FINC 512 Quizzes1-11 (Final Exam)

The expected market return is 12% and the risk-free rate of return is 3%. Using CAMP, what is the expected return for a portfolio that has a standard deviation of 18% and a beta of 1.3?

14.7%

Phil is considering two portfolios: 1. Portfolio A with a return of 11% and a standard deviation of 16% 2. Portfolio B with a return of 6% and a standard deviation of 8% Assuming the correlation between A and B is -0.3, what of the following is the most efficient portfolio?

30% A/ 70% B The expected return is the weighted average return. The standard deviation of each combination is found using the SD for a two-security portfolio. Option a's return and SD =6.5% and 6.89% respectfully Option b's return and SD =7.0% and 6.24% respectfully Option c's return and SD =7.5% and 6.19% respectfully Therefore, the most efficient (highest return for a given level of risk) is option c. Options a and b are inefficient

Val is single and in the 24% federal and 5% state tax brackets. He is considering the purchase of a municipal bond, issued in his state of residence, with a YTM of 6.75%. Val's tax equivalent yield on the bond is closest to: a.) 4.79% b.) 6.75% c.) 8.88% d.) 9.51%

9.51%

A firm generates stable earnings over the long term but has recently enjoyed surging short term profitability. This firm pays a modest $0.50 per share annual dividend and expects profitability to return to its sustainable level over the next few months. This firm will most likely: a.) Increase its annual dividend payment b.) Announce a special dividend c.) Initiate a dividend reinvestment plan d.) Split its shares

? NOT: a.) Increase its annual dividend payment or c.) Initiate a dividend reinvestment plan

A large banking firm recently issued a twelve-year, 7% coupon bond that is callable at the end of the three years. to estimate the bond's sensitivity to price changes, a financial analyst is most likely to use: a.) Effective duration b.) Modified duration c.) Macaulay duration d.) Portfolio duration

??? Not b.) Modified duration or c.) Macaulay duration

OMB is considering two portfolios: 1. Portfolio A with a return of 14% and a standard deviation of 14% 2. Portfolio B with a return of 4% and a standard deviation of 7% Assuming the correlation between A and B is 0.5 and he invests 70% in A and 30% in B, what range of returns should this portfolio produce 95% of the time?

Between -11% and 33% SD=11 Expected return= 0.7(14%)+0.3(4%)=11% As noted in chapter 2, the 95% confidence interval equals 2 standard deviations from the mean. Therefore, the range -11 to 33% is the correct answer.

Which of the following statements is true about equity returns, as represented by the S&P 500 from 1928-2016?

Both a and b are false. Option a is false as the range is approximately 52% to 44%. Option b is false as there has not been a negative 20-year average return during this time period.

Assume that the three-month return for Hunter stock is 3%. Hunter's annualized return is closest to: a.) 11.85%. b.) 12.00%. c.) 12.55%. d.) 13.20%

C.) 12.55% Annualized return = (1.03)4 -1 = 12.55%

Which of the following statement regarding collateralized mortgage obligations (CMO) is least accurate? CMOs are divided into tranches CMOs are subject to interest rate risk and prepayment risk CMOS are not subject to default risk. CMOs allow investors to match the timing of their cash inflows to their cash outflows

CMOS are not subject to default risk.

Consider the situation of firm A and firm B. The current exchange rate is $2.00/£ Firm A is a U.S. MNC and wants to borrow £30 million for 2 years. Firm B is a British MNC and wants to borrow $60 million for 2 years. Their borrowing opportunities are as shown, both firms have AAA credit ratings. $ £ A $6% £5% B $7% £4% Explain how firm B could use the forward exchange markets to redenominate a 2-year £30m 4 percent pound sterling loan into a 2-year USD-denominated loan.

Firm B could borrow £30m today and exchange for at $60m today's spot rate. Then they could enter a 1-year forward contract on euro agreeing to buy enough pounds with dollars to service their loan. At the 1-year forward rate of $2.0385/£ this will cost 0.04 × £30m × $2.0385/£1.00 = $2,446,153.85 in one year. They also enter into a 2-year forward contract on euro agreeing to buy enough dollars with euro to service their loan. At the 2-year forward rate of $2.0777 this will cost 1.04 × £30m × 2.0777/£1.00 = $64,823,076.93 at the end of the second year.

Assume Marleen adds security Y to her portfolio that is less than perfectly positively correlated with the portfolio. Security Y has the same standard deviation as the portfolio. After the addition of the security, the standard deviation of Marleen's portfolio will most likely:

It will decrease. The portfolio standard deviation should decrease as the security being added is not perfectly correlated with the portfolio. For example: Portfolio SD=20%, Security Y SD=20%. Correlation between the portfolio and Y= 0.95. WIth a weight of 95% for the portfolio and 5% for Security Y, the combined standard deviation equals 19.95%

For a market to be considered semi-strong form efficient, an investor would have to outperform an appropriate benchmark by using: a.) Publicly available information b.) Volume data c.) Private Information d.) Historical price data

Not A

Julio has a portfolio of mutual funds A, B, C. He has 50% in A, 40% in B, and 10% in C. The expected return on Julio's portfolio if the expected returns for A, B, and C are 10%, 8%, and 14% is closest to:

The weighted average expected return equals 0.5(10%)+0.4(8%)+0.1(14%)= 9.6%

Tori recently graduated from college with a degree in finance. She enjoys stock analysis and is eager to get started with investing in the market. Tori has approximately $30,000 of student loan debt at an average interest rate of 4.2%, and the $300 monthly payment is easily manageable even at the starting salary for a new college graduate. Although Tori does not currently have any savings, she has asked a financial planner to assist her in opening a brokerage account where she can begin buying stocks to save toward her goal of buying a condo in the next 7-8 years. which of the following is most accurate?

