FP513 ENTIRE - completed except for case study in textbook

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Jordan has the following gains and losses from the previous year: $10,000 long-term capital gain $6,000 long-term capital loss $7,500 short-term capital gain $15,000 short-term capital loss What is the tax ramification of these transactions?

$3,000 deductible loss, $500 carryover loss First, net the long-term gains and losses, and the short-term gains and losses. A $10,000 long-term capital gain with a $6,000 long-term capital loss equals a net long-term capital gain of $4,000. For short-term capital gains and losses, net the $7,500 short-term capital gain with the $15,000 short-term capital loss, which comes to a $7,500 short-term capital loss. Then, take the $4,000 long-term capital gain, and offset it against the $7,500 short-term capital loss, for a net short-term capital loss of $3,500. When Jordan files his tax return he will be able to deduct $3,000 of the $3,500 loss, and will carry forward to the next tax year the remaining $500 short-term loss.

Your client has just opened a margin account with your brokerage firm and purchased 500 shares of stock for $60 per share. The firm has a 55% initial margin and 35% maintenance margin policy. Calculate the stock price at which your client will receive a margin call.

$41.54 The client will receive a margin call when the price of the stock drops to $41.54, calculated as follows: margin call = ($60 × 0.45) ÷ (1 - 0.35) margin call = $27.00 ÷ 0.65 = $41.5385, or $41.54

Gregory carries a balance on his credit card. The nominal APR is 12.99% compounded daily. The effective annual rate is actually 13.87%, calculated as follows

(EAF) effective annual rate = [1 + (0.1299 ÷ 365)]365 - 1 = 0.1387, or 13.87%

A $1,000 bond may be converted into common stock at $40 per share. The current market price of the stock is $35 per share. The bond matures in 15 years, has a 7% coupon, and a current market price of $914. The current interest rate paid on comparable debt is 8%. Calculate the conversion value of the bond and determine which of these statements are CORRECT. 1. The bond is selling at a premium over its conversion value. 2. The bond should be converted because its conversion value is less than its value as a bond. 3. The bond should not be converted because its conversion value is less than its value as a bond. 4. The market price of the stock will increase as the market price of the bond increases.

1 AND 3

Grace's portfolio is comprised of 40% U.S. corporate bond fund, 50% U.S. growth and income equity fund, and 10% municipal bond fund. Grace would like to reduce her portfolio's level of risk and maintain or improve return. Which of these could be recommended to Grace to achieve her goal? 1. Global equity fund 2. Biotechnology sector equity fund 3. Louisiana municipal bond fund 4. Emerging market fund

1 and 4

The principal functions of an investment banker are to 1. distribute securities to the public. 2. provide a secondary market. 3. provide financing for an individual. 4. advise the issuer about alternatives in raising capital.

1 and 4

identify the CORRECT statements regarding warrants. 1. Warrants give the owner the right to purchase a specified number of shares for a specified period at a specified price. 2. Warrants are typically written with a maturity date of nine months. 3. Warrants must include standardized terms required by the Options Clearing Corporation. 4. Warrants are issued by a corporation rather than written by an individual.

1 and 4

Why would financial planners recommend their clients purchase natural resources for their investment portfolios? 1. Diversification 2. Low degree of risk 3. Positive correlation with other financial assets 4. Pass through of certain tax benefits including depletion

1 and 4 Investments in natural resources offer investors a high degree of risk and a negative correlation with other financial assets.

Distributions of dividend and capital gains in cash to mutual fund investors are fully taxable to the investor: 1. are added to the tax basis of the shares once taxes on the distributions are paid. 2. decrease the taxable gain or increase the loss on sale of the shares after taxes are paid. 3. decrease the cost basis of the shares whether or not taxes are paid.

1 only

Which of the following are considered bond classifications for multisector bond funds? Foreign bonds High-dividend-paying common stocks Commodities

1 only

A convertible bond has a 6.5% coupon rate, interest is paid semiannually, and the bond matures in five years. Comparable debt currently yields 7.5%. The bond is convertible into common stock at $25 per share. The current price of the stock is $28, and the current price of the convertible bond is $1,050. What is the investment value of the bond?

A bond's investment value is the same as its intrinsic value as a straight bond. Using an HP 10bII+ calculator, the bond price is determined by inputting the following keystrokes: END Mode, 2 P/YR 5, DOWNSHIFT, N = 10 7.5 = I/YR 1000 x 6.5% / 2 = 32.5 = PMT 1000 = FV Solve for PV = -958.94, or $958.94.

Larry invested $5,000 in the ABC mutual fund one year ago. The fund paid dividends of $100, $150, $50, and $100 at the end of each quarter, all of which were distributed to Larry. At the time of the last dividend payment, his fund had grown to $5,175. What was the dollar-weighted return for this investment? A. 2.85% B. 3.50% C. 11.38% D. 14.00%

C The answer is 11.38%. The dollar-weighted rate of return equals 11.38%, calculated as follows: CF0 = (5,000), CF1 = 100, CF2 = 150, CF3 = 50, and CF4 = 5,275 (5,175 + 100). IRR/YR = 2.8455 × 4 = 11.3821, or 11.38%.

portfolio A has a standard deviation of 55%, and the market has a standard deviation of 40%. Assume that the correlation coecient between Portfolio A and the market is 0.50. What percentage of the total risk of Portfolio A is unsystematic risk A. 25% B. 50% C. 75% D. 100%

C The answer is 75%. The coefficient of determination (R2) of Portfolio A is 25% (0.25). This is derived by squaring the correlation coefficient (R) of 0.50 (0.50 × 0.50 = 0.25). Therefore, 25% is the percentage of returns of Portfolio A that may be explained by the market (or systematic risk). The remainder of the percentage of returns (movement) of Portfolio A is explained by factors independent of the market (or unsystematic risk). To determine this, subtract the systematic risk from 1.0 (1.0 - 0.25 = 0.75, or 75%).

Jerry purchased a 30-year junk bond for $977.36 with a stated coupon rate of 8.5%. What is the YTM for this bond if he receives semiannual coupon payments and expects to hold the bond to maturity? A. 4.36% B. 5.68% C. 8.71% D. 8.93

C The answer is 8.71%. This is calculated as follows: Set the calculator in END Mode and 2 P/Yr. PV = -977.36; FV = 1,000; PMT = 8.5% × 1,000 ÷ 2 = 42.50; 30, DOWNSHIFT, N = 60. Solve for I/YR = 8.71%.

A couple in a high tax bracket wants to invest in a mutual fund to provide current income without large principal uctuations. They have a moderate risk tolerance, and they are considering the following funds: Fund A: High-yield single-state municipal bond fund (long term) Fund B: Long-term municipal bond fund Fund C: Intermediate-term municipal bond fund Fund D: Aggressive growth fund Which of these funds would be the best choice for this couple?

C The answer is Fund C. All three of the municipal bond funds will provide current, tax-free income, but large principal fluctuations are more likely in Fund A and Fund B because they invest in long-term bonds, which have higher durations than intermediate-term bonds. An aggressive growth fund is not appropriate in this situation because the couple desires current income

Current ratio

Current Ratio = Current Assets / Current Liabilities

The current yield of an 8% coupon bond, maturing in five years, and selling currently for $850 is A) 8.56%. B) 6.73%. C) 9.41%. D) 10.14%.

Current yield = annual interest payment ÷ current market price = $80 ÷ $850 = 0.09412, or 9.41%.

John is interested in selling one of the municipal bonds in his portfolio. He is generally risk averse and wants to sell the bond with the most default or credit risk. Of the following four types of municipal bonds in his portfolio, which one do you recommend he sell? A. A general obligation bond B. A revenue bond C. An insured utility revenue bond D. A private activity bond

D The answer is a private activity bond. The bond with the most credit risk is the private activity bond; therefore, if John is generally risk averse, he should sell the private activity bond.

which of the following forms of the ecient market hypothesis (EM) supports technical analysis A. weak B. Semistrong C. Strong D. None of these

D The answer is none of these. The EMH is in direct contradiction to technical analysis because the hypothesis is founded on the belief that all historical price and volume data (which are used by technical analysts) is already accounted for in the current stock price

A convertible bond's market value will NOT fall below its

INVESTMENT VALUE

Cosmo has a margin account with a balance of $50,000 with a national broker-dealer. The initial margin requirement on this account is 50%. Cosmo is interested in purchasing shares of Aardvark Inc., which is currently selling at $40 per share. Assuming the maintenance margin is 40%, what would the price of Aardvark be before Cosmo would receive a margin call?

The answer is $33.33. Margin call = (50% × $40) ÷ (1 - 0.40) = $33.33.

JK Mutual Fund has a return of 15.5% and a beta of 1.1. If the market return is 14%, and the risk-free rate is 4%, what is the alpha for JK Mutual Fund?

The answer is +0.50. Calculate alpha: 15.5 - [4 + (14 - 4)1.1] = +0.50.

Calculate the estimated change in the price of a bond with a present value of $987.56 and Macaulay duration of 4.8 years when its YTM changes from 7% to 6%.

The answer is +4.49%. Given the inverse relationship between bond prices and market interest rates, the price of the bond must increase by 4.49%, calculated as follows: ΔP/P = -4.8 × [(0.06 - 0.07) ÷ (1 + 0.07)] = 0.0449, or 4.49%.

A bond has a current yield to maturity (YTM) of 3.80%. Market interest rates are expected to rise to 4.50% soon. The bond has a duration of 5.5 years. Calculate the estimated price change of the bond.

The answer is -3.71%. The market price of the bond is expected to decrease by 3.71%, calculated as follows: ΔP/P = −5.5[(0.045 − 0.038) ÷ (1 + 0.038)] ΔP/P = −5.5(0.007 ÷ 1.038) ΔP/P = −5.5(0.006745) ΔP/P = −0.0371, or −3.71%

An analysis of the monthly returns for the past year of a mutual fund portfolio consisting of two funds revealed these statistics Fund A Fund B Total return 12% 15% Standard deviation 9% 26% Percentage of portfolio 35% 65% Correlation coefficient (R) 0.32 What is the coefficient of determination (R2) of Fund A and Fund B?

The answer is 0.10. The coefficient of determination is the square of the correlation coefficient (0.32)2 = 0.32 × 0.32 = 0.1024, or 10%.

What is the coefficient of variation for an investment with a standard deviation of 8.65%, an expected return of 11.5%, and a beta of 1.25? A) 0.7522 B) 1.3290 C) 0.9402 D) 0.1438

The answer is 0.7522. CV = standard deviation of asset ÷ expected return of asset, 8.65% ÷ 11.5% = 0.7522.

Which of the following statements regarding an efficient portfolio is CORRECT? 1. Provides the highest return for a given level of risk 2. Has the greatest risk for a given level of expected return 3. Shows an investor's willingness to bear risk 4. Can be created with minimum transaction costs

The answer is 1 only. An investor should try to assemble an investment portfolio containing the optimum combination of risk and return. An efficient portfolio offers maximum return for a given level of risk. An investor's willingness to bear risk is reflected in indifference curves.

Robinson owns a municipal bond with a coupon rate of 2.75%. He is currently in the 32% federal marginal income tax bracket and resides in a state that does not impose a state income tax. Calculate his municipal bond's taxable equivalent yield (TEY).

The answer is 4.04%. The bond's TEY is calculated as follows: 2.75% ÷ (1 - 0.32).

ABC Corporation has issued a 30-year callable bond with a 5.75% coupon at par. The current market price of the bond is $989.50. Calculate the current yield of this bond.

The answer is 5.81%. The current yield is calculated as follows: $57.50 ÷ $989.50 = 0.05811, or 5.81%.

AdM needs large quantities of soybeans in the future for use in manufacturing products. which of the following investment strategies should AM employ to hedge its ris

The answer is ADM should buy soybean futures to hedge against higher soybean prices. ADM needs, or is short, soybeans. Therefore, the company should buy soybean futures (take an opposite position) to hedge against higher soybean prices. This is referred to as a long hedge.

Which of the following bonds would you recommend if the investor's time horizon is 10 years A. ABC bond: AAA rated, 5% coupon, 12-year maturity, duration 8.15 years B. DEF bond: AAA rated, 4% coupon, 10-year maturity, duration 9.50 years C. JKL bond: AAA rated, 4.5% coupon, 15-year maturity, duration 9.25 years D. XYZ bond: AAA rated, 5% coupon, 15-year maturity, duration 9.35 years

The answer is DEF bond: AAA rated, 4% coupon, 10-year maturity, duration 9.50 years. The DEF bond, with a duration of 9.50 years, is the closest to the investor's time horizon of 10 year

The security market line (SML) A) shows a security's expected return as a function of its systematic risk. B) presents the relationship between a security's return and the return of the market portfolio. C) indicates the market portfolio as the only optimal portfolio. D) plots diversifiable risk on the horizontal (X) axis.

The answer is shows a security's expected return as a function of its systematic risk. The security market line (SML) shows the relationship between the rate of return and systematic risk (beta). Thus, the SML depicts a security's expected return as a function of its systematic risk. The intersection between the efficient frontier and a line from the risk-free rate depicts all the optimal portfolios composed of a combination of the market portfolio and the risk-free asset. The market portfolio is the only optimal portfolio comprised solely of risky securities.

Which of the following statements concerning the purpose of an investment policy statement is CORRECT? I. An investment policy statement is a written document that establishes client objectives and sets limitations on the investment manager. II. The investment policy statement can be used as the basis to measure the manager's performance against the stated objectives and constraints. III. Possible investment strategies that should be pursued by an investment adviser on behalf of the client begin with the formulation of a complete and thorough investment policy statement. IV. An allocation among asset classes and their respective weights is a part of any investment policy statement.

The answer is I, II, III, and IV. All of these statements are correct. In addition, the investment policy statement can be provided to the portfolio manager to use in establishing and managing the characteristics of the client's portfolio.

You are about to choose a new mutual fund to add to client portfolios. As you review the Morningstar reports for the funds you are considering, you have focused on each fund's alpha as reported by Morningstar. Alpha tells you

The answer is the difference between a fund's realized return and its risk-adjusted expected return.

To have the right to the next dividend payment of a stock, an investor must purchase the stock

The answer is at least two days before the record date. In order to receive the next dividend, an investor must purchase the stock at least two days before the record date.

Which of the following statements regarding asset allocation is CORRECT? Asset allocation is the main determinant of a portfolio's total return. I. The purpose of strategic asset allocation is to determine an appropriate II. allocation based on the long-term financial goals of the client. A) Neither I nor II B) Both I and II C) II only D) I only

The answer is both I and II. Both of these statements are correct.

The semistrong form of the efficient market hypothesis states that current market prices reflect I. all available information on the history of prices. II. all publicly available information concerning a company. A) II only B) I only C) Neither I nor II D) Both I and II

The answer is both I and II. The semistrong form states that all publicly available information, including past stock price history, is reflected in current stock prices.

Identify which of these is NOT a source of systematic risk. A) Market risk B) Business risk C) Reinvestment rate risk D) Purchasing power risk

The answer is business risk. Business risk is a type of unsystematic risk. Unsystematic risks only affect one company, country, or sector and its related securities.

Exchange rate risk refers to fluctuations in

The answer is the price of one currency relative to other currencies. Relative currency prices and changes to them are the basis of exchange rate risk.

In a repurchase agreement, the percentage dierence between the repurchase price and the amount borrowed is most accurately described as A. the haircut. B. the repo rate. C. the repo margin. D. the federal funds rat

The answer is the repo rate.

Which of the following is a primary purchaser of negotiable CDs? A. Institutional investor B. Individual of modest means C. Hedge fund D. Highly risk-tolerant investor

The answer is institutional investor.

Which of the following is a written document that sets forth a client's objectives, sets limitations on the portfolio manager, provides guidance to the portfolio manager, and provides a means for evaluating performance?

The answer is investment policy statement. The investment policy statement sets forth a client's objectives, sets limitations on the portfolio manager, provides guidance to the portfolio manager, and provides a means for evaluating performance.

Wendy is concerned that her investment's actual return will not equal its expected return. Point out the type of risk that she is concerned about regarding her investment. A) Purchasing power risk B) Investment risk C) Tax risk D) Business risk

The answer is investment risk. Investment risk is the uncertainty that an investment's actual, or realized, return will not equal its expected return.

All of these statements describing real estate mortgage investment conduits (REMICs) are correct except

The answer is investors receive a variable cash flow from the underlying real estate mortgages. Investors who own REMICs receive a specified cash flow from the underlying pool of mortgages. REMICs are self-liquidating pass-through entities that invest exclusively in mortgages and mortgage-backed securities. REMICs frequently issue bonds in the form of collateralized mortgage obligations, which divide payment streams into tranches. Investors in Tranche A receive principal payments first, which reduces their interest rate risk, when compared to other tranche investors.

Investors who want to bear the least amount of risk should acquire stocks with beta coefficients

The answer is less than 0.5. When seeking investments having the least amount of risk, the lowest beta should be selected.

Wade purchased a noninvestment-grade bond for $1,038.90 exactly two years ago today. The bond had a maturity of five years and a coupon rate of 10% (paid semiannually). Assuming the following are the prevailing rates for this type of bond at diferent maturity dates, how much could Wade sell his bond for today? Maturity 1 year 2 years 3 years 5 years Interest Rate 6% 6.5% 7% 8.5%

The answer is $1,079.93. The intrinsic value of Wade's bond (what it should sell for today) is $1,079.93. END Mode, 2 P/Yr N = 3, DOWNSHIFT, N = 6 (number of periodic payments remaining) I/YR = 7 (periodic interest rate based on comparable three-year-term bonds) PMT = 10% × 1,000 ÷ 2 = 50 (semiannual coupon payment) FV = 1,000 Solve for PV = -1,079.9283, or $1,079.93

Lou owns a stock that consistently pays a $1.50 dividend. If his required rate of return is 8.5%, what is the intrinsic value of the stock?

The answer is $17.65. Using the no-growth (perpetuity) dividend discount model: V = D1 ÷ r = 1.50 ÷ 0.085 = $17.65

Assume that ABC stock pays a dividend in the current year of $1.56 per share. The company's dividend is expected to grow by 1.5% per year. Calculate the stock's price if an investor has a required rate of return of 7%.

The answer is $28.79. The formula for the constant growth dividend discount model: V = D1 ÷ (r - g) Therefore, the intrinsic value of ABC stock equals $28.79 [(1.56 × 1.015) ÷ (0.07 - 0.015)].

Fixed-asset turnover

annual sales/fixed assets

An investor is interested in holding a diversified portfolio to reduce unsystematic risk. This can best be accomplished by buying stock in

companies with low correlation coefficients between them.

Inventory turnover ratio

cost of goods sold /average inventory

Acid test or quick ratio

current assets - inventory current liabilities

Operating profit margin

earnings before interest and taxes (EBIT) sales

All of the following statements correctly explain investment risk except A) investors expect to earn a higher rate of return for assuming a higher level of risk. B) systematic risk may be reduced or eliminated by effective portfolio diversification. C) a stock's level of risk is a combination of market risk and diversifiable risk. D) the beta coefficient measures an individual stock's relative volatility to the market.

systematic risk may be reduced or eliminated by effective portfolio diversification.

Anita bought ULA stock for $25,000 six years ago. Today, she sold the stock for $67,000. Calculate Anita's holding period return on ULA.

the answer is 168.00%. Anita's holding period rate of return was 168% {[(67,000 - 25,000) ÷ 25,000] × 100}.

To be eligible for preferential dividend tax rates

the stock must be held for more than 60 days during the 121-day period beginning 60 days BEFORE the ex-dividend date.

what is not an advantage of U.S. Treasury bills

treasury bills is taxed at ordinary federal income tax rates but is not subject to state income tax.

Renee owns a corporate bond with a coupon rate of 6%. If the annual inflation rate is 3.5%, her real rate of return on the bond is 2.42%, calculated as follows:

(1 + 0.06 1/ 0.035))− 1) × 100 = (1.0242 − 1) × 100 = 2.4155, or 2.42%

Identify which of the following statements regarding U.S. Treasury bills is CORRECT. 1. They are purchased at 50% of face value. 2. They are sold at auction in denominations ranging from $50 to $10,000. 3. They are not subject to the original issue discount (OID) taxation rules. 4. They are sold with maturities up to two years.

3 only

A wash sale is deemed to have occurred within which of the following time frames?

61 days

brian owns a taxable corporate bond with a coupon rate of 5%. He pays taxes at a marginal rate of 32%. What is the after-tax yield he will receive on this investment? A. 3.40% B. 3.85% C. 4.72% D. 6.60%

A The answer is 3.40%. Brian will earn an after-tax yield of 3.40%, or 5% × (1 - 0.32

Trey is considering the purchase of American depositary receipts (ADRs). He is looking to further diversify his portfolio. Identify which of these is NOT a feature of this type of investment vehicle.

The answer is they are not subject to exchange rate, or currency, risk. Even though ADRs are denominated in U.S. dollars, they are subject to exchange rate, or currency, risk.

Select the CORRECT statement regarding investors who only purchase high-beta stocks. A) They prefer stocks with low risk and high positive skewness. B) They prefer stocks with low risk and low positive skewness. C) They prefer stocks with high risk and high positive skewness. D) They prefer stocks with high risk and low positive skewness.

The answer is they prefer stocks with high risk and high positive skewness.

Maximum gain or maximum loss for option buyer or option seller(writer)

The maximum gain for the option writer is the call premium received the maximum loss for the option buyer is the call premium paid.

What is the holding period requirement for a stock investor for the dividend to qualify for the preferential tax rates?

The stock must be held for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date.

unit investment trusts (UITs)

Units are sold at net asset value plus a commission for the broker executing the transaction. Units are sold at net asset value plus a commission for the broker executing the transaction. UITs have management fees lower than mutual funds. A bond UIT does not replace bonds that are called.

Holly and Jeff are a married couple who have recently retired and are no longer earning an income. They would like to change their asset allocation to provide more income in their retirement years. Which of the following investments should be recommended to help the couple in achieving their financial objectives? Aggressive growth mutual fund AA rated corporate bonds Zero-coupon bonds Equity income mutual fund

AA rated corporate bonds Equity income mutual fund

All of the following are primary factors in the arbitrage pricing theory (ApT) except A. the unemployment rate. B. interest rates. C. the inflation rate. D. changes in gdp

A The answer is the unemployment rate. The four factors in APT are unexpected changes in inflation, GDP, interest rates, and market risk premiums

which of the following statements regarding kurtosis is CORRECT? I. kurtosis describes the degree to which a distribution is not symmetric about its mean. II. kurtosis measures the peakedness of a distribution reflecting a greater or lesser concentration of returns around the mean.

B The answer is II only. The degree to which a distribution is not symmetric about its mean is measured by skewness. Excess kurtosis, which is measured relative to a normal distribution, indicates the peakedness of a distribution, and it reflects the probability of extreme outcomes.

All of the following statements correctly describe certificates of deposit (CDs)

CDs are commonly referred to as time deposits. CDs are eligible for FDIC coverage. redemption prior to maturity typically results in an early withdrawal penalty. CDs pay a fixed interest rate

Company B has a higher return on equity (ROE) than Company A.

An individual who is a proponent of the efficient market hypothesis (EMh) will likely invest in which of the following A. Growth mutual funds B. Sector mutual funds C. Balanced mutual funds D. Index funds

D The answer is index funds. An individual who believes in the EMH will likely invest in index funds. Inherent in this strategy is a belief that an investor cannot outperform the market with active portfolio management techniques. The remaining choices all incorporate an active portfolio management philosophy.

Identify the yield-curve theory that relies on the laws of supply and demand for various maturities of borrowing and lending.

Market segmentation theory

An investor has a portfolio diversified among many different asset classes. If there was an immediate need for cash, which of the following would probably be the most liquid?

Money Market Mutual Fund

Max bought 100 shares of PET Corporation stock 10 years ago. He paid $10 per share for the stock. The stock currently has a fair market value of $50 per share. Choose the CORRECT statement regarding Max's stock.

If Max does not sell the stock this year, he will not have to pay taxes on the difference between the amount he paid for the stock and the current market price this year.

Which of these statements regarding index options is NOT correct? A)When exercised, index options result only in cash settlement. B)Index options allow investors to earn a return associated with the movements in the market. C)Investors often buy call index options to hedge against the risk of a decline in the value of their long positions in stocks. D)Investors can profit from a decline in the stock market by purchasing a put index option.

The answer is investors often buy call index options to hedge against the risk of a decline in the value of their long positions in stocks. Investors purchase put index options to hedge their long positions in stocks. A decline in stock prices causes the value of their long portfolios to decline. This loss is offset by the gain in the value of the option.

Select the term that measures how far the actual outcomes of a probability distribution deviate from the arithmetic mean. A) Lognormal B) Kurtosis C) Variability D) Skewness

The answer is skewness. Skewness measures how far the median return is from the mean return in decimal terms.

An investor who is interested in developing a portfolio of collectibles should probably do which one of these?

The answer is specialize in a type of collectibles. Specializing in a type of collectible would give an investor a better knowledge of that collectible and its market direction and worth.

JEM Corporation always pays a dividend of $5.50 per share. Calculate the intrinsic value of the stock assuming a required rate of return of 8% and a risk-free rate of return of 4%.

The answer is $68.75. The intrinsic value of the stock is $68.75 ($5.50 ÷ 0.08) using the no-growth (perpetuity) dividend discount model.

VUL stock has a current market price of $25.65 and sales per share of $1.67. Calculate the price-to-sales ratio for this stock.

The answer is 15.36. The formula for the price-to-sales (P/S) ratio: P/S = market price per share ÷ sales per share P/S = $25.65 ÷ $1.67 = 15.3592, or 15.36 This ratio would then be compared to its industry peers to determine whether the stock appears to be overvalued or undervalued.

Eight years ago, ABC Company issued a 20-year bond with a 4% coupon rate. Due to a recent decline in market interest rates, the company decided to call the bonds for 103% of par value. Calculate the rate of return for an investor who purchased the bond at issue for par and surrendered it today for the call price.

The answer is 4.32%. The yield to call on this issue is calculated as follows: END Mode, 2 P/YR PV = -1000 FV = 1030 PMT = 4% x 1000 ÷ 2 = 20 8, DOWNSHIFT, N = 16 Solve for I/YR = 4.32%

Stock A has an expected mean return of 15% and a standard deviation of 22%; Stock B has an expected mean return of 11% and a standard deviation of 13%; and Stock C has an expected mean return of 18% and a standard deviation of 24%. You want to recommend one of these stocks to a client who is most interested in owning stocks that are more likely to deliver the expected mean return. Which stock should you recommend to meet this client's requirement? A) None of these B) Stock B C) Stock C D) Stock A

The answer is Stock B. The coefficient of variation is a measure of the degree of variation of returns compared with the expected mean return. The security with the lowest coefficient of variation is the one most likely to deliver periodic returns closest to its expected return.

Assets with expected returns that lie above the security market line (SML) A) are valued correctly. B) are undervalued. C) are overvalued. D) should be sold.

The answer is are undervalued. Assets that lie above the security market line (SML) are undervalued because their expected returns are higher than the required return represented by the SML.

Identify which of the following statements regarding the risk premiums associated with the capital asset pricing model (CAPM) are CORRECT. I. The stock risk premium is the inducement necessary to entice the individual to invest in a given stock. II. The market risk premium is the incentive required for the individual to invest in the securities market. A) Neither I nor II B) I only C) Both I and II D) II only

The answer is both I and II. Statements I and II are both correct. The stock risk premium is the inducement necessary to entice the individual to invest in a particular stock, whereas the market risk premium is the incentive required for the individual to invest in the securities market in general.

Choose the statement regarding the correlation coefficient that is NOT correct. A) Perfectly positively correlated assets have a correlation coefficient of +1.0. B) Combining assets with less than perfect positive correlation will not reduce the total risk of the portfolio. C) A correlation coefficient of 0.0 means there is no relationship between the returns of the assets. D) Perfectly negatively correlated assets have a correlation coefficient of -1.0.

The answer is combining assets with less than perfect positive correlation will not reduce the total risk or the portfolio. Combining assets with less than perfect positive correlation can reduce the total risk of the portfolio. The further the correlation coefficient between the two assets is away from +1.0, the greater the diversification benefits that may be attained.

During a period of increasing inflation, which one of the following investments might be appropriate? A) Common stock of financial firms B) Common stock of energy firms C) Long-term bonds D) None of these

The answer is common stock of energy firms. Rising inflation causes interest rates to rise, which causes financial firms' cost of sales to rise, thereby restricting these firms' profits and depressing their stock prices. Rising inflation helps companies that hold and/or sell real assets, such as commodities and real estate, thereby causing these companies' stock prices to rise. Long-term bond prices fall as interest rates rise, which they generally do during periods of rising inflation.

Which one of these factors has the greatest impact on the standard deviation of a two-asset portfolio? A) The portfolio's beta B) The weight of each security in the portfolio C) Covariance D) The standard deviation of each security in the portfolio

The answer is covariance. Covariance is the most important variable in minimizing the standard deviation of a portfolio.

Which of these risks is diversifiable?

The answer is default risk. Default risk is diversifiable (unsystematic) risk. The others are examples of systematic risk, or nondiversifiable risk.

When a company issues long-term debt securities instead of common stock, which one of these outcomes is the company most likely trying to achieve?

To increase the company's return on equity

An investor who carefully chooses a bond that has a duration that matches the investor's required holding period is practicing

an immunization strategy.

Identify which of these statements regarding rights and warrants is CORRECT. 1. Rights provide current common stockholders with the ability to retain their ownership percentage when new shares of stock are issued. 2. Warrants are typically attached to new bond issues to attract investors.

both of these

Closed end mutual funds have a: open end mutual funds have:

closed end: fixed number of shares sold open end: shares sold directly from mutual fund company

Payout ratio

dividends/earnings

All of the following statements correctly illustrate convexity and duration relationships

duration has an inverse relationship with the coupon rate. duration has an inverse relationship with the yield to maturity. convexity has an inverse relationship with the coupon rate.

A mutual fund investor who does NOT specify a method to calculate basis must use the

first in, first out (FIFO) method.

Bonds issued by state and local governments that are backed by the full faith and credit of the issuing government and repaid by the issuing municipality's taxing power are categorized as

general obligation bonds.

One advantage of convertible bonds is that they

have a higher coupon rate than the underlying stock's dividend.

Grant calls his broker and tells her to sell his XYZ stock if it falls to $20, but he does not want less than $19.75 for his shares. Select the type of order that his broker should place to sell the stock.

stop limit order

An investor holding a Treasury bill as of the date of maturity includes

the amount of the discount as ordinary income.

On December 27, 20X0, Jackie sells ABC stock for a loss at $12 a share that she originally purchased for $28 per share. On January 9, 20X1, she repurchases the shares for $15 per share. What is her cost basis on the repurchased shares?

the answer is $31. This is a wash sale because the shares were repurchased within 30 days of their sale. The loss is then disallowed for tax purposes, and the disallowed loss is added to the repurchase price to determine the new cost basis. $28 - $12 = $16 disallowed loss, so $16 + $15 = $31 new basis.

A client has a $1.2 million portfolio consisting of these four stocks: 1. $300,000 ABC @1.1 beta 2. $225,000 RTR @0.7 beta 3. $405,000 XYZ @0.3 beta 4. $270,000 PDQ @1.3 beta What is the beta of the portfolio as a whole?

the answer is 0.8. This is the weighted average of beta of components, which is calculated as follows: $300,000 ÷ 1,200,000 = 0.25 weighting × 1.1 beta =0.2750$225,000 ÷ 1,200,000 = 0.1875 weighting × 0.7 beta =0.1313$405,000 ÷ 1,200,000 = 0.3375 weighting × 0.3 beta =0.1013$270,000 ÷ 1,200,000 = 0.225 weighting × 1.3 beta =0.2925Weighted Average Beta:0.8001

Portfolio A has a standard deviation of 55%, and the market has a standard deviation of 40%. The correlation coefficient between Portfolio A and the market is 0.50. Calculate the percentage of total risk that is unsystematic. A) 50% B) 75% C) 25% D) 100%

the answer is 75%. The coefficient of determination explains the percentage of change in the dependent variable that can be explained by changes in the independent variable. Therefore, 25% (0.50 × 0.50) of returns are explained by changes in the market. To determine the percentage of returns that are explained by unsystematic risk, subtract the systematic risk from 1. Therefore, the return explained by unsystematic risk is (1 − 0.25) = 0.75, or 75%.

