F469 Final Exam Review - HW + Practice Problems

Exercise prices for listed stock options usually occur in increments of ____, and bracket the current stock price. A. $1 B. $5 C. $20 D. $25

$5

Which of the following correlations coefficients will produce the least diversification benefit? A. -0.6 B. -0.3 C. 0.0 D. 0.8

0.8

When computing the bank discount yield you would use ____ days in the year. A. 260 B. 360 C. 365 D. 366

360

____ is not a derivative security. A. A share of common stock B. A call option C. A futures contract D. All of the above are derivative securities

A share of common stock

In an efficient market and for an investor that believes in a passive approach to investing, what is the primary duty of a portfolio manager? A. Accounting for results B. Diversification C. Identifying undervalued stocks D. No need for a portfolio manager

diversification

The percentage change in the stock call option price divided by the percentage change in the stock price is the __________ of the option. A. delta B. elasticity C. gamma D. theta

elasticity

Revenue sharing with respect to mutual funds refers to _________. A. fund companies paying brokers if the broker recommends the fund to investors B. allowing certain classes of investors to engage in market timing C. charging loads to new investors in a mutual fund D. directly marketing funds over the Internet

fund companies paying brokers if the broker recommends the fund to investors

Underwriting is one of the services provided by _____. A. the SEC B. investment bankers C. publicly traded companies D. FDIC

investment bankers

On a standard expected return vs. standard deviation graph investors will prefer portfolios that lie to the _____________ of the current investment opportunity set. A. left and above B. left and below C. right and above D. right and below

left and above

Some diversification benefits can be achieved by combining securities in a portfolio as long as the correlation between the securities is _____________. A. 1 B. less than 1 C. between 0 and 1 D. less than or equal to 0

less than 1

Value stocks usually exhibit ___ price-to-book ratios and ___ price-to-earnings ratios. A. low, low B. low, high C. high, low D. high, high

low; low

A __________ gives its holder the right to sell an asset for a specified exercise price on or before a specified expiration date. A. call option B. futures contract C. put option D. interest rate swap

put option

Transactions that do not involve the original issue of securities take place in _________. A. primary markets B. secondary markets C. over-the-counter markets D. institutional markets

secondary markets

Investors require a risk premium as compensation for bearing ______________. A. unsystematic risk B. alpha risk C. residual risk D. systematic risk

systematic risk

If a firm increases its plowback ratio this will probably result in a(n) _______ P/E ratio. A. higher B. lower C. unchanged D. unable to determine

unable to determine

Under firm commitment underwriting the ______ assumes the full risk that the shares cannot be sold to the public at the stipulated offering price A. red herring B. issuing company C. initial stockholder D. underwriter

underwriter

The value of a listed put option on a stock is lower when _______________. I. the exercise price is higher II. the contract approaches maturity III. the stock decreases in value IV. a stock split occurs A. II only B. II and IV only C. I, II and III only D. I, II, III and IV

II only

The formula E(r)-r/std. dev. is used to calculate the _____________. A. Sharpe measure B. Treynor measure C. Coefficient of variation D. Real rate of return

Sharpe measure

Which of the following stock price observations would appear to contradict the weak form of the efficient market hypothesis? A. The average rate of return is significantly greater than zero. B. The correlation between the market return one week and the return the following week is zero. C. You could have consistently made superior returns by buying stock after a 10% rise in price and selling after a 10% fall. D. You could have consistently made superior returns by forecasting future earnings performance with your new Crystal Ball forecast methodology

you could have consistently made superior returns by buying stock after a 10% rise in price and selling after a 10% fall

According to the capital asset pricing model, fairly priced securities have _________. A. negative betas B. positive alphas C. positive betas D. zero alphas

zero alphas

A put on Sanders stock with a strike price of $35 is priced at $2 per share while a call with a strike price of $35 is priced at $3.50. The maximum per share loss to the writer of an uncovered put is __________ and the maximum per share gain to the writer of an uncovered call is _________. A. $33.00; $3.50 B. $33.00; $31.50 C. $35.00; $3.50 D. $35.00; $35.00

$33.00; $3.50

Which of the following correlation coefficients will produce the most diversification benefits? A. -0.6 B. -0.9 C. 0.0 D. 0.4

