Finance 305 Exam #1

You hold 5,000 shares of the 1 million outstanding shares of Wealthy Wranglers common stock. You've just learned that the company plans to issue more shares, so that 2 million shares will be outstanding. This is called _____.

a seasoned equity offering

Statman, Fisher, and Anginer (2008) found that stocks ranked high in Fortune's Survey of Most Admired Companies tended to have lower average risk-adjusted returns than the least admired firms. This could be attributed to

affect

The strong form of the EMH states that ________ must be reflected in the current stock price.

all information, including inside information

Financial markets allow for all but which one of the following?

allow most participants to routinely earn high returns with low risk

A fund that invests in securities worldwide, including the United States, is called ______.

a global fund

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

You run a regression for a stock's return on a market index and find the following Excel output: Multiple R 0.35 R-Square 0.12 Adjusted R-Square 0.02 Standard Error 38.45 Observations 12 Coefficients Standard Error t-Stat p-Value Intercept 4.05 15.44 0.26 0.80 Market 1.32 0.97 1.36 0.10 _______________ % of the variance is explained by this regression.

12 Explanation R2 = 12 means 12% of the variance is explained by the regression.

Proponents of the EMH think technical analysts __________.

are wasting their time

Asset A has an expected return of 15% and a reward-to-variability ratio of .4. Asset B has an expected return of 20% and a reward-to-variability ratio of .3. A risk-averse investor would prefer a portfolio using the risk-free asset and ______.

asset A

The two principal types of REITs are equity trusts, which _______________, and mortgage trusts, which _______________.

invest directly in real estate; invest in mortgage and construction loans

Financial institutions that specialize in assisting corporations in primary market transactions are called _______.

investment bankers

During the 1926-2013 period the Sharpe ratio was greatest for which of the following asset classes?

large U.S. stocks

The yield on tax-exempt bonds is ______.

less than the yield on taxable bonds

An investor holds a very conservative portfolio invested for retirement, but she takes some extra cash she earned from her year-end bonus and buys gold futures. She appears to be engaging in ___________.

mental accounting

The possibility of arbitrage arises when ____________.

mispricing among securities creates opportunities for riskless profits

The NAV of which funds is fixed at $1 per share?

money market funds

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.

strong

Asset allocation refers to _________.

the allocation of the investment portfolio across broad asset classes

Treasury bills are financial instruments issued by __________ to raise funds.

the federal government

The term "underwriting syndicate" describes _______.

the investment banks that participate in the underwriting

According to capital asset pricing theory, the key determinant of portfolio returns is _________.

the systematic risk of the portfolio

Many current and retired Enron Corp. employees had their 401k retirement accounts wiped out when Enron collapsed because ________.

their 401k accounts were not well diversified

One extensive study found that about ______ of financial managers use CAPM to estimate cost of capital.

three quarters

Evidence supporting semistrong-form market efficiency suggests that investors should _________________________.

use a passive trading strategy such as purchasing an index fund or an ETF

In a recent study, Malkiel found that evidence of persistence in the performance of mutual funds ________________ in the 1980s.

virtually disappeared

If a mutual fund has multiple-class shares, which class typically has a front-end load?

Class A

Real assets in the economy include all but which one of the following? land buildings consumer durables common stock

Common Stock

Which one of the following is a true statement?

Common dividends cannot be paid if preferred dividends are in arrears on cumulative preferred stock.

Barnegat Light sold 200,000 shares in an initial public offering. The underwriter's explicit fees were $90,000. The offering price for the shares was $35, but immediately upon issue, the share price jumped to $43. What is the best estimate of the total cost to Barnegat Light of the equity issue?

$1,690,000 Explanation Total cost = 90,000 + (43 - 35)200,000 = $1,690,000

Stock Price X X X 46 X O X O X O 44 X O X O X O 42 X O X O O 40 Identify the support level stock price.

$40

Stock Price X X X 46 X O X O X O 44 X O X O X O 42 X O X O O 40 Identify the resistance-level stock price.

