FIN 4504 Exam 2 UNF Showalter

Consider the chart with seven portfolios. Which of the following statements regarding the efficientfrontier is most accurate?

. Portfolios A, F, and B have the same return, so they are equally efficient. b. Portfolios H, F, and G have the same level of risk. c. Portfolios B, C, and D are all efficient and are optimal portfolios for an investor. d. Portfolios A and G have the same efficiency as they fall along the same 45-degree plane.

Janis, who lives in NY City, is in the 24% federal tax bracket and 6% state income tax bracket. Which of the following bonds that she is considering purchasing has the highest after-tax yield?1. Treasury bond paying 5.4%. 2. Corporate bond paying 5.5%. 3. Florida Municipal bond paying 4.2%

.a. 1 only. b. 2 only. c. 3 only. d. 1 and 2 are the same and the highest

Julio has a portfolio of mutual funds, A, B, and C. He has 50% in A, 40% in B, and 10% in C. The expectedreturn on Julio's portfolio if the expected returns for A, B, and C are 10%, 8%, and 14% is closest to

:a. 9.35%. b. 9.60% .c. 10.67%. d. 11.50%

A U.S. Treasury bond that matures in twenty years is most likely to have substantial

:a. Liquidity risk. b. Interest rate risk. c. Default risk. d. Credit risk

Shaunie buys ten zero-coupon twenty-year bonds for $2,584.19. The yield to maturity on the investmentis 7% with annual compounding. The interest Shaunie is required to report for tax purposes during thefirst year is closest to:

a. $0 because they are zero-coupon bonds. b. $90. c. $181. d. $1,383

A thirty-year bond that pays a 3% coupon rate has a yield to maturity of 6%. With coupon paymentsmade twice per year, the price of this bond is closest to:

a. $584.87. b. $587.06. c. $602.41. d. $622.28

A bond has a modified duration of 4.90. The yield to maturity on this bond is expected to decrease by 110basis points. The percentage change in bond price is closest to:

a. -5.39%. b. -4.41%. c. +4.41%. d. +5.39%.

Nyssa is considering two portfolios:1. Portfolio A with a return of 11% and a standard deviation of 16%2. Portfolio B with a return of 6% and a standard deviation of 8%Assuming the correlation between A and B is -0.3, what of the following is the most efficient portfolio?

a. 10%A / 90%B. b. 20%A / 80%B. c. 30%A / 70%B. d. All three combinations of A and B are equally efficient.

Callen is a young DPT and invests in the Bourgeois tech fund that has a beta of 2.0. If the expected marketreturn is 11% and the risk-free rate of return is 4%, what return should Callen most likely expect fromthe Fund?

a. 11% .b. 15%. c. 18%. d. 22%

An eight-year bond with a current market price of $700 has a 6% coupon rate. If the bond pays interestsemi-annually, its yield to maturity is closest to:

a. 11.92%. b. 12.05%. c. 12.14%. d. 12.17%

The expected market return is 12% and the risk-free rate of return is 3%. Using the CAPM, what is theexpected return for a portfolio that has a standard deviation of 18% and a beta of 1.3?

a. 12.0%. b. 13.8%. c. 14.7%. d. 15.6%

A bond that sells for par value has three years until it matures and has a 4% coupon rate. Assumingsemi-annual interest payments, the current yield is closest to:

a. 2% .b. 3% .c. 4%. d. 5%

Val is single and in the 24% federal and 5% state tax brackets. He is considering the purchase of amunicipal bond, issued in his state of residence, with a YTM of 6.75%. Val's tax equivalent yield on thebond is closest to:

a. 4.79%. b. 6.75%. c. 8.88%. d. 9.51%

The yield on a one-year security is 7% while the yield on a two-year security is 10%. According to theexpectations theory, the implied one-year rate exactly one year from today is closest to:

a. 7%. b. 10%. c. 12%. d. 13%

Which of the following bonds will most likely have the largest decrease in price if interest rates increasein Year 1 of the life of the bonds?

a. An option free 11-year 9% coupon bond selling at a discount. b. A 10-year 5% coupon bond that is callable at 104 in three years. c. A 7-year 4% coupon bond that is puttable after two years. d. A 10-year zero coupon bond.

Guinness is considering two portfolios:1. Portfolio A with a return of 14% and a standard deviation of 14% and2. Portfolio B with a return of 4% and a standard deviation of 7%.Assuming the correlation between A and B is 0.5 and he invests 70% in A and 30% in B, what range ofreturns should this portfolio produce 95% of the time?

a. Between 0% and 9%. b. Between 0% and 22%. c. Between -6% and 26%. d. Between -11% and 33%

An investor considers two portfolios: 1) Portfolio A with a return of 10% and a standard deviation of20% and 2) Portfolio B with a return of 6% and a standard deviation of 8%. Assuming the correlationbetween A and B is +0.2 and he invests 40% in A and 60% in B, what is the most likely range of theportfolio standard deviation?

a. Between 6% and 11%. b. Between 11% and 14%. c. Between 14% and 17%. d. Between 17% and 20%

Which of the following statement regarding collateralized mortgage obligations (CMO) is least accurate?

a. CMOs are divided into tranches. b. CMOs are subject to interest rate risk and prepayment risk. c. CMOS are not subject to default risk. d. CMOs allow investors to match the timing of their cash inflows to their cash outflows.