Tori's willingness (prosperity) to take on risk is greater than her ability (capacity) to take on risk, so the planner should encourage her to accumulate emergency funds prior to purchasing stocks in a brokerage account to save for the goal.

A thirty-year bond that pays a 3% coupon rate has a yield to maturity of 6%. With coupon payments made twice per year, the price of this bond is closest to: a.) $584.87 b.) $587.06 c.) $602.41 d.) $582.87

a.) $584.87

During a period where the risk-free rate of interest is 4%, Jensen's alpha of the Panda fund is closest to: a.) -1.2 b.) 0 c.) 1.0 d.) 2.4

a.) -1.2 Risk free rate (Rf) = 4% Average returns of portfolio (Rp) = 18% Market return (Rm) = 12% Beta of portfolio = 1.9

Janis, who lives in NY City, is in the 24% federal tax bracket and 6% state income tax bracket. which of the following bonds that she is considering purchasing has the highest after-tax yield? 1. Treasury bond paying 5.4% 2. Corporate bond paying 5.5% 3. Florida municipal bond paying 4.2% a.) 1 only b.) 2 only c.) 3 only d.) 1 and 2 are the same and the highest.

a.) 1 only

An eight-year bond with a current market price of $700 has a 6% coupon rate. if the bond pays interest semi-annually, its yield to maturity is closest to: a.) 11.92% b.) 12.05% c.) 12.14% d.) 12.17%

a.) 11.92%

Which of the following statements regarding stock market indexes is most accurate? a.) A price-weighted index requires updating the divisor to reflect changes in outstanding shares of the composite firms. b.) A market cap-weighted index is impacted by stock splits and stock dividends. c.) An equal-weighted index is computed as the average of the dividend payments made by the composite firms. d.) The performance of a price-weighted index is most influenced by lower priced stocks

a.) A price-weighted index requires updating the divisor to reflect changes in outstanding shares of the composite firms.

Which of the following statements regarding the advantage to shareholders of tendering their shares during a stock repurchase compared to receiving a dividend payment is most accurate? a.) A stock repurchase allows shareholders to delay or reduce their tax liability. b.) Tendering shares is more efficient that the cost of reinvesting dividend payments. c.) An increase in the number of investors after the repurchase increases the EPS of the firm. d.) Dividend payments reduce the tax liability of the firm.

a.) A stock repurchase allows shareholders to delay or reduce their tax liability. NOT: b.)

A certificate issued by U.S. banks representing ownership in shares of a stock of a foreign company that are held on deposit in a bank in the firm's home country is: a.) American Depositary Recepits (ADRs) b.) Foreign closed-end funds. c.) Foreign mutual funds. d.)Patriot funds.

a.) American Depositary Recepits (ADRs)

Emma Jones shows signs of being averse to losses. Jones will most likely: a.) Avoid selling stocks that would generate capital loss. b.) Divide her accounts into pre and post retirement segments. c.) Evaluate securities based on both risk and expected return. d.) Use momentum strategies to make buy/sell decisions.

a.) Avoid selling stocks that would generate capital loss.

The authority function of a self-regulatory organization is most likely characterized by: a.) Creation and enforcement of its own policies. b.) The effective management of conflicts of interest. c.) Establishment of clear standards of conduct. d.) Quick resolution of disputes.

a.) Creation and enforcement of its own policies. The authority of a SRO means that it can create a set of rules to which its members must adhere and then enforce them. Managing conflicts of interest is the management of conflicts function; clear standards is the supervisory function; and resolving disputes is the dispute resolution function.

A bond issued and supported by the general credit standing of the issuing corporation is most likely known as a(n): a.) Debenture b.) Indebenture c.) Term bond d.) Serial bond

a.) Debenture

One reasonable goal of active management is to construct risky portfolios with: a.) Higher Sharpe ratios than the relevant benchmark index. b.) Lower Sharpe ratios than the relevant benchmark index. c.) Identical Sharpe ratios as the relevant benchmark index. d.) Sharpe ratios close to 1.0 regardless of the benchmark.

a.) Higher Sharpe ratios than the relevant benchmark index.

Dylan Hope uses commodity futures contracts as part of his search for low correlations and diversification for his equity portfolio. Which of the following decisions would most likely be described as behavioral in nature? a.) Hope avoids tobacco stocks because his grandmother dies of lung cancer. b.) Hope avoids low price-to-book stocks because he prefers growth to value. c.) Hope takes long position in orange juice futures contracts when he expects commodity prices to rise d.) Hope takes short position in gasoline futures contracts when the price of gas at his local station rises by 10% during the previous month.

a.) Hope avoids tobacco stocks because his grandmother dies of lung cancer.

