FINA final conceptual questions from all
You purchased XYZ stock at $50 per share. The stock is currently selling at $65. Your gains could be protected by placing a _________. limit buy order limit sell order market order stop-loss order
d
__________ often accompany short sales and are used to limit potential losses from the short position. Limit orders Restricted orders Limit loss orders Stop-buy orders
d
T/F: IPOs generally provide superior long-term performance as compared to other stocks.
false
T/F: Investors can sue managers for nonpayment of preferred dividends.
false
T/F:Preferred stockholders have voting power.
false
t/f: A corporate debenture is a secured bond.
false
t/f: Dividends on preferred stocks are tax-deductible to individual investors but not to corporate investors.
false
t/f: Holders of corporate bonds have voting rights in the company.
false
If the coupon rate on a bond is 4.5% and the bond is selling at a premium, which of the following is the most likely yield to maturity on the bond? 4.3% 4.5% 5.2% 5.5%
A
Adding additional risky assets to the investment opportunity set will generally move the efficient frontier _____ and to the ______. up; right up; left down; right down; left
B
TIPS are ______. Treasury bonds that pay no interest and are sold at a discount U.K. bonds that protect investors from default risk securities that trade on the Toronto stock index Treasury bonds that protect investors from inflation
D
t/f: A corporate CALLABLE bond gives its holder the right to exchange it for a specified number of the company's common shares.
FALSE
____ is an example of an exchange-traded fund. An SPDR or spider A samurai A Vanguard An open-end fund
a
A firm cuts its dividend payout ratio. As a result, you know that the firm's _______. return on assets will increase earnings retention ratio will increase earnings growth rate will fall
b
A call option with several months until expiration has a strike price of $55 when the stock price is $50. The option has _____ intrinsic value and _____ time value. negative; positive positive; negative zero; zero zero; positive
d
T/F: A corporate CONVERTIBLE bond gives its holder the right to exchange it for a specified number of the company's common shares.
true
T/F: Common dividends cannot be paid if preferred dividends are in arrears on cumulative preferred stock.
true
Security A has a higher standard deviation of returns than security B. We would expect that: I. Security A would have a risk premium equal to security B. II. The likely range of returns for security A in any given year would be higher than the likely range of returns for security B. III. The Sharpe ratio of A will be higher than the Sharpe ratio of B.
two
Debt securities promise: I. A fixed stream of income. II. A stream of income that is determined according to a specific formula. III. A share in the profits of the issuing entity.
1 and 2
Which of the following is (are) true about hedge funds? I. They are open to institutional investors. II. They are open to wealthy individuals. III. They are more likely than mutual funds to pursue simple strategies.
1 and 2
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
You invest all of your money in 1-year T-bills. Which of the following statements is (are) correct? I. Your nominal return on the T-bills is riskless. II. Your real return on the T-bills is riskless. III. Your nominal Sharpe ratio is zero.
1 and 3
Rank the following from highest average historical return to lowest average historical return from 1926 to 2013. I. Small stocks II. Long-term bonds III. Large stocks IV. T-bills
1,3,2,4
Rank the following from highest average historical standard deviation to lowest average historical standard deviation from 1926 to 2013. I. Small stocks II. Long-term bonds III. Large stocks IV. T-bills
1,3,2,4
The optimal risky portfolio can be identified by finding: 1.The minimum-variance point on the efficient frontier 2.The maximum-return point on the efficient frontier and the minimum-variance point on the efficient frontier 3.The tangency point of the capital market line and the efficient frontier 4.The line with the steepest slope that connects the risk-free rate to the efficient frontier
3 and 4
The type of mutual fund that primarily engages in market timing is called _______. a sector fund an index fund an ETF an asset allocation fund
d
Consider a 7-year bond with a 9% coupon and a yield to maturity of 12%. If interest rates remain constant, 1 year from now the price of this bond will be _________. higher lower the same
A
In regard to bonds, convexity relates to the _______. shape of the bond price curve with respect to interest rates shape of the yield curve with respect to maturity slope of the yield curve with respect to liquidity premiums size of the bid-ask spread
A
Money market securities are sometimes referred to as cash equivalents because _____. they are safe and marketable they are not liquid they are high-risk they are low-denomination
A
Performance to date: Up 16%.Client objective: Earn at least 15%.Your scenario: Good chance of large stock price gains or large losses between now and end of year. Long straddle Long bullish spread Short straddle.
