Investments Final Review Quiz Questions - Kiseo Chung

What happened to the effective spread on trades when the SEC allowed the minimum tick size to move from one-eighth of a dollar to one-sixteenth of a dollar in 1997 and from one-sixteenth of a dollar to one cent in 2001?

The effective spread decreased in both cases.

Consider a mutual fund with $300 million in assets at the start of the year and 12 million shares outstanding. If the gross return on assets is 18% and the total expense ratio is 2% of the year-end value, what is the rate of return on the fund?

15.64%

The price of a bond (with par value of $1,000) at the beginning of a period is $980 and at the end of the period is $975. What is the holding-period return if the annual coupon rate is 4.5%?

4.08%

If the coupon rate on a bond is 4.5% and the bond is selling at a premium, which of the following is the most likely yield to maturity on the bond?

4.30%

Floating-rate bonds have a __________ that is adjusted with current market interest rates.

coupon rate

The EBIT of a firm is $300, the tax rate is 35%, the depreciation is $20, capital expenditures are $60, and the increase in net working capital is $30. What is the free cash flow to the firm?

$125

You purchased 200 shares of ABC common stock on margin at $50 per share. Assume the initial margin is 50% and the maintenance margin is 30%. You will get a margin call if the stock drops below _______. (Assume the stock pays no dividends, and ignore interest on the margin loan.)

$35.71

ou sold short 300 shares of common stock at $30 per share. The initial margin is 50%. You must put up _________.

$4,500

The free cash flow to the firm is reported as $405 million. The interest expense to the firm is $76 million. If the tax rate is 35% and the net debt of the firm increased by $50 million, what is the free cash flow to the equity holders of the firm?

$405.6 million

ART has come out with a new and improved product. As a result, the firm projects an ROE of 25%, and it will maintain a plowback ratio of 0.20. Its earnings this coming year will be $3 per share. Investors expect a 12% rate of return on the stock.What price do you expect ART shares to sell for in 4 years?

$41.68

A T-bill quote sheet has 90-day T-bill quotes with a 5.47 ask and a 5.41 bid. If the bill has a $10,000 face value, an investor could sell this bill for _____.

$9,864.75

The price of a stock is $55 at the beginning of the year and $50 at the end of the year. If the stock paid a $3 dividend and inflation was 3%, what is the real holding-period return for the year?

-6.44%

A Treasury bond due in 1 year has a yield of 6.3%, while a Treasury bond due in 5 years has a yield of 8.8%. A bond due in 5 years issued by High Country Marketing Corp. has a yield of 9.6%, while a bond due in 1 year issued by High Country Marketing Corp. has a yield of 6.8%. The default risk premiums on the 1-year and 5-year bonds issued by High Country Marketing Corp. are, respectively, __________ and __________.

0.5%; 0.8%

A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 21%, while stock B has a standard deviation of return of 27%. Stock A comprises 70% of the portfolio, while stock B comprises 30% of the portfolio. If the variance of return on the portfolio is 0.045, the correlation coefficient between the returns on A and B is __________.

0.707

Based on the outcomes in the following table, choose which of the statements below is (are) correct? Scenario: Security A: Security B: Security C: Recession Return > E(r) Return = E(r) Return < E(r) Normal Return = E(r) Return = E(r) Return = E(r) Boom Return < E(r) Return = E(r) Return > E(r) The covariance of security A and security B is zero. The correlation coefficient between securities A and C is negative. The correlation coefficient between securities B and C is positive.

1 and 2 only

The part of a stock's return that is systematic is a function of which of the following variables? 1. Volatility in excess returns of the stock market 2. The sensitivity of the stock's returns to changes in the stock market 3. The variance in the stock's returns that is unrelated to the overall stock market

1 and 2 only

Among the important characteristics of market efficiency is (are) that: 1. There are no arbitrage opportunities. 2. Security prices react quickly to new information. 3. Active trading strategies will not consistently outperform passive strategies.

1, 2, and 3

The yield to maturity on a bond is: 1. above the coupon rate when the bond sells at a discount and below the coupon rate when the bond sells at a premium. 2. the discount rate that will set the present value of the payments equal to the bond price. 3. equal to the true compound return on investment only if all interest payments received are reinvested at the yield to maturity.

1, 2, and 3

Transportation stocks currently provide an expected rate of return of 15%. TTT, a large transportation company, will pay a year-end dividend of $3 per share. If the stock is selling at $60 per share, what must be the market's expectation of the constant-growth rate of TTT dividends?

10%

What is the expected return on the market?

10%

Cache Creek Manufacturing Company is expected to pay a dividend of $3.36 in the upcoming year. Dividends are expected to grow at 8% per year. The risk-free rate of return is 4%, and the expected return on the market portfolio is 14%. Investors use the CAPM to compute the market capitalization rate and use the constant-growth DDM to determine the value of the stock. The stock's current price is $84. Using the constant-growth DDM, the market capitalization rate is __________.

12%

The market capitalization rate on the stock of Aberdeen Wholesale Company is 10%. Its expected ROE is 12%, and its expected EPS is $5. If the firm's plowback ratio is 60%, its P/E ratio will be _________.

14.29

You have the following rates of return for a risky portfolio for several recent years: r2016 = 35.23% r2017 = 18.67% r2018 = −9.87% r2019 = 23.45% The annualized (geometric) average return on this investment is __________.

