Secutities Final

Required: You purchase one Microsoft November $145 put contract for a premium of $6.65. What is your maximum possible profit? Assume each contract is for 100 shares.

$13,835

You are considering acquiring a common share of Sahali Shopping Center Corporation that you would like to hold for 1 year. You expect to receive both $1.25 in dividends and $35 from the sale of the share at the end of the year. The maximum price you would pay for a share today is __________ if you wanted to earn a 12% return. $31.25 $32.37 $38.47 $41.32

$32.37

A common stock pays an annual dividend per share of $5.25. The risk-free rate is 9% and the risk premium for this stock is 6%. If the annual dividend is expected to remain at $5.25, what is the value of the stock?

$35

A zero-coupon bond has a yield to maturity of 5% and a par value of $1,000. If the bond matures in 16 years, it should sell for a price of __________ today. $458.11 $641.11 $789.11 $1,100.11

$458.11

A bond has a par value of $1,000, a time to maturity of 10 years, and a coupon rate of 8.70% with interest paid annually. If the current market price is $870, what will be the approximate capital gain of this bond over the next year if its yield to maturity remains unchanged?

$7.81

An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 18% and a standard deviation of return of 20%. Stock B has an expected return of 14% and a standard deviation of return of 5%. The correlation coefficient between the returns of A and B is 0.50. The risk-free rate of return is 10%. The proportion of the optimal risky portfolio that should be invested in stock A is __________. 0% 40% 60% 100%

0%

Asset A has an expected return of 20% and a standard deviation of 25%. The risk-free rate is 10%. What is the reward-to-variability ratio? 0.40 0.50 0.75 0.80

0.40

Which of the following variables do Fama and French claim do a better job explaining stock returns than beta?1. Book-to-market ratio2. Unexpected change in industrial production3. Firm size 1 only 1 and 2 only 1 and 3 only 1, 2, and 3

1 and 3 only

The value of a listed call option on a stock is lower when: The exercise price is higher. The contract approaches maturity. The stock decreases in value. A stock split occurs. 2, 3, and 4 only 1, 3, and 4 only 1, 2, and 3 only 1, 2, 3, and 4

1, 2, and 3 only

Rank the following from highest average historical return to lowest average historical return from 1926 to 2019. 1. Small stocks 2. Long-term bonds 3. Large stocks 4. T-bills

1,3,2,4

Suppose you pay $9,800 for a $10,000 par Treasury bill maturing in 2 months. What is the annual percentage rate of return for this investment? 2.04% 12.00% 12.24% 12.89%

12.24%

The market capitalization rate on the stock of Aberdeen Wholesale Company is 10%. Its expected ROE is 12%, and its expected EPS is $5. If the firm's plowback ratio is 50%, its P/E ratio will be __________. 8.33 12.50 19.23 24.15

12.50

Suppose you pay $9,400 for a $10,000 par Treasury bill maturing in 6 months. What is the effective annual rate of return for this investment? 6.38 12.77 13.17 14.25

13.17

The arithmetic average of -20%, 33%, and 38% is 30.33% 17.00% 23.67% 12.75%

17.00%

An investment earns 30% the first year, earns 35% the second year, and loses 32% the third year. The total compound return over the 3 years was 131.66% 19.34% 33.00% 6.45%

19.34%

Approximately how many securities does it take to diversify almost all of the unique risk from a portfolio? 2 6 8 20

20

The geometric average of −20%, 45%, and 50% is 18.75% 25.00% 20.28% 37.68%

20.28

The optimal risky portfolio can be identified by finding: 1. The minimum-variance point on the efficient frontier 2. The maximum-return point on the efficient frontier and the minimum-variance point on the efficient frontier 3. The tangency point of the capital market line and the efficient frontier 4. The line with the steepest slope that connects the risk-free rate to the efficient frontier 1 & 2 2&3 3&4 1&4

3&4

A bond with an annual coupon rate of 5.5% sells for $960. What is the bond's current yield?

