Investments study questions midterm 2

What is the price of a callable $100,000, 4.8% semi-annual bond that matures in 18 years and is callable in 10 years, given a current market yield on similar debt of 5.4 and a call premium of 10%? $101,365.74 $96,979.38 $101,279.77 $95,410.41

$101,279.77

What is the maximum price that an investor should pay for a 10-year, $10,000 zero coupon bond, if the current yield to maturity on comparable debt is 4.375%? $6,755.64 $10,000.00 $6,516.81

$6,516.81

What is the price of a $100,000, 4.8% semi-annual coupon bond that matures in 12 years, if the current yield to maturity is 5.4%? $94,800.01 $105,425.25 $94,751.17

$94,751.17

Given the duration of a bond is 8.62 years, the current yield to maturity is 6.5%, and the yield to maturity is expected to decrease by 25 basis points (i.e., 0.25%) what is the expected percent price change of the bond? +2.02% -2.02% -3.32% +3.32%

+2.02%

Given the duration of a $1,000 bond is 8.75 years, the current yield to maturity is 6.5%, and that yield to maturity is expected to increase by 50 basis points (i.e., +.5%) what is the dollar change in price if the current price of the bond is $974.60? - $39.85 + $40.04 - $40.04 + $39.85

- $40.04

Which of the following statements about yield curves is INCORRECT? - A yield curve depicts that market yield to maturity for similar bonds across time. -During a recession you would expect the spread between investment-grade bonds and below-investment-grade bonds to be compressed (narrower). -You would expect to see the flattening of a normal yield curve given market expectations of an impending economic recession. -The yield curve for a U.S. Treasury bond would look different from that of a BBB-rated corporate bond.

-During a recession you would expect the spread between investment-grade bonds and below-investment-grade bonds to be compressed (narrower).

Based on the following data, what is the Stock A's Sharpe Ratio? Portfolio return = 12.6% Standard deviation = 26.3% Beta = 1.4 Risk-free rate = 3.2% .67 .60 .36 .11

.36

Luke is the portfolio manager for the Front Range Value Fund. Last year his portfolio return was 9%, and the portfolio had a beta of 1.2. The S&P 500 Index had a 7.5% return. The T-bill rate was 2.3%. What is the alpha of the Fund? 2.76 1.50 0.46 0.00

.46

Which of the following strategies might immunize a portfolio for an investment horizon of 14 years? (1) Purchase several coupon paying bonds with maturities ranging from 16-18 years. (2) Purchase a zero-coupon bond maturing in 20 years. (3) Create a mixed portfolio of debt maturing in 14 years and equity securities. (4) Purchase a zero-coupon bond maturing in 14 years. 4 only 1 and 3 2 and 3 1 and 4

1 & 4

Which of the following should occur as the business cycle moves from peak to recession? (1) Unemployment rises as corporations have to lay-off workers. (2) Fiscal and monetary policy shifts from controlling inflation to providing economic stimulus. (3) Economic indicators will turn negative; however, leading indicators will turn positive later in the recession as the economy reaches the trough of the cycle. (4) Stocks and bonds will both decrease in value. 1 and 2 3 and 4 1, 2 and 3 1, 2, 3 and 4

1, 2 and 3

Which of the following individual client factors influence the appropriate asset allocation mix? (1) Risk tolerance (2) Financial need (3) Time horizon (4) Financial capacity (5) Investment knowledge and experience (6) Individual preferences and constraints 1, 2, 3 and 6 3, 4 and 5 1, 2 and 6 1, 2, 3, 4, 5 and 6

1, 2, 3, 4, 5 and 6

Your client has a three-year investment horizon; therefore, you decide to use the last three years of historical market data in determining your expected return assumption. Based on the holding period returns, what is the geometric (time weighted) annual rate of return assumption you will use when entering data into your portfolio optimization analyzer? (Base your response on the following market data. Also, calculate your answer based on four decimal places and round your final answer to two decimal places.) 3 years ago (begin price = $23.50; end price = $28.00) 2 years ago (begin price = $28.00; end price = $26.25) 1 year ago (begin price = $26.25; end price = $33.75) 9.80% 12.81% 14.54% 17.61%

12.81%

Your client has a three-year investment horizon; therefore, you decide to use the last three years of historical market data in determining your expected return assumption. Based on the holding period returns, what is the arithmetic (time weighted) annual rate of return assumption you will use when entering data into your portfolio optimization analyzer? (Base your response on the following market data.) 3 years ago (begin price = $23.50; end price = $28.00) 2 years ago (begin price = $28.00; end price = $26.25) 1 year ago (begin price = $26.25; end price = $33.75) 10.5% 13.8% 9.8% 12.8%

