FINA 3315 Final Exam Practice
In late November, Karen bought FIB February puts with a strike price of $25. The ask of the put was $281. The current price of FIB shares is $28.40. The intrinsic value of the put is
$0.00
What is the fundamental value of a put contract with a strike price of $25 when the option is $1.50 and the underlying common stock sells for $26? $0.00, $100, $-100, and $150
$0.00
An annual fee charged to cover marketing costs of a mutual fund is called a
12(b) 1 fee
Evidence suggest that the price of a stock continues to move up or down for a period of
6 to 12 months
Which one of the following statements is correct concerning international funds?
A devaluation of the dollar causes returns on foreign investments to improve from a U.S. perspective
One drawback of investing in mutual funds is the A) annual management fee. B) lack of liquidity of fund shares. C) amount required for the initial investment. D) lack of information on the performance of the fund.
A) annual management fee
The decision of how much money to pay out in dividends is made by the A) board of directors. B) company shareholders. C) chief executive officer. D) chief financial officer.
A) board of directors
The date on which an investor must be a registered shareholder of the firm in order to receive a dividend is called the A) date of record. B) ex-dividend date. C) payment date. D) purchase date.
A) date of record
Beta can be defined as the slope of the line that explains the relationship between A) the return on a security and the return on the market. B) the returns on a security and various points in time. C) the return on stocks and the returns on bonds. D) the risk free rate of return versus the market rate of return.
A) the return on a security and the return on the market
Bonds with one of the top four ratings (Aaa through Baa, or AAA through BBB) are designated as A) split bonds. B) investment grade bonds. C) illiquid bonds. D) high-yield bonds.
B) investment grade bonds
Matt owns 500 shares of IKM stock. The market price of IKM is $51.74. Matt just sold five calls on IKM with a strike price of $50. This is known as A) writing a naked call. B) writing a covered call. C) creating a naked cover. D) covering a short position.
B) writing a covered call
Consider the following statements about a futures clearinghouse: Statement 1: "A clearing house in futures contracts allows for the offsetting of contracts prior to delivery." Statement 2: "A clearing house in futures contracts collects initial margin (performance bonds) from both the long and short sides in the contract." Are the statements most likely correct or incorrect? (Select the best answer below.)
Both statements are correct.
A report describing the transactions in an account, listing the dividend and interest payments received, and detailing the current holdings is called a A) prospectus. B) red herring. C) statement. D) street certificate.
C) Statement
Investors are generally well advised to avoid mutual funds with A) highly rated fund managers. B) low fees and high tax efficiency. C) consistently poor historical performance. D) good performance in both up and down markets.
C) consistently poor historical performance
Followers of the efficient market hypothesis believe that A) very few investors actually analyze or evaluate stocks before they make a purchase decision. B) the needed information to assess the market is available only to corporate insiders. C) investors react quickly and accurately to new information. D) individual traders can have a significant impact on the price of a security.
C) investors react quickly and accurately to new information
Which one of the following was the first listed exchange for stock options in the United States?
Chicago Board Options Exchange
Two assets have a coefficient of correlation of -.4. A) Combining these assets will increase risk. B) Combining these assets will have no effect on risk. C) Combining these assets may either raise or lower risk. D) Combining these assets will reduce risk.
D) Combining these assets will reduce risk.
Which of the following methods might be used to protect a profit on a diversified portfolio of stocks? A) Buy put options on S&P 500 based ETF B) Write S&P 500 Index put options C) Buy S&P 500 Index put options D) Either A or B, but not C
D) Either A or B, but not C
Mutual fund investors delegate all of the following decisions to the fund's managers EXCEPT: A) which companies and industries to invest in B) when to buy and sell individual stocks C) how many securities to hold in the portfolio D) how to allocate investments among different classes of assets such as stocks, bonds, cash, and real estate.
D) how to allocate investments among different classes of assets such as stocks, bonds, cash, and real estate.
