Investments Final Review

Consider a bond with a par value of 1,000 paying a coupon rate of 7% per year semiannually when the market interest rate is only 3% per half year. The bond has 4 years until maturity. What is the bond's price today?

A. $1,000.00 B. $969.43 C. $1,031.15 D. $965.63 E. $1,035.10 <-------- Response Feedback: See Chapter 10 PPT Slide 10-14 ~ 10-21 (Excel examples, the related in-class discussion, and Aplia assignment questions)

Ace Ventura, Inc. has expected earnings of $5 per share for next year. The firm's ROE is 15% and its earnings retention ratio is 40%. If the firm's market capitalization rate (required rate of return) is 10% (constant growth stock), what is the present value of its growth opportunities? (You may want to keep your calculations, since there is another related question.)

A. $100 B. $75 C. $50 D. $12.5 E. $25 <----- Response Feedback: See Chapter 13 PPT Slide 13-16 & 13-17 ~ 13-18 Example (and the related in-class discussion)

Ace Ventura, Inc. has expected earnings of $5 per share for next year. The firm's ROE is 15% and its earnings retention ratio is 40%. If the firm's market capitalization rate (required rate of return) is 10% (constant growth stock), what should its stock price (intrinsic value) be? (You may want to keep your calculations, since there is another related question.)

A. $100 B. $75 <------- C. $50 D. $25 E. $12.5 Response Feedback: See Chapter 13 PPT Slide 13-16 & 13-17 ~ 13-18 Example (and the related in-class discussion)

If a stock call option has the following information: S=$120 (stock current price), X=$110 (call option exercise price), c=$12.50 (call option premium). This call option's Time Value = ___________.

A. $12.50 B. $10.00 C. $0 D. None of the answer selections E. 2.50 <------- Response Feedback: Chapter 16 PowerPoint Slide 16-2 Example

Dée Trader opens a brokerage account, and purchases 390 shares of Internet Dreams at $56 per share. She borrows $4,050 from her broker to help pay for the purchase. The interest rate on the loan is 5%. What is the margin in Dée's account when she first purchases the stock?

A. $15,480 B. $21,840 C. $11,510 D. $3,970 E. $17,790 <------ Response Feedback: =(56*390)-4050=17790; See Chapter 3 PowerPoint Slide 3-25 ~ 3-31 and the embedded Excel Examples on Slide 3-28 as well as Chapter 3 Homework Assignment (HW#2 Part 2 Question 2: Problem 3-15)

You sell short 300 shares of Microsoft which are currently selling at $30 per share. You post the 50% margin required on the short sale. Your broker requires a 30% maintenance margin. Assume you earn no interest on the funds and ignore any dividends. If you earn no interest on the funds in your margin account, what is the (lowest) stock price of Microsoft that will trigger a margin call? (Ignore any dividends)

A. $31.69 B. $34.62 <------ C. $37.81 D. $33.10 E. $36.22 Response Feedback: =(9000+4500+300*0)/(300*(1+30%))=34.62; See Chapter 3 PowerPoint Slide 3-36 ~ 3-40 and the embedded Excel Examples on Slide 3-37 as well as Chapter 3 Homework Assignment (HW#2 Part 2 Question 3: Problem 3-16)

Dée Trader opens a brokerage account, and purchases 390 shares of Internet Dreams at $56 per share. She borrows $4,050 from her broker to help pay for the purchase. The interest rate on the loan is 5%. What is the (highest) stock price that will trigger a margin call?

A. $32.79 B. $16.52 <------ C. $6.81 D. $21.84 E. $26.32 Response Feedback: =(4050*(1+5%))/(390*(1-34%))=16.52; See Chapter 3 PowerPoint Slide 3-25 ~ 3-31 and the embedded Excel Examples on Slide 3-28 as well as Chapter 3 Homework Assignment (HW#2 Part 2 Question 2: Problem 3-15)

June call and put options on King Books Inc. are available with exercise prices of $40, $45, and $50. Among the different exercise prices, the call option with the _____ exercise price and the put option with the _____ exercise price will have the greatest value.

A. $40; $50 <----- B. $50; $50 C. $50; $45 D. $45; $45 E. $50; $40 Response Feedback: See PowerPoint slide 2-44 (and related in-class discussion)

You write (sell) one IBM July $125 strike call contract for a premium of $2. Suppose on the expiration date IBM stock sells for $123 per share. You will have a ______ on the option.

A. $500 loss B. $200 loss C. $200 profit <------ D. $700 profit E. $500 profit Response Feedback: =(-MAX(0,123-125)+2.00)*100 (See the Excel Worksheet Example embedded on Chapter 15 PowerPoint Slide 15-10 as well as Slide 15-11 ~ 15-15 (and the related in class discussion))

The Closed Fund is a closed-end investment company with a portfolio currently worth $275 million. It has liabilities of $4.2 million and 6 million shares outstanding. What is the NAV of the fund?

