FINC 3640-Investments

26. 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

12. The weak 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

A. All security price and volume data

23. 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

27. ______________ is an important characteristic of the relationship between bond prices and yields. A. Convexity b. Concavity c. Complexity d. Linearity

A. Convexity

15. 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. A Roberts search

A. Data mining

8. 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

2. 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

17. 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. Market breadth

18. Conventional finance theory assumes investors are _______ and behavioral finance assumes investors are _______ A. Rational; irrational b. Irrational; rational c. Greedy; philanthropic d. Philanthropic; greedy

A. Rational; irrational

19. Conventional finance theory assumes investors are _______ and behavioral finance assumes investors are _______ A. Rational; irrational b. Irrational; rational c. Greedy; philanthropic d. Philanthropic; greedy

A. Rational; irrational

2. Apple stock has decreased from about $700 per share to approximately $600 per share. The problem most frequently cited is A. Reliability problems with the iPhone B. Faulty map in the iPhone C. Bad leadership D. Ineffective TV advertisements

A. Reliability problems with the iPhone

16. . The Put/Call ratio is a ______ indicator. A. Sentiment b. Flow of funds c. Market structure d. Fundamental

A. Sentiment

16. The Put/Call ratio is a ______ indicator. A. Sentiment b. Flow of funds c. Market structure d. Fundamental

A. Sentiment

19. The invoice price of a bond is the A. Stated or flat price in a quote sheet plus accrued interest b. Stated or flat price in a quote sheet minus accrued interest c. Clean price d. Average of the bid and ask price

A. Stated or flat price in a quote sheet plus accrued interest

11. 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

A. There were no predictable patterns in stock prices

17. 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

A. all past information including security price and volume data

16. 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

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

A. buy the stock

25. A __________ bond is a bond where the issuer has an option to retire the bond before maturity at a specific price after a specific date. A. callable B. coupon C. puttable D. treasury

A. callable

21. 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

A. data mining

11. 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

A. it is very difficult to identify a true trend before the fact

10. 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

26. Yields on municipal bonds are typically ___________ yields on corporate bonds of similar risk and time to maturity. A. lower than B. slightly higher than C. identical to D. twice as high as

A. lower than

19. The primary difference between Treasury notes and bonds is ________. A. maturity at issue B. default risk C. coupon rate D. tax status

A. maturity at issue

29. You own a bond that has a duration of 6 years. Interest rates are currently 7% but you believe the Fed is about to increase interest rates by 25 basis points. Your predicted price change on this bond is _________. a. +1.40% B. -1.40% c. -2.51% d. +2.51%

B. -1.40%

13. What is the expected return on a stock with a beta of 0.8, 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%

17. 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

13. 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

B. All publicly available information

5. In the context of the capital asset pricing model, the systematic measure of risk is __________. a. Unique risk B. Beta c. Standard deviation of returns d. Variance of returns

B. Beta

25. The __________ of a bond is computed as the ratio of annual interest payments to market price. a. Nominal yield B. Current yield c. Yield to maturity d. Yield to call

B. Current yield

21. Consider the expectations theory of the term structure of interest rates. If the yield curve is downward sloping, this indicates that investors expect short-term interest rates to __________ in the future. a. Increase B. Decrease c. Not change d. Change in an unpredictable manner

B. Decrease

20. 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. Timing the market

B. Diversification

13. When the market risk premium rises, stock prices will ________. a. Rise B. Fall c. Recover d. Have excess volatility

B. Fall

14. When the market risk premium rises, stock prices will ________. a. Rise B. Fall c. Recover d. Have excess volatility

B. Fall

17. . 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

B. Finding repeating trends and patterns in prices

5. The risk that can be diversified away is ___________. a. Beta B. Firm specific risk c. Market risk d. Systematic risk

B. Firm specific risk

11. 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

6. 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

21. Trading activity and average returns in brokerage accounts tends to be a. Uncorrelated B. Negatively correlated c. Positively correlated d. Positively correlated for women and negatively correlated for men

B. Negatively correlated

4. Diversification is most effective when security returns are __________. a. High B. Negatively correlated c. Positively correlated d. Uncorrelated

