FIN357 Midterm

Pizza Inc had earnings of $1, $1.25, $4 per share and a dividend policy that resulted in annual dividends per share of $0.40, 0.50, and 1.60 for the past three years. The company anticipates maintaining the same dividend policy this year and also anticipates an increase in earnings to $6 per share this year. What dividend do you expect Pizza Inc. to pay in the next year?

$2.40 .40/1 = 40% .50/1.25 = 40% 1.60/4 = 40% 6*40% = 2.40

The stock prices of five companies are $11, 22, 31, 19 and 27. What is the value of a price weighted index for these stocks?

$22

John executes a short sale of 1,000 shares of ABC at $50 that is subsequently covered at $45. What is is gain or loss?

$5,000 profit

The Benson bond is a 1% coupon bond with semi-annual coupon payments that matures in 22 years. If the YTM for this bond is 3.5%, what is the value of this bond?

$618.65

The David bond is a 8% coupon bond with semi annual coupon payments that matures in 18 years. If the YTM for this bond is 12%, what is the value of the bond?

$707.58

The correlation coefficient between a security and the market portfolio is 0.7. The standard deviation of the security is 30% while the market portfolio has a standard deviation of 15%. The beta of the security is:

1.4

TBT stock pays a $3 dividend, semi-annually, and has earning per share of $9. If the stock is currently trading at $60, what is the dividend yield %?

10%

Rick invested in the Hyper Growth mutual fund 5 years ago. His returns were 26%; -10%; 15%; 3%; and 31% respectively. What was the geometric average return over the five years?

11.97%

Steve buys 1000 shares of Axe stock at $55 per share on January 1, Year 1. At the end of the first year (December 31, Year 1), the stock has dropped, so he buys 500 more shares at $50 per share. At the end of the second year, (December 31, Year 2), he buys another 500 shares for $40 per share. The stock pays a dividend of $3 per share on December 29th of each year. Axe is trading at $63 per share as of December 31, Year 3. What is the dollar weighted return for Steve's investment in Axe since January 1, Year 1 to today?

15.5%

Mike, who is in the 30% tax bracket, bought 1,000 shares of Ruby at $40 per share. Six months later, he sold the stock for $58 per share. What is Mike's after-tax holding period return?

31.5% =[(58-40) x (1.00-0.30)] / 40

A fixed income portfolio with a current market value of $1.6 Billion has an annual standard deviation of 18.1% and an expected return of 9.5%. The relevant z-score at 5% is 1.645. The annual value at risk is?

324,392,000

Fred bought 100 shares of Apple at $115 per share. One year later he sold the stock for $152 per share. During the year, Apple declared and paid dividends of $2 per share. What was Fred's holding period return?

34%

Louis the analyst researches the Jazz fund over the last 1,500 days. He notices that 75 days had daily returns of -0.5% or less. The current value of the fund is $1 million. What is the daily value at risk at a 95% probability level for the fund?

5,000

Arthur is considering purchasing a 12-year bond that is selling for $1,300. What is the current yield for this bond if it has an 8% coupon, paid semi-annually?

6.15%

A firm operating in the food industry is hoping to frame its label on a new chicken breast nugget product. The actual product ingredients are 60% chicken and 40% other blocks including blood vessels, fat grams and other tissues. Which is the best framing option for this firm? a. the majority of our nuggets consist of fresh chicken breast meat b. our nuggets are healthy for you c. Our nuggets contain less than 50% fat d. our nuggets contain only 40% fat and other chicken tissues

A.

A portfolio manager computes a relatively low price-to-book ratio for the small cap firms in the portfolio. The manager computes an intrinsic value of European indexes that match the current market value. Relative valuation by the manager indicates large cap price multiples are in line with their historical values. The manager currently has the following allocations: 20% small cap equities, 55% large cap equities, 20% European mid-cap equities, and 5% cash. A tactical decision to deviate from strategic weights would most likely include an increase in portfolio weights to a. small cap equities b. large cap equities c. European mid cap equities d. Cash

A.

