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3) As diversification increases, the firm-specific risk of a portfolio approaches A) 0. B) 1. C) infinity. D) (n − 1) × n.

37) The measure of risk in a Markowitz efficient frontier is A) specific risk. B) standard deviation of returns. C) reinvestment risk. D) beta.

8) Initial margin requirements are determined by A) the Securities and Exchange Commission. B) the Federal Reserve System. C) the New York Stock Exchange. D) the Federal Reserve System and the New York Stock Exchange.

44) Which of the following is not a source of systematic risk? A) The business cycle B) Interest rates C) Personnel changes D) The inflation rate E) Exchange rates

57) Which of the following factors did Chen, Roll, and Ross not include in their multifactor model? A) Change in industrial production B) Change in expected inflation C) Change in unanticipated inflation D) Excess return of long-term government bonds over T-bills E) All of the factors are included in the Chen, Roll, and Ross multifactor model.

1) The trading of stock that was previously issued takes place A) in the secondary market. B) in the primary market. C) usually with the assistance of an investment banker. D) in the secondary and primary markets.

10) Investors in closed-end funds who wish to liquidate their positions must A) sell their shares through a broker. B) sell their shares to the issuer at a discount to net asset value. C) sell their shares to the issuer at a premium to net asset value. D) sell their shares to the issuer for net asset value. E) hold their shares to maturity.

10) The exploitation of security mispricing in such a way that risk-free economic profits may be earned is called A) arbitrage. B) capital-asset pricing. C) factoring. D) fundamental analysis. E) None of the options are correct.

12) The expected return of a portfolio of risky securities A) is a weighted average of the securities' returns. B) is the sum of the securities' returns. C) is the weighted sum of the securities' variances and covariances. D) is a weighted average of the securities' returns and the weighted sum of the securities' variances and covariances. E) None of the options are correct.

13) Ceteris paribus, a decrease in the demand for loans A) drives the interest rate down. B) drives the interest rate up. C) might not have any effect on interest rates. D) results from an increase in business prospects and a decrease in the level of savings.

14) The efficient frontier of risky assets is A) the portion of the minimum-variance portfolio that lies above the global minimum variance portfolio. B) the portion of the minimum-variance portfolio that represents the highest standard deviations. C) the portion of the minimum-variance portfolio that includes the portfolios with the lowest standard deviation. D) the set of portfolios that have zero standard deviation.

14) The market risk, beta, of a security is equal to A) the covariance between the security's return and the market return divided by the variance of the market's returns. B) the covariance between the security and market returns divided by the standard deviation of the market's returns. C) the variance of the security's returns divided by the covariance between the security and market returns. D) the variance of the security's returns divided by the variance of the market's returns.

15) Historical records regarding return on stocks, Treasury bonds, and Treasury bills between 1926 and 2018 show that A) stocks offered investors greater rates of return than bonds and bills. B) stock returns were less volatile than those of bonds and bills. C) bonds offered investors greater rates of return than stocks and bills. D) bills outperformed stocks and bonds. E) Treasury bills always offered a rate of return greater than inflation.

2) Systematic risk is also referred to as A) market riskor nondiversifiable risk. B) market riskor diversifiable risk. C) unique riskor nondiversifiable risk. D) unique riskor diversifiable risk. E) None of the options are correct.

21) According to the Capital Asset Pricing Model (CAPM), which one of the following statements is false? A) The expected rate of return on a security increases in direct proportion to a decrease in the risk-free rate. B) The expected rate of return on a security increases as its beta increases. C) A fairly priced security has an alpha of zero. D) In equilibrium, all securities lie on the security market line. E) All of the statements are true.

21) The value of a derivative security A) depends on the value of the related security. B) is unable to be calculated. C) is unrelated to the value of the related security. D) has been enhanced due to the recent misuse and negative publicity regarding these instruments. E) is worthless today.

22) The certainty equivalent rate of a portfolio is A) the rate that a risk-free investment would need to offer with certainty to be considered equally attractive as the risky portfolio. B) the rate that the investor must earn for certain to give up the use of his money. C) the minimum rate guaranteed by institutions such as banks. D) the rate that equates "A" in the utility function with the average risk aversion coefficient for all risk-averse investors. E) represented by the scaling factor "-0.005" in the utility function.

24) The ____________ refers to the potential conflict between management and shareholders. A) agency problem B) diversification problem C) liquidity problem D) solvency problem E) regulatory problem

25) The capital allocation line can be described as the A) investment opportunity set formed with a risky asset and a risk-free asset. B) investment opportunity set formed with two risky assets. C) line on which lie all portfolios that offer the same utility to a particular investor. D) line on which lie all portfolios with the same expected rate of return and different standard deviations.

27) In words, the real rate of interest is approximately equal to A) the nominal rate minus the inflation rate. B) the inflation rate minus the nominal rate. C) the nominal rate times the inflation rate. D) the inflation rate divided by the nominal rate. E) the nominal rate plus the inflation rate.

32) Security selection refers to A) choosing which securities to hold based on their valuation. B) investing only in "safe" securities. C) the allocation of assets into broad asset classes. D) top-down analysis.

33) The feature of the APT that offers the greatest potential advantage over the CAPM is the A) use of several factors instead of a single market index to explain the risk-return relationship. B) identification of anticipated changes in production, inflation, and term structure as key factors in explaining the risk-return relationship. C) superior measurement of the risk-free rate of return over historical time periods. D) variability of coefficients of sensitivity to the APT factors for a given asset over time. E) None of the options are correct.

34) Which of the following portfolio construction methods starts with asset allocation? A) Top-down B) Bottom-up C) Middle-out D) Buy and hold E) Asset allocation

35) If the market prices of each of the 30 stocks in the Dow Jones Industrial Average (DJIA) all change by the same percentage amount during a given day, which stock will have the greatest impact on the DJIA? A) The stock trading at the highest dollar price per share B) The stock having the greatest amount of debt in its capital structure C) The stock having the greatest amount of equity in its capital structure D) The stock having the lowest volatility

36) You want to purchase KO stock at $60 from your broker using as little of your own money as possible. If initial margin is 50% and you have $3,000 to invest, how many shares can you buy? A) 100 shares B) 200 shares C) 50 shares D) 500 shares E) 25 shares

4) According to the Capital Asset Pricing Model (CAPM), a well diversified portfolio's rate of return is a function of A) market risk. B) unsystematic risk. C) unique risk. D) reinvestment risk. E) None of the options are correct.

40) A well-diversified portfolio is defined as A) one that is diversified over a large enough number of securities that the nonsystematic variance is essentially zero. B) one that contains securities from at least three different industry sectors. C) a portfolio whose factor beta equals 1.0. D) a portfolio that is equally weighted.

41) The individual investor's optimal portfolio is designated by A) the point of tangency with the indifference curve and the capital allocation line. B) the point of highest reward to variability ratio in the opportunity set. C) the point of tangency with the opportunity set and the capital allocation line. D) the point of the highest reward to variability ratio in the indifference curve. E) None of the options are correct.

43) The first major step in asset allocation is A) assessing risk tolerance. B) analyzing financial statements. C) estimating security betas. D) identifying market anomalies.

44) What does the term negotiable mean, with regard to negotiable certificates of deposit? A) The CD can be sold to another investor if the owner needs to cash it in before its maturity date. B) The rate of interest on the CD is subject to negotiation. C) The CD is automatically reinvested at its maturity date. D) The CD has staggered maturity dates built in. E) The interest rate paid on the CD will vary with a designated market rate.

46) New issues of securities are sold in the ________ market(s). A) primary B) secondary C) over-the-counter D) primary and secondary

5) According to the Capital Asset Pricing Model (CAPM), a well diversified portfolio's rate of return is a function of A) beta risk. B) unsystematic risk. C) unique risk. D) reinvestment risk. E) None of the options are correct.

52) Of the following types of mutual funds, an investor who wishes to invest in a diversified portfolio of foreign stocks (excluding the U.S.) should choose A) international funds. B) global funds. C) regional funds. D) emerging-market funds.

53) Of the following types of ETFs, an investor who wishes to invest in a diversified portfolio that tracks the S&P 500 should choose A) SPY. B) DIA. C) QQQ. D) IWM. E) VTI.

54) In equilibrium, the marginal price of risk for a risky security must be A) equal to the marginal price of risk for the market portfolio. B) greater than the marginal price of risk for the market portfolio. C) less than the marginal price of risk for the market portfolio. D) adjusted by its degree of nonsystematic risk. E) None of the options are true.

55) ________ are, in essence, an insurance contract against the default of one or more borrowers. A) Credit default swaps B) CMOs C) ETFs D) Collateralized debt obligations E) All of the options

58) The separation property refers to the conclusion that A) the determination of the best risky portfolio is objective, and the choice of the best complete portfolio is subjective. B) the choice of the best complete portfolio is objective, and the determination of the best risky portfolio is objective. C) the choice of inputs to be used to determine the efficient frontier is objective, and the choice of the best CAL is subjective. D) the determination of the best CAL is objective, and the choice of the inputs to be used to determine the efficient frontier is subjective. E) investors are separate beings and will, therefore, have different preferences regarding the risk-return tradeoff.