A. $51.85 B. $50.61 C. $45.13 <------ D. $53.09 E. $40.99 Response Feedback: =(275-4.2)/6=45.13; See Chapter 4 PowerPoint Slide 4-4 and the embedded Excel Example

A gold futures contract with current price $650 has a maturity of two years. If the T-bill rate is 4%, what should the futures price be?

A. $663.00 B. $703.58 C. $676.00 D. $703.04 <------- E. $650.00 Response Feedback: =650*(1.04^2) (See Chapter 17 PowerPoint Slide 17-19 and the embedded Excel Worksheet Example)

You have a 25-year maturity, 10% coupon, 10% yield bond with a duration of 10 years and a convexity of 135.5. If the interest rate were to increase 125 basis points, what is your predicted new price for the bond (including convexity)?

A. $797.63 B. $1,072.78 C. $896.95 <------- D. $1,124.22 E. $960.68 Response Feedback: See Chapter 11 PPT Slide 11-26 (Excel) Example

The offering price of an open-end fund is $9.8 per share and the fund is sold with a front-end load of 5%. What is its net asset value?

A. $9.31 <------ B. $10.29 C. $10.00 D. $11.13 E. $9.67 Response Feedback: NAV = offering price × (1 - load) = $9.8 × 0.95 = $9.31; See Chapter 4 PowerPoint Slide 4-4 and the embedded Excel Examples

Refer to Figure 2.4 (click the link to open) and look at the first Treasury bond maturing in February 2013 (not the one highlighted). How much would you have to pay to purchase one of these bonds? (Note: The bond face value here is $1,000,000 and colons in bid-and-asked quotes represent 32 nd.)

A. $964,687.50 B. $960,000.00 C. $963,125.00 D. $962,187.50 <----- E. $959,687.50 Response Feedback: 962187.5=(96+7/32)%*1000000; See Chapter 2 PowerPoint Slide 2-22 and the embedded Excel Example

Refer to Figure 2.4 (click the link to open) and look at the first Treasury bond maturing in February 2013 (not the one highlighted). What was these bonds' closing price yesterday? (Note: The bond face value here is $ 1 , 0 0 0 , 0 0 0 and colons in bid-and-asked quotes represent 32 nd . )

A. $964,687.50 B. $963,125.00 C. $960,000.00 D. $959,687.50 <------ E. $962,187.50 Response Feedback: =(96+7/32-8/32)%*1000000=959687.5; See Chapter 2 PowerPoint Slide 2-22 and the embedded Excel Example

Consider a bond with a par value of 1,000 paying a coupon rate of 7% per year semiannually when the market interest rate is only 3% per half year. The bond has 4 years until maturity. What is the bond's price six months from now after the next coupon is paid?

A. $965.63 B. $1,000.00 C. $969.43 D. $1,031.15 <------- E. $1,035.10 Response Feedback: See Chapter 10 PPT Slide 10-14 ~ 10-21 (Excel examples, the related in-class discussion, and Aplia assignment questions)

A $500,000 stock portfolio has an annual expected return of 12% and a standard deviation of 35%. What is the portfolio Value at Risk (VaR) at a 5% probability level? (Note: From Excel: =Norminv (0.05,0,1) = -1.64485 standard deviations)

A. -$272,150 B. -$212,250 C. -$287,750 D. -$227,850 <----- E. -$250,000 Response Feedback: See Chapter 5 PowerPoint Slide 5-20 & 5-21 and the exact same example

Which of the following correlation coefficients will produce the most diversification benefits?

A. -0.6 B. -0.9 <----- C. 0.4 D. 0 Response Feedback: See Chapter 6 PowerPoint Slide 6-13 (as well as related in-class discussion; also a homework question)

You own a fixed-income asset with a duration of six years. If the level of interest rates, which is currently 9%, goes up by 20 basis points, how much do you expect the price of the asset to go up or down (in percentage terms)?

A. -1.35% B. -0.68% C. -1.10% <----- D. +0.46% E. +1.26% Response Feedback: See Chapter 11 Aplia Assignment Question 6: Homework Assignment #6 (Chapter 10 & 11): Part 2 of 2 - Calculation (120%)

Dée Trader opens a brokerage account, and purchases 390 shares of Internet Dreams at $56 per share. She borrows $4,050 from her broker to help pay for the purchase. The interest rate on the loan is 5%. If the share price falls to $46 per share by the end of the year, what is the rate of return on her investment?

A. -10.33% B. 24.78% C. -42.88% D. -23.06% <------ E. 24.69% Response Feedback: =((390*46-4050*(1+5%))-17790)/17790=-0.230607082630691=-23.06%; See Chapter 3 PowerPoint Slide 3-25 ~ 3-31 and the embedded Excel Examples on Slide 3-28 as well as Chapter 3 Homework Assignment (HW#2 Part 2 Question 2: Problem 3-15)

The Closed Fund is a closed-end investment company with a portfolio currently worth $275 million. It has liabilities of $4.2 million and 6 million shares outstanding. If the fund sells for $38 per share, what is its premium or discount as a percent of NAV?

