FINC 410 Test One

Jessica purchased 400 shares of RTF stock for $14 a share. The stock was purchased with an initial margin of 55 percent. The maintenance margin is 30 percent. The stock is currently selling for $12 a share. What is the minimum dollar amount of equity which Jessica must have today to avoid a margin call?

$1,440

One dollar invested in U.S. Treasury bills at the end of 1925 was worth approximately _____ at the end of 2005.

$18.40

You short sold 400 shares of a stock at $51 a share. The initial margin is 50 percent and the maintenance margin is 25 percent. What is the amount of your total liability for this transaction as initially shown on your account balance sheet?

$20,400

You purchased a stock one year ago at $22 a share. The stock pays a quarterly dividend of $1.20. Today, you sold the stock for $24.50 a share. What is your total dollar return?

$7.30

The capital gains yield is equal to:

(Pt + 1- Pt) / Pt.

Correlation coefficients range from:

-1 to 1

A stock has an average return of 12.8 percent and a standard deviation of 27.2 percent. What range of returns would you expect to see approximately two-thirds of the time?

-14.4 to +40.0 percent

You purchased 200 shares of a stock for $28.33 a share and sold the shares one year later for $27.16 a share. Over the year, you received a total of $.90 in dividends per share. What was your capital gains yield on this investment?

-4.13 percent

One year ago, you purchased a stock for $31.30 a share and have received $.75 each quarter as a dividend payment. Today, the stock is selling at $29.40 a share. What is your capital gains yield?

-6.07 percent

Miller Brothers Hardware has common stock outstanding which has produced annual returns of 6, 14, -3, 11, and 5 percent over the past five years. What is the variance of these returns?

.004230

Stock X has a standard deviation of 18 percent per year and stock Y has a standard deviation of 24 percent per year. The correlation between stock A and stock B is .45. You have a portfolio of these two stocks wherein stock Y has a portfolio weight of 35 percent. What is your portfolio variance?

.02959

Walt recently purchased 800 shares of Hi-Tek, Inc., stock for $6.80 a share. His broker required a cash payment of $5,440, plus trading costs, for the purchase. What was the initial margin requirement on this particular stock?

100 percent

An asset has annual returns of 16, 10, 3, -18, and 21 percent, respectively, for the last five years. What is the standard deviation of these returns?

15.21 percent

Large-company stocks produced the highest rates of return during the period:

1995-1998.

The 95 percent probability range of a normal distribution is defined as the mean plus or minus _____ standard deviation(s).

2

Bonita just sold a stock which returned 5.6 percent over a 3 month period. What was her annualized rate of return?

24.35 percent

You purchased a stock for $42.60 a share and sold it one year later for $44.30 a share. You received a total of $2.10 in dividends. What was your dividend yield on this investment?

4.93 percent

Scott is buying $5,000 worth of a stock with $4,000 in cash plus a $1,000 margin loan. If you constructed a balance sheet reflecting this transaction, the total assets would be:

5,000

A stock produced annual returns of 6, -13, 7, 22, and 9 percent over the past five years. What is the geometric average return?

5.58 percent

The correlation between stock A and stock B is .50. The correlation between stock A and stock C is -.65 and the correlation between stock B and C is .72. Which one of the following portfolios will have the greatest risk, all else constant?

50 percent stock B, 50 percent stock C

The mean plus or minus one standard deviation defines the _____ percent probability range of a normal distribution.

68

For the past five years, a stock produced annual returns of 12, 4, -24, 29, and 16 percent, respectively. What is the arithmetic average return?

7.40 percent

Tracy just inherited a portfolio valued at $50,000 from her grandmother. The portfolio consists of two stocks. The first stock is worth $28,000 and has a standard deviation of 5.4 percent. The second stock has a standard deviation of 11.8 percent. What is the portfolio standard deviation if the correlation of these two stocks is .62?

7.45 percent

Over the last four years, a stock produced returns of 14, 9, -7, and 12 percent, respectively. What is the standard deviation of these returns?

9.56 percent

Which one of the following statements is correct?

A fully diversified portfolio still contains nondiversifiable risk.

Which one of the following statements is correct given various states of the economy?

Both the risk and the return on a security are affected by the likelihood of various economic states occurring.

The reduction in risk realized when a portfolio is invested in a variety of assets is called:

DIVERSIFICATION

The return you anticipate earning in the future on a risky asset is called the _____ return.

