Wrong stuff

An example of a real asset is: 1. A college education 2. Customer goodwill 3. A patent

1, 2, and 3

Money market securities are characterized by: 1. Maturity less than 1 year 2. Safety of the principal investment 3. Low rates of return

1, 2, and 3

The excess return is the __________. rate of return that can be earned with certainty rate of return in excess of the Treasury-bill rate rate of return in excess of a predicted model like CAPM index return

rate of return in excess of the Treasury-bill rate

The market value weighted-average beta of all firms included in the market index will always be __________. 0 between 0 and 1 1 none of these options (There is no particular rule concerning the average beta of firms included in the market index.)

1

The __________ reward-to-variability ratio is found on the __________ capital market line. lowest; steepest highest; flattest highest; steepest lowest; flattest

highest; steepest

You invest all of your money in 1-year T-bills. Which of the following statements is (are) correct? 1. Your nominal return on the T-bills is riskless. 2. Your real return on the T-bills is riskless. 3. Your nominal Sharpe ratio is zero.

1 and 3 only

Debt securities promise: 1. A fixed stream of income. 2. A stream of income that is determined according to a specific formula. 3. A share in the profits of the issuing entity.

1 or 2 only

Active trading in markets and competition among securities analysts helps ensure that: 1. Security prices approach informational efficiency. 2. Riskier securities are priced to offer higher potential returns. 3. Investors are unlikely to be able to consistently find under- or overvalued securities. Multiple Choice

1, 2 and 3

The optimal risky portfolio can be identified by finding: 1. The minimum-variance point on the efficient frontier 2. The maximum-return point on the efficient frontier and the minimum-variance point on the efficient frontier 3. The tangency point of the capital market line and the efficient frontier 4. The line with the steepest slope that connects the risk-free rate to the efficient frontier

3 and 4

_______ portfolio construction starts with selecting attractively priced securities.

Bottom-Up

The CAL provided by combinations of 1-month T-bills and a broad index of common stocks is called the __________. SML CAPM CML total return line

CML

_______ represents an ownership share in a corporation. A call option Common stock A fixed-income security Preferred stock

Common Stock

Which one of the following measures time-weighted returns and allows for compounding?

Geometric average return

Which of the following statistics cannot be negative? Covariance Variance E(r) Correlation coefficient

Variance

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

Land Buildings Consumer Durables Common stock

Stone Harbor Products takes out a bank loan. It receives $100,000 and signs a promissory note to pay back the loan over 5 years. In this transaction, _______. a new financial asset was created a financial asset was traded for a real asset a financial asset was destroyed a real asset was created

a new financial asset was created

The __________ measure of returns ignores compounding.

arithmetic average

If you want to know the portfolio standard deviation for a three-stock portfolio, you will have to __________. calculate two covariances and one trivariance calculate only two covariances calculate three covariances average the variances of the individual stocks

calculate three covariances

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

capital allocation line

A security's beta coefficient will be negative if __________. its returns are negatively correlated with market-index returns its returns are positively correlated with market-index returns its stock price has historically been very stable market demand for the firm's shares is very low

its returns are negatively correlated with market-index returns

Beta is a measure of security responsiveness to __________. firm-specific risk diversifiable risk market risk unique risk

market risk

The normal distribution is completely described by its __________. mean and standard deviation mean mode and standard deviation median and variance

mean and standard deviation

Diversification is most effective when security returns are __________. high negatively correlated positively correlated uncorrelated

negatively correlated

The efficient market hypothesis suggests that _______.

passive portfolio management strategies are the most appropriate investment strategies

The material wealth of society is determined by the economy's _______, which is a function of the economy's _______.

productive capacity; real assets

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

the capital gain yield over the period plus the dividend yield

Market risk is also called __________ and __________. systematic risk; diversifiable risk systematic risk; nondiversifiable risk unique risk; nondiversifiable risk unique risk; diversifiable risk

unique risk; nondiversifiable risk

Adding additional risky assets to the investment opportunity set will generally move the efficient frontier __________ and to the __________. up; right up; left down; right down; left

up; left

According to Tobin's separation property, portfolio choice can be separated into two independent tasks consisting of __________ and __________. 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 identifying the investor's degree of risk aversion; choosing securities from industry groups that are consistent with the investor's risk profile 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 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

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

Which of the following are financial assets? 1. Debt securities 2. Equity securities 3. Derivative securities

1, 2, and 3

__________ is (are) real assets. A. Bonds B. Production equipment C. Stocks D. Life Insurance

Production Equipment

_______ portfolio construction starts with asset allocation.

Top-down

Which one of the following best describes the purpose of derivatives markets?

Transferring risk from one party to another.

The rate of return on __________ is known at the beginning of the holding period, while the rate of return on __________ is not known until the end of the holding period. risky assets; Treasury bills Treasury bills; risky assets excess returns; risky assets index assets; bonds

Treasury bills; risky assets

Which one of the following would be considered a risk-free asset in real terms as opposed to nominal? Money market fund U.S. T-bill Short-term corporate bonds U.S. T-bill whose return was indexed to inflation

U.S. T-bill whose return was indexed to inflation

Which of the following is not a money market security?

U.S. Treasury bill 6-month maturity certificate of deposit common stock mortgage-backed security

Security selection refers to the _______.

allocation of the investment portfolio across broad asset classes analysis of the broad asset classes choice of specific securities within each asset class top-down method of investing

You have calculated the historical dollar-weighted return, annual geometric average return, and annual arithmetic average return. If you desire to forecast performance for next year, the best forecast will be given by the __________.

arithmetic average return

One method of forecasting the risk premium is to use the __________. coefficient of variation of analysts' earnings forecasts variations in the risk-free rate over time average historical excess returns for the asset under consideration average abnormal return on the index portfolio

average historical excess returns for the asset under consideration

The _________ is the covariance divided by the product of the standard deviations of the returns on each fund.

covariance correlation coefficient standard deviation reward-to-variability ratio

The value of a derivative security _______.

depends on the value of another related security

If you want to measure the performance of your investment in a fund, including the timing of your purchases and redemptions, you should calculate the __________.

dollar-weighted return

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 __________. equal to the sum of the securities' standard deviations equal to −1 equal to 0 greater than 0

equal to 0

When the market is more optimistic about a firm, its share price will _______; as a result, it will need to issue _______ shares to raise funds that are needed.

rise; fewer

A measure of the riskiness of an asset held in isolation is __________. beta standard deviation covariance alpha

standard deviation

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 __________. stock's standard deviation variance of the market stock's beta covariance with the market index

stock's standard deviation

Historically, the best asset for the long-term investor wanting to fend off the threats of inflation and taxes while making his money grow has been __________. stocks bonds money market funds Treasury bills

stocks

The reward-to-volatility ratio is given by __________. the slope of the capital allocation line the second derivative of the capital allocation line the point at which the second derivative of the investor's indifference curve reaches zero the portfolio's excess return

the slope of the capital allocation line

The expected rate of return of a portfolio of risky securities is __________. the sum of the individual securities' covariance the sum of the individual securities' variance the weighted sum of the individual securities' expected returns the weighted sum of the individual securities' variance

the weighted sum of the individual securities' expected returns

The values of beta coefficients of securities are __________. always positive always negative always between positive 1 and negative 1 usually positive but are not restricted in any particular way

usually positive but are not restricted in any particular way

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 index