Beta is the slope of the best fit line for the points with coordinates representing the ________ and the ________ for each one of several years. A) rate of return; level of risk for an individual security B) rate of inflation; rate of return for an individual security C) risk level of a stock; market rate of return D) market rate of return; security's rate of return
D) market rate of return; security's rate of return
If a stock is purchased at the beginning of a year, a single dividend is paid at the end of the year and the stock is sold immediately after the dividend has been received. In this case A) the internal rate of return is lower than the holding period return. B) the holding period return. is lower than the internal rate of return. C) it is not possible to calculate the internal rate of return. D) the internal rate of return equals the holding period return
D) the internal rate of return equals the holding period return
Which of the following statements concerning financial futures is correct?
Except for short-term securities, interest rate futures are quoted based on a percentage of the par value of the underlying debt security.
A put option has a strike price of $32. The current price of the stock is $34. The put option is said to be "in-the-money." True or False?
False
Electronic trading systems have increased transaction costs of odd-lot trades. True or False?
False
Futures trading requires large amounts of capital because the buyer of a contract must deposit the full settlement price of the contract at the time of purchase. True or False?
False
Mortgage-backed bonds are issued primarily by state governments and are secured by home mortgages. True or False?
False
Which of the following statements best describes the legal organization of mutual funds>
Funds split their basic functions such as record keeping and investment decisions among two or more companies.
Which of the following best fits the description "blue chip stock"? General Electric, Chipotle Mexican Grill, Under Armour, or Facebook
General Electric
The ability to obtain a given equity position at a reduced capital investment, and therefore magnify returns, is known as triple witching, straddling, hedging, leverage
Hedging
Advantages of index funds include which of the following? I. Low management fees II. They outperform most actively managed funds III. They have a balanced mix of stocks and bonds IV. Securities in the portfolio are selected by professional analysts.
I and II only I. Low management fees II. They outperform most actively managed funds
Which of the following characteristics apply to exchange-traded funds (ETFs)? I. unlimited number of outstanding share II. typically track the performance of some index III. market prices reflect demand for the fund rather than NAV. IV. shares are purchased from and redeemed by the investment company managing the fund.
I and II only I. unlimited number of outstanding share II. typically track the performance of some index
Which of the following represent in-the-money options? I. a call when the market price exceeds the strike price II. a call when the strike price exceeds the market price III. a put when the market price exceeds the strike price IV. a put when the strike price exceeds the market price
I and IV only I. a call when the market price exceeds the strike price IV. a put when the strike price exceeds the market price
Which of the following can be encountered when investing in foreign markets? I. foreign taxation of dividends II. different accounting standards for financial disclosure III. restrictions on types of investments IV. ill-liquid markets
I, II, III, and IV only
Information that can be found on the internet at no cost includes I. P/E Ratios II. recent news about a company III. financial statements IV. future earnings and stock prices
I, II, and III only
The major advantages of futures options over futures contracts include I. positions can be hedged with a smaller commitment of capital II. potential losses are limited to the size of the contract III. greater leverage and the potential for higher percentage returns IV. a greater variety of commodities is available for speculating or hedging purposes.