58) Which country has banned initial coin offerings? A) China B) Germany C) Japan D) USA E) All of the options

6) According to the Capital Asset Pricing Model (CAPM), a well diversified portfolio's rate of return is a function of A) systematic risk. B) unsystematic risk. C) unique risk. D) reinvestment risk.

6) In a "firm commitment," the investment banker A) buys the stock from the company and resells the issue to the public. B) agrees to help the firm sell the stock at a favorable price. C) finds the best marketing arrangement for the investment-banking firm. D) agrees to help the firm sell the stock at a favorable price and finds the best marketing arrangement for the investment-banking firm.

61) Annual percentage rates (APRs) are computed using A) simple interest. B) compound interest. C) either simple interest or compound interest. D) best estimates of expected real costs. E) None of the options are correct.

62) Black argues that past risk premiums on firm-characteristic variables, such as those described by Fama and French, are problematic because A) they may result from data snooping. B) they are sources of systematic risk. C) they can be explained by security characteristic lines. D) they are more appropriate for a single-factor model. E) they are macroeconomic factors.

62) One of the assumptions of the CAPM is that investors exhibit myopic behavior. What does this mean? A) They plan for one identical holding period. B) They are price takers who can't affect market prices through their trades. C) They are mean-variance optimizers. D) They have the same economic view of the world. E) They pay no taxes or transactions costs.

64) Multifactor models, such as the one constructed by Chen, Roll, and Ross, can better describe assets' returns by A) expanding beyond one factor to represent sources of systematic risk. B) using variables that are easier to forecast ex ante. C) calculating beta coefficients by an alternative method. D) using only stocks with relatively stable returns. E) ignoring firm-specific risk.

65) The expected return-beta relationship of the CAPM is graphically represented by A) the security-market line. B) the capital-market line. C) the capital-allocation line. D) the efficient frontier with a risk-free asset. E) the efficient frontier without a risk-free asset.

68) Kurtosis is a measure of A) how fat the tails of a distribution are. B) the downside risk of a distribution. C) the normality of a distribution. D) the dividend yield of the distribution.

69) When a distribution is positively skewed, A) standard deviation overestimates risk. B) standard deviation correctly estimates risk. C) standard deviation underestimates risk. D) the tails are fatter than in a normal distribution.

7) A single-index model uses __________ as a proxy for the systematic risk factor. A) a market index, such as the S&P 500 B) the current account deficit C) the growth rate in GNP D) the unemployment rate.

70) The process of marketing a public offering is usually referred to as ____________. A) Underwriting B) Investment banking C) Brokerage D) Discounting E) IPO

70) The reduction in standard deviation from a well diversified portfolio of 100 stocks will ______________ than that of a 200 stock portfolio. A) not be statistically significantly different B) be statistically significantly different C) equal to D) None of the options are correct

73) A U.S. dollar-denominated bond that is sold in Singapore is a(n) A) Eurobond. B) Yankee bond. C) Samurai bond. D) Bulldog bond.

9) A _________ portfolio is a well-diversified portfolio constructed to have a beta of 1 on one of the factors and a beta of 0 on any other factor. A) factor B) market C) index D) factor and market E) factor, market, and index

9) The largest component of the fixed-income market is _______ debt. A) Treasury B) asset-backed C) corporate D) tax-exempt E) mortgage-backed

1) In the context of the Capital Asset Pricing Model (CAPM), the relevant measure of risk is A) unique risk. B) beta. C) standard deviation of returns. D) variance of returns.

1) Market risk is also referred to as A) systematic risk or diversifiable risk. B) systematic riskor nondiversifiable risk. C) unique riskor nondiversifiable risk. D) unique riskor diversifiable risk.

1) The material wealth of a society is a function of A) all financial assets. B) all real assets. C) all financial and real assets. D) all physical assets.

12) At issue, offering prices of open-end funds will often be A) less than NAV due to loads. B) greater than NAV due to loads. C) less than NAV due to limited demand. D) greater than NAV due to excess demand. E) less than or greater than NAV with no apparent pattern.

12) Other things equal, an increase in the government budget deficit A) drives the interest rate down. B) drives the interest rate up. C) might not have any effect on interest rates. D) increases business prospects.

14) The holding-period return (HPR) on a share of stock is equal to A) the capital gain yield during the period plus the inflation rate. B) the capital gain yield during the period plus the dividend yield. C) the current yield plus the dividend yield. D) the dividend yield plus the risk premium. E) the change in stock price.

15) According to the Capital Asset Pricing Model (CAPM), the expected rate of return on any security is equal to A) Rf + β [E(RM)]. B) Rf + β [E(RM) −Rf]. C) β [E(RM) −Rf]. D) E(RM) + Rf.

16) 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 A) greater than zero. B) equal to zero. C) equal to the sum of the securities' standard deviations. D) equal to −1.

17) A fixed-income security pays A) a fixed level of income for the life of the owner. B) a fixed stream of income or a stream of income that is determined according to a specified formula for the life of the security. C) a variable level of income for owners on a fixed income. D) a fixed or variable income stream at the option of the owner.

17) According to the Capital Asset Pricing Model (CAPM), fairly-priced securities have A) positive betas. B) zero alphas. C) negative betas. D) positive alphas.

19) Efficient portfolios of N risky securities are portfolios that A) are formed with the securities that have the highest rates of return regardless of their standard deviations. B) have the highest rates of return for a given level of risk. C) are selected from those securities with the lowest standard deviations regardless of their returns. D) have the highest risk and rates of return and the highest standard deviations. E) have the lowest standard deviations and the lowest rates of return.

2) In the context of the Capital Asset Pricing Model (CAPM), the relevant risk is A) unique risk. B) systematic risk. C) standard deviation of returns. D) variance of returns.

20) The presence of risk means that A) investors will lose money. B) more than one outcome is possible. C) the standard deviation of the payoff is larger than its expected value. D) final wealth will be greater than initial wealth. E) terminal wealth will be less than initial wealth.

23) Shares for short transactions A) are usually borrowed from other brokers. B) are typically shares held by the short seller's broker in street name. C) are borrowed from commercial banks. D) are typically shares held by the short seller's broker in street name and are borrowed from commercial banks.

25) The risk-free rate is 7%. The expected market rate of return is 15%. If you expect a stock with a beta of 1.3 to offer a rate of return of 12%, you should A) buy the stock because it is overpriced. B) sell short the stock because it is overpriced. C) sell the stock short because it is underpriced. D) buy the stock because it is underpriced. E) None of the options, as the stock is fairly priced.

27) Which of the following orders instructs the broker to sell at or below a specified price? A) Limit-sell order B) Stop-loss C) Limit-buy order D) Stop-buy order E) Market order

28) If the Federal Reserve lowers the Fed Funds rate, ceteris paribus, the equilibrium levels of funds lent will __________, and the equilibrium level of real interest rates will ___________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease E) reverse direction from their previous trends; reverse direction from their previous trends

3) Firms raise capital by issuing stock A) in the secondary market. B) in the primary market. C) to unwary investors. D) only on days when the market is up.

3) In the context of the Capital Asset Pricing Model (CAPM), the relevant risk is A) unique risk. B) market risk. C) standard deviation of returns. D) variance of returns.

33) Which of the following portfolio construction methods starts with security analysis? A) Top-down B) Bottom-up C) Middle-out D) Buy and hold E) Asset allocation

36) Advantage(s) of the APT is (are) A) that the model provides specific guidance concerning the determination of the risk premiums on the factor portfolios. B) that the model does not require a specific benchmark market portfolio. C) that risk need not be considered. D) that the model provides specific guidance concerning the determination of the risk premiums on the factor portfolios, and that the model does not require a specific benchmark market portfolio. E) that the model does not require a specific benchmark market portfolio, and that risk need not be considered.

36) Portfolio theory as described by Markowitz is most concerned with A) the elimination of systematic risk. B) the effect of diversification on portfolio risk. C) the identification of unsystematic risk. D) active portfolio management to enhance returns.

37) A sale by IBM of new stock to the public would be a(n) A) short sale. B) seasoned equity offering. C) private placement. D) secondary-market transaction. E) initial public offering.

37) ________ specialize in helping companies raise capital by selling securities. A) Commercial bankers B) Investment bankers C) Investment issuers D) Credit raters

38) A professional who searches for mispriced securities in specific areas such as merger-target stocks, rather than one who seeks strict (risk-free) arbitrage opportunities is engaged in A) pure arbitrage. B) risk arbitrage. C) option arbitrage. D) equilibrium arbitrage.

38) Commercial banks differ from other businesses in that both their assets and their liabilities are mostly A) illiquid. B) financial. C) real. D) owned by the government. E) regulated.