15.60%

An investor puts up $5,000 but borrows an equal amount of money from his broker to double the amount invested to $10,000. The broker charges 7% on the loan. The stock was originally purchased at $25 per share, and in 1 year the investor sells the stock for $28. The investor's rate of return was _______.

17%

A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 35%, while stock B has a standard deviation of return of 15%. The correlation coefficient between the returns on A and B is 0.45. Stock A comprises 40% of the portfolio, while stock B comprises 60% of the portfolio. The standard deviation of the return on this portfolio is __________.

19.76%

Consider the following two investment alternatives: First, a risky portfolio that pays a 15% rate of return with a probability of 40% or a 5% rate of return with a probability of 60%. Second, a Treasury bill that pays 6%. The risk premium on the risky investment is __________.

3%

The Stone Harbor Fund is a closed-end investment company with a portfolio currently worth $300 million. It has liabilities of $5 million and 9 million shares outstanding. If the fund sells for $30 a share, what is its premium or discount as a percent of NAV?

8.47% discount

$1,000 par value zero-coupon bonds (ignore liquidity premiums) Bond Years to Maturity Yield to Maturity A 1 6.00% B 2 7.50% C 3 7.99% D 4 8.49% E 5 10.70% The expected 1-year interest rate 1 year from now should be about __________.

9.02%

Two investment advisers are comparing performance. Adviser A averaged a 20% return with a portfolio beta of 1.5, and adviser B averaged a 15% return with a portfolio beta of 1.2. If the T-bill rate was 5% and the market return during the period was 13%, which adviser was the better stock picker?

Advisor A was better because he generated a larger alpha.

Which one of the following statements is correct? A. Invoice price = flat price − accrued interest B. Invoice price = flat price + accrued interest C. Flat price = invoice price + accrued interest − settlement price D. Invoice price = settlement price − accrued interest

B

Which type of risk is most significant for nearly all bonds?

Interest rate risk

Insiders are able to profitably trade and earn abnormal returns prior to the announcement of positive news. This is a violation of which form of efficiency?

Strong-form efficiency

Which of the following is not a typical characteristic of common stock ownership?

Unlimited liability

The semistrong-form of the EMH states that __________ must be reflected in the current stock price.

all publicly available information

Arbitrage is based on the idea that __________.

assets with identical risks must have the same expected rate of return

In the context of the capital asset pricing model, the systematic measure of risk is best captured by __________.

beta

You have $500,000 available to invest. The risk-free rate, as well as your borrowing rate, is 8%. The return on the risky portfolio is 16%. If you wish to earn a 22% return, you should __________.

borrow $375,000

In calculating the Dow Jones Industrial Average, the adjustment for stock splits occurs _______.

by adjusting the denominator

Consider the expectations theory of the term structure of interest rates. If the yield curve is downward-sloping, this indicates that investors expect short-term interest rates to __________ in the future.

decrease

Generally speaking, as a firm progresses through the industry life cycle, you would expect the PVGO to __________ as a percentage of share price.

decrease

A firm cuts its dividend payout ratio. As a result, you know that the firm's __________.

earnings retention ratio will increase

An underpriced stock provides an expected return that is __________ the required return based on the capital asset pricing model (CAPM).

greater than

A _______ 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 than mutual funds.

hedge fund

In securities markets, there should be a risk-return trade-off with higher-risk assets having _______ expected returns than lower-risk assets.

higher

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

highest; steepest

A security's beta coefficient will be negative if __________.

its returns are negatively correlated with market-index returns

On a standard expected return versus standard deviation graph, investors will prefer portfolios that lie __________ the current investment opportunity set.

left and above

Everything else equal, the __________ maturity of a bond and the __________ coupon, the greater the sensitivity of the bond's price to interest rate changes.

longer; lower

Net asset value is defined as _______.

market value of assets minus liabilities divided by shares outstanding

The efficient frontier represents a set of portfolios that:

maximize expected return for a given level of risk.

Diversification is most effective when security returns are __________.

negatively correlated

According to the capital asset pricing model, a fairly priced security will plot __________.

on the security market line

An investor's degree of risk aversion will determine their __________.

optimal mix of the risk-free asset and risky asset

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 __________.

overpriced

The efficient market hypothesis suggests that _______.

passive portfolio management strategies are the most appropriate investment strategies

The most significant conceptual difference between the arbitrage pricing theory (APT) and the capital asset pricing model (CAPM) is that the CAPM __________.

recognizes only one systematic risk factor

Consider a Treasury bill with a rate of return of 5% and the following risky securities: Security A: E(r) = 0.15; variance = 0.0400 Security B: E(r) = 0.10; variance = 0.0225 Security C: E(r) = 0.12; variance = 0.1000 Security D: E(r) = 0.13; variance = 0.0625 The investor must develop a complete portfolio by combining the risk-free asset with one of the securities mentioned above. The security the investor should choose as part of her complete portfolio to achieve the best CAL would be __________.

security A

The holding period return on a stock is equal to __________.

the capital gain yield over the period plus the dividend yield

In a _______ index, changes in the value of the stock with the greatest market value will move the index value the most, everything else equal.

value-weighted

Each of two stocks, A and B, is expected to pay a dividend of $7 in the upcoming year. The expected growth rate of dividends is 6% for both stocks. You require a return of 10% on stock A and a return of 12% on stock B. Using the constant-growth DDM, the intrinsic value of stock A __________.

will be higher than the intrinsic value of stock B