Blue-chip stocks are most likely: a.) Issued by reliable companies that have the potential to perform well in any market. b.) Characterized as having high growth potential. c.) Expected to outperform during economic expansions. d.) Securities with high levels of systematic risk.

a.) Issued by reliable companies that have the potential to perform well in any market. Blue-chip stocks are those that are supported by famous brand names and corporations. Blue chip firms are stable, have generated substantial operating cash flow for many years, and are expected to continue being market and industry leaders in the future.

Which of the following is most accurate regarding investment companies? a.) Open-end funds are capable of issuing shares and redeeming shares on a daily basis. b.) Funds that perform well during specified periods tend to repeat that performance over subsequent periods. c.) Index funds are formed to mimic a specified index with managerial leeway in the allocation decision. d.) Funds run by a group of managers tend to outperform single manager funds.

a.) Open-end funds are capable of issuing shares and redeeming shares on a daily basis.

A mortgage-backed security is most likely to be characterized as having: a.) Prepayment risk. b.) Little price risk. c.) Extremely low default risk levels. d.) Annual coupon payments.

a.) Prepayment risk. An MBS loses value when interest rates fall because homeowners refinance their mortgages. This is known as prepayment risk and is greatest when rates are falling. An MBS still has price risk and it typically pays interest monthly. Although historically, MBSs have had low default risk, during the crisis of 2008, they did not. In the current environment, they still have relatively low default risk, just not extremely low risk.

One part of the concept of Prospect Theory states that people place undue emphasis on low probability events that have large potential losses. Which of the following is the best example of this behavior mistake? a.) Purchasing insurance with excessive coverage at high premium cost. b.) Selecting an investment based on the expected returns and risks. c.) Holding onto an investment that has dropped 20% due to a poor earnings trend because the price is well below its 52 week high. d.) Making a decision based on rules of thumb rather than explicitly considering all available information.

a.) Purchasing insurance with excessive coverage at high premium cost.

An order to buy or sell a certain quantity of a security at a specific price or better, but only after a specified price has been reached, is most likely referred to as a: a.) Stop-limit order. b.) Stop-loss order. c.) Stop order. d.) Limit order.

a.) Stop-limit order. NOT: d.) Limit order.

Which of the following statements on securities laws and regulations is least accurate? a.) The Securities Act of 1933 created the Securities and Exchange Commission (SEC). b.) The Investment Advisers Act of 1940 requires investment advisors to register with the SEC (or their state) and to provide with a disclosure brochure. c.) The Securities Exchange Act of 1934 prohibits certain types of conduct in the securities markets. d.) FINRA is a self-regulatory organization that writes and enforces rules governing the activities of broker-dealers in the U.S.

a.) The Securities Act of 1933 created the Securities and Exchange Commission (SEC). The Securities Act of 1934 created the SEC.

Relevant variables for computing the net asset value of a mutual fund most likely exclude: a.) The initial outstanding shares. b.) The current outstanding shares. c.) The market value of the fund's assets. d.) The market value of the fund's liabilites.

a.) The initial outstanding shares

Which of the following statements regarding returns is most accurate? a.) The internal rate of return is a geometric return b.) The arithmetic mean is always less than the geometric mean c.) The geometric return ignores compounding d.) The time weighted return is unique for all investors

a.) The internal rate of return is a geometric return The IRR is a specific type of geometric return. The AM is always greater than or equal to the GM. The AM ignores compounding (not GM). The dollar-weighted return is unique to all investors.

Consider the dollar- and euro-based borrowing opportunities of companies A and B. € borrowing $ borrowing A €7% $8% B €6% $9% A is a U.S.-based MNC with AAA credit; B is an Italian firm with AAA credit. Firm A wants to borrow €1,000,000 for one year and B wants to borrow $2,000,000 for one year. The spot exchange rate is $2.00 = €1.00 and the one-year forward rate is given by IRP as $200(108)/€100(106)=$20377/€100 Suppose they agree to the swap shown here. Is this mutually beneficial swap equally fair to both parties? a.) Yes, A will be better off by €1 percent on €1m; B by 1 percent on $2m and $2.00 = €1.00. b.) Yes, QSD = [€7% − €6% × $2.00/€1.00] − ($8% − $9%) = $2% + $1% = $3%. c.) No, company A saves 1 percent in euro but company B saves only 1 percent in dollars when the spot exchange rate is $2.00 = €1.00—A is twice as better off as B. d.) No, company A borrows at 6 percent in euro but company B borrows at 8 percent in dollars.

a.) Yes, A will be better off by €1 percent on €1m; B by 1 percent on $2m and $2.00 = €1.00.

Jackson Inc. has EPS of $5.625 with a retention ratio of 60%. The annual growth rate in dividends is expected to be 6% and Jackson's shareholders require a return of 11%. The stock price is closest to: a.) $45.00. b.) $47.70. c.) $67.50. d.) $71.55.

b.) $47.70.

