Investment Planning - Final Exam
Bill Camp owns an XYZ Corporation convertible bond. The bond has a 10% coupon rate paid semi-annually and matures in 12 years. Comparable debt is yielding 12%. Bill's bond is convertible at $18 a share, and the current market price of XYZ common stock is $28 a share. What is the conversion value of Bill's convertible bond?
$1,000/$18 = 55.56 x $28 = $1,555.68
Assume that Ms. Grant follows Maxwell's advice and invests $500 each month in shares that have the following prices: Month 1 - $10 Month 2 - $11 Month 3 - $12 Month 4 - $13 Month 5 - $14 Month 6 - $15 What will be Ms. Grant's average cost per share?
$12.26 For additional information about this question please refer to the Formula Investing and Investment Strategies module and its associated reading assignments.
How much was added to the retained earnings balance of Hilbert Stores, Inc. as a result of the most recent year's results?
$120,000
Based on the constant-dividend-growth valuation model, which of the following is the intrinsic value of Richard's shares in the growth stock mutual fund whose most recent dividend was $100, whose dividends are expected to grow at an 8% annual rate, and for which Richard has a 10% required rate of return?
$5,400 For additional information about this question please refer to the Time Influence on Valuation module and its associated reading assignments.
The common stock of XYZ Corporation is presently earning $5 per share and has a price/earnings ratio of 12. If the board of directors declares and pays a 20 percent stock dividend, at what price should the stock sell?
$50 One divides the market price before the payment of the stock dividend by one plus the percent stock dividend paid to determine the price that the stock is expected to sell for after payment of the dividend. The price before payment of the dividend is determined by multiplying the earnings per share by the price-earnings ratio ($5 x 12 = $60). Then divide that price by 1.2 (1 + .20): 60 / 1.2 = $50.
Assume that a margin purchaser of stock must meet a 50% initial margin requirement and a 40% maintenance margin requirement. If 100 shares are bought at $70 per share and later fall to $50 per share, how much additional cash, if any, will the investor be required to deposit?
$500 The maintenance margin is 40% of the stock's current value of $5,000, or $2,000. Since the investor's equity has fallen to $1,500 (that is, 100 x $50 - $3,500), he or she must deposit an additional $500 to meet the maintenance margin requirement.
An investor owns a preferred stock issue that pays an annual dividend of $4.80. The comparable yield on preferred stock of similar quality is 9%. The common stock is priced at $35. What is the intrinsic value of the preferred stock?
$53.33 $4.80/.09 = $53.33
With respect to the recommendation to Mrs. Ingram, what is the investment value of each of the convertible bonds as debt?
$787 For additional information about this question please refer to the Introduction to Fixed Income Securities module and its associated reading assignments.
With respect to Maxwell's recommendation to Mrs. Ingram, what is the present conversion value of each of the bonds as stock
$960 For additional information about this question please refer to the Introduction to Fixed Income Securities module and its associated reading assignments.
Consider the following four bonds: Bond 1: BBB-rated, 6% coupon, matures in 12 years; Bond 2: BBB-rated, 6% coupon, matures in 20 years; Bond 3: BBB-rated, 4% coupon, matures in 15 years; Bond 4: BBB-rated, 9% coupon, matures in 15 years. Which of the following statements correctly describe the potential for price fluctuations of the above bonds? (I) Bond 3 has greater potential for price fluctuations than Bond 4 because of its lower coupon. (II) Bond 4 has greater potential for price fluctuations than Bond 3 because of its higher coupon. (III) Bond 2 has greater potential for price fluctuations than Bond 1 because of its longer maturity. (IV) Bond 1 has greater potential for price fluctuations than Bond 2 because of its shorter maturity.
(I) and (III) only
Which of the following statements concerning intrinsic value and required return is (are) correct? (I) The more risky an asset, the higher the discount rate should be for valuation purposes. (II) Risk and required return are unrelated. (III) Intrinsic value will tend to increase with increases in the discount rate.
(I) only Risk is considered in valuation models by raising the discount rate (required return) as the risk is seen to increase. (II) is incorrect since risk and required return are related as specified in (I). (III) is incorrect since increases in the discount rate (in the denominator of the valuation formula) will decrease (not increase) intrinsic value.