5.73%

You purchased a 5-year annual-interest coupon bond 1 year ago. Its coupon interest rate was 6%, and its par value was $1,000. At the time you purchased the bond, the yield to maturity was 4%. If you sold the bond after receiving the first interest payment and the bond's yield to maturity had changed to 3%, your annual total rate of return on holding the bond for that year would have been approximately _________. 5.0% 5.5% 7.6% 8.9%

7.6%

Jand, Incorporated, currently pays a dividend of $1.58, which is expected to grow indefinitely at 4%. If the current value of Jand's shares based on the constant-growth dividend discount model is $42.91, what is the required rate of return?

7.83%

If you are promised a nominal return of 12% on a 1-year investment, and you expect the rate of inflation to be 3%, what real rate do you expect to earn? 8.74% 5.28% 9.00% 12.00%

8.74%

__________ option can only be exercised on the expiration date. Multiple Choice A Mexican An Asian An American A European

A European

Risk that can be eliminated through diversification is called __________ risk. unique firm-specific diversifiable All of these options are correct

All of these options are correct

One method of forecasting the risk premium is to use the __________. Coefficient of variation of analysts' earnings forecasts Variations in the risk-free rate over time Average historical excess returns for the asset under consideration Average abnormal return on the index portfolio

Average historical excess returns for the asset under consideration

Bonds rated __________ or better by Standard & Poor's and __________ or better by Moody's are considered investment grade. AA; Aa BBB;Baa BB; Ba CCC; CbA

BBB;Baa

An investor buys a call at a price of $6.20 with an exercise price of $57. At what stock price will the investor break even on the purchase of the call?

BEP $62.20

Which of the following observations would provide evidence against the semistrong form of the efficient market theory? Mutual fund managers do not on average make superior returns. You cannot make superior profits by buying (or selling) stocks after the announcement of an abnormal rise in dividends. Low P/E stocks tend to have positive abnormal returns. In any year approximately 50% of mutual funds outperform the market.

Low P/E stocks tend to have positive abnormal returns.

Which one of the following is a common term for the market consensus value of the required return on a stock? Dividend payout ratio Intrinsic value Market capitalization rate Plowback ratio

Market capitalization rate

Suppose that, after conducting an analysis of past stock prices, you come up with the following observations. Which would appear to contradict the weak form of the efficient market hypothesis? The average rate of return is significantly greater than zero. The correlation between the return during a given week and the return during the following week is zero. One could have made superior returns by buying stock after a 10% rise in price and selling after a 10% fall. One could have made higher-than-average capital gains by holding stocks with low dividend yields.

One could have made superior returns by buying stock after a 10% rise in price and selling after a 10% fall.

An investor should do which of the following for stocks with negative alphas? Go long Sell short Hold Do nothing

Sell short

Inflation-indexed Treasury securities are commonly called __________. PIKS CARS TIPS STRIPS

TIPS

Which of the following provides the best example of a systematic-risk event? A strike by union workers hurts a firm's quarterly earnings. Mad Cow disease in Montana hurts local ranchers and buyers of beef. The Federal Reserve increases interest rates 50 basis points. A senior executive at a firm embezzles $10 million and escapes to South America.

The Federal Reserve increases interest rates 50 basis points.

The expected rate of return of a portfolio of risky securities is __________. The sum of the individual securities' covariance The sum of the individual securities' variance The weighted sum of the individual securities' expected returns The weighted sum of the individual securities' variance

The weighted sum of the individual securities' expected returns

Proponents of the EMH typically advocate __________. a conservative investment strategy a liberal investment strategy a passive investment strategy an aggressive investment strategy

a passive investment strategy

The writer of a put option __________. agrees to sell shares at a set price if the option holder desires agrees to buy shares at a set price if the option holder desires has the right to buy shares at a set price has the right to sell shares at a set price

agrees to buy shares at a set price if the option holder desires

The weak-form of the EMH states that __________ must be reflected in the current stock price. all past information, including security price and volume data all publicly available information all information, including inside information all costless information