39) A form of short-term borrowing by dealers in government securities is (are) A) reserve requirements. B) repurchase agreements. C) bankers' acceptances. D) commercial paper. E) brokers' calls.

39) The unsystematic risk of a specific security A) is likely to be higher in an increasing market. B) results from factors unique to the firm. C) depends on market volatility. D) cannot be diversified away.

4) As diversification increases, the unsystematic risk of a portfolio approaches A) 1. B) 0. C) infinity. D) (n −1) × n.

41) A reward-to-volatility ratio is useful in A) measuring the standard deviation of returns. B) understanding how returns increase relative to risk increases. C) analyzing returns on variable-rate bonds. D) assessing the effects of inflation. E) None of the options are correct.

41) You sell short 100 shares of Loser Co. at a market price of $45 per share. Your maximum possible loss is A) $4,500. B) unlimited. C) zero. D) $9,000. E) Cannot be determined from the information given.

42) The change from a straight to a kinked capital allocation line is a result of A) reward-to-volatility ratio increasing. B) borrowing rate exceeding lending rate. C) an investor's risk tolerance decreasing. D) increase in the portfolio proportion of the risk-free asset.

43) In a two-security minimum variance portfolio where the correlation between securities is greater than −1.0, A) the security with the higher standard deviation will be weighted more heavily. B) the security with the higher standard deviation will be weighted less heavily. C) the two securities will be equally weighted. D) the risk will be zero. E) the return will be zero.

43) When a firm markets new securities, a preliminary registration statement must be filed with A) the exchange on which the security will be listed. B) the Securities and Exchange Commission. C) the Federal Reserve. D) all other companies in the same line of business. E) the Federal Deposit Insurance Corporation.

46) In the mean-standard deviation graph, the line that connects the risk-free rate and the optimal risky portfolio, P, is called A) the security market line. B) the capital allocation line. C) the indifference curve. D) the investor's utility line.

47) When two risky securities that are positively correlated but not perfectly correlated are held in a portfolio, A) the portfolio standard deviation will be greater than the weighted average of the individual security standard deviations. B) the portfolio standard deviation will be less than the weighted average of the individual security standard deviations. C) the portfolio standard deviation will be equal to the weighted average of the individual security standard deviations. D) the portfolio standard deviation will always be equal to the securities' covariance.

49) Bond market indexes can be difficult to construct because A) they cannot be based on firms' market values. B) bonds tend to trade infrequently, making price information difficult to obtain. C) there are so many different kinds of bonds. D) prices cannot be obtained for companies that operate in emerging markets. E) corporations are not required to disclose the details of their bond issues.

5) As diversification increases, the unique risk of a portfolio approaches A) 1. B) 0. C) infinity. D) (n −1) × n.

5) T-bills are financial instruments initially sold by ________ to raise funds. A) commercial banks B) the U.S. government C) state and local governments D) agencies of the federal government E) the U.S. government and agencies of the federal government

50) Studies of liquidity spreads in security markets have shown that A) liquid stocks earn higher returns than illiquid stocks. B) illiquid stocks earn higher returns than liquid stocks. C) both liquid and illiquid stocks earn the same returns. D) illiquid stocks are good investments for frequent, short-term traders.

51) Of the following types of mutual funds, an investor who wishes to invest in a diversified portfolio of stocks worldwide (including the U.S.) should choose A) international funds. B) global funds. C) regional funds. D) emerging-market funds.

52) An overpriced security will plot A) on the security market line. B) below the security market line. C) above the security market line. D) either above or below the security market line depending on its covariance with the market. E) either above or below the security-market line depending on its standard deviation.

52) The expected impact of unanticipated macroeconomic events on a security's return during the period is A) included in the security's expected return. B) zero. C) equal to the risk-free rate. D) proportional to the firm's beta. E) infinite.

52) The sale of a mortgage portfolio by setting up mortgage pass-through securities is an example of A) credit enhancement. B) credit swap. C) unbundling. D) derivatives.

53) In words, the covariance considers the probability of each scenario happening and the interaction between A) securities' returns relative to their variances. B) securities' returns relative to their mean returns. C) securities' returns relative to other securities' returns. D) the level of return a security has in that scenario and the overall portfolio return. E) the variance of the security's return in that scenario and the overall portfolio variance.

54) In the single-index model represented by the equation ri = E(ri) + βiF + ei, the term ei represents A) the impact of unanticipated macroeconomic events on security i's return. B) the impact of unanticipated firm-specific events on security i's return. C) the impact of anticipated macroeconomic events on security i's return. D) the impact of anticipated firm-specific events on security i's return. E) the impact of changes in the market on security i's return.

54) Of the following types of ETFs, an investor who wishes to invest in a diversified portfolio that tracks the Dow Jones Industrials should choose A) SPY. B) DIA. C) QQQQ. D) IWM. E) VTI.

56) The technology behind cryptocurrencies that is ideal for secure digital transactions is called ______________. A) bitcoin B) blockchain C) distributed ledgers D) ethereum E) All of the options

58) A call option allows the buyer to A) sell the underlying asset at the exercise price on or before the expiration date. B) buy the underlying asset at the exercise price on or before the expiration date. C) sell the option in the open market prior to expiration. D) sell the underlying asset at the exercise price on or before the expiration date and sell the option in the open market prior to expiration. E) buy the underlying asset at the exercise price on or before the expiration date and sell the option in the open market prior to expiration.

59) A put option allows the holder to A) buy the underlying asset at the strike price on or before the expiration date. B) sell the underlying asset at the strike price on or before the expiration date. C) sell the option in the open market prior to expiration. D) sell the underlying asset at the strike price on or before the expiration date and sell the option in the open market prior to expiration. E) buy the underlying asset at the strike price on or before the expiration date and sell the option in the open market prior to expiration.

6) Financial assets A) directly contribute to the country's productive capacity. B) indirectly contribute to the country's productive capacity. C) contribute to the country's productive capacity, both directly and indirectly. D) do not contribute to the country's productive capacity, either directly or indirectly. E) are of no value to anyone.

6) The bid price of a T-bill in the secondary market is A) the price at which the dealer in T-bills is willing to sell the bill. B) the price at which the dealer in T-bills is willing to buy the bill. C) greater than the asked price of the T-bill. D) the price at which the investor can buy the T-bill. E) never quoted in the financial press.

6) Which pricing model provides no guidance concerning the determination of the risk premium on factor portfolios? A) The CAPM B) The multifactor APT C) Both the CAPM and the multifactor APT D) Neither the CAPM nor the multifactor APT E) None of the options are correct.

60) When comparing investments with different horizons, the ____________ provides the more accurate comparison. A) arithmetic average B) effective annual rate C) average annual return D) historical annual average

66) A "fairly-priced" asset lies A) above the security-market line. B) on the security-market line. C) on the capital-market line. D) above the capital-market line. E) below the security-market line.

7) The market portfolio has a beta of A) 0. B) 1. C) −1. D) 0.5.

77) Corporations can exclude ____________% of the dividends received from preferred stock from taxes. A) 50 B) 70 C) 20 D) 15 E) 62

8) The smallest component of the fixed-income market is _______ debt. A) Treasury B) other asset-backed C) corporate D) tax-exempt E) mortgage-backed

84) What short term interest rate was proposed to be phased out by 2021? A) SONIA B) LIBOR C) Tokyo Interbank rate D) Euribor E) US Treasury Repo

1) As diversification increases, the total variance of a portfolio approaches A) 0. B) 1. C) the variance of the market portfolio. D) infinity. E) None of the options are correct.

1) Which of the following statements regarding risk-averse investors is true? A) They only care about the rate of return. B) They accept investments that are fair games. C) They only accept risky investments that offer risk premiums over the risk-free rate. D) They are willing to accept lower returns and high risk. E) They only care about the rate of return, and they accept investments that are fair games.

1) Which one of the following statements regarding open-end mutual funds is false? A) The funds redeem shares at net asset value. B) The funds offer investors professional management. C) The funds offer investors a guaranteed rate of return. D) The funds redeem shares at net asset value and offer investors professional management.

1) ___________ a relationship between expected return and risk. A) APT stipulates B) CAPM stipulates C) Both CAPM and APT stipulate D) Neither CAPM nor APT stipulate E) No pricing model has been found.

10) The variance of a portfolio of risky securities A) is a weighted sum of the securities' variances. B) is the sum of the securities' variances. C) is the weighted sum of the securities' variances and covariances. D) is the sum of the securities' covariances. E) None of the options are correct.

10) Which of the following is not a component of the money market? A) Repurchase agreements B) Eurodollars C) Real estate investment trusts D) Money market mutual funds E) Commercial paper

10) You sold AAPL stock short at $190 per share. Your losses could be minimized by placing a A) limit-sell order. B) limit-buy order. C) stop-buy order. D) day-order. E) None of the options are correct.

11) Commercial paper is a short-term security issued by ________ to raise funds. A) the Federal Reserve Bank B) commercial banks C) large, well-known companies D) the New York Stock Exchange E) state and local governments

11) The intercept in the regression equations calculated by beta books is equal to A) α in the CAPM. B) α + rf(1 + β). C) α + rf(1 − β). D) 1 − α.

