Investments Ch 1-5

Describe alternative ways an investor may add positions in international equity to his or her portfolio

American Depositary Receipts, or ADRs, are certificates traded in U.S. markets thatrepresent ownership in shares of a foreign company. Investors may also purchaseshares of foreign companies on foreign exchanges. Lastly, investors may use international mutual funds to own shares indirectly

The Standard & Poor's 500 is _______ weighted index. A) an equally B) a price- C) a value- D) a share-

C; value

Which of the following is not a characteristic of a money market instrument? A) Liquidity B) Marketability C) Low risk D) Maturity greater than 1 year

D; Maturity greater than a year

TIPS are _______. A) Treasury bonds that pay no interest and are sold at a discount B) U.K. bonds that protect investors from default risk C) securities that trade on the Toronto stock index D) Treasury bonds that protect investors from inflation

D; Treasury bonds that protect investors from inflation

What portfolio management calls for holding diversified portfolios without spendingeffort or resources attempting to improve investment performance through security analysis

Passive

What is the federal funds rate?

The Federal funds rate is the rate of interest on very short-term loans among financial institutions in the U.S.A

What is the LIBOR rate?

The London Interbank Offer Rate (LIBOR)—a key reference rate in the moneymarket—is the rate at which large banks in London are willing to lend money amongthem.

An investor is in a 30% combined federal plus state tax bracket. If corporate bonds 9% yields, what yield must municipals offer for the investor to prefer them to corporate bonds?

The after-tax yield on the corporate bonds is: 0.09 x (1 - 0.30) = 0.063 or 6.3%.Therefore, the municipals must offer at least 6.3% yields

Which security would sell at a greater price? B. a 3 month expiration call option with an exercise price of $40 or a 3 month call on the same stock with an exercise price of $35

The call with the lower exercise price: The call with the exercise price of $35

Why are high-tax-bracket investors more inclined to invest in municipal bonds than are low-bracket investors?

The coupons paid by municipal bonds are exempt from federal income tax and fromstate tax in many states. Therefore, the higher the tax bracket that the investor is in, the more valuable the tax-exempt feature to the investor

Fill in the blanks with options below. Note that a blank may be filled with one or two options. Geometric average return________________. A) measures time-weighted returns and allows for compounding B) measures the performance of a fund, including the timing of investors' redemptionsand additional purchases C) is mostly used for forecasting future performances D) is required to be published by mutual funds

A, D ; measures time-weighted returns and allows for compounding, is required to be published by mutual funds,

On average, initial public offerings tend to exhibit _______ performance initially and_______ performance over the long term. A) bad; good B) bad; bad C) good; good D) good; bad

D; good; bad

What is the difference between a primary market and a secondary market

The primary market is the market where newly-issued securities are sold, whilethe secondary market is the market for trading existing securities. After firms selltheir newly-issued stocks to investors in the primary market, new investorspurchase stocks from existing investors in the secondary market.

Which security would sell at a greater price? C. a put option on a stock selling at $50 or a put option on another stock selling at $60( all other relevant features of the stocks and options are assumed to be identical)

The put option on the lower priced stock: The put on the stock selling at $50

What would you expect to happen to the spread between yields on a commercial paper and Treasury bills if the economy were to enter a steep recession

The spread will widen. Deterioration of the economy increases credit risk, that is, thelikelihood of default. Investors will demand a greater premium on debt securitiessubject to default risk

common stock

ownership shares in a publicly held corporation

Bonds (fixed income securities)

pay a specifiec cash flow over a specific period

What is the role of an underwriter

purchase securities from the issuing company and resell them

preferred stock

represents nonvoting shares in a corporation, usually paying a fixed stream of dividends (but are not contractually obligated to do so)

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.