$46

You run a regression for a stock's return on a market index and find the following Excel output: Multiple R 0.35 R-Square 0.12 Adjusted R-Square 0.02 Standard Error 38.45 Observations 12 Coefficients Standard Error t-Stat p-Value Intercept 4.05 15.44 0.26 0.80 Market 1.32 0.97 1.36 0.10 This stock has greater systematic risk than a stock with a beta of ___.

.50 Explanation .50 < 1.32

You have a $50,000 portfolio consisting of Intel, GE, and Con Edison. You put $20,000 in Intel, $12,000 in GE, and the rest in Con Edison. Intel, GE, and Con Edison have betas of 1.3, 1, and .8, respectively. What is your portfolio beta?

1.048 Explanation (2050)(1.3)+(1250)(1.0)+(1850)(0.8)=1.048

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%?

1.2 Explanation 17% = 5% + βs[15% - 5%]; βs = 1.2

What is the standard deviation of a portfolio of two stocks given the following data: Stock A has a standard deviation of 30%. Stock B has a standard deviation of 18%. The portfolio contains 60% of stock A, and the correlation coefficient between the two stocks is -1.

10.8% Explanation (.60)2‾‾‾‾‾‾√(.30)2 + (.40)2(.18)2 + 2(−1)(.30)(.18)(.60)(.40) = .108

Suppose you pay $9,400 for a $10,000 par Treasury bill maturing in 6 months. What is the effective annual rate of return for this investment?

13.17% Explanation [10,0009,400]126−1=13.17%

According to the CAPM, what is the expected market return given an expected return on a security of 15.8%, a stock beta of 1.2, and a risk-free interest rate of 5%?

14% Explanation 15.8 = 5 + 1.2 × (MRP); MRP = 9%; Expected market return = 5 + 9 = 14%

Keown and Pinkerton (1981) found cumulative abnormal returns begin roughly _______days prior to the announcement of a takeover.

15

You have the following rates of return for a risky portfolio for several recent years: 2013 35.23% 2014 18.67% 2015 −9.87% 2016 23.45% The annualized (geometric) average return on this investment is _____.

15.60% Explanation (1.78556) ^ (1/4) = 1.156 1.156 - 1 = 15.6%

Consider a mutual fund with $300 million in assets at the start of the year and 12 million shares outstanding. If the gross return on assets is 18% and the total expense ratio is 2% of the year-end value, what is the rate of return on the fund?

15.64% Explanation $300,000,000 × (1.18) = $354,000,000 0.02 × $354,000,000 = $7,080,000 $354,000,000×7,080,000−300,000,000$300,000,000=15.64%

An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 21% and a standard deviation of return of 39%. Stock B has an expected return of 14% and a standard deviation of return of 20%. The correlation coefficient between the returns of A and B is .4. The risk-free rate of return is 5%. The expected return on the optimal risky portfolio is approximately _________. (Hint: Find weights first.)

16% Explanation WB =(.14 - .05)(.392) - (.21 - .05)(.20)(.39)(.4)(.14 - .05)(.392)+ (.21 - .05)(.202) - (.14 - .05 + .21 - .05)(.20)(.39)(.4) WB = 71% and WA = 29% E[rp] = (.29)(.21) + (.71)(.14) = 16.03%

The return on the risky portfolio is 15%. The risk-free rate, as well as the investor's borrowing rate, is 10%. The standard deviation of return on the risky portfolio is 20%. If the standard deviation on the complete portfolio is 25%, the expected return on the complete portfolio is _________.

16.25% Explanation σc=y×σp=.25 σc=y×.20=.25 y = .25/.20 = 1.25 1 − y = −.25 E(rc) = 1.25 × 15% − .25 × 10% = 16.25%

On a particular day, there were 890 stocks that advanced on the NYSE and 723 that declined. The volume in advancing issues was 80,846,000, and the volume in declining issues was 70,397,000. The common measure of market breadth is __________.