A bond for which the bondholder has the right to sell in the bond before maturity at a specific price aftera specific date is a:

a. Callable bond. b. Coupon bond. c. Puttable bond. d. Convertible bond

Which of the following is least accurate regarding the CAPM?

a. Conceptually, the CAPM represents expected returns for various combinations of the risk-free rate ofreturn and the market portfolio. b. The CAPM assumes all investors are rational and have uniform expectations about the risk-returnrelationship for investment alternatives. c. The CAPM assumes investors can borrow at the risk-free rate of return, as well as lend at the risk-free rate of return. d. CAPM is based on the notion that expected returns on individual stocks depends on their total risklevels

A bond issued and supported by the general credit standing of the issuing corporation is most likelyknown as a(n):

a. Debenture. b. Indebenture. c. Term bond. d. Serial bond.

Which of the following techniques or strategies would most likely take advantage of a perceivedundervaluation in the energy sector of the economy?

a. Dollar cost averaging into a portfolio. b. Strategic asset allocation rebalancing. c. Tactical asset allocation. d. Index funds

Which of the following statements regarding the application of duration is most accurate?

a. Duration is used to compute an exact price impact from a change in yield. b. Yield curve risk does not impact duration. c. The duration of a zero coupon bond is less than its time to maturity. d. Effective duration is useful for bonds with embedded options.

Which of the following would most likely be used to determine long-term asset allocation decisions?

a. Dynamic asset allocation. b. Market neutral asset allocation. c. Strategic asset allocation. d. Tactical asset allocation

A large banking firm recently issued a twelve-year, 7% coupon bond that is callable at the end of threeyears. To estimate the bond's sensitivity to price changes, a financial analyst is most likely to use:

a. Effective duration. b. Modified duration. c. Macaulay duration. d. Portfolio duration

A mean-variance optimization model generally is least likely to include:

a. Expected return. b. Expected standard deviation. c. Expected correlation between each asset class. d. Expected beta.

Assume Marleen adds security Y to her portfolio that is less than perfectly positively correlated with the portfolio. Security Y has the same standard deviation as the portfolio. After the addition of the security, the standard deviation of Marleen's portfolio will most likely:

a. It will remain the same .b. It will decrease. c. It will increase. d. It may increase or decrease, depending on the weightings of the portfolio holdings

The intersection of the security market line and the y axis occurs at the:

a. Market premium. b. Market portfolio. c. Real rate of return. d. Risk-free rate of return

Under the CML, a lending portfolio is most likely to have:

a. More than 100% of the portfolio invested in the market portfolio. b. 100% of the portfolio invested at the risk-free rate of return. c. Less than 100% of the portfolio invested in the market portfolio. d. An expected return that is greater than or equal to the market portfolio

The T-bill has a beta equal to ____, while the market portfolio's beta is equal to ____.

a. One; more than one. b. One; less than one. c. Zero; one. d. Less than zero; more than zero

Melody rebalances her portfolio frequently to take advantage of perceived opportunities in certainmarket sectors. The type of asset allocation Melody most likely engaging in is:

a. Optimal. b. Tactical. c. Strategic. d. Hybrid

Assets that lie below the SML are most likely:

a. Overvalued based on its beta. b. Overvalued based on its standard deviation. c. Undervalued based on its beta. d. Undervalued based on its standard deviation

Consider the chart with the six portfolios and the efficient frontier. Which of the following portfolios isthe most efficient in terms of risk and return?

a. Portfolio A .b. Portfolio D. c. Portfolio F. d. Portfolio H

Based on Markowitz's work, which of the following portfolios is least likely to lie on the efficient frontier?

a. Portfolio A: expected return of 10% and standard deviation of 20%. b. Portfolio B: expected return of 18% and standard deviation of 32%. c. Portfolio C: expected return of 14% and standard deviation of 18%. d. Portfolio D: expected return of 9% and standard deviation of 11%

Parker believes that the market premium will fall over the next two months due to expectations aboutthe market portfolio. The slope of the SML will most likely:

a. Remain the same but the SML will shift upwards. b. Remain the same but the SML will shift downwards. c. Increase. d. Decrease

Which of the following statements regarding US treasury securities is most accurate?

a. STRIPS are issued directly from the U.S. Treasury. b. Treasury notes are pure discount bonds. c. STRIPS are subject to the OID rules. d. Treasury notes are subject to the OID rules

The investment policy statement for Abigail's portfolio identifies the following desired asset allocationranges: large cap stocks 30% - 40%, mid cap stocks 10% - 20%, small cap stocks 5% - 15%, REITs 5% -15%, bonds 25% - 35%. Due to market conditions in which bond prices have risen and stock prices havefallen, the current portfolio allocation is as follows: large cap stocks 25%, mid cap stocks 10%, small cap stocks 2%, REITs 8%, bonds 55%. Which of the following rebalancing actions should the portfoliomanager take?

