Lee 2

A 6% coupon U.S. Treasury note pays interest on May 31 and November 30 and is traded for settlement on August 10. The accrued interest on the $100,000 face amount of this note is _________.

$1,170.33

You buy a TIPS at issue at par for $1,000. The bond has a 3% coupon. Inflation turns out to be 2%, 3%, and 4% over the next 3 years. The total annual coupon income you will receive in year 3 is _________.

($30)(1.02)(1.03)(1.04) = $32.78

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

(20/50)(1.3)+(12/50)(1.0)+(18/50)(0.8)=1.048

Consider the one-factor APT. The variance of the return on the factor portfolio is .08. The beta of a well-diversified portfolio on the factor is 1.2. The variance of the return on the well-diversified portfolio is approximately _________.

.1152 (.08)(1.2)^2

The market portfolio has a beta of _________.

1

A coupon bond that pays interest semi annually has a par value of $1000, Matures in eight years, and has a yield to maturity of 6%. It's a coupon rate of 7%, the intrinsic value of the bond today will be

1.062.81

Consider the capital asset pricing model. The market degree of risk aversion, A, is 3. The variance of return on the market portfolio is .0225. If the risk-free rate of return is 4%, the expected return on the market portfolio is _________.

10.75% .04+3(.0225)

The two-factor model on A stock provides a race premium for exposure to marketrisk of 9%, a risk premium for exposure to interest rate risk of -1. 3% and a risk free rate of 3.5%. The beta for exposure to market raise is 1 and the beta for exposure to interest-rate risk is also 1 what is the expected return on the stock

11.2%

Research has identified two systematic factors that affect you as stock returns. The factors are growth in industrial production and changes in long-term interest rates. Industrial production growth is expected to be 3% in long-term interest rates are expected to increase by one percent. You are analyzing a stalk that has a beta of one. Two on the industrial production factor and. Five on the interest-rate factor. It currently has an expected return to a percent. However, if industrial production actually gross five and interest 2 by 2%, what is your best guess of the stocks return

12.9%

The risk premium for exposure Two aluminum commodity prices is 4%, and the firm has a beta relative to aluminum commodity prices of .6. There is premium for exposure to GDP changes is 6%, and the firm has a beta relative to GDP of 1.2. If there is free right is 4%, what is the expected return on the stock

13.6

Consider the multi-factor APT with two factors. Portfolio A has a beta of 0.5 on factor 1 and a beta of 1.25 on factor 2. The risk premiums on the factors 1 and 2 portfolios are 1% and 7% respectively. The risk-free rate of return is 7%. The expected return on portfolio A is __________ if no arbitrage opportunities exist.

16.25% 7 + (0.5)(1) + 1.25(7)

A zero coupon bond has Yoda maturity at 5% and a par value of $1000. If the bond matures in 16 years, it should sell for a price of __ today

458.11

A coupon bond that pays interest of 4% Annually has a par value of $1000, matures in five years, and a selling today at $785. The actual yield to maturity on this bond is

8.12

Consider the CAPM. The risk-free rate is 6%, and the expected return on the market is 18%. What is the expected return on a stock with a beta of 1.3?

= 6% + [18% - 6%](1.3) = 21.6%

Consider the single factor APT. Portfolio A has a beta of 1.3 and an expected return of 21%. Portfolio B has a beta of .7 and an expected return of 17%. The risk-free rate of return is 8%. If you wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio __________ and a long position in portfolio _________.

A;B

The yield to maturity on a bond is

Above the coupon right when the bond sells in a discount and below the coupon rate when the bond sells at a premium, the discount rate that will said the present value of the payments equal to the bond price, equal to the true compound return on investment only fall interest payment received our reinvested at the yield to maturity.

Two investment advisers are comparing performance. Adviser A averaged a 20% return with a portfolio beta of 1.5, and adviser B averaged a 15% return with a portfolio beta of 1.2. If the T-bill rate was 5% and the market return during the period was 13%, which adviser was the better stock picker?

Advisor A was better because he generated a larger alpha.

A firm that has an ROE of 12% is considering cutting its dividend payout. The stockholders of the firm desire a dividend yield of 4% and a capital gain yield of 9%. Given this information, which of the following statements is (are) correct?

All else equal, the firm's growth rate will accelerate after the payout change.

The strong form of the EMH states that

All information, including inside information must be reflected in the current stock price

In a simple CAPM world

All investors will choose to hold the market portfolio which includes all risky assets in the world, investors complete or probably a will bury depending on their risk of version, they're return per universe will be identical for all individual assets, the market portfolio will be on the efficient frontier, and it will be the optimal risky portfolio.

The weak form of the EMH states that

All past information, including security price and volume data must be reflected in the current stock price.

Semistrong-form EMH states that

All publicly available information must be reflected in the current stock price

Bill, Jim, and Shelly are all interested in buying the same stock that pays dividends. Bill plans on holding the stock for 1 year. Jim plans on holding the stock for 3 years. Shelly plans on holding the stock until she retires in 10 years. Which one of the following statements is correct?

All three should be willing to pay the same amount for the stock regardless of their holding period.

Consider two stocks, A and B. Stock A has an expected return of 10% and a beta of 1.2. Stock B has an expected return of 14% and a beta of 1.8. The expected market rate of return is 9% and the risk-free rate is 5%. Security __________ would be considered the better buy because _________.