A. -12.29% B. -15.81% <----- C. +19.62% D. -16.21% E. +18.76% Response Feedback: =(38-45.1333)/45.1333=-15.81%; See Chapter 4 PowerPoint Slide 4-4 and the embedded Excel Examples

A portfolio with a 25% standard deviation generated a return of 15% last year when T-bills were paying 4.5%. This portfolio had a Sharpe ratio of ___________.

A. 0.54 B. 0.22 C. 0.25 D. 0.60 E. 0.42 <------ Response Feedback: (15-4.5)/25=0.42; See Chapter 5 PowerPoint Slide 5-27 and Slide 5-35 Example

(The current stock price of Oracle is $34 and the stock does not pay dividends. The instantaneous riskfree rate of return is 5%. The instantaneous standard deviation of Oracle's stock is 30%. You wish to purchase a call option on this stock with an exercise price of $25 and an expiration date 73 days from now.) Using the Black-Scholes Option Pricing Model to price the call option, d1 is __________. (Note: You may want to save your calculation for another similar question.)

A. 0.99 B. 2.30 C. 1.66 CorrectD. 2.43 <------- E. 0.63 Response Feedback: See Chapter 16 Excel Worksheet Example embedded in PowerPoint Slide 16-17 as well as Slide 16-13 ~ 16-20 (and the related in-class discussion)

Real assets represent about ____ of total assets for commercial banks.

A. 1% <------ B. 40% C. 15% D. 53% E. 25% Response Feedback: See Chapter 1 PowerPoint Slide 1-25 (as well as the related in-class discussion)

On a particular day, there were 920 stocks which advanced on the NYSE and 723 which declined. The volume in advancing issues was 80,846,000 and the volume in declining issues was 70,397,000. The trin ratio is __________ and technical analysts are likely to be __________.

A. 1.05, bearish B. 0.90, bearish C. 0.90, bullish D. 1.11, bearish <----- E. 1.11, bullish Response Feedback: See Chapter 9 PPT Slide 9-26 (Excel, the related in-class discussion, and Aplia assignment question)

Consider the CAPM. The risk-free rate is 5% and the expected return on the market is 15%. What is the beta on a stock with an expected return of 12%? (Hint; Use CAPM to solve for beta.)

A. 1.2 B. 0.7 <------ C. 0.5 D. 1.4 E. 1.6 Response Feedback: See Chapter 7 PPT Slide 7-9 & 7-10 (and the related in-class discussion & Aplia Assignment Questions)

An investor invests 70% of her wealth in a risky asset with an expected rate of return of 15% and a standard deviation of 22.36%, and she puts 30% in a Treasury bill that pays 5%. Her portfolio's expected rate of return and standard deviation are __________ and __________ respectively.

A. 12%; 10.5% B. 10%; 6.7% C. 12%; 15.7% <----- D. 12%; 22.4% E. 10%; 35% Response Feedback: Expected Return = 0.70*(15%)+0.30*(5%)=12%; Standard Deviation = 0.70*(0.05)^0.5=15.7%; See Chapter 5 PowerPoint Slide 5-34 ~ 5-39 (as well as the Example and the embedded Excel Worksheet)

A 36-year maturity bond with par value $1,000 makes semiannual coupon payments at a coupon rate of 14%. What is the equivalent annual yield to maturity of the bond if the bond sells for $1,130?

A. 12.37% <---- B. 12.20% C. 6.10% D. 12.75% E. 6.19% Response Feedback: See Chapter 10 PPT Slide 10-22 ~ 10-24 (Excel examples, the related in-class discussion, and Aplia assignment questions)

A 36-year maturity bond with par value $1,000 makes semiannual coupon payments at a coupon rate of 14%. What is the effective annual yield to maturity of the bond if the bond sells for $1,080?

A. 12.95% B. 5.64% C. 11.27% D. 6.48% E. 13.37% <------ Response Feedback: See Chapter 10 PPT Slide 10-22 ~ 10-24 (Excel examples, the related in-class discussion, and Aplia assignment questions)

Consider the CAPM. The risk-free rate is 6% and the expected return on the market is 18%. What is the expected return on a stock with a beta of 1.3?

A. 15.6% B. 21.6% <----- C. 23.4% D. 18% E. 6% Response Feedback: See Chapter 7 PPT Slide 7-9 & 7-10 (and the related in-class discussion & Aplia Assignment Questions)

The price of a stock is $38 at the beginning of the year and $41 at the end of the year. If the stock paid a $2.50 dividend what is the holding period return for the year?

A. 16.35% B. 6.58% C. 18.66% D. 14.47% <----- E. 8.86% Response Feedback: HPR = (41 - 38 + 2.50)/38 = 0.1447; See Chapter 5 PowerPoint Slide 5-3 and the example

A mutual fund has total assets outstanding of $69 million. During the year the fund bought assets equal to $20.7 million and sold assets equal to $17.25 million. This fund's turnover rate was ______

A. 18.63% B. 33.40% C. 25.00% <----- D. 28.50% E. 30.00% Response Feedback: $17.25/$69 = 25.00%; See Chapter 4 PowerPoint Slide 4-16 and the embedded Excel Example

The market capitalization rate (required rate of return) on the stock of Aberdeen Wholesale Company is 10% (constant growth stock). Its expected ROE is 12% and its expected EPS is $5.00. If the firm's plow-back ratio is 40%, its P/E ratio will be __________. (You may want to keep your calculations, since there is another related question.)

