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"Buy a stock if its price moves up by 2% more than the Dow Average," is an example of a _________________. A. filter rule B. market anomaly C. fundamental approach D. passive trading strategy

The stock price of Atlantis Corp. is $43 today. The risk-free rate of return is 10%, and Atlantis Corp pays no dividends. A call option on Atlantis Corp stock with an exercise price of $40 .... A put option on Atlantis Corp stock with an exercise price of $40 and an expiration date 6 months from now should be worth ___ today

$.05

The current stock price of Howard & Howard is $64 and the stock does not pay dividends. ... You want to purchase a put option on this stock with an exercise price of $55 and an expiration date 73 days from now. Using black-scholes, the put option should be worth ____ today

$.07

A stock priced at $65 has a std dev of 30% ... If you construct a rissoles arbitrage to exploit the mispriced puts, your arbitrage profit will be ____

$.42

A call option has an exercise price of $35 and a stock price of $36.50. If the call option is trading t $2.25, what is the time value embedded in the option?

$.75

A stock with a current market price of $50 and a strike price of $45 has an associated put option priced at $3.50. This put has an intrinsic value of ____ and a time value of ____

$0 ; $3.50

You would like to hold a protective put position on the stock of Avalon Corp to lock in a guaranteed minimum value of $50 at year-end. .... Suppose the desired put options with X=50 were traded. How much would it cost to purchase?

$1.19

A put option has a strike price of $35 and a stock price of $38. if the call option is trading at $1.25, what is the time value embedded in the option?

$1.25

11. Empirical results estimated from historical data indicate that betas _________. A. are always close to zero B. are constant over time C. of all securities are always between zero and 1 D. seem to regress toward 1 over time

D. seem to regress toward 1 over time

C. pension funds

18. Target date immunization would primarily be of interest to _________. A. banks B. mutual funds C. pension funds D. individual investors

18. When the housing bubble burst in 2007, it set off the worst financial crisis _____. A. in 25 years. B. in 40 years. C. in 50 years. D. in 75 years.

19. A support level is ___________________. A. a level beyond which the market is unlikely to rise B. a level below which the market is unlikely to fall C. an equilibrium price level justified by characteristics such as earnings and cash flows D. the peak of a market wave or cycle

C. price volatility

19. Duration is a concept that is useful in assessing a bond's _________. A. credit risk B. liquidity risk C. price volatility D. convexity risk

D. A 10-year zero-coupon bond

2. All other things equal(YTM = 10%), which of the following has the shortest duration? A. A 30-year bond with a 10% coupon B. A 20-year bond with a 9% coupon C. A 20-year bond with a 7% coupon D. A 10-year zero-coupon bond

2. Models of financial markets that emphasize psychological factors affecting investor behavior are called _______. A. data mining B. fundamental analysis C. charting D. behavioral finance

20. According to Kondratieff, the macro economy moves in a series of waves that recur at intervals of approximately _________________. A. 18 months B. 4 years C. 8 years D. 50 years

21. According to Elliot's wave theory, stock market behavior can be explained as _________________. A. a series of medium-term wave cycles with no short-term trend B. a series of long-term wave cycles with no short-term trend C. a series of superimposed long-term and short-term wave cycles D. sine and cosine functions

22. Conventional finance theory assumes investors are _______, and behavioral finance assumes investors are _______. A. rational; irrational B. irrational; rational C. greedy; philanthropic D. philanthropic; greedy

C. Perpetuities

73. The duration is independent of the coupon rate only for which one of the following? A. Discount bonds B. Premium bonds C. Perpetuities D. Short-term bonds

74. In 1997 CSX successfully purchased a significant share of Conrail. Immediately after the first offer was announced and the acquisition eventually consummated, the price of CSX fell below preacquisition levels and took many years to recover. This may be an example of ________________. A. loss aversion B. mental accounting C. overreaction D. managerial overconfidence

C. interest rates fall

74. You have an investment horizon of 6 years. You choose to hold a bond with a duration of 10 years. Your realized rate of return will be larger than the promised yield on the bond if ___________________. A. interest rates increase B. interest rates stay the same C. interest rates fall D. The answer cannot be determined from the information given.

A mutual fund which attempts to hold quantities of shares in proportion to their representation in the market is called a __________ fund. A. stock B. index C. hedge D. money market

54. According to the CAPM, investors are compensated for all but which of the following? A. expected inflation B. systematic risk C. time value of money D. residual risk

D. residual risk

The two most important factors in describing an individual's or organization's investment objectives are ________________. A. income level and age B. income level and risk tolerance C. age and risk tolerance D. return requirement and risk tolerance

D. return requirement and risk tolerance

21. According to the capital asset pricing model, fairly priced securities have _________. A. negative betas B. positive alphas C. positive betas D. zero alphas

D. zero alphas

An investor who expects declining interest rates would maximize their capital gain by purchasing a bond that has a ___ coupon and a ___ term to maturity. A. low; long B. high; short C. high; long D. zero; long

D. zero; long

Fama and French (1991) and Reinganum (1988) found that firms with __________ market/book ratios had higher stock returns. A. high B. low C. medium D. paired

Fama and French have suggested that many market anomalies can be explained as manifestations of ____________. A. regulatory effects B. high trading costs C. information asymmetry D. varying risk premiums

From 1926 to 2008 the world stock portfolio offered _____ return and _____ volatility than the portfolio of large U.S. stocks. A. lower; higher B. lower; lower C. higher; lower D. higher; higher

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? A. January effect B. Neglected firm effect C. P/E effect D. Reversal effect

Fundamental indexing refers to ________. A. investing in index stocks in proportion to the stock's fundamental value B. investing in index stocks in proportion to the stock's market value C. investing an equal dollar amount in index stocks D. investing in an equal amount shares in each of the index stocks

Growth stocks usually exhibit ___ price-to-book ratios and ___ price-to-earnings ratios. A. low, low B. low, high C. high, low D. high, high

Historical returns have generally been ________ for stocks of small firms as/than for stocks of large firms A. same B. lower C. higher D. there is no evidence

Historically small firm stocks have earned higher returns than large firm stocks. When viewed in the context of an efficient market, this suggests that ___________. A. small firms are better run than large firms B. government subsidies available to small firms produce effects that are discernible in stock market statistics C. small firms are riskier than large firms D. small firms are not being accurately represented in the data

Historically the best asset for the long term investor wanting to fend off the threats of inflation and taxes while making his money grow has been ____. A. stocks B. bonds C. money market funds D. Treasury bills

Research suggests that option-pricing models that allow for the possibility of ____ provide more accurate pricing than does the basic Black-Scholes option-pricing model.

I and III only

Insiders are able to profitably trade and earn abnormal returns prior to the announcement of positive news. This is a violation of which form of efficiency? A. Weak form efficiency B. Semi-strong form efficiency C. Strong form efficiency D. Technical analysis

In a recent study, Fama and French found that the return on the aggregate stock market was __________ when the dividend yield was higher. A. higher B. lower C. unaffected D. more skewed

In an efficient market and for an investor that believes in a passive approach to investing, what is the primary duty of a portfolio manager? A. Accounting for results B. Diversification C. Identifying undervalued stocks D. No need for a portfolio manager

In the mean-standard deviation graph, the line that connects the risk-free rate and the optimal risky portfolio, P, is called _________. A. the capital allocation line B. the indifference curve C. the investor's utility line D. the security market line

70.What combination of puts and calls can simulate a long stock investment? A. Long call and short put B. Long call and long put C. Short call and short put D. Short call and long put

72. An investor is bearish on a particular stock and decided to buy a put with a strike price of $25. Ignoring commissions, if the option was purchased for a price of $.85, what is the break-even point for the investor? A. $24.15 B. $25 C. $25.87 D. $27.86

77. What strategy is designed to ensure a value within the bounds of two different stock prices? A. Collar B. Covered Call C. Protective put D. Straddle

A writer of a call option will want the value of the underlying asset to __________, and a buyer of a put option will want the value of the underlying asset to _________. A. decrease; decrease B. decrease; increase C. increase; decrease D. increase; increase

An American call option gives the buyer the right to _________. A. buy the underlying asset at the exercise price on or before the expiration date B. buy the underlying asset at the exercise price only at the expiration date C. sell the underlying asset at the exercise price on or before the expiration date D. sell the underlying asset at the exercise price only at the expiration date

Strips and straps are variations of __________. A. straddles B. collars C. money spreads D. time spreads

The Option Clearing Corporation is owned by _________. A. the exchanges on which stock options are traded B. the Federal Deposit Insurance Corporation C. the Federal Reserve System D. major U.S. banks

The initial maturities of most exchange-traded options are generally __________. A. less than 1 year B. less than 2 years C. between 1 and 2 years D. between 1 and 3 years

The maximum loss a buyer of a stock call option can suffer is the _________. A. call premium B. stock price C. stock price minus the value of the call D. strike price minus the stock price

The value of a listed put option on a stock is lower when: I. The exercise price is higher. II. The contract approaches maturity. III. The stock decreases in value. IV. A stock split occurs. A. II only B. II and IV only C. I, II, and III only D. I, II, III, and IV

Which of the following expressions represents the value of a call option to its holder on the expiration date? A. ST - X if ST > X, 0 if ST ≤ X B. - (ST - X) if ST > X, 0 if ST ≤ X C. 0 if ST ≥ X, X - ST if ST < X D. 0 if ST ≥ X, - (X - ST) if ST < X

What combination of puts and calls can simulate a long stock investment? a) long call and short put b) long call and long put c) short call and short put d) short call and long put

a) long call and short put

most of the stock prices response to a corporate earnings or dividend announcement occurs within

about 10 min or less

a technical analyst is most likely to be affiliated with which investment philosophy

active management

strong form of EMH states that this type of information must be reflected in the current stock price

all information, including inside information

weak form of EMH states that this type of information must be reflected in the current stock price

all past information, including security price and volume data

semistrong form of EMH states that this type of information must be reflected in the current stock price

all publicly available information

A one-dollar increase in a stock's price would result in _____ in the call option's value of ____ than one dollar.

an increase ; less

Which one of the following will increase the value of a put option?

and increase in the volatility of the underlying stock

67. A covered call strategy benefits from what environment? A. Falling interest rates B. Price stability C. Price volatility D. Unexpected events

76. What strategy could be considered insurance for an investment in a portfolio of stocks? A. Covered call B. Protective put C. Short put D. Straddle

78. You are convinced that a stock's price will move by at least 15% over the next 3 months. You are not sure which way the price will move, but you believe that the results of a patent hearing are definitely going to have a major effect on the stock price. You are somewhat more bullish than bearish however. Which one of the following options strategies best fits this scenario? A. Buy a strip. B. Buy a strap. C. Buy a straddle. D. Write a straddle.

85. You own a stock portfolio worth $50,000. You are worried that stock prices may take a dip before you are ready to sell, so you are considering purchasing either at-the-money or out-of-the-money puts. If you decide to purchase the out-of-the-money puts, your maximum loss is __________ than if you buy at-the-money puts and your maximum gain is __________. A. greater; lower B. greater; greater C. lower; greater D. lower; lower

The stock price of Apax inc is currently $105. he stock price a year from now will be either $130 or $90 with equal probabilities. The interest rate at which investors can borrow is 10%. Using the binomial OPM, the value of a call option with an exercise price of $110 and an expiration date 1 year from now should be worth _____ today

$11.59

Calculate the price of a European call option using the Black-Scholes model and the following data: stock price = $56.80, exercise price = $55, time to expiration = 15 days, risk-free rate = 2.5%, std dev = 22%, dividend yield = 8%

$2.04

calculate the price of a call option using the Black Scholes model and the following data: stock price = $47.30, exercise price = $50, time to expiration = 85 days, risk-free rate = 3%, std dev = 35%

$2.22

The current stock price of KMW is $27, the risk-free rate of return is 4%, and the std dev is 30%. What is the price of a 63-day call option with an exercise price of $25?

$2.65

A stock with a stock and exercise price of $20 can either increase to $26 or decrease to $18 over the course of one year. In a one-period binomial option model, given an interest rate of 5% and equal probabilities, what is the likely option price?

$2.88

The current stock price of national paper is $69 and the stock does not pay dividends .... You want to purchase a put option on this stock with an exercise price of $70 and an expiration date 73 days from now. Using the black-scholes, the put option should be worth ___ today

$2.88

Given a stock price o $18, an exercise price of $20, and an interest rate of 7%, what are the intrinsic values which will occur for a one-period binomial option model if the stock price goes up to $23 or down to $16?

$3 and $0

The current stock price of National Paper os $69 and the stock does not pay dividends .... You want to purchase a call option on this stock with an exercise price of $70 and an expiration date 73 days from now. Using the black-scholes OPM, the call option should be worth _____ today

$3.26

You are considering purchasing a put option on a stock with a current price of $33. The exercise price is $35, and the price of the corresponding call option is $2.25. According to the put-call parity theorem, if the risk-free rate of interest is 4% and there are 90 days until expiration, the value of the put should be _____

$3.91

The stock price of Bravo Corp is currently $100. The stock price a year from now will be either $160 of $60 with equal probabilities. The interest rate at which investors invest in rissoles assets is 6%. Using the binomial OPM, the value of a put option with an exercise price of $135 and an expiration date 1 year from now should be worth _____ today

$38.21

A call option has an exercise price of $30 and stock price of $34. If the call option is trading for $5.25, what is the intrinsic value of the option?

The stock price of Harper Corp. is $33 today. The risk-free rate of return is 6%, and Harper corp pays no dividends. ..... A call option on Harper Corp. stock with an exercise price of $30 and the same expiration date should be worth _____ today

$4.31

A stock with a current market price of $50 and a strike price of $45 has an associated call option priced at $6.50. This call has an intrinsic value of ____ and a time value of ____

$5 ; $1.50

You would like to hold a protective put position on the stock of Avalon Corp. .... What would have been the cost of a protective put portfolio?

$51.19

A call option on Juniper Corp. stock with an exercise price $75 and an expiration date 1 year from now is worth $3 today. ... The stock should be worth _____ today

$69.73

The current stock price of Howard & Howard is $64, and the stock does not pay dividends. .... You want to purchase a call option on this stock with an exercise price of $55 and an expiration date 73 days from now. Using the black-scholes OPM, the call option should be worth ____ today

$9.62

You would like to hold a protective position on the stock of Avalon Corp. to lock in a guaranteed minimum value of $50 at year-end. Avalon currently sells for $50. ... Suppose the desired put options with X=50 were traded. What would be the hedge ratio for the option?

-.5

. "Active investment management may generate additional returns at times of about 0.1%. However, the standard deviation of the typical well diversified portfolio is about 20%, so it is very difficult to statistically identify any increase in performance." Even if true, this statement is an example of the _________ problem in deciding how efficient the markets are. A. magnitude B. selection bias C. lucky event D. allocation

. DeBondt and Thaler (1985) found that the poorest performing stocks in one time period experienced __________ performance in the following period and the best performing stocks in one time period experienced __________ performance in the following time period. A. good, good B. good, poor C. poor, good D. poor, poor

. Fundamental analysis is likely to yield best results for _______. A. NYSE stocks B. neglected stocks C. stocks that are frequently in the news D. fast growing companies

. 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. A. semi-strong B. strong C. weak D. perfect

B. a rate anticipation

17. A portfolio manager believes interest rates will drop and decides to sell short-duration bonds and buy long-duration bonds. This is an example of __________ swap. A. a pure yield pickup B. a rate anticipation C. a substitution D. an intermarket spread

. 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 once he had eliminated his loss. If other investors do the same to establish a trading pattern this would contradict _______. A. the strong-form EMH B. the weak-form EMH C. technical analysis D. the semistrong-form EMH

. Small firms have tended to earn abnormal returns primarily in __________. A. the month of January B. the month July C. the trough of the business cycle D. the peak of the business cycle

. The CAL provided by combinations of one month T-bills and a broad index of common stocks is called the ______. A. SML B. CAPM C. CML D. Total Return Line

The current stock price of Alcoco is $70, and the stock does not pay dividends. The instantaneous risk-free rate of return is 6% ... Based on the Black-Scholes OPM, the call option's delta will be ______

.31

In the Black-Scholes model, if an option is not likely to be exercised, both N(d1) and N(d2) will be close to _____. If the option is definitely likely to be exercised, N(d1) and N(d2) will be close to ____

0 ; 1

The value of a listed call option on a stock is lower when: I. The exercise price is higher. II. The contract approaches maturity. III. The stock decreases in value. IV. A stock split occurs.

1,2, and 3

A. A 30-year bond with a 10% coupon

1. All other things equal (YTM = 10%), which of the following has the longest duration? A. A 30-year bond with a 10% coupon B. A 20-year bond with a 9% coupon C. A 20-year bond with a 7% coupon D. A 10-year zero-coupon bond

1. Testing many different trading rules until you find one that would have worked in the past is called _______. A. data mining B. perceived patterning C. pattern searching D. behavioral analysis

You would like to hold a protective put position on the stock of Avalon Corp. .... What portfolio position in stock and t-bills will ensure you a payoff equal to the payoff that would be provided by a protective put with X=$50?

1/2 share of stock and $26.19 in bills

The time value of a call option is likely to decline most rapidly _____ days before expiration?

10. A high amount of short interest is typically considered as a __________ signal, and contrarians may consider it as a _________ signal. A. bearish; bullish B. bullish; bearish C. bearish; false D. bullish; false

A. greater than

10. As a result of bond convexity, an increase in a bond's price when yield to maturity falls is ________ the price decrease resulting from an increase in yield of equal magnitude. A. greater than B. equivalent to C. smaller than D. The answer cannot be determined from the information given.

B. lower coupon rates

11. All else equal, bond price volatility is greater for __________. A. higher coupon rates B. lower coupon rates C. shorter maturity D. lower default risk

11. Technical analysis focuses on _____________________. A. finding opportunities for risk-free investing B. finding repeating trends and patterns in prices C. changing prospects for earnings growth of particular firms or industries D. forecasting technical regulatory changes

12. Behavioralists point out that even if market prices are ____________, there may be _______________. A. distorted; limited arbitrage opportunities B. distorted; fundamental efficiency C. allocationally efficient; limitless arbitrage opportunities D. distorted; allocational efficiency

A. Convexity

12. ______________ is an important characteristic of the relationship between bond prices and yields. A. Convexity B. Concavity C. Complexity D. Linearity

In a binomial option model with three subintervals, the probability that the stock price moves up every possible time is _____

12.5%

13. According to market technicians, it is time to sell stock in a head-and-shoulders formation when ___________. A. the price index pierces the left shoulder B. the price index pierces the right shoulder C. the price index pierces the head D. none of these options takes place

A. more; lower

13. Bond prices are _______ sensitive to changes in yield when the bond is selling at a _______ initial yield to maturity. A. more; lower B. more; higher C. less; lower D. equally; higher or lower

C. Frederick Macaulay

14. The pioneer of the duration concept was _________. A. Eugene Fama B. John Herzog C. Frederick Macaulay D. Harry Markowitz

14. When a stock price breaks through the moving average from below, this is considered to be ______. A. the starting point for a new moving average B. a bearish signal C. a bullish signal D. none of these options

D. an intermarket spread

15. A portfolio manager sells Treasury bonds and buys corporate bonds because the spread between corporate- and Treasury-bond yields is higher than its historical average. This is an example of __________ swap. A. a pure yield pickup B. a rate anticipation C. a substitution D. an intermarket spread

15. When the stock price falls below a moving average, a possible conclusion is that _____. A. market momentum has become positive B. market momentum has become negative C. there is no regular pattern for this stock's market momentum D. professional analysts' opinions are invalid until the stock price rises again

16. Following a period of falling prices, the moving average will _____. A. be below the current price B. be above the current price C. be equal to the current price D. become more volatile than it had been before prices fell

B. 5

16. The duration of a 5-year zero-coupon bond is ____ years. A. 4.5 B. 5 C. 5.5 D. 3.5

17. A moving average of stock prices _________________. A. always lies above the most recent price B. always lies below the most recent price C. is less volatile than the actual prices D. is more volatile than the actual prices

D. the same regardless of the discount rate

22. Given its time to maturity, the duration of a zero-coupon bond is _________. A. higher when the discount rate is higher B. higher when the discount rate is lower C. lowest when the discount rate is equal to the risk-free rate D. the same regardless of the discount rate

C. smaller than

23. An increase in a bond's yield to maturity results in a price decline that is ________ the price increase resulting from a decrease in yield of equal magnitude. A. greater than B. equivalent to C. smaller than D. The answer cannot be determined.

23. The only way for behavioral patterns to persist in prices is if ______________. A. markets are not weak-form efficient B. there are limits to arbitrage activity C. there are no significant trading costs D. market psychology is inconsistent over time

B. lower when the yield to maturity is higher

24. All other things equal, a bond's duration is _________. A. higher when the yield to maturity is higher B. lower when the yield to maturity is higher C. the same at all yield rates D. indeterminable when the yield to maturity is high

24. In the context of a point and figure chart, a horizontal band of Xs and Os is a _____________. A. buy signal B. sell signal C. congestion area D. trend reversal

C. interest rates rise

25. A bank has an average duration of its liabilities equal to 2 years. The bank's average duration of its assets is 3.5 years. The bank's market value of equity is at risk if _______________________. A. interest rates fall B. credit spreads fall C. interest rates rise D. the price of all fixed-income securities rises

25. Even though indexing is growing in popularity, only about _____ of equity in the mutual fund industry is held in indexed funds. This may be a sign that investors and managers __________. A. 5%; are excessively conservative B. 15%; overestimate their ability C. 20%; suffer from framing biases D. 25%; engage in mental accounting

B. lower when the coupon rate is higher

26. All other things equal, a bond's duration is _________. A. higher when the coupon rate is higher B. lower when the coupon rate is higher C. the same when the coupon rate is higher D. indeterminable when the coupon rate is high

26. If investors are too slow to update their beliefs about a stock's future performance when new evidence arises, they are exhibiting _______. A. representativeness bias B. framing error C. conservatism D. memory bias

C. matching the durations of their assets and liabilities

27. Banks and other financial institutions can best manage interest rate risk by _____________. A. maximizing the duration of assets and minimizing the duration of liabilities B. minimizing the duration of assets and maximizing the duration of liabilities C. matching the durations of their assets and liabilities D. matching the maturities of their assets and liabilities

27. If investors overweight recent performance in forecasting the future, they are exhibiting _______. A. representativeness bias B. framing error C. memory bias D. overconfidence

B. duration of the portfolio

28. In the context of a bond portfolio, price risk and reinvestment rate risk exactly cancel out at a time horizon equal to the ____. A. average bond maturity in the portfolio B. duration of the portfolio C. difference between the shortest duration and longest duration of the individual bonds in the portfolio D. average of the shortest duration and longest duration of the bonds in the portfolio

28. Trading activity and average returns in brokerage accounts tend to be _________. A. uncorrelated B. negatively correlated C. positively correlated D. positively correlated for women and negatively correlated for men

A. price; reinvestment

29. Bond portfolio immunization techniques balance ________ and ________ risk. A. price; reinvestment B. price; liquidity C. credit; reinvestment D. credit; liquidity

29. Your two best friends each tell you about a person they know who successfully started a small business. That's it, you decide; if they can do it, so can you. This is an example of _____________. A. mental accounting B. framing bias C. conservatism D. representativeness bias

C. 2.29 years

3. A pension fund must pay out $1 million next year, $2 million the following year, and then $3 million the year after that. If the discount rate is 8%, what is the duration of this set of payments? A. 2 years B. 2.15 years C. 2.29 years D. 2.53 years

3. The trin statistic is a ______ indicator. A. sentiment B. flow of funds C. market structure D. fundamental

30. Which of the following is not a sentiment indicator? A. Confidence index B. Short interest C. Odd-lot trading D. Put/call ratio

C. the value weighted average of the durations of the individual bonds in the portfolio

31. The duration of a portfolio of bonds can be calculated as _______________. A. the coupon weighted average of the durations of the individual bonds in the portfolio B. the yield weighted average of the durations of the individual bonds in the portfolio C. the value weighted average of the durations of the individual bonds in the portfolio D. averages of the durations of the longest- and shortest-duration bonds in the portfolio

31. Which of the following is considered a sentiment indicator? A. A 200-day moving average B. Short interest C. Credit balances in brokerage accounts D. Relative strength

32. An investor holds a very conservative portfolio invested for retirement, but she takes some extra cash she earned from her year-end bonus and buys gold futures. She appears to be engaging in ___________. A. overconfidence B. representativeness C. forecast errors D. mental accounting

B. long-duration bonds

32. Pension fund managers can generally best bring about an effective reduction in their interest rate risk by holding ___________________. A. long-maturity bonds B. long-duration bonds C. short-maturity bonds D. short-duration bonds

33. Which of the following analysts focus more on past price movements of a firm's stock than on the underlying determinants of its future profitability? A. Credit analysts B. Fundamental analysts C. Systems analysts D. Technical analysts

D. Asset-liability swap

33. Which of the following is not a type of bond swap used in active portfolio management? A. Intermarket spread swap B. Substitution swap C. Rate anticipation swap D. Asset-liability swap

34. A trin ratio of greater than 1 is considered a __________. A. bearish signal B. bullish signal C. bearish signal by some technical analysts and a bullish signal by other technical analysts D. trend reversal signal

A. a substitution swap

34. The exchange of one bond for a bond that has similar attributes but is more attractively priced is called ______________. A. a substitution swap B. an intermarket spread swap C. a rate anticipation swap D. a pure yield pickup swap

35. Contrarian investors consider a high put/call ratio a __________. A. bearish signal B. bullish signal C. trend confirmation signal D. signal to enter the options market

C. III, I, II

35. Rank the interest sensitivity of the following from the most sensitive to an interest rate change to the least sensitive: I. 8% coupon, noncallable 20-year maturity par bond II. 9% coupon, currently callable 20-year maturity premium bond III. Zero-coupon 30-year maturity bond A. I, II, III B. II, III, I C. III, I, II D. III, II, I

C. a rate anticipation swap

36. A bond swap made in response to forecasts of interest rate changes is called ______. A. a substitution swap B. an intermarket spread swap C. a rate anticipation swap D. a pure yield pickup swap

36. The ratio of the average yield on 10 top-rated corporate bonds to the average yield on 10 intermediate-grade bonds is called the __________. A. bond price index B. confidence index C. relative strength index D. trin ratio

...

37. An investor needs cash to pay some hospital bills. He is willing to use his dividend income to pay the bills, but he will not sell any stock to do so. He is engaging in ___________. A. overconfidence B. representativeness C. forecast errors D. mental accounting

D. a pure yield pickup swap

37. Moving to higher-yield bonds, usually with longer maturities, is called ________. A. a substitution swap B. an intermarket spread swap C. a rate anticipation swap D. a pure yield pickup swap

38. Bill and Shelly are friends. Bill invests in a portfolio of hot stocks that almost all his friends are invested in. Shelly invests in a portfolio that is totally different from the portfolios of all her friends. Both Bill's and Shelly's stocks fall 15%. According to regret theory, _________________________________________. A. Bill will have more regret over the loss than Shelly B. Shelly will have more regret over the loss than Bill C. Bill and Shelly will have equal regret over their losses D. Bill's and Shelly's risk aversion will increase in the future

B. shorter-duration; longer-duration

38. In a pure yield pickup swap, ________ bonds are exchanged for _________ bonds. A. longer-duration; shorter-duration B. shorter-duration; longer-duration C. high-coupon; high-yield D. low-yield; high-yield

A. underestimates

39. The duration rule always ________ the value of a bond following a change in its yield. A. underestimates B. provides an unbiased estimate of C. overestimates D. The estimated price may be biased either upward or downward, depending on whether the bond is trading at a discount or a premium.