Which of the following statements concerning measures of return is (are) correct? (I) Using a simple average of the returns of each security included in a portfolio as a measure of the return generated by the portfolio assumes equal amounts are invested in each of the securities. (II) From a time value of money perspective, a holding period return would not be a proper measure of return over a period longer than one year. (III) A geometric mean is a more useful measure of return over periods of time of more than one year than is a arithmetic average of annual returns.
(I), (II), and (III)
With respect to Maxwell's recommendation to Ms. Grant, which of the following is (are) among the advantages of dollar cost averaging? (I) Dollar cost averaging produces a lower average cost per share. (II) Dollar cost averaging produces a semi-compulsory form of investing. (III) Dollar cost averaging produces time diversification.
(I), (II), and (III)
Which are the following risks are considered to be systamatic, nondiversifiable risk? (I) Purchasing power (II) Investment manager (III) Default risk (IV) Financial risk (V) Interest rate risk (VI) Business risk (VII) Exchange rate risk
(I), (V), and (VII) only
Which of the following are logical reasons for buying a call? (I) To profit when stock prices increase and to utilize leverage. (II) To protect a short position in a stock. (III) To benefit from the income that is payable periodically. (IV) To hedge against an existing stock portfolio.
- (I) and (II) (I) and (II) are reasons to buy a call. (III) and (IV) are reasons to write a call.
Which of the following statements correctly describe the characteristics of the Behavioral Asset Pricing Model (BAPM)? (I) The model premise is that the market is a result of the interaction between information traders who do not make cognitive errors, and the noise traders who do commit cognitive errors. (II) The supply and demand for stock is determined by behavioral beta, which is utilitarian in nature. (III) Behavioral betas are difficult to determine because the preferences of the noise traders can change over time.
- (I) and (III) The supply and demand for stock is determined by behavioral beta, which is both utilitarian and value-expressive in nature. Statements (I) and (III) are correct.
Which of the following statements concerning current yield and yield to maturity are correct? (I) Current yield and yield to maturity are equal when bonds sell at par. (II) Current yield is less than yield to maturity when bonds sell at a premium. (III) Yield to maturity is greater than current yield when bonds sell at a discount. (IV) Yield to maturity is greater than current yield when bonds sell at par.
- (I) and (III) only (IV) is incorrect, because (I) describes the correct relationship between current yield and yield to maturity when a bond sells at par. (II) is incorrect because the current yield is greater than the yield to maturity when a bond sells at a premium. (III) is a correct statement.
If an efficient market exists, which of the following should common stock portfolio managers consider? (I) Achievement of proper diversification (II) Selection of a stock that recently had a stock split (III) Maximization of transaction costs (IV) Tax implications of investors
- (I) and (IV) only A portfolio manager needs to consider diversification, risk level of investors, tax implications, and transactions costs, among other things. The selection of stocks with stock splits is irrelevant. Additionally, the portfolio manager attempts to minimize or reduce the transactions costs--not maximize transactions costs.
Assume that James Beals has taken a short position with respect to the Toys R Us common stock in his investment portfolio. Which of the following statements is correct? (I) James can be short and long for the Toys R Us stock at the same time. (II) James expects the Toys R Us stock to appreciate substantially soon. (III) James can use the short-against-the box strategy to defer capital gains as long as he keeps the short position open. (IV) James cannot deliver the long position to close the short position if he wants to defer the capital gain.
- (I) and (IV) only For additional information about this question please refer to the Buying and Selling Securities module and its associated reading assignments
Which of the following statements concerning Maxwell's recommendation to Mrs. Evans is (are) correct? (I) What Maxwell is recommending is called a wash sale. (II) If Mrs. Evans follows Maxwell's advice, she will be allowed to take the capital loss at year end as an offset against some of her capital gains.
- (I) only For additional information about this question please refer to the Tax Efficient Investing module and its associated reading assignments.
Which of the following statements concerning business risk is (are) correct? (I) Business risk is the uncertainty of the investor's total return associated with the unique problems of a specific industry or a specific company. (II) An example of business risk would be a company that is exposed to bankruptcy because of the interest charges on its enormous amount of debt.
- (I) only (II) is an incorrect statement because excessive interest charges for a firm's debt would be an example of financial risk, not an example of business risk.
