Finance Final Exam Review

To construct a riskless portfolio using two risky stocks, one would need to find two stocks with a correlation coefficient of ________.

-1.0

Asset A has an expected return of 20% and a standard deviation of 25%. The risk-free rate is 5%. What is the reward-to-variability ratio?

.60 20% − 5%/ 25%=.60

A loan for a new car costs the borrower .8% per month. What is the EAR?

10.03%

You purchased a bond 75 days ago for $911.72. You received an interest payment of $32.00 68 days ago. Today the bond's price is $993.39. What is the holding period return (HPR) on the bond as of today?

12.47% HPR= ending price-beginning price+interest received/ beginning price

You put up $50 at the beginning of the year for an investment. The value of the investment grows 5% and you earn a dividend of $4.00. Your HPR was ____.

13.0% 5%+($4/50)=13.0%

The geometric average of −17%, 30%, and 35% is _________.

13.36% [(1+-0.17)(1+.30)(1+0.35)]^1/3-1=13.36%

The buyer of a new home is quoted a mortgage rate of .5% per month. What is the APR on the loan?

6%

A bond issued by the state of Alabama is priced to yield 6.90%. If you are in the 20% tax bracket, this bond would provide you with an equivalent taxable yield of _________.

8.63% 8.63%=6.90%(1-0.20)

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?

8.74%

The arithmetic average of -12%, 17%, and 22% is ________.

9.00% -12%+17%+22%/3=9.00%

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?

9.2% (.2)(30%)+(.5)(10%)+(.3)(-6%)=9.2%

__________ is not a money market instrument.

A treasury bond

Which of the following is an example of an agency problem? Managers protect their jobs by avoiding risky projects. Managers engage in empire building. Managers overconsume luxuries such as corporate jets. All of the options are examples of agency problems.

All of the options are examples of agency problems

__________ portfolio construction starts with selecting attractively priced securities.

Bottom-up

Risk that can be eliminated through diversification is called ______ risk.

FIRM-SPECIFIC UNIQUE DIVERSIFIABLE

Deposits of commercial banks at the Federal Reserve are called _____.

Federal Funds

The rate of interest on short-term loans among financial institutions is _____.

Federal Funds Rate

Which risk can be partially or fully diversified away as additional securities are added to a portfolio? I. Nonsystematic risk II. Systematic risk III. Market risk IV. Firm-specific risk

I and IV only

Rank the following from highest average historical return to lowest average historical return from 1926 to 2017. I. Small stocks II. Long-term bonds III. Large stocks IV. T-bills

I, III,II,IV

Security A has a higher standard deviation of returns than security B. We would expect that: I. Security A would have a risk premium equal to 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.

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.

The dollar-weighted return is the _________.

Internal rate of return

Firms that specialize in helping companies raise capital by selling securities to the public are called _________.

Investment banks

During the 1926-2013 period which one of the following asset classes provided the lowest real return?

Long-term U.S. Treasury bonds

__________ portfolio management calls for holding diversified portfolios without spending effort or resources attempting to improve investment performance through security analysis.

Passive

Which of the following provides the best example of a systematic-risk event?

President Trump announced trade tariffs against China.

If investors overweight recent performance in forecasting the future, they are exhibiting _______.

Representativeness bias

Which of the following correctly describes a repurchase agreement?

The sale of a security with a commitment to repurchase the same security at a specified future date and a designated price.

Moving averages are ______ indicators.

