FIN 469 HW-Test 1

Which risk can be partially or fully diversified away as additional securities are added to a portfolio? (2)

1) Total risk 2) Firm-specific risk

The historical average rate of return on large company stocks since 1926 has been...

11.5%

Under SEC rules, the managers of certain funds are allowed to deduct charges for advertising, brokerage commissions, and other sales expenses directly from the fund assets rather than billing investors. These fees are known as ____________.

12b-1 charges

3) ________ is not a derivative security. A) None of the options (All of the answers are derivative securities.) B) A share of common stock C) A call option D) A futures contract

A share of common stock

The Dodd-Frank Reform Act does all of the following except A) reduces capital requirements for banks. B) requires public companies to set "claw-back" provisions C) creates an office within the SEC to oversee credit rating agencies. D) increases transparency in the derivatives market E) limits the risk-taking in which banks can engage

A) reduces capital requirements for banks

. 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

Average return

Which of the following is not a true statement regarding municipal bonds? A) The interest income from a municipal bond is exempt from state and local taxation in the issuing state. B) A municipal bond is a debt obligation issued by the federal government. C) A municipal bond is a debt obligation issued by state or local governments. D) The interest income from a municipal bond is exempt from federal income taxation.

B) A municipal bond is a debt obligation issued by the federal government.

Which of the following is not a characteristic of a money market instrument? A) low risk B) maturity greater than 1 year C) marketability D) liquidity

B) Maturity greater than 1 year

________ is not a money market instrument. A) Commercial paper B) A Treasury bill C) A Treasury bond D) A certificate of deposit

C) Treasury bond

_______ represents an ownership share in a corporation.

Common stock

The Sarbanes-Oxley Act tightened corporate governance rules by requiring all but which one of the following? A) Required that corporations have more independent directors. B) Required that the CFO personally vouch for the corporation's financial statements. C) Required the creation of a new board to oversee the auditing of public companies. D) Required that firms could no longer employ investment bankers to sell securities to the public.

D) Required that firms could no longer employ investment bankers to sell securities to the public

Which of the following is not a financial intermediary? A) insurance company B) a credit union C) a mutual fund D) a real estate brokerage firm

D) a real estate brokerage firm

7) Financial markets allow for all but which one of the following? A) channel funds from lenders of funds to borrowers of funds B) shift consumption through time from higher-income periods to lower C) price securities according to their riskiness D) allow most participants to routinely earn high returns with low risk

D) allow most participants to routinely earn high returns with low risk

18. Advantages of investment companies to investors include all but which one of the following? a. Record keeping and administration b. Low-cost diversification c. Professional management d. Guaranteed rates of return

D. Guaranteed rates of return

__________ funds stand ready to redeem or issue shares at their net asset value.

Open-end

________ assets generate net income to the economy, and ________ assets define allocation of income among investors.

Real, financial

Which one of the following would be considered a risk-free asset in real terms as opposed to nominal?

U.S. T-bill whose return was indexed to inflation

Investing in two assets with a correlation coefficient of -.5 will reduce what kind of risk?

Unique risk

Investors who want to liquidate their holdings in a closed-end fund may ___________________

sell their shares on the open market

Losses on short sales are...

unlimited

The cost of buying and selling a stock includes (3):

1) Broker's commissions 2) Dealer's bid-asked spread 3) Price concessions that investors may be forced to make

Which of the following statements are true regarding diversification? (2)

1) For a longer time horizon, uncertainty compounds over a greater number of years. 2) Time diversification does not reduce risk.

Higher portfolio turnover:

1) Results in greater tax liability for investors 2) Results in greater trading costs for the fund, which investors have to pay for 3) Is a characteristic of asset allocation funds

Active trading in markets and competition among securities analysts helps ensure that: (3)

1) Security prices approach informational efficiency 2) Riskier securities are priced to offer higher potential returns 3) Investors are unlikely to be able to consistently find under- or overvalued securities

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: (3)

1) Standard deviation 2) expected return 3) correlation with your portfolio

The optimal risky portfolio can be identified by finding (2):

1) The tangency point of the capital market line and the efficient frontier 2) The line with the steepest slope that connects the risk-free rate to the efficient frontier

True statements about T-bills

1) Typically sell in denominations of $10,000 2) Income from T-bills is exempt from state and local taxes, but NOT federal taxes

According to Tobin's separation property, portfolio choice can be separated into two independent tasks consisting of __________ and __________.