When considering the purchase of a limited partnership interest, an investor should be most concerned with

the answer is economic viability.

The group of investment bankers that actually purchases the stocks to be resold to the investing public is called

the syndicate.

The interest rate theory that long-term rates consist of many short-term rates and that long-term rates will be the average of short-term rates is known as

unbiased expectations theory.

The yield curve graphically plots

yield on the y-axis and time on the x-axis.

Advantages of unit investment trusts include which of these? Stable periodic income Diversification Active management of the portfolio

1 and 2

Which of the following are characteristics of collectibles investments that distinguish them from financial investments? 1. The market is relatively inefficient. 2. The capital gain is taxed at a maximum rate of 20%. 3. There are large spreads between bid and ask prices. 4. There is little liquidity risk.

1 and 3. Collectibles are taxed at a maximum capital gain rate of 28%, compared to the 20% maximum rate on financial assets. Liquidity is a major risk in collectibles, since there is no active market for the assets.

All of the following are reasons for a corporation to issue a warrant except A. as an incentive for investors to purchase preferred stock. B. to allow for standardization of terms among all potential investors. C. to lower the cost of capital necessary to oat an issue. D. as an incentive for investors to purchase corporate debentures.

B The answer is to allow for standardization of terms among all potential investors. Warrants are essentially customized (not standardized) call options issued to meet the needs of both the issuing corporation and the investor.

Eos Company is a privately owned manufacturer of plastics used in the automotive industry. The company is currently financed with a mix of 90% equity and 10% debt. which of the following risks is experienced by the shareholders of Eos Company I. Liquidity risk II. Market risk III. Business risk IV. default risk

D The answer is I, II, and III. Eos Company shareholders own equity in Eos and, therefore, are not subject to default risk. Because Eos is privately held, liquidity risk is relevant. Market risk is a systematic risk, and the automotive industry is particularly subject to market fluctuations. Business risk is the risk associated with individual businesses.

Mysterious Company stock has a mean return of 9% and a standard deviation of 3%. which statement is CORRECT A. Approximately 68% of Mysterious Company's returns will fall between 3% and 15%. B. There are 5% of Mysterious Company's returns that will be greater than 15%. C. half of Mysterious Company's returns will fall below 6%. D. Mysterious Company is unlikely to experience a negative return

D The answer is Mysterious Company is unlikely to experience a negative return. With a normal probability distribution, 68% of the returns fall within one standard deviation of the mean, 95% within two standard deviations, and 99% within three standard deviations. Therefore, Mysterious Company has less than a 1% chance of experiencing a negative return

Which of these describe differences between preferred stock and long-term bonds? 1 Preferred stock usually has a shorter maturity than long-term bonds. 2 Corporations receive more favorable tax treatment when investing in preferred stock than when investing in long-term bonds. 3 Preferred stock dividends are a stronger legal obligation to the firm than interest payments on long-term bonds. 4The market price of preferred stock tends to fluctuate more than the market price of long-term bonds.

II and IV

If information is generated randomly and information announcements are independent, A) price changes will be influenced by the information about past prices and volume. B) prices will change very quickly in response to the new random information. C) price changes will be independent of each other and tend to move in a predictable fashion. D) prices will not reflect all fully available information.

If information is generated randomly and information announcements are independent, prices will tend to fully reflect all available information. In addition, price changes will be independent of one another and tend to occur random patterns.

Jose owns a 30-year corporate bond, with 22 years remaining until maturity, featuring a coupon rate of 6.25% (paid semiannually). Assuming the comparable yield for this quality bond is currently 7%, calculate the intrinsic value of his bond.

The answer is $916.44. Jose's bond has an intrinsic value of $916.44, calculated as follows: END Mode, 2 P/YR FV = 1,000 PMT = 31.25 (6.25% × 1,000 ÷ 2) 22, DOWNSHIFT, N = 44 I/YR =7 Solve for PV = -916.4395, or $916.44

Henry owns a 10-year bond with a coupon rate of 4.85% (paid semiannually). Assuming the comparable yield for this quality bond is currently 5.5%, calculate the intrinsic value of his bond.

The answer is $950.51. The intrinsic value of his bond is $950.51, calculated as follows: END Mode, 2 P/YR, 10, DOWNSHIFT, N = 20; I/YR = 5.5; PMT = 24.25 (4.85% × 1,000 ÷ 2); FV = 1,000; solve for PV = -950.51, or $950.51.

An investor is researching a mutual fund. Last year this fund had a total return of 12% when the stock market had a 10% return. This fund has a beta of 1.2 and a standard deviation of 14%. The risk-free rate of return is 5%. What is the Sharpe ratio for this fund?

The answer is 0.50. The Sharpe ratio is (the investment return - the risk-free return) divided by the investment's standard deviation. Therefore, (0.12 - 0.05) ÷ 14 = 0.07÷0.14 = 0.50.

Assume that the economic forecast for the coming year is expected to be one of increasing inflation and interest rates. The GDP is expected to be strong. Which of the following types of investments would be advisable for the coming year and why? 1. Liquid investments, such as money market funds and short-term securities, to allow the investor flexibility to reinvest as rates increase 2. Long-term debt, such as 20-year government bonds, to lock in current interest rates 3. Stock in public utilities and durable goods firms, becausethey benefit from a rising interest rate environment 4. Tangible assets, such as gold, to keep pace with the rate of inflation

The answer is 1 and 4. Long-term bonds decrease in value in a rising interest rate environment. Stock in public utilities and durable goods firms does not benefit from a rising interest rate environment.

Assume an investor purchased $10,000 of Fund ABC at the beginning of Year 1. Subsequently, he made investments at the beginning of Years 2, 3, and 4 of $1,000, $5,000, and $8,000, respectively. At the beginning of Year 5, the fund was worth $33,000. What was the internal rate of return (IRR) on this fund?

The answer is 12.79%. This problem involves calculating the IRR/YR for uneven cash flows per the following inputs. Using the HP 10bII+: (10,000) CFj, (1,000) CFj (5,000) CFj (8,000) CFj 33,000 CFj SHIFT, IRR/YR = 12.79%

Strahan Corporation's current annual common stock dividend is $3 and is expected to grow by 15% during the next year. The stock's current market price is $35 per share. If Strahan stock had a $30 market price one year ago, calculate the stock's total return. A) 22.86% B) 26.67% C) 8.57% D) 14.29%

The answer is 26.67%. A stock's total return (TR) = (the dividend received during a given period + the change in the stock's price during the same period) ÷ by the stock's current market value at the beginning of the period. Therefore, TR = ($3 + $5) ÷ $30 = 26.67%.

JEM stock has a beta coefficient of 1.35 and the market has a rate of return of 8.50%. The 90-day U.S. Treasury bill rate of return is 1.75%. Based on the information provided, choose the CORRECT statements. 1. The stock risk premium is 6.75%. 2. The market risk premium is 9.11%. 3. The expected rate of return is 10.86%.

The answer is 3 only. The expected rate of return based on the capital asset pricing model is 10.86%, calculated as follows: ri = 0.0175 + (0.085 - 0.0175)1.35 = 10.86, or 10.86% The stock risk premium is 9.11%, (0.085 - 0.0175)1.35. The market risk premium is 6.75%, (0.085 - 0.0175).

A $1,000 U.S. Treasury note maturing in eight years is selling for $938.12. The semiannual coupon payment is $35. What is the yield to maturity (YTM) for the note? A) 8.06% B) 4.03% C) 6.26% D) 8.33%

The answer is 8.06%. The note's YTM is computed as follows: END Mode, 2 P/YR PV = −938.12 PMT = 35 FV = 1,000 8, DOWNSHIFT, N = 16 Solve for I/YR = 8.06%

The annual returns of the ABC fund have been +12%. -4%, and +7%. What is the standard deviation of the fund's returns? A) 8.19% B) 4.04% C) 7.79% D) 5.00%

The answer is 8.19%.

If a mutual fund's beta and standard deviation are expected to decrease in the future, its average annual return and the market average annual return are expected to remain the same, and the risk-free rate is expected to remain constant, which of the following shows the real effect this would have on the following performance measures? Option Alpha Sharpe Ratio A increase decrease B decrease decrease C decrease increase D increase increase

The answer is Option D. A decrease in the risk level decreases the denominator of the Sharpe ratio, while the numerator stays constant, thereby increasing the Sharpe ratio. The decreased risk level, as measured by beta, decreases the expected return for the fund, while the actual portfolio return remains constant, thereby increasing the alpha.

When an analyst divides the P/E ratio by the earnings growth rate, which one of these ratios is being used?

The answer is PEG ratio. This identifies the P/E to Growth (PEG) ratio. P/B is price to book; P/E is price to earnings; P/S is price to sales; DDM is dividend discount model.

RNO Mutual Fund invests in domestic debt and equity securities. The fund's current bond holdings are valued at $63 million, and its equity holdings are valued at $85 million. RNO currently has 3 million outstanding shares; although it is not limited in the number of shares it may sell. Which of these statements is CORRECT?

The answer is RNO shares are priced at $49.33 per share. Because RNO invests in both bonds and equities, it is not a money market mutual fund. RNO's shares are valued at NAV, calculated as follows: ($63 million + $85 million) ÷ 3 million shares = $49.33 per share.

Your client owns a small-cap fund and wants to compare its performance to an appropriate benchmark. You would advise him to choose which benchmark? A) MSCI EAFE B) S&P 500 C) Russell 2000 D) Russell 3000

The answer is Russell 2000. The Russell 2000 is a small-cap index.

Which of these strategies is considered a protective strategy? A)Purchasing a hedge fund B)Purchasing a call option on a stock already owned C)Buying stock index futures D)Buying a put option on a stock already owned

The answer is buying a put option on a stock already owned. A protective strategy limits downside risk. The purchase of a put option on a stock that is already owned reduces downside risk. If the price of a stock declines, the value of the put option increases and protects an investor holding a long position in the underlying stock.

Which of these statements concerning portfolio diversification is CORRECT? A) The benefits of diversification are not realized until at least 25 individual securities are included in the portfolio. B) By increasing the number of securities in a portfolio, the total risk would be expected to fall at a decreasing rate. C) Only systematic risk is reduced as diversification is increased. D) Diversification reduces the portfolio's expected return because diversification reduces a portfolio's total risk.

The answer is by increasing the number of securities in a portfolio, the total risk would be expected to fall at a decreasing rate. As more and more securities are added to a portfolio, diversification benefits begin to diminish. The main attraction of diversification is the reduction of risk without an accompanying loss of return.

Why would an institutional investor choose to purchase commercial paper for a portfolio? A. Commercial paper provides higher yields than U.S. Treasury bills. B. Commercial paper oers tax-free interest payments. C. Commercial paper is generally not rated as to quality. D. Commercial paper is usually oered in denominations below $50,000.

The answer is commercial paper provides higher yields than U.S. Treasury bills.

Ophelia is considering the purchase of the Quest Mutual Fund, which has a beta of 1.2, a standard deviation of 15, and a return of 11%. The current risk-free rate is 4%, and the market risk premium is 7%. Should Ophelia purchase the fund? A) No, because the fund has a negative alpha. B) Yes, because of the fund's Treynor ratio. C) No, because of the fund's Sharpe ratio. D) Yes, because the fund has an 11% return.

The answer is No, because the fund has a negative alpha.

Jay has recently learned that foreign investments are a good way to diversify a portfolio. Select which of these statements regarding the risks and benefits of foreign investments, specifically American depositary receipts (ADRs), is CORRECT.

The answer is foreign taxes paid on income earned from an ADR are eligible for the foreign tax credit. Although ADRs are dollar denominated, they are still subject to exchange rate risk because the dividends are declared in the local currency and converted to U.S. dollars. ADRs are receipts for shares of a foreign company, not shares of a mutual fund. Because ADRs are traded in the secondary market, they are relatively liquid and marketable investments. Foreign taxes paid are eligible for the foreign income tax credit.

Under the efficient market hypothesis, which of the following terms best describes the movement of stock prices? A) Statistical B) Diverse C) Random D) Predictable

The answer is random. Random walk is the term used to describe the pattern of movement of stock prices. Because only new information, which is unpredictable and random, will affect the price of a security, the pattern of price movements for a stock will be random.

Financial leverage affects

The answer is return on equity, earnings per share, and risk to stockholders. ROE and earnings per share are magnified with leverage, and the risk to stockholders increases as a firm's leverage increases.

Identify the efficient market hypothesis that suggests an investor can achieve above-market returns by only utilizing insider information. A) Semistrong B) Weak C) Strong D) All of these forms

The answer is semistrong. The semistrong form suggests that fundamental analysis is of no value and only through the use of insider information can an investor achieve above-market returns.

Which of the following statements regarding the efficient frontier is CORRECT? A) Represents the assets or asset combinations with the least return for the given level of risk B) Represents an inferior set of assets or asset combinations available to investors C) Shows all portfolios that offer the highest expected returns for each level of risk D) Combines all assets that can be held in a portfolio

The answer is shows all portfolios that offer the highest expected returns for each level of risk. Efficient frontiers take all of the possible combinations of assets that can be held in a portfolio into account in order to represent the set of portfolios that offer the highest expected return for a given amount of risk.

Which statement concerning an active portfolio management strategy is CORRECT? A) An actively managed portfolio has low total transaction costs. B) The goal of active portfolio management is to earn a return that exceeds the risk-adjusted return of a passive benchmark portfolio. C) The key to success for an actively managed portfolio is to minimize trading activity. D) An actively managed portfolio has lower risk than a passive benchmark portfolio in most cases.

The answer is the goal of active portfolio management is to earn a return that exceeds the risk-adjusted return of a passive benchmark portfolio. This is net of transaction costs. Such a strategy also involves higher transaction costs and, usually, risk.

Which statement regarding portfolio theory is NOT correct? A) The optimal portfolio has the lowest risk for a given level of return. B) The optimal portfolio for an investor depends upon the investor's ability to assume risk. C) The optimal portfolio will always lie above the efficient frontier. D) The optimal portfolio offers the highest return for a given level of risk.

The answer is the optimal portfolio will always lie above the efficient frontier. The optimal portfolio is found at the point of tangency of the investor's indifference curve and the efficient frontier.

Which of the following statements regarding security market indexes is CORRECT? A) The S&P 500 Index automatically adjusts for stock splits and dividends by focusing on market value instead of price. B) The Wilshire 100 Index is used as a measure of the financial stock sector. C) The Russell 2000 Index is a well-known index used to benchmark large capitalization companies. D) Market indexes reflect the average price behavior of a group of stocks at a given point in time.

The answer is the S&P 500 Index automatically adjusts for stock splits and dividends by focusing on market value instead of price.

An investor in a separately managed account versus a mutual fund has the advantage of A. maintaining an individual cost basis in the securities within the portfolio, thereby making it easier to income tax plan. B. the investment manager purchasing securities for the benefit of the fund. C. owning a set proportion of the securities in the account. D. owning a percentage of the total pooled assets of the fund.

A The answer is maintaining an individual cost basis in the securities within the portfolio, thereby making it easier to income tax plan. The investment manager purchases securities for the benefit of the investor, not the fund. The investor owns 100% of the securities in the account, while a mutual fund owner only owns a percentage of the total pooled assets of the fund.

Stewart, age 29, is seeking an investment that oers the potential for long-term growth based on a broad market index representative of the largest domestic and international nonfinancial companies. e considers himself a moderate to aggressive risk taker and is interested in a low-cost, tax-ecient portfolio. which of the following would be the best investment for Stewart? A. Long-Term Corporate Bond ETF B. Green Energy Mutual Fund C. Nasdaq 100 ETF D. acific Rim rowth ET

george is considering adding ABC stock to his portfolio. ABC has a standard deviation of 4.5% and a beta of 0.85. If the market rate of return is 12% and the 90-day T-bill has a yield of 3%, what are the market risk premium and the stock risk premium for ABC A. Market risk premium: 9%: stock risk premium: 7.65% B. Market risk premium: 9%: stock risk premium: 13.50% C. Market risk premium: 12%: stock risk premium: 7.65% D. Market risk premium: 12%: stock risk premium: 13.50%

A The answer is market risk premium: 9%; stock risk premium: 7.65%. Market risk premium = rm - rf = 12% − 3% = 9%. Stock risk premium = (rm - rf) βi = 9% × 0.85 = 7.65%.

Adding investments with a negative beta to a well-diversified portfolio that currently has a beta of +1.0 will cause A. the expected performance of the portfolio to improve in bear markets. B. the expected performance of the portfolio to decline in bear markets. C. the portfolio to experience more volatility in times of a bull market. D. the portfolio to experience more volatility in times of a bear market.

A The answer is the expected performance of the portfolio to improve in bear markets. A negative beta means that the investment will move in an opposite direction from the overall market. Therefore, if the market is declining, then the asset should increase in value—thereby increasing the expected performance of the portfolio.

Robert owns 400 shares of Intel stock that he purchased several years ago for $60 per share. Intel's current market price is $48 per share. On December 17, Robert decides to buy an additional 200 shares of Intel stock. On December 23, he decides to sell 200 shares that he purchased several years ago so that he can claim a loss on his current year's tax return. Which of the following statements is true? 1. The loss will be disallowed, but Robert will have to reduce his tax basis in the shares he purchased on December 17 by the amount of the loss. 2. The loss will be disallowed; the transactions are illegal and tax penalties will be imposed. 3. The loss will be disallowed; the amount of the disallowed loss will be added to the cost basis of the shares purchased on December 17. 4. The transaction is called a wash sale; wash sale rules apply when shares are sold for a loss and repurchased within 30 days before or after the sale date.

3 and 4

Which of the following statements regarding the variables in the Black/Scholes European call option pricing model is CORRECT? 1. An increase in the price of the underlying stock decreases the value of the . European call option. 2. An increase in the variability of the price of the underlying stock decreases the value of the European call option. 3. An increase in the risk-free rate increases the value of the European call option. 4. An increase in the time to expiration decreases the value of the European call option.

3 only An increase in the price of the underlying stock and/or the variability in the price of the underlying stock increases the value of the European call option. An increase in the time to expiry also increases the value of the European call option.

Jack sells short 200 shares of ABC stock at $38.50 with a 50% initial margin. ABC pays a dividend of $0.50 per share after he sells the stock. Jack then buys back the stock for $32. Calculate his percent gain or loss.

31.17% gain Jack had a total percent gain of 31.17%, calculated as follows: Jack's investment: 200 × $38.50 × 0.50 = $3,850 Proceeds: $7,700 Cost: (6,400) Gain: $1,300 Less dividend payment: (100) Net gain: $1,200 $1,200 ÷ $3,850 = 31.17% gain

Franklin is considering investing in bonds. He may purchase a corporate bond paying a 7% coupon or a municipal bond paying 5.3%. If Franklin's marginal federal income tax rate is 32% and his state does not collect income taxes, Franklin would prefer A. the municipal, because its taxable equivalent yield is 7.79%. B. the corporate, because its after-tax yield is 10.45%. C. the municipal, because its taxable equivalent yield is 16.06%. D. the corporate, because its after-tax yield is 21.21%.

A The answer is the municipal, because its taxable equivalent yield is 7.79%. One can either compare the taxable equivalent yield (TEY) of the municipal bond with the nominal yield for the corporate bond or compare the after-tax yield of the corporate bond with the nominal yield of the municipal bond. The TEY of the municipal bond = 5.3% ÷ (1 - 0.32) = 7.79%, which is more than the nominal yield of the corporate bond. The after-tax yield of the corporate bond is 7% × (1 - 0.32) = 4.76%.

According to the unbiased expectations theory of interest rates,

the current long-term rate is the average of today's short-term rate and expected future short-term rates.

Equity investments made for the launch, early development, or expansion of a business are known as

venture capital.

Galen has come to his financial planner with questions about dividends he received on some of his stock this year. He has received $1,000 in qualified dividends paid in cash. He also has received stock dividends of $4,000, but without a cash dividend option. How much will Galen have to report as dividend income for the current year?

$1000 The answer is $1,000. Only the dividends paid in cash to Galen that are reported as income. The stock dividends did not have a cash-dividend option and are not taxable.

Nellie has accumulated $500,000 in a money market deposit account at ABC Bank and Trust. She is worried about the number of bank failures in the recent years and transfers $250,000 into a money market mutual fund paying a slightly higher return offered by her friend's investment firm. Determine the amount she has insured by the Federal Deposit Insurance Corporation (FDIC).

$250,000 Nellie's FDIC insured funds remain at $250,000. The money market deposit account is insured up to $250,000, but the money market mutual fund is not FDIC insured.

Carly purchased $80,000 of JEM stock for $40 per share utilizing her margin account. She used $40,000 in her money market fund plus she borrowed $40,000 from her broker. She acquired a total of 2,000 shares of JEM stock. JEM stock is currently trading at $39.65 per share. Calculate the stock price that Carly would receive a margin call from her broker. Assume a maintenance margin requirement of 35% and an initial margin requirement of 50%.

$30.77 The answer is $30.77. Carly would receive a margin call when the stock fell to $30.77 per share. Margin call = [(1 − initial margin percentage) ÷ (1 − maintenance margin)] × purchase price of the stock = [(1 - 0.50) ÷ (1 - 0.35)] × 40 = 30.7692, or $30.77.

If a $100 par value preferred stock pays an annual dividend of $5 and comparable yields are 10%, the price of the preferred stock will be

$5 ÷ 0.10 = $50 for preferred stocks, the zero-growth model is used because the preferred stock's dividend is fixed. The formula is V = D0/r, where D0 is the dividend and r is the required return.

Amanda buys 75 shares of BR Enterprise stock for $67 per share on margin. The initial margin is 55%, and the maintenance margin is 40%. Calculate the market price at which Amanda will receive a margin call.

$50.25 Margin call = ([1 - initial margin percentage] ÷ [1 - maintenance margin]) x purchase price of stock : $67 × ([1 − 0.55] ÷ [1 − 0.40]) = $67 x (0.75) = $50.25

An investor buys 100 shares of stock at $75 per share, with a 60% initial margin requirement and 40% maintenance margin requirement. Assuming the stock quickly falls to $40 per share, calculate the additional capital that the investor must provide to cover a margin call.

$600 The current market value of the 100 shares is $4,000. The maintenance margin requires an equity of $4,000 × 0.40, or $1,600. The investor's equity in the account ($1,000) is the market value ($4,000) minus the loan amount ($3,000). A margin call for $600 ($1,600 - $1,000) will be ordered.

$958.94 A bond's investment value is the same as its intrinsic value as a straight bond. Using an HP 10bII+ calculator, the bond price is determined by inputting the following keystrokes: END Mode, 2 P/YR 5, DOWNSHIFT, N = 10 7.5 = I/YR 1000 x 6.5% / 2 = 32.5 = PMT 1000 = FV Solve for PV = -958.94, or $958.94.

Which of these statements correctly describes differences between preferred stock and long-term bonds? 1. Interest paid by firms is a tax-deductible expense; dividends paid on preferred stock are not tax deductible. 2. Bonds usually have a finite maturity; preferred stock is usually perpetual. 3. Bonds pay a fixed amount of interest; preferred stock pays a fluctuating dividend based on earnings. 4. Interest on bonds and preferred stock dividends are legal obligations of a firm that must be paid.

1 AND 2

Which of the following statements correctly describe differences between corporate preferred stock and long-term bonds? 1. Bonds represent a creditor position; preferred stock represents an equity position. 2. Bonds pay a fixed amount of interest; preferred stock pays a fluctuating dividend based on earnings. 3. Interest paid by firms is a tax-deductible expense; dividends paid on preferred stock are not tax deductible. 4. Bonds usually are not rated; preferred stock usually is rated.

1 AND 3

Which of the following are correctly defined bond classifications? 1. Short-term - maturities up to 5 years 2. Intermediate-term - maturities of 5 to 7 years 3. Long-term - maturities longer than 7 years

1 ONLY intermediate-term bonds have maturities 5 to 12 years. Long-term bonds have maturities of longer than 12 years.

Which of these statements concerning technical analysis is CORRECT? 1. The focus of technical analysis is market timing with an emphasis on likely price changes. 2. Technicians tend to concentrate on the past price movements to forecast future price movements. 3. The focus of technical analysis is the process by which stock prices rapidly adjust to new information. 4. Technical analysis is based on the underlying fundamentals of a stock's value.

1 and 2

Under which of these circumstances will dollar cost averaging result in an average cost per share lower than the average price per share? 1. The price of the stock fluctuates over time. 2. A fixed number of shares is purchased regularly. 3. A fixed dollar amount is invested regularly. 4. A constant dollar plan is maintained.

1 and 3

Which of the following statements regarding Eurodollar CDs is CORRECT? 1. Eurodollar CDs are obligations of non-U.S. banks. 2. Eurodollar CDs are more liquid than domestic CDs. 3. Eurodollar CDs offer a slightly higher yield than domestic CDs. 4. Eurodollar CDs are only used to settle transactions in the U.S.

1 and 3

Which of these statements are CORRECT of mutual fund dividend distributions? 1. The fund pays dividends from net investment income. 2. A single taxpayer may exclude $100 worth of dividend income from taxes annually. 3. An investor is liable for taxes on distributions whether a dividend is a cash distribution or is reinvested in the fund. 4. An investor is not liable for taxes if he or she automatically reinvests distributions.

1 and 3

Which of the following statements concerning a knowledge of the risk/return relationship is CORRECT? 1. Future risk/return relationships are not guaranteed to match past risk/return relationships. 2. Chances are that past relative relationships will not continue into the future. 3. A reduction in risk also means a reduction in the possible return on the investment. 4. The smaller the dispersion of returns, the greater the risk associated with a particular investment.

1 and 3 Chances are that past relative relationships will continue into the future. The smaller the dispersion of returns, the lower the risk associated with a particular investment.

Which of these is a correct justification for use of an investment in a client's portfolio? 1. Blue chip common stocks because they provide a hedge against inflation 2. FNMA (Federal National Mortgage Association) securities because they are backed by the full faith and credit of the U.S. government 3. Aggressive growth stocks because they perform better during economic contractions

1 only

Fred Smith, your client, has consulted you regarding increasing the overall yield on his portfolio while simultaneously reducing his risk exposure to the stock market. You have suggested real estate investment trusts (REITs) and explain that there are several different kinds of REITs. Which of the following accurately describe the characteristics of equity REITs? 1. Earn rental income from leasing properties they own 2. Earn interest income from mortgages on real estate properties 3. Are designed to be liquidated in a specific future year 4. Are similar to open-end mutual funds

1 only. Mortgage REITs receive interest income from mortgages they own. Finite life REITs liquidate in a future year. REITs are closed-end funds.

Which of these are nondiversifiable risks? Business risk Interest rate risk Market risk Purchasing power risk

2,3,4

A 15-year, 10% annual coupon bond is sold for $1,150. The bond can be called at the end of five years for $1,100. what is the bond's approximate yield to call (YTC)? A. 8.0% B. 8.4% C. 9.2% D. 10.0%

A The answer is 8.0%. The calculation is as follows: N = 5; FV = 1,100; PMT = 100; PV = -1,150; then, solve for I/YR = 7.9539, rounded to 8.0%. Interest is compounded on an annual basis according to the problem, so the I/YR does not need to be multiplied by two. The calculator should be in END mode and 1 P/Yr.

A portfolio manager considers adding an asset to the portfolio. The manager decides between four equally risky assets: W, X, Y AND Z. The correlations of each asset with the portfolio are as follows: Asset W: 0.90 Asset X: 0.80 Asset Y: 0.40 Asset Z: 0.20 To achieve optimal diversification benefits, which of the assets should be selected by the manager A. Asset W B. Asset X C. Asset Y D. Asset Z

A The answer is Asset Z. Asset Z has the smallest correlation with the portfolio and will therefore provide the largest reduction in portfolio risk

Which of the following statements regarding strategic and tactical asset allocation (TAA) is CORRECT? I. Strategic asset allocation involves selecting the proper asset allocation based on the risk tolerance of the client and rebalancing to keep the portfolio within the parameters of the desired strategic mix. II. TAA involves evaluating asset classes or industries with respect to their value and selling undervalued classes and purchasing overvalued classes. A. I only B. II only C. Both I and II D. Neither I nor I

A The answer is I only. TAA involves buying undervalued classes and selling overvalued classes.

Kim owns a Marina Limited Partnership worth $25,000. She is interested in selling her interest in order to raise money for a down payment on a new rental property. Which of the following are NOT characteristics of her investment in the limited partnership? A. Kim's investment is managed by someone other than herself. B. Tax-free income is provided by the partnership to Kim. C. Her interest may be subject to liquidity and marketability risk. D. The sale of her interest may be restricted.

B. The answer is tax-free income is provided by the partnership to Kim. The income from limited partnerships is not tax exempt. An investor, however, may use a tax loss from a partnership to offset the income from another passive investment.

Which of the following statements is CORRECT? If an investor expects a decline in market interest rates, she should attempt to construct a portfolio of long maturity bonds with low coupon rates. If the investor expects an increase in market interest rates, he should attempt to construct a portfolio of short maturity bonds with high coupon rates.

Both I and II

Which of the following statements regarding duration is CORRECT? Risk-averse investors should consider bonds with low durations. Aggressive investors should consider bonds with low durations when they anticipate that interest rates will rise.

Both I and II

Which of the following statements regarding wash sales is CORRECT? 1. A wash sale occurs if the taxpayer sells or exchanges stock or securities for a loss and, within 30 days before or after the date of the sale or exchange, acquires similar securities. The wash sale rules are easily avoided in the case of fixed-income securities by substituting a bond with the same or similar characteristics as long as it is issued by a different company.

Both I and II

hich of the following statements regarding certificates of deposit (CDs) is CORRECT? CDs are deposits made with a bank or savings and loan for a specified period, commonly one month to five years. Negotiable CDs are deposits of $100,000 or more placed with commercial banks at a specified interest rate for a term of up to one year.

Both are correct

Cheryl is in a 24% federal marginal income tax bracket and resides in a state with a at 5% state income tax rate. She has $50,000 to invest and wants to invest the entire sum in a single bond issue. Which bond should Cheryl choose? A. Taxable corporate bond with a rate of 6% B. Another state's municipal bond with a rate of 5% C. Her city's municipal bond with a rate of 3% D. Her state's municipal bond with a rate of 4%

B The answer is another state's municipal bond with a rate of 5%. The other state's municipal bond will generate the highest after-tax yield of 4.75% for Cheryl, calculated as 5% × (1 - 0.05) = 5% × 0.95 = 4.75%. The after-tax yield for the taxable corporate bond is only 4.26%, or 6% × (1 - 0.29).

August Corporation's common stock experienced the following returns over the past three years: 6%, −10%, 20%. Which is CORRECT in identifying the August Corporation's arithmetic and geometric mean? A. Arithmetic mean: 4.61%; geometric mean: 5.33% B. Arithmetic mean: 5.33%; geometric mean: 4.61% C. Arithmetic mean: 7.00%; geometric mean: 12.00% D. Arithmetic mean: 12.00%; geometric mean: 7.00%

B The answer is arithmetic mean: 5.33%; geometric mean: 4.61%. This is solved as follows: (6% − 10% + 20%) ÷ 3 = 5.33%. Geometric mean: PV = −1, N = 3, PMT = 0, FV = (1.06)(0.90)(1.20) = 1.1448. Solve for I/YR = 0.0461, or 4.61%.

Henry, age 46, has $250,000 to invest in a long-term investment portfolio. he has come to his financial planner, Robbie, to ask for advice. he wants a diversified portfolio while simultaneously limiting risk, minimizing transaction costs, and managing taxes. Also, he desires a portfolio that is based on a passive management approach, but he would still like to include an active management component. Which of the following investment approaches would best suit Henry A. Index funds B. Core and satellite C. Commodities D. Emerging markets

B The answer is core and satellite. The core and satellite approach is the best choice for Henry. Emerging markets and commodities may be used in the satellite portion of the portfolio. Index funds generally are used in a passive portfolio approach

The basic premise of the risk-return tradeoff suggests that risk-averse individuals purchasing investments with higher nondiversifiable risk should expect to earn A. lower rates of return. B. higher rates of return. C. rates of return equal to the market. D. rates of return lower than the market

B The answer is higher rates of return. Investors are risk averse and require higher rates of return for assuming greater investment risk.