ABC Inc. repurchased 30% of its outstanding common stock from the open market. What are the results from this activity? a. decrease in total assets b. decline in EPS c. number of stockholders would remain the same as a result of the preemptive right d. increase in cash

A.

An asset allocation strategy that is most likely to result in actual portfolio weights that can vary greatly from their original strategic weights is a. dynamic allocation strategy b. tactical allocation strategy c. constant weighting strategy d. buy and hold strategy

A.

An asset allocation strategy that is most likely to result in the purchase of securities when prices rise is a. dynamic allocation strategy b. tactical allocation strategy c. constant weighting strategy d. buy and hold strategy

A.

Based on Markowitz's work, which of the following portfolios could not lie on the efficient frontier? a. expected return of 10% and standard deviation of 20% b. expected return of 18% and standard deviation of 32% c. expected return of 14% and standard deviation of 18% d. expected return of 9% and standard deviation of 11%

A.

Hiral is considering the following AA rated bonds. Which of these has the most interest rate risk? a. a 20 year bond with 3% coupon b. 10 year bond with 4% coupon c. 10 year bond with 3% coupon d. 15 year bond with 3% coupon

A.

Which of the following can be greatly reduced by diversification? a. unsystematic risk b. systematic risk c. market risk d. systematic and unsystematic risk

A.

Which of the following has the most default risk? a. Central City municipal General Obligation bond - BBB+ rated b. 30-year treasury bond c. XYZ small cap corporate bond - AA rated d. GNMA

A.

Which of the following reduces the number of outstanding shares and increases the share price proportionately? a. reverse stock split b. stock spin-off c. stock dividend d. DRIP

A.

Which of the following statements are true regarding taxation of treasury notes and bonds? a. interest income and capital gains are exempt from state and local taxes b. interest income and capital gains are exempt from federal taxes c. notes and bonds are taxed differently than T-bills d. original issue discount tax rules apply

A.

Which of the following would be used to determine long-term asset allocation decisions? a. strategic asset allocation b. tactical asset allocation c. market neutral asset allocation d. dynamic asset allocation

A.

A Canadian apple farmer buys fertilizer from a US based firm located near the Canadian border. The apple farmer receives a guarantee of payment from a Canadian bank and sells the guarantee in the secondary market. The risk of the banker's acceptance depends most likely on the: a. Canadian bank b. apple farmer c. US Fertilizer firm d. apple market

A. (a banker's acceptance involves three parties (at least) and the risk of default depends primarily on the credit rating of the bank issuing the payment guarantee)

Which would least likely be classified as an investment adviser by the SEC? a. financial firm that acts as a dealer in investment grade bonds b. financial analyst who issues a report on the performance of value stocks c. money manager who makes asset allocation assignments for institutional investors d. analyst who recommends a triple A rated bond to a client

A. (broker dealers are explicitly excluded from being classified as advisers under the legal framework of the Investment Advisers Act)

Treasury bills are auctioned on a competitive and noncompetitive basis. Which of the following is correct? a. noncompetitive bidding- investors are guaranteed to receive the dollar amount (up to a maximum bid limit) but must accept the discount rate that is determined at auction b. competitive bidding- all competitive bids are filled before noncompetitive bids c. both a and b d. neither a and b

A. (competitive bidders specify the discount rate, yield, or discount margin they wish to receive. Competitive bidders may be awarded all, part, or none of the security for which they bid.

Jethro would like to invest in a security that will provide a steady stream of monthly cash flows to supplement his retirement income. Which of the following is the most suitable investment for meeting Jethro's goal? a. mortgage backed security b. revenue bond c. technology stock d. D-Rated corporate bond

A. (mortgage backed securities and municipal bonds are fixed income securities that make regular cash payments to investors. MBSs make distributions monthly while municipal bond coupon payments are made semi-annually)

A municipal bond would least likely be classified as a revenue bond if it were issued for: a. upgrade to fire prevention facilities b. construction of residential housing c. redevelopment of a professional baseball stadium d. airport construction

A. (residential housing bonds, stadium bonds, and airport bonds are considered to be revenue bonds because they are repaid by the revenue generated by the specific project.)

