FINA 469 HWs 1-3

Which of the following correlation coefficients will produce the most diversification benefits? A. -.6 B. -.9 C. 0 D. .4

-.9

Which of the following statements is (are) true regarding time diversification? I. The standard deviation of the average annual rate of return over several years will be smaller than the 1-year standard deviation. II. For a longer time horizon, uncertainty compounds over a greater number of years. III. Time diversification does not reduce risk.

2 and 3

The optimal risky portfolio can be identified by finding: I. The minimum-variance point on the efficient frontier II. The maximum-return point on the efficient frontier and the minimum-variance point on the efficient frontier III. The tangency point of the capital market line and the efficient frontier IV. The line with the steepest slope that connects the risk-free rate to the efficient frontier

3 and 4

Which of the following is not a characteristic of a money market instrument? A) low risk B) maturity greater than 1 year C) marketability D) liquidity

Maturity greater than 1 year.

Specialized-sector funds concentrate their investments in: a. bonds of a particular maturity b. geographic segments of the real estate market c. government securities d. securities issued by firms in a particular industry

Securities issued by firms in a particular industry.

Investors who want to liquidate their holdings in a closed-end fund may ______ a. sell their shares back to the fund at a discount if they wish b. sell their shares back to the fund at net asset value c. sell their shares on the open market d. sell their shares at a premium to net asset value if they wish

Sell their shares on the open market

According to Tobin's separation property, portfolio choice can be separated into two independent tasks consisting of __________ and __________. A. identifying all investor imposed constraints; identifying the set of securities that conform to the investor's constraints and offer the best risk-return trade-offs B. identifying the investor's degree of risk aversion; choosing securities from industry groups that are consistent with the investor's risk profile C. identifying the optimal risky portfolio; constructing a complete portfolio from T-bills and the optimal risky portfolio based on the investor's degree of risk aversion D. choosing which risky assets an investor prefers according to the investor's risk-aversion level; minimizing the CAL by lending at the risk-free rate

identifying the optimal risky portfolio; constructing a complete portfolio from T-bills and the optimal risky portfolio based on the investor's degree of risk aversion

The historical average rate of return on large company stocks since 1926 has been: 8%, 20%, 11.5%, 5%

11.5%

Under the SEC rules, the managers of certain funds are allowed to deduct charges for advertising, brokerage commissions, and other sales expenses directly from the fund assets rather than billing investors. These fees are known as: a. direct operating expenses b. back-end loads c. 12b-1 charges d. front-end loads

12b-1 charges

______________ is an example of an exchange-traded fund. a. A SPDR or spider b. A samurai c. A Vanguard d. An open-end fund

A SPDR or spider

Which of the following is not a true statement regarding municipal bonds? A) The interest income from a municipal bond is exempt from state and local taxation in the issuing state. B) A municipal bond is a debt obligation issued by the federal government. C) A municipal bond is a debt obligation issued by state or local governments. D) The interest income from a municipal bond is exempt from federal income taxation.

A municipal bond is a debt obligation issued by the federal government.

Financial markets allow for all but: A) channel funds from lenders of funds to borrowers of funds, B) shift consumption through time from higher-income periods to lower C) price securities according to their riskiness D) allow most participants to routinely earn high returns with low risk

Allow most participants to routinely earn high returns with low risk.

Mutual funds that hold both equities and fixed income securities in relatively stable proportions are called __________________. a. income funds b. balanced funds c. asset allocation funds d. index funds

Balanced funds

______________ represents an ownership share in a company. A) Preferred stock B) a call option C) Common stock D) a fixed income security

Common stock

According to multiple studies by Ritter, initial public offerings tend to exhibit _________ performance initially and _________ performance over the long term. a. bad; good b. bad; bad c. good; good d. good; bad

Good, bad

Higher portfolio turnover: I. Results in greater tax liability for investors II. Results in greater trading costs for the fund, which investors have to pay for III. Is a characteristic of asset allocation funds

I, II, and III

Money market securities are characterized by: I. Maturity less than 1 year II. Safety of the principal investment III. Low rates of return

I, II, and III

The cost of buying and selling a stock includes: I. Broker's commissions II. Dealer's bid-asked spread III. Price concessions that investors may be forced to make

I, II, and III

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

I, II, and III

You are considering adding a new security to your portfolio. To decide whether you should add the security, you need to know the security's: I. Expected return II. Standard deviation III. Correlation with your portfolio

I, II, and III

Preferred stock is like long-term debt in that _________ A) the preferred dividend is a tax-deductible expense for the firm B) it promises to pay to its holder a fixed stream of income each year C) in the event of bankruptcy preferred stock has equal status with debt D) it gives the holder voting power regarding the firm's management

It promises to pay to its holder a fixed stream of income each year.