11) The standard deviation of a portfolio of risky securities is A) the square root of the weighted sum of the securities' variances. B) the square root of the sum of the securities' variances. C) the square root of the weighted sum of the securities' variances and covariances. D) the square root of the sum of the securities' covariances.

12) The ____________ provides an unequivocal statement on the expected return-beta relationship for all assets, whereas the _____________ implies that this relationship holds for all but perhaps a small number of securities. A) APT; CAPM B) APT; OPM C) CAPM; APT D) CAPM; OPM

12) Which one of the following terms best describes Eurodollars? A) Dollar-denominated deposits only in European banks. B) Dollar-denominated deposits at branches of foreign banks in the U.S. C) Dollar-denominated deposits at foreign banks and branches of American banks outside the U.S. D) Dollar-denominated deposits at American banks in the U.S. E) Dollars that have been exchanged for European currency.

12) Which statement is not true regarding the capital market line (CML)? A) The CML is the line from the risk-free rate through the market portfolio. B) The CML is the best attainable capital allocation line. C) The CML is also called the security market line. D) The CML always has a positive slope. E) The risk measure for the CML is standard deviation.

14) Consider the single factor APT. Portfolio A has a beta of 0.2 and an expected return of 13%. Portfolio B has a beta of 0.4 and an expected return of 15%. The risk-free rate of return is 10%. If you wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio _________ and a long position in portfolio _________. A) A; A B) A; B C) B; A D) B; B

14) The interest rate charged by banks with excess reserves at a Federal Reserve Bank to banks needing overnight loans to meet reserve requirements is called the A) prime rate. B) discount rate. C) federal funds rate. D) call money rate. E) money market rate.

15) The capital allocation line provided by a risk-free security and N risky securities is A) the line that connects the risk-free rate and the global minimum-variance portfolio of the risky securities. B) the line that connects the risk-free rate and the portfolio of the risky securities that has the highest expected return on the efficient frontier. C) the line tangent to the efficient frontier of risky securities drawn from the risk-free rate. D) the horizontal line drawn from the risk-free rate.

17) Which of the following statement(s) is(are) true regarding the variance of a portfolio of two risky securities?I) The higher the coefficient of correlation between securities, the greater the reduction in the portfolio variance.II) There is a linear relationship between the securities' coefficient of correlation and the portfolio variance.III) The degree to which the portfolio variance is reduced depends on the degree of correlation between securities. A) I only B) II only C) III only D) I and II E) I and III

18) Which of the following is true regarding a firm's securities? A) Common dividends are paid before preferred dividends. B) Preferred stockholders have voting rights. C) Preferred dividends are usually cumulative. D) Preferred dividends are contractual obligations. E) Common dividends can usually be paid if preferred dividends have been skipped.

19) According to the Capital Asset Pricing Model (CAPM), overpriced securities have A) positive betas. B) zero alphas. C) negative alphas. D) positive alphas.

2) Which of the following statements is(are) true?I) Risk-averse investors reject investments that are fair games.II) Risk-neutral investors judge risky investments only by the expected returns.III) Risk-averse investors judge investments only by their riskiness.IV) Risk-loving investors will not engage in fair games. A) I only B) II only C) I and II only D) II and III only E) II, III, and IV only

22) In a well-diversified portfolio, A) market risk is negligible. B) systematic risk is negligible. C) unsystematic risk is negligible. D) nondiversifiable risk is negligible.

24) Which of the following is not an advantage of owning mutual funds? A) They offer a variety of investment styles. B) They offer small investors the benefits of diversification. C) They treat income as "passed through" to the investor for tax purposes. D) All of the options are advantages of mutual funds. E) None of the options are an advantage of mutual funds.

24) Your personal opinion is that a security has an expected rate of return of 0.11. It has a beta of 1.5. The risk-free rate is 0.05 and the market expected rate of return is 0.09. According to the Capital Asset Pricing Model, this security is A) underpriced. B) overpriced. C) fairly priced. D) Cannot be determined from data provided.

25) A disadvantage of using stock options to compensate managers is that A) it encourages managers to undertake projects that will increase stock price. B) it encourages managers to engage in empire building. C) it can create an incentive for managers to manipulate information to prop up a stock price temporarily, giving them a chance to cash out before the price returns to a level reflective of the firm's true prospects. D) All of the above.

25) Which of the following factors would not be expected to affect the nominal interest rate? A) The supply of loans B) The demand for loans C) The coupon rate on previously issued government bonds D) The expected rate of inflation E) Government spending and borrowing

26) Which of the following are mechanisms that have evolved to mitigate potential agency problems? I) Using the firm's stock options for compensationII) Hiring bickering family members as corporate spiesIII) Boards of directors forcing out underperforming managementIV) Security analysts monitoring the firm closelyV) Takeover threats A) II and V B) I, III, and IV C) I, III, IV, and V D) III, IV, and V E) I, III, and V

26) Which of the following orders instructs the broker to buy at or below a specified price? A) Limit-loss order B) Discretionary order C) Limit-buy order D) Stop-buy order E) Market order

28) Which of the following orders instructs the broker to sell at or above a specified price? A) Limit-buy order B) Discretionary order C) Limit-sell order D) Stop-buy order E) Market order

31) An investor will take as large a position as possible when an equilibrium-price relationship is violated. This is an example of A) a dominance argument. B) the mean-variance efficiency frontier. C) a risk-free arbitrage. D) the capital asset pricing model.

31) Asset allocation refers to A) choosing which securities to hold based on their valuation. B) investing only in "safe" securities. C) the allocation of assets into broad asset classes. D) bottom-up analysis.

32) Which of the following statements regarding the Dow Jones Industrial Average (DJIA) is false? A) The DJIA is a measure of the performance of the stock market. B) The DJIA consists of 30 blue chip stocks. C) The DJIA is affected equally by changes in low- and high-priced stocks. D) The DJIA divisor needs to be adjusted for stock splits. E) The value of the DJIA is much higher than individual stock prices.

33) The index that includes the largest number of actively-traded stocks is A) the NASDAQ Composite Index. B) the NYSE Composite Index. C) the Wilshire 5000 Index. D) the Value Line Composite Index. E) the Russell Index.

35) You want to buy 100 shares of Hotstock Inc. at the best possible price as quickly as possible. You would most likely place a A) stop-loss order. B) stop-buy order. C) market order. D) limit-sell order. E) limit-buy order.

38) The finalized registration statement for new securities approved by the SEC is called A) a red herring. B) the preliminary statement. C) the prospectus. D) a best-efforts agreement. E) a firm commitment.

39) In the context of the Arbitrage Pricing Theory, as a well-diversified portfolio becomes larger, its nonsystematic risk approaches A) one. B) infinity. C) zero. D) negative one.

39) One outcome from the SEC investigation of the "Flash Crash of 2010" was A) a prohibition of short selling. B) higher margin requirements. C) approval of new circuit breakers. D) establishment of electronic communications networks (ECNs). E) passage of the Sarbanes-Oxley Act.

4) In the mean-standard deviation graph, an indifference curve has a ________ slope. A) negative B) zero C) positive D) vertical E) Cannot be determined.

42) Which of the following is not a mortgage-related government or government-sponsored agency? A) The Federal Home Loan Bank B) The Federal National Mortgage Association C) The U.S. Treasury D) Freddie Mac E) Ginnie Mae

44) Capital asset pricing theory asserts that portfolio returns are best explained by A) reinvestment risk. B) specific risk. C) systematic risk. D) diversification.

44) The term "arbitrage" refers to A) buying low and selling high. B) short selling high and buying low. C) earning risk-free economic profits. D) negotiating for favorable brokerage fees. E) hedging your portfolio through the use of options.

45) According to the CAPM, the risk premium an investor expects to receive on any stock or portfolio increases A) directly with alpha. B) inversely with alpha. C) directly with beta. D) inversely with beta. E) in proportion to its standard deviation.

5) In the mean-standard deviation graph, which one of the following statements is true regarding the indifference curve of a risk-averse investor? A) It is the locus of portfolios that have the same expected rates of return and different standard deviations. B) It is the locus of portfolios that have the same standard deviations and different rates of return. C) It is the locus of portfolios that offer the same utility according to returns and standard deviations. D) It connects portfolios that offer increasing utilities according to returns and standard deviations. E) None of the options are correct.

53) Covariances between security returns tend to be A) positive because of SEC regulations. B) positive because of Exchange regulations. C) positive because of economic forces that affect many firms. D) negative because of SEC regulations. E) negative because of economic forces that affect many firms.

57) The security characteristic line (SCL) associated with the single-index model is a plot of A) the security's returns on the vertical axis and the market index's returns on the horizontal axis. B) the market index's returns on the vertical axis and the security's returns on the horizontal axis. C) the security's excess returns on the vertical axis and the market index's excess returns on the horizontal axis. D) the market index's excess returns on the vertical axis and the security's excess returns on the horizontal axis. E) the security's returns on the vertical axis and Beta on the horizontal axis.