A. 19.23 B. 11.54 <------- C. 12.37 D. 8.33 E. 50.00 Response Feedback: See Chapter 13 PPT Slide 13-27 & 13-29 Example (and the related in-class discussion)

What is the duration of a 14% coupon bond making annual coupon payments if it has three years until maturity and a yield to maturity of 9%?

A. 2.4471 B. 2.2978 C. 2.6674 <------ D. 2.6425 E. 2.5283 Response Feedback: See Chapter 11 PPT Slide 11-6 ~ 11-8 (Excel Example and the related in-class discussion)

Approximately how many securities does it take to diversify almost all of the unique risk from a portfolio?

A. 20 <---- B. 8 C. 2 D. 6 Response Feedback: See Chapter 6 PowerPoint Slide 6-4 (as well as related in-class discussion; also a homework question)

You sell short 300 shares of Microsoft which are currently selling at $30 per share. You post the 50% margin required on the short sale. Your broker requires a 30% maintenance margin. Assume you earn no interest on the funds and ignore any dividends. If you earn no interest on the funds in your margin account what will be your rate of return after one year if Microsoft is selling at $27? (Ignore any dividends)

A. 20.00% <------ B. 5.00% C. 10.00% D. 6.67% E. 15.00% Response Feedback: =(30-27)/(0.5*30)=20%; See Chapter 3 PowerPoint Slide 3-36 ~ 3-40 and the embedded Excel Examples on Slide 3-37 as well as Chapter 3 Homework Assignment (HW#2 Part 2 Question 3: Problem 3-16)

Refer to Figure 2.4 (click the link to open) and look at the first Treasury bond maturing in February 2013 (not the one highlighted). What is its coupon rate?

A. 4.027% B. 4.150% C. 3.750% D. 4.590% E. 3.875% <----- Response Feedback: Coupon rate is given in the quotation; See Chapter 2 PowerPoint Slide 2-22 and the embedded Excel Example

Refer to Figure 2.4 (click the link to open) and look at the first Treasury bond maturing in February 2 0 1 3 (not the one highlighted) . What is the current yield of the bond? (Note: The bond face value here is $ 1 , 0 0 0 , 0 0 0 and colons in bid-and-asked quotes represent 32 nd . )

A. 4.590% B. 4.027% <------- C. 3.750% D. 4.150% E. 3.875% Response Feedback: =38750/962187.5=0.0402728158493017=4.027%; See Chapter 2 PowerPoint Slide 2-22 and the embedded Excel Example

A 31-year maturity, 9% coupon bond paying coupons semiannually is callable in 7 years at a call price of $1,115. The bond currently sells at a yield to maturity of 8% (4% per half year). What is the bond equivalent (annual) yield to call??

A. 5.87% B. 8.09% <------- C. 6.45% D. 9.38% E. 7.22% Response Feedback: See Chapter 10 PPT Slide 10-27 (Excel examples, the related in-class discussion, and Aplia assignment questions)

You sell short 300 shares of Microsoft which are currently selling at $30 per share. You post the 50% margin required on the short sale. Your broker requires a 30% maintenance margin. Assume you earn no interest on the funds and ignore any dividends. If you earn no interest on the funds in your margin account what will be the margin percentage (Margin%) in your margin account after one year if Microsoft is selling at $27? (Ignore any dividends)

A. 50.00% B. 83.33% C. 66.67% <------ D. 45.00% E. 33.33% Response Feedback: =((9000+4500)-300*27-300*0)/(300*27)=0.666666666666667=66.67%; See Chapter 3 PowerPoint Slide 3-36 ~ 3-40 and the embedded Excel Examples on Slide 3-37 as well as Chapter 3 Homework Assignment (HW#2 Part 2 Question 3: Problem 3-16)

The market capitalization rate (required rate of return) on the stock of Aberdeen Wholesale Company is 10% (constant growth stock). Its expected ROE is 12% and its expected EPS is $5.00. If the firm's plow-back ratio is 40%, its dividend growth rate (g) will be __________. (You may want to keep your calculations, since there is another related question.)

A. 6.0% B. 4.0% C. 7.2% D. 2.4% E. 4.8% <------- Response Feedback: See Chapter 13 PPT Slide 13-27 & 13-29 Example (and the related in-class discussion)

Dée Trader opens a brokerage account, and purchases 390 shares of Internet Dreams at $56 per share. She borrows $4,050 from her broker to help pay for the purchase. The interest rate on the loan is 5%. If the share price falls to $46 per share by the end of the year, what is the margin% in her account at that time? If the maintenance margin requirement is 34%, will she receive a margin call?