167 Explanation Market breadth = 890 - 723 = 167

As of 2017, approximately _____ of mutual fund assets were invested in money market funds.

17%

You have an APR of 7.5% with continuous compounding. The EAR is _____.

7.79 % EAR = e.075 - 1 = 7.79% e = 2.71828

An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 21% and a standard deviation of return of 39%. Stock B has an expected return of 14% and a standard deviation of return of 20%. The correlation coefficient between the returns of A and B is .4. The risk-free rate of return is 5%. The standard deviation of returns on the optimal risky portfolio is _________.

21.4% WB = (.14 - .05)(.392) - (.21 - .05)(.20)(.39)(.4) (.14 - .05)(.392)+ (.21 - .05)(.202) - (.14 - .05 + .21 - .05)(.20)(.39)(.4) WB = 71% and WA = 29% σ2rp = (.292)(.392) + (.712)(.202) + 2(.29)(.71)(.39)(.20).4 σ2rp = .045804 σrp = 21.4%

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?

21.6% Explanation E[rs] = 6% + 1.3[18% - 6%] = 21.6%

As of 2017, approximately _____ of mutual fund assets were invested in bond funds.

22%

Consider a no-load mutual fund with $200 million in assets and 10 million shares at the start of the year and with $250 million in assets and 11 million shares at the end of the year. During the year investors have received income distributions of $2 per share and capital gain distributions of $.25 per share. Assuming that the fund carries no debt, and that the total expense ratio is 1%, what is the rate of return on the fund?

23.75% NAV0 = $200/10 = $20.00 NAV1 = [$250 - ($250 × .01)]/11 = $22.50 Gross return = ($22.50 - $20 + $2 + $.25)/$20 = 23.75%

During the 1926-2013 period the geometric mean return on Treasury bonds was _________.

5.07%

More than ______ of all trading is believed to be initiated by computer algorithms.

50%

Explicit costs of a stock IPO tend to be around ______ of the funds raised.

7%

The arithmetic average of -11%, 15%, and 20% is ________.

8% Explanation −11%+15%+20%3=8.00%

What is the standard deviation of a portfolio of two stocks given the following data: Stock A has a standard deviation of 18%. Stock B has a standard deviation of 14%. The portfolio contains 40% of stock A, and the correlation coefficient between the two stocks is -.23.

9.7% Explanation σ=(.40)2‾‾‾‾‾‾√(.18)2+(.60)2(.14)2+2(−.23)(.18)(.14)(.40)(.60)=.097

__________ is not a money market instrument. A certificate of deposit A Treasury bill A Treasury bond Correct Commercial paper

A Treasury bond Correct

Which of the following is (are) true about nonconforming mortgage loans? They are also known as subprime loans. They have higher default risk than conforming loans. They were able to be offered without due diligence.

All of the options are true.

Which of the following reforms were not included in 2014 regulations regarding money market funds? Institutional funds will "float" the prices of their shares. Funds can limit redemptions or impose a 2% fee if assets fall by more than 30%. increased disclosure of assets' values and liquidity All of the options were included.

All of the options were included.

The difference between LIBOR and the Treasury-bill rate is called the TED spread. measures credit risk in the banking sector. was very low just before the 2008 financial crisis.

All of the options.

All but which one of the following indices is value weighted?

DJIA

Which of the following firms was not engaged in a major accounting scandal between 2000 and 2005?

General Electric

The Hang Seng index reflects market performance on which of the following major stock markets?

Hong Kong

Which famous economist suggested that asset bubbles arise naturally as investors become more willing to take on added risk during stable periods, leading to increased asset prices?