A collateralized mortgage obligation pays a 2% coupon rate on the first tranche plus any prepayments until its $50 million par value is retired. The second and third tranches receive 4% and 5% coupon rates. The third tranche receives principal only after the second is retired. What tranche has the highest prepayment risk? a. 1 b. 2 c. 3

A. (since the first tranche receives all prepayments after the debt is refinanced, it has the highest level of prepayment risk. The third tranche is the riskiest from a default perspective. The second tranche has at least some prepayment risk)

Which of the following is accurate regarding the capital market line (CML)? a. the CML consists of combinations of the risk-free return and the market portfolio with the slope equal to the Sharpe ratio b. CML represents the most efficient portfolios, consisting of various percentages of risky assets c. the CML consists of combinations of the risk-free return and the market portfolio with the slope equal to standard deviation. d. CML is a line that begins at the risk-free rate of return and crosses the efficient frontier at the market portfolio

A. (the slope of the line = the sharpe ratio which equals [(Rm - Rf) / SD]

A firm has $5 billion outstanding in long-term bonds. The firm currently has sufficient cash flow to make the scheduled coupon payments but would struggle to make those payments in the future if a substantial weakening of the economy occurs. The most likely rating on these bonds is: a. BBB b. B c. CC d. AAA

A. (triple B rated bonds are still considered investment quality and generally have enough cash flow to make upcoming debt service payments. The firm, however, is not strong enough to withstand a significant decline in economic output. In the event of a weakening economy, these bonds will likely be downgraded)

A new breed of deep purple roses, which are twice as expensive as other types of roses, are currently very popular among wealthy individuals for landscaping their estates. The price of these rose bushes has risen by 25% over the last year and are expected to rise even more in the coming months, even as farmers plant more bushes to try to meet demand. Which of the following is least likely to result in mania? a. interest rates in the economy fall to historic lows. b. the middle class demonstrates almost zero interest in the new breed c. the government restricts market access to the new bushes d. the government imposes an import tariff on the new breed of roses.

B.

A portfolio manager selects bonds with lower durations than those in the benchmark portfolio. The results of the decision will most likely be revealed in the the a. management effect b. policy effect c. analysis effect d. trading effect

B.

All of the following are correct regarding common stock ownership, except: a. owners of CS have the right to vote on corporate matters b. when a corporation dissolves, the CS holders are the first to be paid from the assets of the company c. shareholder voting can be done in person or by proxy d. with few exceptions, shareholders are protected from personal liability from corporate obligations

B.

An asset allocation strategy that is most likely to result in the purchase of securities when prices fall is a. dynamic allocation strategy b. tactical allocation strategy c. constant weighting strategy d. buy and hold strategy

B.

Edgar Spring inherited 1,000 shares of Canadian Red Tree Company (CRT) which had a price of CAD 81 exactly six months ago. The Price of CRT has subsequently declined to CAD 60. Spring has stated that he will not sell his shares until the prices reaches at least CAD81. Spring most likely shows signs of a. framing b. anchoring c. cognitive dissonance d. mental accounting

B.

Flo Stone is an investor with a diversified equity portfolio. Which of the following most likely indicates that Stone exhibits behavioral characteristics? a. Stone invested in one company with less risk than another company she considered b. Stone ignored recent dividend information regarding one potential investment because she thought it to be unimportant c. Stone selected the securities in her portfolio according to the goal of maximizing her end of period utility d. Stone computes expected return and standard deviation for each of her investments

B.

The measure of "risk per unit of expected return" is most likely referred to as the: a. standard deviation b. coefficient of variation c. correlation of coefficient d. beta

B.

Which of the following is not a money market instrument? a. negotiable CD b. treasury bond c. commercial paper d. Eurodollar account

B.

Which of the following techniques or strategies would take advantage of a perceived undervaluation in the energy sector or the economy? a. index funds b. tactical asset allocation c. strategic asset allocation rebalancing d. dollar cost averaging into a portfolio

B.

Which of the following types of municipal bonds have the greatest risk of default? a. general obligation bond from a state b. revenue bond c. general obligation bond of a city d. dedicated bond

B.