39. The most common measure of __________ is the spread between the number of stocks that advance in price and the number of stocks that decline in price. A. market breadth B. market volume C. odd-lot trading D. short interest

C. A 21-year zero-coupon bond yielding 10%

4. All other things equal, which of the following has the longest duration? A. A 21-year bond with a 10% coupon yielding 10% B. A 20-year bond with a 10% coupon yielding 11% C. A 21-year zero-coupon bond yielding 10% D. A 20-year zero-coupon bond yielding 11%

4. The put/call ratio is a ______ indicator. A. sentiment B. flow of funds C. market structure D. fundamental

40. Jill is offered a choice between receiving $50 with certainty or possibly receiving the proceeds from a gamble. In the gamble a fair coin is tossed, and if it comes up heads, Jill will receive $100; if the coin comes up tails, she will receive nothing. Jill chooses the $50 instead of the gamble. Jill's behavior indicates __________________. A. regret avoidance B. overconfidence C. that she has a diminishing marginal utility of wealth D. prospect theory loss aversion

D. (1 + y)/y

40. Where y = yield to maturity, the duration of a perpetuity would be _________. A. y B. y/(1 + y) C. 1/y D. (1 + y)/y

41. When the market breaks through the moving average line from below, a technical analyst would probably suggest that it is a good time to ___________. A. buy the stock B. hold the stock C. sell the stock D. short the stock

42. If you believed in the reversal effect, you should __________. A. buy bonds this period if you held stocks last period B. buy stocks this period that performed poorly last period C. buy stocks this period that performed well last period D. do nothing if you held the stock last period

43. According to technical analysts, a shift in market fundamentals will __________. A. be reflected in stock prices immediately B. lead to a gradual price change that can be recognized as a trend C. lead to high volatility in stock market prices D. leave prices unchanged

44. According to market technicians, a trin statistic of less than 1 is considered a __________. A. bearish signal B. bullish signal C. volume decline D. signal reversal

6. Short interest is a ______ indicator. A. sentiment B. flow of funds C. market structure D. fundamental

45. It is difficult to test the Kondratieff wave theory because _________. A. it applies to only Russian stocks B. its main proponent found contrary research results C. only two independent data points are generated each century D. the stock market is too volatile to generate smooth waves

46. A _________ is a value above which it is difficult for the market to rise. A. book value B. resistance level C. support level D. confidence level

47. _____________ is a tool that can help identify the direction of a stock's price. A. Prospect theory B. Framing C. A moving average D. Conservatism

48. If the utility you derive from your next dollar of wealth increases by less than a loss of a dollar reduces it, you are exhibiting __________. A. loss aversion B. regret avoidance C. mental accounting D. framing bias

49. In technical analysis, __________ is a value below which the market is relatively unlikely to fall. A. book value B. resistance level C. support level D. the Dow line

5. Relative strength is ______ indicator. A. a fundamental B. an economic C. a technical D. an international

B. inversely

5. The duration of a perpetuity varies _______ with interest rates. A. directly B. inversely C. convexly D. randomly

50. A possible limit on arbitrage activity that may allow behavioral biases to persist is _______. A. technical trends in prices B. momentum effects C. fundamental risk D. trend reversals

B. decreases

50. When interest rates increase, the duration of a 20-year bond selling at a premium _________. A. increases B. decreases C. remains the same D. increases at first and then declines

C. maturities

51. Duration facilitates the comparison of bonds with differing ___________. A. default risks B. conversion ratios C. maturities D. yields to maturity

51. If you are not a contrarian, you consider a high put/call ratio to be a __________. A. bearish signal B. bullish signal C. trend confirmation signal D. signal to enter the options market

a Day 1 Ratio=12/127=0.09449 Day 2 Ratio=15/139=0.107914

52. On day 1, the stock price of Ford was $12 and the automotive stock index was 127. On day 2, the stock price of Ford was $15 and the automotive stock index was 139. Consider the ratio of Ford to the automotive stock index at day 1 and day 2. Ford is __________ the automotive industry, and technical analysts who follow relative strength would advise __________ the stock. A. outperforming; buying B. outperforming; selling C. underperforming; buying D. underperforming; selling Since the ratio is increasing, the relative strength of Ford is improving; it is outperforming and should be bought.

C. buy the AAA and short the AA

52. The historical yield spread between the AA bond and the AAA bond has been 25 basis points. Currently the spread is only 9 basis points. If you believe the spread will soon return to its historical levels, you should ________________________. A. buy the AA and short the AAA B. buy both the AA and the AAA C. buy the AAA and short the AA D. short both the AA and the AAA

d CI(July)=0.0765/0.0842=0.91 CI(August)=0.0600/0.0671=.89

53. At the end of July, the average yields on 10 top-rated corporate bonds and 10 intermediate-grade bonds were 7.65% and 8.42%, respectively. At the end of August, the average yields on 10 top-rated corporate bonds and 10 intermediate-grade bonds were 6% and 6.71%, respectively. The confidence index _________ during August, and bond technical analysts are likely to be ________. A. increased; bullish B. increased; bearish C. decreased; bullish D. decreased; bearish Since the confidence index decreased, this would be considered a bearish signal.

A. I only

53. The duration of a bond normally increases with an increase in: I. Term to maturity II. Yield to maturity III. Coupon rate A. I only B. I and II only C. II and III only D. I, II, and III

c Market breadth = 890 - 723 = 167

54. On a particular day, there were 890 stocks that advanced on the NYSE and 723 that declined. The volume in advancing issues was 80,846,000, and the volume in declining issues was 70,397,000. The common measure of market breadth is __________. A. -10,449,000 B. -167 C. 167 D. 10,449,000

d Trin=70,397,000/723/80,846,000/920=1.11

55. On a particular day, there were 920 stocks that advanced on the NYSE and 723 that declined. The volume in advancing issues was 80,846,000, and the volume in declining issues was 70,397,000. The trin ratio is __________, and technical analysts are likely to be __________. A. .90; bullish B. .90; bearish C. 1.11; bullish D. 1.11; bearish

56. An accumulation of cash by mutual funds may be viewed by technical traders as a __________ indicator. A. bullish B. neutral C. bearish D. trend reversal

57. A point and figure chart: I. Gives a sell signal when the stock price penetrates previous lows II. Tracks significant upward or downward movements III. Has no time dimension IV. Indicates congestion areas A. I and II only B. II and III only C. I, III, and IV only D. I, II, III, and IV

58. When technical analysts say a stock has good "relative strength," they mean that in the recent past __________. A. it has performed well compared to its closest competitors B. it has exceeded its own historical high C. trading volume in the stock has exceeded the normal trading volume D. it has outperformed the market index

59. Technical traders view mutual fund investors as _________ market timers. A. excellent B. frequent C. neutral D. poor

D. A low coupon and a long maturity

59. Which of the following set of conditions will result in a bond with the greatest price volatility? A. A high coupon and a short maturity B. A high coupon and a long maturity C. A low coupon and a short maturity D. A low coupon and a long maturity

A. always be higher than

6. Because of convexity, when interest rates change, the actual bond price will ____________ the bond price predicted by duration. A. always be higher than B. sometimes be higher than C. always be lower than D. sometimes be lower than

60. An important assumption underlying the use of technical analysis techniques is that ___________________. A. security prices adjust rapidly to new information B. security prices adjust gradually to new information C. security dealers will provide enough liquidity to keep price changes relatively small D. all investors have immediate and costless access to information

D. zero; long

60. An investor who expects declining interest rates would maximize her capital gain by purchasing a bond that has a _________ coupon and a _________ term to maturity. A. low; long B. high; short C. high; long D. zero; long

61. If the put/call ratio increases, market contrarians may interpret this as what kind of signal? A. Buy signal B. Sell signal C. Hold signal D. This is not interpreted as a signal

B. I and II only

61. If you choose a zero-coupon bond with a maturity that matches your investment horizon, which of the following statements is (are) correct? I. You will have no interest rate risk on this bond. II. In the absence of default, you can be sure you will earn the promised yield rate. III. The duration of your bond is less than the time to your investment horizon. A. I only B. I and II only C. II and III only D. I, II, and III

B. greater price volatility

62. As compared with equivalent maturity bonds selling at par, deep discount bonds will have ________. A. greater reinvestment risk B. greater price volatility C. less call protection D. shorter average maturity

62. The tendency of investors to hold on to losing investments is called the ________. A. overweighting effect B. head-in-the-sand effect C. disposition effect D. prospector effect

63. Which one of the following best describes fundamental risk? A. A stock is overpriced, but your fund does not allow you to engage in short sales. B. Your models indicate a stock is mispriced, but you are not sure if this is a real profit opportunity or a model input error. C. You buy a stock that you believe is underpriced, and the underpricing persists for a long time, hurting your short-term results. D. A stock is trading in two different markets at two different prices.

64. Day Advances 870 760 960 840 Declines 880 990 790 910 Volume↑ 580 620 480 510 Volume ↓ 670 580 720 520 Yiel@CB 6.8%6.7%6.7%6.6% The trin on day 2 is ___. A. .72 B. 1.04 C. .92 D. .55

d Breadth on day 3 = 960 - 790 = 170

66. The breadth on day 3 is _______. A. -70 B. 10 C. 90 D. 170

a Cumulative breadth, days 1 and 2 = (870 - 880) + (760 - 990) = -240

67. The cumulative breadth for the first 2 days is ___. A. -240 B. -50 C. 110 D. 250

b Cumulative breadth, days 1-4 = (870 - 880) + (760 - 990) + (960 - 790) + (840 - 910) = -140 Negative cumulative breadth is bearish.

68. Cumulative breadth for the 4 days is ___, which is ___. A. -140; bullish B. -140; bearish C. -300; bullish D. -300; bearish

C. Price volatility decreases at a decreasing rate.

68. When bonds sell above par, what is the relationship of price sensitivity to rising interest rates? A. Price volatility increases at an increasing rate. B. Price volatility increases at a decreasing rate. C. Price volatility decreases at a decreasing rate. D. Price volatility decreases at an increasing rate.

The current stock price on Alcoco is $70 and .... According to the Black-Scholes OPM, you should hold _____ shares of stock per 100 put options to hedge your risk

c The trin has decreased, and this is bullish.

69. From day 1 to day 4, the trin has ___ and is ___. A. increased; bullish B. increased; bearish C. decreased; bullish D. decreased; bearish

D. 13 years

69. A zero-coupon bond is selling at a deep discount price of $430. It matures in 13 years. If the yield to maturity of the bond is 6.7%, what is the duration of the bond? A. 6.7 years B. 8 years C. 10 years D. 13 years

7. Moving averages are ______ indicators. A. sentiment B. flow of funds C. trend D. fundamental

B. Buy the Canon bond, and short the Xerox bond.

7. You find a 5-year AA Xerox bond priced to yield 6%. You find a similar-risk 5-year Canon bond priced to yield 6.5%. If you expect interest rates to rise, which of the following should you do? A. Short the Canon bond, and buy the Xerox bond. B. Buy the Canon bond, and short the Xerox bond. C. Short both the Canon bond and the Xerox bond. D. Buy both the Canon bond and the Xerox bond.

A. be less price-volatile

71. If an investment returns a higher percentage of your money back sooner, it will ______. A. be less price-volatile B. have a higher credit rating C. be less liquid D. have a higher modified duration

71. Problems with behavioral finance include: I. The behavioralists tell us nothing about how to exploit any irrationality. II. The implications of behavioral patterns are inconsistent from case to case, sometimes suggesting overreaction, sometimes underreaction. III. As with technical trading rules, behavioralists can always find some pattern in past data that supports a behavioralist trait. A. I only B. II only C. I and III only D. I, II, and III

72. A major problem with technical trading strategies is that ________. A. it is very difficult to identify a true trend before the fact B. it is very difficult to identify the correct trend after the fact C. it is so easy to identify trends that all investors quickly do so D. Kondratieff showed that you can't identify trends without 48 to 60 years of data

D. the percentage of the total present value of the investment received in year t

72. Which one of the following statements correctly describes the weights used in the Macaulay duration calculation? The weight in year t is equal to ____________. A. the dollar amount of the investment received in year t B. the percentage of the future value of the investment received in year t C. the present value of the dollar amount of the investment received in year t D. the percentage of the total present value of the investment received in year t

A. Buy the 5-year bonds, and short the surrounding maturity bonds.

75. A bond portfolio manager notices a hump in the yield curve at the 5-year point. How might a bond manager take advantage of this event? A. Buy the 5-year bonds, and short the surrounding maturity bonds. B. Buy the 5-year bonds, and buy the surrounding maturity bonds. C. Short the 5-year bonds, and short the surrounding maturity bonds. D. Short the 5-year bonds, and buy the surrounding maturity bonds.

75. An investor has her money segregated into checking, savings, and investments. The allocation among the categories is subjective, yet the investor spends freely from the checking account and not the others. This behavior can be explained as _______________. A. loss aversion B. mental accounting C. overreaction D. winner's curse

76. Identify the resistance-level stock price. A. $40 B. $42 C. $44 D. $46

B. Switch from high-duration to low-duration bonds.

76. Market economists all predict a rise in interest rates. An astute bond manager wishing to maximize her capital gain might employ which strategy? A. Switch from low-duration to high-duration bonds. B. Switch from high-duration to low-duration bonds. C. Switch from high-grade to low-grade bonds. D. Switch from low-coupon to high-coupon bonds.

77. Identify the support level stock price. A. $40 B. $42 C. $44 D. $46

A. interest rates increase

77. You have an investment horizon of 6 years. You choose to hold a bond with a duration of 4 years. Your realized rate of return will be larger than the promised yield on the bond if ___________________. A. interest rates increase B. interest rates stay the same C. interest rates fall D. The answer cannot be determined from the information given.

78. Investors gravitate toward the latest hot stock even though it has never paid a dividend. Even though net income is projected to fall over the current and next several years, the price of the stock continues to rise. What behavioral concept may explain this price pattern? A. Overconfidence B. Loss aversion C. Mental accounting D. Calendar bias

A. Cash flow matching

78. What strategy might an insurance company employ to ensure that it will be able to meet the obligations of annuity holders? A. Cash flow matching B. Index tracking C. Yield pickup swaps D. Substitution swap

79. During a period when prices have been rising, the _________ will be _______ the current price. A. relative strength index; declining with B. relative strength index; declining faster than C. moving average; above D. moving average; below

D. I, II, and III

79. You have an investment horizon of 6 years. You choose to hold a bond with a duration of 6 years and continue to match your investment horizon and duration throughout your holding period. Your realized rate of return will be the same as the promised yield on the bond if: I. Interest rates increase. II. Interest rates stay the same. III. Interest rates fall. A. I only B. II only C. I and II only D. I, II, and III

D. horizon analysis

8. A forecast of bond returns based largely on a prediction of the yield curve at the end of the investment horizon is called a _________. A. contingent immunization B. dedication strategy C. duration analysis D. horizon analysis

8. Market breadth is a ______ indicator. A. sentiment B. flow of funds C. technical D. fundamental

...

80. An investor purchases shares of an index fund. The investor could take on the same level of risk by taking out a loan and purchasing a higher-risk specialty fund. The Sharpe ratio on this complete portfolio is higher than her existing investment. What behavioral concept prevents the investor from taking out the loan and investing in the index fund? A. Framing bias B. Excessive volatility C. Loss aversion D. Mental accounting

B. I and II only

80. Immunization of coupon-paying bonds does not imply that the portfolio manager is inactive because: I. The portfolio must be rebalanced every time interest rates change. II. The portfolio must be rebalanced over time even if interest rates don't change. III. Convexity implies duration-based immunization strategies don't work. A. I only B. I and II only C. II only D. I, II, and III

A. I only

81. Advantages of cash flow matching and dedicated strategies include: I. Once the cash flows are matched, there is no need for rebalancing. II. Cash flow matching typically earns a higher rate of return than active bond portfolio management. III. Financial institutions' liabilities often exceed the maturity of available bonds, making cash matching even more desirable. A. I only B. II only C. I and III only D. I, II, and III

81. The price of a stock fluctuates between $43 and $60. If the time frame referenced encompasses the primary trend, the $43 price may be considered the ___________. A. intermediate trend level B. minor trend level C. resistance level D. support level

82. The moving average generates buy signal(s) _____. A. on days 3, 11, and 15 B. on days 2 and 16 C. on days 5, 9, and 13 D. on no days

C. I and IV only

82. Convexity implies that duration predictions: I. Underestimate the percentage increase in bond price when the yield falls. II. Underestimate the percentage decrease in bond price when the yield rises. III. Overestimate the percentage increase in bond price when the yield falls. IV. Overestimate the percentage decrease in bond price when the yield rises. A. I and III only B. II and IV only C. I and IV only D. II and III only

83. The moving average generates sell signals _____. A. on days 3, 11, and 15 B. on days 7, 15, and 18 C. on days 5, 9, and 13 D. on day 16

84. The price of a stock fluctuates over a period of 10 days. The movement of the stock price below the 10-day minimum price of $25 triggers a rash of selling. The $25 price might now be considered the _______________. A. congestion area B. penetration point C. resistance level D. support level

During the 1926-2013 period the geometric mean return on small-firm stocks was ______. A. 5.31% B. 5.56% C. 9.34% D. 11.82%

D. 11.82%

B. the rate of change of the slope of the price-yield curve divided by the bond price

85. Convexity of a bond is ___________. A. the same as horizon analysis B. the rate of change of the slope of the price-yield curve divided by the bond price C. a measure of bond duration D. none of these options

85. Trend analysts who follow bonds are most likely to monitor the ____________. A. confidence index B. odd-lot trading C. short interest D. trin statistic

86. You find that the confidence index is down, the market breadth is up, and the trin ratio is down. In total, how many bullish signs do you have? A. 0 B. 1 C. 2 D. 3

87. You find that the trin ratio is up, the market breadth is down, and the market has closed below its 50-day moving average. In total, how many bearish signs do you have? A. 0 B. 1 C. 2 D. 3

B. increases; a decreasing

9. A bond's price volatility _________ at _________ rate as maturity increases. A. increases; an increasing B. increases; a decreasing C. decreases; an increasing D. decreases; a decreasing

9. The cumulative tally of the number of advancing stocks minus declining stocks is called the ______________. A. market breadth B. market volume C. trin ratio D. relative strength ratio

A day trade with an average stock holding period of under 8 minutes might be most closely associated with which trading philosophy? A. EMH B. Fundamental analysis C. Strong form market efficiency D. Technical analysis

A market anomaly refers to _______. A. an exogenous shock to the market that is sharp but not persistent B. a price or volume event that is inconsistent with historical price or volume trends C. a trading or pricing structure that interferes with efficient buying and selling of securities D. price behavior that differs from the behavior predicted by the efficient market hypothesis

A technical analyst is most likely to be affiliated with which investment philosophy? A. Active management B. Buy and hold C. Passive investment D. Index funds

The ___ stage of the business cycle would be a good time to invest in firms engaged in natural resource extraction and processing such as minerals and petroleum. A) Peak B) Contraction C) Trough D) Expansion

A) Peak

Because of convexity, when interest rates change the actual bond price will ____________ the bond price predicted by duration. A. always be higher than B. sometimes be higher than C. always be lower than D. sometimes be lower than

A. always be higher than

A big increase in government spending is an example of __________. A) a demand shock B) a supply shock C) an unsurprising shock D) none of the above

A) a demand shock

Assume that a company announces unexpectedly high earnings in a particular quarter. In an efficient market one might expect _____________.

A. an abnormal price change immediately after the announcement

Which of the following influence the cost of capital? A. All of these choices are correct. B. General economic conditions. C. Marketability of securities. D. Amount of financing the firm requires.

A. All of these choices are correct.

56. You invest $10,000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 15% and a standard deviation of 21% and a Treasury bill with a rate of return of 5%. How much money should be invested in the risky asset to form a portfolio with an expected return of 11%? A. $6,000 B. $4,000 C. $7,000 D. $3,000

A. $6,000

32. 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 _________. A. .1152 B. .1270 C. .1521 D. .1342

A. .1152

31. 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 _________. A. .1152 B. .1270 C. .1521 D. .1342

A. .1152 Variance = 0.8 x 1.2^2

82. The risk premium for exposure to exchange rates is 5%, and the firm has a beta relative to exchange rates of .4. The risk premium for exposure to the consumer price index is -6%, and the firm has a beta relative to the CPI of .8. If the risk-free rate is 3%, what is the expected return on this stock? A. .2% B. 1.5% C. 3.6% D. 4%

A. .2% Return = .03 + .4(.05) + .8(-.06) = .002

83. The risk premium for exposure to exchange rates is 5%, and the firm has a beta relative to exchange rates of .4. The risk premium for exposure to the consumer price index is -6%, and the firm has a beta relative to the CPI of .8. If the risk-free rate is 3%, what is the expected return on this stock? A. .2% B. 1.5% C. 3.6% D. 4%

A. .2% Return = .03 + .4(.05) + .8(-.06) = .002

10. 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? A. .40 B. .50 C. .75 D. .80

A. .40 20%-10%/25%

When stock returns exhibit positive serial correlation, this means that __________ returns tend to follow ___________ returns.

A. positive; positive

29. A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 24%, while stock B has a standard deviation of return of 18%. Stock A comprises 60% of the portfolio, while stock B comprises 40% of the portfolio. If the variance of return on the portfolio is .0380, the correlation coefficient between the returns on A and B is _________. A. .583 B. .225 C. .327 D. .128

A. .583 .0380 = (.62)(.242) + (.42)(.182) + 2(.6)(.4)(.24)(.18) ρ; ρ = .583

34. 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 .50. The risk-free rate of return is 10%. The proportion of the optimal risky portfolio that should be invested in stock A is _________. A. 0% B. 40% C. 60% D. 100%

A. 0%

24. Research has revealed that regardless of what the current estimate of a firm's beta is, beta will tend to move closer to ______ over time. A. 1 B. 0 C. -1 D. .5

A. 1

24. Research has revealed that regardless of what the current estimate of a firm's beta is, beta will tend to move closer to ______ over time. A. 1 B. 0 C. -1 D. .5

A. 1

71. You consider buying a share of stock at a price of $25. The stock is expected to pay a dividend of $1.50 next year, and your advisory service tells you that you can expect to sell the stock in 1 year for $28. The stock's beta is 1.1, rf is 6%, and E[rm] = 16%. What is the stock's abnormal return? A. 1% B. 2% C. -1% D. -2%

A. 1%

72. You consider buying a share of stock at a price of $25. The stock is expected to pay a dividend of $1.50 next year, and your advisory service tells you that you can expect to sell the stock in 1 year for $28. The stock's beta is 1.1, rf is 6%, and E[rm] = 16%. What is the stock's abnormal return? A. 1% B. 2% C. -1% D. -2%

A. 1% Required return = 6% + (16% - 6%)(1.1) = 17% Abnormal return = 18% - 17% = 1%

22. 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? A. 1.048 B. 1.033 C. 1 D. 1.037

A. 1.048

A family will retire in a few years. They have a high tax bracket and are concerned about their after-tax rate of return. A meeting with their financial planner reveals that they are primarily focused on safety of principal and will need a 6% to 8% average rate of return on their portfolio. They desire a diversified portfolio, and liquidity is likely to be a concern due to health reasons. Which of the following asset allocations seems to best fit this family's situation? A. 10% money market; 50% intermediate-term bonds; 40% blue chip stocks, many with high dividend yields B. 0% money market; 60% intermediate-term bonds; 40% stocks C. 10% money market; 30% intermediate-term bonds; 60% high-dividend-paying stocks D. 5% money market; 35% intermediate-term bonds; 60% stocks, most with low dividends

A. 10% money market; 50% intermediate-term bonds; 40% blue chip stocks, many with high dividend yields

35. 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 .50. The risk-free rate of return is 10%. The expected return on the optimal risky portfolio is _________. A. 14% B. 15.6% C. 16.4% D. 18%

A. 14%

62. You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40%, respectively. X has an expected rate of return of 14%, and Y has an expected rate of return of 10%. To form a complete portfolio with an expected rate of return of 11%, you should invest __________ of your complete portfolio in Treasury bills. A. 19% B. 25% C. 36% D. 50%

A. 19%

46. Stock A has a beta of 1.2, and stock B has a beta of 1. The returns of stock A are ______ sensitive to changes in the market than are the returns of stock B. A. 20% more B. slightly more C. 20% less D. slightly less

A. 20% more

If the nominal rate of return on investment is 6% and inflation is 2% over a holding period, what is the real rate of return on this investment? A. 3.92% B. 4% C. 4.12% D. 6%

A. 3.92%

A mutual fund may not hold more than ______ of the shares of any publicly traded company. A. 5% B. 10% C. 25% D. 50%

A. 5%

During the 1926-2013 period the geometric mean return on Treasury bonds was _________. A. 5.07% B. 5.56% C. 9.34% D. 11.43%

A. 5.07%

28. Your investment has a 40% chance of earning a 15% rate of return, a 50% chance of earning a 10% rate of return, and a 10% chance of losing 3%. What is the standard deviation of this investment? A. 5.14% B. 7.59% C. 9.29% D. 8.43%

A. 5.14%

79. What is the standard deviation of a portfolio of two stocks given the following data: Stock A has a standard deviation of 18%. Stock B has a standard deviation of 14%. The portfolio contains 40% of stock A, and the correlation coefficient between the two stocks is -.23. A. 9.7% B. 12.2% C. 14% D. 15.6%

A. 9.7%

All other things equal, which of the following has the longest duration? A. A 30 year bond with a 10% coupon B. A 20 year bond with a 9% coupon C. A 20 year bond with a 7% coupon D. A 10 year zero coupon bond

A. A 30 year bond with a 10% coupon

A technical analyst is most likely to be affiliated with which investment philosophy?

A. Active management

Bond portfolio immunization techniques balance ________ and ________ risk. A. price; reinvestment B. price; liquidity C. credit; reinvestment D. credit; liquidity

A. price; reinvestment

70. 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? A. Advisor A was better because he generated a larger alpha. B. Advisor B was better because she generated a larger alpha. C. Advisor A was better because he generated a higher return. D. Advisor B was better because she achieved a good return with a lower beta.

A. Advisor A was better because he generated a larger alpha Required return A = 5% + (13% - 5%)(1.5) = 17% Required return B = 5% + (13% - 5%)(1.2) = 14.6% αA = Actual return A - Required return A = 20% - 17% = 3% αB = Actual return B - Required return B = 15% - 14.6% = .4%

69. 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? A. Advisor A was better because he generated a larger alpha. B. Advisor B was better because she generated a larger alpha. C. Advisor A was better because he generated a higher return. D. Advisor B was better because she achieved a good return with a lower beta.