_________________ are often called mutual funds. a. Unit investment trusts b. Open-end investment companies c. Closed-end investment companies d. REITs

Open-end investment companies.

____________ assets generate net income to the economy, and __________ assets define allocation of income among investors: real, real; financial, financial; real, financial; financial, real

Real, financial

The Dodd-Frank Reform act does all of the following except: A) reduces capital requirements for banks. B) requires public companies to set "claw-back" provisions C) creates an office within the SEC to oversee credit rating agencies. D) increases transparency in the derivatives market E) limits the risk-taking in which banks can engage

Reduces capital requirements for banks.

__________ often accompany short sales and are used to limit potential losses from the short position. a. Limit orders b. Restricted orders c. Limit loss orders d. Stop-buy orders

Stop-buy orders

If an investor places a _______ order, the stock will be sold if the price falls to the stipulated level. If an investor places a __________ order, the stock will be bought if its prices rises above the stipulated level. a. stop-buy; stop-loss b. market; limit c. stop-loss; stop-buy d. limit; market

Stop-loss, stop-buy

Which one of the following would be considered a risk-free asset in real terms as opposed to nominal: a. Money market fund b. U.S. T-bill c. Short-term corporate bonds d. U.S. T-bill whose return was indexed to inflation

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

Asset A has an expected return of 15% and a reward-to-variability ratio of .4. Asset B has an expected return of 20% and a reward-to-variability ratio of .3. A risk-averse investor would prefer a portfolio using the risk-free asset and ______. A. asset A B. asset B C. no risky asset D. The answer cannot be determined from the data given

asset A

Which one of the following stock return statistics fluctuates the most over time? A. Covariance of returns B. Variance of returns C. Average return D. Correlation coefficient

average return

If you want to know the portfolio standard deviation for a three-stock portfolio, you will have to ______. A. calculate two covariances and one trivariance B. calculate only two covariances C. calculate three covariances D. average the variances of the individual stocks

calculate three covariances

The _________ reward-to-variability ratio is found on the ________ capital market line. A. lowest; steepest B. highest; flattest C. highest; steepest D. lowest; flattest

highest; steepest

Some diversification benefits can be achieved by combining securities in a portfolio as long as the correlation between the securities is _____________. A. 1 B. less than 1 C. between 0 and 1 D. less than or equal to 0

less than 1

Diversification is most effective when security returns are _________. A. high B. negatively correlated C. positively correlated D. uncorrelated

negatively correlated

Investing in two assets with a correlation coefficient of 1 will reduce which kind of risk? A. Market risk B. Unique risk C. Unsystematic risk D. None of these options (With a correlation of 1, no risk will be reduced.)

none of these options

An investor's degree of risk aversion will determine his or her ______. A. optimal risky portfolio B. risk-free rate C. optimal mix of the risk-free asset and risky asset D. capital allocation line

optimal mix of the risk-free asset and risky asset

If an investor does not diversify his portfolio and instead puts all of his money in one stock, the appropriate measure of security risk for that investor is the ________. A. stock's standard deviation B. variance of the market C. stock's beta D. covariance with the market index

stock's standard deviation

You are considering investing in one of several mutual funds. All the funds under consideration have various combinations of front-end and back-end loads, and/or 12b-1 fees. The longer you plan on remaining in the fund you choose, the more likely you will prefer a fund with a ______ rather than a ________, everything else equal. a. 12b-1 fee; front-end load b. front-end load; 12b-1 fee c. back-end load; front-end load d. 12b-1 fee; back-end load

Front-end load, 12b-1 fee

Active trading in markets and competition among securities analysts helps ensure that: I. Security prices approach informational efficiency. II. Riskier securities are priced to offer higher potential returns. III. Investors are unlikely to be able to consistently find under- or overvalued securities.

I, II, and III

Which of the following are true statements about T-bills? I. T-bills typically sell in denominations of $10,000. II. Income earned on T-bills is exempt from all federal taxes. III. Income earned on T-bills is exempt from state and local taxes.