Which type of bond is typically collateralized by the issuer? A. High-yield B. Mortgage C. Zero-coupon D. Debenture

B The answer is mortgage. High-yield, zero-coupon, and debenture bonds are generally not collateralized by the issuer. Alternatively, a mortgage bond or secured bond is collateralized with (typically) either real property or equipment of the issuer.

The area of the investment policy statement (IPS) that provides the specified return on an inFLation-adjusted basis is best described as A. time horiZon. B. return requirement. C. liquidity. D. unique preferences and

B The answer is return requirement. The return requirement might include absolute or relative dollar or percentage returns on a before-tax or after-tax basis. Also included might be the requirement to provide the specified return on an inflation-adjusted basis

Arthur purchases 200 shares of HMS stock for $23 per share. He then makes subsequent purchases at the end of the following years: Year 1: 50 shares at $26 per share Year 2: 75 shares at $29 per share Year 3: 25 shares at $36 per share At the end of the fourth year, HMS is trading at $41 per share. What is the annualized time-weighted return on the stock over the four-year period? (Assume that no dividends were paid over the four-year period.) A. 13.85% B. 14.25% C. 15.00% D. 15.55%

D The answer is 15.55%. Because time-weighted returns do not consider the cash flows of the investor (Arthur), only appreciation and dividends on the investment are relevant. CF0 = -23 (beginning share value), CF1 = 0, CF2 = 0, CF3 = 0, and CF4 = 41 (ending share value). IRR/YR = 15.5484, or 15.55%.

Mary and Ed, ages 62 and 68, would like to add a new mutual fund investment to their portfolio. They are seeking income along with a preservation of capital. Which of the following would be the best alternative based on their investment objectives? A. High-yield bond fund B. Asset allocation fund C. Russell 2000® Index fund D. U.S. government bond fund

D The answer is U.S. government bond fund. With investment objectives of income and capital preservation, they should choose the U.S. government bond fund. This type of fund is designed to offer an investor income. Also, the securities within this type of portfolio should provide the investor with principal stability.

Which of the following statements regarding a bond ladder strategy is CORRECT? A. A bond ladder strategy involves the purchase of very long-term and very short-term bonds. B. A laddered portfolio of bonds will provide lower yields than a portfolio consisting entirely of short-term bonds. C. A bond ladder strategy is generally more aggressive than a bond barbell strategy. D. A bond ladder strategy is a relatively easy way to immunize a portfolio against interest rate risk.

D The answer is a bond ladder strategy is a relatively easy way to immunize a portfolio against interest rate risk

Bond ABC is selling at par, offers an 8% coupon, and matures in 20 years. Bond ABC has a call feature that allows the bond to be called after 10 years at a price of $1,050. Which of the following statements is CORRECT? A. The YTC for Bond ABC is 8.00%, which is equal to Bond ABC'S YTM. B. The YTC for Bond ABC is 8.00%, which is more than Bond ABC's YTM. C. The YTC for Bond ABC is 8.34%, which is less than Bond ABC's YTM. D. The YTC for Bond ABC is 8.34%, which is more than Bond ABC's YTM.

D The answer is the YTC for Bond ABC is 8.34%, which is more than Bond ABC's YTM. Set the calculator in END Mode and 2 P/Yr. Because ABC is selling at par, its YTM = 8.0%. ABC's YTC is as follows: PV = −1,000; FV = 1,050; 10, DOWNSHIFT, N = 20; PMT = 8% × 1,000 ÷ 2 = 40. Solve for I/YR = 8.34%.

Which of the following applies to U.S. Treasury STRIPS? A. No taxable income is associated with these investments. B. These obligations do not subject purchasers to interest rate risk. C. Their price volatility is much less than that of coupon bonds of similar maturity. D. They are purchased throuugh financial institutions and government securities brokers and dealers.

D The answer is they are purchased through financial institutions and government securities brokers and dealers. The income from STRIPS is taxable annually as accrued interest to the purchaser. STRIPS prices are more volatile than those of coupon bonds of similar maturities, and they carry substantial interest rate risk for the purchaser

All of the following are attributes of an economy that is coming out of recession except A. interest rates are rising. B. cyclical stocks are beginning to increase in price. C. personal incomes are increasing. D. unemployment is increasiNG

D The answer is unemployment is increasing. When an economy is coming out of a recession, hiring would be increasing and unemployment claims would be decreasing. All of the other choices are attributes of a recovering econom

Which of the following statements regarding unit investment trusts (UITs) is NOT correct? A. They do not have a board of directors. B. They do not employ an investment advisor. C. They do not actively manage their own portfolios. D. Unit holders are not taxed on capital gains, interest, or dividends until they dispose of their units or the trust terminates

D The answer is unit holders are not taxed on capital gains, interest, or dividends until they dispose of their units or the trust terminates. During the term of the trust, capital gains, interest, and dividends earned by the trust and passed through to the unit holders are subj

yvette is saving for her son's college education. er son is expected to start college in eight years. Which bond portfolio would likely be immunized with respect to this goal? A. Weighted average time to maturity of bonds is 8 years with coupon of 6% B. eighted average time to maturity of bonds is 10 years with coupon of 0% C. Weighted average time to maturity of bonds is 7 years with coupon of 3% D. eighted average time to maturity of bonds is 10 years with coupon of 5%

D The answer is weighted average time to maturity of bonds is 10 years with coupon of 5%.

Which of the following statements regarding the taxation of corporate bonds is NOT correct? A. The amount attributable to a market discount is generally not includable in income until disposition of the bond. B. At disposition, the market discount is treated as interest income. C. Upon sale, only gain in excess of the accrued market discount is treated as capital gain income. D. When a market premium bond is purchased, the tax law does not permit the taxpayer to elect to amortize the premium over the remaining life of the bond

D The answer is when a market premium bond is purchased, the tax law does not permit the taxpayer to elect to amortize the premium over the remaining life of the bond. The tax law does permit an investor to make an election to amortize the premium over the remaining life of the bond.

An active portfolio strategy is based on which of the following premises? A) The stock market is inefficient B) The portfolio manager's access to corporate management C) The stock market is efficient D) The investor's ability to obtain public information

If the market is efficient, then a buy-and-hold strategy would be best. Only if the market is inefficient is it worth the costs involved in active management to attempt to generate superior returns.

Debbie owns a five-year AAA rated municipal bond with a coupon rate of 3.50% (paid semiannually). If the comparable yield for this quality bond is currently 2.75%, what is the present value of her bond?

The answer is $1,034.81. The present value of her bond is $1,034.81, calculated as follows: END Mode, 2 P/YR 5, DOWNSHIFT, N = 10 I/YR = 2.75 PMT = 17.50 (3.50% × 1,000 ÷ 2) FV = 1,000 Solve for PV = -1,034.81, or $1,034.81.

Calculate the present value of a five-year bond with a coupon rate of 5.50% (paid semiannually) if similar quality bonds are currently yielding 4.35%.

The answer is $1,051.18. The present value of the bond is $1,051.18, calculated as follows: END Mode, 2 P/YR, 5, DOWNSHIFT, N = 10; I/YR = 4.35; PMT = 27.50 (5.50% × 1,000 ÷ 2); FV = 1,000; solve for PV = -1,051.18, or $1,051.18.

Amber purchased a bond for $1,038.90 exactly two years ago. At that time, the bond had a maturity of five years and a coupon rate of 10% (paid semiannually). Assuming the rates below are the prevailing rates for this type of bond at different maturities, calculate the price that Amber could sell her bond for today. Maturities 1 year 3 years 5 years 1 0 years 30 years Interest rates 6% 7% 8.5% 10% 12%

The answer is $1,079.93. Using the 3-year rate of 7% for the calculation: FV = 1,000 I/YR = 7 PMT = 50 (10% x 1000 = 100 ÷ 2) 3, DOWNSHIFT, N = 6 PV = -1,079.9283, or $1,079.93

XYZ Corporation issued bonds with a 25-year maturity, $1,000 par value, and 5.75% coupon (paid semiannually). Five years after issue, interest rates on similar bonds fell to 4.75%. Calculate the price that XYZ bonds should sell for in the marketplace.

The answer is $1,128.20. XYZ bonds should sell for $1,128.20, calculated as follows: END Mode, 2 P/YR FV = 1,000 PMT = 28.75 (57.50 ÷ 2) 20, DOWNSHIFT, N = 40 I/YR =4.75 Solve for PV = -1,128.1979, or $1,128.20

The intrinsic value of a preferred stock with an 8% dividend ($100 par stock) and a market interest rate of 7.5% is

The answer is $106.67. The preferred stock is a perpetuity and priced by the equation: P = D ÷ r = $8.00 ÷ 0.075 = $106.67.

Alex owns a put option with an exercise price of $51. The underlying stock is currently trading at $48 in the secondary market. Assuming the put option is currently trading at $6 and has three months until expiration, calculate the intrinsic value of the put option.

The answer is $300. The price the put option is currently trading at in the secondary market and the premium paid for the put option are both ignored when determining the intrinsic value of the put option. The two factors that matter are the exercise price of the put option and the price that the underlying stock is currently trading at in the secondary market. Therefore, the intrinsic value of this put option is $300 ($51 − $48 × 100 shares), which is the exercise price of the put option minus the price the underlying stock is currently trading at in the secondary market multiplied by 100 shares. Each option contract represents 100 shares of the underlying stock.

Jack is interested in purchasing LFM stock. LFM has an estimated free cash flow to equity (FCFE) for the next year of $2.75 per share, which is expected to grow at a constant rate of 3.5% per year. Jack's required rate of return is 12%. Using the FCFE valuation model, calculate the intrinsic value of LFM stock.

The answer is $32.35. Using the model V = FCFE1 ÷ (r - g), the intrinsic value of the stock is $32.35 [$2.75 ÷ (0.12 - 0.035)].

LJM Corporation has a bond issue with a coupon rate of 8% and seven years remaining until maturity. Assuming a par value of $1,000 and semiannual coupon payments, calculate the intrinsic value of the bond if current market conditions justify a 10% required rate of return.

The answer is $901.01. The intrinsic value of LJM's bond is $901.01, calculated as follows: END Mode, 2 P/YR 7, DOWNSHIFT, N = 14 10 = I/YR 8% × $1,000 ÷ 2 = 40 = PMT 1000 = FV Solve for PV = -901.01, or $901.01.

George has a five-year bond with a coupon rate of 3.65% (paid semiannually). Assuming the comparable yield for this quality bond is 4.85%, calculate the intrinsic value of his bond.

The answer is $947.28. The intrinsic value of George's bond equals $947.28, indicating the bond would be trading at a discount to par. END Mode, 2 P/YR FV = 1,000 5, DOWNSHIFT, N = 10 I/YR = 4.85 PMT = 3.65% × 1,000 ÷ 2 = 18.25 Solve for PV = -947.2835, or $947.28

Lauren's bond has a current market value of $987.56 and Macaulay duration of 3.2. Assuming the bond's yield to maturity (YTM) changes from 6.5% to 6%, calculate the estimated percent change in the price of the bond and the new expected market price of the bond.

The answer is +1.5%, $1,002.37. The formula for determining the change in the price of the bond: ΔP/P = −D[Δy ÷ (1 + y)] ΔP/P = −3.2[(0.06 − 0.065) ÷ (1 + 0.065)] ΔP/P = −3.2(-0.004695) = 0.01502, or 1.5% This means that the bond's price should increase by 1.5% and sell for $1,002.37 (a slight premium to par) in the secondary market.

Your client, Trace, owns a portfolio that earned 12% during the current year. His portfolio has a beta of 1.3 and a standard deviation of 14%. During the current year, the market (as represented by the S&P 500 index) earned 9%. If the current risk-free rate is 5%, which of the following accurately illustrates the Treynor ratios for Trace's portfolio and the market? A) 0.0538; 0.0400 B) 0.0050; 0.0100 C) 0.0050; 0.0400 D) 0.0538; 0.0100

The answer is 0.0538; 0.0400. Calculations are as follows. Trace's Treynor = (0.12 - 0.05) ÷ 1.3 = 0.0538 Market's Treynor = (0.09 - 0.05) ÷ 1 = 0.0400. The market has a beta of 1.0.

The answer is 0.50. The Sharpe ratio is (the investment return - the risk-free return) divided by the investment's standard deviation. Therefore, (0.12 - 0.05) ÷ 14 = 0.07÷0.14 = 0.50.

ABC Corporation has a P/E ratio of 5.00 and an expected growth rate in earnings for the next year of 9.5%. Assuming an investor's required rate of return is 12%, calculate the firm's PEG ratio.

The answer is 0.5263. Calculate the firm's PEG ratio as follows: 5.00 ÷ (0.095 × 100) = 0.5263. After calculating this ratio, it then would be compared to ABC Corporation's peers to determine whether a purchase is warranted.

Shari would like to know the weighted beta coefficient for her portfolio. She owns 100 shares of BDL common stock with a beta of 1.3 and total current market value of $8,000; 400 shares of XTP common stock with a beta of 0.9 and total current market value of $13,000; and 200 shares of SPR common stock with a beta of 0.6 and total current market value of $10,000. What is the overall weighted beta coefficient for Shari's portfolio?

The answer is 0.91. Calculations are shown below: Market Value Weighting Beta WeightedBeta $8,000÷$31,000= 0.258 × 1.3 =0.3354 $13,000÷$31,000= 0.419 × 0.9 =0.3771 $10,000÷$31,000= 0.323 × 0.6 =0.1938 $31,0000 .9063 =ABOUT 0.91

Which of the following are implications of the weak form of the efficient market hypothesis (EMH)? Stock prices fully reflect all historical price behavior. Consistently superior performance is common. Fundamental analysis may produce superior investment performance. Fundamental and technical analysis can produce superior investment performance.

The answer is 1 and 3. Technical analysis is not considered valuable under any of the forms of the EMH; fundamental analysis is considered valuable under the weak form only.

The strong form of the efficient market hypothesis suggests which of the following? 1. Inside information will not lead to superior investment results. 2. Inside information will lead to superior investment results. 3. Studying financial statements will not lead to superior investment results. 4. Studying financial statements will lead to superior investment results.

The answer is 1 and 3. The strong form says that all information, both public and private, is already reflected in the stock price, so nothing will produce superior results.

Which of the following statements correctly distinguishes an investor who practices indexing? 1. The investor purchases index mutual funds. 2. The investor is practicing an active form of portfolio management. 3. The investor is attempting to beat the market (i.e., S&P 500). 4. Indexing and purchasing index funds tends to exhibit low administrative costs and a low turnover of existing assets.

The answer is 1 and 4. In actuality, the investor is following a passive portfolio management style. The purpose of indexing is not to beat the market, but merely match its long-term performance.

Troy requires a 15% return to meet his financial goals. e is interested in a mutual fund with a beta of 1.3. If the market return has averaged 11% over the past 10 years and the Treasury bill rate is currently 4%, should Troy invest in this fund A. No, the fund's expected rate of return is less than Troy's required rate of return. B. No, Troy's required rate of return is less than the fund's expected rate of return. C. es, the fund's expected rate of return is more than Troy's required rate or return. D. es, Troy's required rate of return is more than the fund's expected rate of return

The answer is no, the fund's expected rate of return is less than Troy's required rate of return. Expected rate of return for the mutual fund using CAPM is as follows: rf + (rm - rf) βi = 0.04 + (0.11 − 0.04)1.3 = 0.131, or 13.1%. Because the expected rate of return is less than Troy's required rate of return, he should not purchase shares in the fund.

FER stock has a current dividend of $0.75 per share that has been growing at a rate of 1.25% per year. If an investor's required rate of return is 15% and the stock is currently selling for $6.34 per share, determine whether the investor should purchase the stock.

The answer is no, the stock is overvalued based on the constant growth dividend discount model. Based on the constant growth dividend discount model, the intrinsic value of the stock is $5.52, calculated as follows: [0.75 × (1 + 0.0125)] ÷ (0.15 - 0.0125) = 0.7594 ÷ 0.1375 = 5.5227, or $5.52. Because FER is currently trading at a price of $6.34 per share, it is overvalued, and the investor should not buy the stock.

Choose the form of the efficient market hypothesis that supports technical analysis. A) Strong B) None of these C) Weak D) Semistrong

The answer is none of these. The efficient market hypothesis is in direct contradiction to technical analysis because the efficient market hypothesis is founded on the notion that all historical price and volume data, which is used by technical analysts, is already accounted for in the current stock price.

All of the following are examples of assets unique to a business except A. accounts receivable. B. inventory. C. machinery and equipment. D. notes payable.

The answer is notes payable. Notes payable are an example of a business liability

Baylor stock is currently selling for $63 per share. A call option for this stock with an exercise price of $65 per share may be purchased for a premium of $4. The option expires in three months. which of the following terms best describes this option? A. In the money B. At the money C. Out of the money D. By the money

The answer is out of the money. The option is currently out of the money because the exercise price of the option ($65 per share) is currently greater than the current market price of the stock ($63 per share). Therefore, the option will not be exercised unless the market price increases to more than $65 per share within the three-month period

Which of the following statements describes a limitation of Monte Carlo simulation? A) Variables are assumed to be normally distributed but may not be normally distributed. B) A clearer understanding of short-term and long-term risk can be gained. C) Outcomes of a simulation can only be as accurate as the inputs to the model. D) Simulations do not consider possible input values that lie outside of historical experience.

The answer is outcomes of a simulation can only be as accurate as the inputs to the model. Monte Carlo simulations can be set up with inputs that have any distribution and any desired range of possible values. However, a limitation of the technique is that its output can only be as accurate as the assumptions an analyst makes about the range and distribution of the inputs.

Which one of these is CORRECT regarding preferred stock?

The answer is preferred stock's value is based on prevailing interest rates. The value for a preferred stock is its dividend divided by prevailing interest rates.

What type of index is the Dow Jones Industrial Average (DJIA)?

The answer is price-weighted.

What type of index is the Dow Jones Industrial Average (DJIA)? A) Value-weighted B) Capitalization-weighted C) Equal-weighted D) Price-weighted

The answer is price-weighted. The DJIA is price-weighted, meaning that higher-priced stocks will have more impact on the average than lower-priced stocks. Cap-weighted, which is the same as value-weighted, means the prices of stocks with the largest capitalization relative to the market capitalization of the entire index will have the greatest impact on the index. Equally weighted means that the price movement of each stock in an index has the same impact as that of any other stock in the index.

Which of the following statements regarding the capital market line (CML) is CORRECT? A) Describes the required return of individual stocks B) Uses beta as a risk measure C) Provides a direct relationship between the risk and return for a well-diversified portfolio D) Is not useful for diversified portfolios

The answer is provides a direct relationship between the risk and return for a well-diversified portfolio. The capital market line (CML) graphically depicts the relationship of risk and return for efficient well-diversified portfolios. The CML uses standard deviation as a risk measure.

Which of the following is NOT likely to be an advantage of a valid investment policy statement? A) Provides for short-term strategy shifts in response to short-term dramatic value declines B) Promotes long-term discipline in investment decisions C) Allows for a continual dynamic process in meeting investor objectives D) Identifies and documents investment objectives and constraints

The answer is provides for short-term strategy shifts in response to short-term dramatic value declines. The investment policy statement does not provide for shifts in strategy due to short-term value declines.

Due to an inheritance, Danielle now owns a large position in XYZ stock. She is concerned that the stock may decline in the upcoming months while she is deciding what to do with the investment. What type of investment strategy could her financial planner propose to protect the stock from substantial downside risk?

The answer is purchase a put option. Danielle should purchase a put option (referred to as protective put or portfolio insurance) to protect herself from possible loss. Thereby, the portfolio is protected and the investor's loss on the option is limited to the amount of the premium paid for the put.

All of these positions are used to create a zero-cost collar except A) purchasing a put option on the stock. B) writing a call option on the stock. C) purchasing a call option on the stock. D) a long position in the stock.

The answer is purchasing a call option on the stock. To create a zero-cost collar, the investor will not purchase a call option on the stock. Rather, the investor will use the premium received from writing the call option to subsequently purchase the put option on the underlying stock, thereby creating a cashless collar and protection from downside risk.

Which of the following accurately describes the certificate of deposit investment strategy known as laddering?

The answer is purchasing multiple certificates of deposit (CDs), rather than just one, with differing terms of maturity. Investors with relatively large amounts of money to invest should purchase multiple certificates with equally spaced terms to maturity, a strategy known as laddering.

Myron, age 68, enjoys participating in an investment club. The club actively trades securities for its members, with the goal of modest capital appreciation. In which market do the club's trades take place? A. Primary B. Secondary C. Futures D. Currency

The answer is secondary. The purpose of the secondary market is to provide investors with a method of buying and selling previously issued securities. The purpose of the primary market is to facilitate the initial sale of securities issued to the public.

which of the following subjects the investor to the greatest possible loss? A. Selling a naked call option B. Selling a covered call C. Buying a put option D. Buying a call option

The answer is selling a naked call option. The most risky transaction is selling a naked call option. The loss when purchasing any type of option (call or put) is limited to the option premium paid. However, selling a naked call option exposes the investor to an unlimited loss because there is no limit to how much the underlying stock price can increase in the secondary marke

A wheat farmer would hedge by _____________ wheat futures; a bread manufacturer would hedge by ________________ wheat futures; a speculator would _________ a wheat futures contract if he believes the price of wheat may rise; and a speculator would __________ a wheat futures contract if he believes the price of wheat may fall.

The answer is shorting; buying; buy; short. A wheat farmer would hedge by shorting wheat futures; a bread manufacturer would hedge by buying wheat futures; a speculator would buy a wheat futures contract if he believes the price of wheat may rise; and a speculator would short a wheat futures contract if he believes the price of wheat may fall.

The answer is the Moderato Fund because has a higher Sharpe ratio. In order to use alpha (which uses beta in the formula), beta needs to be a reliable number. This can be determined by R2, which gives the level of systematic risk. The R2 for both funds is low (0.45 and 0.52), meaning beta, and formulas using beta, should not be used. You want an R2 of 0.70 or higher in order to use beta. This then leaves you with Sharpe, and the Moderato Fund has the highest Sharpe ratio of the two.

The Allegro Mutual Fund has an alpha of +1.50, a Sharpe ratio of 0.44, and an R2 with the Russell 2000 of 0.45. The Moderato Mutual Fund has an alpha of +0.40, a Sharpe ratio of 0.48, and an R2 with the Russell 2000 of 0.52. Which fund should be chosen and why? A) The Moderato Fund because it has a higher Sharpe ratio. B) The Allegro Fund because it has a higher alpha. C) The Allegro Fund because it has a lower Sharpe ratio. D) The Moderato Fund because it has a lower alpha.

Consider the following information for the CPM International Growth Fund: Average annual rate of return 7.45% Average market rate of return 8.50% Beta 1.25 Standard deviation 4.55% Risk-free rate of return 3.50% Select the statement that is NOT correct. A) The Treynor ratio for the fund is 0.0400. B) The Sharpe ratio for the fund is 0.8681. C) The fund manager underperformed the market over the given time frame. D) Jensen's alpha for the fund is -2.30%.

The answer is the Treynor ratio for the fund is 0.0400. Based on the information provided, the Treynor ratio for the fund is 0.0316, calculated as follows: Sharpe ratio = (0.0745 - 0.0350) ÷ 0.0455 = 0.8681 Treynor ratio = (0.0745 - 0.0350) ÷ 1.25 = 0.0316 Jensen's alpha = 7.45% - [3.50% + (8.50% - 3.50%) 1.25] = -2.30% When Jensen's alpha is positive, the fund manager outperformed the overall market. In this case, alpha indicates that the fund manager has underperformed.

Which of the following are reasons why a client's preferences, understanding, and experience may influence the management of his or her portfolio? 1. These factors affect investment strategies that might be used by the planner. 2. Consideration of these factors relieves the planner of any fiduciary duty. 3. Consideration of these factors eliminates the need for due diligence of securities. 4. Investment choices must be checked for suitability, with these factors kept in mind.

The answer is 1 and 4. Investment strategies used by a planner should tie closely to the client's goals, risk tolerance, investment preferences, and other intangible factors. Clients with little understanding may not tolerate complicated investment strategies and products. Unsuitability lawsuits are very common in the investment universe. By matching as closely as possible a client's suitability factors with investment products, an advisor may be able to defeat claims of unsuitability.

Companies A and B have exactly the same dollar amount of assets and net income. Company A has a capitalization structure of 70% equity and 30% debt; Company B has a capitalization structure of 40% equity and 60% debt. Which one of these statements is CORRECT? 1. Company B has a higher ROE than Company A. 2. Company B has a higher ROA than Company A. 3. Company A has a higher debt-to-equity ratio than Company B.

The answer is 1 only. All else being equal, a profitable company with a higher debt level will have a higher return on equity. If income is the same for both companies, then the only difference is the percentage of equity. With a lower equity, Company B will have a higher return on equity. Company B has a higher debt-to-equity ratio.

Assuming JHG and DSA stocks have standard deviations of 6.23% and 10.78%, respectively, and a correlation coefficient of 0.17, calculate the covariance between the two stocks.

The answer is 11.42. The covariance between the two stocks is a positive 11.42 (6.23 × 10.78 × 0.17). Covariance measures the extent to which two variables move together, either positively (together) or negatively (opposite).

Element Corp had these annual returns over the past four years: +12%, +6%, -8%, and +20%. What is the standard deviation for Element Corp. over the past four years?

The answer is 11.8%.

Brantley recently purchased a new video game system on his credit card. Assuming the nominal annual percentage rate (APR) is 14.95% (compounded daily), calculate the effective annual rate (EAR). A) 16.12% B) 15.02% C) 13.26% D) 14.95%

The answer is 16.12%. The effective annual rate on his credit card is 16.12%, calculated as follows: EAR = [1 + (0.1495 ÷ 365)]365 - 1 = 0.1612, or 16.12%.

Jonathan purchased 500 shares of CPM stock for $12 per share. At the end of the first year, he made another purchase of 500 shares at a stock price of $12 per share. At the end of the third year, he sold all of the stock for $17 per share. In addition, the stock paid a dividend of 0.35 per share at the end of each year. Calculate the dollar-weighted return to Jonathan over the three-year period. A) 11.63% B) 17.46% C) 13.50% D) 15.60%

The answer is 17.46%. Jonathan earned a dollar-weighted rate of return of 17.46% on CPM stock over the three-year period, calculated as follows: CF0 = −12 × 500 = −6,000 CF1 = (−12 × 500) + (0.35 × 500) = −5,825 CF2 = (0.35 × 1,000) = 350 CF3 = (0.35 × 1,000) + (17 × 1,000) = 17,350 Solve for the internal rate of return (IRR/YR) = 17.4626, or 17.46%

Calculate the expected rate of return for a stock with a beta of 2.0 when the risk-free rate is 6% and the return on the market is 12%. A) 18% B) 12% C) 24% D) 10%

The answer is 18%. Using the capital asset pricing model (CAPM), the expected rate of return is 18% [6% + (12% - 6%)2.0].

Rose purchased TRM stock for $40. A year later the stock paid a dividend of $4. At the end of the second year, Rose sold her TRM stock for $60 per share. What is the time-weighted return for TRM stock for the two-year period? A) 23.26% B) 18.56% C) 20.81% D) 27.58%

The answer is 27.58%. Time-weighted return is calculated as follows: CF0 = (40) CF1 = 4 CF2 = 60 IRR/YR = 27.58%

JEM Technologies, Inc. has assets of $500 million and $50 million in liabilities. For the past year the company earned $125 million, and paid out $50 million in dividends. Calculate the company's return on equity (ROE).

The answer is 28%. $500,000,000 - $50,000,000 = $450,000,000 in equity. $125,000,000 profit ÷ $450,000,000 equity = 0.2778, or 28% ROE.

Harry has an investment that has produced the following returns: Year 1: 10%, Year 2: 5%, Year 3: -7%, Year 4: -3%, Year 5: 12%. Calculate the arithmetic mean return on this investment.

The answer is 3.40%. The arithmetic mean is calculated by dividing the sum of the periodic returns by the total number of periods being evaluated. Therefore, Harry earned an average of 3.40% [(10% + 5% - 7% - 3% + 12%) ÷ 5] per year on his investment.

Your client, Jackson, is considering adding XYZ Mutual Fund to his portfolio. The fund has a correlation coefficient of 0.55 with the S&P 500, and he wants to know how much systematic risk the fund has when compared to this benchmark. You would advise him that the percentage of systematic risk is

The answer is 30%. You have been provided with the correlation coefficient (R) and what you need is the coefficient of determination (R2). Keystrokes are 0.55, DOWNSHIFT, "+" key = 0.3025. This means that 30% of the price movement of the fund is explained by the S&P 500, and the other 70% is not. Stated another way, there is 30% systematic risk, and 70% unsystematic risk.

Assuming Von made a $10,000 investment four years ago that presently has a value of $31,500, calculate the geometric mean return over the four-year investment period.

The answer is 33.22%. An investment growing from $10,000 to $31,500 over a four-year period has a geometric mean return equal to 33.22%, calculated as follows: PV = −10,000 FV = 31,500 N = 4 Solve for I/YR = 33.2225, or 33.22%

ABC Technologies, Inc., a publicly-traded company, uses both equity and debt to finance its operations. The company's stock is currently trading for $52.50 per share and has earnings of $1.50 per share. Calculate ABC's price-to-earnings (P/E) ratio.

The answer is 35. ABC Technologies, Inc. has a P/E ratio of 35 ($52.50 ÷ $1.50).

MLM Corporation exhibits an expected growth in earnings of 11% for the next year. If an investor's required rate of return is 14%, what is the firm's price-to-free-cash-flow (P/FCF) ratio?

The answer is 37.00. The firm's P/FCF ratio is 37.00, calculated as follows: (1 + 0.11) ÷ (0.14 - 0.11) = 37.00. After calculating this ratio, an investor would compare the result with the stock's peers to determine if a purchase is warranted.

American Depositary Receipts (ADRs) are used to: 1. finance foreign exports. 2. eliminate currency risk. 3. sell U.S. securities in overseas markets. 4. trade foreign securities in U.S. markets.

The answer is 4 only. ADRs are used to trade foreign securities in the United States. ADRs are trust receipts issued by a U.S. bank for shares of a foreign company that are held by a foreign branch of the bank. ADRs are legal claims against the equity interest that the bank holds. ADRs do not eliminate currency risk.

Which of the following characteristics are associated with the market anomaly known as the neglected-firm effect? 1. Low price-to-earnings (P/E) ratio stocks outperform high P/E stocks. 2. Stocks of foreign companies outperform known domestic stocks. 3. Neglected-firm stocks underperform large capitalization stocks. 4. Stocks not frequently followed by analysts outperform widely followed stocks.

The answer is 4 only. Neglected firms are those that are neglected (not followed) by many financial analysts. When such companies can be found, the market for those companies may not be efficient, and investors who can take the time to analyze these companies may be able to take advantage of undervalued situations.

The answer is 4.32%. The yield to call on this issue is calculated as follows: END Mode, 2 P/YR PV = -1000 FV = 1030 PMT = 4% x 1000 ÷ 2 = 20 8, DOWNSHIFT, N = 16 Solve for I/YR = 4.32%

Nancy bought $4,000 worth of common stock two years ago. She received dividends of $30 each quarter for the first year and $35 each quarter for the second year. The stock currently is worth $4,100. The graph below summarizes inflows and outflows. What is the internal rate of return that the stock has earned?

The answer is 4.45%. Keystrokes: HP 10bII+(set for 4 P/YR)4000,+/-, CFj30,CFj, 4, SHIFT, Nj35,CFj, 3, SHIFT, Nj4100,+, 35, =, CFjSHIFT, IRR/YR

Steve has an AA rated bond with an annual coupon rate of 4.35% that is currently trading for $965. Calculate the bond's current yield.

The answer is 4.51%. The bond's current yield is calculated as $43.50 ÷ $965. Annual interest payment as a percent of par equals $43.50 ($1,000 × 4.35%) divided by the current market price of $965.