A beta coefficient is a volatility measure of systematic risk. However, differences in calculating beta may result from which of the following? (I) Differences in time periods covered (II) Considering only price changes and not total returns (III) The use of different measurements of the market (IV) Portfolio standard deviation calculations that are mostly positive
- (I), (II), and (III) Differences in time periods covered, considering only price changes and not total returns, and the use of different measurements of the market are all possible reasons why there may be different calculations as to how a beta coefficient is determined. For example, weekly returns over 3 years will result in a different beta from one calculated over 5 years.
Which of the following statements concerning risk-adjusted performance of mutual funds is (are) correct? (I) Alpha measures returns against the average security. (II) Beta measures expected price increase and decrease in relation to the rise and fall of security markets. (III) Studies show that a professionally managed mutual fund on the average performs better than the theoretical unmanaged portfolio of securities with the same risk characteristics. (IV) Risk-adjusted performance studies reveal that bond funds are less risky than common stock funds.
- (I), (II), and (IV) only Studies of the risk-adjusted performance of mutual funds have shown that a professionally managed fund performs on the average no better than a theoretical unmanaged portfolio of securities with the same risk characteristics. The same studies have confirmed what most investors already believed: that bond funds are less risky than common stock funds.
Lynn Taylor, an investor from London, has the following portfolio: 25% US small cap stocks, 30% laddered US treasuries, 10% US equity REITs, and 35% S&P 500 Index fund. What risks is she exposed to? (I) default risk (II) excahnge rate risk (III) reinvestment rate risk
- (II) and (III) only
Capital losses may be used to offset which of the following: (I) Ordinary income in excess of $3,000 (II) Capital gains (III) Interest and dividend income
- (II) and (III) only Only $3,000 of ordinary income may be offset in any one year, but losses may be carried over from year to year.
Which of the following statements concerning diversification is (are) correct? (I) Studies suggest a portfolio of 50 or more different common stocks is needed to substantially reduce unsystematic risk. (II) An investor cannot reduce systematic risk through diversification by adding common stocks to an existing portfolio of common stocks. (III) The key to effective risk reduction through diversification is combining assets whose returns show negative, low positive, or no correlation over time.
- (II) and (III) only Studies show that substantial risk reduction can be achieved with portfolios of as few as 12 to 15 stocks (not 50 or more).
Which of the following statements concerning U.S. government Series EE bonds is (are) correct? (I) They are actively traded in secondary markets. (II) Their interest earnings may be free from federal income taxes. (III) Their interest earnings are fully taxable at the state and local levels.
- (II) only (I) is incorrect because there is no secondary market for Series EE bonds. (III) is incorrect because their interest earnings are not subject to state or local income taxes.
An investor bought a bond for $1,000 that is callable in 8 years at $1,100. The bond matures in 15 years and has a 9% coupon rate, paid semi-annually. What is the yield to call on this bond?
- 9.8% The answer (A) must be multiplied by 2 for the annual yield to call. The future value used is not the par value but the call price. The years to call are used and not the years to maturity.The answer (A) must be multiplied by 2 for the annual yield to call. The future value used is not the par value but the call price. The years to call are used and not the years to maturity. For additional information about this question please refer to the Measures of investment returns module and its associated reading assignments.
A couple in a high marginal income tax bracket wants to invest in a mutual fund to provide a college fund for their children, ages 10 and 8. They are moderately conservative investors. Which of the following funds would be most appropriate for this couple?
- A global fund An aggressive growth fund is probably not appropriate for moderately conservative investors. A sector fund is also not a very conservative investment. A global fund is reasonably conservative and has diversification over the economies of many countries. A gold fund is really a sector fund and is not a moderately conservative investment.
Which of the following statements correctly describes Jensen's alpha?
- A positive alpha indicates that a manager consistently outperforms the required return projected by the capital asset pricing model (CAPM). An alpha of zero is good, in that the fund manager met the required return.
What is the difference between the CAPM and the Arbitrage Pricing Model?
- APT assumes returns are generated by a factor model while the CAPM makes no reference to the underlying return generating process. Both CAPM and APT are equilibrium models. They both assume that investors are insatiable, they dislike risk and perfect markets exist. The significant differences are that the APT allows more variables and has lesser assumptions than the CAPM. It also assumes returns are generated by a factor model.