A. 81.46%; Yes B. 81.46%; No C. 76.30%; Yes D. 76.30%; No <------- E. 58.81%; No Response Feedback: =(390*46-4050*(1+5%))/(390*46)=0.762959866220736=76.30%; NO, since it is higher than the maintenance margin 34%; See Chapter 3 PowerPoint Slide 3-25 ~ 3-31 and the embedded Excel Examples on Slide 3-28 as well as Chapter 3 Homework Assignment (HW#2 Part 2 Question 2: Problem 3-15)

Proponents of the EMH (Efficient Market Hypothesis) typically advocate __________.

A. A passive investment strategy <----- B. A liberal investment strategy C. A risk-taking investment strategy D. An aggressive investment strategy E. A conservative investment strategy Response Feedback: See Chapter 8 PPT Slide 8-9 (and the related in-class discussion)

According to the study on the Stock Price Reaction to CNBC Reports, most of the stock price response to the news occurs within ________________.

A. About 12 minutes <------ B. 2 years C. 1 day D. About 30 seconds E. 6 months Response Feedback: See Chapter 8 PPT Slide 8-4 (and the related in-class discussion)

The semi-strong form of the EMH (Efficient Market Hypothesis) states that ________ must be reflected in the current stock price.

A. All costless information B. All Past information C. All security price and volume data D. All information including inside information E. All publicly available information <------ Response Feedback: See Chapter 8 PPT Slide 8-6 (and the related in-class discussion)

Which of the following is NOT a money market security?

A. All of the other answer selections are not money market securities. B. Bankers acceptance C. Six month maturity certificate of deposit D. Common stock <----- E. U.S. Treasury bill Response Feedback: See Chapter 2 PowerPoint Slide 2-3 (as well as the related in-class discussion)

_____ is an example of an exchange-traded fund.

A. An open-end fund B. A samurai C. A Diamond or DIA <----- D. A Vanguard E. An ADR Response Feedback: See PowerPoint Slide 4-18 (as well as the related in-class discussion)

A call option on Brocklehurst Corp. has an exercise price of $30. The current stock price of Brocklehurst Corp. is $32. The call option is __________.

A. At the money B. In the money <------ C. Out of the money D. Knocked in Response Feedback: See PowerPoint Slide 15-3 (and the related in-class discussion)

A dollar denominated deposit at a London bank is called ______.

A. Banker's acceptance B. Eurodollars <------ C. LIBOR D. Fed funds E. Commercial paper Response Feedback: See Chapter 2 PowerPoint Slide 2-8

On a standard expected return vs standard deviation graph investors will prefer portfolios that lie to the

A. Center B. Southwest C. Northwest <------ D. Southeast E. Northeast Response Feedback: See Chapter 6 PowerPoint Slide 6-12, 6-13, 6-16, and 6-17 (as well as related in-class discussion)

Pharmaceuticals, food, and other necessities would be good performers during the ___ stage of the business cycle.

A. Contraction <------- B. Expansion C. Trough D. None of the answer selections here in this question E. Peak Response Feedback: See Chapter 12 PPT Slide 12-30 & 12-31 (and the related in-class discussion)

An investment strategy which entails shifting the portfolio into industry sectors that are forecast to outperform others based on macroeconomic forecasts is termed _______________.

A. Contraction/expansion analysis B. Life cycle analysis C. None of the answer selections here in this question D. Business cycle shifting E. Sector rotation <------ Response Feedback: See Chapter 12 PPT Slide 12-30 (and the related in-class discussion)

Which of the following statements regarding futures contracts is NOT correct?

A. Contracts sold on exchanges B. Purchaser (long) buys specified quantity at contract expiration for set price. C. Holder has only the future right to buy/sell the underlying asset. <------ D. Future commitment to buy/sell at preset price E. Contract seller (short) delivers underlying commodity at contract expiration for agreed-upon price. Response Feedback: See Chapter 2 PowerPoint Slide 2-48 (as well as the related in-class discussion)

Bonds with coupon rates that fall when the general level of interest rates rise are called ______________.

A. Convertible bonds B. Pay in kind bonds C. Index bonds D. Inverse floaters <------ E. Invertible bonds Response Feedback: See Chapter 10 PPT Slide 10-11 (and the related in-class discussion)

Security selection refers to __________.

A. Deciding how much to invest in each asset-class B. Deciding how much to invest in the market portfolio versus the riskless asset C. Analyzing securities D. Deciding how much to hedge E. Choosing specific securities within each asset-class <----- Response Feedback: See Chapter 1 PowerPoint Slide 1-16

According to the CAPM, the risk premium an investor expects to receive on any stock or portfolio is ________________.

A. Directly related to the risk aversion of the particular investor B. Directly related to the beta of the stock or portfolio <----- C. Inversely related to the risk aversion of the particular investor D. None of the answer selections E. Inversely related to the alpha of the stock or portfolio Response Feedback: See Chapter 7 PPT Slide 7-8 ~ 7-9 (and the related in-class discussion)

According to capital asset pricing theory, the key determinant of portfolio returns is __________.