59) If investors do not know their investment horizons for certain, A) the CAPM is no longer valid. B) the CAPM underlying assumptions are not violated. C) the implications of the CAPM are not violated as long as investors' liquidity needs are not priced. D) the implications of the CAPM are no longer useful.

67) Skewness is a measure of A) how fat the tails of a distribution are. B) the downside risk of a distribution. C) the symmetry of a distribution. D) the dividend yield of the distribution. E) None of the options are correct.

7) An arbitrage opportunity exists if an investor can construct a __________ investment portfolio that will yield a sure profit. A) positive B) negative C) zero D) All of the options. E) None of the options are correct.

70) Certificates of deposit are insured for up to ____________ in the event of bank insolvency. A) $10,000 B) $100,000 C) $250,000 D) $500,000

70) When a distribution is negatively skewed, A) standard deviation overestimates risk. B) standard deviation correctly estimates risk. C) standard deviation underestimates risk. D) the tails are fatter than in a normal distribution.

71) What kind of entity will often sell a company via an initial public offering, when the firm gets too big for similar entities to purchase? A) Underwriter B) Investment banking C) Private Equity D) Broker

8) The APT was developed in 1976 by A) Lintner. B) Modigliani and Miller. C) Ross. D) Sharpe.

9) Pools of money invested in a portfolio that is fixed for the life of the fund are called A) closed-end funds. B) open-end funds. C) unit investment trusts. D) REITS. E) redeemable trust certificates.

10) Which statement is not true regarding the market portfolio? A) It includes all publicly-traded financial assets. B) It lies on the efficient frontier. C) All securities in the market portfolio are held in proportion to their market values. D) It is the tangency point between the capital market line and the indifference curve. E) All of the options are true.

11) Closed-end funds are frequently issued at a ______ to NAV and subsequently trade at a __________ to NAV. A) discount; discount B) discount; premium C) premium; premium D) premium; discount E) No consistent relationship has been observed.

11) In developing the APT, Ross assumed that uncertainty in asset returns was a result of A) a common macroeconomic factor. B) firm-specific factors. C) pricing error. D) a common macroeconomic factor and firm-specific factors.

11) Which of the following statement(s) is(are) true? A) Inflation has no effect on the nominal rate of interest. B) The realized nominal rate of interest is always greater than the real rate of interest. C) Certificates of deposit offer a guaranteed real rate of interest. D) None of the options are true.

11) Which one of the following statements regarding orders is false? A) A market order is simply an order to buy or sell a stock immediately at the prevailing market price. B) A limit-sell order is where investors specify prices at which they are willing to sell a security. C) If stock ABC is selling at $50, a limit-buy order may instruct the broker to buy the stock if and when the share price falls below $45. D) A market order is an order to buy or sell a stock on a specific exchange (market).

12) Restrictions on trading involving insider information apply to the following, except A) corporate officers. B) corporate directors. C) major stockholders. D) All of the individuals. E) None of the options.

13) Deposits of commercial banks at the Federal Reserve Bank are called A) bankers' acceptances. B) repurchase agreements. C) time deposits. D) federal funds. E) reserve requirements.

13) Other things equal, diversification is most effective when A) securities' returns are uncorrelated. B) securities' returns are positively correlated. C) securities' returns are high. D) securities' returns are negatively correlated. E) securities' returns are positively correlated and high.

13) Which of the following statements about real estate investment trusts is true? A) REITs invest in real estate or loans secured by real estate. B) REITs raise capital by borrowing from banks and issuing mortgages. C) REITs are similar to open-end funds, with shares redeemable at NAV. D) REITs invest in real estate or loans secured by real estate and raise capital by borrowing from banks and issuing mortgages. E) All of the options are true.

14) In a factor model, the return on a stock in a particular period will be related to A) firm-specific events. B) macroeconomic events. C) the error term. D) both firm-specific events and macroeconomic events. E) neither firm-specific events nor macroeconomic events.

15) Which of the following statements about money market mutual funds is true? A) They invest in commercial paper, CDs, and repurchase agreements. B) They usually offer check-writing privileges. C) They are highly leveraged and risky. D) They invest in commercial paper, CDs, and repurchase agreements, and they usually offer check-writing privileges. E) All of the options are true.

16) If the index model is valid, _________ would be helpful in determining the covariance between assets GM and GE. A) βGM B) βGE C) σM D) all of the options E) None of the options are correct.

16) If the interest rate paid by borrowers and the interest rate received by savers accurately reflect the realized rate of inflation, A) borrowers gain and savers lose. B) savers gain and borrowers lose. C) both borrowers and savers lose. D) neither borrowers nor savers gain nor lose. E) both borrowers and savers gain.

16) The security market line (SML) is A) the line that describes the expected return-beta relationship for well-diversified portfolios only. B) also called the capital allocation line. C) the line that is tangent to the efficient frontier of all risky assets. D) the line that represents the expected return-beta relationship. E) All of the options.

16) Which of the following statements is true regarding a corporate bond? A) A corporate callable bond gives the holder the right to exchange it for a specified number of the company's common shares. B) A corporate debenture is a secured bond. C) A corporate indenture is a secured bond. D) A corporate convertible bond gives the holder the right to exchange the bond for a specified number of the company's common shares. E) Holders of corporate bonds have voting rights in the company.

17) If the index model is valid, _________ would be helpful in determining the covariance between assets HPQ and KMP. A) βHPQ B) βKMP C) σM D) all of the options E) None of the options are correct.

17) The exact indifference curves of different investors A) cannot be known with perfect certainty. B) can be calculated precisely with the use of advanced calculus. C) are known with perfect certainty and allow the advisor to create more suitable portfolios for the client. D) although not known with perfect certainty, do allow the advisor to create more suitable portfolios for the client.

18) A debt security pays A) a fixed level of income for the life of the owner. B) a variable level of income for owners on a fixed income. C) a fixed or variable income stream at the option of the owner. D) a fixed stream of income or a stream of income that is determined according to a specified formula for the life of the security.

18) According to the Capital Asset Pricing Model (CAPM), underpriced securities have A) positive betas. B) zero alphas. C) negative betas. D) positive alphas. E) None of the options are correct.

18) If the index model is valid, _________ would be helpful in determining the covariance between assets K and L. A) βk B) βL C) σM D) all of the options E) None of the options are correct.

19) A fair game A) will not be undertaken by a risk-averse investor. B) is a risky investment with a zero risk premium. C) is a riskless investment. D) will not be undertaken by a risk-averse investor and is a risky investment with a zero risk premium. E) will not be undertaken by a risk-averse investor and is a riskless investment.

2) As diversification increases, the standard deviation of a portfolio approaches A) 0. B) 1. C) infinity. D) the standard deviation of the market portfolio. E) None of the options are correct.

2) Which one of the following statements regarding closed-end mutual funds is false? A) The funds always trade at a discount from NAV. B) The funds redeem shares at their net asset value. C) The funds offer investors professional management. D) The funds always trade at a discount from NAV and redeem shares at their net asset value. E) None of the options are correct.

20) According to the Capital Asset Pricing Model (CAPM), a security with a A) positive alpha is considered overpriced. B) zero alpha is considered to be a good buy. C) negative alpha is considered to be a good buy. D) positive alpha is considered to be underpriced.

20) An example of a derivative security is A) a common share of Microsoft. B) a call option on Intel stock. C) a commodity futures contract. D) a call option on Intel stock and a commodity futures contract. E) a common share of Microsoft and a call option on Intel stock.

21) The risk premium for common stocks A) cannot be zero, for investors would be unwilling to invest in common stocks. B) must always be positive, in theory. C) is negative, as common stocks are risky. D) cannot be zero, for investors would be unwilling to invest in common stocks and must always be positive, in theory. E) cannot be zero, for investors would be unwilling to invest in common stocks and is negative, as common stocks are risky.

22) Although derivatives can be used as speculative instruments, businesses most often use them to A) attract customers. B) appease stockholders. C) offset debt. D) hedge risks. E) enhance their balance sheets.

23) Empirical results regarding betas estimated from historical data indicate that betas A) are constant over time. B) are always greater than one. C) are always near zero. D) appear to regress toward one over time. E) are always positive.

23) Financial assets permit all of the following except A) consumption timing. B) allocation of risk. C) separation of ownership and control. D) elimination of risk.

24) Which of the following orders is most useful to short sellers who want to limit their potential losses? A) Limit order B) Discretionary order C) Limit-loss order D) Stop-buy order

25) Which of the following would increase the net asset value of a mutual fund share, assuming all other things remain unchanged? A) An increase in the number of fund shares outstanding B) An increase in the fund's accounts payable C) A change in the fund's management D) An increase in the value of one of the fund's stocks

26) Which of the following statements regarding the capital allocation line (CAL) is false? A) The CAL shows risk-return combinations. B) The slope of the CAL equals the increase in the expected return of the complete portfolio per unit of additional standard deviation. C) The slope of the CAL is also called the reward-to-volatility ratio. D) The CAL is also called the efficient frontier of risky assets in the absence of a risk-free asset.