A financial advisor collects the following information that relates to a specific client: Risk-free rate of interest = 3.1% Return due to client's risk = 9.6% Total portfolio return = 13.8% The Fama decomposition would assign a selectivity value that is closes to. a. 7% b. 5% c. 1% d. 2%

C.

A portfolio manager using optimization software would least likely to collect data on a. expected returns b. volatility c. benchmark expectations d. market returns

C.

An investor exhibiting signs of prospect theory would most likely: a. make investment decisions without any regard for feelings of pride and regret b. compute variance, covariance and expected return for each security in the portfolio c. collect and process a reasonable amount of information before making an investment d. reach an optimal point on the efficient frontier

C.

An investor owns a fixed income portfolio that includes 30 different investment grade issues. which of the following comments would most likely be made by an investor influenced by behavioral issues? a. if inflation spikes, the value of my portfolio will likely fall b. portfolio duration matches my investment horizon c. I will immediately rebalance my portfolio when a specific issue is downgraded d. I reinvest my coupons in a money market fund to finance a future purchase

C.

Assume that a bond has an 8% coupon, paid annually, is priced to have a YTM of 10%. What could happen to the YTM if the price and the other bond characteristics remained the same, except that the coupon payments were paid semi-annually instead of annually? a. The YTM would remain 10% b. the YTM would decrease below 10% c. the YTM would increase above 10% d. it cannot be determined without knowing the price of the bond

C.

Examples of income stocks least likely exclude a. tech b. blue chip c. utility d. financial institutions

C.

Four portfolio managers have generated superior performance against each of their benchmarks and the stock market in general. The manager least likely to replicate performance in the future is the one who: a. estimates future dividends for each firm and then computes present values b. uses relative valuation methods, including price-to-book and enterprise value multiple c. increases allocation to any stock that changes its corporate name d. computes intrinsic values using estimates of future operating cash flows

C.

Investors are willing to pay a premium for predictable dividends because a. from a tax standpoint, dividend income is preferred over capital gain income b. return is always higher than capital appreciation c. dividends reduce uncertainty d. constant, predictable dividends are very rare

C.

Monique invested in the Marvelous mutual fund 5 years ago. Her returns were 10%, 10%, 10%, 10% and 10% respectively. Which of the following statements is correct regarding average returns and standard deviation? a. geometric average equals the arithmetic average b. standard deviation of returns is equal to zero c. both a and b d. neither a nor b

C.

T-Bills are auctioned on a competitive and noncompetitive basis. Which of the following is correct? a. competitive bidding- total amount of competitive bids that are filled is determined based on the auction amount and the amount of noncompetitive bids b. noncompetitive bidding- investors are guaranteed to receive the dollar amount (up to the maximum bid limit) and receive the highest yield accepted at auction c. both a and b d. neither a or b

C.

What is the most common type of order? a. limit order b. short order c. market order d. good until canceled order

C.

A financial advisor collects the following information that relates to a specific client Risk-Free Rate of interest = 2.3% Return due to client's risk = 8.1% Diversified return = 0.7% Total portfolio return = 13.9% The Fama decomposition would assign a net selectivity value that is closest to a. 1.9% b. 1.2% c. 0.9% d. 2.8%

D.

A financial analyst uses the 50-day trading history of a mid-cap stock to determine if the stock is undervalued. The analyst is most likely using: a. discounted cash flow technique b. relative valuation method c. indexing d. technical analysis

D.

According to the capital-asset pricing model (CAPM), a security's expected (required) return is equal to the risk-free rate plus a premium: a. based on the total risk of the security b. equal to the security's beta c. based on the unsystematic risk of the security d. based on the systematic risk of the security

D.

Alice minks is a high net worth investor who owns a well-diversified portfolio of fixed income securities. Minks hopes to use part of the future value of her portfolio to purchase a beach house in five years. Minks forecasts the future value of each security in her portfolio based on expectations of interest rate movements, government actions and security analysis. Which decision is most consistent with modern portfolio theory? a. Minks restricted her portfolio to only investment graded bonds because of previous losses in speculative graded bonds. b. Minks expects to make no changes to her portfolio over her investment horizon because she believes she has performed sufficient research c. Minks invests in several bonds issued by real estate firms with properties located along the coastline d. Minks chooses her ten securities based on expected utility maximization

D.