Crowder made an investment that paid him an 8% nominal rate of return for the year in which he held the investment. During that year, the inflation rate was 3%. Based on this information, calculate Crowder's inflation-adjusted return (real return). A) 3.08% B) 4.85% C) 2.67% D) 5.10%

The answer is 4.85%. The inflation-adjusted return (IAR) is computed as: IAR = [((1 + nominal rate of return) ÷ (1 + inflation rate)) − 1] × 100 = ((1.08 ÷ 1.03) − 1) × 100 = 4.8544, or 4.85%

Company EHO has assets of $500 million and $125 million in liabilities. For the past year, the company earned $150 million and paid out $20 million in dividends. what is the company's return on equity (ROE)? A. 10% B. 25% C. 30% D. 40%

The answer is 40%. $500 million - $125 million = $375 million in equity. $150 million profit ÷ $375 million equity = 0.40, or 40% ROE

Jefferson originally purchased 100 shares of XYZ stock for $45 per share. The stock is currently trading at $60 per share. The stock paid dividends of $2 per share in year 1 and $2.30 per share in year 2 (all paid at year end). If Jefferson has held the stock for two years, what is his holding period return? A) 19.0% B) 23.5% C) 42.9% D) 22.0%

The answer is 42.9%. This is calculated as: [($60 - $45) + $2 + $2.30] ÷ $45 = 42.9%.

Billie purchased a 10-year U.S. Treasury bond with a 6.5% coupon paid semiannually. Assuming the bond is currently trading at $1,075, calculate its yield to maturity (YTM).

The answer is 5.51%. END Mode, 2 P/YR PV = -1,075 FV = 1,000 PMT = 32.50 (6.5% × 1,000 ÷ 2) 10, DOWNSHIFT, N = 20 Solve for I/YR = 5.51%. The YTM on the bond is 5.51%, which is lower than the coupon rate of 6.5%, further validating that the bond is trading at a premium.

Five years ago, XYZ Company issued a 20-year bond with a 4.75% coupon paid semiannually. The bond may be called at 104% of par, 10 years after issue. Assuming the bond is currently selling for $990, calculate the bond's yield to call.

The answer is 5.68%. The bond's yield to call is calculated as follows: Note: XYZ Company has the option to call the issue in five years. END Mode, 2 P/YR PV = -990 5, DOWNSHIFT, N = 10 PMT = 23.75 (4.75% x 1000 = 47.50 ÷ 2) FV = 1,040 (1,000 × 1.04) Solve for I/YR = 5.68%

LMN Company has assets of $250 million and $100 million in liabilities. For the past year the company earned $75 million, and paid out $10 million in dividends. What is the company's return on equity (ROE)?

The answer is 50%. $250,000,000 - $100,000,000 = $150,000,000 in equity. $75,000,000 profit ÷ $150,000,000 equity = 0.50, or 50% ROE.

Security A has a standard deviation of 12% and the market has a standard deviation of 16%. The correlation coefficient between Security A and the market is 0.75. What percent of the change in Security A's price can be explained by changes in the market?

The answer is 56%. Because the correlation coefficient is 0.75, the coefficient of determination (R2) is 0.5625, or 56%. Therefore, only 56% of investment returns can be explained by changes in the market (i.e., systematic risk represents 56%).

XYZ Corporation issues a 20-year callable bond paying a 6% coupon (semiannual payments) selling at par ($1,000). XYZ Corporation has the option to call the bonds in five years for 105% of par value. Calculate the bond's nominal yield.

The answer is 6.00%. The nominal yield (coupon rate) is 6%. The nominal yield is stated as a percentage of the par value of the bond

Michael owns a municipal bond, trading at par, with a 4.25% coupon rate and is in the 32% federal marginal income tax bracket. Calculate the taxable equivalent yield (TEY) for this bond.

The answer is 6.25%. TEY = tax-exempt yield ÷ (1 − marginal tax rate) = 0.0425 ÷ (1 − 0.32) = 0.0625, or 6.25%. Therefore, the TEY for Michael's bond is 6.25%. Michael would require this rate of return or higher for an equivalent taxable bond.

Michael owns a municipal bond, trading at par, with a 4.25% coupon rate and is in the 32% federal marginal income tax bracket. Calculate the taxable equivalent yield (TEY) for this bond. A) 5.65% B) 6.25% C) 2.85% D) 12.88%

An analysis of the monthly returns for the past year of a mutual fund portfolio consisting of two funds revealed these statistics: Fund A Fund B Total return 18% 11% Standard deviation 23% 16% Percentage of portfolio 35% 65% Correlation coefficient (R) 0.25 What is the coefficient of determination (R2) of Fund A and Fund B?

The answer is 6.25%. The coefficient of determination is the square of the correlation coefficient (0.25)2 = 0.25 × 0.25 = 0.0625, or 6.25%.

Seven years ago, KLO Industries issued a 15-year bond with a 6% coupon rate. The bonds are currently rated BB+. Due a decline in interest rates, the company decided to call the bonds for 106% of par value. Calculate the rate of return for an investor who purchased the bond at issue for par and surrendered it today for the call price.

The answer is 6.69%. The yield to call on this issue is 6.69%, calculated as follows: END Mode, 2 P/YR FV = 1,060 PV = −1,000 PMT = 30 (6% x 1000 = 60 ÷ 2) 7, DOWNSHIFT, N = 14 Solve for I/YR = 6.69%

The answer is 6.69%. The yield to call on this issue is calculated as follows: END Mode, 2 P/YR FV = 1,060 PV = −1,000 PMT = 30 (6% x 1000 = 60 ÷ 2) 7, DOWNSHIFT, N =14 Solve for I/YR = 6.69%

Andy purchased a four-year bond with a coupon rate of 7.5% paid semiannually. The bond is trading for $1,025 in the secondary market. Calculate the bond's yield to maturity (YTM). A) 3.39% B) 8.05% C) 4.34% D) 6.78%

The answer is 6.78%. The bond's YTM is calculated as follows: END Mode, 2 P/YR PV = -1,025 FV = 1,000 PMT = 37.50 (1,000 × 7.5% ÷ 2) 4, DOWNSHIFT, N = 8 Solve for I/YR = 6.78%.

The Gemini Fund has a correlation coefficient of 0.80 with the S&P 500 Index. How much of the price movement of the Gemini Fund can be explained by the S&P 500 Index? A) 100% B) 75% C) 64% D) 80%

The answer is 64%. The correlation coefficient (R) has been given, so it needs to be squared (R2) in order to come up with the coefficient of determination (0.802 = 0.64).

If the market interest rate is 7.27%, the current yield of a bond with a 9% coupon, $1,000 par, selling for $1,120, and maturing in 10 years is

The answer is 8.04%. The current yield is the coupon payment divided by the market price of the bond: ($90 ÷ $1,120) x 100 = 8.04%.

What is the covariance between OPC and NIR stocks with a standard deviation of 9.13% and 11%, respectively, and a correlation coefficient of 0.85?

The answer is 85.37. The covariance between the two stocks is 85.37 (9.13 × 11 × 0.85). Covariance measures the extent to which two variables move together, either positively (together) or negatively (opposite).

ABC Mutual Fund has a correlation coefficient of 0.93 with the S&P 500 Index. How much of the price movement of the fund can be explained by the S&P 500 Index?

The answer is 86%. The correlation coefficient (R) has been given, so it needs to be squared (R2) in order to come up with the coefficient of determination. (0.932 = 0.8649, or 86%)

The current yield of an 8% coupon bond, maturing in five years, and selling currently for $850 is

The answer is 9.41%. Current yield = annual interest payment ÷ current market price = $80 ÷ $850 = 0.09412, or 9.41%.

Mary is traveling to Europe and has $1,000 (U.S.) that she wants to convert to euros. The current exchange rate is 0.90 euros = $1 (U.S.). How many euros will she receive in this exchange?

The answer is 900. Determine the cost in U.S. dollars to purchase one euro. Using the HP 10bII+: 0.90, SHIFT, 1/x = $1.1111 Then, $1,000 ÷ $1.1111 = 900 euros or $1,000 × 0.90 = 900 euros

STU Corporation stock has an average rate of return of 24% and a standard deviation of 10%. The risk-free rate of return is 4%. Assuming the historical returns for STU stock are normally distributed, calculate the probability that this stock will have a return in excess of the risk-free rate of return.

The answer is 97.5%. The probability of a return above 24% is 50%. The probability of a return between 4% and 24% is 47.5% (95% ÷ 2). Therefore, the probability of a return above 4% is 97.5% (50% + 47.5%).

Alphabet stock is selling for $67 per share. Alphabet's earnings per share last year were $8.90. Comparable firms in the same industry have E ratios of 8.0. hich of the following statements is CORRECT A. Alphabet stock is undervalued because its P/E ratio is greater than 8.0. B. Alphabet stock is undervalued because its intrinsic value is $71.20. C. Alphabet stock is overvalued because its P/E ratio is less than 8.0. D. Alphabet stock is overvalued because its intrinsic value is $71.20

The answer is Alphabet stock is undervalued because its intrinsic value is $71.20. Alphabet's P/E ratio is $67 ÷ $8.90 = 7.53. Because its P/E is lower than that of comparable firms, Alphabet is considered undervalued. Alphabet's intrinsic value is $8.90 × 8.0 = $71.20.

Acme Electric Company announces a cash dividend of $0.50 per share on August 5, to be paid on September 20, the payable date. The company also announces that the record date will be August 25. Bob Johnson purchases 100 shares of Acme on August 24. Based on this information, choose the CORRECT statement regarding the dividend payment.

The answer is Bob will not receive the dividend, because he did not purchase the shares before the ex-dividend date. In order to receive the dividend, Bob must purchase the shares before the ex-dividend date. The ex-dividend date is one business day before the record date. To receive the dividend, Bob must have purchased the shares by August 23.

Jane considers herself to be a conservative investor. To generate additional income, she wants to add an investment-grade bond to her portfolio. She lives in a state that does not have an income tax and she is in the 35% federal income tax bracket. Select the best choice for her portfolio. A) Bond D, AAA rated Treasury bond with a 1.5% coupon rate B) Bond B, A rated corporate debenture with a 4.75% coupon rate C) Bond C, D rated corporate debenture with a 6% coupon rate D) Bond A, AA rated municipal bond with a 3.5% coupon rate

The answer is Bond A, AA rated municipal bond with a 3.5% coupon rate. Even though Bond C has the highest after-tax rate of return, this bond would not be appropriate for Jane based on her desire for an investment-grade bond. Therefore, Bond A would be the best choice. Calculations: Bond A: 3.5% Bond B: 4.75% × (1 - 0.35) = 3.0875% Bond C: 6% × (1 - 0.35) = 3.90% Bond D: 1.5% × (1 - 0.35) = 0.9750%

Which of the following clients would be the best candidate for a hedge fund? A. Marcy, age 23, recent college graduate, student debt, low net worth, entry-level position at a local law firm B. Bob and Carol, mid 30s, two young kids, homeowners, $50,000 net worth, long-term investment perspective C. Howard, age 78, widowed, conservative risk taker, $250,000 net worth, lives on a fixed income D. Drew and Fran, late 50s, no dependents, semiretired, $5 million net worth, moderate risk takers, diversified holdings

The answer is Drew and Fran, late 50s, no dependents, semiretired, $5 million net worth, moderate risk takers, diversified holdings. The best choice for a hedge fund is Drew and Fran. They have no dependents, have a high net worth (diversified), and exhibit a moderate risk tolerance. The other clients would generally not be considered candidates for a hedge fund based on net worth and investment objectives.

You are choosing between two investments: Mutual Fund A with a return of 12% and a standard deviation of 18%, and Mutual Fund B with a return of 8% with a standard deviation of 12%. If the risk-free rate is 3%, which fund should you choose based upon one of the risk-adjusted return measurements? A) Not enough information is provided B) Fund A C) Either Fund A or Fund B D) Fund B

The answer is Fund A. Enough information is given to calculate the Sharpe ratio for each investment. For Fund A (12 - 3) ÷ 18 = 0.50. For Fund B (8 - 3) ÷ 12 = 0.42. The higher the ratio, the better, so Fund A is the best choice.

You have narrowed your choice down to these three mutual funds, which have these annual returns. Which fund should you choose based upon risk and return? Fund X Fund Y Fund Z Year 1 +15% +7% +12% Year 2 +9% +13% +2% Year 3 +5% +8% +11%

The answer is Fund Y.

Identify which of these statements regarding revenue bonds is NOT correct. They are secured by a specific pledge or property. They are a type of full faith and credit bond. Their interest is tax-exempt at the federal level. They are analyzed by the project's ability to generate earnings.

The answer is I and II. Revenue bonds are not secured by property and are not a type of general obligation bond. They are only secured by user fees.

Which of these statements concerning portfolio diversification is CORRECT? 1. By increasing the number of securities in a portfolio, the total risk would be expected to fall at a decreasing rate. 2. Total risk is reduced as diversification is increased. 3. The benefits of diversification are not realized until at least 30 individual securities are included in the portfolio. 4. Diversification reduces the portfolio's expected return because diversification reduces a portfolio's total risk.

The answer is I and II. Studies have shown that an investor only needs about 15-20 assets to fully diversify a portfolio. The main attraction of diversification is the reduction of risk without an accompanying loss of return.

which of the following risks would be of greatest concern to a holder of ADRs? I. Currency II. Liquidity III. Market IV. purchasing power

The answer is I and III. ADRs represent ownership in a foreign security that subjects the holder to currency risk. Since most ADRs are traded on the exchanges, they are subject to little liquidity risk, and, because they represent equity, they are usually a good hedge against inflation

Which of the following are characteristics of the Sharpe ratio? The ratio adjusts the return for variability by using standard deviation as the measure of risk. The ratio assumes that the portfolio being evaluated is well diversified. Both alpha and beta appear in the formula for the ratio. The ratio indicates by how much the realized return differs from the return expected by the capital asset pricing model.

The answer is I only. Statements II, III, and IV are true of Jensen's alpha. Statement II is true of the Treynor ratio.

Limited partnerships are distinguished by which of the following? The general partner controls the business activities of the partnership. The limited partners participate in the business venture with limited liability. The general partner determines when distributions are made to the limited partners. The limited partners may have difficulty selling their interests.

The answer is I, II, III, and IV.

John, age 47, is considering diversifying his large investment portfolio. He has contacted his financial advisor to discuss the merits of investing in a private placement. He meets the definition of an accredited investor. Which of the following are considerations to determine the suitability of a private placement for John? I. How much information regarding the company is available to John? II. How and when might he be able to liquidate III. What are the risk factors? IV. How does this investment mix with his current holding

The answer is I, II, III, and IV. All of these are considerations for an investor when deciding on the purchase of a private placement

Which of the following correctly presents the relationships that exist between different yield measures? I. For a premium bond: coupon rate > current yield > yield to maturity II. For a par bond: coupon rate = current yield = yield to maturity III. For a discount bond: coupon rate < current yield < yield to maturity IV. For a premium bond: current yield < yield to maturity < coupon rate

The answer is I, II, and III. Only Statement IV is incorrectly stated. Certain relationships exist between different yield measures depending on whether the bond is trading at par, at a discount, or at a premium.

Which of the following statements regarding venture capital are CORRECT? I. Venture capitalists have a high risk tolerance. II. They offer investors the potential for high rates of return. III. Investors are willing to lose their entire principal. IV. Venture capital investments exhibit a high level of liquidity

The answer is I, II, and III. Only statement IV is incorrect. Venture capital investments exhibit a lack of liquidity.

Indifference curves, which represent the risk-reward trade-off that the investor is willing to make, will cross the efficient frontier in two locations. lie tangent to the efficient frontier. will not intersect the efficient frontier. A) I, II, and III B) I and II C) I only D) II and III

The answer is I, II, and III. The portfolio that lies at the point of tangency of an indifference curve and the efficient frontier is the optimal portfolio for the investor.

Select the CORRECT statements concerning the analysis of portfolio risk. I. Investors estimate the risk of a portfolio on the basis of the variability of returns. II. Markowitz used risk and expected return as the basis for determining efficient combinations of assets. III. For a given level of risk, investors prefer lower returns to higher returns. IV. Investors base decisions solely on expected return and risk.

The answer is I, II, and IV. Only statement III is incorrect. For a given level of risk, investors prefer higher returns to lower returns.

Which statement regarding the concepts of modern portfolio theory (MPT) is NOT correct? A) Indifference curves represent the risk-reward trade-off that investors are willing to make. B) An infinite number of portfolios exist on the efficient frontier. C) For any given level of risk, investors prefer higher returns to lower returns. D) Markowitz used risk (as measured by beta) and expected return as the basis for determining appropriate assets or portfolios.

The answer is Markowitz used risk (as measured by beta) and expected return as the basis for determining appropriate assets or portfolios. Harry Markowitz's theory uses standard deviation as a measure of portfolio risk.

The Galaxy Fund has a standard deviation of 15, and a mean return of 9%. The Universe Fund has a standard deviation of 22, and a mean return of 13%. The Milky Way Fund has a standard deviation of 18, and a mean return of 11%. Which fund should you choose in order to minimize the risk per unit of return? A) Galaxy Fund B) Universe Fund C) Each fund offers the same risk per unit of return. D) Milky Way Fund

The answer is Milky Way Fund. The Galaxy Fund has a coefficient of variation of 1.67, the Universe Fund has a coefficient of variation of 1.69, and the Milky Way Fund has a coefficient of variation of 1.64. Coefficient of variation = standard deviation ÷ mean return, select the lowest number.

LFM Corporation declared a record date of Wednesday, May 16, for its next quarterly cash dividend. Determine the last day an investor can purchase LFM stock and receive the current dividend.

The answer is Monday, May 14. To receive a cash dividend, an investor must be owner of record as of the close of business on the record date. The record date is the first business day after the ex-dividend date. To be listed as an owner, the investor must purchase the stock before the ex-dividend date, or May 15. Hence, the investor must purchase the stock no later than Monday, May 14, to be entitled to receive the dividend.

Sam holds a considerable amount of both Series EE and Series HH savings bonds. He is nearing retirement and likes the fact that his Series HH bonds pay interest semiannually and would like to exchange most of his Series EE bonds for Series HH bonds to increase his cash flow. Choose which of these statements regarding such an exchange is CORRECT.

The answer is Series EE bonds may no longer be exchanged for Series HH bonds. Until September 2004 (when Series HH bonds were no longer issued by the Treasury), the exchange of EE bonds for HH bonds was a popular way of continuing the income tax deferral on the accrued interest portion of the EE bonds. Such changes are no longer possible.

The answer is Sharpe, because when a portfolio represents the entire investment fund, standard deviation is a better measure of risk. The Sharpe ratio must be computed for a benchmark, which is then compared to the performance of a portfolio. The Treynor ratio is used when the performance of a subportfolio is measured. Alpha is computed using the Jensen performance measure.

A firm declares a $3.00 cash dividend to its shareholders. The firm has issued dividends of only $0.07 per share for each of the last 15 quarters, and market analysts anticipate a similar dividend this quarter. In an efficient market, one would expect A) no price change before or after the announcement. B) a price decrease after the announcement. C) a price increase before the announcement. D) a price change upon the announcement.

The answer is a price change upon the announcement. In an efficient market, the price of the stock will represent all public information. Because the increase in the dividend was not public knowledge until it was declared, no price change would take place before the announcement. A price change, representing the increase in dividends, would be expected immediately after the information became public.

Consider the following information for the CPM International Growth Fund: Average annual rate of return7.45%Average market rate of return8.50%Beta1.25Standard deviation4.55%Risk-free rate of return3.50% Select the statement that is NOT correct. A) The Treynor ratio for the fund is 0.0400. B) The Sharpe ratio for the fund is 0.8681. C) The fund manager underperformed the market over the given time frame. D) Jensen's alpha for the fund is -2.30%.

Bond ABC is selling at par, offers an 8% coupon, and matures in 20 years. The bond has a call feature that allows the issuer to call the bond after 10 years at a price of $1,050. Which of the following statements explains the relationship between the bond's yield to call (YTC) and yield to maturity (YTM)?

The answer is the YTC for Bond ABC is 8.33%, which is more than Bond ABC's YTM. Because Bond ABC is selling at par, the YTM is equal to the coupon rate of 8%. END Mode, @ P/YR PV = -1,000 FV = 1,050 10, DOWNSHIFT, N = 20 PMT = 8% × 1,000 ÷ 2 = 40 Solve for I/YR = 8.33%.

John, your client, received notice that he will be laid off from his job in one month due to his company downsizing as a result of a slowing economy. What would be the best course for your client after his job loss? A) Cancel his health insurance. B) Cash in a growth mutual fund with a large unrealized capital gain. C) Take a loan from his 401(k) plan to pay for current expenses. D) Apply for unemployment benefits.

The answer is apply for unemployment benefits. Cancelling his health insurance without reviewing any COBRA options would not be prudent. He will not be able to take a loan from his 401(k) plan after he terminates his employment. Cashing in his mutual fund may not be wise because any unrealized gain would become taxable.

Brandon owns ABC mutual fund that has produced the following returns over the past three years: Year 1: 4.7% Year 2: −10.0% Year 3: 6.5% Based on this information, calculate both the arithmetic mean (AM) and geometric mean (GM) returns for this series.

The answer is arithmetic mean: 0.40%; geometric mean: 0.1182%. The arithmetic mean is calculated as follows: (4.7% - 10.0% + 6.5%) ÷ 3. The geometric mean is calculated as follows: PV = -1, FV = (1.047)(0.90)(1.065), PMT = 0, N = 3, solve for I/YR = 0.1182.

An investor selects an appropriate portfolio by choosing the portfolio A) with the highest return. B) at the point of tangency between the indifference curve and the efficient frontier. C) with the lowest risk. D) that lies below the efficient frontier.

The answer is at the point of tangency between the indifference curve and the efficient frontier. The investor will choose a portfolio represented by the highest point attainable on the indifference curve.

Which of the following factors is NOT necessary for calculating the measure of risk that is used in Markowitz's efficient frontier? A) Beta for each asset class B) Correlation between each asset class and every other asset class C) The percentage of the portfolio invested in each asset class D) Standard deviation for each asset class

The answer is beta for each class. The efficient frontier consists of efficient portfolios. An efficient portfolio has the highest return for a given level of risk. The risk measure is standard deviation; specifically, the standard deviation of a multi-asset portfolio. The other choices represent inputs needed to determine the standard deviation of a multi-asset portfolio. Beta is not used in the calculation.

An investor wants all of her bonds to mature in 10 years. She buys two bonds immediately, two bonds two years from now, and two more bonds four years from now. As a result, the bonds purchased immediately have a maturity of 10 years, the bonds purchased two years later have a maturity of eight years, and the bonds purchased four years later have a maturity of six years. Select the type of bond strategy she is using for her portfolio.

The answer is bond bullet. When using the bond bullet strategy, an investor purchases a series of bonds with similar maturities focused on one point in time. This strategy may be an effective method in matching duration to the cash needs of an investor.

Select the INCORRECT statement regarding a company's book value. A )Book value represents an accurate measure of the fair market value of the company. B) Different inventory accounting methods may yield a different value for company assets, thereby affecting the book value of the corporation. C) Book value is determined by subtracting company liabilities from company assets. D) Book value per share may be derived by dividing the stockholder's equity portion by the total number of common shares outstanding.

The answer is book value represents an accurate measure of the fair market value of the company. Generally, book value does not represent an accurate measure of the fair market value of the company because this value is determined using historical costs.

All of the following are factors used in determining the price of a call option under the Black-Scholes option valuation model except A. time to expiration. B. risk-free rate. C. call money rate. D. exercise price.

The answer is call money rate. The call money rate is a rate of interest charged by broker-dealers on borrowed money and is not a factor used in determining the price of a call option under Black-Scholes.

All of these statements concerning the use of the correlation coefficient in reducing portfolio risk are CORRECT except A) combining two securities with zero correlation (statistical independence) reduces portfolio risk, but cannot eliminate it. B) combining two securities with perfect negative correlation provides no portfolio risk reduction. C) combining securities with perfect positive correlation provides no portfolio risk reduction. D) because securities typically have some positive correlation with each other, risk can be reduced, but seldom eliminated.

The answer is combining two securities with perfect negative correlation provides no portfolio risk reduction. Combining two securities with perfect negative correlation could eliminate risk altogether. This is the principle behind hedging strategies.

ABC Corporation is a manufacturer of electronic devices used in the manufacturing of airplanes. Five years ago, the corporation floated a $100 million bond issue that would be used to finance improvements at its main manufacturing and distribution center. However, orders for its products have dropped dramatically due to much lower than anticipated demand. The company believes it may miss paying the coupon payment on the bond issue in the upcoming fiscal year. Identify which of these risks the owners of ABC Corporation bonds may be subject to by holding the bonds. A) Market risk B) Reinvestment rate risk C) Default risk D) Regulation risk

The answer is default risk. Default risk is the risk that a business will be unable to service its debt obligations.

Bobby has these securities in his portfolio: ABC common stock, XYZ common stock, PQR mutual fund (domestic small cap), DEZ mutual fund (foreign small cap), 30-year Treasury bond, and 5-year Treasury note. Point out the risk that should NOT concern Bobby.

The answer is default risk. Treasuries are considered default risk-free. Financial risk is the uncertainty introduced from the method by which a firm finances its assets (i.e., debt versus equity financing). Reinvestment rate risk is the risk that as cash flows are received they will be reinvested at lower rates of return than the investment that generated the cash flows. Systematic risk is the risk that all securities are subject to and typically cannot be eliminated through diversification.

All of the following statements correctly explain the core and satellite approach to investing except A) the core and satellite investment strategy has the client invest in both broad market indexes (core) and higher-risk alternatives (satellite). B) one goal of this strategy is to reduce portfolio risk through diversification. C) core investments may include U.S. stocks, U.S. fixed-income, and developed international equities. D) the core portion of the portfolio uses an active investment philosophy to achieve above-market returns.

The answer is the core portion of the portfolio uses an active investment philosophy to achieve above-market returns. The core portion of the portfolio uses a passive investment philosophy to achieve market-based returns, while the satellite portion of the portfolio uses active investment management in an attempt to achieve above-market level returns.

The answer is the fund's alpha is +3, meaning that the fund manager achieved a higher return than required for the amount of risk taken. Alpha is an absolute measure that is simply the difference between the return of the portfolio and the required return (CAPM). The formula is rp - [rf + (rm - rf)β. 13 - [4.5 + (9.5 - 4.5)1.1] = 3. Treynor and Sharpe are comparative or relative measures, and you would choose the investment with the highest number. Alpha is an absolute measure, giving you the actual return above the required return.

An investor might use a stock index option instead of an individual stock option if the investor

The answer is wants to avoid business risk. Buying an index option means the risk associated with any one company (business risk) is avoided. An index option can be used to protect against market or sector swings, and the investor need not be concerned with individual companies.

Analyzing financial statements of a company and performing industry analysis would be beneficial under which of the following forms of the efficient market hypothesis (EMH)? Weak Semistrong Strong Semiweak

The answer is weak. The weak form of the efficient market hypothesis (EMH) states that market prices incorporate all historical price information. However, fundamental analysis, such as analyzing financial statements, may be beneficial under the weak form of the EMH. Semiweak is not a form of the EMH.

Yvette is saving for her son's college education. Her son is expected to start college in 8 years. Choose the bond portfolio that would most likely be immunized with respect to this goal.

The answer is weighted average time to maturity of bonds is 10 years with coupon of 5%. To immunize the portfolio, the duration of the portfolio should match the investor's time horizon. Coupon-paying bonds have durations that are less than their time to maturity. Zero-coupon bonds have durations equal to their time to maturity.

Marcy may add 100 shares of LKM corporation stock to her investment portfolio. The stock recently paid a dividend of $1.85 per share. The dividend is expected to grow at a constant rate of 2.25% per year. Her required rate of return is 7%. The stock is currently trading for $35.75 per share. Determine whether she should purchase the stock and why.

The answer is yes, the stock is undervalued based on an intrinsic value of $39.82. Using the constant growth dividend discount model, the intrinsic value of the stock is $39.82. V = ($1.85 × 1.0225) ÷ (0.07 - 0.0225) V = 1.8916 ÷ 0.04750 V = 39.8232, or $39.82 Based on this value, the stock is undervalued relative to its price in the secondary market. LO 4.3.1

Robyn's bond has a current market value of $1,456.78 and a Macaulay duration of 12.5. Assuming the bond's yield to maturity (YTM) changes from 5.55% to 6.25%, calculate the estimated percent change in the price of the bond and the new expected market price of the bond (based on the percent change).

The answer is −8.29%, $1,336.01. The formula for determining the change in the price of the bond: ΔP/P = −D(Δy ÷ (1 + y)) ΔP/P = −12.5[(0.0625 − 0.0555) ÷ 1+0.0555] ΔP/P = −12.5(0.0066) = −0.08290, or −8.29% The bond's price should decrease by 8.29% and, therefore, sell for $1,336.01 in the secondary market.

All of the following statements correctly describe a type of money market instrument

banker's acceptances are short-term drafts drawn on major banks to finance imports and exports. commercial paper is a short-term, unsecured promissory note issued by large firms and offers a nominally higher yield than T-bills. negotiable CDs are deposits of $100,000 or more and are traded in the open market.

An investor who creates a long straddle most likely expects the underlying security to

increase in volatility. Long straddle profits if the volatility of the underlying security increases more than is reflected in current option prices, which would increase the value of both the call option and the put option. Either a significant increase or a significant decrease in the underlying price would benefit the holder of a long straddle. If the investor was expecting only an increase in price, long call would be a better choice of investment (as the premium paid on the long put would be a waste).

What is the intrinsic value of a put option with an exercise price of $45, when the stock is selling for $40?

intrinsic value of a put option = (exercise price − market price) = ($45 − $40) = $5

All of the following correctly describe disadvantages of cash and cash equivalents

investments in money market mutual funds are not insured or guaranteed by the U.S. government. the rate of return on passbook savings accounts is relatively low when compared to higher risk alternatives such as government bonds. investors choosing to redeem their certificates of deposit (CDs) prior to maturity may be subject to a substantial penalty.

All of the following correctly identify advantages of U.S. Treasury bills

investors are provided a high degree of safety. investors can tailor purchases to meet short-term goals and obligations. they are not subject to default risk.

A strategy where investors with relatively large amounts of money to invest purchase multiple certificates with varying terms to maturity is

laddering.

Interest rate changes have the greatest effect on

long-term bonds.

The reason for using a ladder bond strategy is to

lower interest rate risk.

An investor would consider converting a convertible bond into common stock if the bond's

market price is less than the conversion value.

Alpha

measures an investments risk adjusted performance. higher is better

Long-term bond funds have

more interest rate risk than short-term bonds.

Equity REITs

own property and receive all income from the property rentals, making them more like a stock fund; they also are more volatile than mortgage REITs, and they provide more capital gain opportunity then do mortgage REITs.

The market designed to facilitate the initial sale of securities to the public is referred to as the

primary market.

All of the following are considered risks inherent with equity investments except

reinvestment rate risk. Interest rate risk, market risk, business risk, and financial risk are all risks that impact equity investments. Reinvestment rate risk is a primary consideration for fixed-income investments.

Brett bought 500 shares of WCA stock at $27 per share on margin (50% initial margin percentage) with an annual margin interest rate of 5.25%. After one year, he sold the shares for $44 per share. The stock did not pay dividends during his holding period. Calculate Brett's holding period rate of return using margin.

the answer is 120.68%. Brett's holding period rate of return using margin is 120.68% [($22,000 - $13,500 - $354.38) ÷ $6,750]. With a margin account, Brett's initial investment will be 50% of the total purchase price of $13,500. Margin interest for the year is $354.38 ($6,750 × 0.0525).

Which of the following statements regarding investment theory is NOT correct? A) A correlation coefficient of 0.14 between the returns of Stock A and Stock B indicates that very little of Stock A's returns can be attributed to the returns of Stock B. B) The beta coefficient may be used to help select a portfolio that is consistent with an investor's willingness to assume unsystematic risk. C) Combining two stocks with a negative covariance can significantly reduce the portfolio's standard deviation. D) In a well-diversified portfolio, diversifiable risk is zero.

the answer is The beta coefficient may be used to help select a portfolio that is consistent with an investor's willingness to assume unsystematic risk. Beta is a measure of systematic risk, not unsystematic risk. The beta coefficient may be used to help select a portfolio that is consistent with an investor's willingness to assume systematic risk.

Choose the CORRECT statement regarding yield curves. A) A flat yield curve occurs when the economy is peaking and, therefore, no near-term change in future interest rates is expected. B) An inverted yield curve occurs when the Federal Reserve has tightened credit in an inflationary economy. C) A normal yield curve occurs during periods of economic expansion and generally predicts that market interest rates will rise in the future. D) All of these statements are correct.

the answer is all of these statements are correct. The yield curve is a graph of interest rate yields for bonds of the same quality, ranging in maturity from 31 days to 30 years. An inverted yield curve predicts interest rates will fall and sometimes can signal an upcoming recession.