27) Corporate shareholders are best protected from incompetent management decisions by A) the ability to engage in proxy fights. B) management's control of pecuniary rewards. C) the ability to call shareholder meetings. D) the threat of takeover by other firms. E) one-share/one-vote election rules.

27) Given the capital allocation line, an investor's optimal portfolio is the portfolio that A) maximizes her expected profit. B) maximizes her risk. C) minimizes both her risk and return. D) maximizes her expected utility. E) None of the options are correct.

28) Theoretically, takeovers should result in A) improved management. B) increased stock price. C) increased benefits to existing management of the taken-over firm. D) improved management and increased stock price. E) All of the options.

29) "Bracket Creep" happens when A) tax liabilities are based on real income and there is a negative inflation rate. B) tax liabilities are based on real income and there is a positive inflation rate. C) tax liabilities are based on nominal income and there is a negative inflation rate. D) tax liabilities are based on nominal income and there is a positive inflation rate. E) too many peculiar people make their way into the highest tax bracket.

29) Which of the following orders instructs the broker to buy at or above a specified price? A) Limit-buy order B) Discretionary order C) Limit-sell order D) Stop-buy order E) Market order

3) The means by which individuals hold their claims on real assets in a well-developed economy are A) investment assets. B) depository assets. C) derivative assets. D) financial assets. E) exchange-driven assets.

30) A zero-investment portfolio with a positive expected return arises when A) an investor has downside risk only. B) the law of prices is not violated. C) the opportunity set is not tangent to the capital-allocation line. D) a risk-free arbitrage opportunity exists.

30) Shelf registration A) is a way of placing issues in the primary market. B) allows firms to register securities for sale over a two-year period. C) increases transaction costs to the issuing firm. D) is a way of placing issues in the primary market and allows firms to register securities for sale over a two-year period. E) is a way of placing issues in the primary market and increases transaction costs to the issuing firm.

30) The fee that mutual funds use to help pay for advertising and promotional literature is called a A) front-end load fee. B) back-end load fee. C) operating expense fee. D) 12b-1 fee. E) structured fee.

32) A program trade is A) a trade of 10,000 (or more) shares of a stock. B) a trade of many shares of one stock for one other stock. C) a trade of analytic programs between financial analysts. D) a coordinated purchase or sale of an entire portfolio of stocks. E) not feasible with current technology but is expected to be popular in the near future.

32) The APT differs from the CAPM because the APT A) places more emphasis on market risk. B) minimizes the importance of diversification. C) recognizes multiple unsystematic risk factors. D) recognizes multiple systematic risk factors.

33) An investor who wishes to form a portfolio that lies to the right of the optimal risky portfolio on the capital allocation line must A) lend some of her money at the risk-free rate. B) borrow some money at the risk-free rate. C) invest only in risky securities. D) borrow some money at the risk-free rate, invest in the optimal risky portfolio, and invest only in risky securities E) Such a portfolio cannot be formed.

34) In terms of the risk/return relationship in the APT, A) only factor risk commands a risk premium in market equilibrium. B) only systematic risk is related to expected returns. C) only nonsystematic risk is related to expected returns. D) only factor risk commands a risk premium in market equilibrium, and only systematic risk is related to expected returns. E) only factor risk commands a risk premium in market equilibrium, and only nonsystematic risk is related to expected returns.

35) Which of the following factors might affect stock returns? A) the business cycle B) interest rate fluctuations C) inflation rates D) All of the options.

37) An important difference between CAPM and APT is A) CAPM depends on risk-return dominance; APT depends on a no-arbitrage condition. B) CAPM assumes many small changes are required to bring the market back to equilibrium; APT assumes a few large changes are required to bring the market back to equilibrium. C) implications for prices derived from CAPM arguments are stronger than prices derived from APT arguments. D) Both CAPM depends on risk-return dominance; APT depends on a no-arbitrage condition and CAPM assumes many small changes are required to bring the market back to equilibrium; APT assumes a few large changes are required to bring the market back to equilibrium. E) All of the options are true.

38) Brokers' calls A) are funds used by individuals who wish to buy stocks on margin. B) are funds borrowed by the broker from the bank, with the agreement to repay the bank immediately if requested to do so. C) carry a rate that is usually about one percentage point lower than the rate on U.S. T-bills. D) are funds used by individuals who wish to buy stocks on margin and are funds borrowed by the broker from the bank, with the agreement to repay the bank immediately if requested to do so. E) are funds used by individuals who wish to buy stocks on margin and carry a rate that is usually about one percentage point lower than the rate on U.S. T-bills.

4) In a multifactor APT model, the coefficients on the macro factors are often called A) systematic risk. B) firm-specific risk. C) idiosyncratic risk. D) factor betas.

4) Which one of the following is not a money market instrument? A) Treasury bill B) Negotiable certificate of deposit C) Commercial paper D) Treasury bond E) Eurodollar account

4) _______ are financial assets. A) Bonds B) Machines C) Stocks D) Bonds and stocks E) Bonds, machines, and stocks

40) All of the following are considered new trading strategies, except A) high frequency trading. B) algorithmic trading. C) dark pools. D) short selling.

40) Which of the following securities is a money market instrument? A) Treasury note B) Treasury bond C) Municipal bond D) Commercial paper E) Mortgage security

41) The APT requires a benchmark portfolio A) that is equal to the true market portfolio. B) that contains all securities in proportion to their market values. C) that need not be well-diversified. D) that is well-diversified and lies on the SML. E) that is unobservable.

42) For a two-stock portfolio, what would be the preferred correlation coefficient between the two stocks? A) +1.00 B) +0.50 C) 0.00 D) −1.00 E) None of the options are correct.

44) Based on their relative degrees of risk tolerance, A) investors will hold varying amounts of the risky asset in their portfolios. B) all investors will have the same portfolio asset allocations. C) investors will hold varying amounts of the risk-free asset in their portfolios. D) investors will hold varying amounts of the risky asset and varying amounts of the risk-free asset in their portfolios.

45) Asset allocation may involve A) the decision as to the allocation between a risk-free asset and a risky asset. B) the decision as to the allocation among different risky assets. C) considerable security analysis. D) the decision as to the allocation between a risk-free asset and a risky asset and the decision as to the allocation among different risky assets. E) the decision as to the allocation between a risk-free asset and a risky asset and considerable security analysis.

45) Which of the following is true regarding private placements of primary security offerings? A) Extensive and costly registration statements are required by the SEC. B) For very large issues, they are better suited than public offerings. C) They trade in secondary markets. D) The shares are sold directly to a small group of institutional or wealthy investors. E) They have greater liquidity than public offerings.

46) The factor F in the APT model represents A) firm-specific risk. B) the sensitivity of the firm to that factor. C) a factor that affects all security returns. D) the deviation from its expected value of a factor that affects all security returns. E) a random amount of return attributable to firm events.

46) What is the expected return of a zero-beta security? A) The market rate of return B) Zero rate of return C) A negative rate of return D) The risk-free rate

47) Treasury bills are commonly viewed as risk-free assets because A) their short-term nature makes their values insensitive to interest rate fluctuations. B) the inflation uncertainty over their time to maturity is negligible. C) their term to maturity is identical to most investors' desired holding periods. D) their short-term nature makes their values insensitive to interest rate fluctuations, and the inflation uncertainty over their time to maturity is negligible. E) the inflation uncertainty over their time to maturity is negligible, and their term to maturity is identical to most investors' desired holding periods.

48) Investment bankers perform which of the following role(s)? A) Market new stock and bond issues for firms B) Provide advice to the firms as to market conditions, price, etc. C) Design securities with desirable properties D) All of the options E) None of the options

48) The expected return-beta relationship A) is the most familiar expression of the CAPM to practitioners. B) refers to the way in which the covariance between the returns on a stock and returns on the market measures the contribution of the stock to the variance of the market portfolio, which is beta. C) assumes that investors hold well-diversified portfolios. D) All of the options are true. E) None of the options are true.

48) The line representing all combinations of portfolio expected returns and standard deviations that can be constructed from two available assets is called the A) risk/reward tradeoff line. B) capital allocation line. C) efficient frontier. D) portfolio opportunity set. E) Security Market Line.

49) The security market line (SML) A) can be portrayed graphically as the expected return-beta relationship. B) can be portrayed graphically as the expected return-standard deviation of market-returns relationship. C) provides a benchmark for evaluation of investment performance. D) can be portrayed graphically as the expected return-beta relationship and provides a benchmark for evaluation of investment performance. E) can be portrayed graphically as the expected return-standard deviation of market-returns relationship and provides a benchmark for evaluation of investment performance.

5) In a multifactor APT model, the coefficients on the macro factors are often called A) systematic risk. B) firm-specific risk. C) idiosyncratic risk. D) factor loadings.