A. Advisor A was better because he generated a larger alpha.

2. The _______ decision should take precedence over the _____ decision. A. asset allocation; stock selection B. bond selection; mutual fund selection C. stock selection; asset allocation D. stock selection; mutual fund selection

A. Asset allocation; stock selection

_________ is equal to (common shareholders' equity/common shares outstanding). A. Book value per share B. Liquidation value per share C. Market value per share D. Tobin's Q E. none of the above

A. Book value per share

A bond portfolio manager notices a hump in the yield curve at the five year point. How might a bond manager take advantage of this event? A. Buy the 5 year bonds and short the surrounding maturity bonds B. Buy the 5 year bonds and buy the surrounding maturity bonds C. Short the 5 year bonds and short the surrounding maturity bonds D. Short the 5 year bonds and buy the surrounding maturity bonds

A. Buy the 5 year bonds and short the surrounding maturity bonds

What strategy might an insurance company employ to ensure that it will be able to meet the obligations of annuity holders? A. Cash flow matching B. Index tracking C. Yield pickup swaps D. Substitution swap

A. Cash flow matching

______________ is an important characteristic of the relationship between bond prices and yields. A. Convexity B. Concavity C. Complexity D. Linearity

A. Convexity

Your timing was good last year. You invested more in your portfolio right before prices went up, and you sold right before prices went down. In calculating historical performance measures, which one of the following will be the largest?

A. Dollar-weighted return

Major functions of the investment committee include all but which one of the following? A. Engage in security selection for each portfolio managed B. Broadly determine the overall asset allocation of the investment company C. Determine the asset-class weights for each portfolio D. Determine the asset universe

A. Engage in security selection for each portfolio managed

64. An investor with high risk aversion will likely prefer which of the following risk and return combinations? A. Expected return = 12%, historical standard deviation = 17% B. Expected return = 14%, historical standard deviation = 19% C. Expected return = 16%, historical standard deviation = 21% D. Expected return = 18%, historical standard deviation = 23%

A. Expected return = 12%, historical standard deviation = 17%

WACC is the most appropriate discount rate to use when applying a ______ valuation model. A. FCFF B. FCFE C. DDM D. A or C depending on the debt level of the firm E. P/E

A. FCFF

Which one of the following measures time-weighted returns and allows for compounding?

A. Geometric average return

For an investor concerned with maximizing liquidity, which of the following investments should be avoided? A. Real estate B. Bonds C. Domestic stocks D. International stocks

A. Real estate

The formula (E(rp)-rf)/sigmap is used to calculate the _____________. A. Sharpe ratio B. Treynor measure C. coefficient of variation D. real rate of return

A. Sharpe ratio

______ is a life insurance policy that will provide a death benefit only and has no savings plan. A. Term life B. Whole life C. Variable life D. Universal life

A. Term life

Which one of the following would be considered a "cash equivalent" investment? A. Treasury bills B. Common stock C. Corporate bonds D. Real estate

A. Treasury bills

Annual percentage rates can be converted to effective annual rates by means of the following formula: A. [1 + (APR/n)]n - 1 B. (APR)(n) C. (APR/n) D. (periodic rate)(n)

A. [1 + (APR/n)]n - 1

Which of the following combinations will produce the highest growth rate? Assume that the firm's projects offer a higher expected return than the market capitalization rate. A. a high plowback ratio and a high P/E ratio B. a high plowback ratio and a low P/E ratio C. a low plowback ratio and a low P/E ratio D. a low plowback ratio and a high P/E ratio E. Neither the plowback ratio nor the P/E ratio is related to a firm's growth.

A. a high plowback ratio and a high P/E ratio

If an individual confers legal title to property to another person or institution to manage the property on their behalf, the individual has created ___________. A. a personal trust B. a charitable trust C. an endowment fund D. a mutual fund

A. a personal trust

The exchange of one bond for a bond with similar attributes but more attractively priced is called ______________. A. a substitution swap B. an intermarket spread swap C. rate anticipation swap D. pure yield pickup swap

A. a substitution swap

The weak form of the EMH states that ________ must be reflected in the current stock price

A. all past information, including security price and volume data

63. 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 _________. A. are in equilibrium B. offer an arbitrage opportunity C. are both underpriced D. are both fairly priced

A. are in equilibrium

64. 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 _________. A. are in equilibrium B. offer an arbitrage opportunity C. are both underpriced D. are both fairly priced

A. are in equilibrium

5. Asset A has an expected return of 15% and a reward-to-variability ratio of .4. Asset B has an expected return of 20% and a reward-to-variability ratio of .3. A risk-averse investor would prefer a portfolio using the risk-free asset and ______. A. asset A B. asset B C. no risky asset D. The answer cannot be determined from the data given.

A. asset A

18. Arbitrage is based on the idea that _________. A. assets with identical risks must have the same expected rate of return B. securities with similar risk should sell at different prices C. the expected returns from equally risky assets are different D. markets are perfectly efficient

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

Of the following, the investment time horizon is typically the shortest for __________. A. banks B. endowment funds C. life insurance companies D. pension funds

A. banks

If an investment returns a higher percentage of your money back sooner it will ______. A. be less price volatile B. have a higher credit rating C. be less liquid D. have a higher modified duration

A. be less price volatile

In the mean standard deviation graph, the line that connects the risk-free rate and the optimal risky portfolio, P, is called the _________. A. capital allocation line B. indifference curve C. investor's utility line D. security market line

A. capital allocation line

Other things being equal, a low ________ would be most consistent with a relatively high growth rate of firm earnings and dividends. A. dividend payout ratio B. degree of financial leverage C. variability of earnings D. inflation rate E. none of the above

A. dividend payout ratio

11. Your timing was good last year. You invested more in your portfolio right before prices went up, and you sold right before prices went down. In calculating historical performance measures, which one of the following will be the largest? A. dollar-weighted return B. geometric average return C. arithmetic average return D. mean holding-period return

A. dollar-weighted return

When a company sets up a defined contribution pension plan, the __________ bears all the risk and the __________ receives all the return from the plan's assets. A. employee; employee B. employee; employer C. employer; employee D. employer; employer

A. employee; employee

In a defined benefit pension plan, the _____ bears all of the fund's investment performance risk. A. employer B. employee C. fund manager D. government

A. employer

The first step any investor should take before beginning to invest is to __________. A. establish investment objectives B. develop a list of investment managers with superior records to interview C. establish asset allocation guidelines D. decide between active management and passive management

A. establish investment objectives

12. If enough investors decide to purchase stocks, they are likely to drive up stock prices, thereby causing _____________ and ___________. A. expected returns to fall; risk premiums to fall B. expected returns to rise; risk premiums to fall C. expected returns to rise; risk premiums to rise D. expected returns to fall; risk premiums to rise

A. expected returns to fall; risk premiums to fall

51. The prudent investor rule is an example of a regulation designed to ensure appropriate _____________ by money managers. A. fiduciary responsibility B. fiscal responsibility C. monetary responsibility D. marketing procedures

A. fiduciary responsibility

4. Which one of the following measures time-weighted returns and allows for compounding? A. geometric average return B. arithmetic average return C. dollar-weighted return D. historical average return

A. geometric average return

As a result of bond convexity an increase in a bond's price when yield to maturity falls is ________ the price decrease resulting from an increase in yield of equal magnitude. A. greater than B. equivalent to C. smaller than D. The answer is indeterminate.

A. greater than

High P/E ratios tend to indicate that a company will _______, ceteris paribus. A. grow quickly B. grow at the same speed as the average company C. grow slowly D. not grow E. none of the above

A. grow quickly

50. Liquidity is a risk factor that __________. A. has yet to be accurately measured and incorporated into portfolio management B. is unaffected by trading mechanisms on various stock exchanges C. has no effect on the market value of an asset D. affects bond prices but not stock prices

A. has yet to be accurately measured and incorporated into portfolio management

21. According to the capital asset pricing model, fairly priced securities have _________. A. negative betas B. positive alphas C. positive betas D. zero alphas

D. zero alphas

51. Liquidity is a risk factor that __________. A. has yet to be accurately measured and incorporated into portfolio management B. is unaffected by trading mechanisms on various stock exchanges C. has no effect on the market value of an asset D. affects bond prices but not stock prices

A. has yet to be accurately measured and incorporated into portfolio management

77. A stock has a beta of 1.3. The systematic risk of this stock is ____________ the stock market as a whole. A. higher than B. lower than C. equal to D. indeterminable compared to

A. higher than

78. A stock has a beta of 1.3. The systematic risk of this stock is ____________ the stock market as a whole. A. higher than B. lower than C. equal to D. indeterminable compared to

A. higher than

81. One way that life insurance firms can hedge the risk created by offering whole-life insurance policies is by ________________. A. holding long-term bonds B. holding equities C. holding short-term bonds D. exercising its right to terminate the policy

A. holding long-term bonds

As the typical investor ages, the composition of his wealth usually switches from primarily _______ to primarily _______. A. human capital; financial capital B. financial capital; human capital C. intellectual capital; physical capital D. investable capital; noninvestable capital

A. human capital; financial capital

Conservative investors are likely to want to invest in __________ mutual funds, while risk-tolerant investors are likely to want to invest in __________. A. income; high growth B. income; moderate growth C. moderate-growth; high growth D. high-growth; moderate growth

A. income; high growth

You have an investment horizon of 6 years. You choose to hold a bond with a duration of 4 years. Your realized rate of return will be larger than the promised yield on the bond if ___________________. A. interest rates increase B. interest rates stay the same C. interest rates fall D. one can't tell with the information given

A. interest rates increase

One type of passive portfolio management is ________.

A. investing in a well-diversified portfolio without attempting to search out mispriced securities

46. In his famous critique of the CAPM, Roll argued that the CAPM ______________. A. is not testable because the true market portfolio can never be observed B. is of limited use because systematic risk can never be entirely eliminated C. should be replaced by the APT D. should be replaced by the Fama-French three-factor model

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

47. In his famous critique of the CAPM, Roll argued that the CAPM ______________. A. is not testable because the true market portfolio can never be observed B. is of limited use because systematic risk can never be entirely eliminated C. should be replaced by the APT D. should be replaced by the Fama-French three-factor model

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

54. A security's beta coefficient will be negative if ____________. A. its returns are negatively correlated with market-index returns B. its returns are positively correlated with market-index returns C. its stock price has historically been very stable D. market demand for the firm's shares is very low

A. its returns are negatively correlated with market-index returns

24. On a standard expected return versus standard deviation graph, investors will prefer portfolios that lie to the _____________ of the current investment opportunity set. A. left and above B. left and below C. right and above D. right and below

A. left and above

Life insurance companies try to hedge the risks inherent in whole-life insurance policies by investing in __________. A. long-term bonds B. money market mutual funds C. savings accounts D. short-term commercial paper

A. long-term bonds

Value stocks usually exhibit ______ price-to-book ratios and ______ price-to-earnings ratios.

A. low; low

"Active investment management may at times generate additional returns of about .1%. However, the standard deviation of the typical well-diversified portfolio is about 20%, so it is very difficult to statistically identify any increase in performance." Even if true, this statement is an example of the _________ problem in deciding how efficient the markets are

A. magnitude

The normal distribution is completely described by its _______. A. mean and standard deviation B. mean and variance C. mode and standard deviation D. median and variance

A. mean and standard deviation

38. In a single-factor market model the beta of a stock ________. A. measures the stock's contribution to the standard deviation of the market portfolio B. measures the stock's unsystematic risk C. changes with the variance of the residuals D. measures the stock's contribution to the standard deviation of the stock

A. measures the stock's contribution to the standard deviation of the market portfolio

39. In a single-factor market model the beta of a stock ________. A. measures the stock's contribution to the standard deviation of the market portfolio B. measures the stock's unsystematic risk C. changes with the variance of the residuals D. measures the stock's contribution to the standard deviation of the stock

A. measures the stock's contribution to the standard deviation of the market portfolio

Bond prices are _______ sensitive to changes in yield when the bond is selling at a _______ initial yield to maturity. A. more; lower B. more; higher C. less; lower D. equally; higher or lower

A. more; lower

58. You invest $1,000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 16% and a standard deviation of 20% and a Treasury bill with a rate of return of 6%. A portfolio that has an expected value in 1 year of $1,100 could be formed if you _________. A. place 40% of your money in the risky portfolio and the rest in the risk-free asset B. place 55% of your money in the risky portfolio and the rest in the risk-free asset C. place 60% of your money in the risky portfolio and the rest in the risk-free asset D. place 75% of your money in the risky portfolio and the rest in the risk-free asset

A. place 40% of your money in the risky portfolio and the rest in the risk-free asset

The possibility that you are too conservative and your money doesn't grow fast enough to keep pace with inflation is called ________. A. purchasing power risk B. liquidity risk C. timing risk D. market risk

A. purchasing power risk

The most appropriate discount rate to use when applying a FCFE valuation model is the ___________. A. required rate of return on equity B. WACC C. risk-free rate D. A or C depending on the debt level of the firm E. none of the above

A. required rate of return on equity

58. The measure of unsystematic risk can be found from an index model as _________. A. residual standard deviation B. R-square C. degrees of freedom D. sum of squares of the regression

A. residual standard deviation

59. The measure of unsystematic risk can be found from an index model as _________. A. residual standard deviation B. R-square C. degrees of freedom D. sum of squares of the regression

A. residual standard deviation

Consider a Treasury bill with a rate of return of 5% and the following risky securities: Security A: E(r) = .15; variance = .0400 Security B: E(r) = .10; variance = .0225 Security C: E(r) = .12; variance = .1000 Security D: E(r) = .13; variance = .0625 The investor must develop a complete portfolio by combining the risk-free asset with one of the securities mentioned above. The security the investor should choose as part of her complete portfolio to achieve the best CAL would be _________. A. security A B. security B C. security C D. security D

A. security A

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

A. semistrong

59. If an investor does not diversify his portfolio and instead puts all of his money in one stock, the appropriate measure of security risk for that investor is the ________. A. stock's standard deviation B. variance of the market C. stock's beta D. covariance with the market index

A. stock's standard deviation

45. Historically, the best asset for the long-term investor wanting to fend off the threats of inflation and taxes while making his money grow has been ____. A. stocks B. bonds C. money market funds D. Treasury bills

A. stocks

When testing mutual fund performance over time, one must be careful of ___________, which means that a certain percentage of poorer-performing funds fail over time, making the performance of remaining funds seem more consistent over time.

A. survivorship bias

86. One can profit from an arbitrage opportunity by A. taking a long position in the cheaper market and a short position in the expensive market. B. taking a short position in the cheaper market and a long position in the expensive market. C. taking a long position in both markets. D. taking a short position in both markets .

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

The choice of an active portfolio management strategy rather than a passive strategy assumes ___________. A. the ability to continuously adjust the portfolio to provide superior returns B. asset allocation involving only domestic securities C. stable economic conditions over the short term D. the ability to minimize trading costs

A. the ability to continuously adjust the portfolio to provide superior returns

25. The beta of a security is equal to _________. A. the covariance between the security and market returns divided by the variance of the market's returns B. the covariance between the security and market returns divided by the standard deviation of the market's returns C. the variance of the security's returns divided by the covariance between the security and market returns D. the variance of the security's returns divided by the variance of the market's returns

A. the covariance between the security and market returns divided by the variance of the market's returns

The market risk premium is defined as __________.

A. the difference between the return on an index fund and the return on Treasury bills

The market risk premium is defined as __________. A. the difference between the return on an index fund and the return on Treasury bills B. the difference between the return on a small-firm mutual fund and the return on the Standard & Poor's 500 Index C. the difference between the return on the risky asset with the lowest returns and the return on Treasury bills D. the difference between the return on the highest-yielding asset and the return on the lowest-yielding asset

A. the difference between the return on an index fund and the return on Treasury bills

Small firms have tended to earn abnormal returns primarily in __________.

A. the month of January

25. The term complete portfolio refers to a portfolio consisting of _________________. A. the risk-free asset combined with at least one risky asset B. the market portfolio combined with the minimum-variance portfolio C. securities from domestic markets combined with securities from foreign markets D. common stocks combined with bonds

A. the risk-free asset combined with at least one risky asset

The reward-to-volatility ratio is given by _________.

A. the slope of the capital allocation line

The reward-to-volatility ratio is given by _________. A. the slope of the capital allocation line B. the second derivative of the capital allocation line C. the point at which the second derivative of the investor's indifference curve reaches zero D. the portfolio's excess return

A. the slope of the capital allocation line

59. Standard deviation of portfolio returns is a measure of ___________. A. total risk B. relative systematic risk C. relative nonsystematic risk D. relative business risk

A. total risk

60. Standard deviation of portfolio returns is a measure of ___________. A. total risk B. relative systematic risk C. relative nonsystematic risk D. relative business risk

A. total risk

"Buy a stock if its price moves up by 2% more than the Dow Average" is an example of a _________________.

A. trading rule

38. 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? A. 5.48% B. 8.74% C. 9% D. 12%

B. 8.74%

39. The duration rule always ________ the value of a bond following a change in its yield. A. under-estimates B. provides an unbiased estimate of C. over-estimates D. The estimated price may be biased either upward or downward, depending on whether the bond is trading at a discount or a premium

A. under-estimates

Banz found that, on average, the risk-adjusted returns of small firms __________.

A. were higher than the risk-adjusted returns of large firms

The goal of fundamental analysts is to find securities A. whose intrinsic value exceeds market price. B. with a positive present value of growth opportunities. C. with high market capitalization rates. D. all of the above. E. none of the above.

A. whose intrinsic value exceeds market price.

The tendency when the ______ performing stocks in one period are the best performers in the next and the current ________ performers are lagging the market later is called the reversal effect.

A. worst; best

According to Markowitz and other proponents of modern portfolio theory which of the following activities would not be expected to produce any benefits? A. Diversification B. Investing in Treasury bills C. Investing in stocks of utility companies D. Engaging in active portfolio management to enhance returns

According to historical data, over the long run which of the following assets has the best chance to provide the best after inflation, after tax rate of return? A. Long term Treasury bonds B. Corporate bonds C. Common stocks D. Preferred stocks

According to recent research securities markets fully adjust to earnings announcements _______. A. instantly B. in 1 day C. in 1 week D. gradually over time

According to results by Seyhun __________. A. investors cannot usually earn abnormal returns by following inside trades after knowledge of the trades are made public B. investors can usually earn abnormal returns by following inside trades after knowledge of the trades are made public C. investors cannot earn abnormal returns by following inside trades before knowledge of the trades are made public D. investors cannot earn abnormal returns by trading before insiders

According to results by Seyhun the main reason why investors cannot earn excess returns by following inside trades after they become public is ______________. A. risk premium B. transaction costs C. the SEC late disclosure rule D. the stock reversal effect

According to the semi-strong form of the efficient markets hypothesis ____________. A. stock prices do not rapidly adjust to new information B. future changes in stock prices cannot be predicted from any information that is publicly available C. corporate insiders should have no better investment performance than other investors even if allowed to trade freely D. arbitrage between futures and cash markets should not produce extraordinary profits

An implication of the efficient market hypothesis is that __________. A. high beta stocks are consistently overpriced B. low beta stocks are consistently overpriced C. nonzero alphas will quickly disappear D. growth stocks are better buys than value stocks

Assume that a company announces unexpectedly high earnings in a particular quarter. In an efficient market one might expect _____________. A. an abnormal price change immediately following the announcement B. an abnormal price increase before the announcement C. an abnormal price decrease after the announcement D. no abnormal price change before or after the announcement

81. The two-factor model on a stock provides a risk premium for exposure to market risk 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 risk is 1, and the beta for exposure to interest rate risk is also 1. What is the expected return on the stock? A. 8.7% B. 11.2% C. 13.8% D. 15.2%

B. 11.2% Return = 3.5 + 9 - 1.3 = 11.2%

16. An investment earns 10% the first year, earns 15% the second year, and loses 12% the third year. The total compound return over the 3 years was ______. A. 41.68% B. 11.32% C. 3.64% D. 13%

B. 11.32%

A trough is __________. A) a transition from an expansion in the business cycle to the start of a contraction B) a transition from a contraction in the business cycle to the start of an expansion C) only something used by farmers to feed pigs and is not a term in investments D) none of the above

B) a transition from a contraction in the business cycle to the start of an expansion

If you expect a larger interest rate increase than other market participants do, you would A) buy long-term bonds B) buy short-term bonds C) buy long-term government bonds only D) buy short-term government bonds only

B) buy short-term bonds

During the 1926-2010 period the Sharpe ratio was greatest for which of the following asset classes?

B. Large U.S. stocks

You have the following rates of return for a risky portfolio for several recent years: 2011 35.23% 2012 18.67% 2013 −9.87% 2014 23.45% If you invested $1,000 at the beginning of 2011, your investment at the end of 2014 would be worth ___________. A. $2,176.60 B. $1,785.56 C. $1,645.53 D. $1,247.87

B. $1,785.56

64. You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40%, respectively. X has an expected rate of return of 14%, and Y has an expected rate of return of 10%. If you decide to hold 25% of your complete portfolio in the risky portfolio and 75% in the Treasury bills, then the dollar values of your positions in X and Y, respectively, would be __________ and _________. A. $300; $450 B. $150; $100 C. $100; $150 D. $450; $300

B. $150; $100

65. You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40%, respectively. X has an expected rate of return of 14%, and Y has an expected rate of return of 10%. The dollar values of your positions in X, Y, and Treasury bills would be _________, __________, and __________, respectively, if you decide to hold a complete portfolio that has an expected return of 8%. A. $162; $595; $243 B. $243; $162; $595 C. $595; $162; $243 D. $595; $243; $162

B. $243; $162; $595

55. Consider the following two investment alternatives: First, a risky portfolio that pays a 20% rate of return with a probability of 60% or a 5% rate of return with a probability of 40%. Second, a Treasury bill that pays 6%. If you invest $50,000 in the risky portfolio, your expected profit would be _________. A. $3,000 B. $7,000 C. $7,500 D. $10,000

B. $7,000

32. The standard deviation of return on investment A is .10, while the standard deviation of return on investment B is .04. If the correlation coefficient between the returns on A and B is -.50, the covariance of returns on A and B is _________. A. -.0447 B. -.0020 C. .0020 D. .0447

B. -.0020 Covariance = -.50(.10)(.04)

71. Which of the following correlation coefficients will produce the most diversification benefits? A. -.6 B. -.9 C. 0 D. .4

B. -.9

81. The expected return of a portfolio is 8.9%, and the risk-free rate is 3.5%. If the portfolio standard deviation is 12%, what is the reward-to-variability ratio of the portfolio? A. 0 B. .45 C. .74 D. 1.35

B. .45 Reward-to-variability ratio = (.089 - .035)/.12 = .45

69. The Manhawkin Fund has an expected return of 16% and a standard deviation of 20%. The risk-free rate is 4%. What is the reward-to-volatility ratio for the Manhawkin Fund? A. .8 B. .6 C. 9 D. 1

B. .6

52. A stock has a correlation with the market of .45. The standard deviation of the market is 21%, and the standard deviation of the stock is 35%. What is the stock's beta? A. 1 B. .75 C. .60 D. .55

B. .75

72. If the beta of the market index is 1 and the standard deviation of the market index increases from 12% to 18%, what is the new beta of the market index? A. .8 B. 1 C. 1.2 D. 1.5

B. 1

According to James Tobin, the long run value of Tobin's Q should tend toward A. 0. B. 1. C. 2. D. infinity. E. none of the above.

B. 1

73. If the beta of the market index is 1 and the standard deviation of the market index increases from 12% to 18%, what is the new beta of the market index? A. .8 B. 1 C. 1.2 D. 1.5

B. 1 Market beta always equals 1 regardless of market volatility.

80. Using the index model, the alpha of a stock is 3%, the beta is 1.1, and the market return is 10%. What is the residual given an actual return of 15%? A. .0% B. 1% C. 2% D. 3%

B. 1% Residual = 15 - (3 + 1.1 × 10) = 1%

79. Using the index model, the alpha of a stock is 3%, the beta is 1.1, and the market return is 10%. What is the residual given an actual return of 15%? A. .0% B. 1% C. 2% D. 3%

B. 1% Residual = 15 - (3 + 1.1 × 10) = 1%

Most studies indicate that investors' risk aversion is in the range _____. A. 1-3 B. 1.5-4 C. 3-5.2 D. 4-6

B. 1.5-4

80. What is the standard deviation of a portfolio of two stocks given the following data: Stock A has a standard deviation of 30%. Stock B has a standard deviation of 18%. The portfolio contains 60% of stock A, and the correlation coefficient between the two stocks is -1. A. 0% B. 10.8% C. 18% D. 24%

B. 10.8%

82. The two-factor model on a stock provides a risk premium for exposure to market risk 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 risk is 1, and the beta for exposure to interest rate risk is also 1. What is the expected return on the stock? A. 8.7% B. 11.2% C. 13.8% D. 15.2%

B. 11.2% Return = 3.5 + 9 - 1.3 = 11.2%

76. Research has identified two systematic factors that affect U.S. stock returns. The factors are growth in industrial production and changes in long-term interest rates. Industrial production growth is expected to be 3%, and long-term interest rates are expected to increase by 1%. You are analyzing a stock that has a beta of 1.2 on the industrial production factor and .5 on the interest rate factor. It currently has an expected return of 12%. However, if industrial production actually grows 5% and interest rates drop 2%, what is your best guess of the stock's return? A. 15.9% B. 12.9% C. 13.2% D. 12%

B. 12.9% E[rnew] = 12% + (5% - 3%)(1.2) + (-2% - 1%)(.5) = 12.9%

77. Research has identified two systematic factors that affect U.S. stock returns. The factors are growth in industrial production and changes in long-term interest rates. Industrial production growth is expected to be 3%, and long-term interest rates are expected to increase by 1%. You are analyzing a stock that has a beta of 1.2 on the industrial production factor and .5 on the interest rate factor. It currently has an expected return of 12%. However, if industrial production actually grows 5% and interest rates drop 2%, what is your best guess of the stock's return? A. 15.9% B. 12.9% C. 13.2% D. 12%

B. 12.9% E[rnew] = 12% + (5% - 3%)(1.2) + (-2% - 1%)(.5) = 12.9%

75. What is the expected return on a stock with a beta of .8, given a risk-free rate of 3.5% and an expected market return of 15.5%? A. 3.8% B. 13.1% C. 15.6% D. 19.1%

B. 13.1% Expected return = 3.5 + (.8)(15.5 - 3.5) = 13.1%

76. What is the expected return on a stock with a beta of .8, given a risk-free rate of 3.5% and an expected market return of 15.5%? A. 3.8% B. 13.1% C. 15.6% D. 19.1%

B. 13.1% Expected return = 3.5 + (.8)(15.5 - 3.5) = 13.1%

41. An investor can design a risky portfolio based on two stocks, A and B. The standard deviation of return on stock A is 20%, while the standard deviation on stock B is 15%. The correlation coefficient between the returns on A and B is 0%. The expected return on the minimum-variance portfolio is approximately _________. A. 10% B. 13.6% C. 15% D. 19.41%

B. 13.6%

38. An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 21% and a standard deviation of return of 39%. Stock B has an expected return of 14% and a standard deviation of return of 20%. The correlation coefficient between the returns of A and B is .4. The risk-free rate of return is 5%. The expected return on the optimal risky portfolio is approximately _________. (Hint: Find weights first.) A. 14% B. 16% C. 18% D. 19%

B. 16%

31. A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 35%, while stock B has a standard deviation of return of 15%. The correlation coefficient between the returns on A and B is .45. Stock A comprises 40% of the portfolio, while stock B comprises 60% of the portfolio. The standard deviation of the return on this portfolio is _________. A. 23% B. 19.76% C. 18.45% D. 17.67%

B. 19.76% σ2p = (.402)(.352) + (.602)(.15)2 + (2)(.4)(.6)(.35)(.15)(.45) σ2p = .039046 σp = 19.76%

40. The variance of the return on the market portfolio is .04 and the expected return on the market portfolio is 20%. If the risk-free rate of return is 10%, the market degree of risk aversion, A, is _________. A. .5 B. 2.5 C. 3.5 D. 5

B. 2.5 A = (.20 - .10)/.04 = 2.5

41. The variance of the return on the market portfolio is .04 and the expected return on the market portfolio is 20%. If the risk-free rate of return is 10%, the market degree of risk aversion, A, is _________. A. .5 B. 2.5 C. 3.5 D. 5

B. 2.5 A = (.20 - .10)/.04 = 2.5

83. A project has a 50% chance of doubling your investment in 1 year and a 50% chance of losing half your money. What is the expected return on this investment project? A. 0% B. 25% C. 50% D. 75%

B. 25% E[rp] = (.5)(100) + (.5)(-50) = 25%

54. Consider the following two investment alternatives: First, a risky portfolio that pays a 15% rate of return with a probability of 40% or a 5% rate of return with a probability of 60%. Second, a Treasury bill that pays 6%. The risk premium on the risky investment is _________. A. 1% B. 3% C. 6% D. 9%

B. 3%

Suppose you pay $9,700 for a $10,000 par Treasury bill maturing in 3 months. What is the holding-period return for this investment? A. 3.01% B. 3.09% C. 12.42% D. 16.71%

B. 3.09%

39. Security A has an expected rate of return of 12% and a beta of 1.1. The market expected rate of return is 8%, and the risk-free rate is 5%. The alpha of the stock is _________. A. -1.7% B. 3.7% C. 5.5% D. 8.7%

B. 3.7%

40. Security A has an expected rate of return of 12% and a beta of 1.1. The market expected rate of return is 8%, and the risk-free rate is 5%. The alpha of the stock is _________. A. -1.7% B. 3.7% C. 5.5% D. 8.7%

B. 3.7%

Price volatility is greatest on which one of the following investments? A. Commercial paper B. 30-year zero-coupon bonds C. Treasury notes D. Treasury bills

B. 30-year zero-coupon bonds

36. 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 .50. The risk-free rate of return is 10%. The standard deviation of return on the optimal risky portfolio is _________. A. 0% B. 5% C. 7% D. 20%

B. 5%

A life insurance firm wants to minimize its interest rate risk, and it is planning on paying out $250,000 in 5 years. Which one of the following investments best matches its goal? A. High-yield utility stocks B. 5-year zero-coupon bonds C. 10-year coupon bonds D. Money market investments rolled over as needed

B. 5-year zero-coupon bonds

The duration of a 5-year zero coupon bond is ____ years. A. 4.5 B. 5.0 C. 5.5 D. 3.5

B. 5.0

The arithmetic average of -11%, 15%, and 20% is ________.

