Final Exam Prep Questions

10. Consider the CAPM. The risk-free rate is 5%, and the expected return on the market is 15%. What is the beta on a stock with an expected return of 17%? A. .5 B. .7 C. 1 D. 1.2

D. 1.2

19. You put up $50 at the beginning of the year for an investment. The value of the investment grows 4% and you earn a dividend of $3.50. Your HPR was ____. A. 4% B. 3.5% C. 7% D. 11%

D. 11%

9. Consider the CAPM. The risk-free rate is 6%, and the expected return on the market is 18%. What is the expected return on a stock with a beta of 1.3? A. 6% B. 15.6% C. 18% D. 21.6%

D. 21.6%

25. A stock with a current market price of $50 and a strike price of $45 has an associated call option priced at $6.50. This call has an intrinsic value of ______ and a time value of _____. A. $5; $1.50 B. $1.50; $5 C. $0; $6.50 D. $6.50; $0

A. $5; $1.50

26. Portfolio performance is often decomposed into various subcomponents, such as the return due to: I. Broad asset allocation across security classes II. Sector weightings within equity markets III. Security selection with a given sector The one decision that contributes most to the fund performance is _____. A. I B. II C. III D. All contribute equally to fund performance.

A. I Broad asset allocation across security classes

36. All other things equal (YTM = 10%), which of the following has the longest duration? A. a 30-year bond with a 10% coupon B. a 20-year bond with a 9% coupon C. a 20-year bond with a 7% coupon D. a 10-year zero-coupon bond

A. a 30-year bond with a 10% coupon

37. Because of convexity, when interest rates change, the actual bond price will ____________ the bond price predicted by duration. A. always be higher than B. sometimes be higher than C. always be lower than D. sometimes be lower than

A. always be higher than

An example of a highly cyclical industry is the _________. A. automobile industry B. tobacco industry C. pharmaceutical industry D. utility industry

A. automobile industry

8. A __________ gives its holder the right to buy 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

A. call option

16. Which of the following assets is most liquid? A. cash equivalents B. receivables C. inventories D. plant and equipment

A. cash equivalents

23. The __________ is the stock price minus exercise price, or the profit that could be attained by immediate exercise of an in-the-money call option. A. intrinsic value B. time value C. stated value D. discounted value

A. intrinsic value

35. A call 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; negative C. zero; zero D. zero; positive

A. negative; positive

4. 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. A. rise; fewer B. fall; fewer C. rise; more D. fall; more

A. rise; fewer

In regard to bonds, convexity relates to the _______. A. shape of the bond price curve with respect to interest rates B. shape of the yield curve with respect to maturity C. slope of the yield curve with respect to liquidity premiums D. size of the bid-ask spread

A. shape of the bond price curve with respect to interest rates

14. You purchase one MBI July 120 call contract (equaling 100 shares) for a premium of $5. You hold the option until the expiration date, when MBI stock sells for $123 per share. You will realize a ______ on the investment. A. $200 profit B. $200 loss C. $300 profit D. $300 loss

B. $200 loss

The duration of a 5-year zero-coupon bond is ____ years. A. 4.5 B. 5 C. 5.5 D. 3.5

B. 5

32. A top-down analysis of a firm's prospects starts with an analysis of the ____. A. firm's position in its industry B. U.S. economy or even the global economy C. industry D. specific firm under consideration

B. U.S. economy or even the global economy

15. A European call option gives the buyer the right to _________. A. buy the underlying asset at the exercise price on or before the expiration date B. buy the underlying asset at the exercise price only at the expiration date C. sell the underlying asset at the exercise price on or before the expiration date D. sell the underlying asset at the exercise price only at the expiration date

B. buy the underlying asset at the exercise price only at the expiration date

18. When the market risk premium rises, stock prices will ________. A. rise B. fall C. recover D. have excess volatility

B. fall

12. Everything else equal, the __________ the maturity of a bond and the __________ the coupon, the greater the sensitivity of the bond's price to interest rate changes. A. longer; higher B. longer; lower C. shorter; higher D. shorter; lower

B. longer; lower

13. All else equal, bond price volatility is greater for __________. A. higher coupon rates B. lower coupon rates C. shorter maturity D. lower default risk

B. lower coupon rates

5. Suppose an investor is considering one of two investments that are identical in all respects except for risk. If the investor anticipates a fair return for the risk of the security he invests in, he can expect to _____ . A. earn no more than the Treasury-bill rate on either security. B. pay less for the security that has higher risk. C. pay less for the security that has lower risk. D. earn more if interest rates are lower.