The risk associated with the amount of debt a company has issued is A) business risk. B) financial risk. C) interest rate risk. D) systematic risk.

the answer is financial risk. Financial risk is the risk related to the amount of debt a company has. Business risk is the risk associated with the nature of the business. Interest rate risk is the risk that as interest rates increase, bond prices decrease. Systematic risk is the risk associated with all factors affecting all comparable investments.

basic option positions

the answer is if an investor writes a put, the maximum loss is the exercise price less the amount of premiums received. If an investor buys a put, the maximum gain is the exercise price less the amount of premium paid. If an investor writes a call, the maximum loss is unlimited. If an investor buys a call, the maximum loss is the premium paid.

A risk-averse client, living in Iowa, holds a high proportion of his investment portfolio in cash and cash equivalents in U.S. financial institutions in dollars. The advisor should point out to the client that the portfolio is most subject to which of the following risks?

the answer is purchasing power risk

All of the following are features of limited partnerships

the general partner controls the business activities of the partnership. the general partner determines when distributions are made to the limited partners. the limited partners have limited liability.

All of the following statements concerning security valuation and analysis are CORRECT except

the intrinsic value of a security is the future value of expected future cash flows inflated at an appropriate risk-free rate, without taking the risk of the investment into consideration.

Which of the following correctly identifies the role of a limited partner in a limited partnership?

the limited partners may not participate in the management of the partnership.

All of the following correctly identify features of limited partnerships except the general partner controls the business activities of the partnership. the limited partners may participate in the management of the partnership. the limited partners have limited liability. the general partner determines when distributions are made to the limited partners.

the limited partners may participate in the management of the partnership.

Open interest is

the number of futures contracts outstanding for a commodity on any given trading day.

Two months ago, an investor purchased a call option trading for $3 with an exercise price of $30. The stock's market price was $32. What was the time value of the call option?

time value = option premium − intrinsic value = option premium − (stock's market price − exercise price) = $3 − ($32 − $30) = $1

A collateralized mortgage obligation (CMO) differs from other mortgage-backed securities in that the cash flows associated with the CMO's pool of underlying mortgages are divided into repayment periods known as

tranches A CMO differs from mortgage-backed securities in that the cash flows associated with the CMO's pool of underlying mortgages are divided into repayment periods known as tranches.

The issuer-specific component of the variability in a stock's total return that is unrelated to overall market variability is known as

unsystematic risk.

Mortgage REITs

used to finance real estate ventures that develop property or finance construction. A REIT is a closed-end investment company investing in real estate, short-term construction loans, or mortgages.

The difference between a convertible bond and a bond with warrants is that

when warrants are exercised, the issuer receives equity capital from the warrants in addition to the original debt from the bond with warrants; when convertible bonds are converted, the bond is replaced with stock.

Larry is looking to add a real estate investment to his portfolio that is publicly traded on the exchanges, thereby offering him diversification and marketability. He has decided that a real estate investment trust (REIT) is the best choice and asks his financial planner for information about the REITs available for purchase. Based on Larry's request, the financial planner explained the various investment choices. Which of these was incorrectly stated by his financial planner?

The answer is for the shareholders, income received is considered passive income. For REIT shareholders, income received is considered investment (not passive) income. Similar to a closed-end investment company, a REIT invests in real estate, short-term construction loans, and mortgages. Some REITs are publicly traded on the exchanges and may sell at a premium or discount to net asset value. As a result, the REIT investor achieves diversification and marketability.

Dale is concerned about a decline in the stock market. e has many holdings in growth stock mutual funds and would like to diversify his portfolio into an investment that oers a hedge against a bearish market. hich of the following investments would be the most appropriate for ale A. Fine art and paintings B. old coins C. Oil and gas futures D. Savings bond

The answer is gold coins. Precious metals derive their value from factors that are external to the financial markets. As a result, the price of precious metals often moves inversely (i.e., has a negative correlation) with the market prices of stocks. Therefore, investing in gold coins may be used as a hedge against a declining, or bearish, stock market

Baylor stock is currently selling for $63 per share. A put option for this security with an exercise price of $65 per share can be purchased for $4 per share. The option expires in three months. Which of these statements best describes this option?

The answer is in-the-money. A put option is in-the-money when the exercise price is greater than the market price of the underlying security. A put option is out-of-the-money when the market price is greater than the exercise price.

Which of these statements describing real estate limited partnerships (RELPs) is CORRECT? A) Income attributed to limited partners is considered passive income for income tax purposes. B) Interests in RELPs are generally traded in the secondary market. C) Limited partners have limited management responsibilities. D) An individual may be the sole owner of a RELP.

The answer is income attributed to limited partners is considered passive income for income tax purposes. Real estate limited partnerships (RELPs) are composed of at least two partners. Limited partners do not have any management responsibilities, and income attributed to them is treated as passive income by the IRS. RELPs are not publicly traded.

An individual who is a proponent of the efficient market hypothesis (EMH) will likely invest in which of the following? A) Balanced mutual funds B) Growth mutual funds C) Index funds D) Sector mutual funds

The answer is index funds. An individual who believes in the EMH will likely invest in index funds. Inherent in this strategy is a belief that an investor cannot outperform the market with active portfolio management techniques. The remaining choices all incorporate an active portfolio management philosophy.

Choose the stock value that is defined as the discounted present value based on future cash flows as determined by some form of a dividend discount model.

The answer is intrinsic value. A stock's intrinsic value is its discounted present value based on future cash flows as determined by some form of a dividend discount model.

All of the following statements concerning market efficiency are correct except A) an efficient market is one in which the prices of securities quickly and fully reflect all available information. B) investors usually react slowly to new and random information pertaining to securities markets. C) the efficient market hypothesis states that securities markets are efficient, with the prices of securities reflecting their current economic value. D) the weak form of market efficiency involves market data, whereas the semistrong involve the assimilation of all public information and the strong form involves both public and and private information.

The answer is investors usually react slowly to new and random information pertaining to securities markets. Another condition that guarantees an efficient market is investors reacting quickly to new information.

All of the following illustrate a characteristic of a Monte Carlo simulation except A) the user gets a best-case scenario and a worst-case scenario. B) a clearer understanding of short-term and long-term risk can be gained. C) the simulation provides insight into the range of outcomes. D) large changes in the projected rate of return will make small differences in the outcome.

The answer is large changes in the projected rate of return will make small differences in the outcome. Small changes in the projected rate of return will make large differences in the outcome.

Reasons for investing in real estate include all of these except A) liquidity. B) relatively constant cash flow. C) potential tax shelter. D) potential long-term appreciation.

The answer is liquidity. Real estate is an illiquid investment. Real estate offers the ability to shelter an investment's cash flow. Income real estate provides a relatively dependable source of cash flow. Real estate offers investors an excellent source of long-term capital appreciation.

Which of these represents the best reason to include real estate as part of an investment portfolio? A) Low potential for capital appreciation B) Low management costs C) Low correlation between real estate and equity investments D) High liquidity

The answer is low correlation between real estate and equity investments. Real estate's low correlation with equities provides investors with an additional way to diversify a portfolio. Real estate ownership may present an opportunity for capital appreciation. Investment in real estate generally requires substantial management costs and is not liquid.

Your client is concerned that the stock market is overvalued and may experience a large market correction within the next year. The client is 45 years old, has significant retirement savings, little debt, and no dependents. The current retirement portfolio mix is 80% stock/20% fixed-income. What is the best course of action for your client to take regarding this concern? A) Maintain a long-term perspective and consider keeping the current portfolio allocation. B) Reallocate the retirement plan proceeds into a conservative target asset allocation portfolio focused on U.S. Treasuries. C) Reposition all stock investments into fixed-income investments. D) Liquidate the retirement portfolio and reposition the proceeds into cash.

The answer is maintain a long-term perspective and consider keeping the current portfolio allocation. When confronted with financial or economic crisis events, the best course of action is for clients to keep a long-term perspective and focus on long time horizons rather than reacting negatively to market events.

When working with anxious clients who are concerned about widely fluctuating stock market prices, what is the most important service you can provide to them? A) Discussing their risk tolerance. B) Guaranteeing them a profit on their investments. C) Referring them to a financial counselor. D) Managing their expectations.

The answer is managing their expectations. Unrealistic expectations can be a function of a client's ignorance about financial markets and securities. By using your knowledge, you can educate clients about markets and securities so that expectations are realistic. Doing so also strengthens the client/planner relationship and allows you to demonstrate your expertise.

Which of the following is NOT considered a constraint when developing an investment policy statement? A) Liquidity needs B) Market conditions C) Time horizon D) Taxes

The answer is market conditions. An investment policy statement is a written document that sets forth a client's objectives and establishes certain limitations on the investment manager. The following are constraints of the investment policy statement: time horizon, liquidity needs, taxes, laws and regulations, and unique circumstances/preferences. Market conditions are not a constraint when developing an investment policy statement.

Which one of these alternatives correctly outlines the importance of the portfolio perspective?

The answer is market participants should analyze the risk-return trade-off of the portfolio, not the risk-return trade-off of the individual investments in a portfolio. The key underlying principle of the portfolio perspective is that market participants should analyze the risk-return trade-off of the portfolio as a whole, not the risk-return trade-off of the individual investments in the portfolio.

Identify which of these is NOT an unsystematic risk.

The answer is market risk. Unsystematic risk is the risk that affects only one company, country, or sector and its securities. Market risk is an example of a systematic risk.

In a positively skewed distribution, what is the order (from lowest value to highest) for the distribution's mode, mean, and median values?

The answer is mode, median, mean. In a positively skewed distribution, the mode is less than the median, which is less than the mean.

The use of financial leverage affects all of these except A)earnings per share. B)return on equity. C)risk to stockholders. D)monetary policy.

The answer is monetary policy. Return on equity and earnings per share are magnified with leverage, and the risk to stockholders increases as a firm's leverage increases. A country's monetary policy is not affected by a company's use of financial leverage.

What is the best choice for clients to use to finance an unanticipated financial crisis? A) Credit cards B) Money market mutual fund C) Home equity D) Retirement plan loan

The answer is money market mutual fund. Clients should establish an emergency fund, generally funded with highly liquid and marketable investments such as money market mutual funds, to finance any unanticipated financial emergencies.

Which of the following statements regarding the arbitrage pricing theory (APT) is CORRECT? A) The risk-free rate of return does not affect the return. B) Beta is a pricing factor. C) Inflation is not a pricing factor. D) Multiple factors affect the return of a security.

The answer is multiple factors affect the return of a security. The APT determines returns based on multiple factors. These factors might include inflation, growth in GDP, major political upheavals, or changes in interest rates.

XYZ stock has a current dividend of $1.75 that has been growing at a constant rate of 8% per year. If the stock is currently selling for $100 and your required rate of return is 10%, would you buy the stock at today's price?

The answer is no, because the stock is overvalued on the basis of the constant growth dividend discount model. On the basis of the constant growth dividend discount model, the intrinsic value of XYZ stock is $94.50, calculated as follows: D0(1 + g) ÷ (r - g) = $1.75(1.08) ÷ (0.10 - 0.08) = $94.50. Because XYZ stock is currently selling for $100 per share, it is overvalued in the market and the investor should not buy the stock.

Investors may use P/E ratios and price/sales ratios to value stocks. If this analysis is used, which of the following is desirable?

A low P/E and a low price/sales ratio

Which of the following is a type of growth mutual fund?

Asset allocation fund

what is the best measure of risk for an asset held in a well-diversified portfolio.

Beta is the best measure of risk for an asset held in a well-diversified portfolio.

Times interest earned

EBIT/ interest expense

In general, rising interest rates result in which of the following combinations?

In general, rising interest rates result in falling stock and bond prices.

Which of the following statements best describes banker's acceptances?

Short-term drafts drawn by a private company on a major bank used to finance imports and exports

Your client owns a small-cap fund and wants to compare its performance to an appropriate benchmark. You would advise him to choose which benchmark?

The answer is Russell 2000. The Russell 2000 is a small-cap index.

What is one disadvantage of investing in convertible bonds?

The yield to maturity tends to be lower than that of similar nonconvertible bonds.

Stock XYZ has an average return of 18% with a standard deviation of 21. Within what range could an investor expect a return to fall 68% of the time?

-3% to 39% By definition, an investment's return will be within one standard deviation of the mean return 68% of the time. The mean return of 18% plus or minus one standard deviation is 18% - 21% (-3%) and 18% + 21% (39%).

You are about to recommend international mutual funds to your clients. Which of the following are characteristics of investing internationally? 1. International markets are less efficient than U.S. markets. 2. International mutual funds have the exchange rate risks of individual foreign stocks. 3. Due to lower correlations with U.S. stocks, foreign stocks can lower total portfolio risk. 4. Investors in foreign securities avoid U.S. tax on realized capital gains.

1, 2, 3 Foreign markets have fewer analysts following stocks than do U.S. markets, and the information available from many foreign companies is minimal, making these markets less efficient than U.S. markets. The covariance of foreign stocks, especially small-cap and emerging market stocks, with U.S. stocks is relatively low, serving to lower the standard deviation of the portfolio in which such stocks are placed. Exchange rate risk is a systematic risk with foreign investments. Foreign income is taxed first in the country of origin and then again in the United States; U.S. taxpayers can take a foreign tax credit for taxes paid to other countries.

The Dow Jones Utility Average has recently dropped 30% from its high, and you decide to recommend a utility sector fund to your clients. If they invest in the fund, your clients will be exposed to which of these risks? Interest rate risk Business risk Default risk Financial risk

1, 2, 4

Which of the following statements correctly explain real estate investing? 1. Real estate allows investors to use substantial leverage when acquiring property. 2. Real estate may be used as a hedge against inflation. 3. Real estate offers high liquidity to investors. 4. Real estate owned can be used as collateral for loans and offers investors tax write-offs.

1, 2, 4

All of these statements correctly identifies a separately managed account

1. in a separately managed account, the investor owns 100% of the securities in the account. 2. one advantage of a separately managed account is the ability to maintain an individual cost basis in the securities held in the account. 3. a separately managed account holds a diversified portfolio of securities managed by a professional money manager.

You are considering purchase of a stock that is currently selling for $23 and pays a dividend of $1.15 per share. The dividend is expected to grow at a rate of 15% per year for the next three years. After that, the dividend is expected to grow at a constant rate of 8%. Your required return is 13%. The maximum price you should pay for this stock is

13 I/YR 0 CF0 1.3225 CF1 1.5209 CF2 1.7490 + 37.7784 CF3 29.7559 SHIFT, NPV The 37.7784 is calculated from the constant growth DDM, starting at the end of the third year: [1.7490(1.08)] ÷ (0.13 - 0.08) = 37.7784

Which of these statements regarding bond portfolio immunization is CORRECT? 1 .Immunization allows an investor to ensure that the value of his or her bond portfolio remains the same, regardless of whether interest rates increase or decrease. 2. Immunization is accomplished by creating a portfolio whose duration is equal to the investor's investment time horizon. 3. Immunization allows investors to earn a current yield that is equal to the yield to maturity. 4. Immunization allows an investor to earn a specific rate of return, regardless of whether interest rates increase or decrease.

2 AND 4

Which of the following are characteristics of closed-end funds? 1. A closed-end fund stands ready to redeem shares from investors. 2. Closed-end funds trade like common stocks. 3. Closed-end fund shares can be bought on margin or sold short. 4. Closed-end funds will always trade at net asset value.

2 and 3

Which of the following types of federal income tax treatment generally apply to municipal bonds? 1. Ordinary income 2. tax-free income 3. Capital gains or losses 4. Tax-deferred income

2 and 3

An investment portfolio has the following three stocks: Stock Investment Beta Stock 1 $8,000 0.6 Stock 2 $22,000 1.3 Stock 3 $12,000 0.9 Which of the following are CORRECT statements about this portfolio? 1. The weighted beta for the portfolio is 0.93. 2. The weighted beta for the portfolio is 1.05. 3. The portfolio is less risky than the market. 4. The portfolio is riskier than the market.

2 and 4

Which of the following are factors used in industry analysis for investment purposes? Financial leverage Government rules and regulations Labor conditions Technological advances

2, 3, 4

What is the highest long-term capital gains rate on collectibles?

28%

Which of the following is the most appropriate and accurate indicator for determining a client's risk tolerance level? A) There is no single appropriate method for determining risk tolerance. B) Questionnaire C) Standard deviation D) Beta

A client's risk tolerance level is an intangible and subjective factor. No single method accurately determines that risk level.

A well-crafted investment policy statement will take all of the following into account except A) hobbies the client intends to pursue in retirement. B) anticipated liquidity needs. C) the client's time horizon. D) investments the client is especially interested in considering for her portfolio.

A properly crafted IPS will keep both the client and the advisor on track, and minimize any disagreements or confusion.

Carol sells her AA rated 5% YTM bond for $940 and buys a BB-rated 6% bond for $900. Both bonds mature in four years. This transaction illustrates which of these swaps?

A pure yield pickup swap

Terri has been an active investor for many years, and her present portfolio consists of listed stocks, penny stocks, and options. She earns approximately $175,000 annually, has $35,000 in cash to invest, and is in the 32% marginal income tax bracket. Terri is interested in accumulating wealth for the future and does NOT need current income. Which one of these fixed-income securities best suits Terri's needs at this time?

A rated, discount, long-term, tax-free, municipal revenue bond

In order to do an effective job of investment counseling, which of the following should be analyzed and reviewed? Financial goals Client tax situation Client financial statements Client preferences, investment understanding, and experience

All of these are parts of a comprehensive client analysis. In addition, the planner should discuss the risk tolerance and risk exposure of the client and the liquidity needs and the investment time horizon of the client. LO 8.5.1

Which of the following factors should be considered when investing in antiques? Supply Marketability Inflation Dealer reputation

All of these. The antique/collectibles markets are inefficient, where supply is frequently limited, making supply an important consideration. Some rare and famous antiques may be in great demand and be marketable; for many, however, no, or a limited, market and demand may exist. Rising inflation generally encourages investors to purchase tangibles. Dealer reputation is important in the collectibles market to minimize fraud.

The coupon rate or nominal yield of a bond is the stated annual interest rate that will be paid each period for the term of the bond. Select the statement that best describes how the coupon rate is stated.

As a percentage of the par value of the bond

Identify which of these is NOT a characteristic of a normal yield curve.

As the maturity date of bonds lengthens, the corresponding bond yield decreases.

Which one of the following statements CORRECTLY matches a technical indicator to the information it provides in signaling a change from a bear to a bull market?

Barron's Confidence Index indicates that the yield differential between low-quality bonds and high-quality bonds is decreasing.

You want to generate additional income from your portfolio, and are considering purchasing either bonds or preferred stocks. Which of the following statements is NOT correct concerning the characteristics of bonds and preferred stocks?

Bonds are subject to more interest rate risk than preferred stocks.

If interest rates are expected to decrease in the near future, which of the following combinations of strategies is recommended?

Buy zero-coupon bonds Buy bonds with longer maturities

Which of the following is a general characteristic of hedge funds?

Charge both a management fee and a carried interest fee

A large-cap mutual fund has an average annual return of 11%, a beta of 1.05, and a standard deviation of 16%. what is the coeffcient of variation (CV) of this fund? A. 0.12 B. 0.15 C. 0.69 D. 1.45

D The answer is 1.45. The CV is the standard deviation divided by the average annual return. Therefore, 1

Price-to-earnings ratio

market price per share/earnings per share

The main purpose of a laddered bond portfolio is to

minimize the effect of changes in interest rates.

Average cost per share

Dollar amount invested/# of shares

Gordon, age 40, wants to invest in a mutual fund that will provide capital appreciation. He wants a fund that will do as well as the overall market and has a low expense ratio, but he does not want to assume a high risk to achieve his objective. He is considering purchasing one of the following mutual funds: I. Fund A: a growth mutual fund that has a beta of 1.10 and invests in medium- to high-grade common stock II. Fund B: an index mutual fund that has a beta of 1.00 and invests in common stock that mirrors the S&P 500 Index Which of these funds would best meet Gordon's objective?

Fund B, because it has a beta of 1.00, has low expenses, and is less risky

Which of these statements best describes the concept of bond duration?

Duration is the average weighted time it takes the bondholder to receive the interest and principal payments from a bond in present value dollars.

Select the incorrect statement regarding foreign bonds. A) Yankee bonds are sold in the United States by companies outside of the United States and provide all interest payments in U.S. dollars. B) Eurodollar bonds must be registered with the Securities and Exchange Commission (SEC). C) Yankee bonds are not subject to exchange rate risk, but they are subject to default risk. D) Foreign bonds may provide an investor with portfolio diversification benefits.

Eurodollar bonds do not have to be registered with the SEC.

Portfolio immunization is designed to protect bondholders from which of the following risks? Interest rate risk Reinvestment rate risk Default risk

I and II

Immunization offsets which two risks in a bond portfolio?

Interest rate risk and reinvestment rate risk

When investment bankers absorb the loss on an initial public offering, which one of the following terms represents this type of offering?

Firm commitment

Choose the agency issue which historically did NOT have an indirect backing and guarantee of the U.S. government.

Government National Mortgage Association

Lauren short sells 200 shares of XYZ at $32 with a 50% initial margin. XYZ pays a dividend of $1 per share before she covers the short sale. She then buys back the stock for $30. What is her percentage profit or loss?

Lauren's investment: 200 × $32 × 0.5 = $3,200 $6,400 Proceeds from short sale (6,000) Cost to repurchase shares $400 Gain (200) Dividend payment $200 Net profit net profit ÷ investment = % gain/loss $200 ÷ $3,200 = 6.25% gain

Which of these choices correctly illustrates the relationship between a bond's price and various yields?

For a discount bond: coupon rate < current yield < yield to maturity When a bond trades at a discount, its yield to maturity will be greater than its current yield, which will be greater than its coupon rate.

Mike places a market order to sell short 200 shares of ABC stock. The order is filled at $23.45 per share. Assuming he can cover the short by purchasing the shares at $20 per share, calculate his gain or loss.

Gain of $690 Mike will have a gain of $690 on the shares of XYZ stock. $23.45 proceeds - $20.00 cost $3.45 gain × 200 shares = $690

Your client purchased a call of KLN Corp. for $800. The exercise price was $35, and the market price of KLN Corp. stock was $38. Six months later, the market price of KLN Corp. stock was $40 and the client sold the call for $1,250. What was the holding period return on this investment?

HPR=(sale price − purchase price) / purchase price=(1,250−800)/ 800=56.25%

Limited partnerships are distinguished by which of the following? I. The general partner controls the business activities of the partnership. II. The limited partners participate in the business venture with limited liability. III. The general partner determines when distributions are made to the limited partners. IV. The limited partners may have difficulty selling their interests.

I, II, III, and IV

In general, rising interest rates result in which of the following combinations? A) Rising stock and bond prices B) Falling stock and bond prices C) Falling bond prices and rising stock prices D) Rising bond prices and falling stock prices

In general, rising interest rates result in falling stock and bond prices.

An investor who makes the assumptions that security prices reflect all available information, that organized exchanges can execute trades rapidly, that security prices change rapidly in response to new information, and that security prices follow random patterns is a believer in

In its purest form, the efficient market hypothesis suggests that investors are unable to outperform the market on a consistent basis. The fundamental assumption of the theory is that current stock prices reflect all available information for a company and that prices rapidly (or immediately) adjust to reflect any new information.

Select the entity that issues guaranteed investment contracts (GICs).

Insurance companies

Which of these statements about closed-end funds is CORRECT?

Investors in closed-end shares can profit from changes in the discount to NAV.

An active approach to portfolio management is more likely to reward investors in which of the following asset classes? Emerging market equities U.S. large-cap stocks U.S. small-cap stocks European large-cap stocks

Investors who follow an active approach to portfolio management will benefit most from a portfolio containing emerging market equities and U.S. small-cap stocks, which tend to be more volatile investments.

Choose the characteristic that does not apply to Eurodollars.

Issued by the U.S. Treasury

Kristy has a fixed-income portfolio that consists of three individual bonds. FMV Duration Product Bond A $5,000 5.0 $25000 Bond B $3,000 8.0 $24000 Bond C $2,000 12.0 $24000 Total $10,000 $73000 What is the duration of Kristy's portfolio?

It is 7.3 ......portfolio duration = $73,000 ÷ $10,000 = 7.3

Janice, who is in the 35% marginal income tax bracket, would like to purchase a bond for her investment portfolio. Assuming all of the bonds are of similar investment quality, which would produce the highest after-tax yield?

Janice should purchase the municipal bond based on the following after-tax yield calculations: U.S. Treasury bond [2.75% × (1 − 0.35)] 1.79% Corporate bond [5.25% × (1 − 0.35)] 3.41% Municipal bond (tax-free) 3.55% U.S Treasury note [2.25% × (1 − 0.35)] 1.46%

Which of the following statements regarding performance measures is CORRECT? A) Jensen's alpha may be used by itself to judge an investment. B) The Sharpe ratio uses beta as its measure of risk. C) A negative alpha indicates the investment lost money. D) The reliability of their betas is important for the Jensen and Sharpe performance measures.

Jensen's alpha may be used by itself to judge an investment.

Identify the types of bonds that are subject to the most default risk.

Junk bonds, sometimes referred to as high-yield bonds, are subjected to the most default risk. Obligations of the U.S. government are free from default risk. AA rated bonds are not free from default risk, but they are less likely to default than junk bonds.

You have narrowed your choice down to these investments with the following characteristics: JJJ LLL NNN YYY Mean return 10 18 7 11 Standard deviation 17 25 10 19 Which fund has the least risk per unit of return?

LLL Fund Using the coefficient of variation (CV). JJJ Fund: 17 ÷ 10 = 1.70 LLL Fund: 25 ÷ 18 = 1.39 NNN Fund 10 ÷ 7 = 1.43 YYY Fund 19 ÷ 11 = 1.73 The stock with the lowest CV has the least amount of total risk per unit of expected return.

Which of these investments should be recommended during periods of falling interest rates?

Long-term bonds

The Nelsons, a family of modest means, are preparing to implement their financial plan. As part of their plan, they need to place more cash into a convenient emergency fund. Determine which of the following investments would be most suitable for the Nelsons' emergency fund.

Money market mutual fund

Which of these investments is advisable during periods of rising interest rates?

Money market mutual funds

One of the characteristics of real estate investment trusts (REITs) is that they generally

Most real estate investments are not readily marketable. Therefore, an investor in real estate can generally expect some difficulty in converting a property to cash if cash is needed quickly. However, a REIT securitizes real estate properties, thereby allowing REIT investors to easily sell REIT shares in the open market. REITs must flow through at least 90% their income to investors; therefore the investors and not the REITs pay tax on these distributions.

Which of these valuation methods is the most appropriate to use when analyzing a stock?

Multiple methods

Income or dividends produced by which of the following securities is exempt from federal income tax?

Municipal bonds

Net profit margin

Net Income/Sales

Return on assets (ROA

Net Income/Total Assets

ll of these statements correctly describe the price-to-earnings divided by growth (PEG) ratio except

PEG is an indication of how much an investor is paying for a specific revenue stream.

risks associated with tangible assets:

Price fluctuations Higher front-end costs Loss from fraud and theft Lack of liquidity and marketability

Which of the following accurately describes the certificate of deposit investment strategy known as laddering?

Purchasing multiple certificates, rather than just one, with differing terms of maturity

Roger is willing to invest in securities with above-average risk if he is rewarded for doing so. He has been following the stock of a company that he likes, but is concerned because the stock dropped 9% the last time the S&P 500 dropped 7%. Roger believes that an 11% return for the market next year would be good. The current market risk premium is 7.5% and the Treasury bill rate is 5.75%. The stock Roger has been following has the following characteristics: Standard deviation 18% Dividend yield 2.4% P/E ratio 17 P/E ratio relative to S&P 500 1.4 Beta 1.25 Using the CAPM formula, calculate the required rate of return for the stock and determine if the stock appears to meet Roger's criteria of investing in above-average-risk stocks only if he is rewarded for doing so.

Required rate of return is 5.75% + (7.5%)1.25 = 15.13%. The fact that Roger believes 11% would be a good return is not relevant for computation of the required rate of return—only the computed market risk premium is relevant. The market return is computed as 7.5% + 5.75% = 13.25%. Roger will invest in an above-average risk stock (beta = 1.3) if he can be rewarded for taking the extra risk. The reward is the greater-than-market return of 15.13%.

Accounts receivable turnover

Sales / Average Accounts Receivable

An investor who owns a sector fund that has substantial unsystematic risk and would like to know how a portfolio manager performed on a risk-adjusted basis would use which of the following indicators? A) Treynor ratio B) Beta C) Jensen's alpha D) Sharpe ratio

Sharpe uses standard deviation and assumes the portfolio is not well diversified and measures total risk.

Alice uses a stockbroker to borrow shares of stock from another investor's account and then sells the borrowed stock in the open market. She later repurchases the stock in the open market and replaces, or covers, the borrowed stock. Identify the type of transaction that she used in her account.

Short sale

Which statement regarding single-country, closed-end funds is NOT correct? A)Single-country funds trade at the fund's NAV. B)Capital appreciation is the primary objective of single-country funds. C)Professional management of the fund and portfolio diversification within the selected market are available with single-country funds. D)After the initial public offering, the fund will generally not issue additional shares.

Single-country funds are closed-end funds and, like other closed-end funds, generally trade at a discount to NAV.

Dividend reinvestment:

Such a program has the benefit of dollar cost averaging and Dividend shares are purchased at no commission cost.

Which of the following statements regarding fundamental and technical analysis is CORRECT?

Technical analysis is not considered valid under the efficient market hypothesis, because this type of analysis is attempting to predict future prices based on past price movement.

Which of these statements regarding the bond ladder strategy is CORRECT?

The bond ladder strategy is used to immunize a portfolio against interest rate risk.

If an investor has a net short-term capital loss of $1,200 and a net long-term capital gain of $2,500, which of the following statements is true?

The client pays tax on a net long-term capital gain of $1,300.

Which of the following describes downside risk with respect to convertible bonds?

The difference between the current market value of the bond and its investment value.

Which of the following occurs when a 10% stock dividend is paid?

The firm's retained earnings decrease.

What is the taxable equivalent yield on a municipal bond with an 8.75% return for an investor in the 24% marginal tax bracket?

The formula for solving this problem is 8.75% ÷ (1 - 0.24) = 8.75% ÷ 0.76 = 11.51%.

Jennifer owns a state public purpose bond. She sells the bond and realizes a capital gain of $4,000. Prior to selling the bond, the total interest she had earned for the year was $99. Considering the sale and the interest amount, calculate the amount she must include in gross income.

The interest on public purpose bonds is received tax-free by the holder. Only the capital gain realized on the sale is subject to income taxation.

The minimum price at which an option will trade on an exchange is identified as the

The minimum price at which an option will trade on an exchange is known as the intrinsic value.

Assume a $1,000 par value bond with 3 years until maturity is currently trading for $1,027.23. The bond has a coupon rate of 6% (annual coupon payments) and a current YTM of 5%. The bond has a duration of 2.51 years. Calculate what the new market price for the bond would be if the YTM changed from 5% to 4.5%.

The new price of the bond should be $1,041.23. FV = 1,000 PMT = 60 I/YR = 4.5 N = 3 Solve for PV = -1,041.2345, or $1,041.23

Juliet owns a PRT Inc. bond with a par value of $1,000. PRT is a AA rated bond maturing in seven years. Juliet receives $55 of interest income from PRT semiannually. Comparable debt, i.e., AA rated, seven-year maturity, yields 12%. The bond's duration is five years. Assume the Fed is concerned about inflation and increases the discount rate. As a consequence, market interest rates on seven-year AA rated bonds change from 12% to 13%. How will the price of Juliet's bond change?

The price will decrease by approximately 5%.

ex dividend date

Therefore, all purchases made on or after the ex-dividend date are not entitled to the next dividend to be paid. The ex-dividend date is one trading day before the record date.

Which of the following is true of warrants?

They allow for customization of terms among all potential investors Warrants are essentially customized (not standardized) call options issued to meet the needs of both the issuing corporation and the investor.

What is not true about warrants?

