

You purchase one September 50 put contract for a put premium of $2. What is the maximum profit that you could gain from this strategy?

−$200 + $5,000 = $4,800 (if the stock falls to zero).

You purchase one June 70 put contract for a put premium of $4. What is the maximum profit that you could gain from this strategy?

−$400 + $7,000 = $6,600 (if the stock falls to zero).

Suppose you purchase one WFM May 100 call contract at $5 and write one WFM May 105 call contract at $2. The maximum loss you could suffer from your strategy is

−$5 + $2 = −$3 × 100 = −$300.

You buy one Home Depot June 60 call contract and one June 60 put contract. The call premium is $5 and the put premium is $3. Your maximum loss from this position could be

−$5 + (-$3) = −$8 × 100 = $800.

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