The preferred stock for Iron Heights pays an annual dividend of $6.00 while the firm's preferred shareholders require an 9.6% return. The value of this stock is closest to: a.) $61.50. b.) $62.50. c.) $63.50. d.) $64.50.

b.) $62.50.

Shaunie buys ten zero-coupon twenty-year bonds for $2,584.19. The yield to maturity on the investment is 7% with annual compounding. The interest Shaunie is required to report for tax purposes during the first year is closest to: a.) $0 because they are zero-coupon bonds b.) $90. c.) $181 d.) $1,383.

b.) $90. Not a.) $0 because they are zero-coupon bonds

The portfolio turnover for Find 1 is closest to: Fund 1 Average Daily assets: $610 Purchases: $722 Sales: $486 a.) 0.654 b.) 0.797 c.) 1.024 d.) 1.485

b.) 0.797 Assets sold/Total assets 486/610= 0.7967213115 NOT: d.) 1.485

Which of the following statements regarding mutual funds are most accurate? 1.) They provide diversification for investors who have only a small amount to invest. 2.) From the initial purchase of mutual fund shares, an investor is assured of a minimum income level and a stated redemption price. 3.) They do not charge sales fees on initial investments. 4.) Their earnings are exempt from federal income taxes at the corporate (mutual fund) level. a.) 1 and 2 b.) 1 and 4 c.) 2 and 3 d.) 3 and 4

b.) 1 and 4 NOT: a.) 1 and 2

Portfolio D has a standard deviation of 17% and a correlation with the market of 1.00. If the standard deviation of the market is 15%, what is the beta for D? a.) 1.00 b.) 1.13 c.) 1.24 d.) 1.47

b.) 1.13 Beta equals the standard deviation of the portfolio times the correlation, divided by the standard deviation of the market: (0.17 x 1.00) ÷ 0.15 = 1.13.

Elmer has owned an interest in a company called Fudd Enterprises (FE). During the same time, Treasuries have yielded a 3% return. FE has an average return of -3% with a standard deviation of 6%. Assuming the returns are normally distributed, what is the probability that FE will have a return greater than the Treasury securities? a.) 2.5% b.) 16% c.) 34% d.) 66%

b.) 16%

Malik David purchased 100 shares of the Canadian Textile Fund for CAD 25 at the beginning of the year and was subject to a front-end load of 4.5%. The net asset value of the fund increased by 11% during the year while the fund's expense ratio was 1.2%. The annual return earned by David if he sells at year's end is closest to: a.) 4.50%. b.) 4.86%. c.) 5.30%. d.) 9.82%.

b.) 4.86%.

Sissy invested in the Not-so-Good mutual fund five years ago. Her returns were -5%, -8%, -5%, -6% and -8%, respectively. What is the difference between the arithmetic average and the geometric average return over the five years? a.) 0%. b.) <0.01%. c.) Greater than or equal to 0.01%, but less than 0.1%. d.) Greater than or equal to 0.1%.

b.) <0.01%.

Which type of underwriting arrangement is the riskiest to the underwriter? a.) A best efforts agreement. b.) A firm commitment. c.) A private placement. d.) A standby underwriting.

b.) A firm commitment.

Which of the following mutual fund types will most likely have the highest total risk level? a.) A large-cap index fund. b.) A small-cap growth fund. c.) A large-cap international fund. d.) A mid-cap domestic fund.

b.) A small-cap growth fund

Which of the following statements concerning risk is least accurate? a.) Country risk, or political risk, is the variability in a security's returns resulting from the instability of a country's economy or government. b.) Financial risk is associated with the use of equity as part of a company's capital structure. c.) Market risk is the variability in a security's returns resulting from fluctuations in the overall market. d.) Business risk is the risk associated with the industry or environment in which a business operates.

b.) Financial risk is associated with the use of equity as part of a company's capital structure. Options a, c, and d are correct. Option b is incorrect as financial risk deals with debt as part of a capital structure, not equity.

An investor compares three funds and an index when the risk-free rate of interest is 3%. Which of the four listed in the table below is most likely to have the highest risk-adjusted return according to the Treynor ratio? a.) Fund 1 b.) Fund 2 c.) Fund 3 d.) Index

b.) Fund 2

Which of the following statements regarding technical and fundamental analysis is most accurate? a.) Technical analysis values securities based on expected cash flows. b.) In fundamental analysis, future cash flows are projected by analysing a firm's financial statements. c.) Fundamental analysis is based on supply and demand. d.) Technical analysis requires an evaluation of macroeconomic conditions.

b.) In fundamental analysis, future cash flows are projected by analysing a firm's financial statements. ?

A U.S. Treasury bond that matures in twenty years is most likely to have substantial: a.) Liquidity risk. b.) Interest rate risk. c.) Default risk. d.) Credit risk.

b.) Interest rate risk.

A portfolio manager who earns a negative return to selectivity most likely has: a.) Underperformed its benchmark. b.) Invested in assets that are overvalued. c.) Outperformed a diversified portfolio. d.) Failed in invest in the appropriate risk-free asset allocation.

b.) Invested in assets that are overvalued.