Trend

The ______ measure of returns ignores compounding.

arithmetic average

After considering current market conditions, an investor decides to place 60% of her funds in equities and the rest in bonds. This is an example of _____ .

asset allocation

Asset A has an expected return of 15% and a reward-to-variability ratio of .3. Asset B has an expected return of 20% and a reward-to-variability ratio of .4. A risk-averse investor would prefer a portfolio using the risk-free asset and ______.

asset b

In calculating the Dow Jones Industrial Average, the adjustment for a stock split occurs _________.

by adjusting the divisor

Eurodollars are _________.

dollar-denominated deposits at any foreign bank or foreign branch of an American bank

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 _________.

equal to 0

Technical analysis focuses on _____________________.

finding repeating trends and patterns in prices

Diversification can reduce or eliminate __________ risk.

firm- specific risk

The risk that can be diversified away is __________.

firm-specific risk

In securities markets, there should be a risk-return trade-off with higher-risk assets having _________ expected returns than lower-risk assets.

higher

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

market order

Beta is a measure of security responsiveness to _________.Beta is a measure of security responsiveness to _________.

market risk

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 ___________.

mental accounting g

Suppose an investor is considering one of two investments that are identical in all respects except for risk. If the investor anticipates a fair return for the risk of the security he invests in, he can expect to _____ .

pay less for the security that has higher risk

The excess return is the _________.

rate of return in excess of the Treasury-bill rate

Which of the following statistics cannot be negative?

variance

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

the capital gain yield over the period plus the dividend yield

The market risk premium is defined as __________.

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

The purchase of a futures contract gives the buyer _________.

the obligation to buy an item at a specified price

Suppose that a stock portfolio and a bond portfolio have a zero correlation. This means that ______.

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

The expected rate of return of a portfolio of risky securities is _________.

the weighted sum of the securities' expected returns

Firm-specific risk is also called __________ and __________.

unique risk;diversifiable risk

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

up; left

Which one of the following is a true statement regarding corporate bonds?

A corporate convertible bond gives its holder the right to exchange it for a specified number of the company's common shares.

The _________ price is the price at which a dealer is willing to purchase a security.

Bid

Real assets in the economy include all but which one of the following?

Common Stock

Which of the following is (are) true about hedge funds? I. They are open to institutional investors. II. They are open to wealthy individuals. III. They are more likely than mutual funds to pursue simple strategies.

I. They are open to institutional investors. II. They are open to wealthy individuals.

Which one of the following is a true statement regarding the Dow Jones Industrial Average?

It is a price-weighted average of 30 large industrial stocks

ou invested in a 3-month certificate of deposit at your bank. Your investment was $1,634, and at the end of the term you will receive $1,746. a. What is the holding period return (HPR) on your investment? (Round your answer to 2 decimal places.) HPR Not attempted % b. What is the annual percentage rate (APR)? (Round your answer to 2 decimal places.) APR Not attempted % c. What is the effective annual rate (EAR)? (Round your answer to 2 decimal places.) EAR Not attempted % rev: 03_08_2018_QC_CS-121289

a. 6.85% HPR= (1746-1634)/1634 b. 27.42% 6.85%*(12/3) c. 30.37% =(1+0.2742/4)^4=1.3037

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

book building

An investor in a T-bill earns interest by _________.

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

Security selection refers to the ________.

choice of specific securities within each asset class

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

highest; steepest

Purchases of new issues of stock take place _________.

in the primary market

Decreasing the number of stocks in a portfolio from 50 to 10 would likely ________________.

increases the nonsystematic risk of the portfolio.

The value of a derivative security _________.

is affected by the value of the underlying security

A moving average of stock prices _________________.

is less volatile than the actual prices

Diversification is most effective when security returns are _________.

negatively correlated

Which of the following is not a money market security?

Common Stock

The cost of buying and selling a stock includes: I. Broker's commissions II. Dealer's bid-asked spread III. Price concessions that investors may be forced to make

I, II, and III

Debt securities promise: I. A fixed stream of income. II. A stream of income that is determined according to a specific formula. III. A share in the profits of the issuing entity.

I. A fixed stream of income. II. A stream of income that is determined according to a specific formula.

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,

Shelly will have more regret over the loss than Bill

A portfolio with a 30% standard deviation generated a return of 15% last year when T-bills were paying 6.0%. This portfolio had a Sharpe ratio of ____.

0.30

Stock A has a beta of 1, and stock B has a beta of 1.2. The returns of stock A are ______ sensitive to changes in the market than are the returns of stock B.

