BUSFIN 4221 Investments Cao Chapters Midterm 1 Practice Questions

The CAL provided by combinations of 1-month T-bills and a broad index of commonstocks is called the ________.41)A)CML B)SML C)CAPM D)total return line

A)CML

The part of a stock's return that is systematic is a function of which of the followingvariables?I. Volatility in excess returns of the stock marketII. The sensitivity of the stock's returns to changes in the stock marketIII. The variance in the stock's returns that is unrelated to the overall stock market6)A)I and II onlyB)I, II, and IIIC)I onlyD)II and III only

A)I and II only

According to the CAPM, which of the following is not a true statement regarding themarket portfolio.30)A)It is always the minimum-variance portfolio on the efficient frontier.B)It lies on the efficient frontier.C)All securities in the market portfolio are held in proportion to their market values.D)It includes all risky assets in the world, including human capital.

A)It is always the minimum-variance portfolio on the efficient frontier

An investor in a T-bill earns interest by ________.24)A)buying the bill at a discount from the face value to be received at maturityB)receiving interest payments every 90 daysC)converting the T-bill at maturity into a higher-valued T-noteD)receiving dividend payments every 30 days

A)buying the bill at a discount from the face value to be received at maturity

On a standard expected return versus standard deviation graph, investors will prefer portfolios that lie to the ________ the current investment opportunity set.7)A)left and aboveB)right and aboveC)left and belowD)right and below

A)left and above

An investor's degree of risk aversion will determine his or her ________.32)A)optimal mix of the risk-free asset and risky assetB)optimal risky portfolioC)capital allocation lineD)risk-free rate

A)optimal mix of the risk-free asset and risky asset

Q: What is the optimal CAL?

A: It is the CAL with the highest possible slope.

Money market securities are characterized by: I. Maturity less than 1 year II. Safety of the principal investment III. Low rates of return17)A)I onlyB)I, II, and IIIC)I and III onlyD)I and II only

B) I,II,III

37)You invest all of your money in 1-year T-bills. Which of the following statements is (are)correct? I. Your nominal return on the T-bills is riskless. II. Your real return on the T-bills is riskless. III. Your nominal Sharpe ratio is zero.37)A)I, II, and IIIB)I and III onlyC)II onlyD)I only

B)I and III only

Which of the following are assumptions of the simple CAPM model?I. Individual trades of investors do not affect a stock's price.II. All investors plan for one identical holding period.III. All investors analyze securities in the same way and share the same economic view ofthe world.IV. All investors have the same level of risk aversion.10)A)I, II, III, and IV B)I, II, and III only C)I, II, and IV only D)II, III, and IV only

B)I, II, and III only

The optimal risky portfolio can be identified by finding:I. The minimum-variance point on the efficient frontierII. The maximum-return point on the efficient frontier and the minimum-variance point onthe efficient frontierIII. The tangency point of the capital market line and the efficient frontierIV. The line with the steepest slope that connects the risk-free rate to the efficientfrontier29)A)I and IV onlyB)III and IV onlyC)I and II onlyD)II and III only

B)III and IV only

The graph of the relationship between expected return and beta in the CAPM context iscalled the ________. A)SCL B)SML C)CAL D)CML

B)SML

The SML is valid for ________, and the CML is valid for ________.23)A)only individual assets; well-diversified portfolios onlyB)both well-diversified portfolios and individual assets; well-diversified portfoliosonlyC)both well-diversified portfolios and individual assets; both well-diversifiedportfolios and individual assetsD)only well-diversified portfolios; only individual assets

B)both well-diversified portfolios and individual assets; well-diversified portfoliosonly

The efficient market hypothesis suggests that ________.18)A)a bottom-up approach is the most appropriate investment strategyB)passive portfolio management strategies are the most appropriate investmentstrategiesC)either active or passive strategies may be appropriate, depending on the expecteddirection of the marketD)active portfolio management strategies are the most appropriate investmentstrategies

B)passive portfolio management strategies are the most appropriate investmentstrategies

Beta is a measure of ________.31)A)relative business riskB)relative systematic riskC)relative nonsystematic riskD)total risk

B)relative systematic risk

If an investor places a ________ order, the stock will be sold if its price falls to thestipulated level. If an investor places a ________ order, the stock will be bought if itsprice rises above the stipulated level.46)A)market; limitB)stop-loss; stop-buyC)limit; marketD)stop-buy; stop-loss

B)stop-loss; stop-buy

18)The market risk premium is defined as ________.18)A)the difference between the return on the highest-yielding asset and the return onthe lowest-yielding assetB)the difference between the return on an index fund and the return on Treasury billsC)the difference between the return on the risky asset with the lowest returns and thereturn on Treasury billsD)the difference between the return on a small-firm mutual fund and the return onthe Standard & Poor's 500 Index

B)the difference between the return on an index fund and the return on Treasury bills

Standard deviation of portfolio returns is a measure of ________.18)A)relative business riskB)total riskC)relative nonsystematic riskD)relative systematic risk

B)total risk

Which one of the following stock return statistics fluctuates the most over time?14)A)correlation coefficientB)covariance of returnsC)average returnD)variance of returns