The Jensen Hybrid Fund would most likely be chosen as an investment vehicle by: a.) Investors seeking high returns on equity investments. b.) Investors seeking to plan for retirement. c.) Investors seeking growth opportunities. d.) Investors seeking low tax liabilities.

b.) Investors seeking to plan for retirement

Treasury bills most likely sell at a discount because they: a.) Are generally considered to be default risk-free. b.) Make no explicit interest payments. c.) Have yields lower than their coupon rates. d.) Have short maturities.

b.) Make no explicit interest payments. Treasury bills promise to pay the face value of the bill at maturity, which is typically less than one year. Since no coupon payments are made, the price of the bill will almost certainly sell for less than its face value.

Dinah's portfolio consists of a 50% equity index fund and a 50% fixed income index fund. The portfolio will be reallocated using the constant weighting method. More details are shown below: The price of the Equity Fund changes to $20.00 and the price of the Fixed Income Fund changes to $30.40. According to the rebalancing rules associated with the constant weighting strategy, Dinah will most likely: a.) Sell 33 shares of Equity and purchase 50 shares of Fixed Income. b.) Sell 50 shares of Equity and purchase 33 shares of Fixed Income. c.) Sell 33 shares of Fixed Income and purchase 46 shares of Equity. d.) Sell 46 shares of Fixed Income and purchase 33 shares of Equity.

b.) Sell 50 shares of Equity and purchase 33 shares of Fixed Income.

Which of the following statements regarding the constant growth dividend discount model is most accurate? a.) The model is based on the dividend one year from the valuation period. b.) The model requires that the required return be greater than or equal to the growth rate of the dividend. c.) The model can be rearranged to determine the payout ratio. d.) The model is highly sensitive to small differences in the required rate of return or the dividend growth rate.

b.) The model requires that the required return be greater than or equal to the growth rate of the dividend.

Which of the following statements most likely identifies a disadvantage of exchange traded funds (ETFs)? a.) They can be bought and sold at any time during market hours, like stocks and bonds. b.) They are subject to brokerage commissions. c.) They can transfer securities out to redeeming shareholders. d.) They represent a basket of stocks and/or bonds.

b.) They are subject to brokerage commissions.

Which of the following is least likely to be a component of the mission of the Securities and Exchange Commission? a.) To protect investors. b.) To insure against large losses for issuers in the primary market. c.) To maintain fair, orderly, and efficient markets. d.) To facilitate capital formation.

b.) To insure against large losses for issuers in the primary market. The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.

A young investor purchases shares in a firm for $112. the investment banker uses a 50% initial margin and a 35% maintenance margin for accounts of this type. The price of this stock falls to $56. The amount the investor would be required to deposit in the account is closest to: a.) $0.00. b.) $14.80. c.) $19.60. d.) $28.00.

c.) $19.60. NOT: b.) $14.80 $112*50% = $56 = $56*35% = $19.60 $19.60

An investor shorted 100 shares of a retail banking firm at a price of $80 per share. The investor received a $2 dividend before closing out the short position when the shared were priced at $50, the investor's gain is closest to: a.) $28 b.) $30 c.) $2,800 d.) $3,000

c.) $2,800 NOT: d.) $3,000 100 X 80= 8,000 100 X 50= 5,000 100 X 2= 200 8,000-5,000-200= $2,800

An investor buys $100,000 in par value of TIPS with a coupon rate of 8%. Inflation during the first six months is 2.4%. The first semi-annual coupon payment is closest to: a.) $2,000. b.) $2,048. c.) $4,096. d.) $8,192.

c.) $4,096. Semi-Annual CP= (100,000 * 1.024 * 0.08)/2= $4,096.

The International Growth Fund's (IGF) return exceeds the risk-free rate by 14.2%. IGF has a beta of 1.3, the risk-free rate is 3.2%, and the relevant market risk premium is 10%. Jensen's alpha for IGF is closest to: a.) -2.0 b.) +1.96 c.) +1.2 d.) +5.2

c.) +1.2

Which of the following statements concerning no-load mutual funds is (are) correct? 1. These funds do not charge a sales commission, but they may collect a redemption fee. 2. These funds may charge 12b-1 fees for marketing expenses. 3. Shares of these funds may be sold without a prospectus because they are sold by direct mail and media advertising. a.) 1 only b.) 2 only c.) 1 and 2 d.) 1,2, and 3

c.) 1 and 2

Horace bought 10,000 shares of LaLa at $40 per share. Two years later he sold the stock for $80 per share. LaLa declared and paid a dividend of $4 per share during the period Horace held the stock. Horace's holding period return is closest to: a.) 10% b.) 100% c.) 110% d.) 210%

c.) 110% HPR = [(sale price - purchase price) +/- cash flows] ÷ purchase price [(80-40) + 4] ÷ 40 = 110%

A bond sells for par value has three years til it matures and has a 4% coupon rate. Assuming semi-annual interest payments, the current yield is closest to: a.) 2% b.) 3% c.) 4% d.) 5%

c.) 4%

The Yoko Fund earns 11.2% during the year while the risk-free rate is 3.1%. The Yoko Fund has a beta of 1.20 and a standard deviation of 17.5%. The Treynor Ratio is closest to: a.) 0.463 b.) 0.640 c.) 6.750 d.) 9.333

c.) 6.750

The board of directors of a firm with $100 in net income announces it will pay a $20 dividend next week. The firm's retention ratio is closest to: a.) 10% b.) 74% c.) 80% d.) 16%

c.) 80% Retention ratio =( Net Income - Dividends ) / Net income = ( 100 -20 )/ 100 = 80 /100 =80%

Examples of anchoring most likely include: a.) An investor who avoids buying risky equity securities. b.) A money manager over allocating a sector believed to outperform in the future. c.) An investor holding an underperforming equity security until its price rises by 25%. d.) An investor owning gaming stocks because he has always enjoyed gambling at casinos.

c.) An investor holding an underperforming equity security until its price rises by 25%.