All of the following statements regarding US Treasury securities are correct EXCEPT: a. the same yield is paid by all investors b. treasury securities are issued in an auction format c. the minimum investment is only $100 d. individual investors cannot purchase treasury issues directly from the Treasury Department

D.

Ivan is considering purchasing a 20 year bond that is selling for $1,055. Which of the following is correct if this bond has a 3.75% coupon, paid semi-annually? a. the current yield > YTM b. The YTM < current yield c. the coupon rate > current yield d. All of the above

D.

James Johnson is a Portuguese farmer who provides livestock and wheat to help finance a voyage across the Atlantic Ocean in the 1510. Johnson receives a promise from the fleet's commander that he will pay Johnson 5% or all profits upon the fleet's return to Portugal. The voyage is mostly funded by the Portuguese government, but a few individuals are permitted to participate. This is the sole voyage in which Johnson has invested. The trip is successful, and Johnson receives his due share three years after the fleet left Portugal. Which statement is most accurate? a. government funding made the investment less risky for Johnson b. the fleet commander guaranteed Johnson's rate of return c. Johnson identified all risks inherent in this investment d. Johnson suffered from lack of diversification.

D.

T-Bills may have a maturity equal to which of the following when they are issued? a. four weeks b. 52 weeks c. thirteen weeks d. all of the above

D.

Which of the following is correct regarding a callable bond? a. the callable bond is more likely to be called when interest rates increase in an attempt to reduce interest expense b. the callable bond is attractive due to its higher par value c. the callable bond will have a lower YTM than a similar non-callable bond d. none of the above

D.

Which of the following not correct concerning bonds? a. a bonds YTM is the return an investor earns if they reinvest all coupon payments at the expected return and hold till maturity b. a bond's coupon is ussually paid semi-annually c. a bond's coupon is usually a fixed % of the par value d. a debenture bond is backed by an asset that the bond holder can repossess if the debt is not paid

D.

Which of the following types of bonds will most likely have the lowest YTM, assuming similar credit quality and maturity? a. puttable debenture b. callable mortgage backed bond c. callable debenture d. puttable mortgage backed bond.

D.

Which of the following would most likely be considered a stock market anomaly? a. target firms in the acquisition market outperform the broad market index b. firms usine reverse stock splits underperform an industry index c. firms with higher dividend payout ratios experience less growth than firms with low dividend payout ratios d. firms with high volume trading on the day after a trading holiday outperform an index

D.

Which of the following would protect an investor from exchange rate risk? a. American depository receipts b. global mutual funds c. Yankee bonds d. foreign pay bonds

D.

The piece of legislation whose purpose is to reduce the volatility in financial markets is

Dodd Frank Act of 2010

On April 15, Jorge Inc declared a $30 per share quarterly dividend payable June 1 to stockholders on record on Friday, May 20. What is the latest date by which an investor could purchase the stock and still receive the dividend?

May 18

Assume that the 1, 2, 3, 5, 10, 20 and 30 year rates were 2%, 2.5%, 3.4%, 4.2%, 5.0% and 5.8% respectively. What type of yield curve is this?

Normal

Max invests in a portfolio with a Beta of zero. What is the portfolios expected return?

equal to the risk free rate of return

The beta of a portfolio is

equal to the weighted beta of the portfolio

Under the CML a lending portfolio...

has less than 100% of the portfolio invested in the market portfolio

Bonnie Brooks, CFA, believes she has found a country whose financial markets exhibit pricing that reflects neither historical prices nor volume. The market is most likely

inefficient

Assets that lie below the SML are considered to be

overvalued based on its beta

The primary use of secondary equity markets is most likely to:

provide marketability for investors

Short term borrowing by dealers in government securities is called

repurchase agreements

The price of a bond that a buyer would pay is equal to

the asked price plus accrued interest

Parker believes that the market premium will go down over the next two months due to expectations about the market portfolio. What should happen to the SML?

the slope of the SML should decrease