13.8%

Jake invested $10,000 in a mutual fund that returned 12% the first year. The second year he invested another $8,000 and the fund was up another 15%. Pleased with the growth of investments, he invested another $9,000 in year three and enjoyed another 9% increase. At the end of that year, the portfolio was valued at $37,460. What was Jake's average dollar-weighted return? 26% 49% 17% 12%

17%

What is the five-year spot rate, given a short rate of 2.24% in year one, a short rate of 2.48% in year two, a short rate of 2.62% in year three, a short rate of 3.05% in year four and a short rate of 3.62% in year five? 2.62% 2.80% 2.94% 3.05%

2.8%

Your client is considering a corporate bond with a 6.17% before-tax yield and a municipal bond with a 4.93% before-tax yield. At what marginal tax rate would the investor be indifferent between investing in the corporate and investing in the municipal bond? 15.4% 25.2% 20.1% 28%

20.1%

Based on the following data, what is the expected return of Stock A? Treynor ratio = .156 Standard deviation = .22 Beta = 1.2 Risk-free rate = 6% 24.7% 18.8% 12.7% 9.4%

24.7%

Over the past year you earned a nominal rate of interest of 6.4 percent on your money. The inflation rate was 2.8 percent over the same period. What is the exact real rate of return that was earned? 3.40% 3.70% 3.50% 3.60%

3.5%

Given that the 3-year spot rate is 3.68%, the short rate in year one is 3.48% and the short rate in year two is 3.62%, then what is the forward rate for year 3? 3.59% 3.76% 3.94% 4.12%

3.94

What is the duration of a $10,000 6% bond that matures in 5 years if the market yield to maturity is 6.4%? 4.53 years 4.32 years 4.49 years 4.46 years

4.46 years

What is the investor's 3-year holding period return given the following information? Initial investment $20,000 Year 1 cash distributions $1,200 Year 2 cash distributions $1,500 Year 3 cash distributions $800 End-of-year-3 sale proceeds $24,600 17.5% 14.2% 32.9% 40.5%

40.5%

What is the yield to maturity of a $10,000, 6.2% semi-annual bond that matures in 15 years, given a current market price of $9,531.43? 6.70% 3.35% 5.99% 6.20%

6.7%

What is the duration of a portfolio that contains the following securities? Bond F - $100,000, duration = 6.4 years Bond G - $250,000, duration = 11.8 years Bond H - $150,000, duration = 8.4 year 4.85 years 9.70 years 8.40 years 8.97 years 4.49 years

9.7 years

Which of the following correctly describes a bond ladder? - A fixed income portfolio where a portion of the portfolio is invested in short-term bonds and the remaining portion in long-term bonds. - A fixed income portfolio where the individual bonds mature on different dates. - A bond that has a variable maturity date. - A fixed income portfolio where the individual bonds are purchased at different times but mature on the same date.

A fixed income portfolio where the individual bonds mature on different dates.

Which of the following statements is correct? -A bond with warrant allows the investor to turn in the bond to the issuing company in exchange for a set number of company shares as specified in the bond's provisions. -A stock right allows existing common shareholders to buy additional shares at a set price. -A convertible bond allows the investor to retain the bond and buy a set number of shares at a price specified in the bond's provisions. -A callable bond allows the issuing company to recall the bond at any time before maturity.

A stock right allows existing common shareholders to buy additional shares at a set price.

The greater an investor's belief in market inefficiency, then the greater the argument for: Investing in market indexes Active investing Buy and hold Passive investing

Active investing

According to the Vanguard study entitled "Putting a value on your value," which of the following represents the greatest component of alpha (i.e., value to client)? Cost effective implementation Behavioral coaching Rebalancing the portfolio mix Identifying a suitable asset allocation Formulating a workable budget

Behavioral coaching

All but one of the following are included within the index of leading economic indicators. Which of the following indicators is NOT a leading indicator of economic activity? - Average weekly claims for unemployment insurance - New manufacturing orders for consumer goods - Consumer price index - Number of new building permits S&P 500 stock prices

Consumer price index

Which of the following combinations of monetary and fiscal policy would promote an economic expansion? -Increase bank reserve requirements; decrease government spending -Decrease the discount rate; decrease individual income tax rates -Buy government securities (open market operations); increase corporate tax rates -Increase the discount rate; increase individual tax rates