5) Investment bankers A) act as intermediaries between issuers of stocks and investors. B) act as advisors to companies in helping them analyze their financial needs and find buyers for newly-issued securities. C) accept deposits from savers and lend them out to companies. D) act as intermediaries between issuers of stocks and investors and act as advisors to companies in helping them analyze their financial needs and find buyers for newly-issued securities.

50) The single-index model A) greatly reduces the number of required calculations relative to those required by the Markowitz model. B) enhances the understanding of systematic versus nonsystematic risk. C) greatly increases the number of required calculations relative to those required by the Markowitz model. D) greatly reduces the number of required calculations relative to those required by the Markowitz model and enhances the understanding of systematic versus nonsystematic risk. E) enhances the understanding of systematic versus nonsystematic risk and greatly increases the number of required calculations relative to those required by the Markowitz model.

50) The spread between the LIBOR and the Treasury-bill rate is called the A) term spread. B) T-bill spread. C) LIBOR spread. D) TED spread.

50) With regard to a futures contract, the long position is held by A) the trader who bought the contract at the largest discount. B) the trader who has to travel the farthest distance to deliver the commodity. C) the trader who plans to hold the contract open for the lengthiest time period. D) the trader who commits to purchasing the commodity on the delivery date. E) the trader who commits to delivering the commodity on the delivery date.

51) Mortgage-backed securities were created when ________ began buying mortgage loans from originators and bundling them into large pools that could be traded like any other financial asset. A) GNMA B) FNMA C) FHLMC D) FNMA and FHLMC E) GNMA and FNMA

51) The security characteristic line (SCL) A) plots the excess return on a security as a function of the excess return on the market. B) allows one to estimate the beta of the security. C) allows one to estimate the alpha of the security. D) All of the options. E) None of the options are correct.

51) Which of the following is true about the security market line (SML) derived from the APT? A) The SML has a downward slope. B) The SML for the APT shows expected return in relation to portfolio standard deviation. C) The SML for the APT has an intercept equal to the expected return on the market portfolio. D) The benchmark portfolio for the SML may be any well-diversified portfolio. E) The SML is not relevant for the APT.

51) Which of the following measures of risk best highlights the potential loss from extreme negative returns? A) Standard deviation B) Variance C) Upper partial standard deviation D) Value at risk (VaR) E) None of the options are correct.

52) As the number of securities in a portfolio is increased, what happens to the average portfolio standard deviation? A) It increases at an increasing rate. B) It increases at a decreasing rate. C) It decreases at an increasing rate. D) It decreases at a decreasing rate. E) It first decreases, then starts to increase as more securities are added.

52) To build an indifference curve, we can first find the utility of a portfolio with 100% in the risk-free asset, then A) find the utility of a portfolio with 0% in the risk-free asset. B) change the expected return of the portfolio and equate the utility to the standard deviation. C) find another utility level with 0% risk. D) change the standard deviation of the portfolio and find the expected return the investor would require to maintain the same utility level. E) change the risk-free rate and find the utility level that results in the same standard deviation.

53) The risk premium on the market portfolio will be proportional to A) the average degree of risk aversion of the investor population. B) the risk of the market portfolio as measured by its variance. C) the risk of the market portfolio as measured by its beta. D) the average degree of risk aversion of the investor population and the risk of the market portfolio as measured by its variance. E) the average degree of risk aversion of the investor population and the risk of the market portfolio as measured by its beta.

54) The standard deviation of a two-asset portfolio is a linear function of the assets' weights when A) the assets have a correlation coefficient less than zero. B) the assets have a correlation coefficient equal to zero. C) the assets have a correlation coefficient greater than zero. D) the assets have a correlation coefficient equal to one. E) the assets have a correlation coefficient less than one.

54) ________ were designed to concentrate the credit risk of a bundle of loans on one class of investor, leaving the other investors in the pool relatively protected from that risk. A) Stocks B) Bonds C) Derivatives D) Collateralized debt obligations E) All of the options

55) The capital asset pricing model assumes A) all investors are price takers. B) all investors have the same holding period. C) investors pay taxes on capital gains. D) all investors are price takers and have the same holding period. E) all investors are price takers, have the same holding period, and pay taxes on capital gains.

56) In a factor model, the return on a stock in a particular period will be related to A) factor risk. B) nonfactor risk. C) standard deviation of returns. D) factor risk and nonfactor risk. E) None of the options are true.

57) The capital asset pricing model assumes A) all investors are rational. B) all investors have the same holding period. C) investors have heterogeneous expectations. D) all investors are rational and have the same holding period. E) all investors are rational, have the same holding period, and have heterogeneous expectations.

58) Which of the following factors did Chen, Roll, and Ross include in their multifactor model? A) Change in industrial waste B) Change in expected inflation C) Change in unanticipated inflation D) Change in expected inflation and unanticipated inflation E) All of the factors were included in their model.

59) Which of the following factors were used by Fama and French in their multifactor model? A) Return on the market index B) Excess return of small stocks over large stocks C) Excess return of high book-to-market stocks over low book-to-market stocks D) All of the factors were included in their model. E) None of the factors were included in their model.

6) The index model was first suggested by A) Graham. B) Markowitz. C) Miller. D) Sharpe.

63) Multifactor models seek to improve the performance of the single-index model by A) modeling the systematic component of firm returns in greater detail. B) incorporating firm-specific components into the pricing model. C) allowing for multiple economic factors to have differential effects. D) All of the options are correct. E) None of the options are correct.

69) Certificates of deposit are insured by the A) SPIC. B) CFTC. C) Lloyds of London. D) FDIC. E) All of the options are correct.

7) Elias is a risk-averse investor. David is a less risk-averse investor than Elias. Therefore, A) for the same risk, David requires a higher rate of return than Elias. B) for the same return, Elias tolerates higher risk than David. C) for the same risk, Elias requires a lower rate of return than David. D) for the same return, David tolerates higher risk than Elias. E) Cannot be determined.

7) The secondary market consists of A) transactions on the AMEX. B) transactions in the OTC market. C) transactions through the investment banker. D) transactions on the AMEX and in the OTC market. E) transactions on the AMEX, through the investment banker, and in the OTC market.

8) Most actively-managed mutual funds, when compared to a market index such as the Wilshire 5000, A) beat the market return in all years. B) beat the market return in most years. C) exceed the return on index funds. D) do not outperform the market.

8) When an investment advisor attempts to determine an investor's risk tolerance, which factor would they be least likely to assess? A) The investor's prior investing experience B) The investor's degree of financial security C) The investor's tendency to make risky or conservative choices D) The level of return the investor prefers E) The investor's feelings about loss

83) The best measure of a portfolio's risk adjusted performance is the _________. A) return B) standard deviation C) Jensen alpha D) Sharpe measure E) All of them

9) Which of the following determine(s) the level of real interest rates?I) The supply of savings by households and business firmsII) The demand for investment fundsIII) The government's net supply and/or demand for funds A) I only B) II only C) I and II only D) I, II, and III

9) You purchased JNJ stock at $130 per share. The stock is currently selling at $145. Your gains may be protected by placing a A) stop-buy order. B) limit-buy order. C) market order. D) limit-sell order. E) None of these options are correct.

1) Which of the following are not characteristics of money market instruments? A) Liquidity B) Marketability C) Long maturity D) Liquidity premium E) Long maturity and liquidity premium

10) According to the index model, covariances among security pairs are A) due to the influence of a single common factor represented by the market index return. B) extremely difficult to calculate. C) related to industry-specific events. D) usually positive. E) due to the influence of a single common factor represented by the market index return and usually positive.

13) The cost of buying and selling a stock consists of A) broker's commissions. B) dealer's bid-asked spread. C) a price concession an investor may be forced to make. D) broker's commissions and dealer's bid-asked spread. E) broker's commissions, dealer's bid-asked spread, and a price concession an investor may be forced to make.

13) Which statement is true regarding the capital market line (CML)?I) The CML is the line from the risk-free rate through the market portfolio.II) The CML is the best attainable capital allocation line.III) The CML is also called the security market line.IV) The CML always has a positive slope. A) I only B) II only C) III only D) IV only E) I, II, and IV

14) Which of the following statements about real estate investment trusts is true? A) REITs may be equity trusts or mortgage trusts. B) REITs are usually highly leveraged. C) REITs are similar to closed-end funds. D) REITs may be equity trusts or mortgage trusts and are usually highly leveraged. E) All of the options are true.

15) Rosenberg and Guy found that __________ helped to predict a firm's beta. A) the firm's financial characteristics B) the firm's industry group C) firm size D) the firm's financial characteristics and the firm's industry group E) All of the options are correct.

17) In the event of the firm's bankruptcy, A) the most shareholders can lose is their original investment in the firm's stock. B) common shareholders are the first in line to receive their claims on the firm's assets. C) bondholders have claim to what is left from the liquidation of the firm's assets after paying the shareholders. D) the claims of preferred shareholders are honored before those of the common shareholders. E) the most shareholders can lose is their original investment in the firm's stock and the claims of preferred shareholders are honored before those of the common shareholders.