1, 2, and 3

Consider a no-load mutual fund with $500 million in assets and 20 million shares at the start of the year and with $520 million in assets and 22 million shares at the end of the year. During the year investors have received capital gain distributions of $6 per share. Assuming that the fund carries no debt, and that the total expense ratio is 1%, what is the rate of return on the fund? NAV0 = Total assests0 / # of shares0 NAV1 = (Total assets1 * (1-Expense ratio))/ # of shares 1 Return = (NAV1-NAV0 + Distributions)/NAV0 A) 17.6% B) 18.5% C) 19.6% D) Cannot be determined

A; 17.6%

The geometric average of −10%, 15%, and 25% is __________. rgeometric = [(1+r1)*(1+r2)*...*(1+rn)]^(1/n) A) 8.96% B) 11.00% C) 9.80% D) 15.88%

A; 8.96%

Which of the following correctly describes a repurchase agreement A. The sale of security with a commitment to repurchase the same security at a specified future date and a designated Price B. The sale of a security witha commitment to repurchase the same security at a future date left unspecified at a designated price C. The purchase of a security with a commitment to purchase more of the same security at a specified future date

A; A repurchase agreement is the sale of a security with a commitment to repurchasethe same security at a specified future date and a designated price

Which of the following is not a type of managed investment company? A) Unit investment trusts B) Closed-end funds C) Open-end funds D) Hedge funds

A; Unit investment trusts

Firms raise capital by issuing stock A) in the secondary market. B) in the primary market. C) to unwary investors. D) only on days when the market is up.

A; in the secondary amrket

The two principal types of REITs are equity trusts, which _______, and mortgage trusts,which _______. A) invest directly in real estate; invest in mortgage and construction loans B) invest in mortgage and construction loans; invest directly in real estate C) use extensive leverage; distribute less than 95% of income to shareholders D) distribute less than 95% of income to shareholders; use extensive leverage

A; invest directly in real estate; invest in mortgage and construction loans

Limit order

An order that specifies price at which an investor is willing to buy or sell asecurity

Treasury bills are financial instruments issued by _______ to raise funds. A) commercial banks B) the federal government C) large corporations D) state and city governments

B); federal government

A loan for a new car has an APR of 6%, compounded per month. What is the EAR? EAR = (1+(APR/n))^n - 1 A) 0.5% B) 6.17% C) 6% D) 10.56%

B; 6.17%

Which one of the following is a true statement regarding the Dow Jones IndustrialAverage? A) It is a value-weighted average of 30 large industrial stocks. B) It is a price-weighted average of 30 large industrial stocks. C) It is a price-weighted average of 100 large stocks traded on the New York StockExchange. D) It is a value-weighted average of all industrial stocks traded on the New York StockExchange.

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

Which one of the following statements about market and limit orders is not true? A) Market orders entail greater price uncertainty than limit orders. B) Market orders entail greater time-of-execution uncertainty than limit orders. C) A collection of limit orders waiting to be executed is called a limit order book. D) A single market order, especially a large one, may be filled at multiple prices.

B; Market orders entail greater time-of-execution uncertainty than limit orders.

The process of polling potential investors regarding their interest in a forthcoming initialpublic offering (IPO) is called ______. A) interest building B) book building C) market analysis D) customer identification

B; book building

Assume that you have just purchased some shares in an investment company reporting$560 million in assets, $60 million in liabilities, and 10 million shares outstanding. What is thenet asset value (NAV) of these shares? NAV = (MArket value of assets- Liabilities)/# of shares A) $10 B) $40 C) $50 D) $60

C; $50

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

D Allow most participants to routinely earn high returns with low risk.

The cost of buying and selling a stock includes: 1. Broker's commissions 2. Dealer's bid-asked spread 3. Price concessions that investors may be forced to make A) 1 and 2 only B) 2 and 3 only C) 1 and 3 only D) 1, 2, and 3

D; 1, 2, and 3

Which of the following is (are) true about dark pools? 1. They allow anonymity in trading. 2. They often involve large blocks of stocks. 3. Trades made through them might not be reported. A) 1 and 2 only B) 2 and 3 only C) 1 and 3 only D) 1, 2, and 3

D; 1, 2, and 3

Rank the following types of markets from least integrated and organized to mostintegrated and organized: 1. Brokered markets 2. Continuous auction markets 3. Dealer markets 4. Direct search markets A) 4, 2, 1, 3 B) 1, 3, 4, 2 C) 2, 3, 4, 1 D) 4, 1, 3, 2

D; 4, 1, 3, 2

Differences between hedge funds and mutual funds are that A) hedge funds are only subject to minimal SEC regulation. B) hedge fund managers can pursue strategies not available to mutual funds, such as shortselling, heavy use of derivatives, and leverage. C) hedge funds may lock-up investors' investment for an extended period of time. D) All of the options.