B; it offers an expected excess return of 1.8%

Bonds rated _____ or better by Standard & Poor's are considered investment grade.

BBB

Which of the following variables do Fama and French claim do a better job explaining stock returns than Beta?

Book to market ratio, firm size

The risk-free rate is 4%. The expected market rated of return is 11%. If you expect stock X with a beta of. Eight to offer right of return of 12%, then you should

Buy stock X because it is under priced

According to Markowitz and other proponents of modern portfolio theory, which of the following activities would not be expected to produce any benefits?

Engaging in active portfolio management to enhance returns

Bonds issued in the currency of the issues country but sold in other national markets are

Eurobonds

If enough investors decide to purchase stocks, they are likely to drive up stock prices, thereby causing______and ________

Expected returns to fall, risk premiums to fall

When all investors in our securities in the same way and share the same economic view of the world we say they have

Homogeneous expectations

Assumptions of simple CAPM return

Individual trades of investors do not affect his dog's price, all investors play from when identical holding., All investors analyst securities in the same way and share the same economic view of the world.

If a stock has an intrinsic value of $15 and an actual stock price of 13.50, you know that

It will generate a positive alpha

Everything else equal, the ____the maturity of a bond and the ____ the coupon, the greater the sensitivity of the bonds price to interest rate changes.

Longer; lower.

Even if the markets are efficient, professional portfolio management is still important because it provides investors with

Low-cost diversification and A portfolio with a specified risk level

If the simple CAPM is valid and all portfolios are priced correctly, which of the situations below is possible? Consider each situation independently, and assume the risk-free rate is 5%.

Option D

New-economy companies generally have higher _______ than old-economy companies.

P/E multiples

Someone who invest in the Vanguard index 500 mutual fund could most accurately be described as using what approach

Passive investment

A _____ bond gives the bond holder the right to cash in the bond before maturity at a specific price after a specific date

Puttable

Fans and French claim that After controlling for firm size and the ratio of the firms book value to market value, beta is

Relatively useless in predicting future stock returns

The expected return on the market portfolio is 15%, The risk free rate is 8%. The expected return on SDA Corp. common stock is 16%. The beta of SDA Corp. common stock is 1.25. Within the context of the capital asset pricing model,

SDA Corp. stock's alpha is -.75%

Which of the following belieifs would not proclude charting as a method of portfolio management?

Start process follow recurring patterns

The broadcast information set is included in the

Strong form efficiency argument

inflation-indexed bond Treasury securities are commonly called

TIPS

Arbitrage is

The creation of riskless profits made possible by relative miss pricing among securities

Consider the liquidity preference theory of the term structure of interest rates. On average, one would expect investors to require _________.

a higher yield on long-term bonds than on short-term bonds

Proponents of the EMH typically advocate __________.

a passive investment strategy

According to the capital asset pricing model, a fairly priced security will plot

along the security market line

According to the liquidity preference theory of the term structure of interest rates, an increase in the yield on long term corporate bonds versus short term bonds could be due to

an increase in expected interest rate volatility

Assume that both X and Y are well-diversified portfolios and the risk-free rate is 8%. Portfolio X has an expected return of 14% and a beta of 1. Portfolio Y has an expected return of 9.5% and a beta of .25. In this situation, you would conclude that portfolios X and Y _________.

are in equilibrium

Arbitrage is based on the idea that

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

In the context of the capital asset pricing model, the systematic measure of risk is captured by

beta

Consider two bonds, A and B. Both bonds presently are selling at their par value of $1,000. Each pays interest of $120 annually. Bond A will mature in 5 years, while bond B will mature in 6 years. If the yields to maturity on the two bonds change from 12% to 14%, _________.

both bonds will decrease in value but bond B will decrease more than bond A

If you are holding a premium bond, you must expect a _______ each year until maturity. If you are holding a discount bond, you must expect a _______ each year until maturity. (In each case assume that the yield to maturity remains stable over time.)

capital loss; capital gain

A bond was purchased at a premium and is now selling at a discount because of a change in market interest rates. If the bond pays a 4% annual coupon, what is the likely impact on the holding-period return if an investor decides to sell now?

decreased

Which of the following is not a method employed by followers of technical analysis

earnings forecasting

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

fall

In his famous critique of the CAPM, Roll argued that the CAPM ______________.

is not testable because the true market portfolio can never be observed

The primary objective of fundamental analysis is to identify

mispriced stocks

An implication of the efficient market hypothesis is that

nonzero alphas will quickly disappear

Which of the following yield Curves generally implies a normal healthy economy

positive slope

Market anomaly refers to _______.

price behavior that differs from the behavior predicted by the efficient market hypothesis

The most significant conceptual difference between the arbitrage pricing theory (APT) and The capital asset pricing model (CAPM) is that the CAPM

recognizes only one systematic risk factor

Which of the following is not a method employed by fundamental analysts

relative strength analysis

The invoice price of a bond is the

stated or flat price in a quote sheet plus accrued interest

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

stock price changes that are random and unpredictable

Investors require a risk premium as compensation for bearing

systematic risk

One can profit from an arbitrage opportunity by

taking a long position in the cheaper market and a short position in the expensive market.

If a stock is correctly priced, then you know that ____________.

the sum of the stock's expected capital gain and dividend yield is equal to the stock's required rate of return

According to capital asset pricing theory, a key determinant of portfolio returns is

the systematic risk of the portfolio

In a well-diversified portfolio, __________ risk is negligible.

unsystematic