20% less

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 60% of the portfolio, while stock B comprises 40% of the portfolio. The standard deviation of the return on this portfolio is _________.

24.3% σ2p = (.602)(.352) + (.402)(.15)2 + (2)(.6)(.4)(.35)(.15)(.45)σ2p = .05904σp = 24.30%

You purchased a share of stock for $57. One year later you received $3.10 as dividend and sold the share for $56. Your holding-period return was _________.

3.68% 56+3.10-57/57=3.68%

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?

3.92%

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 expected return on this investment project?

40% E[rp] = (.6)(100%) + (.4)(-50%) = (.6)(1) + (.4)(-.5) = .4 = 40%

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?

54.5%

A project has a 0.72 chance of doubling your investment in a year and a 0.28 chance of halving your investment in a year. What is the standard deviation of the rate of return on this investment?

67.33% Expected return = (0.72 × 1) + 0.28 × (−0.5) = 0.58 or 58% Variance = [0.72 × (1 − 0.58)2] + [0.28 × (−0.50 − 0.58)2] = 0.4536 Standard deviation = √0.4536 = 0.6735 or 67.35%

An investment earns 10% the first year, earns 16% the second year, and loses 15% the third year. The total compound return over the 3 years was ______

8.46% (1.10)(1.16)(1-.15)-1=8.46%

When a stock price breaks through the moving average from below, this is considered to be ______.

A bullish signal

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

I. Security prices approach informational efficiency. II. Riskier securities are priced to offer higher potential returns. III. Investors are unlikely to be able to consistently find under- or overvalued securities.

The optimal risky portfolio can be identified by finding: The tangency point of the capital market line and the efficient frontier The line with the steepest slope that connects the risk-free rate to the efficient frontier The minimum-variance point on the efficient frontier The maximum-return point on the efficient frontier and the minimum-variance point on the efficient frontier

I. The tangency point of the capital market line and the efficient frontier II. The line with the steepest slope that connects the risk-free rate to the efficient frontier

During a period when prices have been rising, the _________ will be _______ the current price.

Moving Average; below

ScenarioSecurity ASecurity BSecurity CRecessionReturn > E(r)Return = E(r)Return < E(r)NormalReturn = E(r)Return = E(r)Return = E(r)BoomReturn < E(r)Return = E(r)Return > E(r) The correlation coefficient between securities B and C is positive. The correlation coefficient between securities A and C is negative. The covariance of security A and security B is zero.

The correlation coefficient between securities A and C is negative. The covariance of security A and security B is zero.

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

Unique risk

An investor buys six shares of XYZ at the beginning of 2015, buys another two shares at the beginning of 2016, sells one share at the beginning of 2017, and sells all seven remaining shares at the beginning of 2018. a. What are the arithmetic and geometric average time-weighted rates of return for the investor? b-1. Prepare a chart of cash flows for the four dates corresponding to the turns of the year for January 1, 2015, to January 1, 2018. b-2. What is the dollar-weighted rate of return? (Hint: If your calculator cannot calculate internal rate of return, you will have to use a spreadsheet or trial and error.)

a. 1.98%=A 1.65%=G b. -720,-246, 131, 854 b-2. $0.7483%

On a standard expected return versus standard deviation graph, investors will prefer portfolios that lie to the _____________ the current investment opportunity set.

left and above

Rational risk-averse investors will always prefer portfolios _____________.

located on the capital market line to those located on the risky asset efficient frontier

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 .85. The standard deviation of the resulting portfolio will be ________________.

more than 15% but less than 19% σ2p = (.52)(.242) + (.52)(.122) + 2(.5)(.5)(.24)(.12).85 = .03024; σ = 17.39%

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

none of these options (With a correlation of 1, no risk will be reduced.)

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; buy-stop

Market risk is also called __________ and _________.

systematic risk; non-diversifiable

Asset allocation refers to _________.

the allocation of the investment portfolio across broad asset classes