B. 8%

The arithmetic average of -11%, 15%, and 20% is ________. A. 15.67% B. 8% C. 11.22% D. 6.45%

B. 8%

You have an EAR of 9%. The equivalent APR with continuous compounding is _____. A. 8.47% B. 8.62% C. 8.88% D. 9.42%

B. 8.62%

68. A security with normally distributed returns has an annual expected return of 18% and standard deviation of 23%. The probability of getting a return between -28% and 64% in any one year is _____. A. 68.26% B. 95.44% C. 99.74% D. 100%

B. 95.44%

28. 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. A; A B. A; B C. B; A D. B; B

B. A; B

29. 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. A; A B. A; B C. B; A D. B; B

B. A; B

In an efficient market and for an investor who believes in a passive approach to investing, what is the primary duty of a portfolio manager?

B. Diversification

________ are analysts who use information concerning current and prospective profitability of a firms to assess the firm's fair market value. A. Credit analysts B. Fundamental analysts C. Systems analysts D. Technical analysts E. Specialists

B. Fundamental analysts

45. The part of a stock's return that is systematic is a function of which of the following variables? I. Volatility in excess returns of the stock market II. The sensitivity of the stock's returns to changes in the stock market III. The variance in the stock's returns that is unrelated to the overall stock market A. I only B. I and II only C. II and III only D. I, II, and III

B. I and II only

76. As you lengthen the time horizon of your investment period and decide to invest for multiple years, you will find that: I. The average risk per year may be smaller over longer investment horizons. II. The overall risk of your investment will compound over time. III. Your overall risk on the investment will fall. A. I only B. I and II only C. III only D. I, II, and III

B. I and II only

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

B. I and II only

In calculating the variance of a portfolio's returns, squaring the deviations from the mean results in: I. Preventing the sum of the deviations from always equaling zero II. Exaggerating the effects of large positive and negative deviations III. A number for which the unit is percentage of returns A. I only B. I and II only C. I and III only D. I, II, and III

B. I and II only

Security A has a higher standard deviation of returns than security B. We would expect that: I. Security A would have a higher risk premium than security B. II. The likely range of returns for security A in any given year would be higher than the likely range of returns for security B. III. The Sharpe ratio of A will be higher than the Sharpe ratio of B. A. I only B. I and II only C. II and III only D. I, II, and III

B. I and II only

Which of the following arguments supporting passive investment strategies is (are) correct? I. Active trading strategies may not guarantee higher returns but guarantee higher costs. II. Passive investors can free-ride on the activity of knowledge investors whose trades force prices to reflect currently available information. III. Passive investors are guaranteed to earn higher rates of return than active investors over sufficiently long time horizons. A. I only B. I and II only C. II and III only D. I, II, and III

B. I and II only

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. A. I only B. I and III only C. II only D. I, II, and III

B. I and III only

3. 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 of the world. IV. All investors have the same level of risk aversion. A. I, II, and IV only B. I, II, and III only C. II, III, and IV only D. I, II, III, and IV

B. I, II, and III only

48. In a study conducted by Jagannathan and Wang, it was found that the performance of beta in explaining security returns could be considerably enhanced by: I. Including the unsystematic risk of a stock II. Including human capital in the market portfolio III. Allowing for changes in beta over time A. I and II only B. II and III only C. I and III only D. I, II, and III

B. II and III only

49. In a study conducted by Jagannathan and Wang, it was found that the performance of beta in explaining security returns could be considerably enhanced by: I. Including the unsystematic risk of a stock II. Including human capital in the market portfolio III. Allowing for changes in beta over time A. I and II only B. II and III only C. I and III only D. I, II, and III

B. II and III only

2. 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 returns II. Relatively useless in predicting future stock returns III. A good predictor of the firm's specific risk A. I only B. II only C. I and III only D. I, II, and III

B. II only

_______ is the amount of money per common share that could be realized by breaking up the firm, selling the assets, repaying the debt, and distributing the remainder to shareholders. A. Book value per share B. Liquidation value per share C. Market value per share D. Tobin's Q E. None of the above

B. Liquidation value per share

B. Neglected-firm effect

Which one of the following institutions typically has the longest investment horizon? A. Mutual funds B. Pension funds C. Property and casualty insurers D. Banks

B. Pension funds

Which Fidelity Magellan portfolio manager is often referenced as an exception to the general conclusion of efficient markets

B. Peter Lynch

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

B. Relative strength analysis

9. The arbitrage pricing theory was developed by _________. A. Henry Markowitz B. Stephen Ross C. William Sharpe D. Eugene Fama

B. Stephen Ross

9. The arbitrage pricing theory was developed by _________. A. Henry Markowitz B. Stephen Ross C. William Sharpe D. Eugene Fama

B. Stephen Ross

. Market economists all predict a rise in interest rates. An astute bond manager wishing to maximize her capital gain might employ which strategy? A. Switch from low duration to high duration bonds. B. Switch from high duration to low duration bonds. C. Switch from high grade to low grade bonds. D. Switch from low coupon to high coupon bonds

B. Switch from high duration to low duration bonds.

28. In a world where the CAPM holds, which one of the following is not a true statement regarding the capital market line? A. The capital market line always has a positive slope. B. The capital market line is also called the security market line. C. The capital market line is the best-attainable capital allocation line. D. The capital market line is the line from the risk-free rate through the market portfolio.

B. The capital market line is also called the security market line

27. In a world where the CAPM holds, which one of the following is not a true statement regarding the capital market line? A. The capital market line always has a positive slope. B. The capital market line is also called the security market line. C. The capital market line is the best-attainable capital allocation line. D. The capital market line is the line from the risk-free rate through the market portfolio.

B. The capital market line is also called the security market line.

25. The rate of return on _____ is known at the beginning of the holding period, while the rate of return on ____ is not known until the end of the holding period. A. risky assets; Treasury bills B. Treasury bills; risky assets C. excess returns; risky assets D. index assets; bonds

B. Treasury bills; risky assets

The rate of return on _____ is known at the beginning of the holding period, while the rate of return on ____ is not known until the end of the holding period.

B. Treasury bills; risky assets

If the expected ROE on reinvested earnings is equal to k, the multistage DDM reduces to A. V0 = (Expected Dividend Per Share in Year 1)/k B. V0 = (Expected EPS in Year 1)/k C. V0 = (Treasury Bond Yield in Year 1)/k D. V0 = (Market return in Year 1)/k E. none of the above

B. V0 = (Expected EPS in Year 1)/k

The most appropriate discount rate to use when applying a FCFF valuation model is the ___________. A. required rate of return on equity B. WACC C. risk-free rate D. A or C depending on the debt level of the firm E. none of the above

B. WACC

_______ is a life insurance policy that provides a death benefit and a fixed-rate tax-deferred savings plan. A. Term life B. Whole life C. Variable life D. Universal life

B. Whole life

The price of your investment increases 20% one month after you buy it. You do not believe that the stock's prospects have changed. Which one of the following actions would indicate the lowest amount of risk aversion? A. You hang on to the stock, anticipating that it will go higher. B. You buy more stock, anticipating that it will go higher. C. You sell all of your stock holdings immediately. D. You sell half of your stock holdings and invest the proceeds in other areas of your portfolio.

B. You buy more stock, anticipating that it will go higher.

A company whose stock is selling at a P/E ratio greater than the P/E ratio of a market index most likely has _________. A. an anticipated earnings growth rate which is less than that of the average firm B. a dividend yield which is less than that of the average firm C. less predictable earnings growth than that of the average firm D. greater cyclicality of earnings growth than that of the average firm E. none of the above.

B. a dividend yield which is less than that of the average firm

A portfolio manager believes interest rates will drop and decides to sell short duration bonds and buy long duration bonds. This is an example of __________ swap. A. a pure yield pick up B. a rate anticipation C. a substitution D. an inter-market spread

B. a rate anticipation

A portfolio consists of three index funds: an equity index accounting for 40% of the total portfolio, a bond index accounting for 30% of the total portfolio, and an international index accounting for 30% of the total portfolio. After each quarter the portfolio manager buys and sells some of each sector to preserve the original weights for each sector. This is an example of ____________. A. a passively managed core with an actively managed component B. a totally passively managed fund C. passive asset allocation with active security selection D. active asset allocation with passive security selection

B. a totally passively managed fund

57. A stock's alpha measures the stock's ____________________. A. expected return B. abnormal return C. excess return D. residual return

B. abnormal return

58. A stock's alpha measures the stock's ____________________. A. expected return B. abnormal return C. excess return D. residual return

B. abnormal return

49. You are constructing a scatter plot of excess returns for stock A versus the market index. If the correlation coefficient between stock A and the index is -1, you will find that the points of the scatter diagram ___________ and the line of best fit has a ______________. A. all fall on the line of best fit; positive slope B. all fall on the line of best fit; negative slope C. are widely scattered around the line; positive slope D. are widely scattered around the line; negative slope

B. all fall on the line of best fit; negative slope

The semistrong form of the EMH states that ________ must be reflected in the current stock price

B. all publicly available information

25. According to the capital asset pricing model, in equilibrium _________. A. all securities' returns must lie below the capital market line B. all securities' returns must lie on the security market line C. the slope of the security market line must be less than the market risk premium D. any security with a beta of 1 must have an excess return of zero

B. all securities' returns must lie on the security market line

26. According to the capital asset pricing model, in equilibrium _________. A. all securities' returns must lie below the capital market line B. all securities' returns must lie on the security market line C. the slope of the security market line must be less than the market risk premium D. any security with a beta of 1 must have an excess return of zero

B. all securities' returns must lie on the security market line

20. According to the capital asset pricing model, a fairly priced security will plot _________. A. above the security market line B. along the security market line C. below the security market line D. at no relation to the security market line

B. along the security market line

2. The ______ measure of returns ignores compounding. A. geometric average B. arithmetic average C. IRR D. dollar-weighted

B. arithmetic average

10. In the context of the capital asset pricing model, the systematic measure of risk is captured by _________. A. unique risk B. beta C. the standard deviation of returns D. the variance of returns

B. beta

10. In the context of the capital asset pricing model, the systematic measure of risk is captured by _________. A. unique risk B. beta C. the standard deviation of returns D. the variance of returns

B. beta

41. The risk-free rate is 4%. The expected market rate of return is 11%. If you expect stock X with a beta of .8 to offer a rate of return of 12%, then you should _________. A. buy stock X because it is overpriced B. buy stock X because it is underpriced C. sell short stock X because it is overpriced D. sell short stock X because it is underpriced

B. buy stock X because it is underpriced

42. The risk-free rate is 4%. The expected market rate of return is 11%. If you expect stock X with a beta of .8 to offer a rate of return of 12%, then you should _________. A. buy stock X because it is overpriced B. buy stock X because it is underpriced C. sell short stock X because it is overpriced D. sell short stock X because it is underpriced

B. buy stock X because it is underpriced

8. The ________ is equal to the square root of the systematic variance divided by the total variance. A. covariance B. correlation coefficient C. standard deviation D. reward-to-variability ratio

B. correlation coefficient

When interest rates increase, the duration of a 20-year bond selling at a premium _________. A. increases B. decreases C. remains the same D. increases at first, then declines

B. decreases

In a defined contribution pension plan, the _____ bears all of the fund's investment performance risk. A. employer B. employee C. fund manager D. government

B. employee

In 1937 the Eli Lilly family donated millions of dollars in stock to fund a not-for-profit charitable organization. Such organizations are typically called _________________. A. annuities B. endowments C. mutual funds D. personal trusts

B. endowments

70. The expected return on the market is the risk-free rate plus the _____________. A. diversified returns B. equilibrium risk premium C. historical market return D. unsystematic return

B. equilibrium risk premium

71. The expected return on the market is the risk-free rate plus the _____________. A. diversified returns B. equilibrium risk premium C. historical market return D. unsystematic return

B. equilibrium risk premium

15. The risk that can be diversified away is __________. A. beta B. firm-specific risk C. market risk D. systematic risk

B. firm-specific risk

9. You have calculated the historical dollar-weighted return, annual geometric average return, and annual arithmetic average return. You always reinvest your dividends and interest earned on the portfolio. Which method provides the best measure of the actual average historical performance of the investments you have chosen? A. dollar-weighted return B. geometric average return C. arithmetic average return D. index return

B. geometric average return

Published data on past returns earned by mutual funds are required to be ______. A. dollar-weighted returns B. geometric returns C. excess returns D. index returns

B. geometric returns

DeBondt and Thaler (1985) found that the poorest-performing stocks in one time period experienced __________ performance in the following period and that the best-performing stocks in one time period experienced __________ performance in the following time period.

B. good; poor

As compared with equivalent maturity bonds selling at par, deep discount bonds will have ________. A. greater reinvestment risk B. greater price volatility C. less call protection D. shorter average maturity

B. greater price volatility

If a defined benefit pension fund's actual rate of return is _____ than the actuarial assumed rate, then the ___________. A. greater; employees will benefit B. greater; firm's shareholders will benefit C. lower; employees will benefit D. lower; firm's shareholders will benefit

B. greater; firm's shareholders will benefit

68. Decreasing the number of stocks in a portfolio from 50 to 10 would likely ________________. A. increase the systematic risk of the portfolio B. increase the unsystematic risk of the portfolio C. increase the return of the portfolio D. decrease the variation in returns the investor faces in any one year

B. increase the unsystematic risk of the portfolio

A bond's price volatility _________ at a/an _________ rate as maturity increases. A. increases; increasing B. increases; decreasing C. decreases; increasing D. decreases; decreasing

B. increases; decreasing

A mutual fund that attempts to hold quantities of shares in proportion to their representation in the market is called a __________ fund

B. index

Under a "passive core" portfolio management strategy, a manager would ___________.

B. index part of the portfolio and actively manage the rest

For a bank, the difference between the interest rate charged to borrowers and the interest rate paid on liabilities is called the __________. A. insurance premium B. interest rate spread C. risk premium D. term premium

B. interest rate spread

The _______ is defined as the present value of all cash proceeds to the investor in the stock. A. dividend payout ratio B. intrinsic value C. market capitalization rate D. plowback ratio E. none of the above

B. intrinsic value

The duration of a perpetuity varies _______ with interest rates. A. directly B. inversely C. convexly D. randomly

B. inversely

During the 1926-2013 period the Sharpe ratio was greatest for which of the following asset classes? A. small U.S. stocks B. large U.S. stocks C. long-term U.S. Treasury bonds D. bond world portfolio return in U.S. dollars

B. large U.S. stocks

58. Some diversification benefits can be achieved by combining securities in a portfolio as long as the correlation between the securities is _____________. A. 1 B. less than 1 C. between 0 and 1 D. less than or equal to 0

B. less than 1

Which of the following is the best measure of the floor for a stock price? A. book value B. liquidation value C. replacement cost D. market value E. Tobin's Q

B. liquidation value

26. Rational risk-averse investors will always prefer portfolios _____________. A. located on the efficient frontier to those located on the capital market line B. located on the capital market line to those located on the efficient frontier C. at or near the minimum-variance point on the efficient frontier D. that are risk-free to all other asset choices

B. located on the capital market line to those located on the efficient frontier

Pension fund managers can generally best bring about an effective reduction in their interest rate risk by holding ___________________. A. long maturity bonds B. long duration bonds C. short maturity bonds D. short duration bonds

B. long duration bonds

All else equal, bond price volatility is greater for __________. A. higher coupon rates B. lower coupon rates C. shorter maturity D. lower default risk

B. lower coupon rates

Historically, P/E ratios have tended to be _________. A. higher when inflation has been high B. lower when inflation has been high C. uncorrelated with inflation rates but correlated with other macroeconomic variables D. uncorrelated with any macroeconomic variables including inflation rates E. none of the above

B. lower when inflation has been high

All other things equal, a bond's duration is _________. A. higher when the coupon rate is higher B. lower when the coupon rate is higher C. the same when the coupon rate is higher D. indeterminate when the coupon rate is high

B. lower when the coupon rate is higher

All other things equal, a bond's duration is _________. A. higher when the yield to maturity is higher B. lower when the yield to maturity is higher C. the same at all yield rates D. indeterminable when the yield to maturity is high

B. lower when the yield to maturity is higher

From 1926 to 2013 the world stock portfolio offered _____ return and _____ volatility than the portfolio of large U.S. stocks. A. lower; higher B. lower; lower C. higher; lower D. higher; higher

B. lower; lower

A passive asset allocation strategy involves _________. A. investing in the stock of companies that are price takers B. maintaining approximately the same proportions of a portfolio in each asset class over time C. varying the proportions of a portfolio in each asset class in response to changing market conditions D. selecting individual securities in different sectors that are believed to be undervalued

B. maintaining approximately the same proportions of a portfolio in each asset class over time

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

B. misplacing among securities creates opportunities for riskless profits

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

B. mispricing among securities creates opportunities for riskless profits

12. Diversification is most effective when security returns are _________. A. high B. negatively correlated C. positively correlated D. uncorrelated

B. negatively correlated

Fundamental analysis is likely to yield best results for _______.

B. neglected stocks

33. Security X has an expected rate of return of 13% and a beta of 1.15. The risk-free rate is 5%, and the market expected rate of return is 15%. According to the capital asset pricing model, security X is _________. A. fairly priced B. overpriced C. underpriced D. none of these answers

B. overpriced

32. Security X has an expected rate of return of 13% and a beta of 1.15. The risk-free rate is 5%, and the market expected rate of return is 15%. According to the capital asset pricing model, security X is _________. A. fairly priced B. overpriced C. underpriced D. none of these answers

B. overpriced In equilibrium, E(rX) = 5% + 1.15(15% - 5%) = 16.5%.

Stock market analysts have tended to be ___________ in their recommendations to investors

B. overwhelmingly optimistic

A portfolio manager indexes part of a portfolio and actively manages the rest of the portfolio. This is called a _________ strategy. A. passive-aggressive B. passive core C. passively active D. balanced fund

B. passive core

Under the provisions of a typical defined benefit pension plan, the employer is responsible for _____________. A. investing in conservative fixed-income assets B. paying benefits to retired employees C. counseling employees in the selection of asset classes D. paying employees the market rate of return on employee contributions

B. paying benefits to retired employees

Many defined benefit pension plans have a target rate of return on investment that is equal to the ____________. A. firm's return on equity B. plan's assumed actuarial rate of return C. economic inflation rate because wages often increase with inflation D. estimated stock market return

B. plan's assumed actuarial rate of return

89. Compensation of money managers is _____ based on alpha or other appropriate risk-adjusted measures. A. never B. rarely C. almost always D. always

B. rarely

The excess return is the _________. A. rate of return that can be earned with certainty B. rate of return in excess of the Treasury-bill rate C. rate of return to risk aversion D. index return

B. rate of return in excess of the Treasury-bill rate

51. Beta is a measure of ______________. A. total risk B. relative systematic risk C. relative nonsystematic risk D. relative business risk

B. relative systematic risk

52. Beta is a measure of ______________. A. total risk B. relative systematic risk C. relative nonsystematic risk D. relative business risk

B. relative systematic risk

A version of earnings management that became common in the 1990s was A. when management makes changes in the operations of the firm to ensure that earning do not increase or decrease too rapidly. B. reporting "pro forma" earnings". C. when management makes changes in the operations of the firm to ensure that earning do not increase too rapidly. D. when management makes changes in the operations of the firm to ensure that earning do not decrease too rapidly. E. none of the above.

B. reporting "pro forma" earnings".

Both investors and gamblers take on risk. The difference between an investor and a gambler is that an investor _______. A. is normally risk neutral B. requires a risk premium to take on the risk C. knows he or she will not lose money D. knows the outcomes at the beginning of the holding period

B. requires a risk premium to take on the risk

In a pure yield pickup swap, ________ bonds are exchanged for _________ bonds. A. longer duration; shorter duration B. shorter duration; longer duration C. high coupon; high yield D. low yield; high yield

B. shorter duration; longer duration

FCF and DDM valuations should be ____________ if the assumptions used are consistent. A. very different for all firms B. similar for all firms C. similar only for unlevered firms D. similar only for levered firms E. none of the above

B. similar for all firms

43. A measure of the riskiness of an asset held in isolation is ____________. A. beta B. standard deviation C. covariance D. alpha

B. standard deviation

At the early stage of an individual's working career, his or her retirement portfolio should probably consist mostly of _______. A. annuities B. stocks C. bonds D. commodities

B. stocks

If you believe in the __________ form of the EMH, you believe that stock prices reflect all relevant information, including information that is available only to insiders

B. strong

75. A portfolio of stocks fluctuates when the Treasury yields change. Since this risk cannot be eliminated through diversification, it is called __________. A. firm-specific risk B. systematic risk C. unique risk D. none of the options

B. systematic risk

18. Market risk is also called __________ and _________. A. systematic risk; diversifiable risk B. systematic risk; nondiversifiable risk C. unique risk; nondiversifiable risk D. unique risk; diversifiable risk

B. systematic risk; nondiversifiable risk

Choosing stocks by searching for predictable patterns in stock prices is called ________.

B. technical analysis

21. Harry Markowitz is best known for his Nobel Prize-winning work on _____________. A. strategies for active securities trading B. techniques used to identify efficient portfolios of risky assets C. techniques used to measure the systematic risk of securities D. techniques used in valuing securities options

B. techniques used to identify efficient portfolios of risky assets

The holding period return on a stock is equal to _________.

B. the capital gain yield over the period plus the dividend yield

The holding period return on a stock is equal to _________. A. the capital gain yield over the period plus the inflation rate B. the capital gain yield over the period plus the dividend yield C. the current yield plus the dividend yield D. the dividend yield plus the risk premium

B. the capital gain yield over the period plus the dividend yield

The price of a stock is $38 at the beginning of the year and $41 at the end of the year. If the stock paid a $2.50 dividend, what is the holding-period return for the year? A. 6.58% B. 8.86% C. 14.47% D. 18.66%

C. 14.47%

57. Arbitrage is __________________________. A. an example of the law of one price B. the creation of riskless profits made possible by relative mispricing among securities C. a common opportunity in modern markets D. an example of a risky trading strategy based on market forecasting

B. the creation of riskless profits made possible by relative misplacing among securities

56. Arbitrage is __________________________. A. an example of the law of one price B. the creation of riskless profits made possible by relative mispricing among securities C. a common opportunity in modern markets D. an example of a risky trading strategy based on market forecasting

B. the creation of riskless profits made possible by relative mispricing among securities

50. The term excess return refers to ______________. A. returns earned illegally by means of insider trading B. the difference between the rate of return earned and the risk-free rate C. the difference between the rate of return earned on a particular security and the rate of return earned on other securities of equivalent risk D. the portion of the return on a security that represents tax liability and therefore cannot be reinvested

B. the difference between the rate of return earned and the risk-free rate

In the context of a bond portfolio, price risk and reinvestment rate risk exactly cancel out at a time horizon equal to ____. A. the average bond maturity in the portfolio B. the duration of the portfolio C. the difference between the shortest duration and longest duration of the individual bonds in the portfolio D. the average of the shortest duration and longest duration of the bonds in the portfolio

B. the duration of the portfolio

When used in the context of investment decision making, the term liquidity refers to _____________. A. the ease and speed with which an asset can be sold at any value possible B. the ease and speed with which an asset can be sold without having to discount the value C. an aspect of monetary policy D. the proportion of short-term to long-term investments held in an investor's portfolio

B. the ease and speed with which an asset can be sold without having to discount the value

The term investment horizon refers to __________. A. the proportion of short-term to long-term investments held in an investor's portfolio B. the planned liquidation date of an investment C. the average maturity date of investments held in a portfolio D. the maturity date of the longest investment in the portfolio

B. the planned liquidation date of an investment

Convexity of a bond is ___________. A. the same as horizon analysis B. the rate of change of the price-yield curve divided by bond price C. a measure of bond duration D. none of the above

B. the rate of change of the price-yield curve divided by bond price

22. Suppose that a stock portfolio and a bond portfolio have a zero correlation. This means that ______. A. the returns on the stock and bond portfolios tend to move inversely B. the returns on the stock and bond portfolios tend to vary independently of each other C. the returns on the stock and bond portfolios tend to move together D. the covariance of the stock and bond portfolios will be positive

B. the returns on the stock and bond portfolios tend to vary independently of each other

52. According to capital asset pricing theory, the key determinant of portfolio returns is _________. A. the degree of diversification B. the systematic risk of the portfolio C. the firm-specific risk of the portfolio D. economic factors

B. the systematic risk of the portfolio

53. According to capital asset pricing theory, the key determinant of portfolio returns is _________. A. the degree of diversification B. the systematic risk of the portfolio C. the firm-specific risk of the portfolio D. economic factors

B. the systematic risk of the portfolio

The term hedge refers to an investment that is used ________________. A. primarily for tax-loss selling purposes B. to mitigate specific financial risks C. to conceal one's true investment strategy from other market participants D. primarily to defer capital losses

B. to mitigate specific financial risks

One of the major functions of the investment committee is to ________________. A. determine security selection of each portfolio operated by the investment company B. translate the objectives and constraints of the investment company into an asset universe C. determine the percentages of each security in the total investment company portfolio D. calculate and report the overall rate of return to investment company constituents

B. translate the objectives and constraints of the investment company into an asset universe

6. Adding additional risky assets to the investment opportunity set will generally move the efficient frontier _____ and to the ______. A. up; right B. up; left C. down; right D. down; left

B. up; left

9. Which of the following statistics cannot be negative? A. Covariance B. Variance C. E(r) D. Correlation coefficient

B. variance

Investors want high plowback ratios A. for all firms. B. whenever ROE > k. C. whenever k > ROE. D. only when they are in low tax brackets. E. whenever bank interest rates are high.