19) Money market securities A) are short term. B) are highly marketable. C) are generally very low risk. D) are highly marketable and are generally very low risk. E) All of the options.

19) Which of the following is true of the Dow Jones Industrial Average? A) It is a value-weighted average of 30 large industrial stocks. B) It is a price-weighted average of 30 large industrial stocks. C) The divisor must be adjusted for stock splits. D) It is a value-weighted average of 30 large industrial stocks, and the divisor must be adjusted for stock splits. E) It is a price-weighted average of 30 large industrial stocks, and the divisor must be adjusted for stock splits.

2) A purchase of a new issue of stock takes place A) in the secondary market. B) in the primary market. C) usually with the assistance of an investment banker. D) in the secondary and primary markets. E) in the primary market and usually with the assistance of an investment banker.

2) The money market is a subsector of the A) commodity market. B) capital market. C) derivatives market. D) equity market. E) None of the options are correct.

2) _______ are real assets. A) Land B) Machines C) Stocks and bonds D) Knowledge E) Land, machines, and knowledge

20) If the nominal return is constant, the after-tax real rate of return A) declines as the inflation rate increases. B) increases as the inflation rate increases. C) declines as the inflation rate declines. D) increases as the inflation rate decreases. E) declines as the inflation rate increases and increases as the inflation rate decreases.

20) Management fees and other expenses of mutual funds may include A) only front-end loads. B) onlyback-end loads. C) only 12b-1 charges. D) only front-end and back-end loads. E) front-end loads, back-end loads, and 12b-1 charges.

20) Which of the following statement(s) is(are) true regarding the selection of a portfolio from those that lie on the capital allocation line?I) Less risk-averse investors will invest more in the risk-free security and less in the optimal risky portfolio than more risk-averse investors.II) More risk-averse investors will invest less in the optimal risky portfolio and more in the risk-free security than less risk-averse investors.III) Investors choose the portfolio that maximizes their expected utility. A) I only B) II only C) III only D) I and III E) II and III

21) The utility score an investor assigns to a particular portfolio, other things equal, A) will decrease as the rate of return increases. B) will decrease as the standard deviation decreases. C) will decrease as the variance decreases. D) will increase as the variance increases. E) will increase as the rate of return increases.

22) Specialists on stock exchanges perform which of the following functions? A) Act as dealers in their own accounts B) Analyze the securities in which they specialize C) Provide liquidity to the market D) Act as dealers in their own accounts and analyze the securities in which they specialize E) Act as dealers in their own accounts and provide liquidity to the market

25) Which of the following orders instructs the broker to buy at the current market price? A) Limit order B) Discretionary order C) Limit-loss order D) Stop-buy order E) Market order

28) Commingled funds are A) amounts invested in equity and fixed-income mutual funds. B) funds that may be purchased at intervals of 3, 6, or 12 months at the discretion of management. C) amounts invested in domestic and global equities. D) closed-end funds that may be repurchased only once every two years at the discretion of mutual fund management. E) partnerships of investors that pool their funds, which are then managed for a fee.

3) In a multifactor APT model, the coefficients on the macro factors are often called A) systematic risk. B) factor sensitivities. C) idiosyncratic risk. D) factor betas. E) factor sensitivities and factor betas.

3) Treasury Inflation-Protected Securities (TIPS) A) pay a fixed interest rate for life. B) pay a variable interest rate that is indexed to inflation but maintain a constant principal. C) provide a variable stream of income in real (inflation-adjusted) dollars. D) have their principal adjusted in proportion to the Consumer Price Index. E) provide a constant stream of income in real (inflation-adjusted) dollars and have their principal adjusted in proportion to the Consumer Price Index.

3) Which of the following functions do investment companies perform for their investors? A) Record keeping and administration B) Diversification and divisibility C) Professional management D) Lower transaction costs E) All of the options.

30) The Sarbanes-Oxley Act A) requires corporations to have more independent directors. B) requires the firm's CFO to personally vouch for the firm's accounting statements. C) prohibits auditing firms from providing other services to clients. D) requires corporations to have more independent directors and requires the firm's CFO to personally vouch for the firm's accounting statements. E) All of the above.

35) _______ are examples of financial intermediaries. A) Commercial banks B) Insurance companies C) Investment companies D) Credit unions E) All of the options

38) A statistic that measures how the returns of two risky assets move together is: A) variance. B) standard deviation. C) covariance. D) correlation. E) covariance and correlation.

4) Which of the following statements regarding the specialist are true? A) Specialists maintain a book listing outstanding, unexecuted limit orders. B) Specialists earn income from commissions and spreads in stock prices. C) Specialists stand ready to trade at quoted bid and ask prices. D) Specialists cannot trade in their own accounts. E) Specialists maintain a book listing outstanding, unexecuted limit orders, earn income from commissions and spreads in stock prices, and stand ready to trade at quoted bid and ask prices.

49) Security returns A) are based on both macro events and firm-specific events. B) are based on firm-specific events only. C) are usually positively correlated with each other. D) are based on firm-specific events only and are usually positively correlated with each other. E) are based on both macro events and firm-specific events and are usually positively correlated with each other.

5) _________ financial asset(s). A) Buildings are B) Land is a C) Derivatives are D) U.S. agency bonds are E) Derivatives and U.S. agency bonds are

50) Differences between hedge funds and mutual funds are that A) hedge funds are only subject to minimal SEC regulation. B) hedge funds are typically open only to wealthy or institutional investors. C) hedge fund managers can pursue strategies not available to mutual funds, such as short selling, heavy use of derivatives, and leverage. D) hedge funds are commonly structured as private partnerships. E) All of the options.

52) Which of the following is false about the security market line (SML) derived from the APT? A) The SML has an upward slope. B) The SML for the APT shows expected return in relation to factor intensity. C) The SML for the APT has an intercept that does not equal the expected return on the market portfolio. D) The benchmark portfolio for the SML may be any well-diversified portfolio. E) The SML has a downward slope, shows expected return in relation to portfolio standard deviation, and has an intercept equal to the expected return on the market portfolio.

53) If arbitrage opportunities are to be ruled out, each well-diversified portfolio's expected excess return must be A) inversely proportional to the risk-free rate. B) inversely proportional to its standard deviation. C) proportional to its weight in the market portfolio. D) proportional to its standard deviation. E) proportional to its beta coefficient.

53) The capital market line I) is a special case of the capital allocation line. II) represents the opportunity set of a passive investment strategy. III) has the one-month T-Bill rate as its intercept. IV) uses a broad index of common stocks as its risky portfolio. A) I, III, and IV B) II, III, and IV C) III and IV D) I, II, and III E) I, II, III, and IV

55) A two-asset portfolio with a standard deviation of zero can be formed when A) the assets have a correlation coefficient less than zero. B) the assets have a correlation coefficient equal to zero. C) the assets have a correlation coefficient greater than zero. D) the assets have a correlation coefficient equal to one. E) the assets have a correlation coefficient equal to negative one.

56) One "cost" of the single-index model is that it A) is virtually impossible to apply. B) prohibits specialization of efforts within the security analysis industry. C) requires forecasts of the money supply. D) is legally prohibited by the SEC. E) allows for only two kinds of risk—macro risk and micro risk.

56) The capital asset pricing model assumes A) all investors are price takers. B) all investors have the same holding period. C) investors have homogeneous expectations. D) all investors are price takers and have the same holding period. E) all investors are price takers, have the same holding period, and have homogeneous expectations.

57) With regard to a futures contract, the short position is held by A) the trader who bought the contract at the largest discount. B) the trader who has to travel the farthest distance to deliver the commodity. C) the trader who plans to hold the contract open for the lengthiest time period. D) the trader who commits to purchasing the commodity on the delivery date. E) the trader who commits to delivering the commodity on the delivery date.

58) The idea that there is a limit to the reduction of portfolio risk due to diversification is A) contradicted by both the CAPM and the single-index model. B) contradicted by the CAPM. C) contradicted by the single-index model. D) supported in theory, but not supported empirically. E) supported both in theory and by empirical evidence.

63) The CAPM applies to A) portfolios of securities only. B) individual securities only. C) efficient portfolios of securities only. D) efficient portfolios and efficient individual securities only. E) all portfolios and individual securities.

68) The largest component of the money market is/are A) repurchase agreements. B) money market mutual funds. C) T-bills. D) Eurodollars. E) savings deposits.

7) The smallest component of the money market is A) repurchase agreements. B) small-denomination time deposits. C) savings deposits. D) money market mutual funds. E) commercial paper.

75) Unsecured bonds are called A) junk bonds. B) debentures. C) indentures. D) subordinated debentures. E) either debentures or subordinated debentures.

86) What interest rate have US regulators proposed be the new short term benchmark rate? A) SONIA B) LIBOR C) Tokyo Interbank rate D) Euribor E) US Treasury Repo

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