Test 3 investments CH. - 7,8,9,&10

A convertible bond has a par value of $1,000, but its current market price is $950. The current price of the issuing company's stock is $19, and the conversion ratio is 40 shares. The bond's conversion premium is ________.

$190 Conversion premium = 950 - 40(19) = 190

If the quote for a Treasury bond is listed in the newspaper as 98:2812 bid, 98:4062 ask, the actual price at which you can purchase this bond given a $10,000 par value is ________.

$9,840.62 9,840.62 (10,000)/100

The cumulative breadth for the first 2 days is ________.

-240

What is the alpha of a portfolio with a beta of 2 and actual return of 15%?

0% CAPM E(ri) = 5% + 2(10% - 5%) = 15%; Alpha = Actual return - Expected return = 15% - 15% = 0%A portfolio with a return of 15% and a beta of 2 lies on the SML and therefore has an alpha of zero.

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% E(rm) = .04+3(.0225) =10.75

The risk-free rate and the expected market rate of return are 6% and 16%, respectively. According to the capital asset pricing model, the expected rate of return on security X with a beta of 1.2 is equal to ________.

18% E(rx)=.06+1.2(.16-.06) = .18

The price of a bond (with par value of $1,000) at the beginning of a period is $980 and at the end of the period is $975. What is the holding-period return if the annual coupon rate is 4.5%?

4.08% HPR = [(975 + 45 - 980)/980] - 1 = 4.08%

McLean and Pontiff (2012) identify more than ________ characteristics associated with abnormal returns.

80

$1,000 par value zero-coupon bonds (ignore liquidity premiums) The expected 1-year interest rate 1 year from now should be about ________.

9.02% 1.075^2=1.06(1+f2) 1.155625/1.06 = 1.0902123 f2=9.02

A coupon bond that pays interest of 4% annually has a par value of $1,000, matures in 5 years, and is selling today at $785. The actual yield to maturity on this bond is ________.

9.6%

________ is a tool that can help identify the direction of a stock's price.

A moving average

________ is the return on a stock beyond what would be predicted from market movements alone.

An abnormal return

Even if the markets are efficient, professional portfolio management is still important because it provides investors with: I. Low-cost diversificationII. A portfolio with a specified risk levelIII. Better risk-adjusted returns than an index

I and II only

Fama and French claim that after controlling for firm size and the ratio of the firm's book value to market value, beta is: I. Highly significant in predicting future stock returnsII. Relatively useless in predicting future stock returnsIII. A good predictor of the firm's specific risk

II only

Someone who invests in the Vanguard Index 500 mutual fund could most accurately be described as using which approach?

Passive investment

Inflation-indexed Treasury securities are commonly called ________.

TIPS

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 Elliot's wave theory, stock market behavior can be explained as ________.

a series of superimposed long-term and short-term wave cycles

A stock's alpha measures the stock's ________.

abnormal return

According to the capital asset pricing model, in equilibrium ________.

all securities' returns must lie on the security market line

Proponents of the EMH think technical analysts ________.

are wasting their time

Arbitrage is based on the idea that ________.

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

Following a period of falling prices, the moving average will ________.

be above the current price

A ________ bond gives the issuer an option to retire the bond before maturity at a specific price after a specific date.

coupon

Floating-rate bonds have a ________ that is adjusted with current market interest rates.

coupon rate

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

An implication of the efficient market hypothesis is that ________.

high-beta stocks are consistently overpriced

Which type of risk is most significant for bonds?

interest rate risk

A moving average of stock prices ________.

is less volatile than the actual prices

The cumulative tally of the number of advancing stocks minus declining stocks is called the ________.

market breadth

Fundamental analysis determines that the price of a firm's stock is too low, given its intrinsic value. The information used in the analysis is available to all market participants, yet the price does not seem to react. The stock does not trade on a major exchange. What concept might explain the ability to produce excess returns on this stock?

neglected-firm effect

The moving average generates buy signal(s) ________.

on days 2 and 16

At the beginning of the month, the healthcare index was 134 and the stock market index was 2100. At the end of the month, the healthcare index was 147 and the stock market index was 2214. Consider the ratio of the healthcare index to the market index at the beginning and end of the month. The healthcare index is ________ the market index, and technical analysts who use relative strength would advise ________ the healthcare index.

outperforming; buying

The measure of unsystematic risk can be found from an index model as ________.

residual standard deviation

An important assumption underlying the use of technical analysis techniques is that ________.

security prices adjust gradually to new information

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

semistrong

The TRIN statistic is a ________ indicator.

sentiment

Evidence suggests that there may be ________ momentum and ________ reversal patterns in stock price behavior.

short-term; long-term

An important characteristic of market equilibrium is ________.

the absence of arbitrage opportunities