EXPECTED

To eliminate the majority of diversifiable risk requires a portfolio to contain at least 40 diverse securities.

F

A portfolio can only belong to the Markowitz efficient set of portfolios if the portfolio's _____ than that of every other portfolio that has the same level of _____.(I.) return is less; risk(II.) return is greater; risk(III.) risk level is less; return(IV.) risk level is greater; return

II and III only

If you own a security and make money if the price of the security increases you are said to have a _____ position.

LONG

Variance is a measure of:

RISK

Portfolio weights are based on the face value of bond securities.

T

There is some combination of stock and bonds which produces a lower risk portfolio than that which is obtainable from an all-bond portfolio.

T

Which one of the following had the narrowest bell curve for the period 1926-2005?

U. S. Treasury bills

The risk premium is defined as the rate of return on:

a risky asset minus the risk-free rate.

Asset allocation:

affects both the risk and the return of a portfolio.

Joshua has decided to invest 40 percent of his money in large company stocks, 35 percent in small company stocks, and the balance in bonds. This is a(n) _____ decision.

asset allocation

The geometric average return is the:

average compound return earned per year over a multiyear period.

The total dollar return on an equity investment is defined as the:

capital gain or loss plus any dividend income.

You own a portfolio consisting of two stocks. The stocks have a zero correlation. If stock A increases its return by 10 percent over the course of one year, the return on Stock B will:

change in an unpredictable manner.

Asset allocation is the:

distribution of investment funds among various broad categories of assets.

The portfolio risk that decreases as the number of securities in the portfolio increases is referred to as _____ risk.

diversifiable

The annual dividend at time t + 1 divided by the stock price at time t is called the:

dividend yield.

The Markowitz efficient frontier is defined as the:

entire set of efficient portfolios given varying levels of risk.

Correlation is the:

extent to which the returns on two assets move together.

The 95 percent probability range is equal to the mean plus or minus three standard deviations.

false

Historically, the higher the risk premium, the ______ the average return, and the _____ the standard deviation of the returns.

higher; higher

The wider the distribution of an investment's returns over time, the _____ the expected rate of return and the ______ the standard deviation of returns.

higher; higher

Small-company stocks have the _____ and the _____ for the period 1926-2005.

highest average return; greatest volatility

Considering the state of the economy:

improves the estimate of a stock's expected rate of return.

You will receive a margin call every time your margin:

is less than the required maintenance margin.

The minimum equity that must be maintained at all times in a margin account is called the:

maintenance margin.

The portfolio weight of an asset is the:

market value of that asset expressed as a percentage of the total portfolio value.

You are analyzing the possible portfolios which can be created from combining bonds and stocks. If you select the one portfolio that has the lowest standard deviation, you have identified the _____ portfolio.

minimum variance

All efficient portfolios which consist of the same two assets plot at or above the:

minimum variance portfolio.

The frequency distribution, which is completely defined by its average and standard deviation, is referred to as a(n):

normal distribution.

The call money rate is the:

rate at which the brokerage firm borrows funds which are subsequently loaned to margin customers.

Nondiversifiable risk:

remains constant as the number of assets in a portfolio decreases.

The arithmetic average return is the:

return earned in an average year over a multiyear period.

The rate of return earned on a U.S. Treasury bill is referred to as the:

risk-free rate.

Which one of the following categories of investments would you expect to have the highest standard deviation of returns over a long period of time?

small-company stocks

Which one of the following had the greatest volatility for the period 1926-2005?

small-company stocks

Which one of the following had the highest average return for the period 1926-2005?

small-company stocks

The square root of the variance is called the:

standard deviation.

The expected risk premium on a security is computed by:

subtracting the risk-free rate from the security's expected return.

The greater the variance of a portfolio, the:

the less certain the actual return.

Over the past 200 years, U.S. Treasury bills have outperformed gold.

true

Adding foreign securities to a portfolio containing domestic stocks and bonds tends to shift the Markowitz efficient frontier:

upward and to the left.

The average squared difference between the actual annual returns and the average return for a period of time is measured by the:

variance.

The standard deviation is a measure of:

volatility.

You are computing the expected return on a portfolio of 6 stocks given 3 states of the economy. How will the expected return of the portfolio be computed given an economic state?

weighted average of the individual stock returns where the weights are based on the market value of each of the stock positions