All the following statements concerning the weak form of the efficient markets hypothesis (EMH) are correct, EXCEPT:
- All public and private information concerning a stock is fully reflected in its current price. Only the strong form of the EMH suggests that all private as well as public information is incorporated in current market prices
The information ratio is best described as:
- An asset's excess return above the benchmark return divided by the standard deviation of the excess return.
All the following statements concerning market risk for the investor are correct EXCEPT:
- An astute program of diversification of common stock ownership will be very helpful in reducing market risk. When the stock market as a whole is declining, "an astute program of diversification" will do little to reduce an investor's overall losses. Diversification would not have been very helpful to an investor in listed common stocks following the terrorist attacks on September 11, 2001.
According to the CAPM, which of the four is the most efficient?
- Asset D has a return of 18%; beta = 1.25; standard deviation = 21.5% For additional information about this question please refer to the Asset pricing models module and its associated reading assignments.
Which of the following assets in James Beals' investment portfolio probably has the lowest degree of liquidity?
- Beals Funeral Home, Inc. common stock For additional information about this question please refer to the Investment Risks module and its associated reading assignments.
Which of the following statements is true?
- Black-Scholes Option Valuation Model shows that the fair value of an option is determined by price of the underlying stock, exercise price, risk-free rate, time to expiration, dividend yield, and volatility of the common stock. The Black-Scholes Option Valuation Model requires use of a computer program or a table of natural logarithms and a table of cumulative normal distribution probabilities. It shows that the fair value of an option is determined by six factors: current market price of the underlying stock, exercise price of the option, risk-free rate of return, life of the option, the stock's dividend yield, and the risk or volatility of the common stock. It assumes that the risk-free rate and common stock volatility are constant over the option's life
Which of the following statements concerning the value of convertible bonds is (are) correct? (I) The value of a convertible bond is related to the value of the stock into which the bonds may be converted. (II) The value of a convertible bond is related to the value of the bond as debt.
- Both (I) and (II)
Which of the following statements regarding the reinvestment risk associated with mortgage-backed securities is (are) correct? (I) Prepayment of residential mortgages typically speeds up when interest rates are about ready or have already started to decline. (II) Mortgage-backed securities offer a higher yield than is usually found in other fixed income securities (of comparable quality) in order to compensate for the prepayment risk.
- Both (I) and (II)
Which of the following statements concerning zero coupon bonds is (are) correct? (I) Although they pay no interest currently, the accrued interest is taxable annually. (II) They permit the investor to lock in a current high yield
- Both (I) and (II) By definition, a zero coupon bond does not pay current interest. However, federal tax law makes the earned interest taxable as it is earned. The investor locks in a current high yield as interest earned is, in effect, reinvested at the rate originally calculated in the purchase price of the bond.
Your client is married and retiring next month. Both he and his wife are 62 years old and in excellent health. He wants advice on asset allocation for their retirement nestegg. The income requirement is such that the anticipated draw-down will be 3.5% - 4.0% per year. What is the best asset allocation selection for their needs
- Cash/money market fund: 15%; high-grade bonds: 40%; blue-chip stocks: 45%.
Black-Scholes-Merton (formally known as Black-Scholes) option valuation model is used to calculate the price of a:
- Either a call and/or a put
Which of the following phrases most accurately describes the overall portfolio of the investments owned by Pat and Libby?
- Extremely inconsistent
Which fund is subject to the most unsystematic risk?
- Fund A, beta = 1.0, standard deviation = 22%, coefficient of determination = 78% For additional information about this question please refer to the Investment risks module and its associated reading assignments.
All the following statements concerning diversification are correct EXCEPT:
- If the investor's broker advises him or her that another September, 2001 stock market crash is imminent, the investor would be wise to sell all his or her common stock mutual fund shares and put the cash in a money market fund. Our belief is that it would be a most unusual broker who could predict accurately another crash like that following September 11, 2001. Our feeling is that the sale of 30% or 40% of the mutual fund shares might be appropriate, but certainly not 100%.
A planner observes the following about the client: age 35, knowledgeable about investments, retiring in 30 years, perfect health, financially secure and would like to invest for his parents who live on a conservative pension plan. Which of the following may be the best asset allocation for the parent's needs?
- Income (80% bonds, 20% stocks) Income (80% bonds, 20% stocks) may be the best asset allocation for the needs of this client's parents.