A
You can be sure that a bond will sell at a premium to par when _________. its coupon rate is greater than its yield to maturity its coupon rate is less than its yield to maturity its coupon rate is equal to its yield to maturity its coupon rate is less than its conversion value
A
The yield to maturity on a bond is: I. Above the coupon rate when the bond sells at a discount and below the coupon rate when the bond sells at a premium II. The discount rate that will set the present value of the payments equal to the bond price III. Equal to the true compound return on investment only if all interest payments received are reinvested at the yield to maturity
ALL
Everything else equal, the __________ the maturity of a bond and the __________ the coupon, the greater the sensitivity of the bond's price to interest rate changes. longer; higher longer; lower shorter; higher shorter; lower
B
Yields on municipal bonds are generally lower than yields on similar corporate bonds because of differences in _________. marketability risk taxation call protection
C
Commercial paper is a short-term security issued by __________ to raise funds. the Federal Reserve the New York Stock Exchange large well-known companies all of these options
C
If you want to measure the performance of your investment in a fund, including the timing of your purchases and redemptions, you should calculate the __________. geometric average return arithmetic average return dollar-weighted return index return
C
Consider two bonds, A and B. Both bonds presently are selling at their par value of $1,000. Each pays interest of $120 annually. Bond A will mature in 5 years, while bond B will mature in 6 years. If the yields to maturity on the two bonds change from 12% to 14%, _________. both bonds will increase in value but bond A will increase more than bond B both bonds will increase in value but bond B will increase more than bond A both bonds will decrease in value but bond A will decrease more than bond B both bonds will decrease in value but bond B will decrease more than bond A
D
Which method provides the best measure of the actual average historical performance of the investments you have chosen? dollar-weighted return geometric average return arithmetic average return index return
b
Which one of the following is not an example of a brokered market? residential real estate market market for large block security transactions primary market for securities NASDAQ
d
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 ________. stock's beta covariance with the market index variance of the market stock's standard deviation
d
After considering current market conditions, an investor decides to place 60% of her funds in equities and the rest in bonds. This is an example of _____ . asset allocation security analysis top-down portfolio management passive management
a
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 ______. asset A asset B no risky asset The answer cannot be determined from the data given.
a
Consider an investment opportunity set formed with two securities that are perfectly negatively correlated. The global minimum-variance portfolio has a standard deviation that is always _________. equal to 0 greater than 0 equal to the sum of the securities' standard deviations
a
Each of two stocks, A and B, is expected to pay a dividend of $7 in the upcoming year. The expected growth rate of dividends is 6% for both stocks. You require a return of 10% on stock A and a return of 12% on stock B. Using the constant-growth DDM, the intrinsic value of stock A _________. will be higher than the intrinsic value of stock B will be the same as the intrinsic value of stock B will be less than the intrinsic value of stock B
a
If an investor uses the full amount of margin available, the equity in a margin account used for a stock purchase can be found as ________. market value of the stock - amount owed on the margin loan market value of the stock + amount owed on the margin loan market value of the stock ÷ margin loan margin loan × market value of the stock
a
If you place an order to buy or sell a share of a mutual fund during the trading day, the order will be executed at _____. the NAV calculated at the market close at 4 pm New York time the real time NAV the NAV delayed 15 minutes the NAV calculated at the opening of the next day's trading
a
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 indifference curve investor's utility line security market line
a
Performance to date: Up 16%.Client objective: Earn at least 15%.Your scenario: Good chance of large stock price losses between now and end of year. Long put options Short call options Long call options.