all past information, including security price and volume data

The semistrong-form of the EMH states that __________ must be reflected in the current stock price. all security price and volume data all publicly available information all information, including inside information all costless information

all publicly available information

Buyers of listed options __________ required to post margins, and writers of naked listed options __________ required to post margins. are; are not are; are are not; are are not; are not

are not; are

Proponents of the EMH think technical analysts __________. should focus on relative strength should focus on resistance levels should focus on support levels are wasting their clients' time

are wasting their clients' time

Asset A has an expected return of 15% and a reward-to-variability ratio of 0.4. Asset B has an expected return of 20% and a reward-to-variability ratio of 0.3. A risk-averse investor would prefer a portfolio using the risk-free asset and __________. asset A asset B no risky asset The answer cannot be determined from the data given.

asset A

The measure of risk used in the capital asset pricing model is __________. specific risk the standard deviation of returns reinvestment risk beta

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

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

The maximum loss a buyer of a stock call option can suffer is the __________. call premium stock price stock price minus the value of the call strike price minus the stock price

call premium

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 gain; capital loss capital gain; capital gain capital loss; capital gain capital loss; capital loss

capital loss; capital gain

You invest in the stock of Rayleigh Corporation and write a call option on Rayleigh Corporation This strategy is called a __________. covered call long straddle naked call money spread

covered call

A call option on Brocklehurst Corporation has an exercise price of $30. The current stock price of Brocklehurst Corporation is $32. The call option is __________. Multiple Choice at the money in the money out of the money knocked in

in the money

TIPS offer investors inflation protection by __________ by the inflation rate each year. increasing only the coupon rate increasing only the par value increasing both the par value and the coupon payment increasing the promised yield to maturity

increasing both the par value and the coupon payment

The primary objective of fundamental analysis is to identify __________. well-run firms poorly run firms mispriced stocks high P/E stocks

mispriced stocks

The possibility of arbitrage arises when __________ there is no consensus among investors regarding the future direction of the market, and thus trades are made arbitrarily mispricing among securities creates opportunities for riskless profits two identically risky securities carry the same expected returns investors do not diversify

mispricing among securities creates opportunities for riskless profits

Diversification can reduce or eliminate __________ risk all systematic nonsystematic only insignificant

nonsystematic

You invest in the stock of Valleyview Corporation and purchase a put option on Valleyview Corporation This strategy is called a __________. long straddle naked put protective put short stroll

protective put

Evidence suggests that there may be __________ momentum and __________ reversal patterns in stock price behavior. short-run; short-run long-run; long-run long-run; short-run short-run; long-run

short-run; long-run

The complete portfolio refers to the investment in __________. the risk-free asset the risky portfolio the risk-free asset and the risky portfolio combined the risky portfolio and the index

the risk-free asset and the risky portfolio combined

Joe bought a stock at $57 per share. The price promptly fell to $55. Joe held on to the stock until it again reached $57, and then he sold it once he had eliminated his loss. If other investors do the same to establish a trading pattern, this would contradict __________. the strong-form EMH the weak-form EMH technical analysis the semistrong-form EMH

the weak-form EMH

The correlation coefficient between two assets equals __________. their covariance divided by the product of their variances the product of their variances divided by their covariance the sum of their expected returns divided by their covariance their covariance divided by the product of their standard deviationsCorrect

their covariance divided by the product of their standard deviations

Standard deviation of portfolio returns is a measure of __________. total risk relative systematic risk relative nonsystematic risk relative business risk

total risk

The potential loss for a writer of a naked call option on a stock is __________. equal to the call premium larger the lower the stock price limited unlimited

unlimited

You believe that stock prices reflect all information that can be derived by examining market trading data such as the history of past stock prices, trading volume, or short interest, but you do not believe stock prices reflect all publicly available and inside information. You are a proponent of the __________ form of the EMH. semistrong strong weak perfect

weak

A stock has an intrinsic value of $15 and an actual stock price of $13.50. You know that this stock __________. has a Tobin's q value < 1 will generate a positive alpha has an expected return less than its required return has a beta > 1

will generate a positive alpha