-0.9

In order to construct a riskless portfolio using two risky stocks, one would need to find two stocks with a correlation coefficient of ________. A. 1.0 B. 0.5 C. 0 D. -1.0

-1.0

The market value weighted average beta of firms included in the market index will always be _____________. A. 0 B. between 0 and 1 C. 1 D. There is no particular rule concerning the average beta of firms included in the market index

1

What is the most likely correlation coefficient between a stock index mutual fund and the S&P 500? A. -1.0 B. 0.0 C. 1.0 D. 0.5

1.0

The commission, or front-end load, paid when you purchase shares in mutual funds, may not exceed __________. A. 3% B. 6% C. 8.5% D. 10%

8.5%

Which of the following does not approximate the performance of a buy and hold portfolio strategy? A. An equally weighted index B. A price weighted index C. A value weighted index D. Weights are not a factor in this situation

A value weighted index

Which of the following statements is true regarding time diversification? I. The standard deviation of the average annual rate of return over several years will be smaller than the one-year standard deviation. II. For a longer time horizon, uncertainty compounds over a greater number of years. III. Time diversification does not reduce risk. A. I only B. II only C. II and III only D. I, II and III E. None of the statements are correct

I, II, and III

The value of a listed call option on a stock is lower when _______________. I. the exercise price is higher II. the contract approaches maturity III. the stock decreases in value IV. a stock split occurs A. II, III and IV only B. I, III and IV only C. I, II and III only D. I, II, III and IV

I, II, and III only

The interest rate charged by large banks in London to lend money among themselves is called _________. A. the prime rate B. the discount rate C. the federal funds rate D. LIBOR

LIBOR

An example of a derivative security is _________. A. a common share of General Motors B. a call option on Intel stock C. a Ford bond D. a U.S. Treasury bond

a call option on Intel stock

Consider the liquidity preference theory of the term structure of interest rates. On average, one would expect investors to require _________. A. a higher yield on short term bonds than long term bonds B. a higher yield on long term bonds than short term bonds C. the same yield on both short term bonds and long term bonds D. the liquidity preference theory cannot be used to make any of the other statements

a higher yield on long term bonds than short term bonds

You are constructing a scatter plot of excess returns for Stock A versus the market index. If the correlation coefficient between Stock A and the index is -1 you will find that the points of the scatter diagram ______________________ and the line of best fit has a ______________. A. all fall on the line of best fit; positive slope B. all fall on the line of best fit; negative slope C. are widely scattered around the line; positive slope D. are widely scattered around the line; negative slope

all fall on the line of best fit; negative slope

According to the capital asset pricing model, a fairly priced security will plot _________. A. above the security market line B. along the security market line C. below the security market line D. at no relation to the security market line

along the security market line

A one dollar increase in a stock's price would result in __________ in the call option's value of __________ than one dollar. A. a decrease; less B. a decrease; more C. an increase; less D. an increase; more

an increase; less

The ______ measure of returns ignores compounding. A. geometric average B. arithmetic average C. IRR D. dollar weighted

arithmetic average

After considering current market conditions an investor decides to place 60% of their funds in equities and the rest in bonds. This is an example of A. asset allocation B. security analysis C. top down portfolio management D. passive management

assest allocation

Arbitrage is based on the idea that _________. A. assets with identical risks must have the same expected rate of return B. securities with similar risk should sell at different prices C. the expected returns from equally risky assets are different D. markets are perfectly efficient

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

A down-and-out option is one type of ________ option. A. barrier B. lookback C. digital D. Asian

barrier

The difference between the price at which a dealer is willing to buy, and the price at which a dealer is willing to sell, is called the _________. A. market spread B. bid-ask spread C. bid-ask gap D. market variation

bid-ask spread

An investor in a T-bill earns interest by _________. A. receiving interest payments every 90 days B. receiving dividend payments every 30 days C. converting the T-bill at maturity into a higher valued T-note D. buying the bill at a discount from the face value received at maturity

buying the bill at a discount from the face value received at maturity

A __________ bond is a bond where the issuer has an option to retire the bond before maturity at a specific price after a specific date. A. callable B. coupon C. puttable D. treasury