a
The _______ decision should take precedence over the _____ decision. asset allocation; stock selection bond selection; mutual fund selection stock selection; asset allocation stock selection; mutual fund selection
a
The __________ is the stock price minus exercise price, or the profit that could be attained by immediate exercise of an in-the-money call option. intrinsic value time value stated value discounted value
a
The efficient frontier represents a set of portfolios that maximize expected return for a given level of risk. minimize expected return for a given level of risk. maximize risk for a given level of return. None of the options
a
The inside quotes on a limit order book can be found ______. at the top of the list at the bottom of the list by taking the averages of the bid and ask prices on the list only by direct contact with the specialist who maintains the book
a
Which one of the following best describes the purpose of derivatives markets? Transferring risk from one party to another. Investing for a short time period to earn a small rate of return. Investing for retirement. Earning interest income.
a
Which one of the following measures time-weighted returns and allows for compounding? geometric average return arithmetic average return dollar-weighted return historical average return
a
You want to earn a return of 10% on each of two stocks, A and B. Each of the stocks is expected to pay a dividend of $4 in the upcoming year. The expected growth rate of dividends is 6% for stock A and 5% for stock B. Using the constant-growth DDM, the intrinsic value of stock A _________. will be higher than the intrinsic value of stock B will be the same as the intrinsic value of stock B will be less than the intrinsic value of stock B
a
The material wealth of society is determined by the economy's _________, which is a function of the economy's _________. investment bankers; financial assets investment bankers; real assets productive capacity; financial assets productive capacity; real assets
d
You want to earn a return of 11% on each of two stocks, A and B. Stock A is expected to pay a dividend of $3 in the upcoming year, while stock B is expected to pay a dividend of $2 in the upcoming year. The expected growth rate of dividends for both stocks is 4%. Using the constant-growth DDM, the intrinsic value of stock A _________. will be higher than the intrinsic value of stock B will be the same as the intrinsic value of stock B will be less than the intrinsic value of stock B
a
Your timing was good last year. You invested more in your portfolio right before prices went up, and you sold right before prices went down. In calculating historical performance measures, which one of the following will be the largest? dollar-weighted return geometric average return arithmetic average return mean holding-period return
a
____ is a mechanism for mitigating potential agency problems. Tying income of managers to success of the firm Directors defending top management Antitakeover strategies All of the options.
a
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.
all
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
all
Which of the following are financial assets? I. Debt securities II. Equity securities III. Derivative securities
all
Which of the following is (are) true about dark pools? I. They allow anonymity in trading. II. They often involve large blocks of stocks. III. Trades made through them might not be reported.
all
Which one of the following statements about IPOs is true? 1. IPOs generally have been poor long-term investments. 2. IPOs often provide very good initial returns to investors. 3. Shares in IPOs are often primarily allocated to institutional investors.
all
After much investigation, an investor finds that Intel stock is currently underpriced. This is an example of ______. asset allocation security analysis top-down portfolio management passive management
b
All else equal, call option values are _____ if the _____ is lower. higher; stock price higher; exercise price lower; dividend payout higher; lower volatility
b
All major stock markets today are effectively _______________. specialist trading systems electronic trading systems continuous auction markets direct search markets
b
Published data on past returns earned by mutual funds are required to be ______. dollar-weighted returns geometric returns excess returns index returns
b
Suppose an investor is considering one of two investments that are identical in all respects except for risk. If the investor anticipates a fair return for the risk of the security he invests in, he can expect to _____ . earn no more than the Treasury-bill rate on either security. pay less for the security that has higher risk. pay less for the security that has lower risk. earn more if interest rates are lower.
b
The average depth of the limit order book is _____. lower for the large stocks in the S&P 500 Index than for the smaller stocks in the Russell 2000 Index higher for the large stocks in the S&P 500 Index than for the smaller stocks in the Russell 2000 Index about the same for both the large stocks in the S&P 500 Index and the smaller stocks in the Russell 2000 Index
b
The rate of return on _____ is known at the beginning of the holding period, while the rate of return on ____ is not known until the end of the holding period. risky assets; Treasury bills Treasury bills; risky assets excess returns; risky assets index assets; bonds
b
The term inside quotes refers to _____. the difference between the lowest bid price and the highest ask price in the limit order book. the difference between the highest bid price and the lowest ask price in the limit order book. the difference between the lowest bid price and the lowest ask price in the limit order book. the difference between the highest bid price and the highest ask price in the limit order book.