Decrease the discount rate; decrease individual income tax rates

Which of the following sectors would you expect to outperform during a market recession? Auto manufacturer Financial firm Airline Hospitality company Food and beverage firm

Food and beverage firm

Which of the following hedge funds offer the best return-to-risk profile based on William Sharpe's information ratio given the fact that the benchmark offered an 8.5% return? (1) Fund A - 17.0% return, tracking error 6.8%, beta 1.8 (2) Fund B - 24.0% return, tracking error 9.3%, beta 2.1 (3) Fund C - 28.0% return, tracking error 12.8%, beta 2.7 (4) Fund D - 10.0% return, tracking error 3.5%, beta 1.3 Fund A Fund C Fund D Fund B

Fund b

Which of the following cognitive biases help explain why individuals value current consumption more than deferred gratification? Status quo or endowment effect Hyperbolic discounting Anchoring bias Ambiguity bias Over-conservatism bias

Hyperbolic discounting

In a highly efficient market, there should be no exceptions. However, evidence shows some persistent patterns that offer out-performance relative to a buy and hold strategy. Which of the following is NOT recognized market anomalies? "Dogs of the Dow" International stock effect Turn-of-the-month effect Small firm effect Low market multiple stocks January effect

International stock effect

Which form of efficient market hypothesis is supported by the January effect? Weak form efficiency None of these Semi-strong form efficiency Strong form efficiency

None of these

Your friend completed the Market Technician Association certification in technical analysis. Which form of market efficiency supports his efforts in applying the tenants of technical analysis to outperform? None of these Strong form efficiency Semi-strong form efficiency Weak form efficiency

None of these

Market volatility creates an on-going roller-coaster of emotion. Which of the following emotional or cognitive biases best describe the sabotaging behavior of hanging onto losers, rather than harvesting the tax loss and then re-positioning the portfolio? Regret avoidance Representativeness Herding Ambiguity aversion Mental accounting

Regret avoidance

Which of the following is NOT a fundamental premise of prospect theory. - The highest portfolio value becomes a reference point for portfolio evaluation - Investors focus on change in wealth rather than wealth maximization -Risk-averse investors are more focused on gains than losses - When experiencing a loss, risk-averse investors will become more risk seeking

Risk-averse investors are more focused on gains than losses

An investor recently profited from a series of trades. A new opportunity is considered, and the investor quickly decides on investing a large percentage of the portfolio. What heuristic probably impacted this aggressive investment decision. Endowment effect Mental accounting Framing Sequential prospects

Sequential prospects

Which of the following statements is INCORRECT? - The lower the coupon rate of the bond, then the lower the price sensitivity to interest rate moves. - The price of existing bonds moves inversely with market interest rates. - The greater the term to maturity of the bond, then the greater the price sensitivity to interest rate moves. - The higher the initial yield to maturity of the bond, then the less sensitive the bond is to interest rate moves.

The lower the coupon rate of the bond, then the lower the price sensitivity to interest rate moves.

According to the Brinson, Singer and Beebower study, which of the following is the most important decision that impacts long-term wealth accumulation? asset allocation security selection portfolio hedging market timing

asset allocation

Based on the life cycle investment strategy, at which stage of the economic life cycle would the investor be weighted in fixed income securities? consolidation stage (age 45-67) never, the investment portfolio would always be weighted towards growth securities accumulation stage (age 20-45) distribution stage (in retirement)

distribution stage (in retirement)

A firm in an industry that is very sensitive to the business cycle will likely have a stock beta ___________. greater than 1.0 equal to 1.0 less than 1.0 but greater than 0.0 equal to or less than 0.0 there is no relationship between beta and sensitivity to the business cycle

greater than 1.0

What would you expect to see at the end of a recession? high inflation and high unemployment low interest rates and high unemployment low inflation and low unemployment high inflation and high unemployment

low interest rates and high unemployment

"Stock prices adjust rapidly to the release of all new public information." This statement is an expression of which one of the following ideas?" - semi-strong form of efficient market theory - arbitrage pricing theory - random walk hypothesis - technical analysis

semi-strong form of efficient market theory

Your friend, Ben, is an active investor who practices sector rotation based on the chart patterns of different sector ETFs. Right now he is over-weighted in consumer non-durable goods. This trading approach is an example of which of the following? portfolio rebalancing tactical asset allocation strategic asset allocation trading optimization

tactical asset allocation