The intrinsic value of a stock can best be defined as which of the following?
- Investment value of the stock based on estimated future cash flows generated by an investment in the stock.
Which of the following statements concerning systematic risk is correct?
- It covers those types of risk that cause all securities to move together in a systematic manner. Systematic risk affects broad categories of assets. For instance, a rise in interest rates affects all bonds and even the valuation of common stocks. A change in investor psychology (market risk) affected all common stocks after September 11, 2001. Having a diversified portfolio of common stocks wouldn't have helped at that time. Business risk and financial risk are unsystematic risks.
With regard to downside risk, what should an investment manager be most concerned about?
- Leptokurtic distribution
All the following statements concerning the systematic risk associated with the ownership of investment quality assets are correct EXCEPT:
- Market risk, interest rate risk, and financial risk are all systematic risks. Market risk, interest rate risk, and financial risk are all financial risks, not systemic risks. Financial risk arises out of the magnitude of debt that a particular firm has. Systematic risk cannot be eliminated even when diversifying with different types of assets, such as bonds, real estate, and stocks because rising interest rates (that is, interest rate risk) will negatively affect different types of assets, such as bonds, real estate, and stocks.
Investors that segment their money into separate accounts, such as capital gain account and a dividend account is known as:
- Mental accounting For additional information about this question please refer to the Asset pricing models module and its associated reading assignments.
Which asset is subject to the most reinvestment rate risk?
- Mortgage-backed security
If after her divorce Anne Beals altered her investment risk profile so that she became a moderately aggressive investor, which of the following changes in her investment portfolio should be recommended? (I) A reduction in her holdings of cash (II) An increase in her holdings of the Merrill Lynch Long-Term Municipal Bond Fund (III) A withdrawal of the money in the GICs to invest in the common stock fund she holds outside the retirement plan (IV) A shift of investments from the Scudder High Yield Bond Fund to a Long Term Treasury Fund
- None of the above For additional information about this question please refer to the Asset Allocation and Portfolio Diversification module and its associated reading assignments.
Tracy is concerned that inflation will increase soon. Given an inflationary economic environment, which one of the following investment vehicles would be most appropriate for Tracy to purchase?
- Precious metals; inflation will cause these assets to increase in value. Precious metals would be the best investment in inflationary periods. Automotive stocks would not be a good investment because inflation causes interest rates to rise, which decreases demand for postponable, durable goods such as automobiles and houses. Long-term bonds would not be a good investment because higher interest rates will cause long-term bond prices to decline. Short-term bonds would also be a poor choice because inflation will cause interest rates to increase, not decrease.
All the following statements concerning the liquidity of investment-quality assets are correct EXCEPT:
- Stocks that can be traded on organized stock exchanges have good liquidity since they can be sold by a mere telephone call to one's broker. Although common stocks can readily be converted to cash, this cannot always be accomplished without a significant price concession. At times when market risk is affecting the stock market unfavorably, the investor may not be able to cash out with the principal intact.
Which of the following strategies is correctly paired with its opposite?
- Technical Analysis - Fundamental Analysis The opposites are: Market Timing - Buy and Hold; Momentum - Contrarian; Passive - Active; and Technical Analysis - Fundamental Analysis.
Assume the value of a portfolio grew from an initial $10,000 investment to $20,000 over six years. Further assume that dividends were reinvested over the six-year time span, no other funds were added to the portfolio, and no withdrawals were made from the portfolio. Which of the following statements concerning the average return and geometric mean return for the portfolio is correct?
- The average return is greater than 16%, and the geometric mean return is less than 12.5%.
Which forms of the Efficient Market Hypothesis (EMH) does Pat accept?
- The semi-strong form and the weak form
Which one of the following tells an investor that the Barron's Confidence Index indicates a bear market?
- The yield differential between high and low quality bonds is large. During a bear market, the Barron's Confidence Index will be low, which results from a large differential in yield between high quality corporate bonds (numerator) and average quality bonds (denominator).
Passive portfolio managers DO NOT subscribe to which of the following?
- There is value in fundamental analysis Passive managers do not believe that there is value in any sort of security analysis because the market is efficient and securities reflect all previous, public and insider information.
Which of the following is true about the various portfolio measurements?