B. whenever ROE > k.

For most firms, P/E ratios and risk A. will be directly related. B. will have an inverse relationship. C. will be unrelated. D. will both increase as inflation increases. E. none of the above.

B. will have an inverse relationship.

Year Beg Year $ #shares b/s 2011 50 100 b 2012 55 50 b 2013 51 75 s 2014 54 75s What is the dollar-weighted return over the entire time period? A. 2.87% B.74% C. 2.6% D. 2.21%

B.74%

87. An investor should do which of the following for stocks with negative alphas? A. go long B.sell short C. hold D. do nothing

B.sell short

Banz found that, on average, the risk-adjusted returns of small firms __________. A. was higher than the risk-adjusted returns of large firms B. was the same as the risk-adjusted returns of large firms C. was lower than the risk-adjusted returns of large firms D. was negative

Basu found that firms with high P/E ratios __________. A. earned higher average returns than firms with low P/E ratios B. earned the same average returns as firms with low P/E ratios C. earned lower average returns than firms with low P/E ratios D. had higher dividend yields than firms with low P/E ratios

Both investors and gamblers take on risk. The difference between an investor and a gambler is that an investor ___________ A. is normally risk neutral B. requires a risk premium to take on the risk C. knows he or she will not lose money D. knows the outcomes at the beginning of the holding period

7. You have calculated the historical dollar-weighted return, annual geometric average return, and annual arithmetic average return. If you desire to forecast performance for next year, the best forecast will be given by the ________. A. dollar-weighted return B. geometric average return C. arithmetic average return D. index return

C. arithmetic average return

__________ the ratio of the number of people classified as unemployed to the total labor force.

C) The unemployment rate is

Assume the U.S. government was to decide to increase its budget deficit. This will cause __________ to increase. A) interest rates B) the output of the economy C) both a and b D) neither a nor b

C) both a and b

In the dividend discount model, _______ which of the following are not incorporated into the discount rate? A) real risk-free rate B) risk premium for stocks C) return on assets D) expected inflation rate E) none of the above

C) return on assets

An analyst starts by examining the broad economic environment and then considers the implications of the outside environment on the industry in which the firm operates. Finally, the firm's position within the industry is examined. This is called __________ analysis.

C) top-down

How a company raises capital and how they budget or invest it are considered independently. The financing department is responsible for keeping costs low and using a balance of funding sources. In the short term, a company may overemphasize the most recently issued capital, but in the long run, the firm will ascribe to target weights for each capital type. The investment decision should be made assuming a weighted average cost of capital including each of the different sources of capital and long-run target weights. . risk-free rate. B. net present value of the project to be financed. C. percentage of financing coming from each financing source. D. company's product.

C. percentage of financing coming from each financing source.

51. The holding-period return on a stock was 25%. Its ending price was $18, and its beginning price was $16. Its cash dividend must have been _________. A. $.25 B. $1 C. $2 D. $4

C. $2

53. The holding-period return on a stock was 32%. Its beginning price was $25, and its cash dividend was $1.50. Its ending price must have been _________. A. $28.50 B. $33.20 C. $31.50 D. $29.75

C. $31.50

Your great aunt Zella invested $100 in 1925 in a portfolio of large U.S. stocks that earned a compound return of 10% annually.If she left that money to you, how much would be in the account 90 years later in 2015? A. $1,000 B. $9,900 C. $531,302 D. $5,843,325

C. $531,302

71. The price of a stock is $55 at the beginning of the year and $50 at the end of the year. If the stock paid a $3 dividend and inflation was 3%, what is the real holding-period return for the year? A. -3.64% B. -6.36% C. -6.44% D. -11.74%

C. -6.44%

59. You invest $1,000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 16% and a standard deviation of 20% and a Treasury bill with a rate of return of 6%. The slope of the capital allocation line formed with the risky asset and the risk-free asset is approximately _________. A. 1.040 B. .80 C. .50 D. .25

C. .50

30. The standard deviation of return on investment A is .10, while the standard deviation of return on investment B is .05. If the covariance of returns on A and B is .0030, the correlation coefficient between the returns on A and B is _________. A. .12 B. .36 C. .60 D. .77

C. .60

55. The market value weighted-average beta of firms included in the market index will always be _____________. A. 0 B. between 0 and 1 C. 1 D. none of these options (There is no particular rule concerning the average beta of firms included in the market index.)

C. 1

72. What is the most likely correlation coefficient between a stock-index mutual fund and the S&P 500? A. -1 B. 0 C. 1 D. .5

C. 1

37. You invest $600 in security A with a beta of 1.5 and $400 in security B with a beta of .90. The beta of this portfolio is _________. A. 1.14 B. 1.2 C. 1.26 D. 1.5

C. 1.26

38. You invest $600 in security A with a beta of 1.5 and $400 in security B with a beta of .90. The beta of this portfolio is _________. A. 1.14 B. 1.2 C. 1.26 D. 1.5

C. 1.26

43. Consider the one-factor APT. The standard deviation of return on a well-diversified portfolio is 20%. The standard deviation on the factor portfolio is 12%. The beta of the well-diversified portfolio is approximately _________. A. .60 B. 1 C. 1.67 D. 3.20

C. 1.67

42. Consider the one-factor APT. The standard deviation of return on a well-diversified portfolio is 20%. The standard deviation on the factor portfolio is 12%. The beta of the well-diversified portfolio is approximately _________. A. .60 B. 1 C. 1.67 D. 3.20

C. 1.67 0.20 / 0.12

37. 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 _________. A. 6.75% B. 9% C. 10.75% D. 12%

C. 10.75% E(rn)= .04+3(.0225)= 10.75

36. 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 _________. A. 6.75% B. 9% C. 10.75% D. 12%

C. 10.75% 2.25% x 3 + 4%

42. An investor can design a risky portfolio based on two stocks, A and B. The standard deviation of return on stock A is 20%, while the standard deviation on stock B is 15%. The correlation coefficient between the returns on A and B is 0%. The standard deviation of return on the minimum-variance portfolio is _________. A. 0% B. 6% C. 12% D. 17%

C. 12%

An investor invests 70% of her wealth in a risky asset with an expected rate of return of 15% and a variance of 5%, and she puts 30% in a Treasury bill that pays 5%. Her portfolio's expected rate of return and standard deviation are __________ and __________ respectively. A. 10%; 6.7% B. 12%; 22.4% C. 12%; 15.7% D. 10%; 35%

C. 12%; 15.7%

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? A. 2.04% B. 12 % C. 12.24% D. 12.89%

C. 12.24%

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? A. 6.38% B. 12.77% C. 13.17% D. 14.25%

C. 13.17%

80. The risk premium for exposure to aluminum commodity prices is 4%, and the firm has a beta relative to aluminum commodity prices of .6. The risk premium for exposure to GDP changes is 6%, and the firm has a beta relative to GDP of 1.2. If the risk-free rate is 4%, what is the expected return on this stock? A. 10% B. 11.5% C. 13.6% D. 14%

C. 13.6% Return = .04 + .6(.04) + 1.2(.06) = .136

81. The risk premium for exposure to aluminum commodity prices is 4%, and the firm has a beta relative to aluminum commodity prices of .6. The risk premium for exposure to GDP changes is 6%, and the firm has a beta relative to GDP of 1.2. If the risk-free rate is 4%, what is the expected return on this stock? A. 10% B. 11.5% C. 13.6% D. 14%

C. 13.6% Return = .04 + .6(.04) + 1.2(.06) = .136

1. An adjusted beta will be ______ than the unadjusted beta. A. lower B. higher C. closer to 1 D. closer to 0

c. closer to 1

30. Consider the multifactor APT with two factors. Portfolio A has a beta of .5 on factor 1 and a beta of 1.25 on factor 2. The risk premiums on the factor 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. A. 13.5% B. 15% C. 16.25% D. 23%

C. 16.25% E(rA) = 7 + 0.5(1) + 1.25(7) = 16.25%

31. Consider the multifactor APT with two factors. Portfolio A has a beta of .5 on factor 1 and a beta of 1.25 on factor 2. The risk premiums on the factor 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. A. 13.5% B. 15% C. 16.25% D. 23%

C. 16.25% E(rA) = 7 + 0.5(1) + 1.25(7) = 16.25%

43. 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 _________. A. 12% B. 17% C. 18% D. 23%

C. 18%

44. 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 _________. A. 12% B. 17% C. 18% D. 23%

C. 18%

Year Beg Year $ #shares b/s 2011 50 100 b 2012 55 50 b 2013 51 75 s 2014 54 75s geometric average return for the period? A. 2.87% B. .74% C. 2.6% D. 2.21%

C. 2.6%

41. Treasury bills are paying a 4% rate of return. A risk-averse investor with a risk aversion of A = 3 should invest entirely in a risky portfolio with a standard deviation of 24% only if the risky portfolio's expected return is at least ______. A. 8.67% B. 9.84% C. 21.28% D. 14.68%

C. 21.28%

39. An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 21% and a standard deviation of return of 39%. Stock B has an expected return of 14% and a standard deviation of return of 20%. The correlation coefficient between the returns of A and B is .4. The risk-free rate of return is 5%. The standard deviation of the returns on the optimal risky portfolio is _________. A. 25.5% B. 22.3% C. 21.4% D. 20.7%

C. 21.4%

62. You find that the annual Sharpe ratio for stock A returns is equal to 1.8. For a 3-year holding period, the Sharpe ratio would equal _______. A. 1.8 B. 2.48 C. 3.12 D. 5.49

C. 3.12 The Sharpe ration grows at a rate of so the 3-year Sharpe ration would be 1.8 × = 3.12.

49. You purchased a share of stock for $29. One year later you received $2.25 as dividend and sold the share for $28. Your holding-period return was _________. A. -3.57% B. -3.45% C. 4.31% D. 8.03%

C. 4.31%

What is the geometric average return of the following quarterly returns: 3%, 5%, 4%, and 7%? A. 3.72% B. 4.23% C. 4.74% D. 4.90%

C. 4.74%

33. Consider two perfectly negatively correlated risky securities, A and B. Security A has an expected rate of return of 16% and a standard deviation of return of 20%. B has an expected rate of return of 10% and a standard deviation of return of 30%. The weight of security B in the minimum-variance portfolio is _________. A. 10% B. 20% C. 40% D. 60%

C. 40%

63. You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40% respectively. X has an expected rate of return of 14%, and Y has an expected rate of return of 10%. To form a complete portfolio with an expected rate of return of 8%, you should invest approximately __________ in the risky portfolio. This will mean you will also invest approximately __________ and __________ of your complete portfolio in security X and Y, respectively. A. 0%; 60%; 40% B. 25%; 45%; 30% C. 40%; 24%; 16% D. 50%; 30%; 20%

C. 40%; 24%; 16%

47. A portfolio with a 25% standard deviation generated a return of 15% last year when T-bills were paying 4.5%. This portfolio had a Sharpe ratio of ____. A. .22 B. .60 C. 42 D. .25

C. 42

57. You invest $1,000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 16% and a standard deviation of 20% and a Treasury bill with a rate of return of 6%. __________ of your complete portfolio should be invested in the risky portfolio if you want your complete portfolio to have a standard deviation of 9%. A. 100% B. 90% C. 45% D. 10%

C. 45%

85. If you believe you have a 60% chance of doubling your money, a 30% chance of gaining 15%, and a 10% chance of losing your entire investment, what is your expected return? A. 5% B. 15% C. 54.5% D. 114.5%

C. 54.5%

The buyer of a new home is quoted a mortgage rate of .5% per month. What is the APR on the loan? A. .50% B. 5% C. 6% D. 6.5%

C. 6%

You have an APR of 7.5% with continuous compounding. The EAR is _____. A. 7.5% B. 7.65% C. 7.79 % D. 8.25%

C. 7.79 %

8. Consider the CAPM. The expected return on the market is 18%. The expected return on a stock with a beta of 1.2 is 20%. What is the risk-free rate? A. 2% B. 6% C. 8% D. 12%

C. 8% 20% = rF + (18 - rF)(1.2); rF = 8%

8. Consider the CAPM. The expected return on the market is 18%. The expected return on a stock with a beta of 1.2 is 20%. What is the risk-free rate? A. 2% B. 6% C. 8% D. 12%

C. 8% 20% = rF + (18 - rF)(1.2); rF = 8%

What is the geometric average return over 1 year if the quarterly returns are 8%, 9%, 5%, and 12%? A. 8% B. 8.33 % C. 8.47% D. 8.5 %

C. 8.47%

44. Semitool Corp. has an expected excess return of 6% for next year. However, for every unexpected 1% change in the market, Semitool's return responds by a factor of 1.2. Suppose it turns out that the economy and the stock market do better than expected by 1.5% and Semitool's products experience more rapid growth than anticipated, pushing up the stock price by another 1%. Based on this information, what was Semitool's actual excess return? A. 7% B. 8.5% C. 8.8% D. 9.25%

C. 8.8% 6% + (1.5%)(1.2) + 1% = 8.8%

Hedge ratios for long call positions are _____ , and hedge ratios for long put positions are _____

positive ; negative

40. An investor can design a risky portfolio based on two stocks, A and B. The standard deviation of return on stock A is 24%, while the standard deviation on stock B is 14%. The correlation coefficient between the returns on A and B is .35. The expected return on stock A is 25%, while on stock B it is 11%. The proportion of the minimum-variance portfolio that would be invested in stock B is approximately _________. A. 45% B. 67% C. 85% D. 92%

C. 85%

The geometric average of -12%, 20%, and 25% is _________.

C. 9.7%

The geometric average of -12%, 20%, and 25% is _________. A. 8.42% B. 11% C. 9.7% D. 18.88%

C. 9.7%

All other things equal, which of the following has the longest duration? A. A 20 year bond with a 10% coupon yielding 10% B. A 20 year bond with a 10% coupon yielding 11% C. A 20 year zero coupon bond yielding 10% D. A 20 year zero coupon bond yielding 11%

C. A 20 year zero coupon bond yielding 10%

29. Consider the single factor APT. Portfolio A has a beta of .2 and an expected return of 13%. Portfolio B has a beta of .4 and an expected return of 15%. The risk-free rate of return is 10%. 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. A; A B. A; B C. B; A D. B; B

C. B; A

30. Consider the single factor APT. Portfolio A has a beta of .2 and an expected return of 13%. Portfolio B has a beta of .4 and an expected return of 15%. The risk-free rate of return is 10%. 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. A; A B. A; B C. B; A D. B; B

C. B; A

44. 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 _________. A. A; it offers an expected excess return of .2% B. A; it offers an expected excess return of 2.2% C. B; it offers an expected excess return of 1.8% D. B; it offers an expected return of 2.4%

C. B; it offers an expected excess return of 1.8%

45. 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 _________. A. A; it offers an expected excess return of .2% B. A; it offers an expected excess return of 2.2% C. B; it offers an expected excess return of 1.8% D. B; it offers an expected return of 2.4%

C. B; it offers an expected excess return of 1.8%

The CAL provided by combinations of 1-month T-bills and a broad index of common stocks is called the ______.

C. CML

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

C. CML

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

C. Earnings forecasting

Which of the following contradicts the proposition that the stock market is weakly efficient?

C. Every January, the stock market earns above-normal returns.

The pioneer of the duration concept was _________. A. Eugene Fama B. John Herzog C. Frederick Macaulay D. Harry Markowitz

C. Frederick Macaulay

47. Which of the following variables do Fama and French claim do a better job explaining stock returns than beta? I. Book-to-market ratio II. Unexpected change in industrial production III. Firm size A. I only B. I and II only C. I and III only D. I, II, and III

C. I and III only

48. Which of the following variables do Fama and French claim do a better job explaining stock returns than beta? I. Book-to-market ratio II. Unexpected change in industrial production III. Firm size A. I only B. I and II only C. I and III only D. I, II, and III

C. I and III only

Medfield College's $10 million endowment fund is not allowed to spend any contributed capital or any capital gains. The fund may spend only investment earnings. The fund is expected to need between $500,000 and $1,000,000 to pay for new lab equipment for the science building. Which of the following is (are) true? I. The fund should have a target rate of return of at least 10%. II. The limitations on spending require that the fund limit its considerations to growth stocks. III. The requirement to spend money out of the fund this year provides a liquidity constraint that may reduce the fund's rate of return. A. I only B. II only C. I and III only D. I, II, and III

C. I and III only

Rank the following from highest average historical return to lowest average historical return from 1926 to 2010. I. Small stocks II. Long-term bonds III. Large stocks IV. T-bills

C. I, III, II, IV

Rank the following from highest average historical return to lowest average historical return from 1926 to 2013. I. Small stocks II. Long-term bonds III. Large stocks IV. T-bills A. I, II, III, IV B. III, IV, II, I C. I, III, II, IV D. III, I, II, IV

C. I, III, II, IV

Rank the following from highest average historical standard deviation to lowest average historical standard deviation from 1926 to 2010. I. Small stocks II. Long-term bonds III. Large stocks IV. T-bills

C. I, III, II, IV

Rank the following from highest average historical standard deviation to lowest average historical standard deviation from 1926 to 2013. I. Small stocks II. Long-term bonds III. Large stocks IV. T-bills A. I, II, III, IV B. III, IV, II, I C. I, III, II, IV D. III, I, II, IV

C. I, III, II, IV

The present value of growth opportunities (PVGO) is equal to I) the difference between a stock's price and its no-growth value per share. II) the stock's price III) zero if its return on equity equals the discount rate. IV) the net present value of favorable investment opportunities. A. I and IV B. II and IV C. I, III, and IV D. II, III, and IV E. III and IV

C. I, III, and IV

61. Which of the following statements is (are) true regarding time diversification? I. The standard deviation of the average annual rate of return over several years will be smaller than the 1-year standard deviation. II. For a longer time horizon, uncertainty compounds over a greater number of years. III. Time diversification does not reduce risk. A. I only B. II only C. II and III only D. I, II, and III

C. II and III only

27. The optimal risky portfolio can be identified by finding: I. The minimum-variance point on the efficient frontier II. The maximum-return point on the efficient frontier and the minimum-variance point on the efficient frontier III. The tangency point of the capital market line and the efficient frontier IV. The line with the steepest slope that connects the risk-free rate to the efficient frontier A. I and II only B. II and III only C. III and IV only D. I and IV only

C. III and IV only

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

C. It is always the minimum-variance portfolio on the efficient frontier

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

C. It is always the minimum-variance portfolio on the efficient frontier.

During the 1926-2013 period which one of the following asset classes provided the lowest real return? A. Small U.S. stocks B. Large U.S. stocks C. Long-term U.S. Treasury bonds D. Equity world portfolio in U.S. dollars

C. Long-term U.S. Treasury bonds

During the 1985-2010 period the Sharpe ratio was lowest for which of the following asset classes?

C. Long-term U.S. Treasury bonds

The duration is independent of the coupon rate only for which one of the following? A. Discount bonds B. Premium bonds C. Perpetuities D. Short term bonds

C. Perpetuities

When bonds sell above par, what is the relationship of price sensitivity to rising interest rates? A. Price volatility increases at an increasing rate B. Price volatility increases at a decreasing rate C. Price volatility decreases at a decreasing rate D. Price volatility decreases at an increasing rate

C. Price volatility decreases at a decreasing rate

63. 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, _________. A. SDA Corp. stock is underpriced B. SDA Corp. stock is fairly priced C. SDA Corp. stock's alpha is -.75% D. SDA Corp. stock alpha is .75%

C. SDA Corp. stock alpha is -.75%

62. 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, _________. A. SDA Corp. stock is underpriced B. SDA Corp. stock is fairly priced C. SDA Corp. stock's alpha is -.75% D. SDA Corp. stock alpha is .75%

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

23. The graph of the relationship between expected return and beta in the CAPM context is called the _________. A. CML B. CAL C. SML D. SCL

C. SML

23. The graph of the relationship between expected return and beta in the CAPM context is called the _________. A. CML B. CAL C. SML D. SCL

C. SML

You are looking to invest in one of three stocks. All other things being equal, Stock A has high expected earnings growth, stock B has only modest expected earnings growth, and stock C is expected to generate poor earnings growth. According to LaPorta's 1996 study, which stock is likely to generate the greatest alpha for you?

C. Stock C

Insiders are able to profitably trade and earn abnormal returns prior to the announcement of positive news. This is a violation of which form of efficiency?

C. Strong-form efficiency

Which of the following would tend to reduce a firm's P/E ratio? A. The firm significantly decreases financial leverage B. The firm increases return on equity for the long term C. The level of inflation is expected to increase to double-digit levels D. The rate of return on Treasury bills decreases E. None of the above

C. The level of inflation is expected to increase to double-digit levels

15. The capital asset pricing model was developed by _________. A. Kenneth French B. Stephen Ross C. William Sharpe D. Eugene Fama

C. William Sharpe

15. The capital asset pricing model was developed by _________. A. Kenneth French B. Stephen Ross C. William Sharpe D. Eugene Fama

C. William Sharpe

Just 2 months after you put money into an investment, its price falls 25%. Assuming that none of the investment fundamentals have changed, which of the following actions would evidence the greatest risk tolerance? A. You sell to avoid further worry and buy something else. B. You do nothing and wait for the investment to come back. C. You buy more, thinking that if it was a good investment before, now it's not only good but cheap too. D. You sue your financial adviser.

C. You buy more, thinking that if it was a good investment before, now it's not only good but cheap too.

Which of the following stock price observations would appear to contradict the weak form of the efficient market hypothesis?

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

Proponents of the EMH typically advocate __________.

C. a passive investment strategy

The strong form of the EMH states that ________ must be reflected in the current stock price

C. all information, including inside information

One method of forecasting the risk premium is to use the _______. A. coefficient of variation of analysts' earnings forecasts B. variations in the risk-free rate over time C. average historical excess returns for the asset under consideration D. average abnormal return on the index portfolio

C. average historical excess returns for the asset under consideration

20. Which one of the following stock return statistics fluctuates the most over time? A. Covariance of returns B. Variance of returns C. Average return D. Correlation coefficient

C. average return

The historical yield spread between the AA bond and the AAA bond has been 25 basis points. Currently the spread is only 9 basis points. If you believe the spread will soon return to its historical levels you should ________________________. A. buy the AA and short the AAA B. buy both the AA and the AAA C. buy the AAA and short the AA D. short both the AA and the AAA

C. buy the AAA and short the AA

69. If you want to know the portfolio standard deviation for a three-stock portfolio, you will have to ______. A. calculate two covariances and one trivariance B. calculate only two covariances C. calculate three covariances D. average the variances of the individual stocks

C. calculate free coverlances

1. An adjusted beta will be ______ than the unadjusted beta. A. lower B. higher C. closer to 1 D. closer to 0

C. closer to 1

78. According to historical data, over the long run which of the following assets has the best chance to provide the best after-inflation, after-tax rate of return? A. long-term Treasury bonds B. corporate bonds C. common stocks D. preferred stocks

C. common stocks

GAAP allows A. no leeway to manage earnings. B. minimal leeway to manage earnings. C. considerable leeway to manage earnings. D. earnings management if it is beneficial in increasing stock price. E. none of the above.

C. considerable leeway to manage earnings.

51. You are recalculating the risk of ACE stock in relation to the market index, and you find that the ratio of the systematic variance to the total variance has risen. You must also find that the ____________. A. covariance between ACE and the market has fallen B. correlation coefficient between ACE and the market has fallen C. correlation coefficient between ACE and the market has risen D. unsystematic risk of ACE has risen

C. correlation coefficient between ACE and the market has risen

45. According to the CAPM, the risk premium an investor expects to receive on any stock or portfolio is _______________. A. directly related to the risk aversion of the particular investor B. inversely related to the risk aversion of the particular investor C. directly related to the beta of the stock D. inversely related to the alpha of the stock

C. directly related to the beta of the stock

46. According to the CAPM, the risk premium an investor expects to receive on any stock or portfolio is _______________. A. directly related to the risk aversion of the particular investor B. inversely related to the risk aversion of the particular investor C. directly related to the beta of the stock D. inversely related to the alpha of the stock

C. directly related to the beta of the stock

3. If you want to measure the performance of your investment in a fund, including the timing of your purchases and redemptions, you should calculate the __________. A. geometric average return B. arithmetic average return C. dollar-weighted return D. index return

C. dollar-weighted return

Basu found that firms with high P/E ratios __________.

C. earned lower average returns than firms with low P/E ratios

The major asset most people have during their early working years is their ________. A. home B. stock portfolio C. earning power derived from their skills D. bond portfolio

C. earning power derived from their skills

The Fama and French evidence that high book-to-market firms outperform low book-to-market firms even after adjusting for beta means that _________.

C. either high book-to-market firms are underpriced or the book-to-market ratio is a proxy for a systematic risk factor

17. Consider an investment opportunity set formed with two securities that are perfectly negatively correlated. The global minimum-variance portfolio has a standard deviation that is always _________. A. equal to the sum of the securities' standard deviations B. equal to -1 C. equal to 0 D. greater than 0

C. equal to 0

You are thinking of investing in one of two assets. Asset A has higher systematic risk than asset B. You can be sure that asset A's _______ return will be higher than asset B's, but you can't be sure if asset A's _______ return will be higher than asset B's. A. realized; expected B. real; nominal C. expected; realized D. nominal; expected

C. expected; realized

Dividend discount models and P/E ratios are used by __________ to try to find mispriced securities. A. technical analysts B. statistical analysts C. fundamental analysts D. dividend analysts E. psychoanalysts

C. fundamental analysts

Low P/E ratios tend to indicate that a company will _______, ceteris paribus. A. grow quickly B. grow at the same speed as the average company C. grow slowly D. P/E ratios are unrelated to growth E. none of the above

C. grow slowly

61. You run a regression of a stock's returns versus a market index and find the following: Based on the data, you know that the stock _____. A. earned a positive alpha that is statistically significantly different from zero B. has a beta precisely equal to .890 C. has a beta that is likely to be anything between .6541 and 1.465 inclusive D. has no systematic risk

C. has a beta that is likely to be anything between .6541 and 1.465 inclusive

16. If all investors become more risk averse, the SML will _______________ and stock prices will _______________. A. shift upward; rise B. shift downward; fall C. have the same intercept with a steeper slope; fall D. have the same intercept with a flatter slope; rise

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

Empirical evidence confirms that investors become __________ as they approach retirement. A. greedier B. less interested in investments C. more risk averse D. more risk tolerant

C. more risk averse

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

To _____ means to mitigate a financial risk. A. invest B. speculate C. hedge D. renege

C. hedge

Historical returns have generally been __________ for stocks of small firms as (than) for stocks of large firms. A. the same B. lower C. higher D. none of these options (There is no evidence of a systematic relationship between returns on small-firm stocks and returns on large-firm stocks.)