I, II, and III only I. positions can be hedged with a smaller commitment of capital II. potential losses are limited to the size of the contract III. greater leverage and the potential for higher percentage returns
Which of the following statements concerning mortgage backed securities are correct? I. They are secured by a pool of residential mortgages II. A portion of the income stream is a non-taxable return of capital III. They are backed by the full faith and credit of the US govt IV. Their maturity depends on prepayments of the mortgages in the pool
I, II, and IV only I. They are secured by a pool of residential mortgages II. A portion of the income stream is a non-taxable return of capital IV. Their maturity depends on prepayments of the mortgages in the pool
Which of the following are specifically stated in futures contracts? I. the quantity of the commodity to be delivered II. the quality of the commodity to be delivered III. the exact price at which the commodity must be delivered IV. the time and place at which the commodity must be delivered
I, II, and IV only I. the quantity of the commodity to be delivered II. the quality of the commodity to be delivered IV. the time and place at which the commodity must be delivered
In the Capital Asset Pricing Model, which of the following factors are used to determine the required rate of return? I. the risk-free interest rate II. future cash flows III. expected return on the market portfolio IV. beta
I, III, and IV only I. the risk-free interest rate III. expected return on the market portfolio IV. beta
Which of the following factors influence short-term interest rates on government securities? I. Federal Reserve actions II. interest rate risk III. expected future inflation IV. the real rate of return
I, III, and IV only I. Federal Reserve actions III. expected future inflation IV. the real rate of return
In January, JB stock was selling for $50 per share. When the calls and the puts with a strike price of $45 expired on March 20, JB was selling at $46. Which investors made a profit? I. the writer of the call II. the buyer of the call III. the writer of the put IV. the buyer of the put
II and III II. the buyer of the call III. the writer of the put
If an investor is going to participate in the commodities market by buying a contract, he/she should do which of the following? I. Realize that making a profit is relatively easy II. Be mentally prepared for an enormous loss III. Be financially able to meet repeated margin calls IV. Spend all of their available cash on margin deposits
II and III only II. Be mentally prepared for an enormous loss III. Be financially able to meet repeated margin calls
Which of the following statements concerning futures are correct? I. Investors in financial futures can earn both dividend income from the underlying security as well as the potential capital gain from the futures contract. II. The return on a futures contract is computed by dividing the net difference between the sale and the purchase price of the contract by the amount of the margin deposit. III. It is very easy to lose your entire investment in a futures contract in a very short period of time due to the volatility of the futures market and also the use of leverage. IV. Conservative investors tend to purchase one futures contract as a means of increasing the return on their portfolio while maintaining minimal risk.
II and III only II. The return on a futures contract is computed by dividing the net difference between the sale and the purchase price of the contract by the amount of the margin deposit. III. It is very easy to lose your entire investment in a futures contract in a very short period of time due to the volatility of the futures market and also the use of leverage.
Which of the following statements concerning market, stop loss, and limit orders are correct? I. Market orders guarantee both a price and an execution II. Market orders guarantee an execution but not a price III. Limit orders guarantee a price but not an execution IV. Stop-loss orders may never be executed.
II, III, and IV only II. Market orders guarantee an execution but not a price III. Limit orders guarantee a price but not an execution IV. Stop-loss orders may never be executed.
Which of the following trading strategies are correct? I. If you expect the British pound to appreciate in value, you should short the pound. II. If you expect interest rates to rise, you should go long on interest rate futures. III. If you expect the stock market to rise, you should go long on stock-index futures. IV. If you expect the stocks in your portfolio to temporarily decline in value, you should short stock-index futures.
III and IV only III. If you expect the stock market to rise, you should go long on stock-index futures. IV. If you expect the stocks in your portfolio to temporarily decline in value, you should short stock-index futures.
Which one of the following types of risk cannot be effectively eliminated through portfolio diversification? Labor problems, Inflation risk, Product recalls, or Materials shortage
Inflation Risk
Which of the following would provide the most compelling evidence contradicting the semi-strong form of the efficient markets hypothesis? (Select the best answer below)
Low P/E stocks have positive long-term abnormal returns.
Which one of the following statements is correct?
Low P/E stocks tend to outperform high P/E stocks on a risk-adjusted basis
An order to sell 300 shares of ABC stock at the best available price is called a
Market Order
Over-the-counter market activity is reflected in the
NASDAQ index
Which one of the following statements concerning mutual funds is correct?
The mutual fund industry is the largest financial intermediary in the United States.
Which of the following statements concerning put options are correct?
The writer of a put profits if the price of the underlying stock rises
A company's estimated future earning and its P/E ration can be used to estimate the stock's future price. True or False?
True
A negative beta means that on average a stock moves in the opposite direction of the market. True or False?
True
A successful hedge results in a guaranteed sales price to producers of commodities. True or False?
True
After the U.S. dollar, bonds denominated in euros are the largest segment of the global bond market. True or False?