- Treynor Ratio compares the risk premium to the risk of the market The Treynor Ratio compares the risk premium to the risk of the market by using beta as part of the equation.
Which of the following statements correctly describes a case where standard deviation is the best measure of the portfolio's risk level?
- When the portfolio has a low R squared (coefficient of determination) value Standard deviation is a better measure of the risk level of the portfolio when the portfolio is not well diversified. This will be the case when R squared is low. When the portfolio is well diversified, beta is a good measure of the risk level.
Which of the following is not an anomalie of the efficient market hypothesis (EMH)?
- Window dressing effect For additional information about this question please refer to the Efficent market Theory module and its associated reading assignments.
Times interest earned is an example of:
- a debt ratio For additional information about this question please refer to the Valuation of bonds and stocks module and its associated reading assignments.
Richard's investment in the apartment building has entailed the following cash flows since he bought it. Beginning of year 1 - ($95,000) - Purchase price End of years 1, 2, 3, and 4 - $ 2,050 - Net rental income What is the net present value of Richard's investment in the apartment building if he believes a discount rate of 12% accurately reflects the riskiness of this investment? Assume there is a 6% commission on the sales price plus $2,000 for closing costs upon the sale.
-$15,371 For additional information about this question please refer to the Measures of Investment Returns module and its associated reading assignments.
Which of the following was the compound annual rate of growth in the value of the Florida condominium from the date of its purchase for $125,000 until the date of its valuation in Richard's mother's estate six years later at $120,000?
-0.68% For additional information about this question please refer to the Measures of Investment Returns module and its associated reading assignments.
Which of the following is the acid-test or quick ratio for Hilbert Stores, Inc.?
.86 to 1
An investor owns three investments in his or her portfolio. Stock FG has a current market value of $14,500, a beta of .85, and an expected return of 10.5:%. Mutual Fund PR has a current market value of $8,600, a beta of .92, and an expected return of 11.7%. Mutual Fund SK has a current market value of $19,800, a beta of 1.25, and an expected return of 9.8%. What is the weighted average expected return on the portfolio?
10.42% The answer is 10.17%. Since the expected returns are equal, an investor would prefer the portfolio that carries the lesser risk. Beta is considered a measure of risk for a well diversified portfolio. Accordingly, an investor would prefer Portfolio Y, since the lower beta suggests less risk.
The risk-free rate of return is 7.3%, and the market rate of return is 10.2%. An investor is considering a stock that sells for $40 and pays $.85 in dividends that are expected to grow at 7% annually. The beta of the stock is 1.12. Based on the CAPM formula, what is the investor's required rate of return?
10.55%
Anne Beals' common stock mutual fund was purchased two years ago for $8,000. Since then it has paid dividends at the end of each quarter as follows: Qtrs #1 and 2 - $250 per Qtr Qtrs #3 and 4 - $300 per Qtr Qtrs #5, 6 and 7 - $350 per Qtr Qtr #8 - $400 All dividends have been reinvested. If Anne were to sell the shares today for their fair market value, what would be her approximate annual internal rate of return from this investment?
12%
According to the CAPM formula, what is the required return for the following stock? Beta = 1.25; standard deviation = 22.5%; market risk premiun = 7%; 90-day T-bill = 5%?
13.75% For additional information about this question please refer to the Asset pricing models module and its associated reading assignments.
The risk-free rate of return is 9%, and the market rate of return is 15%. An investor is considering a stock that sells for $50 and pays $1.25 in dividends that are expected to grow by 6% annually. The beta of the stock is .97. Based on the CAPM formula, what is the investor's required rate of return?
14.82%
What is the probability that the return on Pat's 401(k) plan will be less than 0%?
2.5%
An investor bought a quantitative hedge fund with an expected return of 20% and a standard deviation of 15%. The investor has asked you to determine the probability of incurring a 10% loss. What is the probability of incurring at least a loss of 10% on this investment?
2.5% For additional information about this question please refer to the Investment risks module and its associated reading assignments.
Which of the following is the current ratio for Hilbert Stores, Inc.?
2.86 to 1
Anne Beals' common stock mutual fund was purchased two years ago for $8,000. Since then it has paid dividends at the end of each quarter as follows: Qtrs #1 and 2 - $250 per Qtr Qtrs #3 and 4 - $300 per Qtr Qtrs #5, 6 and 7 - $350 per Qtr Qtr #8 - $400 All dividends have been taken in cash. If Anne were to sell the shares today for their fair market value, what would be her approximate annual internal rate of return from this investment?