callable

Security selection refers to the ________. A. allocation of the investment portfolio across broad asset classes B. analysis of the value of securities C. choice of specific securities within each asset class D. top down method of investing

choice of specific securities within each asset class

______ are partnerships of investors with portfolios that are larger than most individual investors but are still too small to warrant managing on a separate basis. A. Commingled funds B. Closed-end funds C. REITs D. Mutual funds

commingled funds

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 __________. A. geometric average return B. arithmetic average return C. dollar weighted return D. index return

dollar weighted return

The small firm in January effect is strongest ________. A. early in the month B. in the middle of the month C. late in the month D. in even numbered years

early in the month

Which of the following is not a method employed by followers of technical analysis? A. Charting B. Relative strength analysis C. Earnings forecasting D. Trading around support and resistance levels

earnings forecasting

A firm cuts its dividend payout ratio. As a result you know that the firm's _______. A. return on assets will increase B. earnings retention ratio will increase C. earnings growth rate will fall D. stock price will fall

earnings retention ratio will increase

Which of the following contradicts the proposition that the stock market is weakly efficient? A. Over 25% of mutual funds outperform the market on average. B. Insiders earn abnormal trading profits. C. Every January, the stock market earns above normal returns. D. Applications of technical trading rules fail to earn abnormal returns

every January, the stock market earns above normal returns

A down-and-out option _______________. A. provides a payoff if the firm's stock price falls below some specified percentage of what it was at the beginning of the option term B. provides a payoff if the firm's stock price falls below some specified dollar amount during the term of the option C. expires worthless if the firm's stock price falls below some specified percentage of what it was at the beginning of the option term D. expires worthless if the firm's stock price falls below some specified dollar amount during the term of the option

expires worthless if the firm's stock price falls below some specified dollar amount during the term of the option

You are considering investing in one of several mutual funds. All the funds under consideration have various combinations of front-end and back-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. 12b-1 fee; front-end load B. front-end load; 12b-1 fee C. back-end load, front-end load D. 12b-1 fee; back-end load

front-end load; 12b-1 fee

You have calculated the historical dollar weighted return, annual geometric average return and annual arithmetic average return. You always reinvest your dividends and interest earned on the portfolio. Which method provides the best measure of the actual average historical performance of the investments you have chosen? A. Dollar weighted return B. Geometric average return C. Arithmetic average return D. Index return

geometric average return

A fund that invests in securities worldwide, including the United States is called a/an ______. A. international fund B. emerging market fund C. global fund D. regional fund

global fund

According to recent research security markets fully adjust to earnings announcements _______. A. instantly B. in 1 day C. in 1 week D. gradually over time

gradually over time

Advantages of investment companies to investors include all but which one of the following? A. Record keeping and administration B. Low cost diversification C. Professional management D. Guaranteed rates of return

guaranteed rates of return

Which type of investment fund is commonly known to invest in options and futures in large scale? A. Commingled funds B. Hedge funds C. ETFs D. REITS

hedge funds

Growth stocks usually exhibit ___ price-to-book ratios and ___ price-to-earnings ratios. A. low, low B. low, high C. high, low D. high, high

high; high

In a recent study, Fama and French found that the return on the aggregate stock market was __________ when the dividend yield was higher. A. higher B. lower C. unaffected D. more skewed

higher

The inside quotes on a limit order book would be comprised of the ______. A. highest bid price and the lowest ask price B. lowest bid price and the lowest ask price C. lowest bid price and the highest ask price D. highest bid price and the highest ask price

highest bid price and the lowest ask price

When matching orders from the public a specialist is required to use the _______. A. lowest outstanding bid price and highest outstanding ask price B. highest outstanding bid price and highest outstanding ask price C. lowest outstanding bid price and lowest outstanding ask price D. highest outstanding bid price and lowest outstanding ask price

highest outstanding bid price and lowest outstanding ask price

Firms that specialize in helping companies raise capital by selling securities to the public are called _________. A. pension funds B. investment banks C. savings banks D. REITs

investment banks

Commercial paper is a short-term security issued by __________ to raise funds. A. the Federal Reserve B. commercial banks C. large well-known companies D. the New York Stock Exchange