They are incentives for investors to purchase futures contracts They increase the cost of capital necessary to float an issue There are incentives for investors to purchase the corporation's preferred stock

Debt-to-capital ratio

Total Debt / Total Capital

Debt-to-equity ratio

Total Debt/Total Equity

Which of the following is both liquid and marketable?

U.S. Treasury bills

Which of the following is the risk that disappears in the portfolio construction process? A) Unsystematic risk B) Interest rate risk C) Purchasing power risk D) Systematic risk

Unsystematic risk (diversifiable risk) is the risk that is eliminated when the investor builds a well-diversified portfolio.

Marvin is considering adding XYZ stock to his holdings. The stock has these characteristics: Beta 1.45 Standard deviation 15.58% Current dividend $1.35 Required rate of return 8% Risk-free rate of return 2% The current dividend is expected to grow for three years at a rate of 2% and then 3% thereafter. Based on the information provided, calculate the intrinsic value of XYZ stock and determine if Marvin should add XYZ to his portfolio if it is currently trading at $24.50.

With an intrinsic value of $27.13, the stock is undervalued and should be added to the portfolio. Compute the value of each future dividend until the growth rate stabilizes (Years 1-3). D1 = $1.35 × 1.02 = $1.38 D2 = $1.38 × 1.02 = $1.41 D3 = $1.41 × 1.02 = $1.44 Use the constant growth dividend discount model to compute the remaining intrinsic value of the stock at the beginning of the year when the dividend growth rate stabilizes (Year 4). D4 = $1.44 × 1.03 = $1.48 V = $1.48 ÷ (0.08 - 0.03) = $29.60 Use the uneven cash flow method to solve for the net present (intrinsic) value of the stock. CF0 = $0 CF1 = $1.38 CF2 = $1.41 CF3 = $1.44 + $29.60 = $31.04 I/YR = 8% Solve for NPV = 27.1272, or $27.13

You have recommended a growth mutual fund to a new client. The client considered your recommendation and asked why he should not invest in another fund that he had been following, which appeared to have a better performance over the past three years. You explained the concept of risk-adjusted performance and obtained this information about the two funds: Your Fund Client Fund Three-year total return 13.5% 14.75% Average P/E ratio 20% 24% Standard deviation 19% 23% Beta 1.03 1.24 Which fund would you recommend based on each fund's relationship between risk and return?

Your fund, because its coefficient of variation is 1.41, compared to the client's coefficient of variation of 1.56 The standard deviation is divided by the total return to obtain the coefficient of variation. A beta is higher does not mean that any higher return is acceptable. The client's fund has higher risk as measured by both standard deviation and beta, but taking this higher risk does not provide sufficient return based on the coefficient of variation calculation.

If all of these bonds are of similar credit risk, choose which will be the least sensitive to interest rate changes.

Zero-coupon bond maturing in six months Coupon-paying bonds have durations that are less than their time to maturity. Zero-coupon bonds have durations that are equal to their time to maturity. Bonds with shorter durations are less sensitive to changes in interest rates. Thus, the six-month zero-coupon bond is the least sensitive to changes in interest rates.

Equity income funds may hold which of these types of securities? Income-producing common stocks Convertible bonds Convertible preferred stocks

all of these

Identify those risks that pertain to hedge funds. Overuse of leverage Excessive short selling Lack of transparency Lack of regulation

all of these

Most fixed-income securities are subject to which of the following risks? Purchasing power risk Liquidity risk Default risk Reinvestment rate risk

all of these

Which of the following methods can be used in determining the basis in a mutual fund when the shares were acquired at different times? Specific identification First in, first out (FIFO) Average cost method

all of these

A client of yours, George, wants to maximize his return on an intermediate-term bond that he plans to hold until maturity. You have gathered information on the following two bonds, both of which have a $1,000 par value. Bond 1: A rated; coupon rate of 6%; matures in 6 years and pays interest semiannually; currently selling for $850; duration is 5.16 years. Bond 2: A rated; coupon rate of 10%; matures in 8 years and pays interest semiannually; currently selling for $1,100; duration is 7.15 years. Which of these bonds would you recommend to George and why? 1. Bond 1 because it has a higher yield to maturity than Bond 2 2. Bond 2 because its higher coupon rate gives it a superior total return to Bond 1 3. Bond 2 because it has a higher duration than Bond 1

he answer is I only. Bond 1's YTM (9.32%) is higher than Bond 2's YTM (8.26%) For both calculations, END Mode, 2 P/YR. Bond 1: PV = -850 FV = 1000 PMT = 30 (6% × $1,000 ÷ 2) 6, DOWNSHIFT, N = 12 Solve for I/YR = 9.32% Bond 2: PV = -1100 FV = 1000 PMT = 50 (10% × 1,000 ÷ 2) 8, DOWNSHIFT, N = 16 Solve for I/YR = 8.26%.

Select which of these is NOT a primary risk associated with a coupon-paying bond.

he answer is debenture risk. A coupon-paying bond is also subject to reinvestment rate risk.

A distribution that is more peaked than normal is A) platykurtic. B) convex. C) skewed. D) leptokurtic.

he answer is leptokurtic. A distribution that is more peaked than normal is leptokurtic. A distribution that is flatter than normal is platykurtic.

If a bond is immunized against interest rate risk, a dollar decline in the bond's price, resulting from rising interest rates, will be approximately offset by a dollar increase in the

income from coupons reinvested over the investment horizon.

All else remaining equal, if the dividend payout ratio decreases, the value of a company's common stock would

increase because the company's dividend growth rate will increase.

All of these statements correctly describe yield curves except

The answer is a positive yield curve can signal an upcoming economic recession. A positive (or normal) yield curve occurs during periods of economic expansion and generally predicts that market interest rates will rise.

To measure the performance of an investment manager, which of the following methods of computing returns should be used?

The answer is time-weighted return. The time-weighted return should be used to measure the performance of an investment manager.

All of the following are primary factors in the arbitrage pricing theory (APT) except A) unemployment rate. B) changes in GDP. C) inflation rate. D) interest rates.

The answer is unemployment rate. These factors might include inflation, growth in GDP, major political upheavals, or changes in interest rates.

Return on equity (ROE)

Net Income/Equity

An investment, such as an option, whose value is based on that of another security is classified as

The answer is a derivative. An investment whose value is based on that of another security is a derivative. Examples of derivatives include options, futures, and warrants.

Which of the following statements best describes Eurodollars?

U.S. dollar-denominated deposits at banks outside the United States

Dave and Pam Larson, ages 65 and 63, respectively, recently retired. They successfully saved for their retirement throughout their careers using a low-risk approach. They would like to restructure their investments to have current income now to travel in their leisure time. Which of the following investment alternatives would be appropriate for the Larsons' goal? 1 Equity income mutual fund shares 2Aggressive growth mutual fund shares 3 Newly issued U.S. government bonds 4 GNMA fund shares

1, 3, 4

Identify which of the following statements pertaining to the various types of money market investments is CORRECT. 1. Commercial paper offers higher yields than T-bills. 2. Eurodollars are U.S. dollar-denominated deposits at banks outside of the United States. 3. Banker's acceptances are short-term drafts drawn by a private company on a major bank to finance imports and exports. 4. T-bills are subject to default risk and a lack of marketability.

1,2,3

closed end mutual funds

1. Closed-end shares generally trade at a discount or premium to NAV, whereas open-end shares trade at NAV plus commission, if applicable. 2. The number of available shares in a closed-end fund is fixed, whereas the number of available shares in an open-end fund varies.

Characteristics of warrants

1. a warrant is a long-term call option issued as a sweetener with a new bond issue. 2. a warrant typically has a maturity date of several years. 3. a warrant differs from a traditional option security in terms of maturity. 4. Warrants are customized to fit the needs of the issuing corporation. 5. Warrants typically have a maturity date of several years.

Sally, Michael, and Anita use dierent methods for choosing assets for their investment portfolios. Sally uses technical analysis to determine when to buy and sell the stocks in her portfolio. Michael is committed to a passive investment strategy and a well-diversified portfolio of randomly selected stocks. Anita ignores historical volume and price information, but she reviews the financial statements of the firms in which she is interested. which of the following statements best describes Sally, Michael, and Anita? I. Anita accepts the strong form of the efficient market hypothesis (EMH). II. Michael accepts the semistrong form of the EMh. III. Sally accepts the weak form of the EM. IV. Both Anita and Sally accept the semistrong form of the EMH. A. II only B. I and IV C. II and III D. II, III, and IV

A The answer is II only. Under the weak form of the EMH, access to fundamental analysis and insider information can achieve superior results. Under the semistrong form of the EMH, only access to insider information can achieve superior results. Under the strong form of the EMH, not even access to insider information can achieve superior results. Anita uses fundamental analysis, which is supported only by the weak form of EMH. Michael does not use fundamental or technical analysis. His strategy is supported by both the semistrong and strong forms of the EMH. Sally uses technical analysis, which is rejected by all forms of the EMH.

Patrick, age 57, has just retired from his job as a teacher. e is a widower and has three self-sucient adult children. As part of his compensation plan, he has a cash balance retirement plan. He would like to transfer these assets to his broker and allocate the portfolio according to an income objective with low to moderate risk and a long-term time horiZon. Which of the following portfolios should Patrick's financial advisor recommend? A. Portfolio 1 65% bond index fund, 20% S&P 500 Index fund, 10% international stock fund, 5% money market fund B. Portfolio 2.40% high-yield bond fund, 20% municipal bond fund, 20% .S. government securities fund, 20% small-cap growth fund C. Portfolio 3.80% S&P 500 Index fund, 10% international bond fund, 10% money market fund D. Portfolio 425% Bond Index fund, 60% S&P 500 Index fund, 10% international stock fund, 5% money market fund

A The answer is Portfolio 1—65% bond index fund, 20% S&P 500 Index fund, 10% international stock fund, 5% money market fund. Because Patrick has recently retired, the portfolio should primarily provide income. In addition, his age necessitates a modest growth component to his portfolio. A portfolio consisting of 65% bonds, 30% stocks, and 5% money market is consistent with an income objective with low to moderate risk and a long-term time horizon.

Portfolio A has a standard deviation of 5.5%, a beta of 1.15, an actual return of 8%, and an expected return of 10%. Portfolio B has a standard deviation of 7.5%, a beta of 1.50, an actual return of 9%, and an expected return of 12%. Assume a risk-free rate of return of 2.75% and an R2 of 0.40 with respect to the market. Given this information, which of the following statements is CORRECT? A. Portfolio A has a higher Sharpe ratio than Portfolio B, indicating that Portfolio A outperformed Portfolio B. B. Portfolio B has a higher Sharpe ratio than Portfolio A, indicating that Portfolio B outperformed Portfolio A. C. Portfolio A has a higher Jensen's alpha than Portfolio B, indicating that Portfolio A outperformed Portfolio B. D. Portfolio B has a higher Treynor ratio than Portfolio A, indicating that Portfolio B outperformed Portfolio A.

A The answer is Portfolio A has a higher Sharpe ratio than Portfolio B, indicating that Portfolio A outperformed Portfolio B. Because R2 is less than 0.70, the Sharpe ratio must be used to compare the performance of the portfolios. The formula for the Sharpe ratio is as follows: Sp = (rp - rf) ÷ σp Sharpe for Portfolio A = (0.08 - 0.0275) ÷ 0.055 = 0.9545 Sharpe for Portfolio B = (0.09 - 0.0275) ÷ 0.075 = 0.8333 As a result, the Sharpe ratio for Portfolio A is higher than Portfolio B, indicating that Portfolio A outperformed Portfolio B.

Mildred is the portfolio manager of a small-cap fund that invests strictly within the United States. Which index would provide the best benchmark for Mildred's fund? A. Russell 2000 Index B. MSCI EAFE Index C. S&P 500 Index D. Wilshire 5000 Index

A The answer is Russell 2000 Index. The Russell 2000 is an index of small-capitalization U.S. stocks. The MSCI EAFE is an index of European, Australasian, and Far East stocks. The S&P 500 is an index of large-capitalization U.S. stocks. The Wilshire 5000 is a broad market index.

A pooled investment with a share price significantly dierent from its net asset value (NAV) per share is most likely A. a closed-end fund. B. an open-end fund. C. an exchange-traded fund (ETF). D. a unit investment trust (UIT).

A The answer is a closed-end fund. Closed-end funds' share prices can differ significantly from their NAVs.

The risk level of a typical guaranteed investment contract (GIC) with an insurance company is best described as A. conservative. B. aggressive. C. extremely risky. D. default-risk free

A The answer is conservative. A guaranteed investment contract (GIC) is regarded as a conservative investment; however, it is not free of default risk.

ABC Corporation is a manufacturer of electronic devices used in the manufacturing of airplanes. ive years ago, the corporation oated a $100 million bond issue that would be used to finance improvements at its main manufacturing and distribution center. However, orders for its products have dropped dramatically due to demand being much lower than anticipated. The company believes it may miss paying the coupon payment on the bond issue in the upcoming fiscal year. The owners of the ABC Corporation bonds are facing which of the following types of risk? A. Default risk B. Reinvestment rate risk C. Market risk D. Regulation risk

A The answer is default risk. Default risk is the risk that a business will be unable to service its debt obligat

A portfolio consisting of 30% bonds, 20% growth stocks, 40% blue-chip conservative stocks, and 10% cash is most representative of which type of investment objective A. Growth and income B. Current income C. Aggressive growth D. Capital preservation

A The answer is growth and income. A portfolio consisting of 30% bonds, 20% growth stocks, 40% blue-chip conservative stocks, and 10% cash is most representative of a growth and income investment objective

All of the following are examples of nondiversifiable risks except A. liquidity risk. B. market risk. C. interest rate risk. D. purchasing power risk.

A The answer is liquidity risk. Liquidity risk is a type of unsystematic, or diversifiable, risK

Which of these is NOT correct when defining an accredited investor under Rule 501 of Regulation D?

A natural person who has individual net worth, or joint net worth with the person's spouse, that exceeds $1 million at the time of the purchase, including the equity in a primary residence.

The use of P/E ratios to select stocks suggests which of these?

A stock should be purchased if it is selling near its historic low P/E.

You are considering buying a stock that has a mean return of 14% and a standard deviation of 20. You can expect the return to fall within what range 95% of the time?

A stock with a standard deviation of 20 will deviate from the mean by one standard deviation 68% of the time, two standard deviations 95% of the time, and three standard deviations 99% of the time. So for this stock, plus or minus 40 from the mean of 14% would be -26% and +54%.

In analyzing the position of a portfolio in terms of risk/return on the capital market line (CML), superior performance exists if the fund's position is ________ the CML, inferior performance exists if the fund's position is ________ the CML, and equilibrium position exists if it is ________ the CML. A) above; below; on B) above; on; below C) below; above; on D) below; on; above

According to modern portfolio theory, the CML defines performance of a portfolio. All portfolios should plot on the CML in proportion to the risk of the portfolio. The Y axis is return and the X axis is the risk level. If a fund has superior performance, its return will be above the return level for the given risk level; if inferior, its return will be below the return level for the given risk level; and if it is in equilibrium, then it will plot exactly on the CML.

The exercise price of a put is $25 and the market price of the stock is $18. Which of the following statements is true?

An investor who purchases a put option makes a profit only if the market price of the stock is lower than the exercise (strike) price of the option. Until the market price drops below the strike price, the option is said to be out of the money. It is in the money when the market price drops below the strike price. This put is in the money by $7.

Michael purchased 800 shares of ABC stock at $75 per share. The stock paid a $1.20 dividend per share at the end of the year. During this same year, there was a 2-for-1 stock split. If the value of Michael's investment at the end of the year was $66,000, what was his holding period return (HPR)? A. 8.3% B. 10.0% C. 12.0% D. 13.2%

D The answer is 13.2%. Michael's HPR was 13.2%, computed as follows: HPR = ($66,000 − $60,000 + ( $1.20 × 800 × 2))/ ($60,000= $7,920)/ $60,00=13.2%

ABC Company common stock is currently trading at $75 per share. Joe owns a $1,000 par value bond convertible into ABC common stock with a conversion ratio of 15. What is the conversion value of Joe's bond? A. $875 B. $1,000 C. $1,125 D. $1,500

C The answer is $1,125. The conversion value of Joe's bond is $1,125, or 15 × $75 per share. This is the minimum value for which the convertible bond will sell in the secondary market.

Jane's portfolio consists of two stocks, each comprising 50% of the portfolio. Stock 1 has an expected return of 4.5%, a standard deviation of 1.5%, and a beta of 0.65. Stock 2 has an expected return of 8%, a standard deviation of 3%, and a beta of 0.82. If the correlation coefficient between Stock 1 and Stock 2 is 0.75, what is the beta for Jane's portfolio A. 0.01 B. 0.63 C. 0.74 D. 2.25

C The answer is 0.74. The portfolio beta is a weighted average: (0.50 × 0.65) + (0.50 × 0.82) = 0.7

Susan is earning a before-tax (nominal) return of 10% on a recently purchased investment. Her combined federal and state marginal income tax rate is 37%. What is her after-tax rate of return on this investment? A. 2.7% B. 3.7% C. 6.3% D. 6.7%

C The answer is 6.3%. Susan's after-tax rate of return on the investment is 6.3%, calculated as follows: 0.10 × (1 - 0.37) = 0.10 × 0.63 = 0.063, or 6.3%

In a rising stock market, which of the following methods of establishing basis in mutual fund shares is the most favorable to the taxpayer-owner? A. Average cost method B. FIFO C. Specific identification D. Amortized cost method

For which of the following investors would zero-coupon bonds be most appropriate? A. Nancy, age 67, recently retired, conservative risk tolerance, has a need for immediate income B. Jim, age 26, aggressive risk tolerance, modest income, has a need for an emergency fund C. Ralph and Gina, ages 42 and 40, have a 13-year-old daughter, need $25,000 for college funding in 5 years D. Marvin and Juanita, ages 56 and 50, moderate to aggressive risk takers, both employed, high net worth, wish to retire in 13 years

C The answer is Ralph and Gina, ages 42 and 40, have a 13-year-old daughter, need $25,000 for college funding in 5 years. Ralph and Gina would be the best choice to invest in zero-coupon bonds. Their need is clearly defined in terms of amount and time frame. Zero-coupon bonds could be purchased to provide the necessary funds at the desired time.

Which of the following statements, with respect to the features of U.S. savings bonds, is CORRECT? A. Series EE and Series I bonds are sold at a discount and accrue interest annually. B. Series EE and Series HH bonds may be used as payment for qualified higher education costs free of income tax. C. Series I bonds feature a combination of fixed and ination-adjusted interest rates. D. Series HH bonds may be obtained only by using cash and not with a tax-free exchange of Series EE bonds.

C The answer is Series I bonds feature a combination of fixed and inflation-adjusted interest rates.

Investors will typically choose a fund of funds (FOF) to A. avoid the double layer of management fees. B. focus solely on coinvestment opportunities. C. benefit from diversification across many private equity funds. D. exercise more control over individual portfolio companies

C The answer is benefit from diversification across many private equity funds.

Janine's investment portfolio is 50% growth stocks, 10% foreign stocks, and 40% blue-chip stocks. Janine is interested in further diversification. Which mutual fund would best meet her goal? A. Emerging market fund B. Global equity fund C. Bond fund D. Aggressive growth fund

C The answer is bond fund. Janine's portfolio contains foreign equities and growth stocks. She does not own fixed-income securities.

Which of the following statements is NOT correct concerning the use of the correlation coecient in reducing portfolio risk? A. Combining securities with perfect positive correlation provides no portfolio risk reduction. B. Combining two securities with ero correlation (statistical independence) reduces portfolio risk, but cannot be eliminated. C. Combining two securities with perfect negative correlation provides no portfolio risk reduction. D. Because securities typically have some positive correlation with each other, risk can be reduced, but seldom eliminated.

C The answer is combining two securities with perfect negative correlation provides no portfolio risk reduction. This could eliminate risk altogether and is the principle behind hedging strategies.

According to the liquidity preference theory, which of the following statements is least accurate? A. All else equal, investors prefer short-term securities over long-term securities. B. Long-term rates should be higher than short-term rates because of the added risks. C. Investors perceive little risk dierential between short-term and long-term securities. D. Borrowers will pay a premium for long-term funds to avoid having to roll over short-term debt

C The answer is investors perceive little risk differential between short-term and long-term securities.

Shelley is contemplating buying 100 shares of ABC Corporation's preferred stock for $42 per share. She knows the dividend is a fixed amount, paid quarterly, and determined by taking a percentage of which of the following? A. Market value B. Book value C. Par value D. Intrinsic value

C The answer is par value

karl and wendy, ages 35 and 34, have provided their financial planner with the following information: Salary (Wendy) $100,000 Salary (Karl) $55,000 Investment portfolio1 $150,000 Personal debt $5,000 Personal residence $250,000 Mortgage $188,000 Checking account $12,000 100% of the assets are invested in common stocks. They have communicated that they are aggressive risk takers and wish to reposition $8,000 from their checking account to their investments. They prefer a risky investment to add to their mostly blue-chip stock portfolio. Which of the following stocks would be most appropriate for the couple to add to their portfolio? A. International airline stock B. Grocery stock C. Pharmaceutical stock D. Utility stock

C The answer is pharmaceutical stock. The best choice for the couple is the pharmaceutical stock. This type of stock is generally riskier and may provide a higher rate of return than the other choices. Grocery stock is considered a defensive stock. Utility stock is an example of an income stock. An international airline stock is a cyclical stock

With respect to the term structure of interest rates, the market segmentation theory holds that A. an increase in demand for long-term borrowings could lead to an inverted yield curve. B. expectations about the future of short-term interest rates are the major determinants of the shape of the yield curve. C. the yield curve reects the maturity demands of financial institutions and investors. D. the shape of the yield curve is independent of the relationship between long-and short-term interest rates.

C The answer is the yield curve reflects the maturity demands of financial institutions and investors. T

Coretta, age 63, is an executive with ABC Corporation (a publicly traded company). She wants to retire within two years. Over the years, she has accumulated a large position in her company's stock. She is concerned that her portfolio may not be diversified enough to withstand a substantial decline in ABC's stock price. She would like to retain control over the proceeds and create a diversified portfolio. She has come to you for advice on how to handle this situation. Based on this information, which is the best choice for Coretta? A. Gift the stock to a family member. B. Sell the stock to a family member. C. Use an exchange fund. D. Sell the stock and transfer the proceeds to a charitable remainder trust.

C The answer is use an exchange fund. The best course of action for Coretta is to use an exchange fund. This fund permits investors with concentrated portfolios to contribute the stock to the fund. In exchange, the investor receives a proportional interest in the fund. All of the other choices will require Coretta to give up control of the proceeds

U.S. Treasury bills would be most appropriate for which of the following investors? A. John, age 25, single, no dependents, aggressive risk tolerance, need for growth and speculation B. Mary and Ed, ages 43 and 41, moderate risk takers, need for college funding in 8 years for their 10-year-old daughter, Megan C. Jack and Krissy, ages 65 and 63, conservative risk tolerance, need for liquidity and safety of principal D. Lucy, age 54, divorced, moderate to aggressive risk tolerance, need for retirement funding i

C. The answer is Jack and Krissy, ages 65 and 63, conservative risk tolerance, need for liquidity and safety of principal. Investors seeking diversification, liquidity, and safety of principal are the best candidates for U.S. Treasury bills. In this case, the best choice is Jack and Krissy.

Which of the following is the best reason for an import company to use banker's acceptances? A. The company is seeking the use of a secured line of credit. B. The company is looking to raise long-term capital for a new product line. C. The company needs to finance international purchases. D. The company needs to provide collateral for a bond issue.

C. The answer is the company needs to finance international purchases. Banker's acceptances are similar to unsecured lines of credit and are not used as collateral for other loans or new product development

What kind of investment company has no provision for redemption of outstanding shares?

Closed end mutual fund

A financial reporter notices that the quoted price of one investment company's shares is at a 22% discount from the NAV. From this information, it can be deduced that the company is likely which of the following?

Closed-end investment company

Daniel has several investment company products within his retirement portfolio. One of these investments trades on an exchange, may trade at a premium or discount to its net asset value, and has a fixed capital structure. These features illustrate which of these investments?

Closed-end investment company

A money market mutual fund manager recently purchased negotiable, short-term, unsecured promissory notes issued by a number of large corporations for the portfolio. Select the type of investment the money manager purchased.

Commercial paper

Company A and Company B are in the same industry and have approximately the same dollar amount of assets and operating income. Company A has a return on equity (ROE) of 28% and Company B has an ROE of 12%. Which of the following statements best identifies the major difference causing the disparity in ROE between Company A and Company B?

Company A has more debt than Company B.

Leslie purchased a 10-year bond with a coupon rate of 4.75% paid semiannually. The bond has a current market price of $1,035. Calculate the yield to maturity (YTM) for Leslie's bond. A) 4.4520% B) 4.7500% C) 4.3154% D) 4.3118%

Explanation The answer is 4.3154%. The bond's YTM is calculated as follows: END Mode, 2 P/YR PV = −1035 FV = 1000 PMT = 4.75% × 1000 ÷ 2 = 23.75 10, DOWNSHIFT, N = 20 Solve for I/YR = 4.3154% The YTM for Leslie's bond is lower than its coupon rate because the bond is trading at a premium.

You are about to recommend the purchase of an additional mutual fund to add to a client's portfolio, with the objective of reducing the portfolio's total risk. Upon analysis of several funds, you determine that the standard deviations of the current portfolio and each of the potential new funds are equal, but that the correlation coefficients of these funds with the current portfolio are as shown in the answer choices below. Which of the funds should you recommend?

Fund D: correlation coefficient = -0.08 According to modern portfolio theory, total portfolio risk, as measured by standard deviation, is lowered by combining securities in a portfolio so that individual securities have negative (or low positive) correlations between each other's rates of return.

Which of the following is CORRECT with regard to the purchasers of gold futures contracts? A)They do not have to meet margin requirements. Incorrect Answer B) They have less speculative positions. Incorrect Answer C)They run the risk of government intervention altering the supply and demand for gold. D)They are considered to be unleveraged positions.

Government intervention has always been an issue for gold. The price was fixed for years and Americans were forbidden from owning gold. Although this has changed, the possibility of government intervention does exist. These positions are very speculative and are highly leveraged and risky.

Consider the following information regarding Stock A and Stock B. The market's standard deviation is 15. Stock A Stock B Correlation coefficient with market 0.20 0.80 Standard deviation 20 10 Which of the following statements are true and why? I. The beta of Stock A is lower than the beta of Stock B due to the impact of the correlation coefficients. II. The beta of Stock A is higher than the beta of Stock B because the standard deviation of Stock A is twice the standard deviation of Stock B. III. The ratio of Stock A's correlation coefficient to Stock B's correlation coefficient indicates that Stock B's beta is four times Stock A's beta. IV. The correlation coefficient of Stock A suggests that the price movements of the market are likely to have little relationship with the price movements of Stock A.

I and IV According to the formula for beta, Stock A's beta is (20 ÷ 15) × 0.20 = 0.27 and Stock B's beta is (10 ÷ 15) × 0.80 = 0.53. Statement II is incorrect because it does not take into account the relative correlation coefficients. Statement III is incorrect because it does not take into account the relative standard deviations.

Mutual fund I has a standard deviation of 4% and an expected return of 10%. Mutual fund J has a standard deviation of 8% and an expected return of 13%. If I and J have a correlation coefficient of -1.0, which of the following statements is CORRECT?

I and J are perfectly negatively correlated. J's coefficient of variation is 8% ÷ 13% = 0.615. I's coefficient of variation = 4% ÷ 10% = 0.40. I is less risky, on a risk-adjusted basis, than J. Because I and J are perfectly negatively correlated (correlation coefficient of -1.0), there exists a combination of I and J such that the standard deviation is zero. The expected return of a portfolio is the weighted average, which cannot be less than the lowest expected return of the portfolio components.

Identify which of these statements regarding bonds is CORRECT. If a bond is issued in registered form, payments will be made to the owner of record. If a bond is issued in bearer form, payments will be made to whoever holds or possesses the bond. A bond acquired in the secondary market at a discount is called a market discount bond. The amount attributable to a market discount is always includable in income in the year of acquisition.

I, II, and III

Identify which of these statements regarding zero-coupon bonds is NOT correct. 1 Zero-coupon bonds are purchased at par and defer interest payments until maturity. 2 Because there are no coupon payments for zero-coupon bonds, no current income is recognized. 3 A zero-coupon bond is issued at a discount and pays semiannual interest payments. 4 Corporations may favor zero-coupon bonds because they have an extended period to use the money that has been raised by the offering.

I, II, and III

What are the advantages of a private placement to the issuing firm? I. Avoidance of disclosure requirements II. Reduction in the time needed to raise the capital III. Avoidance of some costs associated with publicly selling securities IV. Limited to 25 unaccredited investors, but is available to an unlimited number of accredited investors

I, II, and III

Which of the following would be held in a money market portfolio? 1. Treasury bill 2. Negotiable CDs 3. Commericial paper

I, II, and III

Identify which of the following statements regarding money market deposit accounts (MMDAs) are NOT correct. They are FDIC insured. They offer unlimited check writing privileges. They are primarily offered by open-end investment companies. They require a minimum balance.

II and III

Which of these describe similarities between preferred stock and long-term bonds? Both dividends and interest are tax-deductible expenses for the issuing corporations. Both generally pay a fixed periodic payment. Both preferred dividends and interest must be paid before common stock cash dividends are paid.

II and III

Which of the following statements assessing derivative securities is CORRECT? I. A call option is at the money when the exercise price is less than the market price of the stock. II. A put option is at the money when the exercise price is greater than the market price of the stock. III. Buyers of calls are betting that the price of the underlying common stock will rise, making the call option more valuable. IV. Put buyers are betting that the price of the underlying common stock will decline, making the put option more valuable.

III and IV are correct. Statements I and II are incorrect because both call and put options are at the money when the exercise price equals the market price of the stock.

Characteristics that apply to eurodollars:

Interest earned is taxed as ordinary income in the year received Maturities of less than six months Dollar-denominated deposits

Which of the following risks relating to fixed-income investments have an offsetting effect on one another?

Interest rate risk and reinvestment rate risk

The Mountain Fund has a standard deviation of 22, a mean return of 15%, and a correlation coefficient with the S&P 400 Mid-Cap Index of 0.85. Mountain Fund is subject to how much systematic risk?

R-squared gives us the amount of systematic risk, and we have been given R (correlation coefficient). So, we square 0.85 to come up with an R-squared of 0.7225, or 72%.

Barbara, a Louisiana resident, is in the 35% marginal federal income tax bracket and the 6% marginal state income tax bracket. Select the bond that would provide Barbara with the highest after-tax rate of return.

Louisiana municipal bond with a coupon rate of 5.5% U.S. Treasury bond (exempt from state income tax): 6% × (1 - 0.35) = 3.90% Corporate bond: 8% × [1 - (0.35 + 0.06)] = 4.72% Texas municipal bond (exempt from federal income tax): 5.8% × (1 - 0.06) = 5.45% Louisiana municipal bond (exempt from both federal and state income tax): 5.5%

To immunize a bond portfolio over a specific investment horizon, an investor would do which of the following?

Match the average weighted duration of the bond portfolio to the investment horizon.

The Finite Mutual Fund has a correlation coefficient of 0.90 with the S&P 500 Index. How much of the price movement of the Finite Mutual Fund is explained by the S&P 500 Index?

R-squared gives us the amount of systematic risk, and we have been given R (correlation coefficient). So, we square 0.90 to come up with an R-squared of 0.81, or 81%.

Choose the risk that is attributable to cash and cash equivalents.

Purchasing power risk Cash and cash equivalents are subject to purchasing power (inflation) risk because they offer limited potential for growth.

Lloyd is a dealer in government securities. He has purchased government securities from another dealer, Fred, and has agreed to sell them back at a later date. From Lloyd's perspective, which transaction has been executed?

Reverse repurchase agreement

Richard has become very interested in the stock market and enjoys spending his spare time researching companies in the medical field. He believes studying and analyzing the industry, combined with his advanced exposure to trends and new innovations in medicine, will give him an advantage in achieving superior performance in medical stock investment opportunities. Choose the form of the efficient market hypothesis (EMH), if any, that Richard is considered subscribing to.

Richard is subscribing to the weak form of the EMH because he believes fundamental analysis and insider information will yield superior performance.

Select the type of mutual fund that generally focuses its investment objective in a narrow area such as natural resources, technology, or health care.

