Anup Test 1

Which of the following is not a money market instrument?

Preferred stock

The advantage of preferred stocks relative to common stocks is:

Preferred stockholders have preference over the dividend payments to common stockholders

__________ is a true statement regarding risk averse investors.

They only accept investments that offer risk premium over the risk free rate.

The third market refers to:

Trading of exchange-listed securities that takes place off the exchange floor with the aid of a broker

Risk that can be eliminated through diversification is called ______ risk.

Unique Firm Specific Diversifiable ALL OF THE ABOVE

Consider the following two investment alternatives. First, a risky portfolio that pays 20% rate of return with a probability of 60% or 5% with a probability of 40%. Second, a treasury bill that pays 6%. If you invest $50,000 in the risky portfolio, your expected profit would be _________.

$7,000 Er= .6(20) + .4(5) =14% 50,000 x .14= 7,000

If you require a real growth in the purchasing power of your investment of 8%, and you expect the rate of inflation over the next year to be 3%, what is the lowest nominal return that you would be satisfied with?

11.24% 1.08* 1.03 -1 = 11.24

An investment earns 10% the first year, earns 15% the second year, and loses 12% the third year. Your total compound return over the 3 years was ______.

11.32% (1.1)(1.15)(.88)-1= .1132

If you purchase stock for $50, receive dividends of $2, and sell the stock at the end of the year for $55, what is your holding period return?

14%. new-old+div/ Old

The geometric average of 10%, 20%, and 25% is

18.2% [(1.1)(1.20)(1.25)] ^1/3 -1

Stock A has a beta of 1.2, and stock B has a beta of 1. The returns of stock A are ______ sensitive to changes in the market than are the returns of stock B.

20% or more

You purchased 250 shares of common stock on margin for $25 per share. The initial margin is 65%, and the stock pays no dividend. Your rate of return would be __________ if you sell the stock at $32 per share. Ignore interest on margin.

43%

Consider the following two investment alternatives. First, a risky portfolio that pays 15% rate of return with a probability of 60% or 5% with a probability of 49%. Second, a treasury bill that pays 6%. The risk premium on the risky investment is __________

5% .6(15) + .4(5)= 11, E-risky 11-6=5%

If you are promised a nominal return of 12% on a 1-year investment, and you expect the rate of inflation to be 3%, what real rate do you expect to earn?

8.74% ((1+.12)/(1+.03))-1=8.74

With respect to mutual funds, late trading refers to the practice of

Accepting buy or sell orders after the market closes and NAV has already been determined for the day

Risk that can be eliminated through diversification is called ______ risk.

All of the above Unique Firm-specific Diversifiable

Blue chips stocks:

Are common stocks of large, financially sound corporations with a good history of dividend payments and consistent earnings growth

Which of the following issues is typically covered in corporate finance?

Both B and C Capital budgeting Working Capital management

The owner of a futures contract is:

Has the obligation to buy or sell a specified amount of an asset at a stated price on a particular date

Some diversification benefits can be achieved by combining securities in a portfolio as long as the correlation between the securities is _____________.

Less than 1

An order to buy or sell specified quantity of a stock at a specified price or better is called a:

Limit Order

An example of municipal bonds is:

Revenue Bond

The _____ could be used in an index model to represent common or systematic risk factors.

S&P 500 index

The securities and exchange commission was created by the:

Securities Exchange act of 1934

The _____ requires full disclosure of relevant information relating to issuance of new securities

Securities act of 1933

Which of the following statements about dual listing is wrong?

Securities listed on the NYSE can also be listed on the AMEX

Consider a Treasury bill with a rate of return of 5% and the following risky securities: Security A: E(r) = .15; variance = .0400 Security B: E(r) = .10; variance = .0225 Security C: E(r) = .12; variance = .1000 Security D: E(r) = .13; variance = .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 exchange generating the largest volume in the United States is the:

The New York Stock Exchange

Beta is a measure of ______________.

market risk

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 would normally be .05+1.15(.15-.05)=16.5%