large well-known companies

The possibility of arbitrage arises when ____________. A. there is no consensus among investors regarding the future direction of the market, and thus trades are made arbitrarily B. mis-pricing among securities creates opportunities for riskless profits C. two identically risky securities carry the same expected returns D. investors do not diversify

mis-pricing among securities creates opportunities for riskless profits

You buy a call option on Merritt Corp. with an exercise price of $50 and an expiration date in July and write a call option on Merritt Corp. with an exercise price of $55 with an expiration date in July. This is called a ________. A. time spread B. long straddle C. short straddle D. money spread

money spread

The primary measurement unit used for assessing the value of one's stake in an investment company is ___________________. A. Net Asset Value B. Average Asset Value C. Gross Asset Value D. Total Asset Value

net asset value

An implication of the efficient market hypothesis is that __________. A. high beta stocks are consistently overpriced B. low beta stocks are consistently overpriced C. nonzero alphas will quickly disappear D. growth stocks are better buys than value stocks

nonzero alphas will quickly disappear

__________ funds stand ready to redeem or issue shares at their net asset value. A. Closed-end B. Index C. Open-end D. Hedge

open-end

In a perfectly efficient market the best investment strategy is probably a/an A. active strategy B. passive strategy C. asset allocation D. market timing

passive strategy

A put option with several months until expiration has a strike price of $55 when the stock price is $50. The option has _____ intrinsic value and _____ time value. A. negative; positive B. positive; positive C. zero; zero D. zero; positive

positive; positive

You invest in the stock of Valleyview Corp. and purchase a put option on Valleyview Corp. This strategy is called a _________. A. long straddle B. naked put C. protective put D. short stroll

protective put

The excess return is the _________. A. rate of return that can be earned with certainty B. rate of return in excess of the Treasury bill rate C. rate of return to risk aversion D. index return

rate of return in excess of the Treasury bill rate

Which of the following is not a method employed by fundamental analysts? A. Analyzing the Fed's next interest rate move B. Relative strength analysis C. Earnings forecasting D. Estimating the economic growth rate

relative strength analysis

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 his complete portfolio to achieve the best CAL would be _________. A. security A B. security B C. security C D. security D

security A

Empirical results estimated from historical data indicate that betas _________. A. are always close to zero B. are constant over time C. of all securities are always between zero and one D. seem to regress toward one over time

seem to regress toward one over time

Which of the following strategies makes a profit if the stock price declines and loses money when the stock price increases? A. Long call and short put B. Long call and long put C. Short call and short put D. Short call and long put

short call and long put

Which of the following beliefs would not preclude charting as a method of portfolio management? A. The market is strong form efficient. B. The market is semi-strong form efficient. C. The market is weak form efficient. D. Stock prices follow recurring patterns.

stock prices follow recurring patterns

Strike prices of options are adjusted for ____________ but not for ____________. A. dividends; stock splits B. stock splits; cash dividends C. exercise of warrants; stock splits D. stock price movements; stock dividends

stock splits; cash dividends

If you believe in the __________ form of the EMH, you believe that stock prices reflect all relevant information including information that is available only to insiders. A. semi-strong B. strong C. weak D. perfect

strong

Choosing stocks by searching for predictable patterns in stock prices is called ________. A. fundamental analysis B. technical analysis C. index management D. random walk investing

technical analysis

Random price movements indicate ________. A. irrational markets B. that prices cannot equal fundamental values C. that technical analysis to uncover trends can be quite useful D. that markets are functioning efficiently

that markets are functioning efficiently

If you place an order to buy or sell a share of a mutual fund during the trading day the order will be executed at A. the NAV calculated at the market close at 4:00 pm New York time. B. the real time NAV. C. the NAV delayed 15 minutes. D. the NAV calculated at the open of the next day's trading

the NAV calculated at the market close at 4:00pm New York time

An important characteristic of market equilibrium is _______________. A. the presence of many opportunities for creating zero-investment portfolios B. all investors exhibit the same degree of risk aversion C. the absence of arbitrage opportunities D. the a lack of liquidity in the market

the absence of arbitrage opportunities

In a world where the CAPM holds which one of the following is not a true statement regarding the capital market line? A. The capital market line always has a positive slope B. The capital market line is also called the security market line C. The capital market line is the best attainable capital allocation line D. The capital market line is the line from the risk-free rate through the market portfolio

the capital market line is also called the security line

The beta of a security is equal to _________. A. the covariance between the security and market returns divided by the variance of the market's returns B. the covariance between the security and market returns divided by the standard deviation of the market's returns C. the variance of the security's returns divided by the covariance between the security and market returns D. the variance of the security's returns divided by the variance of the market's returns

the covariance between the security and market returns divided by the variance of the market's returns