C)average return

An individual who goes short in a futures position ________.27)A)has the right to purchase the underlying commodity at contract maturityB)has the right to deliver the underlying commodity at contract maturityC)commits to delivering the underlying commodity at contract maturityD)commits to purchasing the underlying commodity at contract maturity

C)commits to delivering the underlying commodity at contract maturity

Consider an investment opportunity set formed with two securities that are perfectlynegatively correlated. The global minimum-variance portfolio has a standard deviationthat is always ________.19)A)equal to -1B)greater than 0C)equal to 0D)equal to the sum of the securities' standard deviations

C)equal to 0

if enough investors decide to purchase stocks, they are likely to drive up stock prices,thereby causing ________ and ________.11)A)expected returns to rise; risk premiums to fallB)expected returns to fall; risk premiums to riseC)expected returns to fall; risk premiums to fallD)expected returns to rise; risk premiums to rise

C)expected returns to fall; risk premiums to fall

If all investors become more risk averse, the SML will ________ and stock prices will________.20)A)shift upward; riseB)have the same intercept with a flatter slope; riseC)have the same intercept with a steeper slope; fallD)shift downward; fall

C)have the same intercept with a steeper slope; fall

The yield on tax-exempt bonds is ________.32)A)greater than the yield on taxable bondsB)normally about 90% of the yield on taxable bondsC)less than the yield on taxable bondsD)usually less than 50% of the yield on taxable bonds

C)less than the yield on taxable bonds

An order to buy or sell a security at the current price is a ________.45)A)stop-buy orderB)limit orderC)market orderD)stop-loss order

C)market order

The purchase of a futures contract gives the buyer ________.36)A)the right to sell an item at a specified priceB)the right to buy an item at a specified priceC)the obligation to buy an item at a specified priceD)the obligation to sell an item at a specified price

C)the obligation to buy an item at a specified price

Adding additional risky assets to the investment opportunity set will generally move theefficient frontier ________ and to the ________.12)A)down; rightB)up; rightC)up; leftD)down; left

C)up; left

________ portfolio construction starts with selecting attractively priced securities.10)A)Side-to-sideB)Upside-downC)Top-downD)Bottom-up

D) bottom up

The ________ measure of returns ignores compounding.2)A)IRRB)geometric averageC)dollar-weightedD)arithmetic average

D)arithmetic average

Your timing was good last year. You invested more in your portfolio right before priceswent up, and you sold right before prices went down. In calculating historicalperformance measures, which one of the following will be the largest?8)A)arithmetic average returnB)mean holding-period returnC)geometric average returnD)dollar-weighted return

D)dollar-weighted return

Diversification is most effective when security returns are ________.25)A)highB)positively correlatedC)uncorrelatedD)negatively correlated

D)negatively correlated

An investor should do which of the following for stocks with negative alphas?4)A)holdB)do nothingC)go longD)sell short

D)sell short

The bid price of a Treasury bill is ________.26)A)greater than the ask price of the Treasury bill expressed in dollar termsB)the price at which the investor can buy the Treasury billC)the price at which the dealer in Treasury bills is willing to sell the billD)the price at which the dealer in Treasury bills is willing to buy the bill

D)the price at which the dealer in Treasury bills is willing to buy the bill

Initial public offerings (IPOs) are usually ________ relative to the levels at which theirprices stabilize after they begin trading in the secondary market.48)A)correctly pricedB)mispriced, but without any particular biasC)overpricedD)underpriced

D)underpriced

)In a simple CAPM world which of the following statements is (are) correct?I. All investors will choose to hold the market portfolio, which includes all risky assets inthe world.II. Investors' complete portfolio will vary depending on their risk aversion.III. The return per unit of risk will be identical for all individual assets.IV. The market portfolio will be on the efficient frontier, and it will be the optimal riskyportfolio.

I II III & IV

Active trading in markets and competition among securities analysts helps ensure that: I. Security prices approach informational efficiency. II. Riskier securities are priced to offer higher potential returns. III. Investors are unlikely to be able to consistently find under- or overvalued securities.

I, II, & III

Initial Margin Requirement (IMR)

Minimum % initial investor equity

Capital Allocation Line (CAL)

Plot of risk-return combinations available by varying allocation between risky and risk-free

Bid:

Price at which dealer will buy from you

ask

Price at which dealer will sell to you

Risk aversion:

Reluctance to accept risk

Repurchase Agreements (RPs)

Short-term sales of securities with promise to repurchase at higher price • RP is a collateralized loan • Many RPs are overnight; "Term" RPs may have a 1-month maturity

Covariance is

a measure of how much two variables move together.

When computing the bank discount yield, you would use ________ days in the year.22)A)365B)360C)366D)260

b) 360

T-bills are issued with initial maturities of: I. 4 weeks II. 16 weeks III. 26 weeks IV. 32 weeks21)A)I, II, and III onlyB)I, II, III, and IVC)I and II onlyD)I and III only

d) I & III only

alpha < 0 then security is

overpriced

alpha = 0 then security is

properly priced

alpha > 0 then security is

underpriced

Ch.7 CAPM section next

ye ye

Ch 6 hereafter

yeet

Chapter 5 following:

yes it is

Chapters 1-3 following

yes they are

Reverse RPs

• Lending money; obtaining security title as collateral • "Haircuts" may be required depending on collateral