a. Sell bonds, buy large and small cap stocks. b. Sell bonds, buy large, mid, and small cap stocks and REITs. c. Sell large cap stocks, buy bonds. d. Sell large cap stocks and REITs, buy bonds and mid cap stocks

Which of the following statements regarding sensitivity analysis is most accurate?

a. Sensitivity analysis is used in connection with behavior finance principles to assess how sensitive aclient is to losses in the portfolio. b. Sensitivity analysis is used in connection with a mean-variance optimization asset allocation strategyto determine how often the portfolio should be rebalanced. c. Sensitivity analysis can be used in conjunction with the SML line to determine the optimal portfoliofor the client, based on the client's sensitivity to the types of assets in the portfolio. d. Sensitivity analysis can be used in conjunction with forecasting to provide an understanding of howthe portfolio may change under various what-if scenarios

Which of the following statements about Treasury bills and commercial paper is most accurate?

a. T-bills and commercial paper are default-risk free. b. Yields on T-bills are slightly higher than commercial paper since they are issued by the United States government. c. Both a and b. d. Neither a nor b.

Which of the following statements about Treasury bills is most accurate?

a. T-bills are issued with maturities of 4 weeks, 13, weeks, and 26 weeks only. b. T-bills that extend beyond a calendar year are subject to taxation on the income earned bothin the year of issuance and the year of maturity. c. T-bills are sold on a pure discount basis only. d. The stop-yield is the lowest yield determined during a T-bill auction.

Which of the following is most accurate regarding the CAPM?

a. The CAPM assumes investors are not rational and have certain behavioral biases. b. The CAPM assumes investors have modest transaction costs (including taxes). c. The CAPM implies that the return of an investor equals the market premium magnified by theportfolio's beta plus the risk-free rate of return. d. CAPM believes that a portion of unsystematic risk remains even after diversification

Which of the following statements regarding the graph of the SML is most accurate?

a. The beta of Portfolios A, B, and C are identical as they fall directly on the line. b. The expected return of Portfolio C is the difference between the market's expected return and the risk-free rate. c. Portfolio A has lower systematic risk than Portfolio B. d. The slope of the line is the market risk premium

Which of the following statements regarding bond characteristics is most accurate?

a. The coupon rate is the rate of interest paid on the market value of a bond. b. The YTM for a bond is the IRR of the cash flows that the investor earns if the bond is held to maturity. c. Callable bonds tend to have a lower YTM than non-callable bonds with the same default risk and maturity. d. None of the above are correct

Which of the following statements regarding asset pricing is most accurate?

a. The expected return based on the CAPM varies in proportion to the beta and the market riskpremium. b. Portfolios below the SML are ideal because they are undervalued. c. A borrowing portfolio will be less volatile than a lending portfolio. d. The CAPM assumptions accurately reflect the reality of capital markets.

Which of the following statements is true about equity returns, as represented by the S&P 500 from 1928- 2016?

a. The historical 1-year returns for the S&P 500 have ranged from approximately 25% to -15%. b. The lowest 20-year average return for this time period was -3.0%. c. Both a and b are true. d. Both a and b are false.

Which of the following statements regarding the advantages of owning corporate bonds is mostaccurate?

a. They have lower default risk than Treasuries. b. They generally pay lower interest than Treasuries. c. They generally offer some inflation protection via the semi-annual payment of coupons. d. They offer higher security of principal than equities

Tori recently graduated from college with a degree in finance. She enjoys stock analysis and is eager toget started with investing in the market. Tori has approximately $30,000 of student loan debt at anaverage interest rate of 4.2%, and the $300 monthly payment is easily manageable even at the startingsalary for a new college graduate. Although Tori does not currently have any savings, she has asked afinancial planner to assist her with opening a brokerage account where she can begin buying stocks tosave toward her goal of buying a condo in the next 7-8 years. Which of the following conclusions is mostaccurate?

a. Tori's willingness (propensity) to take on risk is greater than her ability (capacity) to take onrisk, so the planner should encourage her to begin investing toward her goal by purchasingstocks in the brokerage account. b. Tori's ability (capacity) to take on risk is greater than her willingness (propensity) to take onrisk, so the planner should encourage her to begin investing toward her goal by purchasingstocks in the brokerage account. c. Tori's willingness (propensity) to take on risk is greater than her ability (capacity) to take onrisk, so the planner should encourage her to accumulate emergency funds prior to purchasingstocks in a brokerage account to save for the goal. d. Tori's ability (capacity) to take on risk is greater than her willingness (propensity) to take onrisk, so the planner should encourage her to accumulate emergency funds prior to purchasingstocks in the brokerage account to save for the goal.

Which of the following statements regarding asset pricing is most accurate?

e. The expected return based on the CAPM varies in proportion to the beta and the market riskpremium. f. Portfolios below the SML are ideal because they are undervalued. g. A borrowing portfolio will be less volatile than a lending portfolio. h. The CAPM assumptions accurately reflect the reality of capital markets