D; All of the options.

Mutual funds provide the following for their shareholders. A) Diversification B) Professional management C) Record keeping and administration D) All of these choices are correct

D; All of these choices are correct

Advantages of ETFs over mutual funds include all but which one of the following? A) ETFs trade continuously, so investors can trade throughout the day. B) ETFs can be sold short or purchased on margin, unlike fund shares. C) ETF providers do not have to sell holdings to fund redemptions. D) ETF values do not diverge from NAV.

D; ETF values do not diverge from NAV.

Advantages of investment companies to investors include all but which one of thefollowing? A) Record keeping and administration B) Low-cost diversification C) Professional management D) Guaranteed rates of return

D; Guaranteed rates of return

Elias is a risk-averse investor. David is a less risk-averse investor than Elias. Therefore, A) for the same risk, David requires a higher rate of return than Elias. B) for the same return, Elias tolerates higher risk than David. C) for the same risk, Elias requires a lower rate of return than David. D) for the same return, David tolerates higher risk than Elias.

D; for the same return, David tolerates higher risk than Elias

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

Higher

How does buying on margin magnify both the upside potential and downside risk of an investment portfolio

Margin is a type of leverage that allows investors to post only a portion of thevalue of the security they purchase. As such, when the price of the security risesor falls, the gain or loss represents a much higher percentage, relative to the actualmoney invested.

Domestic Net Worth

Sum of real assets

Which security would sell at a greater price? A. a 10 year Treasury bond with a 5% coupon rate or a 10 year T- bond with a 6% coupon rate

The higher coupon bond: The 10-year T-bond with a 6% coupon

True or false. Correct if false. Market orders entail greater price uncertainty than limit orders

True

Primary market

a market in which new issues of securities are offered to the public

Equity

an ownership share in a corporation

Real Assets

assets used to produce goods and services

financial assets

claims on real assets or the income generated by them

What is the role of a prospectus

description of the firm and the security it is issuing; it can beviewed as a marketing tool for the underwriter.

Market order

directs the broker to buy or sell atwhatever price is available in the market

Real assets in the economy include:

land, buildings, consumer durables

corporate bonds

long-term debt issued by corporations

Derivative Securities

securities providing payoffs that depend on the values of other assets

A major cause of the mortgage market meltdown in 2007 and 2008 was linked to_______.

securitization

Asset allocation refers to

the allocation of the investment portfolio across broad asset classes

secondary market

the market in which previously issued securities are traded among investors

Preferred stock is like long-term debt in that _______. A) it gives the holder voting power regarding the firm's management B) it promises to pay to its holder a fixed stream of income each year C) the preferred dividend is a tax-deductible expense for the firm D) in the event of bankruptcy preferred stock has equal status with debt

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

Fill in the blanks with options below. Note that a blank may be filled with one or two options. Dollar-weighted return ________________. A) measures time-weighted returns and allows for compounding B) measures the performance of a fund, including the timing of investors' redemptionsand additional purchases C) is mostly used for forecasting future performances D) is required to be published by mutual funds

B; measures the performance of a fund, including the timing of investors' redemptionsand additional purchases

Which of the following is not a typical characteristic of common stock ownership? A) Residual claimant B) Unlimited liability C) Voting rights D) Right to any dividend paid by the corporation.

B; unlimited liability

A portfolio with a 20% standard deviation generated a return of 15% last year when T-bills were paying 5%. This portfolio had a Sharpe ratio of __________. S= [E(rp)-rf]/σp A) 0.20 B) 0.25 C) 0.50 D) 0.65

C; 0.50

The arithmetic average of −10%, 15%, and 25% is __________. r arithmetic = (r1+r2+...Rn)/n A) 0% B) -10% C) 10% D) 15%

C; 10%

The return on the risky portfolio is 15%. The risk-free rate, as well as the investor's borrowing rate, is 5%. The standard deviation of return on the risky portfolio is 20%. If the standard deviation on the complete portfolio is 30%, the expected return on the complete portfolio is __________. E(Rc)= y*E(Rp)+(1-y)*Rf σc = y*σp A) 7.5% B) 15% C) 20% D) 20.5%