C. higher

28. The _________ reward-to-variability ratio is found on the ________ capital market line. A. lowest; steepest B. highest; flattest C. highest; steepest D. lowest; flattest

C. highest; steepest

48. According to Tobin's separation property, portfolio choice can be separated into two independent tasks consisting of __________ and __________. A. identifying all investor imposed constraints; identifying the set of securities that conform to the investor's constraints and offer the best risk-return trade-offs B. identifying the investor's degree of risk aversion; choosing securities from industry groups that are consistent with the investor's risk profile C. identifying the optimal risky portfolio; constructing a complete portfolio from T-bills and the optimal risky portfolio based on the investor's degree of risk aversion D. choosing which risky assets an investor prefers according to the investor's risk-aversion level; minimizing the CAL by lending at the risk-free rate

C. identifying the optimal risky portfolio; constructing a complete portfolio from T-bills and the optimal risky portfolio based on the investor's degree of risk aversion

The dividend discount model A. ignores capital gains. B. incorporates the after-tax value of capital gains. C. includes capital gains implicitly. D. restricts capital gains to a minimum. E. none of the above.

C. includes capital gains implicitly.

You have an investment horizon of 6 years. You choose to hold a bond with a duration of 10 years. Your realized rate of return will be larger than the promised yield on the bond if ___________________. A. interest rates increase B. interest rates stay the same C. interest rates fall D. one can't tell with the information given

C. interest rates fall

A bank has an average duration of its liabilities equal to 2 years. The bank's average duration of its assets is 3.5 years. The bank's market value of equity is at risk if _______________________. A. interest rates fall B. credit spreads fall C. interest rates rise D. the price of all fixed income securities rises

C. interest rates rise

An individual is on the game show Squeal or No Squeal, and she has a choice between receiving a certain gain of $100,000 and receiving a 50% chance of winning $200,000 or zero. If she takes the gamble instead of the certain $100,000, she is acting ____________________. A. like a person who is risk-neutral B. like a person who is risk averse C. like a person who is a risk lover D. irrationally

C. like a person who is a risk lover

An investor has a long time horizon and desires to earn the market rate of return. However, the investor will need to withdraw funds each year from her investment portfolio. The biggest constraint a planner would face with this client is a ___________ constraint. A. tax B. risk-tolerance C. liquidity D. social

C. liquidity

The asset universe is the _____________________. A. set of investments in which an investment company can legally invest B. existing set of assets the investment company currently owns in one or more of its portfolios C. list of assets approved by the investment committee that may be placed into the investment company's portfolio D. market portfolio of all available risky assets

C. list of assets approved by the investment committee that may be placed into the investment company's portfolio

During the 1986-2013 period, the Sharpe ratio was lowest for which of the following asset classes? A. small U.S. stocks B. large U.S. stocks C. long-term U.S. Treasury bonds D. equity world portfolio in U.S. dollars

C. long-term U.S. Treasury bonds

. M. Keyes put all his money in one stock, and the stock doubled in value in a matter of months. He did this three times in a row with three different stocks. J. M. got his picture on the front page of the Wall Street Journal. However, the paper never mentioned the thousands of investors who made similar bets on other stocks and lost most of their money. This is an example of the ________ problem in deciding how efficient the markets are.

C. lucky event

. The ______ is a common term for the market consensus value of the required return on a stock. A. dividend payout ratio B. intrinsic value C. market capitalization rate D. plowback rate E. none of the above

C. market capitalization rate

14. Beta is a measure of security responsiveness to _________. A. firm-specific risk B. diversifiable risk C. market risk D. unique risk

C. market risk

31. The risk that a downturn in the market may substantially reduce your investment principal is called _______. A. purchasing power risk B. interest rate risk C. market risk D. liquidity risk

C. market risk

Banks and other financial institutions can best manage interest rate risk by _____________. A. maximizing the duration of assets and minimizing the duration of liabilities B. minimizing the duration of assets and maximizing the duration of liabilities C. matching the durations of their assets and liabilities D. matching the maturities of their assets and liabilities

C. matching the durations of their assets and liabilities

Duration facilitates the comparison of bonds with differing ___________. A. default risk B. conversion ratios C. maturities D. yields to maturity

C. maturities

The primary objective of fundamental analysis is to identify __________.

C. mispriced stocks

The tendency of poorly performing stocks and well-performing stocks in one period to continue their performance into the next period is called the ________________.

C. momentum effect

23. You put half of your money in a stock portfolio that has an expected return of 14% and a standard deviation of 24%. You put the rest of your money in a risky bond portfolio that has an expected return of 6% and a standard deviation of 12%. The stock and bond portfolios have a correlation of .55. The standard deviation of the resulting portfolio will be ________________. A. more than 18% but less than 24% B. equal to 18% C. more than 12% but less than 18% D. equal to 12%

C. more than 12% but less than 18% σ2p = .02592 = (.52)(.242) + (.52)(.122) + 2(.5)(.5)(.24)(.12).55 = .02592; σ = 16.1%

Two assets have the following expected returns and standard deviations when the risk-free rate is 5%: Asset A E(rA) = 10% σA = 20% Asset B E(rB) = 15% σB = 27% An investor with a risk aversion of A = 3 would find that _________________ on a risk-return basis. A. only asset A is acceptable B. only asset B is acceptable C. neither asset A nor asset B is acceptable D. both asset A and asset B are acceptable

C. neither asset A nor asset B is acceptable

56. Diversification can reduce or eliminate __________ risk. A. all B. systematic C. nonsystematic D. only an insignificant

C. nonsystematic

An implication of the efficient market hypothesis is that __________.

C. nonzero alphas will quickly disappear

7. An investor's degree of risk aversion will determine his or her ______. A. optimal risky portfolio B. risk-free rate C. optimal mix of the risk-free asset and risky asset D. capital allocation line

C. optimal mix of the risk-free asset and risky asset

Target date immunization would primarily be of interest to _________. A. banks B. mutual funds C. pension funds D. individual investors

C. pension funds

17. According to the capital asset pricing model, a security with a _________. A. negative alpha is considered a good buy B. positive alpha is considered overpriced C. positive alpha is considered underpriced D. zero alpha is considered a good buy

C. positive alpha is considered underpriced

Since 1955, Treasury bond yields and earnings yields on stocks were _______. A. identical B. negatively correlated C. positively correlated D. uncorrelated

C. positively correlated

Duration is a concept that is useful in assessing a bond's _________. A. credit risk B. liquidity risk C. price volatility D. convexity risk

C. price volatility

36. A bond swap made in response to forecasts of interest rate changes is called ______. A. a substitution swap B. an intermarket spread swap C. rate anticipation swap D. pure yield pickup swap

C. rate anticipation swap

55. The most significant conceptual difference between the arbitrage pricing theory (APT) and the capital asset pricing model (CAPM) is that the CAPM _____________. A. places less emphasis on market risk B. recognizes multiple unsystematic risk factors C. recognizes only one systematic risk factor D. recognizes multiple systematic risk factors

C. recognizes only one systematic risk factor

56. The most significant conceptual difference between the arbitrage pricing theory (APT) and the capital asset pricing model (CAPM) is that the CAPM _____________. A. places less emphasis on market risk B. recognizes multiple unsystematic risk factors C. recognizes only one systematic risk factor D. recognizes multiple systematic risk factors

C. recognizes only one systematic risk factor

In the dividend discount model, _______ which of the following are not incorporated into the discount rate? A. real risk-free rate B. risk premium for stocks C. return on assets D. expected inflation rate E. none of the above

C. return on assets

36. Historically, small-firm stocks have earned higher returns than large-firm stocks. When viewed in the context of an efficient market, this suggests that ___________. A. small firms are better run than large firms B. government subsidies available to small firms produce effects that are discernible in stock market statistics C. small firms are riskier than large firms D. small firms are not being accurately represented in the data

C. small firms are riskier than large firms

An increase in a bond's yield to maturity results in a price decline that is ________ the price increase resulting from a decrease in yield of equal magnitude. A. greater than B. equivalent to C. smaller than D. The answer is indeterminate

C. smaller than

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

C. stock price changes that are random and unpredictable

The broadest information set is included in the _____.

C. strong-form efficiency argument

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

C. the Federal Reserve increases internet rates 50 basis points

35. An important characteristic of market equilibrium is _______________. A. the presence of many opportunities for creating zero-investment portfolios B. all investors exhibit the same degree of risk aversion C. the absence of arbitrage opportunities D. the lack of liquidity in the market

C. the absence of arbitrage opportunities

36. An important characteristic of market equilibrium is _______________. A. the presence of many opportunities for creating zero-investment portfolios B. all investors exhibit the same degree of risk aversion C. the absence of arbitrage opportunities D. the lack of liquidity in the market

C. the absence of arbitrage opportunities

70. Which of the following correlation coefficients will produce the least diversification benefit? A. -.6 B. -.3 C. 0 D. .8

D. .8

13. The market portfolio has a beta of _________. A. -1 B. 0 C. .5 D. 1

D. 1

If a firm has a required rate of return equal to the ROE A. the firm can increase market price and P/E by retaining more earnings. B. the firm can increase market price and P/E by increasing the growth rate. C. the amount of earnings retained by the firm does not affect market price or the P/E. D. A and B. E. none of the above.

C. the amount of earnings retained by the firm does not affect market price or the P/E.

One of the problems with attempting to forecast stock market values is that A. there are no variables that seem to predict market return. B. the earnings multiplier approach can only be used at the firm level. C. the level of uncertainty surrounding the forecast will always be quite high. D. dividend payout ratios are highly variable. E. none of the above.

C. the level of uncertainty surrounding the forecast will always be quite high.

8. The complete portfolio refers to the investment in _________. A. the risk-free asset B. the risky portfolio C. the risk-free asset and the risky portfolio combined D. the risky portfolio and the index

C. the risk-free asset and the risky portfolio combined

The complete portfolio refers to the investment in _________.

C. the risk-free asset and the risky portfolio combined

The duration of a portfolio of bonds can be calculated as _______________. A. the coupon weighted average of the durations of the individual bonds in the portfolio B. the yield weighted average of the durations of the individual bonds in the portfolio C. the value weighed average of the durations of the individual bonds in the portfolio D. averages of the durations of the longest and shortest duration bonds in the portfolio

C. the value weighed average of the durations of the individual bonds in the portfolio

13. The expected rate of return of a portfolio of risky securities is _________. A. the sum of the securities' covariances B. the sum of the securities' variances C. the weighted sum of the securities' expected returns D. the weighted sum of the securities' variances

C. the weighted sum of the securities' expected returns

3. Many current and retired Enron Corp. employees had their 401k retirement accounts wiped out when Enron collapsed because ________. A. they had to pay huge fines for obstruction of justice B. their 401k accounts were held outside the company C. their 401k accounts were not well diversified D. none of these options

C. their 401k accounts were not well diversified

88. One extensive study found that about ______ of financial managers use CAPM to estimate cost of capital. A. one-third B. one-half C. three quarters D. ninety percent

C. three quarters

Evidence supporting semistrong-form market efficiency suggests that investors should _________________________.

C. use a passive trading strategy such as purchasing an index fund or an ETF

Which measure of downside risk predicts the worst loss that will be suffered with a given probablility? A. standard deviation B. variance C. value at risk D. Sharpe ratio

C. value at risk

An active asset allocation strategy involves _________. A. investing in the stock of companies that are price takers B. maintaining approximately the same proportions of a portfolio in each asset class over time C. varying the proportions of a portfolio in each asset class in response to changing market conditions D. selecting individual securities in different sectors that are believed to be undervalued

C. varying the proportions of a portfolio in each asset class in response to changing market conditions

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.

C. weak

Choosing stocks by searching for predictable patterns in stock prices is called ________. A. fundamental analysis B. technical analysis C. index management D. random walk investing

13. The market portfolio has a beta of _________. A. -1 B. 0 C. .5 D. 1

D. 1

7. Consider the CAPM. The risk-free rate is 5%, and the expected return on the market is 15%. What is the beta on a stock with an expected return of 17%? A. .5 B. .7 C. 1 D. 1.2

D. 1.2 17% = 5% + [15% - 5%]βs; βs = 1.2

7. Consider the CAPM. The risk-free rate is 5%, and the expected return on the market is 15%. What is the beta on a stock with an expected return of 17%? A. .5 B. .7 C. 1 D. 1.2

D. 1.2 17% = 5% + [15% - 5%]βs; βs = 1.2

A loan for a new car costs the borrower .8% per month. What is the EAR? A. .80% B. 6.87% C. 9.6% D. 10.03%

D. 10.03%

You put up $50 at the beginning of the year for an investment. The value of the investment grows 4% and you earn a dividend of $3.50. Your HPR was ____. A. 4% B. 3.5% C. 7% D. 11%

D. 11%

39. If you require a real growth in the purchasing power of your investment of 8%, and you expect the rate of inflation over the next year to be 3%, what is the lowest nominal return that you would be satisfied with? A. 3% B. 8% C. 11% D. 11.24%

D. 11.24%

Which of the following would not be considered a supply shock? A) a change in the price of imported oil B) frost damage to the orange crop C) a change in the level of education of the average worker D) an increase in the level of government spending

D) an increase in the level of government spending

Where Y = yield to maturity, the duration of a perpetuity would be _________. A. Y B. Y/(1 + Y) C. 1/Y D. (1 + Y)/Y

D. (1 + Y)/Y

57. To construct a riskless portfolio using two risky stocks, one would need to find two stocks with a correlation coefficient of ________. A. 1 B. .5 C. 0 D. -1

D. -1

88. What is the VaR of a $10 million portfolio with normally distributed returns at the 5% VaR? Assume the expected return is 13% and the standard deviation is 20%. A. 13% B. -13% C. 19.90% D. -19.90

D. -19.90

75. According to the CAPM, what is the expected market return given an expected return on a security of 15.8%, a stock beta of 1.2, and a risk-free interest rate of 5%? A. 5% B. 9% C. 13% D. 14%

D. 14% 15.8 = 5 + 1.2 × (MRP); MRP = 9%; Expected market return = 5 + 9 = 14%

74. According to the CAPM, what is the expected market return given an expected return on a security of 15.8%, a stock beta of 1.2, and a risk-free interest rate of 5%? A. 5% B. 9% C. 13% D. 14%

D. 14% 15.8 = 5 + 1.2 × (MRP) MRP = 9%; Expected market return = 5 + 9 = 14%

You have the following rates of return for a risky portfolio for several recent years: 2011 35.23% 2012 18.67% 2013 −9.87% 2014 23.45% The annualized (geometric) average return on this investment is _____. A. 16.15% B. 16.87% C. 21.32% D. 15.60%

D. 15.60%

61. The return on the risky portfolio is 15%. The risk-free rate, as well as the investor's borrowing rate, is 10%. The standard deviation of return on the risky portfolio is 20%. If the standard deviation on the complete portfolio is 25%, the expected return on the complete portfolio is _________. A. 6% B. 8.75 % C. 10% D. 16.25%

D. 16.25%

83. The two-factor model on a stock provides a risk premium for exposure to market risk of 12%, a risk premium for exposure to silver commodity prices of 3.5%, and a risk-free rate of 4%. The beta for exposure to market risk is 1, and the beta for exposure to commodity prices is also 1. What is the expected return on the stock? A. 11.6% B. 13% C. 15.3% D. 19.5%

D. 19.5% Return = 3.5 + 4 + 12 = 19.5%

84. The two-factor model on a stock provides a risk premium for exposure to market risk of 12%, a risk premium for exposure to silver commodity prices of 3.5%, and a risk-free rate of 4%. The beta for exposure to market risk is 1, and the beta for exposure to commodity prices is also 1. What is the expected return on the stock? A. 11.6% B. 13% C. 15.3% D. 19.5%

D. 19.5% Return = 3.5 + 4 + 12 = 19.5%

16. Approximately how many securities does it take to diversify almost all of the unique risk from a portfolio? A. 2 B. 6 C. 8 D. 20

D. 20

6. 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? A. 6% B. 15.6% C. 18% D. 21.6%

D. 21.6% E[rs] = 6% + [18% - 6%](1.3) = 21.6%

6. 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? A. 6% B. 15.6% C. 18% D. 21.6%

D. 21.6% E[rs] = 6% + [18% - 6%](1.3) = 21.6%

Both a wife and her husband work in the airline industry. They are in their 40s, and they have a high tax bracket and are concerned about their after-tax rate of return. A meeting with their financial planner reveals that they are primarily focused on long-term capital gains and will need at least a 9% to 11% average rate of return to meet their retirement goals. They desire a diversified portfolio, and liquidity is not currently a major concern. Which of the following asset allocations seems to best fit their situation? A. 10% money market; 40% long-term bonds; 10% commodities; 40% high-dividend-paying stocks B. 0% money market; 60% long-term bonds; 40% stocks C. 10% money market; 30% long-term bonds; 10% commodities; 50% high-dividend-paying stocks D. 5% money market; 30% long-term bonds; 5% commodities; 60% stocks, most with low dividends and high growth prospects

D. 5% money market; 30% long-term bonds; 5% commodities; 60% stocks, most with low dividends and high growth prospects

37. An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 21% and a standard deviation of return of 39%. Stock B has an expected return of 14% and a standard deviation of return of 20%. The correlation coefficient between the returns of A and B is .4. The risk-free rate of return is 5%. The proportion of the optimal risky portfolio that should be invested in stock B is approximately _________. A. 29% B. 44% C. 56% D. 71%

D. 71%

82. A project has a 60% chance of doubling your investment in 1 year and a 40% chance of losing half your money. What is the standard deviation of this investment? A. 25% B. 50% C. 62% D. 73%

D. 73% E[rp] = (.60)(1) + (.40)(-.5) = .40 σ2rp = (.60)(1 - .40)2 + (.40)(-.5 - .40)2 = .54 σrp = .73

73. According to the CAPM, what is the market risk premium given an expected return on a security of 13.6%, a stock beta of 1.2, and a risk-free interest rate of 4%? A. 4% B. 4.8% C. 6.6% D. 8%

D. 8% 13.6 = 4 + 1.2 × (MRP); MRP = 8%

74. According to the CAPM, what is the market risk premium given an expected return on a security of 13.6%, a stock beta of 1.2, and a risk-free interest rate of 4%? A. 4% B. 4.8% C. 6.6% D. 8%

D. 8% 13.6 = 4 + 1.2 × (MRP); MRP = 8%

27. Your investment has a 20% chance of earning a 30% rate of return, a 50% chance of earning a 10% rate of return, and a 30% chance of losing 6%. What is your expected return on this investment? A. 12.8% B. 11% C. 8.9% D. 9.2%

D. 9.2%

All other things equal, which of the following has the shortest duration? A. A 30 year bond with a 10% coupon B. A 20 year bond with a 9% coupon C. A 20 year bond with a 7% coupon D. A 10 year zero coupon bond

D. A 10 year zero coupon bond

The Gordon model A. is a generalization of the perpetuity formula to cover the case of a growing perpetuity. B. is valid only when g is less than k. C. is valid only when k is less than g. D. A and B. E. A and C

D. A and B.

59. Which of the following set of conditions will result in a bond with the greatest price volatility? A. A high coupon and a short maturity. B. A high coupon and a long maturity. C. A low coupon and a short maturity. D. A low coupon and a long maturity.

D. A low coupon and a long maturity.

85. The CAPM _______. A. predicts the relationship between risk and expected return of an asset B. provides a benchmark rate of return for evaluating possible investments C. helps us make an educated guess as to expected return on assets that have not yet traded in the marketplace D. All of the options.

D. All of the options.

1. Risk that can be eliminated through diversification is called ______ risk. A. unique B. firm-specific C. diversifiable D. all of these options

D. All of these options

Which of the following is not a type of bond swap used in active portfolio management? A. Inter-market spread swap B. Substitution swap C. Rate anticipation swap D. Asset-liability swap

D. Asset-liability swap

The required rate of return on equity is the most appropriate discount rate to use when applying a ______ valuation model. A. FCFF B. FCFE C. DDM D. B or C E. P/E

D. B or C

For which one of the following institutions is liquidity usually the most important? A. Mutual funds B. Pension funds C. Life insurers D. Banks

D. Banks

85. The measure of risk used in the capital asset pricing model is ___________. A. specific risk B. the standard deviation of returns C. reinvestment risk D. beta

D. Beta

50. The SML is valid for _______________, and the CML is valid for ______________. A. only individual assets; well-diversified portfolios only B. only well-diversified portfolios; only individual assets C. both well-diversified portfolios and individual assets; both well-diversified portfolios and individual assets D. both well-diversified portfolios and individual assets; well-diversified portfolios only

D. Both well-diversified portfolios and individual assets; well-diversified portfolios only

An investor with low risk aversion will likely prefer which of the following risk and return combinations? A. Expected return = 11%, historical standard deviation = 12% B. Expected return = 12%, historical standard deviation = 14% C. Expected return = 14%, historical standard deviation = 18% D. Expected return = 17%, historical standard deviation = 21%

D. Expected return = 17%, historical standard deviation = 21%

47. Which risk can be partially or fully diversified away as additional securities are added to a portfolio? I. Total risk II. Systematic risk III. Firm-specific risk A. I only B. I and II only C. I, II, and III D. I and III

D. I and III

5. 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 in the 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 risky portfolio. A. I, II, and III only B. II, III, and IV only C. I, III, and IV only D. I, II, III, and IV

D. I, II, III, IV

D. I, II, III, and IV

77. You are considering adding a new security to your portfolio. To decide whether you should add the security, you need to know the security's: I. Expected return II. Standard deviation III. Correlation with your portfolio A. I only B. I and II only C. I and III only D. I, II, and III

D. I, II, and III

87. You own $75,000 worth of stock, and you are worried the price may fall by year-end in 6 months. You are considering using either puts or calls to hedge this position. Given this, which of the following statements is (are) correct? I. One way to hedge your position would be to buy puts. II. One way to hedge your position would be to write calls. III. If major stock price declines are likely, hedging with puts is probably better than hedging with short calls. A. I only B. II only C. I and III only D. I, II, and III

D. I, II, and III

Among the important characteristics of market efficiency is (are) that: I. There are no arbitrage opportunities. II. Security prices react quickly to new information. III. Active trading strategies will not consistently outperform passive strategies.

D. I, II, and III

The amount of risk an individual should take depends on his or her: I. Return requirements II. Risk tolerance III. Time horizon

D. I, II, and III

A clearly understood investment policy statement is not critical for which one of the following? I. Mutual funds II. Individuals III. Defined benefit pension funds A. II only B. III only C. I only D. None of these options (A policy statement is necessary for all three.)

D. None of these options (A policy statement is necessary for all three.)

74. Investing in two assets with a correlation coefficient of 1 will reduce which kind of risk? A. Market risk B. Unique risk C. Unsystematic risk D. None of these options (With a correlation of 1, no risk will be reduced.)

D. None of these options (with a correlation of 1, no risk will be reduced)

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

D. Passive investment

Which of the following typically strives to earn a return on their investments that exceeds the actuarially determined rate of return? A. Banks B. Thrifts C. Mutual funds D. Pension funds

D. Pension funds

55. According to the CAPM, investors are compensated for all but which of the following? A. Expected inflation B. Systematic risk C. Time value of money D. Residual risk

D. Residual risk

Which of the following beliefs would not preclude charting as a method of portfolio management?

D. Stock prices follow recurring patterns.

54. The expected return of the risky-asset portfolio with minimum variance is _________. A. the market rate of return B. zero C. the risk-free rate D. The answer cannot be determined from the information given.

D. The answer cannot be determined from the information given

53. The expected return of the risky-asset portfolio with minimum variance is _________. A. the market rate of return B. zero C. the risk-free rate D. The answer cannot be determined from the information given.

D. The answer cannot be determined from the information given.

________ is equal to the total market value of the firm's common stock divided by (the replacement cost of the firm's assets less liabilities). A. Book value per share B. Liquidation value per share C. Market value per share D. Tobin's Q E. None of the above.

D. Tobin's Q

Which one of the following would be considered a risk-free asset in real terms as opposed to nominal? A. money market fund B. U.S. T-bill C. short-term corporate bonds D. U.S. T-bill whose return was indexed to inflation

D. U.S. T-bill whose return was indexed to inflation

A portfolio consists of three index funds: an equity index, a bond index, and an international index. The portfolio manager changes the weights periodically according to forecasts for each sector. This is an example of __________. A. a passively managed core with an actively managed component B. a totally passively managed fund C. passive asset allocation with active security selection D. active asset allocation with passive security selection

D. active asset allocation with passive security selection

A portfolio manager sells treasury bonds and buys corporate bonds because the spread between corporate and Treasury bond yields is higher than its historical average. This is an example of __________ swap. A. a pure yield pick up B. a rate anticipation C. a substitution D. an intermarket spread

D. an intermarket spread

Proponents of the EMH think technical analysts __________.

D. are wasting their time

84. The measure of risk used in the capital asset pricing model is ___________. A. specific risk B. the standard deviation of returns C. reinvestment risk D. beta

D. beta

60. You have $500,000 available to invest. The risk-free rate, as well as your borrowing rate, is 8%. The return on the risky portfolio is 16%. If you wish to earn a 22% return, you should _________. A. invest $125,000 in the risk-free asset B. invest $375,000 in the risk-free asset C. borrow $125,000 D. borrow $375,000

D. borrow $375,000

49. The SML is valid for _______________, and the CML is valid for ______________. A. only individual assets; well-diversified portfolios only B. only well-diversified portfolios; only individual assets C. both well-diversified portfolios and individual assets; both well-diversified portfolios and individual assets D. both well-diversified portfolios and individual assets; well-diversified portfolios only

D. both well-diversified portfolios and individual assets; well-diversified portfolios only

34. Building a zero-investment portfolio will always involve _____________. A. an unknown mixture of short and long positions B. only short positions C. only long positions D. equal investments in a short and a long position

D. equal investments in a short and a long position

35. Building a zero-investment portfolio will always involve _____________. A. an unknown mixture of short and long positions B. only short positions C. only long positions D. equal investments in a short and a long position

D. equal investments in a short and a long position

Many stock analysts assume that a mispriced stock will A. immediately return to its intrinsic value. B. return to its intrinsic value within a few days. C. never return to its intrinsic value. D. gradually approach its intrinsic value over several years. E. none of the above.

D. gradually approach its intrinsic value over several years.

According to 1968 research by Ball and Brown, securities markets fully adjust to earnings announcements _______.