Sector funds sector funds tend to limit their investments to one sector of the economy, such as natural resources, technology, or health care.

Which of the following terms is considered early-stage business funding for the purpose of research and development of an idea?

Seed financing

George owns 1,000 shares of XYZ stock. Based on recent analyst projections and George's own research, he believes XYZ's price will remain flat over the next few months. Accordingly, which strategy would George likely employ if one of his objectives was to increase his portfolio's income stream?

Sell 10 XYZ call option contracts This is known as the covered call strategy and is used to increase the income of the portfolio when the price of the underlying stock is expected to remain flat for a period of time. Assuming the price of the underlying stock continues to remain flat, there is little chance of the option being exercised and the stock being called away.

Which of the following bond strategies should not be recommended if an investor expects interest rates to increase?

Sell low-duration bonds and buy longer duration bonds.

A client has $12,000 of capital gains and $15,000 of capital losses. How much unused loss is carried forward to the following tax year?

The answer is $0. After netting capital gain and losses, the client has a net capital loss of $3,000. Because $3,000 of net losses can be deducted during any one tax year, there is no carryforward.

Your client purchased the Zenith Fund three years ago at $13.16. Here are the year-end prices of the fund up until today: 20X7 $14.21 20X8 $15.86 20X9 $14.78 What is the geometric return of Zenith Fund for this three-year period?

The $13.16 has grown to $14.78 over a three-year period, so ($13.16) is the PV: $14.78 FV, 3 N, and solve for I/YR, which equals 3.95%.

Which of the following is an example of technical analysis?

The 39-week moving average is one technical indicator.

Roger is interested in purchasing a commercial real property investment currently offered for $2 million. he will finance the investment by taking out a $1.5 million loan, on which the debt service will be $9,000 per month. The real property will be depreciated using the straight-line depreciation method at $6,000 per month. Roger has determined that the gross rental receipts from the property will be $25,000 per month and that the vacancy and collection losses will be estimated at 5% of potential gross income . Operating expenses will be $12,000 per month. hat is the monthly NOI of Roger's potential investment?

The answer is $11,750. The monthly NOI of Roger's potential commercial real property investment is $11,750, computed as follows: Gross rental receipts: $25,000 − vacancy and collection losses (5% of PGI, or $1,250) = effective gross income: $23,750 − operating expenses (*$12,000) = NOI of $11,750 *Operating expenses do not include debt service or depreciation expense.

A client is considering the purchase of a $25 par preferred stock to add income to his portfolio. The stock has an 8% stated annual dividend rate and will never change. The investor's discount rate is 12%. What is the most the investor should pay for this stock?

The answer is $16.67. The zero growth or dividend in perpetuity formula would apply: 8% of $25 par is $2.00, so $2.00 ÷ 0.12 = $16.67

CAR stock is currently paying a dividend of $1 per share. Assume the stock's dividend is expected to grow for three years at 5% per year. After three years, the dividend is expected to grow at a constant 2% rate. The investor's required rate of return is 8%. What is the intrinsic value of CAR stock?

The answer is $18.45. This is found by using the multistage growth dividend discount model, which shows the intrinsic value of CAR stock is $18.45. 1. Compute the value of each future dividend until the growth rate stabilizes (Years 1-3). D1 = $1.00 × 1.05 = $1.05 D2 = $1.05 × 1.05 = $1.10 D3 = $1.10 × 1.05 = $1.16

Chuck owns a convertible bond that has a conversion price of $40 per share and a coupon of 5.5%. Interest is paid semiannually. The current market price of the stock is $41 per share. The investment value of the bond is $940, and the bond currently sells for a market price of $1,120. What is the downside risk of this bond?

The answer is $180. The downside risk of a convertible bond is the dollar or percentage decline from the current market price of the convertible bond to the investment value of the bond: $1,120 - $940 = $180.

Caralla Foods produced before-tax earnings of $15 million last year. A large institutional investor has determined an appropriate capitalization for valuing this company is 8%. In addition, the risk-free rate of return is 5%. Based on this information, calculate the value of Caralla Foods using the discounted earnings model.

The answer is $187,500,000. The formula for the discounted earnings model: V = E ÷ RD = 15,000,000 ÷ 0.08 = 187,500,000 Using the discounted earnings method produces a current corporate valuation of $187,500,000.

George Jones owns a convertible bond that has a conversion price of $50 per share and an annual coupon rate of 6.0%. Interest is paid semiannually. The current market price of the stock is $51 per share. The investment value of the bond is $890, and the bond currently sells for a market price of $1,080. What is the downside risk of this bond?

The answer is $190. The downside risk of a convertible bond is the dollar or percentage decline from the current market price of the convertible bond to the investment value of the bond: $1,080 - $890 = $190.

Your client, Ralph, has $15,000 of capital gains and $20,000 of capital losses in the current tax year. How much unused loss may Ralph carry forward to the following tax year?

The answer is $2,000. After netting capital gain and losses, the client has a net capital loss of $5,000. Because $3,000 of net losses can be deducted during any one tax year, the client will carry over the remaining $2,000 capital loss.

Jeff is interested in BEC stock. BEC's earnings and dividends are expected to grow at a constant rate of 6% per year for the foreseeable future. If Jeff's required rate of return is 11%, what is the intrinsic value of BEC stock if it is currently paying a dividend of $1.20

The answer is $25.44. This is found by using the constant growth dividend discount model: intrinsic value = D0(1 + g) ÷ (r - g) = $1.20(1.06) ÷ (0.11 - 0.06) = $25.44.

An investor sells (writes) a call option with an exercise price of $45 on abc stock for $2.50. The option expires when the stock is trading at $44.50. what is the investor's gain or loss?

The answer is $250 gain. This option was allowed to expire because it was out of the money. When the option expires, the investor's gain is the amount of premium received, or $250 ($2.50 × 100 shares). Recall each option contract represents 100 shares of underlying stock.

Assume that Zephyr stock pays a dividend in the current year of $1.75 per share and that the dividend is expected to grow by 2% per year. Calculate the price of the stock assuming an investor has a required rate of return of 8%.

The answer is $29.75. The formula for the constant growth dividend discount model: V = D1 ÷ (r - g) Therefore the intrinsic value of ADM stock equals $29.75 [(1.75 × 1.02) ÷ (0.08 - 0.02)].

Brandon is considering selling a piece of residential real estate that he has owned for 12 years. The apartment complex consists of 100 units with an average rental rate of $400 per month. Laundry and parking gross potential income is $20,000 per year. The vacancy rate is 7%, and operating expenses are 30% of potential gross income (I). Brandon takes $40,000 of depreciation each year, and his mortgage costs $6,000 per month. If the capitaliation rate for comparable properties is 9%, what should be the selling price for Brandon's property

The answer is $3,500,000. PGI = $400 per month × 100 units × 12 months + $20,000 (laundry and parking) = $500,000. Net income after vacancy and expenses = $500,000 × [1 − (0.07 + 0.30)] = $500,000 × 0.63 = $315,000. Sales price = $315,000 ÷ 0.09 = $3,500,000. Depreciation and financing expenses are not considered

Norma owns ABC Corporation bonds of AA rated quality that mature in seven years, pay semiannual interest, and have a coupon of 8%. Similar bonds (AA rated, seven years to maturity) yield 9%. The ABC Corporation bonds are convertible into common stock at $26 per share, and the current market price of ABC common stock is $23. What is the conversion value of an ABC Corporation bond?

The answer is $884.61. The conversion value = conversion ratio × market price of common stock. Therefore, the conversion value equals ($1,000 ÷ $26) × $23 = $884.61.

Consider CPM stock with a current dividend of $1.05 per share and a market price of $46.65 per share. The current dividend is expected to grow for three years at a rate of 2% and then 3% thereafter. Assume the required rate of return is 6%. Using the multistage growth dividend discount model, calculate the intrinsic value of CPM stock. (Round all numbers to the nearest cent.)

The answer is $34.82. Compute the value of each future dividend until the growth rate stabilizes (years 1 through 3). D1 = $1.05 × 1.02 = $1.07 D2 = $1.07 × 1.02 = $1.09 D3 = $1.09 × 1.02 = $1.11 Use the constant growth dividend discount model to compute the remaining intrinsic value of the stock at the beginning of the year when the dividend growth rate stabilizes (year 4). D4 = $1.11 × 1.03 = $1.14 V = $1.14 ÷ (0.06 - 0.03) = $38.00 Use the uneven cash flow method to solve for the net present (intrinsic) value of the stock. CF0 = $0 CF1 = $1.07 CF2 = $1.09 CF3 = $1.11 + $38.00 = $39.11 I/YR = 6% Solve for NPV = 34.8170, or $34.82

Your client purchased 100 shares of FAQ stock at $60 per share with a 50% initial margin percentage and a 35% maintenance margin requirement. If the stock drops to $40 per share, how much money does your client need to deposit to meet the required equity amount in the margin accoun

The answer is $400. Calculate as follows: Value: $40 × 100 shares = $4,000 Loan amount: $6,000 × 0.50 = ($3,000) Actual equity: $1,000 Required equity: $4,000 × 0.35 = ($1,400) Cash deposit needed: $400

The answer is $41.54. The client will receive a margin call when the price of the stock drops below $41.54, calculated as follows: Margin call = ($60 × 0.45) ÷ (1 - 0.35) Margin call = $27.00 ÷ 0.65 = $41.5385, or $41.54

On December 17, 2020, Henry sells XYZ stock for a loss at $25 a share that he originally purchased for $42 per share. On January 4, 2021, he repurchases the shares for $26 per share. What is his cost basis on the repurchased shares?

The answer is $43. This is a wash sale because the shares were repurchased within 30 days of their sale. The loss is then disallowed for tax purposes, and the disallowed loss is added to the repurchase price to determine the new cost basis ($42 - $25 = $17 disallowed loss, so $17 + $26 = $43 new cost basis).

Amelia is considering buying shares of HSO stock valued at $50 per share. She forecasts the stock to trade in excess of $75 per share over the next three years. During this time, she expects to receive annual dividends of $4.50 per share. Given a 10% required rate of return, calculate the intrinsic value of the stock.

The answer is $45.00. The intrinsic value of the stock is $45, using the perpetuity dividend discount model, calculated as follows: $4.50 ÷ 0.10 = $45.

On December 18, 20X1, John sells some stock for a loss at $15 a share that he originally purchased for $40 per share. On January 9, 20X2, John repurchases the shares for $22 per share. What is his cost basis on the repurchased shares?

The answer is $47. This is a wash sale because the shares were repurchased within 30 days of their sale. The loss is then disallowed for tax purposes, and the disallowed loss is added to the repurchase price to determine the new cost basis. $40 - $15 = $25 disallowed loss, so $25 + 22 = $47 new basis.

Kinzie owns a stock that consistently pays a $.50 dividend. Assuming Kinzie's required rate of return is 9.5%, calculate the intrinsic value of the stock.

The answer is $5.26. Using the no-growth (perpetuity) dividend discount model: V = D1 ÷ r = 0.50 ÷ 0.095 = 5.2632, or $5.26

Robert wishes to short ABC stock. He places a market order to sell short 100 shares of ABC stock, and the order is filled at a price of $45 per share. If Robert later buys 100 shares of ABC stock at $40 per share, what is his gross profit, if any

The answer is $500. Robert will make $500 on the shares of ABC stock that he sells short, calculated as follows: $45 proceeds - $40 cost = $5 gain × 100 shares = $500.

LFM Corporation has an estimated free cash flow to equity (FCFE) of $2.50 per share in the current year. Moreover, its FCFE is expected to grow at a constant rate of 2% per year. Assuming an institutional investor has a required rate of return of 6.5%, calculate the intrinsic value of LFM stock.

The answer is $56.67. The formula for the discounted free cash-flow model: V = FCFE1 ÷ (r - g) = ($2.50 × 1.02) ÷ (0.065 - 0.02) = 2.55 ÷ 0.045 = 56.6667, or $56.67

An analyst's report on Derjet Industries has provided the following corporate information: Total assets $100,000,000 Total equity$50,000,000 Net income$12,500,000 Earnings per share $3.50P/E ratio2.2 Dividend growth rate 1.65% Assuming an investor has a required rate of return of 15%, calculate the maximum price that should be paid for this stock in the secondary market.

The answer is $7.70. Calculate the intrinsic value of the stock using EPS and the P/E ratio, which is $7.70 ($3.50 × 2.2).

Today, a U.S. Treasury STRIP (Separate Trading of Registered Interest and Principal of Securities) bond has been created with a $100,000 par value, seven-year, 3% Treasury note. Assuming prevailing seven-year market rates are 4%, calculate the market value of the principal unit (rounded to nearest dollar).

The answer is $75,992. If prevailing market interest rates are 4%, the principal unit is priced as follows: 100,000 = FV 7 = N 4 = I/YR 0 = PMT Solve for PV = 75,991.7813, or $75,992 LO 2.1.1

Ellen purchased a BB rated convertible bond of TCD Corporation that has a 10% coupon and matures in nine years. Comparable debt (BB rated, nine years to maturity) yields 12%. The bonds are convertible at $32 per share of common stock, and the current market price of TCD common stock is $25. What is the conversion value of this bond?

The answer is $781.25. The conversion value = conversion ratio × market price of common stock. Therefore, the conversion value equals ($1,000 ÷ $32) × $25 = $781.25.

Lawrence purchases a 20-year corporate bond with a coupon rate of 7.5% paid semiannually. Assuming the comparable yield for this type of bond is 9.5%, calculate the intrinsic value of his bond.

The answer is $822.37. Intrinsic value: END Mode, 2 P/YR 20, DOWNSHIFT, N = 40 I/YR = 9.5 PMT = 37.50 (7.5% × 1,000 ÷ 2) FV = 1,000 Solve for PV = 822.37 or $822.37.

The answer is 1 only. Bond 1's YTM (9.32%) is higher than Bond 2's YTM (8.26%) For both calculations, END Mode, 2 P/YR. Bond 1: PV = -850 FV = 1000 PMT = 30 (6% × $1,000 ÷ 2) 6, DOWNSHIFT, N = 12 Solve for I/YR = 9.32% Bond 2: PV = -1100 FV = 1000 PMT = 50 (10% × 1,000 ÷ 2) 8, DOWNSHIFT, N = 16 Solve for I/YR = 8.26%.

Top-down analysis includes which of these? 1. Economic and market factors 2. Industry analysis 3. Company analysis

The answer is 1, 2, AND 3 . Top-down analysis includes all these elements. Top-down analysis allows investors to look at the big picture first and then work their way down to the details.

XYZ Company issued a series of bonds 20 years ago. The bonds originally sold at par, have a 6.25% coupon rate (paid semiannually), and mature in 30 years. Five years after issue, the prevailing market interest rate for similar type bonds was 5.15%. Based on this information, identify which of the following statements are CORRECT. 1. The bond's yield to maturity at issue was 6.25%. 2. The bond's price five years after issue was $1,153.68. 3. The current yield of the bond five years after issue was 5.42%. 4. The bond was selling at a discount in the secondary market five years after issue.

The answer is 1, 2, and 3.. Because the bond was selling for a price exceeding the par value, the bond was trading at a premium. A bond selling for par at issue will have a yield to maturity equal to the annual coupon rate. Statement II: END Mode, 2 P/YR FV =1,000 PMT = 62.50 ÷ 2 = 31.25 25, DOWNSHIFT, N = 50 I/YR = 5.15 Solve for PV = 1,153.68, or $1,153.68 Statement III: Current yield = $62.50 ÷ $1,153.68 (found in Statement II) Current yield = 0.0542, or 5.42%

John is traveling to Europe and has $2,000 that he wants to convert to euros. The current exchange rate is 0.68 euros per $1. How many euros will John receive in this exchange?

The answer is 1,360 0.68, gold, 1/x = $1.4706 Then, $2,000 ÷ $1.4706 = 1,360 euros, or $2,000 × 0.68 = 1,360 euros.

Keegan is an analyst for Global Growth and Income Mutual Fund. For the past five years, the fund has returned -20%, 17%, 5%, 15%, and -7%, respectively. Calculate the geometric mean of these returns. A) 2.0000% B) 5.1105% C) 1.0018% D) 1.0221%

The answer is 1.0018%. The geometric mean return is calculated as follows: PV = -1 FV = (1 - 0.20)(1 + 0.17)(1 + 0.05)(1 + 0.15)(1 - 0.07) = 1.0511 N = 5 Solve for I/YR = 1.0018, or 1.0018%

Assume your client's portfolio contains these: $20,000 of Stock A with a beta of 0.90 $50,000 of Stock B with a beta of 1.20 $30,000 of stock C with a beta of 1.10 What is the beta coefficient for this portfolio?

The answer is 1.11. Calculated as follows: 0.20 × 0.90 = 0.18 0.50 × 1.20 = 0.60 0.30 × 1.10 = 0.33 0.18 + 0.60 + 0.33 = 1.11 Using the HP 10bII+: 0.9, INPUT, 20,000, Σ+ 1.2, INPUT, 50,000, Σ+ 1.1, INPUT, 30,000, Σ+ SHIFT, 6 key (x̅w,b) = 1.11

What is the weighted average beta of a portfolio with 20% in Stock A with a beta of 0.9, 50% in Stock B with a beta of 1.2, and 30% in Stock C with a beta of 1.1?

The answer is 1.11. Keystrokes are 0.9, INPUT, 20, ∑+, 1.2, INPUT, 50, ∑+, 1.1, INPUT, 30, ∑+, SHIFT, 6 (alternate function is weighted average) = 1.11.

Gary Stevens would like to know the weighted beta for his portfolio. He owns 100 shares of ACE common stock with a beta of 1.1 and total current market value of $5,000; 400 shares of BDF common stock with a beta of 0.70 and total current market value of $8,000; and 200 shares of GIK common stock with a beta of 1.5 and total current market value of $10,000. What is the overall weighted beta coefficient for Gary's portfolio?

The answer is 1.13

Brenda is interested in calculating the inflation-adjusted rate of return of a recent investment. Assuming the after-tax return on her investment is 6.25% and the inflation rate is 5%, calculate the inflation-adjusted rate of return.

The answer is 1.19%. The inflation-adjusted rate of return is calculated as follows: [(1.0625 ÷ 1.05) − 1] × 100 = 1.19%

A stock that you are researching has an expected return of 22%, a beta of 1.2, a correlation coefficient of 0.65 with the Russell 2000, an R2 of 0.38 with the S&P 500, and a standard deviation of 28%. Which one of these is the stock's coefficient of variation?

The answer is 1.27. CV = standard deviation of asset ÷ expected return of asset, 28% ÷ 22% = 1.27.

Mark owns a corporate bond with a coupon rate of 6.78%. Assume the annual inflation rate is 2.5% and he is in the 35% federal marginal income tax bracket. Calculate his after-tax, inflation-adjusted rate of return on this bond. A) 1.50% B) 1.86% C) 2.04% D) 4.17%

The answer is 1.86%. First, calculate Mark's after-tax rate of return on the corporate bond [0.0678 × (1 - 0.35)] = 0.04407, or 4.41%. Next, calculate the after-tax, inflation-adjusted rate of return {[(1 + 0.0441) ÷ (1 + 0.025)] - 1} × 100 = 1.8634, or 1.86%.

The yield to maturity on a zero-coupon bond ($1,000 par value) currently selling at $677 and maturing in four years is approximately A) 15.00% B) 37.48% C) 10.00% D) 4.00%

The answer is 10.00%. Solve for yield to maturity: END Mode, 2 P/YR PV = −677 FV = 1,000 PMT = 0 4, DOWNSHIFT, N = 8 Solve for I/YR = 10% (rounded).

What is the internal rate of return (IRR) on an investment that was purchased for $10,000, generated income at the end of Year 1 of $600, required an additional expenditure at the end of Year 2 of $300, and was sold at the end of Year 3 for $13,000?

The answer is 10.24%. Using the HP 10bII+: CF0 = (10,000) CF1 = 600 CF2 = (300) CF3 = 13,000 Solve for IRR/YR = 10.2432, or 10.24%.

Which of the following statements about the efficient market hypothesis (EMH) and associated anomalies are CORRECT? 1. An investor purchasing a high price-to-earnings (P/E) ratio is exploiting the P/E effect anomaly. 2. An investor studying annual reports and analysts' reports in his stock selection process believes that markets are weak-form efficient. 3. An investor who buys the securities of firms that are not followed by many analysts is trying to benefit from the neglected-firm effect. 4. An investor who befriends the chauffeur of a firm's CEO to solicit information about the firm's plans before making investment decisions believes the markets are strong-form efficient.

The answer is 2 and 3. The P/E effect suggests that portfolios consisting of stocks with low price-to-earnings ratios have higher average returns than do portfolios consisting of stocks with high P/E ratios. Strong-form market efficiency suggests that all public and private information is included in market prices. A person who solicits private information believes that it is possible to profit by making trading decisions based on private information and does not believe that the markets are efficient in the strong form. Weak-form efficiency suggests that all historical price and volume information is included in stock prices but that gains may be made by analyzing other publicly available information. An investor studying annual reports and analysts' reports to make stock selections indicates that the person is conducting fundamental analysis, because the investor believes that the markets are weak-form efficient.

The weak form of the efficient market hypothesis: reinforces the value of technical analysis. implies that technical analysis is not worthwhile. implies that fundamental analysis is not worthwhile. implies that inside traders cannot earn superior risk-adjusted returns.

The answer is 2 only. The weak form implies that information contained in historical stock prices is fully incorporated into current stock prices; therefore, technical analysis (the study of historical prices and volume) is not worthwhile in predicting future prices. This form neither refutes fundamental analysis nor implies that traders using insider information cannot earn superior profits.

TLP stock sells for $40 a share and pays an annual dividend of $2.75, which is expected to increase 5% annually. An investor has a required rate of return of 13%. Which of the following conclusions about TLP stock can be drawn? 1. It is undervalued. 2. It has an intrinsic value of $36.09. 3. It is overvalued. 4. It has an expected rate of return of 12.2%.

The answer is 2, 3, and 4. The constant growth dividend discount model may be used as follows: V = D1 ÷ (r - g) = (2.75 × 1.05) ÷ (0.13 - 0.05) = 2.8875 ÷ 0.08 = 36.09, or $36.09 With an intrinsic value that is less than the current market price, the stock would be considered overvalued and not worthy of a purchase. With option IV, the expected return is lower than the required return. In order to calculate the expected return, we can solve for it using the following steps: $40 = 2.8875 ÷ (x - 0.05) $40 (x - 0.05) = 2.8875 $40x - 2 = 2.8875 $40x = 4.8875 x = 4.8874 ÷ $40 = 0.1222, or 12.2%

DMM stock has a P/E ratio of 12 and is expected to have an expected growth rate of earnings of 6%. Based on this information, calculate the PEG ratio of DMM stock.

The answer is 2. The PEG ratio is calculated by dividing a company's P/E ratio by the firm's expected growth rate of earnings: PEG = P/E ÷ g. Therefore, the PEG of DMM stock is 2 (12 ÷ 6). DMM's ratio would then be compared to its peers to determine whether the stock is a good buy.

Carolyn owns a corporate bond with a coupon rate of 3.60%. Currently, the inflation rate is 1.50%. Calculate the real rate of return on this bond. A) 2.07% B) 2.10% C) 3.60% D) 5.10%

The answer is 2.07%. The real rate of return on this bond is calculated as follows: [((1 + 0.036) ÷ (1 + 0.015)) - 1] × 100 = 0.0207 × 100 = 2.07%

Kumar purchased 100 shares of YTR stock from his broker. He earned returns of 7%, -3%, 8%, -10%, and 12% in years 1 through 5 respectively. Calculate Kumar's geometric mean return on his investment over the five-year period.

The answer is 2.47%. First, calculate the future value per $1 of Kumar's investment: (1.07)(0.97)(1.08)(0.90)(1.12) = 1.13. Next, calculate the geometric mean: PV = -1, FV = 1.13, N = 5, solve for I/YR = 2.4745, or 2.47%.

Johnny owns a municipal bond with a coupon rate of 4.25%. Assuming the annual inflation rate is 1.65%, calculate Johnny's real rate of return on his bond. A) 4.25% B) 2.56% C) 2.60% D) 1.58%

The answer is 2.56%. Johnny realized a real rate of return of 2.56%. Real rate of return = {[(1 + 0.0425) ÷ (1 + 0.0165)] - 1} × 100 = 2.5578, or 2.56%.

Kellie purchased a five-year bond with a coupon rate of 2.50% paid semiannually. The bond has a current market price of $985. Calculate the yield to maturity (YTM) for Kellie's bond.

The answer is 2.8238%. The bond's YTM is calculated as follows: END Mode, 2 P/YR PV = −985 FV = 1,000 PMT = 2.50% × 1,000 × 2 = 12.50 5, DOWNSHIFT, N = 10 Solve for I/YR = 2.8238% The YTM for Kellie's bond is higher than its coupon rate because the bond is trading at a discount.

Assume a 3-year, $1,000 par value corporate bond is currently trading for $959.53. The bond has a coupon rate of 4% (paid once per year) and a yield to maturity of 5.50%. Calculate the duration for this bond.

The answer is 2.8835 years. The duration for this bond is 2.8835 years, calculated as follows: Year Cash Flow(CF) Present Value(PV) of CF PV × Year 1 40.00 37.91 37.91 2 40.00 35.94 71.88 3 1,040.00 885.68 2,657.04 Totals 959.53 2,766.83 To solve for the PV of a given CF (example Year 1): FV = 40, N = 1, PMT = 0, 5.5 = I/YR, solve for PV. Divide the sum in the last column (2,766.83) by the total PV/market price of the bond (959.53) to derive the duration of 2.8835 years.

Myles purchased 1,000 shares of XYZ growth fund for $15 per share. At the end of the two years, he sold all of the shares for $22 per share. At the end of each year, the fund paid a dividend of $0.50 per share. Calculate the fund's time-weighted return over the two-year period.

The answer is 24.15%. The fund produced a 24.15% time-weighted rate of return over the two-year period, calculated as follows: CF0 = -15 × 1,000 = −15,000 CF1 = 0.50 × 1,000 = 500 CF2 = (0.50 × 1,000) + (22 × 1,000) = 22,500 Solve for the internal rate of return (IRR/YR) = 24.1525% (rounded to 24.15%)

Given a required rate of return of 8%, a growth rate of 4%, a beta of 1.25, and a standard deviation of 2.5%, calculate the price-to-free-cash flow for this particular investment.

The answer is 26.0. The formula for price-to-free-cash flow: P/FCF = (1 + G) ÷ (r - g) = (1 + 0.04) ÷ (0.08 - 0.04) = 1.04 ÷ 0.04 = 26.0 After calculating this ratio, an investor would compare this P/FCF to other investments to see whether a purchase is warranted.

Which of these are characteristics of foreign currency exchange? I. When a strong foreign currency is converted into U.S. dollars, more dollars are received than if the foreign currency had stayed stable or declined. II. An increase in the supply of a currency results in its devaluation. III. A U.S. investor in foreign assets would want the U.S. dollar to strengthen against foreign currencies after the assets are purchased. IV. When the U.S. dollar weakens against a foreign currency, the total return increases to a U.S. investor holding stocks denominated in that currency.

The answer is I, II, and IV. When an investor has money invested in a foreign stock, the investor should want the dollar to decline relative to the foreign currency so that a currency gain occurs in addition to the security gain. Currencies are subject to the same supply/demand rules that apply to goods and services and to the money supply. Increasing supply results in decreasing price of the currency.

Which of following are reasons why an investor would choose stocks over bonds? I. A stockholder is not entitled to share in the earnings of the company. II. Bondholders do not have an ownership interest in the company. III. A stockholder has the right above a bondholder to assets of the corporation in case of liquidation. IV. A stockholder is entitled to a proportionate share of the assets of the company

The answer is II and IV. A stockholder is entitled to share in the earnings of the company. A bondholder has the right above a stockholder to assets of the corporation in case of liquidation.

Which of the following statements regarding the efficient market hypothesis (EMH) is CORRECT? I. The EMH suggests that active management should be used. II. Under the EMH, all publicly known information is incorporated into security A) Both I and II B) II only C) Neither I nor II D) I only

The answer is II only. The EMH suggests that passive, not active, management should be used.

The weak form of the efficient market hypothesis I. reinforces the value of technical analysis. II. implies that technical analysis is not worthwhile. III. implies that fundamental analysis is not worthwhile. IV. implies that inside traders cannot earn superior risk-adjusted returns. A) II and III B) II only C) I, III, and IV D) I and IV

The answer is II only. The weak form implies that information contained in historical stock prices is fully incorporated into current stock prices; therefore, technical analysis (the study of historical prices and volume) is not worthwhile in predicting future prices. This form neither refutes fundamental analysis nor implies that traders using insider information cannot earn superior profits.

Identify which of these statements concerning technical analysis is CORRECT. I. Technical analysis is focused on the process by which stock prices rapidly adjust to new information. II. Technical analysis is based on the underlying fundamentals of a stock's value. III. The focus of technical analysis is market timing with an emphasis on price changes. IIV. Technicians concentrate on past stock price movements to forecast future stock price movements.

The answer is III and IV. Statements I and II are incorrect. Fundamental analysis is based on the underlying fundamentals of a stock's value. Technicians concentrate on the short run, looking for short-term price movements. The focus of technical analysis is the gradual process whereby stock prices adjust to new information. Technical analysis involves analyzing past stock prices to forecast future prices.

Identify which of these statements regarding option pricing models is CORRECT. 1. The binomial option pricing model assumes that the price of the option will change constantly because the market price of the underlying security also changes constantly. 2. The Black-Scholes option valuation model is designed to determine the price of an American call option. 3. The Black-Scholes option valuation model assumes that the price of the option will change in discrete increments on the basis of movements (up or down) in the price of the underlying stock. 4. The binomial model assumes the call option being valued has an exercise price of $100.

The answer is IV only. The Black-Scholes option valuation model assumes that the price of the option will change constantly because the market price of the underlying security also changes constantly and is designed to determine the price of a European call option. The binomial option pricing model assumes that the price of the option will change in discrete increments on the basis of movements (up or down) in the price of the underlying stock.

During his next meeting with his financial advisor, Zachary would like to compare the performance of his international investments against a benchmark. Select the appropriate benchmark to use for this comparison. A) Wilshire 5000 Index B) Dow Jones Industrial Average C) MSCI EAFE Index D) S&P 500 Index

The answer is MSCI EAFE Index. The MSCI EAFE Index is used as a measure of the international securities markets. The other choices are not used to measure international investments, rather, they are used as benchmarks for domestic issues.

Which of the following would be an appropriate index to track an investment in an international developed markets mutual fund?

The answer is MSCI EAFE. The MSCI EAFE Index tracks markets in Europe, Australasia, and the Far East (primarily Japan).

Which of the following would be an appropriate index to track an investment in an international developed markets mutual fund? A) MSCI EAFE B) Russell 2000 C) IFC Investable D) IFC Emerging Markets Free Global

The answer is MSCI EAFE. The MSCI EAFE Index tracks markets in Europe, Australasia, and the Far East (primarily Japan).

The current risk-free rate of return is 4%, and the market risk premium is 5%. One stock under consideration for investment has a beta of 1.3. Calculate the expected rate of return for both the market portfolio and the individual stock. A) Market = 10.50%; Stock = 9.00% B) Market = 6.92%; Stock = 11.70% C) Market = 11.70%; Stock = 10.50% D) Market = 9.00%; Stock = 10.50%

The answer is Market = 9.00%; Stock = 10.50%. The expected rate of return for the market portfolio is 9%, calculated as follows: Using the capital asset pricing model (CAPM), rp = 4% + (5% × 1.0). The market has a beta of 1.0 and the market risk premium, rather than the market return, is given. The expected rate of return for the stock is 10.50%, calculated as follows: Using CAPM, ri = 4% + (5% × 1.3) = 10.50%.

Jim is a paper maker who purchases lumber from tree farmers around his state. Which of these hedge positions should Jim consider if he is concerned with rising lumber prices?

The answer is a long hedge; Jim should buy lumber futures contracts to protect against rising lumber prices. A long hedge uses a long futures position to hedge a short position (purchasing lumber).