A. Economic factors B. The firm specific risk of the portfolio C. The degree of diversification D. The systematic risk of the portfolio <----- E. The interest rate risk Response Feedback: See Chapter 7 PPT Slide 7-9 (and the related in-class discussion)

Technical analysis focuses on _____________________.

A. Finding opportunities for risk-free investing B. Forecasting technical regulatory changes C. Finding repeating trends and patterns in prices <------ D. Changing prospects for earnings growth of particular firms or industries Response Feedback: See Chapter 9 PPT Slide 9-15 & beyond (and the related in-class discussion)

Which of the following is NOT a behavioral bias indicated in the behavioral finance arguments?

A. Framing B. Short Interest <----- C. Prospect Theory D. Mental Accounting E. Regret Avoidance Response Feedback: See Chapter 9 PPT Slide 9-5, 9-6 and 9-27 (and the related in-class discussion)

You are considering investing in one of several mutual funds. All the funds under consideration have various combinations of front-end loads and/or 12b-1 fees. The longer you plan on remaining in the fund you choose, the more likely you will prefer a fund with a __________ rather than a __________, everything else equal.

A. Front-end load; 12b-1 fee <------ B. 12b-1 fee; front-end load Response Feedback: See Chapter 4 PowerPoint Slide 4-9 ~ 4-14 (as well as the related in-class discussion)

Futures contracts have many advantages over forward contracts except that

A. Futures positions are easier to trade B. Futures contracts are tailored to the specific needs of the investor <------ C. None of the answer selections D. Counterparty credit risk is not a concern on futures E. Futures trading preserves the anonymity of the participants

Initial public offerings tend to exhibit __________ performance initially, and __________ performance over the long term.

A. Good; bad <------ B. Bad; good C. Bad; bad D. Good; good Response Feedback: See Chapter 3 PowerPoint Slide 3-5 & 3-7 ~ 3-8 (as well as the related in-class discussion)

You would expect the beta of cyclical industries to be ______ and the beta of defensive industries to be _______.

A. Greater than 1; less than 1 <------- B. 1; 0 C. Less than 1; greater than 1 D. Greater than 1; greater than 1 E. Less than 1; less than 1 Response Feedback: See Chapter 12 PPT Slide 12-29 (and the related in-class discussion)

The bonds of Elbow Grease Dishwashing Company have received a rating of "C" by Moody's. The "C" rating indicates the bonds are __________.

A. High grade B. Junk bonds <------ C. Intermediate grade D. Safe bonds E. Investment grade Response Feedback: See Chapter 10 PPT Slide 10-37 (and the related in-class discussion

According to the technical analysis discussed in class, which of the following is NOT a bullish sentiment?

A. High value of Confidence Index B. Trin Statistics > 1 <------ C. Decline of Put/Call Ratio D. All of the answer selections indicate bullish sentiments. Response Feedback: See Chapter 9 PPT Slide 9-25 ~ 9-27 (Excel Examples, the related in-class discussion and Aplia Assignment Questions)

The ______ measure of returns ignores compounding.

A. IRR B. arithmetic average <------ C. geometric average D. None of the answer selections E. dollar weighted Response Feedback: See Chapter 5 PowerPoint Slide 5-4 (as well as related in-class discussion)

Which of the followings measures effective bond maturity?

A. Immunization B. Convexity C. Yield to maturity D. Duration <------- E. None of the answer selections Response Feedback: See Chapter 11 PPT Slide 11 - 6 (and the related in-class discussion)

When conducting fundamental analysis to analyze equity securities, which of the followings is NOT included in or related to the process?

A. Industry analysis B. Top-down approach C. Domestic and global economic analysis D. Company analysis E. All of the answer selections are included or related <----- Response Feedback: See Chapter 12 PPT Slide 12 - 2 (and the related in-class discussion)

Fama and French have suggested that many market anomalies (contradicting market efficiency) can be explained as manifestations of ____________.

A. Information asymmetry B. Market inefficient C. Time varying risk premiums <----- D. High trading costs E. Regulatory effects Response Feedback: See Chapter 8 PPT Slide 8-20 (and the related in-class discussion)

The __________ is the stock price minus exercise price, or the profit that could be attained by immediate exercise of an in-the-money call option.

A. Intrinsic value <----- B. Stated value C. None of the answer selections D. Discounted value E. Time value Response Feedback: See Chapter 16 PowerPoint Slide 16-2 ~ 16-3 (as well as the example on Slide 16-2 and the related in-class discussion)

A future contract__________.

A. Is a contract to be signed in the future by the buyer and the seller of a commodity B. Gives the buyer the right, but not the obligation, to buy an asset some time in the future C. Is none of the answer selections D.Is an agreement to buy or sell a specified amount of an asset at whatever the spot price happens to be on the expiration date of the contract E. Is an agreement to buy or sell a specified amount of an asset at a predetermined price on the expiration date of the contract <------ Response Feedback: See PowerPoint Slide 17-2 (and the related in-class discussion)

Which type of investment fund is commonly known to invest in options and futures in large scale? It is a private investment pool open only to wealthy or institutional investors that is exempt from SEC regulation and can therefore pursue more speculative policies not allowed for mutual funds.