D. gradually over time

Growth stocks usually exhibit ______ price-to-book ratios and ______ price-to-earnings

D. high; high

If a firm follows a low-investment-rate plan (applies a low plowback ratio), its dividends will be _______ now and _______ in the future than a firm that follows a high-reinvestment-rate plan. A. higher, higher B. lower, lower C. lower, higher D. higher, lower E. It is not possible to tell.

D. higher, lower

4. When all investors analyze securities in the same way and share the same economic view of the world, we say they have ____________________. A. heterogeneous expectations B. equal risk aversion C. asymmetric information D. homogeneous expectations

D. homogeneous expectations

D. horizon analysis

The dollar-weighted return is the _________.

D. internal rate of return

The dollar-weighted return is the _________. A. difference between cash inflows and cash outflows B. arithmetic average return C. geometric average return D. internal rate of return

D. internal rate of return

Most tests of semistrong efficiency are _________.

D. joint tests of market efficiency and the risk-adjustment measure

Endowment funds are held by __________. A. financial intermediaries B. individuals C. profit-oriented firms D. nonprofit institutions

D. nonprofit institutions

Market anomaly refers to _______.

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

The prudent investor rule requires __________. A. executives of companies to avoid investing in options of companies they work for B. executives of companies to disclose their transactions in stocks of companies they work for C. professional investors who manage money for others to avoid all risky investments D. professional investors who manage money for others to constrain their investments to those that would be approved by a prudent investor

D. professional investors who manage money for others to constrain their investments to those that would be approved by a prudent investo

C. rate anticipation swap

D. pure yield pickup swap

D. seem to regress toward 1 over time

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

D. short-run; long run

An investor refuses to invest in any firm that produces alcohol or tobacco. This is an example of a ___________ constraint. A. return requirement B. risk-tolerance C. liquidity D. social

D. social

19. Investors require a risk premium as compensation for bearing ______________. A. unsystematic risk B. alpha risk C. residual risk D. systematic risk

D. systematic risk

19. Investors require a risk premium as compensation for bearing ______________. A. unsystematic risk B. alpha risk C. residual risk D. systematic risk

D. systematic risk

The semistrong form of the efficient market hypothesis implies that ____________ generate abnormal returns and ____________ generate abnormal returns.

D. technical analysis cannot; fundamental analysis cannot

______ insurance policy provides death benefits, with no buildup of cash value. A. whole-life B. universal life C. variable life D. term life

D. term life

The most popular approach to forecasting the overall stock market is to use A. the dividend multiplier. B. the aggregate return on assets. C. the historical ratio of book value to market value. D. the aggregate earnings multiplier. E. Tobin's Q.

D. the aggregate earnings multiplier.

According to Peter Lynch, a rough rule of thumb for security analysis is that A. the growth rate should be equal to the plowback rate. B. the growth rate should be equal to the dividend payout rate. C. the growth rate should be low for emerging industries. D. the growth rate should be equal to the P/E ratio. E. none of the above.

D. the growth rate should be equal to the P/E ratio.

60. One of the main problems with the arbitrage pricing theory is __________. A. its use of several factors instead of a single market index to explain the risk-return relationship B. the introduction of nonsystematic risk as a key factor in the risk-return relationship C. that the APT requires an even larger number of unrealistic assumptions than does the CAPM D. the model fails to identify the key macroeconomic variables in the risk-return relationship

D. the model fails to identify the key macroeconomic variables in the risk-return relationship

61. One of the main problems with the arbitrage pricing theory is __________. A. its use of several factors instead of a single market index to explain the risk-return relationship B. the introduction of nonsystematic risk as a key factor in the risk-return relationship C. that the APT requires an even larger number of unrealistic assumptions than does the CAPM D. the model fails to identify the key macroeconomic variables in the risk-return relationship

D. the model fails to identify the key macroeconomic variables in the risk-return relationship

Which one of the following statements correctly describes the weights used in the Macaulay duration calculation? The weight in year t is equal to ____________. A. the dollar amount of the investment received in year t B. the percentage of the future value of the investment received in year t C. the present value of the dollar amount of the investment received in year t D. the percentage of the total present value of the investment received in year t

D. the percentage of the total present value of the investment received in year t

Earnings managements is A. when management makes changes in the operations of the firm to ensure that earning do not increase or decrease too rapidly. B. when management makes changes in the operations of the firm to ensure that earning do not increase too rapidly. C. when management makes changes in the operations of the firm to ensure that earning do not decrease too rapidly. D. the practice of using flexible accounting rules to improve the apparent profitability of the firm. E. none of the above.

D. the practice of using flexible accounting rules to improve the apparent profitability of the firm

Given its time to maturity the duration of a zero coupon bond is _________. A. higher when the discount rate is higher B. higher when the discount rate is lower C. lowest when the discount rate is equal to the risk free rate D. the same regardless of the discount rate

D. the same regardless of the discount rate

11. The correlation coefficient between two assets equals _________. A. their covariance divided by the product of their variances B. the product of their variances divided by their covariance C. the sum of their expected returns divided by their covariance D. their covariance divided by the product of their standard deviations

D. their covariance divided by the product of their standard deviations

Evidence by Blake, Elton, and Gruber indicates that, on average, actively managed bond funds ______.

D. underperform passive fixed-income indexes by an amount equal to fund expenses

73. Investing in two assets with a correlation coefficient of -.5 will reduce what kind of risk? A. Market risk B. Nondiversifiable risk C. Systematic risk D. Unique risk

D. unique risk

19. Firm-specific risk is also called __________ and __________. A. systematic risk; diversifiable risk B. systematic risk; nondiversifiable risk C. unique risk; nondiversifiable risk D. unique risk; diversifiable risk

D. unique risk; diversifiable risk

14. In a well-diversified portfolio, __________ risk is negligible. A. nondiversifiable B. market C. systematic D. unsystematic

D. unsystematic

14. In a well-diversified portfolio, __________ risk is negligible. A. nondiversifiable B. market C. systematic D. unsystematic

D. unsystematic

53. The values of beta coefficients of securities are __________. A. always positive B. always negative C. always between positive 1 and negative 1 D. usually positive but are not restricted in any particular way

D. usually positive but are not restricted in any particular way

Fama and French have suggested that many market anomalies can be explained as manifestations of ____________.

D. varying risk premiums

78. Which of the following is a correct expression concerning the formula for the standard deviation of returns of a two-asset portfolio where the correlation coefficient is positive? A. σ2rp < (W12σ12 + W22σ22) B. σ2rp = (W12σ12 + W22σ22) C. σ2rp = (W12σ12 - W22σ22) D. σ2rp > (W12σ12 + W22σ22)

D. σ2rp > (W12σ12 + W22σ22)

The _________ is the fraction of earnings reinvested in the firm. A. dividend payout ratio B. retention rate C. plowback ratio D. A and C E. B and C

E. B and C

Who popularized the dividend discount model, which is sometimes referred to by his name? A. Burton Malkiel B. Frederick Macaulay C. Harry Markowitz D. Marshall Blume E. Myron Gordon

E. Myron Gordon

Because the DDM requires multiple estimates, investors should A. carefully examine inputs to the model. B. perform sensitivity analysis on price estimates. C. not use this model without expert assistance. D. feel confident that DDM estimates are correct. E. both A and B.

E. both A and B.

The Black-Scholes option-pricing formula was developed for ____

European options

Even if the markets are efficient, professional portfolio management is still important because it provides investors with _________. I. low cost diversification II. provides a portfolio with a specified risk level III. provides better risk adjusted returns than an index A. I only B. I and II only C. II and III only D. I, II and III

Evidence by Blake, Elton and Gruber indicates that on average actively managed bond funds A. outperform passive fixed-income indexes __________. B. under perform passive fixed-income indexes by a wide margin C. perform as well as passive fixed-income indexes D. under perform passive fixed-income indexes by an amount equal to fund expenses

Evidence suggests that there may be _______ momentum and ________ reversal patterns in stock price behavior. A. short-run, short-run B. long-run, long-run C. long-run, short-run D. short-run, long run

Evidence supporting semi-strong form market efficiency suggests that investors should _________________________. A. rely on technical analysis to select securities B. rely on fundamental analysis to select securities C. use a passive trading strategy such as purchasing an index fund or an ETF D. select securities by throwing darts at the financial pages of the newspaper

A longer time to maturity will unambiguously increase the value of a call option because:

II and III only

NOT a topic related to the debate over market efficiency

IPO results

If the U.S. capital markets are not informationally efficient ______. A. the markets cannot be allocationally efficient B. then systematic risk does not matter C. then no type of analysis can be used to generate abnormal returns D. then returns must follow a random walk

If the daily returns on the stock market are normally distributed with a mean of 0.05% and a standard deviation of 1.00%, the probability that the stock market would have a return of -23.00% or worse on one particular day (as it did on Black Monday) is approximately __________. A. 0.0% B. 0.1% C. 1.0% D. 10.0%

If you believe in the __________ form of the EMH, you believe that stock prices reflect all relevant information including information that is available only to insiders. A. semi-strong B. strong C. weak D. perfect

If you wan to measure the performance of your investment in a fund, including the timing of your purchases and redemptions, you should calculate ______ A. geometric average return B. arithmetic average return C. dollar weighted return D. index return

Important characteristic(s) of market efficiency is that _________________. I. there are no arbitrage opportunities II. security prices react quickly to new information III. active trading strategies will not consistently outperform passive strategies A. I only B. II only C. I and III only D. I, II and III

In a 1953 study of stock prices, Maurice Kendall found that ________. A. there were no predictable patterns in stock prices B. stock prices exhibited strong serial autocorrelation C. day to day stock prices followed consistent trends D. fundamental analysis could be used to generate abnormal returns

J.M. Keyes put all his money in one stock and the stock doubled in value in a matter of months. He did this three times in a row with three different stocks. J.M. got his picture on the front page of the Wall Street Journal. However the paper never mentioned the thousands of investors who made similar bets on other stocks and lost most of their money. This is an example of the ________ problem in deciding how efficient the markets are. A. magnitude B. selection bias C. lucky event D. small firm

Jaffee found that stock prices __________ after insiders intensively bought shares and __________ after insiders intensively sold shares. A. decreased, decreased B. decreased, increased C. increased, decreased D. increased, increased

All else the same, an American-style option will be ______ valuable than a ______ style option

More European

Most evidence indicates that U.S. stock markets are _______________________. A. reasonably weak form and semi-strong form efficient B. strong form efficient C. reasonably weak form but not semi- or strong form efficient D. neither weak form, semi- or strong form efficient

Most of the stock price response to a corporate earnings or dividend announcement occurs within ________________. A. about 30 seconds B. about 10 minutes C. 6 months D. 2 years

Most people would readily agree that the stock market is not _________. A. weak form efficient B. semi-strong form efficient C. strong form efficient D. efficient at all

Most studies indicate that investors' risk aversion is in the range _____. A. 1-3 B. 2-4 C. 3-5 D. 4-6

Most tests of semi-strong efficiency are _________. A. designed to test whether inside information can be used to generate abnormal returns B. based on technical trading rules C. unable to generate any evidence of market anomalies D. joint tests of market efficiency and the risk adjustment measure

The Black-Scholes hedge ratio for a long call option is equal to ____

N(d1)

The Black-Scholes hedge ratio for a long put-option is equal to ____

N(d1) - 1

One method to forecast the risk premium is to use the _______. A. coefficient of variation of analysts' earnings forecasts B. variations in the risk free rate over time C. average historical excess returns for the asset under consideration D. average abnormal return on the index portfolio

Proponents of the EMH think technical analysts __________. A. should focus on relative strength B. should focus on resistance levels C. should focus on support levels D. are wasting their time

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

Published data on past returns earned by mutual funds are required to be ____ A. dollar weighted returns B. geometric returns C. excess returns D. index returns

Random price movements indicate ________. A. irrational markets B. that prices cannot equal fundamental values C. that technical analysis to uncover trends can be quite useful D. that markets are functioning efficiently

In the mean standard deviation graph, the line that connects the risk-free rate and the optimal risky portfolio, P, is called the _________.

S. capital allocation line

Suppose you purchase a call and write a put on the same stock with the same exercise price and expiration. If prices are at equilibrium, the value of this portfolio is _____

S0 = Xe ^ -rT

Security A has a higher standard deviation of returns than Security B. We would expect that ______. I. Security A would have a higher risk premium than Security B II. the likely range of returns for Security A in any given year would be higher than the likely range of returns for Security B III. the Sharpe measure of A will be higher than the Sharpe measure of B. A. I only B. I and II only C. II and III only D. I, II and III

If you know that a call option will be profitably exercised, then the Black-scholes model price will simplify to _____

So - PV(X)

Someone who invests in the Vanguard Index 500 mutual fund could most accurately be described as using what approach? A. Active management B. Arbitrage C. Fundamental analysis D. Passive investment

Stock market analysts have tended to be ___________ in their recommendations to investors. A. slightly overly optimistic B. overwhelmingly optimistic C. slightly overly pessimistic D. overwhelmingly pessimistic

The option smirk in the black-scholes option model indicates that ______

Stock prices may fall by a larger amount than the model assumes

Stock prices that are stable over time _______. A. indicate that prices are useful indicators of true economic value B. indicate that the market is not incorporating new information into current stock prices C. ensure that an economy allocates its resources efficiently D. indicates that returns follow a random walk process

Studies show that the bid-ask spread for the least liquid stocks may be as high as ______. A. 3% B. 5% C. 9% D. 12%

Which of the following is not an issue that is central to the debate regarding market efficiency?

The tax-loss selling issue

Tests of mutual fund performance indicate that funds with ______________ tend to have poorer performance. A. more funds in the family B. higher expense and turnover ratios C. lower management fees D. larger asset size

The Fama and French evidence that high book to market firms outperform low book to market firms even after adjusting for beta means _________. A. high book to market firms are underpriced B. low book to market firms are underpriced C. either high book to market firms are underpriced or the book to market ratio is a proxy for a systematic risk factor D. high book to market firms have more post earnings drift

The _________ effect may explain much of the small firm anomaly. I. January effect II. neglected effect III. liquidity effect A. I only B. II only C. II and III only D. I, II and III

The broadest information set is included in the A. weak form efficiency argument B. semi-strong form efficiency argument C. strong form efficiency argument D. technical analysis trading method

The complete portfolio refers to the investment in _______ A. risk-free asset B. risky portfolio C. risk-free asset and the risky portfolio combined D. risky portfolio and the index

c CI day 1=6.8/7.4=0.92

The confidence index on day 1 is _____. A. .82 B. .89 C. .92 D. 1.09 Confidence index on day 1 = 6.8/7.4 = .92

The dollar weighted average is the ______ A. difference between cash inflows and outflows B. arithmetic average return C. geometric average return D. IRR

The excess return is A. rate of return that can be earned with certainty B. rate of return in excess of the Treasury bill rate C. rate of return to risk aversion D. index return

The holding period return on a stock is equal to ______ A. capital gain yield over the period plus the inflation rate B. capital gain yield over the period plus the dividend yield C. current yield plus the dividend yield D. dividend yield plus the risk premium

The lack of adequate trading volume in stock that may ultimately lead to its ability to produce excess returns is referred to as the ____________________. A. January effect B. liquidity effect C. neglected firm effect D. P/E effect

The market risk premium is defined as______________ A. the difference between the return on an index fund and the return on Treasury Bills B. the difference between the return on a small firm mutual fund and the return on the Standard and Poor's 500 index C. the difference between the return on the risky asset with the lowest returns and the return on Treasury Bills D. the difference between the return on the highest yielding asset and the lowest yielding asset

The primary objective of fundamental analysis is to identify __________. A. well run firms B. poorly run firms C. mis-priced stocks D. high P/E stocks

The rate of return on the ______ is known at the beginning of the holding period while the rate of return on ______ is not known until the end of the holding period. A. risky assets, Treasury bills B. Treasury bills, risky assets C. excess returns, risky assets D. index assets, bonds

The reward/ variability ratio is given by _______ A. the slope of the CAL B. the second derivative of the CAL C. the point at which the second derivative of the investor's indifference curve reaches zero D. portfolio excess return

The semi-strong form of the EMH states that ________ must be reflected in the current stock price. A. all security price and volume data B. all publicly available information C. all information including inside information D. all costless information

The semi-strong form of the efficient market hypothesis implies that ____________ generate abnormal returns and ____________ generate abnormal returns. A. Technical analysis cannot; fundamental analysis can B. Technical analysis can; fundamental analysis can C. Technical analysis can; fundamental analysis cannot D. Technical analysis cannot; fundamental analysis cannot

The small firm in January effect is strongest ________. A. early in the month B. in the middle of the month C. late in the month D. in even numbered years

The strong form of the EMH states that ________ must be reflected in the current stock price. A. all security price and volume data B. all publicly available information C. all information including inside information D. all costless information

The tendency of poorly performing stocks and well performing stocks in one period to continue their performance into the next period is called the ________________. A. fad effect B. martingale effect C. momentum effect D. reversal effect

The tendency when the ______ performing stocks in one period are the best performers in the next and the current ________ performers are lagging the market later is called the reversal effect. A. worst, best B. worst, worst C. best, worst D. best, best

The term random walk is used in investments to refer to ______________. A. stock price changes that are random but predictable B. stock prices that respond slowly to both old and new information C. stock price changes that are random and unpredictable D. stock prices changes that follow the pattern of past price changes

The weak form of the EMH states that ________ must be reflected in the current stock price. A. all past information including security price and volume data B. all publicly available information C. all information including inside information D. all costless information

This measure of returns ignores compounding A. geometric average B. arithmetic average C. IRR D. dollar weighted

The _____ is the difference between the actual call price and the intrinsic value.

Time value

Value stocks may provide investors with better returns than growth stocks if _______. I. value stocks are out of favor with investors II. prices of growth stocks include premiums for overly optimistic growth levels III. value stocks are likely to generate positive earnings surprises. A. I only B. II only C. I and III only D. I, II and III

Value stocks usually exhibit ___ price-to-book ratios and ___ price-to-earnings ratios. A. low, low B. low, high C. high, low D. high, high

Of the variables in the Black-Scholes OPM, the ___ is not directly observable

Variance of the underlying asset return

When calculating the variance of a portfolio's returns squaring the deviations from the mean results in ________. I. preventing the sum of the deviations from always equaling zero II. exaggerating the effects of large positive and negative deviations III. a number in units of percentage of returns A. I only B. I and II only C. I and III only D. I, II and III

When stock returns exhibit positive serial correlation, this means that __________ returns tend to follow ___________ returns. A. positive; positive B. positive; negative C. negative; positive D. positive; zero

When testing mutual fund performance over time one must be careful of ___________, which means that a certain percentage of poorer performing funds fail over time which makes the performance of remaining funds seem more consistent over time. A. survivorship bias B. lucky event bias C. magnitude bias D. mean reversion bias

When the market risk premium rises, stock prices will ________. A. rise B. fall C. recover D. have excess volatility

Which Fidelity Magellan portfolio manager is often referenced as an exception to the general conclusion of efficient markets? A. Jeff Vinik B. Peter Lynch C. Robert Stansky D. William Hayes

Which of the following are correct arguments supporting passive investment strategies? I. Active trading strategies may not guarantee higher returns but guarantee higher costs II. Passive investors can free ride on the activity of knowledge investors whose trades force prices to reflect currently available information III. Passive investors are guaranteed to earn higher rates of return than active investors over sufficiently long time horizons A. I only B. I and II only C. II and III only D. I, II and III

Which of the following beliefs would not preclude charting as a method of portfolio management? A. The market is strong form efficient. B. The market is semi-strong form efficient. C. The market is weak form efficient. D. Stock prices follow recurring patterns.

Which of the following contradicts the proposition that the stock market is weakly efficient? A. Over 25% of mutual funds outperform the market on average. B. Insiders earn abnormal trading profits. C. Every January, the stock market earns above normal returns. D. Applications of technical trading rules fail to earn abnormal returns.

Which of the following is not a concept related to explaining abnormal excess stock returns? A. January effect B. Neglected firm effect C. P/E effect D. Preferred stock effect

Which of the following is not a method employed by followers of technical analysis? A. Charting B. Relative strength analysis C. Earnings forecasting D. Trading around support and resistance levels

Which of the following is not a method employed by fundamental analysts? A. Analyzing the Fed's next interest rate move B. Relative strength analysis C. Earnings forecasting D. Estimating the economic growth rate

Which of the following is not a topic related to the debate over market efficiency? A. IPO results B. Lucky event issue C. Magnitude issue D. Selection bias

Which of the following is not an issue that is central to the debate regarding market efficiency? A. The magnitude issue B. The tax loss selling issue C. The lucky event issue D. The selection bias issue

Which of the following statements is/are correct? A. If a market is weak form efficient it is also semi- and strong form efficient B. If a market is semi-strong efficient it is also strong form efficient C. If a market is strong form efficient it is also semi-strong but not weak form efficient D. If a market is strong form efficient it is also semi- and weak form efficient

Which of the following stock price observations would appear to contradict the weak form of the efficient market hypothesis? A. The average rate of return is significantly greater than zero. B. The correlation between the market return one week and the return the following week is zero. C. You could have consistently made superior returns by buying stock after a 10% rise in price and selling after a 10% fall. D. You could have consistently made superior returns by forecasting future earnings performance with your new Crystal Ball forecast methodology.

7. At contract maturity the value of a call option is ___________, where X equals the option's strike price and ST is the stock price at contract expiration. A. Max (0, ST - X) B. Min (0, ST - X) C. Max (0, X - ST) D. Min (0, X - ST)

Which of the following would violate the efficient market hypothesis? A. Intel has consistently generated large profits for years. B. Prices for stocks before stock splits show on average consistently positive abnormal returns. C. Earning abnormal returns after a firm announces surprise earnings. D. High earnings growth stocks fail to generate higher returns for investors than low earnings growth stocks.

Which one of the following measure time weighted returns? I. geometric average return II. arithmetic average return III. dollar weighted return A. I only B. II only C. I and II only D. I and III only

Which one of the following would be considered a risk-free asset in real terms as opposed to nominal? A. Money market fund B. U.S. T-bill C. Short term corporate bonds D. U.S. T-bill whose return was indexed to inflation

You are an investment manager who is currently managing assets worth $6 billion. You believe that active management of your fund could generate between an additional one tenth of 1% return on the portfolio. If you want to make sure your active strategy adds value, how much can you spend on security analysis? A. $12,000,000 B. $6,000,000 C. $3,000,000 D. $0

You are looking to invest in one of three stocks. Stock A has high expected earnings growth, Stock B has only modest expected earnings growth and Stock C is expected to generate poor earnings growth. Which stock is likely to generate the greatest alpha for you? A. Stock A B. Stock B C. Stock C D. You cannot tell from the information given

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 or inside information. You are a proponent of ____________. A. semi-strong B. strong C. weak D. perfect

You believe that you can earn 2% more on your portfolio if you engage in full time stock research. However, the additional trading costs and tax liability from active management will cost you about 0.5%. You have a $800,000 stock portfolio. What is the most you can afford to spend on your research? A. $4,000 B. $8,000 C. $12,000 D. $16,000

You have calculated the historical dollar weighted return, annual geometric average return and annual arithmetic average return. If you desire to forecast performance for next year, the best forecast will be given by the ______ A. dollar weighted return B. geometric average return C. arithmetic average return D. index return

You have calculated the historical dollar weighted return, annual geometric average return and annual arithmetic average return. You always reinvest your dividends and interest earned on the portfolio. Which method provides the best measure of the actual average historical performance of the investments you have chosen? A. dollar weighted return B. geometric average return C. arithmetic average return D. index return

You invest all of your money in one 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 measure is zero. A. I only B. I and III only C. II only D. I, II and III

Your timing was good last year. You invested more in your portfolio right before prices went up and you sold right before prices went down. In calculating historical performance measures, which one of the following will be the largest? A. dollar weighted return B. geometric average return C. arithmetic average return D. mean holding period return

__________ is the return on a stock beyond what would be predicted from market movements alone. A. A normal return B. A subliminal return C. An abnormal return D. An excess return

6. All else the same, an American style option will be ______ valuable than a ______ style option. A. more; European- B. less; European- C. more; Canadian- D. less; Canadian-

65. The common stock of the Avalon Corporation has been trading in a narrow range around $40 per share for months, and you believe it is going to stay in that range for the next 3 months. The price of a 3-month put option with an exercise price of $40 is $3, and a call with the same expiration date and exercise price sells for $4. How can you create a position involving a put, a call, and riskless lending that would have the same payoff structure as the stock at expiration? A. Buy the call, sell the put; lend the present value of $40. B. Sell the call, buy the put; lend the present value of $40. C. Buy the call, sell the put; borrow the present value of $40. D. Sell the call, buy the put; borrow the present value of $40.