b
Venture capital is _________. frequently used to expand the businesses of well-established companies supplied by venture capital funds and individuals to start-up companies illegal under current U.S. laws most frequently issued with the help of investment bankers
b
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. 12b-1 fee; front-end load front-end load; 12b-1 fee back-end load; front-end load 12b-1 fee; back-end load
b
An investor's degree of risk aversion will determine his or her ______. optimal risky portfolio risk-free rate optimal mix of the risk-free asset and risky asset capital allocation line
c
Historically, small-firm stocks have earned higher returns than large-firm stocks. When viewed in the context of an efficient market, this suggests that ___________. small firms are better run than large firms government subsidies available to small firms produce effects that are discernible in stock market statistics small firms are riskier than large firms small firms are not being accurately represented in the data
c
One method of forecasting the risk premium is to use the _______. coefficient of variation of analysts' earnings forecasts variations in the risk-free rate over time average historical excess returns for the asset under consideration average abnormal return on the index portfolio
c
The Sarbanes-Oxley Act tightened corporate governance rules by requiring all but which one of the following? Required that corporations have more independent directors. Required that the CFO personally vouch for the corporation's financial statements. Required that firms could no longer employ investment bankers to sell securities to the public. Required the creation of a new board to oversee the auditing of public companies.
c
The _________ is the difference between the actual call price and the intrinsic value. stated value strike value time value binomial value
c
The _________ reward-to-variability ratio is found on the ________ capital market line. lowest; steepest highest; flattest highest; steepest lowest; flattest
c
The constant-growth dividend discount model (DDM) can be used only when the ___________. growth rate is less than or equal to the required return growth rate is greater than or equal to the required return growth rate is less than the required return growth rate is greater than the required return
c
Which of the following funds are usually most tax-efficient? equity funds bond Funds ETFs specialized-sector funds
c
Which of the following is not a financial intermediary? a mutual fund an insurance company a real estate brokerage firm
c
Which of the following is not a money market security? U.S. Treasury bill 6-month maturity certificate of deposit common stock All of the options
c
You have calculated the historical dollar-weighted return, annual geometric average return, and annual arithmetic average return. If you desire to forecast performance for next year, the best forecast will be given by the ________. dollar-weighted return geometric average return arithmetic average return index return
c
You hold 5,000 shares of the 1 million outstanding shares of Wealthy Wranglers common stock. You've just learned that the company plans to issue more shares, so that 2 million shares will be outstanding. This is called _____. an advanced equity offering a weathered equity offering a seasoned equity offering a veteran equity offering
c
__________ assets generate net income to the economy, and __________ assets define allocation of income among investors. Financial, financial Financial, real Real, financial Real, real
c
ou are recalculating the risk of ACE stock in relation to the market index, and you find that the ratio of the systematic variance to the total variance has risen. You must also find that the ____________. covariance between ACE and the market has fallen correlation coefficient between ACE and the market has fallen correlation coefficient between ACE and the market has risen unsystematic risk of ACE has risen
c
security selection refers to the ________. allocation of the investment portfolio across broad asset classes analysis of the value of securities choice of specific securities within each asset class top-down method of investing
c
Advantages of ECNs over traditional markets include all but which one of the following? lower transactions costs anonymity of the participants small amount of time needed to execute and order ability to handle very large orders
d
Advantages of ETFs over mutual funds include all but which one of the following? ETFs trade continuously, so investors can trade throughout the day. ETFs can be sold short or purchased on margin, unlike fund shares. ETF providers do not have to sell holdings to fund redemptions. ETF values can diverge from NAV.
d
Financial markets allow for all but which one of the following? shift consumption through time from higher-income periods to lower price securities according to their riskiness channel funds from lenders of funds to borrowers of funds allow most participants to routinely earn high returns with low risk
d
Private placements can be advantageous, compared to public issue, because: I. Private placements are cheaper to market than public issues. II. Private placements may still be sold to the general public under SEC Rule 144A. III. Privately placed securities trade on secondary markets.
one
According to Tobin's separation property, portfolio choice can be separated into two independent tasks consisting of identifying the _____ and constructing a complete portfolio from t bills and the optimal risky portfolio based on the investors __________.
optimal risky portfolio, degree of risk aversion