Brooke and Brisco each invested $1,000 into a mutual fund. Brooke invested her money in a fund that generated an 11% return with a 1% expense ratio, netting a 10% return. Brisco invested in a different fund that generated an 11% return with a 2% expense ratio, netting a 9% return. At the end of a 20-year investment horizon, Brook's portfolio will have outperformed Brisco's portfolio by: a.) Between 0% and 10% b.) Between 10% and 20%term-3 c.) Between 20% and 30% d.) Over 30%

c.) Between 20% and 30%

Parker has a portfolio with a beta of 1.0 and an alpha of 0. Based on the CAPM, the return for the portfolio is: a.) 10% b.) Greater than Rm c.) Equal to Rm d.) Less than Rm but greater than Rf

c.) Equal to Rm

Solid Rock Fund invests in long-term high quality corporate fixed-income securities. Investors would most likely be attracted to this fund during times of: a.) High equity returns. b.) High inflationary periods. c.) Falling interest rates. d.) Concentrated sector bankruptcies.

c.) Falling interest rates. NOT: b.) High inflationary periods.

Which of the following statements regarding the difference between mortgage-backed securities and fixed-rate bonds is least accurate? a.) MBSs pay coupons monthly while fixed-rate bonds pay coupons semi-annually. b.) MBSs pay principal monthly while fixed-rate bonds pay principal at maturity. c.) MBSs are subject to interest rate risk while fixed-rate bonds are not. d.) MBSs are subject to prepayment risk while fixed-rate bonds are not.

c.) MBSs are subject to interest rate risk while fixed-rate bonds are not. Both fixed-rate bonds and MBSs are subject to interest rate risk. When yields rise, the price of both a fixed rate bond and an MBS will fall.

A research analyst estimated the intrinsic value of a defensive stock to be $35 per share. The analyst also expects a substantial increase in the gross domestic product over the next 24 months. The current market price of the defensive stock is $60 per share. The analyst is most likely to: a.) Conclude the stock is undervalued. b.) Recommend adding the stock to client portfolios in anticipation of the increase in GDP. c.) Offer a sell recommendation to clients who own shares in the defensive stock. d.) Write a report outlining the benefits of owning this stock over the next 24 months.

c.) Offer a sell recommendation to clients who own shares in the defensive stock. (Correct) NOT: b.) Recommend adding the stock to client portfolios in anticipation of the increase in GDP.

A bond for which the bondholder has the right to sell in the bond before maturity at a specific price after a specific date is a: a.) Callable bond b.) Coupon bond c.) Puttable bond d.) Convertible bond

c.) Puttable bond

Which of the following statements regarding US treasury securities is most accurate? a.) STRIPS are issued directly from the U.S. Treasury. b.) Treasury notes are pure discount bonds. c.) STRIPS are subject to the OID rules. d.) Treasury notes are subject to the OID rules.

c.) STRIPS are subject to the OID rules.

Which of the following statements about Treasury bills is most accurate? a.) T-bills are issued with maturities of 4 weeks, 13, weeks, and 26 weeks only b.) T-bills that extend beyond a calendar year are subject to taxation on the income earned both in the year of issuance and the year of maturity c.) T-bills are sold on a pure discount basis only. d.) The stop-yield is the lowest yield determined during a T-bill auction

c.) T-bills are sold on a pure discount basis only.

Which of the following statements regarding private placements is least accurate? a.) They are often referred to as an unregistered offering. b.) The main attractions of a private placement is in the lack of registration requirements associated with an IPO. c.) The downside to private placement is that it is expensive and time consuming. d.) Bonds have been the most common privately placed issue.

c.) The downside to private placement is that it is expensive and time consuming.

A split bond rating would most likely occur when: a.) In issuer has two outstanding bonds. b.) The bonds are nearing default. c.) Two rating agencies disagree on the default level of an issue. d.) There are differences between default risk and systematic risk.

c.) Two rating agencies disagree on the default level of an issue. A split rating occurs only when two rating agencies assign a different grade for the same bond. This is not uncommon as each rating agency has its own method to compute default risk for each bond.

Which of the following statements regarding unit investment trusts (UIT) is least accurate? a.) Most UITs are passively managed. b.) Drawbacks of UITs include the payment of lump sum organizational costs. c.) UITs are the least diversified among all investment companies. d.) UITs require the use of a sponsor

c.) UITs are the least diversified among all investment companies.