26% For additional information about this question please refer to the Measures of Investment Returns module and its associated reading assignments.
An investor just bought a bond at a price of $1,035.43. The bonds matures in 5 and 1/2 years with a maturity value of $1,000, pays a 6% coupon (paid semianually), and the YTM for comparable instruments are 5.25%. Assuming the investor holds the bond to maturity, what will the holding period return (HPR) be?
28.45% For additional information about this question please refer to the Measures of investment returns module and its associated reading assignments.
What has been the approximate standard deviation of the rates of return on Pat's 401(k) plan in the past ten years?
4 For additional information about this question please refer to the Investment Risks module and its associated reading assignments.
Which of the following is the current yield on Richard and Gloria's $12,000 investment in the money market mutual fund?
4.3% For additional information about this question please refer to the Measures of Investment Returns module and its associated reading assignments.
What is the standard deviation of a security with the following returns for the last 5 years: This year = 14% Last year = 8% Two years ago = 3% Three years ago = 19% Four years ago = 6%
6.44% For additional information about this question please refer to the Investment risks module and its associated reading assignments.
Joe Joesph just purchased a bond for $1,085. It matures in 12 years at $1,000 but is callable in 6 years at a special price of $1,040. The bond has a coupon rate of 8% paid semi-anually. Calculate the yield to call (YTC) and the yield to maturity (YTM) for this bond.
6.80% (YTC), 6.94% (YTM) For additional information about this question please refer to the Measures of investment returns module and its associated reading assignments.
Richard's investment in the apartment building has entailed the following cash flows since he bought it. Beginning of year 1 - ($95,000) - Purchase price End of years 1, 2, 3, and 4 - $ 2,050 - After-tax cash flow If today, at the end of year 4, Richard were to sell the building for $115,500, net of taxes and transaction costs, what will have been his after-tax annual internal rate of return on this investment?
7.0% For additional information about this question please refer to the Measures of Investment Returns module and its associated reading assignments.
Which of the following assets cannot lie on the efficient frontier? Asset A: return = 15%, standard deviation = 19% Asset B: return = 11%, standard deviation = 10% Asset C: return = 17%, standard deviation = 20% Asset D: return = 11%, standard deviation = 12% Asset E: return = 15%, standard deviation = 18%
Asset A and D
According to the Modern Portfolio Theory, a risk-averse investor will always do what?
Choose the portfolio with the smaller standard deviation.
Which of the following best describes technical analysis?
Fundamental analysis seeks the intrinsic value of a stock by forecasting its future earnings revenue and dividends. Technical analysis uses past data to identify patterns. Bond immunization combines debt securities with varying durations to produce an average duration that meets an investment objective. Passive portfolio management creates a portfolio that mimics a benchmark index.
Paul recently purchased a bond for $950. It matures in 3 years and has a coupon rate of 9.5% paid semi-annually. What is the internal rate of return (YTM) on this bond?
IRR = 11.52%
All the following statements concerning rates of return are correct EXCEPT:
Investors tend to realize their expected returns on risky securities more often on a short-term basis than on a long-term basis.
Which of the following correctly presents the equation used to calculate intrinsic value if a constant dividend growth rate is assumed into perpetuity?
P = Do (1 + g) / r-g
Which of the following best describes probability analysis?
Probability analysis looks at the actual performance of a portfolio in comparison to its expected outcomes. When selecting securities for a portfolio, certain assumptions are made as to the expected return. These assumptions are accompanied by the probability of attaining the expected return. Probability analysis uses standard deviation, variance, coefficient of determination, beta and alpha to determine the risk adjusted return of the portfolio.
Assume that for retirement planning purposes Anne Beals has only the investments in her profit-sharing plan and IRAs to provide for her retirement needs. What changes, if any, should be recommended to her for the investment of this retirement fund?
She should increase her investment in growth stocks and corporate bonds and reduce the holdings of GICs.
All the following statements concerning interest rate risk are correct EXCEPT:
The market price variation for short-term fixed-income securities is greater than the market price variation for long-term securities. The variation in market prices for long-term fixed-income securities is greater than for short-term fixed-income securities.