69.Which strategy benefits from upside price movement and has some protection should the price of the security fall? A. Bull spread B. Long put C. Short call D. Straddle

You buy a call option on Summit Corp. with an exercise price of $40 and an expiration date in September, and you write a call option on Summit Corp. with an exercise price of $40 and an expiration date in October. This strategy is called a _________. A. time spread B. long straddle C. short straddle D. money spread

You invest in the stock of Rayleigh Corp. and write a call option on Rayleigh Corp. This strategy is called a _________. A. covered call B. long straddle C. naked call D. money spread

You purchase a call option on a stock. The profit at contract maturity of the option position is ___________, where X equals the option's strike price, ST is the stock price at contract expiration, and C0 is the original purchase price of the option. A. Max (-C0, ST - X - C0) B. Min (-C0, ST - X - C0) C. Max (C0, ST - X + C0) D. Max (0, ST - X - C0)

84. Bill Jones inherited 5,000 shares of stock priced at $45 per share. He does not want to sell the stock this year due to tax reasons, but he is concerned that the stock will drop in value before year-end. Bill wants to use a collar to ensure that he minimizes his risk and doesn't incur too much cost in deferring the gain. January call options with a strike of $50 are quoted at a cost of $2, and January puts with a $40 exercise price are quoted at a cost of $3. If Bill establishes the collar and the stock price winds up at $35 in January, Bill's net position value including the option profit or loss and the stock is _________.

a Position value = 5,000 shares × $45/share = $225,000. To establish a collar, you would need 5,000/100 = 50 options. You would buy the 50 puts at a cost of $3(100)(50) = $15,000 and write the 50 calls, earning a premium of $2(100)(50) = $10,000. The initial cost is $15,000 - $10,000 = $5,000. If the stock price in January is $35, then profit can be found as: Profit = [Max ($0, $40 - $35) - Max ($0, $35 - $50)](100)(50) - $5,000 = $20,000 New stock value = 5,000 shares × $35 = $175,000, so Net position value = $175,000 + $20,000 = $195,000

Suppose you purchase one Texas Instruments August 75 call contract quoted at $8.50 and write one Texas Instruments August 80 call contract quoted at $6. If, at expiration, the price of a share of Texas Instruments stock is $79, your profit would be _________. A. $150 B. $400 C. $600 D. $1,850 Profit = 100[(79 - 75)] - 8.50 + 6] = $150

a Profit = 100[(79 - 75)] - 8.50 + 6] = $150

4. You write one IBM July 120 call contract for a premium of $4. You hold the option until the expiration date, when IBM stock sells for $121 per share. You will realize a ______ on the investment. A. $300 profit B. $200 loss C. $600 loss D. $200 profit

a Short call profit = Min [0, ($120 - $121)(100)] + $400 = $300

proponents of EMH typically advocate

a passive investment strategy

A writer of a call option will want the value of the underlying asset to __________, and a buyer of a put option will want the value of the underlying asset to _________. a) decrease; decrease b) decrease; increase c) increase; decrease d) increase; increase

a) decrease; decrease

A put option with several months until expiration has a strike price of $55 when the stock price is $50. The option has ____ intrinsic value and ____ time value

positive ; positive

A European call option gives the buyer the right to _________. A. buy the underlying asset at the exercise price on or before the expiration date B. buy the underlying asset at the exercise price only at the expiration date C. sell the underlying asset at the exercise price on or before the expiration date D. sell the underlying asset at the exercise price only at the expiration date

A call option on Brocklehurst Corp. has an exercise price of $30. The current stock price of Brocklehurst Corp. is $32. The call option is _________. A. at the money B. in the money C. out of the money D. knocked in

A put option on Dr. Pepper Snapple Group, Inc., has an exercise price of $45. The current stock price is $41. The put option is _________. A. at the money B. in the money C. out of the money D. knocked out

An Asian call option gives its holder the right to ____________. A. buy the underlying asset at the exercise price on or before the expiration date B. buy the underlying asset at a price determined by the average stock price during some specified portion of the option's life C. sell the underlying asset at the exercise price on or before the expiration date D. sell the underlying asset at a price determined by the average stock price during some specified portion of the option's life

Exercise prices for listed stock options usually occur in increments of ____ and bracket the current stock price. A. $1 B. $5 C. $20 D. $25

In 1973, trading of standardized options on a national exchange started on the _________. A. AMEX B. CBOE C. NYSE D. CFTC

Longer-term American-style options with maturities of up to 3 years are called __________. A. warrants B. LEAPS C. GICs D. CATs

The writer of a put option _______________. A. agrees to sell shares at a set price if the option holder desires B. agrees to buy shares at a set price if the option holder desires C. has the right to buy shares at a set price D. has the right to sell shares at a set price

You buy a call option and a put option on General Electric. Both the call option and the put option have the same exercise price and expiration date. This strategy is called a _________. A. time spread B. long straddle C. short straddle D. money spread

__________ is the most risky transaction to undertake in the stock-index option markets if the stock market is expected to fall substantially after the transaction is completed. A. Writing an uncovered call option B. Writing an uncovered put option C. Buying a call option D. Buying a put option

1. You purchase one IBM July 120 call contract for a premium of $5. You hold the option until the expiration date, when IBM stock sells for $123 per share. You will realize a ______ on the investment. A. $200 profit B. $200 loss C. $300 profit D. $300 loss

b Long call profit = Max [0, ($123 - $120)(100)] - $500 = -$200

3. You purchase one IBM July 120 put contract for a premium of $3. You hold the option until the expiration date, when IBM stock sells for $123 per share. You will realize a ______ on the investment. A. $300 profit B. $300 loss C. $500 loss D. $200 profit

b Long put profit = Max [0, ($120 - $123)(100)] - $300 = -$300

You are cautiously bullish on the common stock of the Wildwood Corporation over the next several months. The current price of the stock is $50 per share. You want to establish a bullish money spread to help limit the cost of your option position. You find the following option quotes: Ignoring commissions, the cost to establish the bull money spread with calls would be _______. A. $1,050 B. $650 C. $400 D. $400 income rather than cost To establish a bull money spread with calls, you would buy the 45 call at a cost of $8.50 and write the 55 call, earning the $2 premium. The initial cost is ($2 - $8.50)(100) = -$650.

b To establish a bull money spread with calls, you would buy the 45 call at a cost of $8.50 and write the 55 call, earning the $2 premium. The initial cost is ($2 - $8.50)(100) = -$650.

You sell one Hewlett Packard August 50 call contract and sell one Hewlett Packard August 50 put contract. The call premium is $1.25 and the put premium is $4.50. Your strategy will pay off only if the stock price is __________ in August. A. either lower than $44.25 or higher than $55.75 B. between $44.25 and $55.75 C. higher than $55.75 D. lower than $44.25 You have positive profit in the range $50 - ($1.25 + $4.50) and $50 + ($1.25 + $4.50).

b You have positive profit in the range $50 - ($1.25 + $4.50) and $50 + ($1.25 + $4.50).

When issued, most convertible bonds are issued _____________. a) deep in the money b) deep out of the money c) slightly out of the money d) slightly in the money

b) deep out of the money

Investor A bought a call option, and investor B bought a put option. All else equal, if the interest rate increases, the value of investor A's position will ______ and the value of investor B's position will _______. a) increase; increase b) increase; decrease c) decrease; increase d) decrease; decrease

b) increase; decrease

b. I, II and III only

b. II only

The value of a listed call option on a stock is lower when: I. The exercise price is higher. II. The contract approaches maturity. III. The stock decreases in value. IV. A stock split occurs. A. II, III, and IV only B. I, III, and IV only C. I, II, and III only D. I, II, III, and IV

You are considering purchasing a call option with a strike price of $35. The price of the underlying stock is currently $27. Without any further information, you would expect the hedge ratio for this option to be _______

positive and near 0

Research suggests that the performance of the Black-Scholes option-pricing model has _____

been deficient for stocks with high dividend payouts

Hedge ratios for long puts are always

between -1 and 0

The delta of a put option on a stock is always ____

between 0 and -1

Hedge ratios for long calls are always_______

between 0 and 1

A ___ is an option valuation model based on the assumption that stock prices can move to only two values over any short time period

binomial model

example of a trading rule

buy a stock if its price moves up by 2% more than the Dow Average

You find the option prices for three June call options on the same stock. The 95 call has an implied volatility of 25%, the 100 call has an implied volatility of 25%, and the 105 call has an implied volatility of 30%. If you believe this represents a misplacing situation, you may want to _____

buy either the 95 or the 100 call and write the 105 call

According to the put-call parity theorem, the payoffs associated with ownership of a call option can be replicated by _____

buying the underlying stock, borrowing the present value of the exercise price, and buying a put on the same underlying stock and with the same exercise price

71. An investor purchases a long call at a price of $2.50. The expiration price is $35. If the current stock price is $35.10, what is the break-even point for the investor? A. $32.50 B. $35 C. $37.50 D. $37.60 Break even = 35 + 2.50 = 37.50

73.Which of the following strategies makes a profit if the stock price stays stable? A. Long call and short put B. Long call and long put C. Short call and short put D. Short call and long put

75. If you combine a long stock position with selling an at-the-money call option, the resulting net payoff profile will resemble the payoff profile of a _______. A. long call B. short call C. short put D. long put

8. At contract maturity the value of a put option is ___________, where X equals the option's strike price and ST is the stock price at contract expiration. A. Max (0, ST - X) B. Min (0, ST - X) C. Max (0, X - ST) D. Min (0, X - ST)

9. An American put option gives its holder the right to _________. A. buy the underlying asset at the exercise price on or before the expiration date B. buy the underlying asset at the exercise price only at the expiration date C. sell the underlying asset at the exercise price on or before the expiration date D. sell the underlying asset at the exercise price only at the expiration date

A "bet" option is also called a ____ option. A. barrier B. lookback C. digital D. foreign exchange

A futures call option provides its holder with the right to ___________. A. purchase a particular stock at some time in the future at a specified price B. purchase a futures contract for the delivery of options on a particular stock C. purchase a futures contract at a specified price for a specified period of time D. deliver a futures contract and receive a specified price at a specific date in the future

Advantages of exchange-traded options over OTC options include all but which one of the following? A. Ease and low cost of trading B. Anonymity of participants C. Contracts that are tailored to meet the needs of market participants D. No concerns about counterparty credit risk

An option with a payoff that depends on the average price of the underlying asset during at least some portion of the life of the option is called ______ option. A. an American B. a European C. an Asian D. an Australian

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

Each listed stock option contract gives the holder the right to buy or sell __________ shares of stock.

The common stock of the Avalon Corporation has been trading in a narrow range around $40 per share for months, and you believe it is going to stay in that range for the next 3 months. The price of a 3-month put option with an exercise price of $40 is $3, and a call with the same expiration date and exercise price sells for $4. What would be a simple options strategy using a put and a call to exploit your conviction about the stock price's future movement? A. Sell a call. B. Purchase a put. C. Sell a straddle. D. Buy a straddle.

You invest in the stock of Valleyview Corp. and purchase a put option on Valleyview Corp. This strategy is called a _________. A. long straddle B. naked put C. protective put D. short stroll

You write a put option on a stock. The profit at contract maturity of the option position is ___________, where X equals the option's strike price, ST is the stock price at contract expiration, and P0 is the original premium of the put option. A. Max (P0, X - ST - P0) B. Min (-P0, X - ST - P0) C. Min (P0, ST - X + P0) D. Max (0, ST - X - P0)

66. A stock is trading at $50. You believe there is a 60% chance the price of the stock will increase by 10% over the next 3 months. You believe there is a 30% chance the stock will drop by 5%, and you think there is only a 10% chance of a major drop in price of 20%. At-the-money 3-month puts are available at a cost of $650 per contract. What is the expected dollar profit for a writer of a naked put at the end of 3 months? A. $300 B. $200 C. $475 D. $0

c E[Profit] = -{.60Max [$0, $50 - ($50)(1.1)] + .30Max [$0, $50 - ($50)(0.95)] + .10Max [$0, $50 - ($50)(.80)]} (100) + $650 = - [.6(0) + .3(250) + .1(1,000)] + 650 = $475

83. You find digital option quotes on jobless claims. You can buy a call option with a strike price of 300,000 jobless claims. This option pays $100 if actual claims exceed the strike price and pays zero otherwise. The option costs $68. A second digital call with a strike price of 305,000 jobless claims is available at a cost of $53. Suppose you buy the option with the 300,000 strike and sell the option with the 305,000 strike and jobless claims actually wind up at 303,000. Your net profit on the position is ______. A. -$15 B. $200 C. $85 D. $185

c Initial cost = -C300 + C305 = -$68 + $53 = -$15 At actual jobless claims of 303,000, at contract maturity the C300 call is worth $100 and the C305 call is worthless. Profit = +$100 - $0 - $15 = $85

You buy one Hewlett Packard August 50 call contract and one Hewlett Packard August 50 put contract. The call premium is $1.25, and the put premium is $4.50. Your highest potential loss from this position is _________. A. $125 B. $450 C. $575 D. unlimited Loss = 100(1.25 + 4.50) = 575 if stock price is $50 at expiration

c Loss = 100(1.25 + 4.50) = 575 if stock price is $50 at expiration.

You purchase one IBM March 120 put contract for a put premium of $10. The maximum profit that you could gain from this strategy is _________. A. $120 B. $1,000 C. $11,000 D. $12,000 Profit = 100(120 - 10) = 11,000

c Profit = 100(120 - 10) = 11,000

You are cautiously bullish on the common stock of the Wildwood Corporation over the next several months. The current price of the stock is $50 per share. You want to establish a bullish money spread to help limit the cost of your option position. You find the following option quotes: If in June the stock price is $53, your net profit on the bull money spread (buy the 45 call and sell the 55 call) would be ________. A. $300 B. -$400 C. $150 D. $50 ST = $53 at contract maturity in June Profit = C45, June - C55, June - Initial cost Profit = [Max (0, $53 - $45) - Max (0, $53 - $55)](100) - $650 = $150

c ST = $53 at contract maturity in June Profit = C45, June - C55, June - Initial cost Profit = [Max (0, $53 - $45) - Max (0, $53 - $55)](100) - $650 = $150

The common stock of the Avalon Corporation has been trading in a narrow range around $40 per share for months, and you believe it is going to stay in that range for the next 3 months. The price of a 3-month put option with an exercise price of $40 is $3, and a call with the same expiration date and exercise price sells for $4. Suppose you write a strap and the stock price winds up to be $42 at contract expiration. What was your net profit on the strap? A. $200 B. $300 C. $700 D. $400

c Selling a strap entails selling two calls and selling one put. Initial income = 2C0 + P0 = [(2)(4) + 3](100) = $1,100. If the final stock price is $42, the position profit is found as Profit = [-2Max ($0, $42 - 40) + Max ($0, $40 - $42)](100) + $1,100 = $700

68. You sell one IBM July 90 call contract for a premium of $4 and two puts for a premium of $3 each. You hold the position until the expiration date, when IBM stock sells for $95 per share. You will realize a ______ on this strip. A. $300 profit B. $100 loss C. $500 profit D. $200 profit

c Selling an IBM July 90 strip entails selling two IBM July 90 puts and one IBM July 90 call. Initial income = C90 + 2P90 = [4 + 2(3)](100) = $1,000. If the final stock price is $95, the position value is found as: Profit = [-Max ($0, $95 - 90) + 2Max ($0, $90 - $95)](100) + $1,000 = -$500 + $1,000 = $500

A one-dollar increase in a stock's price would result in __________ in the call option's value of __________ than one dollar. a) a decrease; less b) a decrease; more c) an increase; less d) an increase; more

c) an increase; less

A high dividend payout will ______ the value of a call option and ______ the value of a put option. a) increase; decrease b) increase; increase c) decrease; increase d) decrease; decrease

c) decrease; increase

Investor A bought a call option that expires in 6 months. Investor B wrote a put option with a 9-month maturity. All else equal, as the time to expiration approaches, the value of investor A's position will _______ and the value of investor B's position will _______. a) increase; increase b) increase; decrease c) decrease; increase d) decrease; decrease

c) decrease; increase

If the Black-Scholes formula is solved to find the standard deviation consistent with the current market call premium, that standard deviation would be called the _______. a) variability b) volatility c) implied volatility d) deviance

c) implied volatility

You write a put option on a stock. The profit at contract maturity of the option position is ___________, where X equals the option's strike price, ST is the stock price at contract expiration, and P0 is the original premium of the put option. a) max (P0, X - ST - P0) b) min (-P0, X - ST - P0) c) min (P0, ST - X + P0) d) max (0, ST - X - P0)

c) min (P0, ST - X + P0)

The delta of a call option on a stock is always _____

positive but less than 1

What aspect of the time value of money does the factor of e represent in the Black-Scholes option value formula?

continuous compounding

Perfect dynamic hedging requires _______

continuous rebalancing

5. ______ option can only be exercised on the expiration date. A. A Mexican B. An Asian C. An American D. A European

70. From day 1 to day 4, the confidence index has _____. This is _____. A. increased; bullish B. decreased; bullish C. increased; bearish D. decreased; bearish Confidence index, day 1 = 6.8/7.4 = .92 Confidence index, day 4 = 6.6/7.6 = .87 The CI is decreasing; this is bearish.

74.Which of the following strategies makes a profit when the stock price declines and loses money when the stock price increases? A. Long call and short put B. Long call and long put C. Short call and short put D. Short call and long put

A European put option gives its holder the right to _________. A. buy the underlying asset at the exercise price on or before the expiration date B. buy the underlying asset at the exercise price only at the expiration date C. sell the underlying asset at the exercise price on or before the expiration date D. sell the underlying asset at the exercise price only at the expiration date

A quanto provides its holder with the right to ______________. A. participate in the payoffs from a portfolio of gambling casino stocks B. exchange a fixed amount of a foreign currency for dollars at a specified exchange rate C. participate in the investment performance of a foreign security D. exchange the payoff from a foreign investment for dollars at a fixed exchange rate

A time spread may be executed by _____. A. selling an option with one exercise price and buying a similar one with a different exercise price B. buying two options that have the same expiration dates but different strike prices C. selling two options that have the same expiration dates but different strike prices D. selling an option with one expiration date and buying a similar option with a different expiration date

An Asian put option gives its holder the right to ____________. A. buy the underlying asset at the exercise price on or before the expiration date B. buy the underlying asset at a price determined by the average stock price during some specified portion of the option's life C. sell the underlying asset at the exercise price on or before the expiration date D. sell the underlying asset at a price determined by the average stock price during some specified portion of the option's life

Exchange-traded stock options expire on the _______________ of the expiration month. A. second Monday B. third Wednesday C. second Thursday D. third Friday

The potential loss for a writer of a naked call option on a stock is _________. A. equal to the call premium B. larger the lower the stock price C. limited D. unlimited

Which one of the following is the ticker symbol for the CBOE option contract on the S&P 100 Index? A. SPX B. DJX C. CME D. OEX

Which one of the statements about margin requirements on option positions is not correct? A. The margin required will be higher if the option is in the money. B. If the required margin exceeds the posted margin, the option writer will receive a margin call. C. A buyer of a put or call option does not have to post margin. D. Even if the writer of a call option owns the stock, the writer will have to meet the margin requirement in cash.

You buy a call option on Merritt Corp. with an exercise price of $50 and an expiration date in July, and you write a call option on Merritt Corp. with an exercise price of $55 and an expiration date in July. This is called a ________. A. time spread B. long straddle C. short straddle D. money spread

86. You purchase one IBM July 90 call contract for a premium of $4. The stock has a 2-for-1 split prior to the expiration date. You hold the option until the expiration date, when IBM stock sells for $48 per share. You will realize a ______ on the investment. A. $300 profit B. $100 loss C. $400 loss D. $200 profit

d Long call profit = 2Max {0, [$48 - ($90/2)(100)]} - $400 = $200

2. You purchase one IBM July 125 call contract for a premium of $5. You hold the option until the expiration date, when IBM stock sells for $123 per share. You will realize a ______ on the investment. A. $200 profit B. $200 loss C. $500 profit D. $500 loss

d Long call profit = Max [0, ($123 - $125)(100)] - $500 = -$500

The May 17, 2012, price quotation for a Boeing call option with a strike price of $50 due to expire in November is $20.80, while the stock price of Boeing is $69.80. The premium on one Boeing November 50 call contract is _________. A. $1,980 B. $4,900 C. $5,000 D. $2,080 Premium = $20.80 × 100 = $2,080

d Premium = $20.80 × 100 = $2,080

The common stock of the Avalon Corporation has been trading in a narrow range around $40 per share for months, and you believe it is going to stay in that range for the next 3 months. The price of a 3-month put option with an exercise price of $40 is $3, and a call with the same expiration date and exercise price sells for $4. Selling a straddle would generate total premium income of _____. A. $300 B. $400 C. $500 D. $700

d Sell a straddle = sell a put + sell a call Premium income for selling a straddle = (P0 + C0)100 = ($3 + $4)(100) = $700

when the stock returns exhibit positive serial correlation, this means that ___ returns tend to follow ___ returns

positive, positive

market anomaly refers to

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

You are cautiously bullish on the common stock of the Wildwood Corporation over the next several months. The current price of the stock is $50 per share. You want to establish a bullish money spread to help limit the cost of your option position. You find the following option quotes: Suppose you establish a bullish money spread with the puts. In June the stock's price turns out to be $52. Ignoring commissions, the net profit on your position is _______________. A. $500 B. $700 C. $200 D. $250 To establish a bull money spread with puts, you would buy the 45 put at a cost of $2 and write the 55 put, earning the $7.50 premium. The initial revenue is ($7.50 - $2)(100) = $550. ST = $52 at contract maturity in June Profit = P45, June - P55, June + Initial revenue Profit = [Max (0, $45 - $52) - Max (0, $55 - $52)](100) + $550 = $250.

d To establish a bull money spread with puts, you would buy the 45 put at a cost of $2 and write the 55 put, earning the $7.50 premium. The initial revenue is ($7.50 - $2)(100) = $550. ST = $52 at contract maturity in June Profit = P45, June - P55, June + Initial revenue Profit = [Max (0, $45 - $52) - Max (0, $55 - $52)](100) + $550 = $250.

The value of a call option increases with all of the following except ___________. a) stock price b) time to maturity c) volatility d) dividend yield

d) dividend yield

A high dividend payout will ____ the value of a call option and _____ the value of a put option

decrease ; increase

If a stock price increases, the price of a put option on the stock will ___ and the price of a call option on the stock will _____

decrease ; increase

Investor A bought a call option that expires in 6 months. Investor B wrote a put option with a 9 month maturity. All else equal, as the time to expiration approaches, the value of investor A's position will ____ and the value of investor B's position will ______

decrease ; increase

The hedge ratio is often called the option's ____

delta

in an efficient market and for an investor who believes in a passive approach to investing, what is the primary duty of a portfolio manager

diversification

The value of a call option increases with all of the following except _____

dividend yield

The fact that American put values may not equal the price implied by put-call parity is attributable to the possibility of what event?

early exercise

NOT a method employed by followers of technical analysis

earnings forecasting

The percentage change in the call option price divided by the percentage change in the stock price is the ____ of the option

elasticity

according to Markowitz, which activity would not be expected to produce any benefits

engaging in active portfolio management to enhance returns

when the market risk premium rises, stock prices will

fall

according to the semistrong form of the efficient market hypothesis

future changes in stock prices cannot be predicted from any information that is publicly available

in their 2010 study, fama and french used a four-factor model to analyze excess returns on equity mutual funds. they found that the funds

had negative alphas after fees were considered

what would contradict the weak form of EMH

having consistently superior returns by buying stock after a 10% rise in price in selling after a 10% fall

random walk

when stock price changes are random and unpredictable

American Outlook Inc. is issuing bonds to obtain the funding necessary to acquire a major competitor. Review of the balance sheets indicates that American Outlook has also issued preferred and common stock in the past. Which component cost(s) should American Outlook use in evaluating the financial cost of acquiring the new firm?. The weighted average component cost of common stock, preferred stock, and debt. B. The price the firm paid for its assets divided by their market value. C. Shareholders' equity. D. The cost of the new debt issue alone.

he weighted average component cost of common stock, preferred stock, and debt.

growth stocks usually exhibit __ price to book ratios and ___ price to earnings ratios

high, high

in a 1988 study, fama and french found that the return on the aggregate stock market was ____ when the dividend yield was higher

higher

All else equal, call option values are ____ if the ____ is lower

higher ; exercise price

According to the black-scholes option-pricing model, two options of the same stock but with different exercise prices should always have the same ______

implied volatility

If the Black-Scholes formula is solved to find the standard deviation consistent with the current market call premium, the std dev would be called the ____

implied volatility

In the Black-Scholes model, as the stock's price increases, the values of N(d1) and N(d2) will ____ for a call and _____ for a put option.

increase ; decrease

Investor A bought a call option, and investor B bought a put option. All else equal, if the interest rate increases, the value of investor A's position will ____ and the value of investor B's position will _____

increase ; decrease

Investor A bought a call option, and investor B bought a put option. All else equal, if the underlying stock price volatility increases, the value of investor A's position will ____ and the value of investor B's position will _____

increase ; increase

jaffe found that stock prices ___ after insiders intensively bought shares and ___ after insiders intensively sold shares

increased, decreased

stock prices that are stable over time

indicate that the market is not incorporating new information into current stock prices

The ____ is the stock price minus exercise price, or the profit that could be attained by immediate exercise of an in-the money call option

intrinsic value

type of passive portfolio management

investing in a well-diversified portfolio without attempting to search out mispriced items

what would violate the EMH

investors that earn abnormal returns months after a firm announces surprise earnings

The intrinsic value of an out-of-the-money call option ______

is zero

technical analysis

when you choose stocks by searching for predictable patterns in stock prices

A hedge ratio of .7 implies that a hedge portfolio should consist of

long .7 shares for each short call

value stocks usually exhibit __ price to book ratios and ____ price to earnings ratios

low, low

primary objective of fundamental analysis is to identify

mispriced stocks

The price of a stock put option is _____ correlated with the stock price and _____ correlated with the exercise price.

negatively ; positively

fundamental analysis is likely to yield best results for

neglected stock

Research conducted by Rubinstein (1994) suggests that _____ command a disproportionately high time value

out-of-the-money put options

You calculate the Black-Scholes value of a call option as $3.50 for a stock that does not pay dividends, but the actual call price is $3.75. The most likely explanation for the discrepancy is that either the option is _____ or the volatility you input into the model is too ______

overvalued and should be written; low

stock market analysts have tended to be ___ in their recommendations to investors

overwhelmingly optimistic

someone who invests in the vanguard index 500 mutual fund could most accurately be described as using which approach

passive management

The practice of using options or dynamic hedging strategies to provide protection against investment losses while maintaining upside potential is called _____

portfolio insurance

Before expiration, the time value of an out-of-the-money stock option is ______

positive

A higher-dividend payout policy will have a _____ impact on the value of a put and a _____ impact on the value of a call

positive ; negative

If you have an extremely "bullish" outlook on the stock market, you could attempt to maximize your rate of return by ______

purchasing out-of-the-money call options

most evidence indicates that US stock markets are

reasonably weak-form and semistrong-form efficeint

NOT a method employed by fundamental analysis

relative strength analysis

the broadest information set is included in the

semistrong efficiency argument

What combination of variables is likely to lead to the lowest time value?

short time to expiration and low volatility

Which combination of stock, exercise, and option prices are most likely associated with an American call option?

stock = $65, exercise = $60, option = $7

The value of a put option increases with all of the following except _____

stock price

Strike prices of options are adjusted for _____ but not for ____

stock splits ; cash dividends

most people agree that the stock market is not

strong-form efficient

a day trade with an average stock holding period of under 8 minutes might be most closely associated with which trading philosophy

technical analysis

reversal effect

tendency when the worst performing stocks in one period are the best performers in the next and current best performers are lagging the market later

Which of the following is a true statement?

the actual value of a call option is greater than its intrinsic value prior to expiration

The delta of an option is _____

the change in the dollar value of an option of a dollar change in the price of the underlying asset

if the US capital markets are not informally efficient then

the markets cannot be allocationally efficicent

In order for a binomial option price to approach the black scholes price, ______

the number of subintervals must increase substantially

The divergence between an option's intrinsic value and its market value is usually greatest when ______

the option is approximately at the money

When the returns of an option and stock are perfectly correlated as in two-state binomial option model, the hedge ratio must be equal to the ratio of _____

the range of the option outcomes to the range of the stock outcomes

The intrinsic value of a call option is equal to _____

the stock price minus the exercise price

NOT an issue that is central to the debate regarding efficiency

the tax-loss selling issue

in 1953 maurice kendall found that

there were no predictable patterns in stock prices

index fund

type of mutual fund that attempts to hold quantities of shares in proportion to their representation in the market

evidence by blake, elton, and gruber indicates that on average actively managed bond funds

underperform passive fixed income indexes by an amount equal to fund expenses

evidence supporting semistrong-form market efficiency suggests that investors should

use a passive trading strategy such as purchasing an index fund or an ETF

proponents of EMH think technical analysts are

wasting their time

survivorship bias

when a certain percentage of poorer-performing funds fail over time, making the performance of remaining funds seem more consistent over time

A stock priced at $65 has a std dev of 30%. Three-month calls and puts with an exercise price of $60 are available. .... If you want to construct a rissoles arbitrage to exploit the mispriced puts, you should _____

write the call and buy the put and buy the stock and borrow the present value of the exercise price

A call option with several months until expiration has a strike price of $55 when the stock price is $50. The option has _____ intrinsic value and ____ time value

Chapter 22 Investors and the Investment Process, FINA chp 16, Investments 12, Finance 327: Chapter 15, FIN 3826 Chapter 11, fin363 review, Finance 351: Chapter 9, CH 8 Investment Review, Investment Final Ch 8, FIN 3826 Ch 8, Investments Chapter 7, 7,...

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