B. Negatively correlated

10. 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 the above

B. Overpriced

25. 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 is equal to the time horizon 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

3. Which of the following statistics cannot be negative? a. Covariance B. Variance c. E[r] d. Correlation coefficient

B. Variance

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

B. abnormal return

5. 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

8. 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

29. 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

14. 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

C. A passive investment strategy

18. The Dow Theory is a technique that attempts to identify ___________________. a. Only long-term trends in stock market prices b. Only short-term trends in stock market prices C. Both long-term and short-term trends in stock market prices d. Trends in arbitrage trading opportunities

C. Both long-term and short-term trends in stock market prices

20. If investors are too slow to update their beliefs about a stock's future performance when new evidence arises they are exhibiting _______ and if they overweight recent performance in forecasting the future they are exhibiting _______. a. Representativeness bias; conservatism b. Framing error; representativeness C. Conservatism; memory bias d. Memory bias; overconfidence

C. Conservatism; memory bias

15. 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

C. Earnings forecasting

19. 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

C. Earnings forecasting

22. Sinking funds are commonly viewed as protecting the _______ of the bond. a. Issuer b. Underwriter C. Holder d. Dealer

C. Holder

2. 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 optimal risky asset d. Capital allocation line

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

8. 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

22. 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

30. Yields on municipal bonds are generally lower than yields on similar corporate bonds because of differences in __________. a. Marketability b. Risk C. Taxation d. Call protection

C. Taxation

9. 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 interest rates 50 basis points.

7. 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 three covariances

30. TIPS are an example of _______________. A. Eurobonds B. convertible bonds C. indexed bonds D. catastrophe bonds

C. indexed bonds

15. 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

24. A convertible bond has a par value of $1,000 but its current market price is $975. The current price of the issuing company's stock is $28 and the conversion ratio is 35 shares. The bond's market conversion value is __________. a. $1,000 b. $880 c. $933 D. $980

D. $980

12. 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. like 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

D. I, II and III

9. 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

D. If a market is strong form efficient it is also semi- and weak form efficient

6. 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 one D. Seem to regress toward one over time

D. Seem to regress toward one over time

11. 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

D. Stock prices follow recurring patterns

23. A debenture is __________. a. Secured by other securities held by the firm b. Secured by equipment owned by the firm c. Secured by property owned by the firm D. Unsecured

D. Unsecured

7. In a well diversified portfolio, __________ risk is negligible. a. Nondiversifiable b. Market c. Systematic D. Unsystematic

D. Unsystematic

9. In a well diversified portfolio, __________ risk is negligible. a. Nondiversifiable b. Market c. Systematic D. Unsystematic

D. Unsystematic

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

10. 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

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

D. behavioral finance

12. 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

1. The US is a net importer of _____________ and a net exporter of ____________ A. gasoline, gasoline B. crude oil, crude oil, C. gasoline, crude oil D. crude oil, gasoline

D. crude oil, gasoline

14. The invoice price of a bond is the ______. a. stated or flat price in a quote sheet plus accrued interest b. stated or flat price in a quote sheet minus accrued interest c. bid price d. average of the bid and ask price

a. stated or flat price in a quote sheet plus accrued interest

8. 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

a. there were no predictable patterns in stock prices

18. Suppose that the market risk premium and the risk-free rate are expected to be 12% and 4%, respectively. If a stock has a beta of 0.80, what is its expected return on the stock? a. 10.4% b. 13.6% c. 16.0% d. 16.8%

b. 13.6%

4. Which of the following statistics cannot be negative? a. Covariance b. Variance c. E[r] d. Correlation coefficient

b. Variance

13. 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

b. finding repeating trends and patterns in prices

11. 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

b. index

5. Diversification is most effective when security returns are _________. a. high b. negatively correlated c. positively correlated d. uncorrelated

b. negatively correlated

3. 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

15. A portfolio is composed of 40% of asset A and 60% of asset B. The beta of asset A is 1.2 and the beta of asset B is 1.5. The beta of the portfolio is: a. 1.35 b. 1.32 c. 1.38 d. None of the above

c. 1.38

16. Consider a 3-year bond with annual payments. YTM = y = 0.06, face value = $1000 and an annual coupon rate is 0.06. The duration of the bond is: a. 3 years. b. 2.76 years c. 2.83 years d. none of the above