A. MBS B. REITS C. Hedge funds <------ D. Mutual funds E. Commingled funds Response Feedback: See Chapter 4 PowerPoint Slide 4-5 (as well as the related in-class discussion)

Which of the followings is NOT an equity valuation model?

A. P/E Ratio B. Price-to-Cash-Flow Ratio C. Multistage Growth Dividend Discount Model D. Constant Growth Dividend Discount Model E. Industry Life Cycle Model <------- Response Feedback: See Chapter 13 PPT Slide 13 - 6 ~ 13-22, Slide 13-25; Chapter 12 Slide 12-33 (and the related in-class discussion)

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

A. Passive <------ B. Market timing C. Arbitraging D. Idiotic E. Active Response Feedback: See Chapter 1 PowerPoint Slide 1-20 (as well as the related in-class discussion)

Which of the following statements regarding Active versus Passive investment Strategies is incorrect?

A. Passive investors can vary the combinations of risky and risk-free assets according to their risk aversion. B. Active investors "free-ride" in a competitive investment environment. <----- C. Investing in a broad stock index and a risk free investment is an example of a passive strategy. D. Active strategies entail more trading costs than passive strategies. E. Passive investors make no attempt to actively find undervalued strategies nor actively switch their asset allocations. Response Feedback: See Chapter 5 PowerPoint Slide 5-45

Underwriting is one of the services provided by ____.

A. Publicly traded companies B. investment bankers <------ C. FDIC D. The SEC Response Feedback: See Chapter 3 PowerPoint Slide 3-4 ~ 3-6 (as well as the related in-class discussion)

Advantages of investment companies to investors include all but which one of the following?

A. Reduced transaction costs B. Guaranteed rates of return <------- C. Professional management D. Diversification and divisibility E. Record keeping and administration Response Feedback: See Chapter 4 PowerPoint Slide 4-2

__________ are an indirect way U.S. investors can invest in foreign companies.

A. STRIPs B. SDRs C. IRAs D. ADRs <----- E. CPCs Response Feedback: See Chapter 2 PowerPoint Slide 2-32

Based on your analysis, a stock has an intrinsic value of $15 and an actual stock price of $13.50. You know that the trading signal for this stock is

A. Sell or Short Sell B. Buy <----- C. Sell now and buy back later D. Hold or Fairly Priced E. Not enough information to determine Response Feedback: See Chapter 13 PPT Slide 13-5 (and the related in-class discussion)

When the market breaks through the moving average line from below, a technical analyst would probably suggest it is a good time to ___________.

A. Sell the stock B. Hold the stock C. Buy the stock <------ D. Short the stock Response Feedback: See Chapter 9 PPT Slide 9-16 (and the related in-class discussion)

A European put option gives its holder the right 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 only at the expiration date C. Buy the underlying asset at the exercise price on or before the expiration date D. Sell the underlying asset at the exercise price only at the expiration date <------- Response Feedback: See PowerPoint Slide 15-6 (and the related in-class discussion)

Which of the following statements regarding bond interest rate risk and interest rate sensitivity is NOT correct?

A. Sensitivity of bond's price-to-yield change is inversely related to current yield to maturity. B. As maturity increases, sensitivity of bond prices to changes in yields increases at decreasing rate. C. Long-term bond prices more sensitive to interest rate changes than short-term bonds. D. Interest rate risk is inversely related to bond's coupon rate; low-coupon bonds are more sensitive to interest rates. E. Increase in bond's yield to maturity results in greater price change than yield decrease of equal magnitude. <---- Response Feedback: See Chapter 11 PPT Slide 11 - 2 ~ 11 - 3 (and the related in-class discussion)

An order to buy or sell a security at the current price is a _______________.

A. Stop loss order B. Market order <------- C. Limit order D. Stop buy order Response Feedback: See Chapter 3 PowerPoint Slide 3-12

If an investor places a _________ order the stock will be sold if its price falls to the stipulated level. If an investor places a __________ order the stock will be bought if its price rises above the stipulated level.

A. Stop-buy; stop-loss B. Stop-loss; stop-buy <------ C. Limit; market D. Limit sell; limit buy E. Market; limit Response Feedback: See Chapter 3 PowerPoint Slide 3-12 & 3-14

What do you conclude about the accuracy of the two rules (duration rule versus duration-with-convexity rule) in predicting the change of bond price due to yield change?

A. The duration-with-convexity rule provides more accurate approximations to the actual change in price. <--------- B. They have the similar accuracy. C. It depends on the duration of a bond. D. The duration rule provides more accurate approximations to the actual change in price. E. It depends on the convexity of a bond. Response Feedback: See Chapter 11 PPT Slide 11-21 ~ 11-25 (Excel Example and the related in-class discussion)

The value of a call option increases with the decrease of ___________.