C; 20%

Your investment has a 20% chance of earning a 25% rate of return, a 50% chance of earning a 5% rate of return, and a 30% chance of losing 10%. What is your expected return on this investment? E(r) = Σp(s)r(s) A) 25% B) 6% C) 4.5% D) 11%

C; 4.5%

An investor invests 80% of her wealth in a risky asset with an expected rate of return of10% and a standard deviation of 30%, and she puts 20% in a Treasury bill that pays 2%. Her portfolio's expected rate of return and standard deviation are __________ and __________respectively. E(Rc)= y*E(Rp)+(1-y)*Rf σc = y*σp A) 8.4%; 6% B) 9.2%; 15% C) 8.4%; 24% D) 9.2%; 30%

C; 8.4%, 24%

The difference between balanced funds and asset allocation funds is that _______. A) balanced funds invest in bonds while asset allocation funds do not B) asset allocation funds invest in bonds while balanced funds do not C) balanced funds have relatively stable proportions of stocks and bonds while theproportions may vary dramatically for asset allocation funds D) balanced funds make no capital gain distributions and asset allocation funds makeboth dividend and capital gain distributions

C; balanced funds have relatively stable proportions of stocks and bonds while theproportions may vary dramatically for asset allocation funds

The interest rate charged by banks with excess reserves at a Federal Reserve Bank tobanks needing overnight loans to meet reserve requirements is called the A) prime rate. B) discount rate. C) federal funds rate. D) call money rate.

C; federal funds rate

Fill in the blanks with options below. Note that a blank may be filled with one or two options. Arithmetic average return ________________. A) measures time-weighted returns and allows for compounding B) measures the performance of a fund, including the timing of investors' redemptionsand additional purchases C) is mostly used for forecasting future performances D) is required to be published by mutual funds

C; is mostly used for forecasting future performances,

Investors who want to liquidate their holdings in a closed-end fund may _______. A) sell their shares back to the fund at a discount if they wish B) sell their shares back to the fund at net asset value C) sell their shares on the open market D) sell their shares at a premium to net asset value if they wish

C; sell their shares on the open market

True or false. Correct if false. AN ECN(electric communications network) is a computer link used by security dealers primarily to advertise prices at which they are willing to buy or sell shares

False, An ECN (Electronic Communications Network) is a computer link used byall participants to advertise prices at which they are willing to buy or sell shares

True or false. Correct if false. An investor who wishes ti sell shares immediately should ask his/her broker to enter a limit order

False, An investor who wishes to sell shares immediately should ask his or herbroker to enter a market order.

True or false. Correct if false. An issue of additional shares of stock to the public by Microsoft should be called an IPO

False, An issue of additional shares of stock to the public by Microsoft would becalled an SEO (Seasoned Equity Offering)

True or false. Correct if false. Market orders entail greater time-of-execution uncertainty than limit orders

False; Market orders entail less time-of-execution uncertainty than limit orders

True or false. Correct if false. The ask price is less than the bid price

False; The ask price is greater than the bid price.

How does a municipal revenue bond differ from a general obligation bond? Which would you expect to have a lower yield to maturity?

General obligation bonds are backed by the taxing power of the local governments,while revenue bonds have proceeds attached to specific projects. A revenue bond hasfewer guarantees, it is riskier in terms of default, and, therefore, you expect it to havea higher yield.

In the event of the firm's bankruptcy, A) common shareholders are the first in line to receive their claims on the firm's assets. B) bondholders have claim to what is left from the liquidation of the firm's assets afterpaying the shareholders. C) the claims of preferred shareholders are honored before those of the commonshareholders. D) the maximum loss of shareholders can be unlimited.

C; the claims of preferred shareholders are honored before those of the common shareholders

The systemic risk that led to the financial crisis of 2008 was increased by

CDOs; collaterlized debt obligations

What are the key differences between common stock, preferred stock and corporate bonds

Common shareholders have voting rights and may receive dividends (but are not contractually obligated to do so). Preferred stock represents nonvoting shares in a corporation, usually paying a fixed stream of dividends (but are not contractually obligated to do so). While corporate bonds are long-term debt issued by corporations, the bonds typically pay semi-annual coupons (and are contractually obligated to pay them) and return the face value of the bond at maturity