A firm with a price-earning ratio of 8.39 has earning shares per share of $5.38. This firm will have an expected price closest to: a.) $42.93 b.) $43.38 c.) $44.16 d.) $45.14

d.) $45.14 ? price-earnings ratio = Market price / Earnings per share Earnings per share *price-earnings ratio = Market price Market price = 8.39 * $ 5.38 = $45.1382

Edgar Corp (EC) is a growth company that has never paid a dividend. The EC board of directors has decided to pay its first dividend one year from today. The first dividend will be $2.00 per share. Because of the growth expectations for the company, it is expected that the following two dividend payments will increase by 40% each year. Beyond that, the EC dividend is expected to grow at 6% annually. EC shareholders require 11%. The value of EC is closest to: a.) $58.59. b.) $61.00. c.) $61.68. d.) $67.71.

d.) $67.71. Closest answer value of stock = Present value of dividends + Horizontal value Horizontal value = dividend next year/(Required return - growth rate) => horizontal value = 2 * 1.4^2*1.06/(0.11-0.06) = 83.104 value of stock = 2/1.11 + 2*1.4/1.11^2 + 2*1.4^2/1.11^3 + 83.104/1.11^3 = 67.70

A bond has a modified duration of 4.90. The yield to maturity on this bond is expected to decrease by 110 basis points. The percentage change in bond price is closest to: a.) -5.39% b.) -4.41% c.) +4.41% d.) +5.39%

d.) +5.39% Expected percentage price change = Annual modified duration*bond's yield to maturity decreases by ___ basis points =4.90*1.10= +5.39%

The yield on a one-year security is 7% while the yield on a two-year security is 10%. According to the expectations theory, the implied one-year rate exactly one year from today is closest to: a.) 7% b.) 10% c.) 12% d.) 13%

d.) 13%

ACE has EPS of $10.00 per share and has a retention ratio of 80%. Its dividend is expected to grow at a rate of 9%. If ACE stock is trading at $54.50, then the shareholder's required return is closest to: a.) 4%. b.) 9%. c.) 11%. d.) 13%.

d.) 13%. EPS ( earnings Per Share ) = $10 Retention Ratio = 80% or 0.80 So, Payout Ratio = 1 - Retention Ratio = 1 - 0.80 = 0.20 So, Current Dividend ( D0 ) = $10 x 0.20 = $2 Dividend Growth rate ( G ) = 9% or 0.09 Now, Price of a constant growth dividend stock is given by Price = D1 / ( Re - G ) Where, D1 = Expected Dividend next year = Current Dividend x ( 1 + Growth rate ) = $2 x 1.09 = $2.18 Re = Required rate of return Price = $54.50 So, putting the values in above equation we get, $54.50 = $2.18 / ( Re - 0.09 ) So, Re - 0.09 = $2.18 / $54.50 So, Re = 0.04 + 0.09 = 0.13 or 13%

A firm in the water bottling industry pays a current dividend of $2.19. Its earnings per share is $8.36 and an analysis of the financial statements shows a return on equity of 9.32%. The sustainable growth rate is closest to: a.) 4.92% b.) 5.27% c.) 5.81% d.) 6.88%

d.) 6.88% ? Sustainable growth rate= Retention rate*ROE Retention rate= 1-(Dividend/EPS) Given, Dividend= $2.19, EPS= $8.36 Therefore, Retention Rate= 1-(2.19/8.36) = 73.8038% Also given, ROE= 9.32%. Therefore, Sustainable growth rate= 9.32%*73.8038% = 6.878517%

Which of the following bonds will most likely have the largest decrease in price if the interest rates increase in Year 1 of the life of the bonds? a.) An option free 11-year 9% bond selling at a discount. b.) A 10-year 5% coupon bond that is callable at 104 in three years. c.) A 7-year 4% coupon bond that is callable after two years. d.) A 10-year zero coupon bond.

d.) A 10-year zero coupon bond. When rates rise, price of callable bonds behave the same way as normal bonds When rates rise, price of puttable bonds decrease less than normal bonds Discount bond has lesser duration than zero coupon bond hence they fall less

Firms are least likely to use the primary equity market to raise capital for: a.) Global expansion. b.) Research and development investments. c.) The launch of new product lines. d.) A desire to increase its financial leverage.

d.) A desire to increase its financial leverage. Firms use the equity markets for a variety of reasons, such as to raise capital for global expansion, for research costs, and for the introduction of new product lines. When firms issue new shared of equity, however, their debt-equity ratios are therefore financial leverage will fall.

Elmer currently owns a mutual fund with a correlation of 0.93 with the S&P 500 index. Elmer would like to diversify his portfolio by adding either the Wabbit Fund, which has a 0.48 correlation with the S&P 500 index and a standard deviation of 5%, or the Yosemite Fund, which has a .95 correlation with the S&P 500 index and a standard deviation of 12%. Which of the following is correct? a.) Adding the Wabbit Fund will provide greater diversification due to its lower standard deviation. b.) Adding the Yosemite Fund will provide greater diversification due to its higher standard deviation. c.) Adding the Yosemite Fund will provide greater diversification due to its higher R-square value. d.) Adding the Wabbit Fund will provide greater diversification due to its lower R-square value.

d.) Adding the Wabbit Fund will provide greater diversification due to its lower R-square value. NOT: a.) Adding the Wabbit Fund will provide greater diversification due to its lower standard deviation.