The market risk premium is defined as __________. A. the difference between the return on an index fund and the return on Treasury bills B. the difference between the return on a small firm mutual fund and the return on the Standard and Poor's 500 index C. the difference between the return on the risky asset with the lowest returns and the return on Treasury bills D. the difference between the return on the highest yielding asset and the lowest yielding asset

the difference between the return on an index fund and the return on Treasury bills

Small firms have tended to earn abnormal returns primarily in __________. A. the month of January B. the month July C. the trough of the business cycle D. the peak of the business cycle

the month of January

The bid price of a treasury bill is _________. A. the price at which the dealer in treasury bills is willing to sell the bill B. the price at which the dealer in treasury bills is willing to buy the bill C. greater than the ask price of the treasury bill expressed in dollar terms D. the price at which the investor can buy the treasury bill

the price at which the dealer in treasury bills is willing to buy the bill

Joe bought a stock at $57 per share. The price promptly fell to $55. Joe held on to the stock until it again reached $57 and then he sold once he had eliminated his loss. If other investors do the same to establish a trading pattern this would contradict _______. A. the strong-form EMH B. the weak-form EMH C. technical analysis D. the semistrong-form EMH

the weak-form EMH

The correlation coefficient between two assets equals to _________. A. their covariance divided by the product of their variances B. the product of their variances divided by their covariance C. the sum of their expected returns divided by their covariance D. their covariance divided by the product of their standard deviations

their covariance divided by the product of their standard deviations

Which one of the following invests in a portfolio that is fixed for the life of the fund? A. Mutual fund B. Money market fund C. Managed investment company D. Unit investment trust

unit investment trust

Adding additional risky assets to the investment opportunity set will generally move the efficient frontier _____ and to the ______. A. up, right B. up, left C. down, right D. down, left

up; left

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

usually positive, but are not restricted in any particular way

Which of the following statistics cannot be negative? A. Covariance B. Variance C. E[r] D. Correlation coefficient

variance

You wish to earn a return of 11% on each of two stocks, A and B. Stock A is expected to pay a dividend of $3 in the upcoming year while stock B is expected to pay a dividend of $2 in the upcoming year. The expected growth rate of dividends for both stocks is 4%. Using the constant growth DDM, the intrinsic value of stock A _________. A. will be higher than the intrinsic value of stock B B. will be the same as the intrinsic value of stock B C. will be less than the intrinsic value of stock B D. more information is necessary to answer this question

will be higher than the intrinsic value of stock B

The tendency when the ______ performing stocks in one period are the best performers in the next and the current ________ performers are lagging the market later is called the reversal effect. A. worst, best B. worst, worst C. best, worst D. best, best

worst; best

Real assets in the economy include all but which one of the following? A. Land B. Buildings C. Consumer durables D. Common stock

Common stock

Which of the following is not a money market security? A. U.S. Treasury bill B. Six month maturity certificate of deposit C. Common stock D. Banker's acceptance

Common stock

Advantages of ETFs over mutual funds include all but which one of the following? A. ETFs trade continuously so investors can trade throughout the day B. ETFs can be sold short or purchased on margin, unlike fund shares C. ETF providers do not have to sell holdings to fund redemptions D. ETF values can diverge from NAV

ETF values can diverge from NAV

Which of the following are financial assets? I. Debt securities II. Equity securities III. Derivative securities A. I only B. I and II only C. II and III only D. I, II and III

I, II, and III

Which of the following indices are market-value weighted? I. The NYSE Composite II. The S&P 500 III. The Wilshire 5000 A. I and II only B. II and III only C. I and III only D. I, II and III

I, II, and III