Finance Investments

You put up $50 at the beginning of the year for an investment. The value of the investment grows 4% and you earn a dividend of $3.50. Your HPR was ____. A. 4% B. 3.5% C. 7% D. 11%

D. 11$ 1.04 x 50=$52 52+3.5-50 divided by 50 = 11%

Value a preferred stock paying a fixed divident of $2 per share when the discount rate is 8%

V=$2/0.08-0 = $25

A single-stock futures contract on a non-dividend-paying stock with current price 150 has a maturity of 1 year. If the T-bill rate is 3%, what should the futures price be?

future price = current price x 1+ tbill rate 150 x 1+3% = 154.5

You purchase one MBI July 120 call contract for a premium of $5. You hold the option until the expiration date, when MBI stock sells for $123 per share. You will realize a ______ on the investment. A. $2 profit B. $2 loss C. $3 profit D. $3 loss

(123 - 120) - 5 = 2 Answer is B. $2 loss

if the yield for 4-year maturity zero-coupon bonds is 8% and the yield for 3-year maturity zero-coupon bonds is 7% the the forward rate in year 4 is:

1.08^4/1.07^3 = 1.1106 or 11.06%

Stock A's Beta is 1.2, risk free rate is 5% and market portfolio's return is expected to be 10%. What is the expected return of Stock A?

1.2(10%-5%) = 11%

____ is a mechanism for mitigating potential agency problems A. Tying income of managers to success of the firm B. Directors defending top management C. Antitakeover strategies D. All of the options

A. Tying income of managers to success of the firm

An example of a derivative security is _________. A. a common share of General Motors B. a call option on Intel stock C. a Ford bond D. a U.S. Treasury bond

B. a call option on Intel stock

Risk that can be eliminated through diversification is called ______ risk. A. unique B. firm-specific C. diversifiable D. all of these options

B. firm-specific

Holding other factors constant, which one of the following bonds has the smallest price volatility? A. 5-year, 0% coupon bond B. 5-year, 12% coupon bond C. 5 year, 14% coupon bond D. 5-year, 10% coupon bond

C. 5 year, 14% coupon bond Smallest duration has the smallest price volatility *the higher the coupon rate the shorter the duration

__________ portfolio management calls for holding diversified portfolios without spending effort or resources attempting to improve investment performance through security analysis. A. Active B. Momentum C. Passive D. Market-timing

C. Passive

Consider the Sharpe and Treynor performance measures. When a pension fund is large and has many managers, the __________ measure is better for evaluating individual managers while the __________ measure is better for evaluating the manager of a small fund with only one manager responsible for all investments. A. Sharpe, Sharpe B. Sharpe, Treynor C. Treynor, Sharpe D. Treynor, Treynor E. Both measures are equally good in both cases.

C. Treynor, Sharpe

In an efficient market the correlation coefficient between stock returns for two non-overlapping time periods should be A. positive and large. B. positive and small. C. zero. D. negative and small. E. negative and large

C. Zero

All other things equal, which of the following has the longest duration? A. a 20-year bond with a 10% coupon yielding 10% B. a 20-year bond with a 10% coupon yielding 11% C. a 20-year zero-coupon bond yielding 10% D. a 20-year zero-coupon bond yielding 11%

C. a 20 year zero coupon bond yielding 10%

Your investment has a 20% chance of earning a 30% rate of return, a 50% chance of earning a 10% rate of return, and a 30% chance of losing 6%. What is your expected return on this investment? A. 12.8% B. 11% C. 8.9% D. 9.2%

D. 9.2%

Which of the following is an example of an agency problem? A. Managers engage in empire building. B. Managers protect their jobs by avoiding risky projects. C. Managers overconsume luxuries such as corporate jets. D. All of the options are examples of agency problems.

D. All of the options are examples of agency problems

Real assets in the economy include all but which one of the following? A. Land B. Buildings C. Consumer durables D. Common Stock

D. Common Stock

A mutual fund with a beta of 1.1 has outperformed the S&P 500 over the last 20 years. We know that this mutual fund manager _____. A. must have had superior stock selection ability B. must have had superior asset allocation ability C. must have had superior timing ability D. may or may not have outperformed the S&P 500 on a risk-adjusted basis

D. May or may not have outperformed the S&P 500 on a risk adjusted basis

Other things equal, diversification is most effective when A. securities' returns are uncorrelated. B. securities' returns are positively correlated. C. securities' returns are high. D. securities' returns are negatively correlated.

D. securities returns are negatively correlated

Firm reinvests 60% of its earnings in projects with ROE of 10%, capitalization rate is 15%. Expected year-end dividend is $2/share, paid out of earnings of $5/share. What is the PVGO? g=ROE x b = 10% x .6 = 6%

P=$2/0.15-0.06 = $22.22 PVGO =Price per share - no-growth value per share PVGO = $22.22-$5/.15 = -$11.11

A mutual fund with beta of 0.8 has an expected rate of return of 14%. If risk free rate is 5% and you expect market return to be 15%, should you invest in this fund?

rate of return% - (risk free rate + Beta [expect market return-riskfree rate] 14% - (5%+0.8[15%-5%]= 1% Yes we should invest in this fund because it is postive