c. 2.83 years

10. The primary objective of fundamental analysis is to identify __________. a. well run firms b. poorly run firms c. mispriced stocks d. high P/E stocks

c. mispriced stocks

20. 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

12. Models of financial markets that emphasize psychological factors affecting investor behavior are called _______. a. data mining b. fundamental analysis c. charting d. behavioral finance

d. behavioral finance

6. 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

9. 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

d. short‐run, long run

7. In a well‐diversified portfolio, __________ risk is negligible. a. nondiversifiable b. market c. systematic d. unsystematic

d. unsystematic

2. If there is high unexpected inflation, an investor should not be in a. Bonds b. Fixed Income securities c. Commodities d. Stocks e. a and b.

e. a and b.

1. Tax policy affects stock prices. The basic argument(s ) used in formulating tax policy are (is): a. Equity of fairness b. The constitution c. Economic growth d. a. and b. e. a. and c.

e. a. and c.

9. 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, 1.0 and 0.8 respectively. What is your portfolio beta? A. 1.048 b. 1.033 c. 1.000 d. 1.037

A. 1.048

13. If the coupon rate on a bond is 4.50% and the bond is selling at a premium, which of the following is the most likely yield to maturity on the bond? A. 4.30% B. 4.50% C. 5.20% D. 5.50%

A. 4.30%

16. 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

A. there were no predictable patterns in stock prices

8. The standard deviation of portfolio returns is a measure of ___________. A. total risk B. relative systematic risk C. relative non-systematic risk D. relative business risk

A. total risk

18. Bonds issued in the U.S. are __________ and most bonds issued overseas are ___________. A. bearer bonds; registered bonds B. registered bonds; bearer bonds C. straight bonds; convertible bonds D. puttable bonds; callable

B. registered bonds; bearer bonds

4. A portfolio of stocks fluctuates when the treasury yields change. Since this risk can not be eliminated through diversification, it is called __________. A. firm specific risk B. systematic risk C. unique risk D. none of the above

B. systematic risk

5. A portfolio of stocks fluctuates when the treasury yields change. Since this risk can not be eliminated through diversification, it is called __________. A. firm specific risk B. systematic risk C. unique risk D. none of the above

B. systematic risk

20. 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

B. technical analysis

6. What is the most likely correlation coefficient between a stock index mutual fund and the S&P 500? A. -1.0 B. 0.0 C. 1.0 D. 0.5

C. 1.0

10. 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

C. momentum effect

24. Sinking funds are commonly viewed as protecting the _______ of the bond. A. issuer B. underwriter C. holder D. dealer

C. holder

7. 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 5.0%? A. 5.0% B. 9.0% C. 13.0% D. 14.0%

D. 14.0%

4. 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%

7. 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%

14. You would typically find all but which one of the following in a bond contract? A. A dividend restriction clause B. A sinking fund clause C. A requirement to subordinate any new debt issued D. A price-earnings ratio

D. A price-earnings ratio

1. Risk that can be eliminated through diversification is called ______ risk. a. Unique b. Firm-specific c. Diversifiable D. All of the above

D. All of the above

6. 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

3. 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

20. A debenture is __________. a. Secured by other securities held by the firm b. Secured by equipment owned by the firm c. Secured by property owned by the firm D. Unsecured

D. Unsecured

18. 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

D. short-run, long run

14. 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 non-systematic risk as a key factor in the risk-return relationship C. that the APT requires an even larger number of unrealistic assumptions than 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

2. Libya currently supplies about what percent of the world's crude oil a) 2% b) 5% c) 10% d) 15%

a) 2%

19. 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

1. The name of the current Libyan dictator is a) Benjamin Netanyahu b) Muammar Gaddafi c) Bashar al-Assad d) Mahmoud Ahmadineajad

b) Muammar Gaddafi

17. A coupon bond which pays interest semi-annually has a par value of $1,000, matures in 2 years, and has a yield to maturity of 8%. If the coupon rate is 10%, the intrinsic value of the bond today will be ________. a. $768 b. $965 c. $1,000 d. $1,036

d. $1,036 *******