Hyman Minsky

The NYSE has lost market share to ECNs in recent years. Part of the NYSE's response to the growth of ECNs has been to: I. Purchase Archipelago, a major ECN, and rename it NYSE Arca II. Enable automatic trade execution through its new Market Center III. Impose a tighter limit on bid-ask spreads

I only

Higher portfolio turnover: I. Results in greater tax liability for investors II. Results in greater trading costs for the fund, which investors have to pay for III. Is a characteristic of asset allocation funds

I, II, and III

The cost of buying and selling a stock includes: I. Broker's commissions II. Dealer's bid-asked spread III. Price concessions that investors may be forced to make

I, II, and III

Which of the following are financial assets? I. Debt securities II. Equity securities III. Derivative securities

I, II, and III

Rank the following from highest average historical return to lowest average historical return from 1926 to 2017. I. Small stocks II. Long-term bonds III. Large stocks IV. T-bills

I, III, II, IV

Rank the following from highest average historical standard deviation to lowest average historical standard deviation from 1926 to 2017. I. Small stocks II. Long-term bonds III. Large stocks IV. T-bills

I, III, II, IV

Which one of the following is a true statement regarding the Dow Jones Industrial Average?

It is a price-weighted average of 30 large industrial stocks.

The interest rate charged by large banks in London to lend money among themselves is called _________.

LIBOR

Which one of the following is not an example of a brokered market? residential real estate market market for large block security transactions primary market for securities NASDAQ

NASDAQ

In 2007, the NASDAQ stock market merged with _____.

OMX, which operates seven Nordic and Baltic stock exchanges

According to the Flow of Funds Accounts of the United States, the largest single asset of U.S. households is ___. mutual fund shares real estate pension reserves corporate equity

Real Estate

The graph of the relationship between expected return and beta in the CAPM context is called the _________.

SML

The __________ system enables exchange members to send orders directly to a specialist over computer lines.

SUPERDOT

The figures below show plots of monthly excess returns for two stocks plotted against excess returns for a market index. Which stock is likely to further reduce risk for an investor currently holding her portfolio in a well-diversified portfolio of common stock?

Stock A

he figures below show plots of monthly excess returns for two stocks plotted against excess returns for a market index. Which stock is riskier to a nondiversified investor who puts all his money in only one of these stocks?

Stock A is riskier.

If you are not a contrarian, you consider a high put/call ratio to be a __________.

bearish signal

In ________ markets, participants post bid and ask prices at which they are willing to trade, but orders are not automatically executed by computer. ____________ execute trades for people other than themselves, and in _______________ markets a computer matches orders with an existing limit order book and executes the trades automatically.

dealer; Brokers; electronic

A dollar-denominated deposit at a London bank is called _____.

eurodollars

When the market risk premium rises, stock prices will ________.

fall

Deposits of commercial banks at the Federal Reserve are called _____.

federal funds

In a market economy, capital resources are primarily allocated by ____________.

financial markets

High P/E firms tend to be poor investments. This illustrates which of the following information processing errors?

forecasting error

Revenue sharing with respect to mutual funds refers to _________.

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

Published data on past returns earned by mutual funds are required to be ______.

geometric returns

Which of the following funds invest specifically in stocks of fast-growing companies?

growth equity funds

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 Explanation In equilibrium, E(rX) = 5% + 1.15(15% - 5%) = 16.5%.

Stock market analysts have tended to be ___________ in their recommendations to investors.

overwhelmingly optimistic

The ratio of trading activity of a portfolio to the assets of the portfolio is called the ____________.

portfolio turnover

Beta is a measure of ______________.

relative systematic risk

A firm that has large securities holdings and wishes to raise money for a short length of time may be able to find the cheapest financing from which of the following?

repurchase agreement

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

Specialized-sector funds concentrate their investments in _________________.

securities issued by firms in a particular industry

If you believe in the __________ form of the EMH, you believe that stock prices reflect all publicly available information but not information that is available only to insiders.

semistrong

Short interest is a ______ indicator.

sentiment

he put/call ratio is a ______ indicator.

sentiment

Which of the following is considered a sentiment indicator?

short interest

The term random walk is used in investments to refer to ______________.

stock price changes that are random and unpredictable

If an investor places a _________ order, the stock will be sold if its price falls to the stipulated level. If an investor places a __________ order, the stock will be bought if its price rises above the stipulated level.

stop-loss; buy stop