True
As investors approach retirement age, they should hold more bonds and less stock. True or False?
True
Failure to meet a margin call will cause an investor's futures contract to be sold. True or False?
True
For a given stated rate of interest, a sum compounded monthly will earn more interest than a sum compounded annually. True or False?
True
Generally speaking, short-term bonds have lower yields than long-term bonds. True or False?
True
If the actual rate of return on an investment portfolio is constant from year to year, the standard deviation of the portfolio is zero. True or False?
True
Investing globally offers better diversification than investing only domestically. True or False?
True
Investors can trade futures on electricity and natural gas. True or False?
True
Like ordinary stocks, exchange-traded funds (ETFs) can be sold short. True or False?
True
Most exchange-traded funds are index funds. True or False?
True
Mutual fund fees are disclosed in the fund prospectus. True or False?
True
Socially responsible funds only hold stocks of companies that meet the fund's ethical guidelines. True/False?
True
The writer of an option creates the option by selling it. True or False?
True
The dividend valuation model (DVM) cannot accommodate which of the following assumptions?
a constant growth rate of dividends greater than the required rate of return
Mutual funds often report returns as the growth of $10,000 over a period of time. These returns assume that
all dividends and capital gains are reinvested
When using the constant-growth dividend valuation model, which of the following will lower the value of the stock?
an increase in the required rate of return
Inflation tends to have a particularly negative impact on the price of
bonds
Beginning investors with small amounts to invest should
buy mutual funds or exchange traded funds (ETFs)
A vertical spread with limited risk might involve
buying a call at a lower strike price and writing a call at a higher strike price
An increase in the market rate of return on an outstanding bond will
decrease the bond price
Government securities money funds are structured to eliminate
default risk
One characteristic of 12(b)-1 charges is that they are payable
each year regardless of the performance of the mutual fund
One characteristic of bond funds is the
fluctuation in value in response to changing interest rates
A cyclical company tends to: (select the best answer below)
have earning that track the overall economy
Purchasers of call options
have the right to buy a certain number of underlying shares at a specified price
Performance fees based on profits earned by the fund are typical of
hedge funds
The most important lesson investors can learn from behavioral finance is
how to avoid letting their emotions and biases affect their investment decisions
An exchange traded fund that invests in the stocks of large corporations is an example of
indirect investment
A Long Straddle
is a strategy that produces profits when the price of the underlying security moves significantly in either direction.
The margin deposit associated with the purchase of a futures contract
is used to cover any loss in market value of the contract resulting from adverse price fluctuations
When a corporation declares a stock split, it usually does so because
it wants to make its stock more affordable to average investors
In some markets it may take many months to sell a residential property. This is an example of
liquidity risk
The premium on a stock index call would be expected to increase as the
market becomes more volatile
A convenient way for small investors to enjoy the benefits of a broadly diversified portfolio is by purchasing
mutual fund shares
The basic reason why investors use spreading strategies when speculating in commodities is to
reduce risk
The efficient frontier
represents the best attainable trade-off between risk and return
If an investor does not respond to a margin call, the broker will
sell some of the investor's holding to cover the margin call
Larry is a corn farmer. To attempt to maximize the value of his crop, Larry is most likely to benefit from
selling a futures contract on corn for delivery at harvest time
With futures contracts, the price at which the commodity must be delivered is
set when the futures contract is sold
An inverted yield curve
sometimes results from actions by the Federal Reserve to control inflation
A capital loss is computed by
subtracting the original cost of an investment from the proceeds received from the sale of that investment.
Conversion privileges, offered by many mutual fund families, refer to the ability to:
switch from one fund to another within the same family, often without paying a commission
The primary market tends to be more active when
the economy is expanding, and stock prices are rising
The writer of a put option hopes that the price of the underlying stock will rise because
the option is less likely to be exercised.
The major attraction of convertible bonds is
the option to convert the bond into shares of the company's stock
traditional portfolio management
typically centers on inter-industry diversification