A portfolio manager who uses mean-variance optimization to construct an optimal portfolio will satisfy which of the following? a.) Only investors with low risk tolerance. b.) Only investors with high risk tolerance. c.) Only investors with moderate risk tolerance. d.) All investors, regardless of their level of risk.

d.) All investors, regardless of their level of risk.

Which of the following statements regarding the application of duration is most accurate? a.) Duration is used to compute an exact price impact from a change in yield. b.) Yield curve risk does not impact duration. c.) The duration of a zero coupon bond is less than its time to maturity. d.) Effective duration is useful for bonds with embedded options.

d.) Effective duration is useful for bonds with embedded options.

An investor compares three funds and an index when the risk-free rate of interest is 3%. Which of the four listed in the table below is most likely to have the highest risk-adjusted return according to the Sharpe ratio? a.) Fund 1 b.) Fund 2 c.) Fund 3 d.) Index

d.) Index

Which of the following statements regarding bond characteristics is most accurate? a.) The coupon rate is the rate of interest paid on the market value of a bond. b.) The YTM for a bond is the IRR of the cash flows that the investor earns if the bond is held to maturity c.) Callable bonds tend to have a lower YTM than non-callable bonds with the same default risk and maturity d.) None of the above are correct

d.) None of the above are correct

Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow $10,000,000 fixed for 5 years. Their external borrowing opportunities are shown here: Fixed-Rate Floating-Rate Borrowing Cost Borrowing Cost Company X 10% LIBOR Company Y 12% LIBOR + 1.5% Design a mutually beneficial interest only swap for X and Y with a notational principal of $10 million by having appropriate values for; A = Company X's external borrowing rate B = Company Y's payment to X (rate) C = Company X's payment to Y (rate) D = Company Y's external borrowing rate a) A = 10%; B = 11.75%; C = LIBOR - .25%; D = LIBOR + 1.5% b) A = 10%; B = 10%; C = LIBOR - .25%; D = LIBOR + 1.5% c) A = LIBOR; B = 10%; C = LIBOR - .25%; D = 12% d) A = LIBOR; B = LIBOR; C = LIBOR - .25%; D = 12% a.) Option c b.) Option d c.) Option a d.) Option b

d.) Option b

Security X and Security Y have a correlation coefficient of 0.0. If Security X's price is expected to increase by 8%: a.) Security Y should increase by 8% b.) Security Y should decrease by 8% c.) Security Y's return should be 0%. d.) Security Y's return cannot be calculated.

d.) Security Y's return cannot be calculated.

A swap bank makes the following quotes for 5-year swaps and AAA-rated firms: USD Euro Bid Ask Bid Ask 5% 5.2% 7% 7.2% a.) The bank stands ready to pay $5.2 percent against receiving dollar LIBOR on 5-year loans. b.) The bank stands ready to receive €7 percent against receiving dollar LIBOR on 5-year loans. c.) none of the options d.) The bank stands ready to pay €7 percent against receiving dollar LIBOR on 5-year loans.

d.) The bank stands ready to pay €7 percent against receiving dollar LIBOR on 5-year loans.

An investor who uses only the Treynor ratio to evaluate the performance of a mutual fund is most likely to conclude: a.) Total risk is more important than systematic risk b.) The fund is not well-diversified. c.) A measure of market portfolio performance is essential to evaluate the fund d.) The beta of the fund captures the relevant risk of the fund.

d.) The beta of the fund captures the relevant risk of the fund.

Which of the following statements regarding the advantages of owning corporate bonds is most accurate? a.) They have lower default risk than Treasuries b.) They generally pay lower interest than Treasuries c.) They generally offer some inflation protection via the semi-annual payment of coupons. d.) They offer higher security of principal than equities

d.) They offer higher security of principal than equities

Chris Cowlings, Chartered Financial Analyst®, uses fundamental analysis to evaluate equity securities in the country of Gooseburg. Cowling has been able to use inflation data, historical dividend information, and price to book rations to consistently outperform Gooseburg's broad equity index. Cowling would most likely identify the markets in Gooseburg as being: a.) Semi-strong form b.) Strong form c.) Inefficient d.) Weak form

d.) Weak form

An investor uses fundamental analysis to form a portfolio of equity securities. The portfolio has outperformed its benchmark for a period of almost a decade. The market under these conditions is most likely: a.) Inefficient b.) Semi-strong form efficient c.) Strong form efficient d.) Weak form efficient

d.) Weak form efficient

Which of the following statements about Treasury bills and commercial paper is most accurate? a.) T-bills and commercial paper are default-risk-free. b.) Yields on T-bills are slightly higher than commercial paper since they are issued by the United States government. c.) both a and b d.) neither a nor b

d.) neither a nor b? Not c

The T-bill has a beta equal to _____, while the market portfolio's beta is equal to _____.

zero; one Within the CAPM, the T-bills should not be affected by changes in the market. Thus, its beta should be equal to zero. The market portfolio is defined as having a beta of 1.0.