A. Time to maturity B. Dividend yield <------ C. Volatility D. Stock price Response Feedback: See Chapter 16 PowerPoint Slide 16-5 (as well as the related in-class discussion)

Security X has an expected rate of return of 13% and a beta of 1.15. The risk-free rate is 5% and the market expected rate of return is 15%. According to the capital asset pricing model, security X is __________.

A. Underpriced B. None of the answer selections C. Overpriced <------- D. Fairly priced Response Feedback: See Chapter 7 PPT Slide 7-12 & 7-13 (and the related in-class discussion & Aplia Assignment Question)

The Dow Jones Industrial Average is ______.

A. an equally weighted average B. none of the other answer selections C. a value weight and average D. a price weighted average <----- E. an unweighted average Response Feedback: See Chapter 2 PowerPoint Slide 2-36

When interest rate _______, callable bonds are more likely to be called by the issuers.

A. fluctuates B. equals coupon rate C. falls significantly <------ D. rises significantly E. remains stable Response Feedback: See Chapter 10 PPT Slide 10-28 (the related in-class discussion, and Aplia assignment question)

The greatest percentage of mutual fund assets are invested in ________.

A. hybrid funds B. bond funds C. money market funds D. equity funds <------- Response Feedback: See PowerPoint Slide 4-8

Both investors and gamblers take on risk. The difference between an investor and a gambler is that an investor __________.

A. knows he or she will not lose money B. knows the outcomes at the beginning of the holding period C. is normally risk neutral D. is normally not risk averse E. requires a risk premium to take on the risk <------ Response Feedback: See Chapter 5 PowerPoint Slide 5-26 (as well as related in-class discussion)

Investors tend to ________ bond convexity.

A. like <------ B. dislike C. speculate in D. be indifferent to Response Feedback: See Chapter 11 PPT Slide 11 - 28 (and the related in-class discussion)

The _________ reward-to-variability ratio is found on the ________ capital market line.

A. lowest; flattest B. lowest; steepest C. highest; flattest D. highest; steepest <------ Response Feedback: See Chapter 6 PowerPoint Slide 6-16 (as well as related in-class discussion; also a homework question)

Suppose Apple's current stock price is $357.20 and a call option with strike price $350 sells for $9.00 (call premium). This call option is currently ___________________.

A. out of the money B. on the money C. in the money <-------- D. none of the answer selections E. at the money Response Feedback: See Chapter 2 PowerPoint Slide 2-45 (as well as the related in-class discussion)

Investors who wish to liquidate their holdings in a closed-end fund may ________________________.

A. sell their shares on the open market <------ B. sell their shares back to the fund at net asset value C. none of the other answer selections D. sell their shares at a premium to net asset value if they wish E. sell their shares back to the fund at a discount if they wish Response Feedback: See Chapter 4 PowerPoint Slide 4-4 (as well as in-class discussion)

If an investor does not diversify his portfolio and instead puts all of his money in one stock, the appropriate measure of security risk for that investor is the ________.

A. stock's beta B. covariance with the market index C. stock's standard deviation <----- D. variance of the market Response Feedback: See Chapter 6 PowerPoint Slide 6-3 (as well as related in-class discussion; also a homework question)

The risk that can be diversified away is __________.

A. systematic risk B. beta C. firm-specific risk <----- D. market risk Response Feedback: See Chapter 6 PowerPoint Slide 6-3 (as well as related in-class discussion; also a homework question)

Historical returns have generally been __________ for stocks of large firms as/than for long-term bonds.

A. the same B. higher <------ C. lower D. There is no evidence of a systematic relationship between returns on large firm stocks and returns on long-term bonds E. lower 50% of the time and higher the other 50% of the time Response Feedback: See Chapter 5 PowerPoint Slide 5-31 (as well as related in-class discussion)

As discussed in class, empirical tests on mutual fund performances seem to indicate that, to a large extent, the markets appear to be _________________.

A. weak form inefficient B. sometimes efficient and sometimes inefficient C. semi-strong form efficient <------ D. strong from efficient E. inefficient Response Feedback: See Chapter 8 PPT Slide 8-22 ~ 8-29 (especially 8-29 and the related in-class discussion)

According to Tobin's separation property, portfolio choice can be separated into two independent tasks consisting of __________ and __________.

A.identifying all investor imposed constraints; identifying the set of securities that conform to the investor's constraints and offer the best risk-return trade-offs B.identifying the optimal risky portfolio; constructing a complete portfolio from T-bills and the optimal risky portfolio based on the investor's degree of risk aversion <------- C.choosing which risky assets an investor prefers according to the investor's risk-aversion level; minimizing the CAL by lending at the risk-free rate D.identifying the investor's degree of risk aversion; choosing securities from industry groups that are consistent with the investor's risk profile Response Feedback: See Chapter 6 PowerPoint Slide 6-23 (as well as related in-class discussion; also a homework question)