1) identifying the optimal risky portfolio 2) constructing a complete portfolio from T-bills and the optimal risky portfolio based on the investor's degree of risk aversion

Money market securities are characterized by...

1) maturity of less than one year 2) safety of the principal investment 3) low rates of return

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

1. Small stocks 2. Large stocks 3. Long-term bonds 4. T-bills

Which of the following are financial assets? I. Debt securities II. Equity securities III. Derivative securities

I, II, III

Investing in two assets with a correlation coefficient of 1 will reduce which kind of risk?

None- with a correlation of 1, no risk will be reduced

______________________ are often called mutual funds.

Open-end investment companies

______ often accompany short sales and are used to limit potential losses from the short position

Stop-buy orders

TIPS are...

Treasury bonds that protect investors from inflation

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

Variance

A SPDR or spider

_____ is an example of an exchange-traded fund.

You decide to purchase an equal number of shares of stocks of firms to create a portfolio. If you wanted to construct an index to track your portfolio performance, your best match for your portfolio would be to construct...

a price-weighted index

Currently, the Dow Jones Industrial Average is computed by...

adding the prices of 30 large "blue-chip" stocks and dividing by a divisor adjusted for stock splits and large stock dividends

Mutual funds that hold both equities and fixed-income securities in relatively stable proportions are called...

balanced funds

The process of polling potential investors regarding their interest in a forthcoming initial public offering (IPO) is called ________.

book building

If you want to know the portfolio standard deviation for a three-stock portfolio, you will have to ______.

calculate 3 covariances

The systemic risk that led to the financial crisis of 2008 was increased by... A) collateralized debt obligations B) all of the options C) credit default swaps D) subprime mortgages

collateralized debt obligations, credit default swaps, and subprime mortgages

Real assets in the economy include all but which one of the following? A) land B) buildings C) consumer durables D) common stock

common stock

You are considering investing in one of several mutual funds. All the funds under consideration have various combinations of front-end and back-end loads and/or 12b-1 fees. The longer you plan on remaining in the fund you choose, the more likely you will prefer a fund with a __________ rather than a __________, everything else equal.

front-end load; 12b-1 fee

According to multiple studies by Ritter, initial public offerings tend to exhibit __________ performance initially and __________ performance over the long term.

good; bad

The _________ reward-to-variability ratio is found on the ________ capital market line.

highest; steepest

Preferred stock is like long-term debt in that...

it promises to pay to its holder a fixed stream of income each year

Some diversification benefits can be achieved by combining securities in a portfolio as long as the correlation between the securities is _____________.

less than 1

An order to buy or sell a security at the current price is a...

market order

Diversification is most effective when security returns are _________.

negatively correlated

An investor's degree of risk aversion will determine his or her ______.

optimal mix of the risk-free asset and risky asset

According to the Flow of Funds Accounts of the United States, the largest single asset of U.S. households is...

real estate

Specialized-sector funds concentrate their investments in ...

securities issued by firms in a particular industry

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 ________.

stock's standard deviation

You purchased XYZ stock at $50 per share. The stock is currently selling at $65. Your gains could be protected by placing a _________

stop-loss order

If an investor places a _________ order, the stock will be sold if its price falls to the stipulated level. If an investor places a __________ order, the stock will be bought if its price rises above the stipulated level.

stop-loss; stop-buy

Initial public offerings (IPOs) are usually ___________ relative to the levels at which their prices stabilize after they begin trading in the secondary market.

underpriced

Adding additional risky assets to the investment opportunity set will generally move the efficient frontier _____ and to the ______.

up; left

In a ________ index, changes in the value of the stock with the greatest market value will move the index value the most, everything else equal.

value weighted