Adam is trying to evaluate the performance of his portfolio on a risk-adjusted basis. He has a nondiversified portfolio of large-cap stocks. He knows there are different measures of risk-adjusted performance and is not sure which one to use. Which of the following is the most appropriate measure to use? A) Treynor, because when a portfolio represents one subportfolio of a large diversified portfolio, beta is a better measure of risk. B) Sharpe, because when a portfolio represents the entire investment fund, standard deviation is a better measure of risk. C) Sharpe, because it is used to compute alpha by comparing the Sharpe ratio for a portfolio with the Sharpe ratio for the S&P 500. D) Jensen, because it compares a portfolio's return to that of a market index.

Jerry Warner would like to increase his portfolio of common stock. He requires a 13% rate of return on common stock investments. He is considering purchasing one of these stocks: Stock 1: Dividends are currently $3.00 annually and are expected to increase 7% annually; market price = $45 Stock 2: Dividends are currently $2.25 annually and are expected to increase 8% annually; market price = $50 Which stock is most appropriate to purchase in this situation, and why?

The answer is Stock 1, because the return on investment is greater than Jerry's required rate of return. The intrinsic value of Stock 1 = $53.50 [($3 × 1.07) ÷ (0.13 - 0.07)]. Because $53.50 is more than $45, the stock is undervalued and would return more than his required return. The intrinsic value of Stock 2 = $33.50 [($2.25 × 1.08) ÷ (0.13 - 0.08)]. Because $48.60 is less than $50, the stock is overvalued and would return less than his required return.

Al, age 37, wants to add to his common stock portfolio. He wants long-term capital appreciation and requires a 14% rate of return on stock investments. He is considering the purchase of one of these two stocks: Stock 1: Dividends are currently $1.20 annually and are expected to increase 10% annually; market price = $38 Stock 2: Dividends are currently $1.00 annually and are expected to increase 11% annually; market price = $30 Which stock would be most appropriate for Al to purchase at this time, and why?

The answer is Stock 2, because the return on investment is greater than Al's required rate of return. The intrinsic value of Stock 1 = $33 [($1.20 x 1.10) ÷ (0.14 - 0.10)]. Because $33 is less than $38, the stock is overvalued and would return less than his required return. The intrinsic value of Stock 2 = $36.67 [($1.00 x 1.11) ÷ (0.14 - 0.11)]. Because $36.67 is more than $30, the stock is undervalued and would return more than his required return.

Consider this information regarding two possible investments: Stocks J and K. Stock J: Expected return: 11.5% Standard deviation: 8% Stock K: Expected return: 8.2% Standard deviation: 6% Identify which of these investments you would prefer and why.

The answer is Stock J because it has the lowest coefficient of variation. The stock with the lower coefficient of variation (CV) provides the least amount of risk for a given level of return. CV = standard deviation of asset ÷ expected return of asset. Stock J: CV = 0.08 ÷ 0.115 = 0.6957 Stock K: CV = 0.06 ÷ 0.082 = 0.7317

A client has a portfolio of blue-chip stocks that were purchased many years ago by her spouse. The spouse is now deceased and the client is considering her needs for income and feels the dividend yield on the stocks is not sufficient. You have decided she should be in 60% fixed-income. Which of the following sets of factors related to the recommended changes in the portfolio is the most important for the portfolio advisor to review? A) Client goals, cash flows, and legal constraints B) Tax issues, risk tolerance level, and client goals C) Tax issues, liquidity, and legal constraints D) Risk tolerance level, liquidity, and social investing

The answer is Tax issues, risk tolerance level, and client goals. Investments purchased years ago will probably have a low tax basis, which could affect decisions to sell them, or they may have become worthless, in which case they can be used as a tax deduction. Likewise, the risk level of the investment is probably unknown and may not be compatible with the client's risk tolerance level and goals.

which tranche of a collateralized mortgage obligation (CMO) carries the greatest amount of interest rate risk?

The answer is Tranche Z. Tranche Z has the longest repayment period and receives no payments until the other tranches are repaid. Thus, Tranche Z carries the greatest amount of interest rate risk.

CDE Inc. bonds have the following characteristics: 10% coupon $1,000 par value Current price of $1,136.92 Eight years to maturity Callable in five years at $1,100 Calculate the bond's yield to maturity (YTM) and yield to call (YTC).

The answer is YTM: 7.68%; YTC: 8.26% Yield to maturity is calculated as: END Mode, 2 P/YR PMT = 50 FV = 1,000 PV = -1,136.92 8, DOWNSHIFT, N = 16 I/YR (YTM) = 7.68, or 7.68% Yield to call is calculated as: PMT = 50 FV = 1,100 PV = -1,136.92 5, DOWNSHIFT, N =10 I/YR (YTC) = 8.26, or 8.26%

which of the following statements describing the diference between a RELp and a REIT is CORRECT?

The answer is a REIT is a portfolio investment and generates investment income. In contrast, distributions from a RELP are subject to the passive income taxation rules. A RELP is managed by a general partner, whereas a REIT is managed by a board of directors. Some REITs are actively traded on the exchanges.

Dividend reinvestment plans offer which of these advantages?

The answer is a convenient means to accumulate shares. The advantage to an investor is the saving of commissions by using a dividend reinvestment plan (DRIP). The advantage is to an investor, not to the company. The use of a DRIP has no effect on the stock's par value. A dividend reinvestment program has no effect on the company's ability to retain more earnings.

Which of the following correctly describes a lifecycle fund? A) A fund that bases and adjusts its asset allocation on a specific target date at which the investor will retire B) A fund that utilizes sector rotation to adjust the asset allocation based on where the economy is in its "life cycle" C) A fund that bases and adjusts its asset allocation based on the current phase of life of the investor D) A fund that invests in other funds, usually offering three portfolios with different levels of risk, such as conservative, moderate, and growth

The answer is a fund that bases and adjusts its asset allocation on a specific target date at which the investor will retire. This is also known as a target-date fund.

The performance of two growth and income mutual funds is displayed below: ABC Fund XYZ Fund Average annual rate of return 8.65% 6.78% Standard deviation of returns 5.86%9. 98% Beta 0.75 1.00 Assuming a risk-free rate of return of 5%, which of these statements is CORRECT? A) All of these statements are correct. B) The Sharpe ratio for XYZ Fund is 0.1784 and 0.6229 for ABC Fund. C) XYZ Fund has a higher level of systematic risk than ABC Fund. D) Based on the Treynor ratio, ABC Fund has a better risk-adjusted performance than XYZ Fund.

The answer is all of the statements are correct. When compared with another investment, the higher the Treynor ratio, the better the risk-adjusted performance of the asset. Therefore, ABC Fund with a Treynor ratio of 0.0487 has a better risk-adjusted performance than XYZ Fund. XYZ Fund has a beta greater than ABC Fund, indicating a higher level of systematic risk. Calculations: Treynor ratio for ABC Fund is 0.0487 [(0.0865 - 0.05) ÷ 0.75] Treynor ratio for XYZ Fund is 0.0178 [(0.0678 - 0.05) ÷ 1.00] Sharpe ratio for ABC Fund is 0.6229 [(0.0865 - 0.05) ÷ 0.0586] Sharpe ratio for XYZ Fund is 0.1784 [(0.0678 - 0.05) ÷ 0.0998]

Select the CORRECT statement regarding security market indexes and averages. A) All of these statements are correct. B) The S&P 500 Index is used by most professionals as a benchmark for U.S. large-cap equity investments. C) The Russell 2000 Index is used to benchmark small capitalization companies. D) The Wilshire 5000 Index is often used as a measure of the overall market within the United States.

The answer is all of these statements are correct. Averages and indexes are constructed to inform investors about changes in the market. They also serve as benchmarks for the performance of investors' portfolios and the performance of money managers.

Select the CORRECT statement regarding security market indexes and averages. A) The Wilshire 5000 Index is often used as a measure of the overall market within the United States. B) All of these statements are correct. C) The Russell 2000 Index is used to benchmark small capitalization companies. D) The S&P 500 Index is used by most professionals as a benchmark for U.S. large-cap equity investments.

In order to do an effective job of investment counseling, the investment adviser should examine and review the client's 1. financial goals. 2. risk tolerance and risk exposure. 3. tax situation. 4. liquidity and marketability needs.

The answer is all of these. In order to do an effective job of investment counseling, the adviser should examine and review the client's financial goals, risk tolerance and risk exposure, tax situation, liquidity and marketability needs, and financial statements.

Which of the following should be agreed upon between the client and the investment professional when making recommendations based on an investment policy statement? A) Permitted and excluded investments B) Risk tolerance C) All of these D) Return requirement

The answer is all of these. The client and the investment professional should agree on return requirement, risk tolerance, and permissible investments. Other factors to incorporate are liquidity needs, asset allocation, time horizons, tax considerations, and laws and regulations.

One implication of the efficient market hypothesis is that A) technical analysis, when combined with fundamental analysis, can lead to higher investment returns. B) although security markets are efficient, they are not necessarily equally efficient. C) using public information can provide superior investment results. D) nonfinancial markets are efficient.

The answer is although security markets are efficient, they are not necessarily equally efficient.. Markets are efficient when many analysts follow a company, when information about a company is rapidly disseminated, and when no individual investor or analyst has information not readily available to any other investor or analyst. Some markets (e.g., foreign markets) may be less efficient, as may the markets for companies where few analysts follow a company, such as a small company that has few shares available for purchase by large institutional investors.

All of these statements correctly describe international investing except A) an international investor faces the additional risks of foreign currency risk and country risk. B) an emerging market is a market in a highly developed foreign economy with stable political and social institutions. C) international investing offers diversification and potentially higher returns. D) one method to engage in international investing is through American depositary receipts.

The answer is an emerging market is a market in a highly developed foreign economy with stable political and social institutions. Emerging markets are markets in lesser developed countries.

Which of the following would cause the risk premium an investor expects to earn on a stock to increase when using the capital asset pricing model (CAPM)? A) A decrease in covariance B) An increase in standard deviation C) An increase in the correlation coefficient D) An increase in beta

The answer is an increase in beta. All other factors remaining equal, an increase in beta will cause the risk premium to increase. In addition, the resultant expected rate of return will increase.

When analyzing various investment alternatives, investors would generally choose which of these? A) An investment exhibiting a low positive skewness and a leptokurtic distribution B) An investment exhibiting a low positive skewness and a platykurtic distribution C) An investment exhibiting a high positive skewness and a platykurtic distribution D) An investment exhibiting a high positive skewness and a leptokurtic distribution

The answer is an investment exhibiting a high positive skewness and a leptokurtic distribution.

The anticipation of inflation suggests that the investor should A) sell stocks of gold companies. B) anticipate higher interest rates. C) buy bonds. D) avoid real estate investments.

The answer is anticipate higher interest rates. Real assets, which includes gold and real estate, should do well in inflationary times. Bonds do poorly because interest rates will increase to fight inflation, and increases in interest rates cause bond prices to fall.

To evaluate the performance of a portfolio manager, you should calculate the portfolio's A) time-weighted return. B) portfolio return. C) dollar-weighted return. D) holding period return.

The answer is time-weighted return. Because portfolio managers have no control over the deposits and withdrawals made by clients, the time-weighted return is a more appropriate measure of performance.

After suffering an unexpected job loss and losing a $125,000 annual salary, your client, Joe, comes to you to review his asset allocation. In addition to possibly having a prolonged unemployment period, Joe, age 62, would like to retire within eight years. He is concerned about the allocation of the Section 401(k) plan at his prior employer which is 100% invested in an S&P 500 Index fund. The balance of the account is $2,500,000. Based on this information, what should you do next? A) Discuss Joe's risk tolerance and make appropriate changes to his plan's asset allocation. B) Have Joe complete any necessary paperwork to transfer his 401(k) plan assets to an IRA. C) Tell Joe to focus on finding a job and not be concerned with his asset allocation. D) Recommend Joe apply for early Social Security benefits to provide him with income during his job search.

The answer is discuss Joe's risk tolerance and make appropriate changes to his plan's asset allocation. With retirement looming on the horizon, Joe should consider reducing the risk exposure in his retirement plan. Moving the 401(k) to an IRA could be a consideration, but this should not be an immediate planning recommendation. Recommending he take early Social Security benefits may not be prudent due to tax issues and locking in a lower monthly benefit for life.

The Sharpe ratio A) uses the portfolio tracking error. B) does not assume the portfolio is well diversified. C) uses the portfolio's beta. D) assumes the portfolio is well diversified.

The answer is does not assume the portfolio is well diversified. The Sharpe ratio uses standard deviation in its denominator and, therefore, is a catchall formula that may be used to compare the performance of all portfolios whether they are diversified or not.

which of the following describes the flow of the top-down valuation process? A. Economic analysis, industry analysis, company analysis B. Company analysis, industry analysis, economic analysis C. Economic analysis, company analysis, industry analysis D. Picking the best stocks regardless of the industry or economic conditions

The answer is economic analysis, industry analysis, company analysis. Top-down analysis works from the macro to the micro level—economic analysis, industry analysis, company analysi

Interest in gold as an investment increases during periods of which of these?

The answer is economic or political uncertainty. Economic or political uncertainty causes the demand for gold to grow.

In the Markowitz framework, an investor should most appropriately evaluate a potential investment based on its A) required return. B) expected return. C) intrinsic value compared to market value. D) effect on portfolio risk and return.

The answer is effect on portfolio risk and return. Modern portfolio theory concludes that an investor should evaluate potential investments from a portfolio perspective and consider how the investment will affect the risk and return characteristics of an investor's entire portfolio.

The duration of a zero-coupon bond is

The answer is equal to the bond's maturity. The duration of a zero-coupon bond is equal to the bond's maturity.

Andy owns a yen-denominated bond that matures in 15 years. Andy's bond is subject to which one of these combinations of systematic risk?

The answer is exchange rate risk and reinvestment rate risk. Because Andy owns a foreign investment, he would be subject to exchange rate risk. Also, coupon-paying bonds are subject to reinvestment rate risk.

Which of these is NOT a type of unsystematic risk? A) Country risk B) Default risk C) Exchange rate risk D) Financial risk

The answer is exchange rate risk. Exchange rate risk is a type of systematic risk. Systematic risks are those risks that affect the entire market.

An assumption of technical analysis is that market prices: A. exhibit identifiable trends and patterns that persist and repeat. B. are the only information necessary to analyze a freely trading market. C. reflect supply and demand conditions because actual transactions reflect rational decisions by buyers and sellers. D. reflect only irrational investor behavior.

The answer is exhibit identifiable trends and patterns that persist and repeat. Technical analysis assumes persistent trends and repeating patterns in market prices can be used to forecast price behavior. Technical analysts believe prices reflect supply and demand but that buying and selling can be motivated by both rational and irrational causes. Volume, along with price, is important information to a technical analyst.

An investor analyzing a particular security is generally concerned with A) expected return. B) trailing P/E ratio of the stock. C) historical return. D) actual return.

The answer is expected return. Expected return is what determines an asset's value. The expected return must be greater than the investor's required return to induce the investor to make the investment. Historical return is only important to the extent that it may impact future return.

Which of the following statements about the importance of risk and return in the investment objective is least accurate? A) Expressing investment goals in terms of risk is more appropriate than expressing goals in terms of return. B) The return objective may be stated in dollar amounts even if the risk objective is stated in percentages. C) The return and risk objectives have to be consistent with reasonable capital market expectations, as well as the client constraints. D) The investor's risk tolerance is likely to determine what level of return will be feasible.

The answer is expressing investment goals in terms of risk is more appropriate than expressing goals in terms of return. Expressing investment goals in terms of risk is not more appropriate than expressing goals in terms of return. The investment objectives should be stated in terms of both risk and return. Risk tolerance will likely help determine what level of expected return is feasible.

Which of these types of risk is associated with the degree to which a company utilizes debt to finance its operations? A) Business risk B) Default risk C) Financial risk D) Credit risk

The answer is financial risk. Financial risk is associated with the degree to which a company utilizes debt to finance its operations.

Which of the following approaches would be emphasized by an investor who believes in the importance of fundamental security analysis A. Support and resistance levels B. Financial statement review C. The strong form of the ecient market hypothesis (EMH) D. Indexing

The answer is financial statement review. Fundamental analysts attempt to determine the intrinsic value of a security and, therefore, review the financial statements of companies to help them determine this value. If an investor believes in the strong form of EMH, fundamental analysis is of no use. Support and resistance levels are used by technical analysts.

Linda and Ralph Stewart have never invested in the stock market, but they would like to begin an investment program to cover college expenses for their two young children. The Stewarts' required rate of return is 11%. They are considering the purchase of one of these two stocks: Stock 1: Dividends are currently $1.85 annually and are expected to increase 9% annually; market price = $59 Stock 2: Dividends are currently $1.58 annually and are expected to increase 6% annually; market price = $37 Which stock would be most appropriate for the Stewarts to purchase at this time, and why?

The answer is stock 1, because the return on investment is greater than the Stewarts' required rate of return. The intrinsic value of Stock 1 = $100.83 [($1.85 × 1.09) ÷ (0.11 - 0.09)]. Because $100.83 is more than $59, the stock is undervalued and would return more than their required return. The intrinsic value of Stock 2 = $33.50 [($1.58 × 1.06) ÷ (0.11 - 0.06)]. Because $33.50 is less than $37, the stock is overvalued and would return less than their required return.

Unsystematic (unique) risk can be reduced by buying A) stocks in numerous unrelated companies. B) stocks in natural resource companies. C) stock in less-interest-rate-sensitive companies. D) international stocks.

The answer is stocks in numerous unrelated companies.

Your client has established a balanced portfolio with various amounts allocated to different asset classes, and periodically she rebalances the portfolio to keep the same approximate percentages in these asset classes. Her approach is A) strategic asset allocation. B) dynamic asset allocation. C) core-satellite asset allocation. D) tactical asset allocation.

The answer is strategic asset allocation. Strategic asset allocation involves re-balancing back to the original allocation and adjusting the allocation based on changing client circumstances. Tactical asset allocation involves choosing various sectors that you believe will do best, and changing as you believe is necessary. Dynamic asset allocation changes the allocation amounts as the market changes, typically used by institutional investors. Core-satellite asset allocation is a combination of strategic and tactical.

While managing his portfolio, James's investment adviser attempts to take advantage of perceived market inefficiencies. His investment adviser is not concerned with James's long-term goals; rather, the interest lies in continuously changing the investment mix to take advantage of overall investor sentiment. Based on this information, choose the type of portfolio management style that the investment adviser is using to manage James's money. A) Strategic asset allocation B) Tactical asset allocation C) Buy and hold D) Portfolio ratio analysis

The answer is tactical asset allocation. Tactical asset allocation continuously adjusts the asset allocation in an attempt to take advantage of changing market conditions.

An investor who reallocates her portfolio frequently to take advantage of perceived opportunities in other market sectors is using which one of the following types of asset allocation? A) Strategic B) Dynamic C) Passive D) Tactical

The answer is tactical. Reallocating a portfolio frequently to take advantage of perceived under- or overvaluations in a particular market is tactical asset allocation, which is akin to market timing. Strategic asset allocation involves determining the best risk/return portfolio for an investor and then rebalancing to that optimum mix when percentages change due to market movements. The dynamic strategy is used by institutions, and involves increasing risky assets as the portfolio value rises, and decreasing risky assets as the portfolio value declines.

All of the following affect an investor's risk tolerance except A) tax bracket. B) investment time horizon. C) family situation. D) years of experience with investing in the markets.

The answer is tax bracket. Tax concerns play an important role in investment planning; however, these constitute an investment constraint, not an investment objective (i.e., risk tolerance).

All of these correctly express risks associated with an investment in undeveloped land except A)an investment in undeveloped land always guarantees a short-term profit. B)the investor may not be able to obtain permits to build on the land. C)access to the land may be restricted. D)the land may be adversely rezoned.

The answer is that an investment in undeveloped land always guarantees a short-term profit. An investment in undeveloped land is made with the expectation that the land will eventually provide a significant, future capital return over the long run.

In a financial market A) that is efficient, new information will be slowly reflected in securities prices. B) investors who do not believe in the efficient market hypothesis (EMH) will stop seeking undervalued securities. C) investors will take an active investment strategy if they are strong believers in the efficient market hypothesis (EMH). D) that is efficient, the prices of securities will not differ from their justified economic values for any length of time.

The answer is that is efficient, the prices of securities will not differ from their justified economic values for any length of time. An efficient market is a market that quickly reflects all new information. Accordingly, security prices will not depart from their justified economic value for any extended period. Investors who are strong subscribers to the EMH will be passive investors. On the other hand, investors who do not believe in the EMH will become active investors and will seek to identify undervalued securities.

A distribution with a mean that is less than its median most likely

The answer is that the distribution is negatively skewed. A distribution with a mean that is less than its median is a negatively skewed distribution. A negatively skewed distribution is characterized by many small gains and a few extreme losses. Note that kurtosis is a measure of the peakedness of a return distribution. In a symmetrical distribution, the mean, median, and mode are all equal.

A beta coefficient of 1.3 indicates that a stock

The answer is that the stock is more volatile than the market. A beta that is higher than 1.0 indicates that the stock's volatility and risk are higher than that of the market.

According to the arbitrage pricing theory (APT), the return on a stock represents which of the following? A) The APT is not related to the expected return on the stock. B) The APT is reduced through the construction of diversified portfolios. C) The APT depends on the stock's responsiveness to unexpected changes. D) The APT equals the market return if the expected rate of inflation is realized.

The answer is the APT depends on the stock's responsiveness to unexpected changes. The APT is related to the expected return on the stock. The APT is not reduced by the construction of diversified portfolios. The APT does not take into consideration the market return if the expected rate of inflation is realized.

Shannon is evaluating the absolute performance of the Shining Star mutual fund. The return of the fund for the past year was 13%, beta is 1.10, and standard deviation is 23. The market return is 9.5%, and the risk-free rate is 4.5%. Which of the following statements is true? A) The fund's Sharpe ratio is 0.37, meaning this fund should be chosen when compared with another fund with a Sharpe ratio of 0.48. B) The fund's alpha cannot be determined; however, 13% is a good relative return. C) The fund's Treynor ratio is 7.73, meaning the fund manager achieved a 7.73% higher return than required for the amount of risk taken. D) The fund's alpha is +3, meaning that the fund manager achieved a higher return than required for the risk taken.

Mary owns a put option with an exercise price of $20 per share. The option is currently trading for $0.53 and the underlying stock is currently trading for $19.67 per share in the secondary market. Based on this information, select the INCORRECT statement.

The answer is the option is out-of-the-money. The option is in-the-money because the option has a positive intrinsic value. The option has an intrinsic value of $0.33 ($20.00 - $19.67) and a time value of $0.20 ($0.53 - $0.33).

When using a security market index to represent a market's performance, the performance of that market over time is best represented by A) the change in the index value. B) the index value. C) the change in the standard deviation of the index. D) the percent change in the index value.

The answer is the percent change in the index value. Percentage changes in the value of a security market index over time represent the performance of the market, segment, or asset class from which the securities are chosen.

Which of these best describes the concept of asset allocation? A) The process of apportioning assets available for investment among various investment classes B) The process of purchasing securities over time by investing a predetermined amount at regular intervals C) Dividends being automatically invested back into the investment from which they were earned D) A written document that sets forth a client's investment objectives and limitations on the investment manager

The answer is the process of apportioning assets available for investment among various investment classes. Asset allocation is the main determinant of a portfolio's total return. Historically, these investment classes have consisted of cash and cash equivalents, equities (stock), and debt (bonds). However, recently (and more properly), the potential investment classes have been broadened to also include real estate, international investments, collectibles, and precious metals.

If two stocks have positive covariance, which of these statements is CORRECT? A) The two stocks must be in the same industry. B) The rates of return tend to move in the same direction relative to their individual means. C) If one stock doubles in price, the other will also double in price. D) The rates of return tend to move in the opposite direction relative to their individual means.

The answer is the rates of return tend to move in the same direction relative to their individual means. If one stock doubles in price, the other will also double in price is true if the correlation coefficient = 1. The two stocks need not be in the same industry.

If a security has an average return of 14.2% and a standard deviation of 8.4%, then

The answer is the security's returns can be expected to be between 5.8% and 22.6% approximately 68% of the time. This security can be expected to have a return that does not range beyond one standard deviation on either side of its average return approximately 68% of the time.

A Japanese bank has decided to use some of its U.S. dollar reserves, resulting from the U.S. merchandise trade deficit with Japan, to invest in U.S. Treasury bonds. The U.S. Treasury securities pay approximately 6% interest, compared to 2% interest paid on Japanese bonds. For the Japanese bank to retain at least this differential in interest income, which of these situations in the foreign exchange market would have to occur?

The answer is the yen would have to depreciate or remain steady relative to the dollar during the holding period of the bond. When an investor in Country A invests in a security in Country B, the investor benefits if Country A's currency depreciates relative to Country B (or Country B's currency appreciates relative to Country A). Because rising interest rates cause bond prices to decline, the best possible scenario would be for the yen to depreciate and for U.S. interest rates to fall. This would give both a capital gain and a currency gain.

Beverly owns two stocks with a correlation coefficient of zero. Which of these is CORRECT? A) These stocks are well diversified because they will move in unison. B) These stocks are not well diversified because they move in unison. C) These stocks will move independently of each other. D) These stocks are well diversified because as one stock appreciates in value, the other decreases in value.

The answer is these stocks will move independently of each other. A correlation coefficient of zero means that the two stocks will move independently. Because most stocks are positively correlated, a correlation coefficient of zero should provide more diversification benefits than most pairs of stocks.

. Which of the following statements best describes money market mutual funds? A. They allow up to six withdrawals per month and are insured by the FDIC. B. They are an asset that provides a modest rate of return, diversification, and liquidity. C. They are used primarily to finance imports and exports. D. The average maturity date of the investments within these types of funds is 270 days.

The answer is they are an asset that provides a modest rate of return, diversification, and liquidity.

Which of the following statements regarding cash distributions of ordinary and capital gains dividend distributions to mutual fund investors is CORRECT?

The answer is they are fully taxable to the investor. Ordinary and capital gain dividend distributions are taxable. If these distributions are reinvested, the individual receives an increased tax basis. If the distributions are made in cash, there is no increase in the tax basis of the underlying securities.

To evaluate the performance of a portfolio manager, you should calculate the portfolio's

LAC Corporation stock is currently trading for $180 per share. If the company institutes a 3-for-2 stock split, calculate the company's stock price following the stock split.

The company's new stock price will be $120, calculated as follows: $180 ÷ 3 × 2 = $120.

What is the downside risk of a 6% coupon convertible bond currently trading at $1,040 with a maturity of 12 years and a conversion value of $950? The current interest rate on comparable debt is 7.5%.

The downside risk of a convertible bond is the difference between the market price and its investment value. To determine the investment value, calculate what the bond would be worth based just on interest rates. HP 10bII+: END Mode, 2 P/YR 1000 = FV 30 = PMT 12, DOWNSHIFT, N = 24 7.5 = I/YR Solve for PV = $882.66. The current market price of the bond is $1,040, so $1,040 - $882.66 = $157.33. The conversion value, which is higher ($950), is not relevant in determining downside risk.

Currently it costs $1.47 in U.S. dollars to purchase one Eurodollar. If a U.S. investor purchases euros, what would be the result for this investor if the exchange rate were to be 0.70 euros per U.S. dollar when the euros were converted back into U.S. dollars?

The key here is to compare apples to apples and state the currency rate from the same perspective. You are given how many U.S. dollars are needed to purchase a euro ($1.47), so calculate how many euros you would receive for one U.S. dollar: HP 10bII+: $1.47, SHIFT, 1/x = 0.6803 euros per U.S. dollar You are told the rate has changed to 0.70 euros per U.S. dollar, and before it was 0.68 euros per U.S. dollar. This means the investor needs to spend more euros for one U.S. dollar—so the euro is worth less (devaluation), and the U.S. dollar is worth more (revaluation). In order to make money on a currency transaction, the home currency (the U.S. dollar in this case) needs to go down (devaluation), and the foreign currency needs to go up (revaluation). The opposite has happened in this case, so the U.S. investor has lost money because the U.S. dollar has gone up in value (revalued).

A 35-unit apartment complex has 20 one-bedroom and 15 two-bedroom apartments renting for $450 and $600 per month, respectively. Laundry income: $2,000 per year Vacancy and collection losses: 9% of potential gross income (PGI) Operating expenses: Property taxes $16,000 Property insurance $4,000 Management fee $6,200 Utilities $11,700 Accounting/legal $2,400 Advertising/license $2,700 Repairs and maintenance $8,500 Snow removal/security $2,500 Miscellaneous $1,000 No major repairs are expected over the next five years. Cost of the project is $1.7 million. Land is valued at $300,000 and improvements at $1.4 million. Improvements will be depreciated using the straight-line method over 27.5 years. Assume the property is purchased on January 1 of the year so that a full year's depreciation is allowed in year 1. A mortgage of $1.2 million is available at 9% for 30 years (annual payments), fully amortized. The investor's marginal tax bracket is 24%. Calculate the net operating income (NOI) for the apartment complex for the next year.

The key to this problem is to recognize that interest expense and depreciation are not included in expenses when calculating NOI. The calculation is as follows: Gross rental income of $216,000 plus other income of $2,000 equals potential gross income (PGI) of $218,000. Subtract vacancy and collection losses (9%) of $19,620 to arrive at effective gross income of $198,380. Subtract operating expenses of $55,000, resulting in net operating income (NOI) of $143,380.

Identify which of these statements regarding Treasury Inflation-Protected Securities (TIPS) is CORRECT.

The principal value is adjusted for inflation every six months based on the Consumer Price Index (CPI), and one-half of the stated coupon rate is paid semiannually on the inflation-adjusted principal value.

You are comparing two stocks based on the statistics below. Which one is the better investment based on the risk/return relationship? Stock A Stock B Average Return 3.00% 9.00% Standard Deviation 3.95 11.86

The two stocks have equal risk/reward profiles. The coefficient of variation is used to evaluate risk/return and is 3.95 ÷ 3.00 = 1.32 for stock A and 11.86 ÷ 9.00 = 1.32 for stock B, so both are equal in the amount of return relative to the risk.

Which of the following is CORRECT with respect to convertible bonds and convertible preferred stock if the value of the common stock rises?

The value of convertible bonds and convertible preferred stock rises.

What are some characteristics of negotiable certificates of deposit (CDs)?

They are deposits of $100,000 or more placed with commercial banks at a specified interest rate. Negotiable CDs are bought most often by institutional investors rather than by individuals. Negotiable CDs are bought and sold in the secondary market at a market-determined price.

Which of the following is NOT a characteristic of negotiable CDs? They are deposits of $100,000 or more placed with commercial banks at a specified interest rate. Negotiable CDs are bought most often by institutional investors rather than by individuals. They are used as short-term drafts drawn to finance imports and exports. Negotiable CDs are bought and sold in the secondary market at a market-determined price.

They are used as short-term drafts drawn to finance imports and exports.

Which of these statements correctly explain zero-coupon bonds?

They eliminate reinvestment rate risk.

Identify the incorrect statement regarding savings accounts.

They require a minimum balance of $500

An investor who is looking for the opportunity to buy an investment that generates consistent income with no portfolio turnover, no management fee, and low operating expenses would choose which of these?

Unit investment trust (UIT)

Louis owns an investment that is an unmanaged portfolio in which the money manager initially selects the securities to be included in the portfolio and then holds those securities until they mature or the investment portfolio terminates. This statement best describes which type of investment?

Unit investment trust (UIT)

All of the following statements concerning the types of orders used to buy and sell securities are correct:

a good-til-canceled (GTC) order is an order to buy or sell a security at a specific or limit price that lasts until the order is completed or canceled. a stop order is an order specifying a certain price at which a market order takes effect. a limit order is an order to buy or sell at a specified (or better) price.

Expecting rising interest rates, an investor sells his BB rated, 3.5% coupon bonds with 20-year maturities and purchases A rated, 6% coupon bonds with maturities of four years. The investor has executed

a rate anticipation swap.

All of these statements correctly identifies a separately managed account except

a separately managed account is a privately offered pool of capital for wealthy, sophisticated investors.

An active bond management strategy, where one bond is swapped for another bond with similar characteristics but a higher yield to maturity, is considered

a substitution swap.

A transaction whereby an investor sells a bond for a loss, in order to reduce capital gains, while investing the proceeds of the sale in a bond of similar quality and maturity is considered

a tax swap.

When a taxpayer sells or exchanges stock or securities for a loss and, within 30 days before or after the date of the sale or exchange, acquires similar securities, this transaction is classified as

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