Investments B BUS 454 Chapter 1 & 2 Homework

The maximum maturity on commercial paper is _____.

270 days, because a longer maturity would cause the issue to be non-exempt

A benchmark market value index is comprised of three stocks. Yesterday the three stocks were priced at $26, $36, and $80. The number of outstanding shares for each is 800,000 shares, 700,000 shares, and 400,000 shares, respectively. If the stock prices changed to $30, $34, and $82 today respectively, what is the 1-day rate of return on the index?

3.33%

Three stocks have share prices of $29, $95, and $65 with total market values of $500 million, $450 million, and $250 million, respectively. If you were to construct a price-weighted index of the three stocks, what would be the index value?

63

Which of the following is an example of an agency problem?

All of the options are examples of agency problems.

__________ portfolio construction starts with selecting attractively priced securities.

Bottom-up

__________ are examples of financial intermediaries.

Commercial banks Insurance companies Investment companies Answer: All of the options

The U.K. stock index is the _________.

FTSE

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.

I and III only

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.

I or II only

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

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

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

I, II, and III

Which of the following indexes are market value-weighted? I. The NYSE Composite II. The S&P 500 III.The Wilshire 5000

I, II, and III

Which one of the following is a true statement regarding the Dow Jones Industrial Average?

It is a price-weighted average of 30 large industrial stocks.

The interest rate charged by large banks in London to lend money among themselves is called _________.

LIBOR

What options position is associated with: a. The right to buy an asset at a specified price? b. The right to sell an asset at a specified price? c. The obligation to buy an asset at a specified price? d. The obligation to sell an asset at a specified price?

Long call Long put Short put Short call

__________ portfolio management calls for holding diversified portfolios without spending effort or resources attempting to improve investment performance through security analysis.

Passive

Which of the following correctly describes a repurchase agreement?

The sale of a security with a commitment to repurchase the same security at a specified future date and a designated price.

__________ portfolio construction starts with asset allocation.

Top-down

TIPS are ______.

Treasury bonds that protect investors from inflation

The Standard & Poor's 500 is __________ weighted index.

a value-

Consider the three stocks in the following table. Pt represents price at time t, and Qt represents shares outstanding at time t. Stock C splits two-for-one in the last period. P0 Q0 P1 Q1 P2 Q2 A 90 100 95 100 95 100 B 50 200 45 200 45 200 C 100 200 110 200 55 400 Calculate the first-period rates of return on the following indexes of the three stocks: a. A market value-weighted index b. An equally weighted index

a. 3.85 b. 1.85

The historical average rate of return on large company stocks since 1926 has been _____ .

almost 12%

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

Which of the following is used to back international sales of goods and services?

bankers' acceptance

An investor in a T-bill earns interest by _________.

buying the bill at a discount from the face value to be received at maturity

Security selection refers to the ________.

choice of specific securities within each asset class

Real assets in the economy include all but which one of the following?

common stock

Financial intermediaries exist because small investors cannot efficiently _________.

diversify their portfolios assess and monitor the credit risk of borrowers gather information Answer: all of the options

A dollar-denominated deposit at a London bank is called _____.

eurodollars

Deposits of commercial banks at the Federal Reserve are called _____.

federal funds

Investors will earn higher rates of returns on TIPS than on equivalent default-risk standard bonds if _______________.

inflation is higher than anticipated over the investment period

Firms that specialize in helping companies raise capital by selling securities to the public are called _________.

investment banks

Preferred stock is like long-term debt in that ___________.

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

Commercial paper is a short-term security issued by __________ to raise funds.

large well-known companies

The average rate of return on U.S. Treasury bills since 1926 was _________.

less than 4%

The efficient market hypothesis suggests that _______.

passive portfolio management strategies are the most appropriate investment strategies

A firm that has large securities holdings and wishes to raise money for a short length of time may be able to find the cheapest financing from which of the following?

repurchase agreement

After much investigation, an investor finds that Intel stock is currently underpriced. This is an example of ______.

security analysis

Asset allocation refers to _________.

the allocation of the investment portfolio across broad asset classes

Money market securities are sometimes referred to as cash equivalents because _____.

they are safe and marketable

Financial assets represent _____ of total assets of U.S. households.

under 70%