1 and 3

Which risk can be partially or fully diversified away as additional securities are added to a portfolio? I. Total risk II. Systematic risk III. Firm-specific risk

1 and 3

Rank the following from highest average historical return to lowest average historical return from 1926 to 2010: I. Small stocks II. Long-term bonds III. Large stocks IV. T-bills

1, 3, 2, 4

You decide to purchase an equal number of shares of stock of firms to create a portfolio. If you wanted to construct an index to track your portfolio performance, your best match for your portfolio would be to construct ________. A) a bond price index B) a value-weighted index C) a price-weighted index D) an equally weighted index

A price-weighted index

Which of the following is not a financial intermediary? A) an insurance company B) a credit union C) a mutual fund D) a real estate brokerage firm

A real estate brokerage firm

_____________________ is not a derivative security: none of the options, a share of common stock, a call option, a futures contract

A share of common stock.

_________________ is not a money market instrument. A) Commercial paper B) a treasury bill C) A Treasury bond D) a certificate of deposit

A treasury bond

Currently the Dow Jones Industrial Average is computed by __________ A) adding the prices of 30 large "blue-chip" stocks and dividing by a divisor adjusted for stock splits and large stock dividends B) adding the prices of 30 large "blue-chip" stocks and dividing by 30 C) measuring the current total market value of the 30 stocks in the index relative to the total value on the previous day D) calculating the total market value of the 30 firms in the index and dividing by 30

Adding the prices of 30 large "blue-chip" stocks and dividing by a divisor adjusted for stock splits and large stock dividends.

The process of polling potential investors regarding their interest in a forthcoming IPO is called: a. interest building b. book building c. market analysis d. customer identification

Book building

The systemic risk that led to the financial crisis of 2008 was increased by __________. A) collateralized debt obligations B) all of the options C) credit default swaps D) subprime mortgages

Collateralized debt obligations, credit default swaps, and subprime mortgages (all of the options)

Real Assets in the economy include all but which one of the following? buildings, land, consumer durables, common stock

Common Stock

Advantages of investment companies to investors include all but which one of the following? a. Record keeping and administration b. Low-cost diversification c. Professional management d. Guaranteed rates of return

Guaranteed rates of return

An order to buy or sell a security at the current price is a __________ a. limit order b. market order c. stop-loss order d. stop-buy order

Market order

____________ fund stand ready to redeem or issue shares at their net asset value. a. Closed-end b. Index c. Open-end d. Hedge

Open-end

The ratio of trading activity of a portfolio to the assets of the portfolio is called the __________ a. reinvestment ratio b. trading rate c. portfolio turnover d. tax yield

Portfolio turnover.

According to the Flow of Funds Accounts of the United States, the largest single asset of US households is: real estate, mutual fund shares, pension reserves, corporate equity

Real estate

The Sarbanes-Oxley Act tightened corporate governance rules by requiring all but which one of the following? A) Required that corporations have more independent directors. B) Required that the CFO personally vouch for the corporation's financial statements. C) Required the creation of a new board to oversee the auditing of public companies. D) Required that firms could no longer employ investment bankers to sell securities to the public.

Required that firms could no longer employ investment bankers to sell securities to the public.

TIPS are A) securities that trade on the Toronto stock index B) Treasury bonds that protect investors from inflation C) Treasury bonds that pay no interest and are sold at a discount D) U.K. bonds that protect investors from default risk

Treasury bonds that protect investors from inflation.

IPOs are usually ________ relative to the levels at which their prices stabilize after they begin trading in the secondary market a. overpriced b. correctly priced c. underpriced d. mispriced, but without any particular bias

Underpriced

In a ________ index, changes in the value of the stock with the greatest market value will move the index value the most, everything else equal. A) equally weighted index B) price-weighted index C) bond price index D) value-weighted index

Value-weighted index

Investing in two assets with a correlation coefficient of -.5 will reduce what kind of risk? A. Market risk B. Nondiversifiable risk C. Systematic risk D. Unique risk

unique risk

Adding additional risky assets to the investment opportunity set will generally move the efficient frontier _____ and to the ______ A. up; right B. up; left C. down; right D. down; left

up; left

Which of the following statistics cannot be negative? A. Covariance B. Variance C. E(r) D. Correlation coefficient

variance