B. pay less for the security that has higher risk.

30. An investor who goes short in a futures contract will _____ any increase in value of the underlying asset and will _____ any decrease in value in the underlying asset. A. pay; pay B. pay; receive C. receive; pay D. receive; receive

B. pay; receive

22. You purchased a share of stock for $29. One year later you received $2.25 as dividend and sold the share for $28. Your holding-period return was _________. A. -3.57% B. -3.45% C. 4.31% D. 8.03%

C. 4.31%

7. Which one of the following is a true statement regarding corporate bonds? A. A corporate callable bond gives its holder the right to exchange it for a specified number of the company's common shares. B. A corporate debenture is a secured bond. C. A corporate convertible bond gives its holder the right to exchange it for a specified number of the company's common shares. D. Holders of corporate bonds have voting rights in the company

C. A corporate convertible bond gives its holder the right to exchange it for a specified number of the company's common shares.

31. Inflation-indexed Treasury securities are commonly called ____. A. PIKs B. CARs C. TIPS D. STRIPS

C. TIPS

1. 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

C. choice of specific securities within each asset class

38. Banks and other financial institutions can best manage interest rate risk by _____________. A. maximizing the duration of assets and minimizing the duration of liabilities B. minimizing the duration of assets and maximizing the duration of liabilities C. matching the durations of their assets and liabilities D. matching the maturities of their assets and liabilities

C. matching the durations of their assets and liabilities

28. Target date immunization would primarily be of interest to _________. A. banks B. mutual funds C. pension funds D. individual investors

C. pension funds

27. Duration is a concept that is useful in assessing a bond's _________. A. credit risk B. liquidity risk C. price volatility D. convexity risk

C. price volatility

6. 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

C. put option

43. A __________ bond gives the bondholder the right to cash in the bond before maturity at a specific price after a specific date. A. callable B. coupon C. puttable D. Treasury

C. puttable

42. An investor who goes long in a futures contract will _____ any increase in value of the underlying asset and will _____ any decrease in value in the underlying asset. A. pay; pay B. pay; receive C. receive; pay D. receive; receive

C. receive; pay

17. Which of the following is not one of the three key financial statements available to investors in publicly traded firms? A. income statement B. balance sheet C. statement of operating earnings D. statement of cash flows

C. statement of operating earnings

24. The _________of a call option is the difference between the actual call price and the intrinsic value. A. stated value B. strike value C. time value D. binomial value

C. time value

3. Commodity and derivative markets allow firms to adjust their _________. A. management styles B. focus from their main line of business to their investment portfolios C. ways of doing business so that they'll always have positive returns D. exposure to various business risks

D. exposure to various business risks

In a well-diversified portfolio, __________ risk is negligible. A. nondiversifiable B. market C. systematic D. unsystematic

D. unsystematic

2. The value of a derivative security _________. A. depends on the value of another related security B. affects the value of a related security C. is unrelated to the value of a related security D. can be integrated only by calculus professors

A. depends on the value of another related security

21. 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 ____. A. stocks B. bonds C. money market funds D. Treasury bills

A. stocks

20. 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 & 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 return on the lowest-yielding asset

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

33. Attempting to forecast future earnings and dividends is consistent with which of the following approaches to securities analysis? A. technical analysis B. fundamental analysis C. both technical analysis and fundamental analysis D. indexing

B. fundamental analysis

29. A person with a long position in a commodity futures contract wants the price of the commodity to ______. A. decrease substantially B. increase substantially C. remain unchanged D. increase or decrease substantially

B. increase substantially

41. A person with a long position in a commodity futures contract wants the price of the commodity to ______. A. decrease substantially B. increase substantially C. remain unchanged D. increase or decrease substantially

B. increase substantially