Investments test 2 Conceptuals
An increase in a bond's yield to maturity results in a price decline that is ________ the price increase resulting from a decrease in yield of equal magnitude. A. greater than B. equivalent to C. smaller than D. The answer is indeterminate
C
An example of a non-investment grade bond would have a rating from S&P of: A. AAA B. AA C. BBB D. BB
D
Convertible debt is often issued: A. after firms have called in previously issued bonds B. when the dirty price of a bond is greater than the clean price C. when firms have a AA rating or lower from S&P D. by riskier firms
D
__________, the Capital Market Line can be downward sloping. a. Ex post b. When investors are risk‐lovers c. When the SML is upward sloping d. When the risk premium for the market is very high
A
Moving averages are ______ indicators. a. sentiment b. flow of funds c. trend d. fundamental
C
The constant growth dividend model uses the: A. historical growth rate in dividends. B. historical growth rate in earnings. C. estimated growth rate in dividends. D. estimated growth rate in earnings.
C
Assuming constant, simple growth of earnings, which valuation model(s) would produce the same intrinsic value estimate as the constant growth dividend discount model? A. 2-stage growth DDM B. 3-stage growth DDM C. Present value of growth opportunities model D. All these models
D
Which one of the following focuses more on past price movements of a firm's stock than on the underlying determinants of its future profitability? a. Credit analysts b. Fundamental analysts c. Systems analysts d. Technical analysts
D
The possibility of arbitrage arises when ____________. a.there is no consensus among investors regarding the future direction of the market, and thus trades are made arbitrarily b. mis-pricing among securities creates opportunities for riskless profits c. two identically risky securities carry the same expected returns d. investors do not diversify
B
The price/sales ratio indicates: A. the amount of risk in the firm's operations. B. what the market is willing to pay for a firm's revenues. C. the price advantage a company has for its brand names. D. what the analysts see as the breakup value of the firm.
B
The ratio of the average yield on 10 top-rated corporate bonds to the average yield on 10 intermediate-grade bonds is called the __________. a. bond price index b. confidence index c. relative strength index d. trin ratio
B
What is NOT one of the contractually stated terms of a debenture? A. Par value B. Yield to maturity C. Maturity date D. Coupon rate
B
Which of the following is NOT true when using the PVGO valuation method or model? A. When growth is greater than or equal to the discount rate, the result is incalculable or not meaningful B. When ROE is less than the discount rate, this results in positive growth opportunities value C. When ROE is equal to the discount rate, the impact of retained earnings on firm value is equal to zero D. A firm which pays out all earnings as dividends will have zero growth in future earnings
B
Which of the following is a market anomaly? a. A relationship between money supply growth and stock prices. b. A relationship between P/E ratios and subsequent stock returns. c. Independence of stock price changes. d. Adjustment of stock prices due to accounting changes.
B
Which of the following is an assumption of the CMT a. Single investors can affect the market by their buying and selling decisions. b. There is no inflation. c. Investors prefer capital gains over dividends. d. Different investors have different probability distributions..
B
Which of the following statements is true regarding the efficiency of foreign securities and foreign markets? a. Foreign securities tend to be more analyzed than U.S. securities. b. Foreign markets tend to be less efficient than U.S. markets. c. Foreign markets often lag behind U.S. markets as much as 6 months. d. Foreign markets tend to be as efficient as U.S. markets.
B
Which of the following variables do Fama and French claim do a better job explaining stock returns than beta? I. Book to market ratio II. Unexpected change in industrial production III. Firm size a. I only b. I and II only c. I and III only d. I, II and III
B
__________ is the amount of money per common share that could be realized by breaking up the firm, selling its assets, repaying its debt, and distributing the remainder to shareholders. A. Book value per share B. Liquidation value per share C. Market value per share D. Tobin's Q
B
A _________ is a value above which it is difficult for the market to rise. a. book value b. resistance level c. support level d. confidence level
B
According to behavioral finance, markets are always a. informationally efficient. b. informationally inefficient. c. weak-form efficient. d. semi-strong form efficient.
B
All of the following are interchangeable terms except for: A. discount rate B. coupon rate C. required rate of return D. capitalization rate
B
All of the following are interchangeable terms except for: A. discount rate B. coupon rate C. required rate of return D. capitalization rate
B
The evidence obtained on weak-form efficiency casts serious doubts on fundamental analysis. a. TRUE b. FALSE
B
According to the semi-strong form of the EMH, investors who invest in a stock after a highly positive announcement concerning the stock can expect to earn a. normal return because the stock will be fairly priced when purchased. b. extraordinary return because the new information will not affect the price until later. c. extraordinary loss because insiders possess non-public information. d. zero return because the next price is expected to be the same as the last price.
A
Bonds trade on an accrual interest basis. This means an investor: A. can sell a bond at any time without losing the interest that has accrued B. can buy a bond at any time and gain the interest accrued from the time of the last payment C. can sell a bond at any time and retain the interest portion of the bond D. buy a bond at any time and receive an immediate interest check
A
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
Convertible bonds give their investors the right to convert the bond into common stock whenever they choose. A. TRUE B. FALSE
A
Duration facilitates the comparison of bonds with differing ___________. A. maturities B. conversion ratios C. default risk D. yields to maturity
A
If a certain stock has a beta greater than 1.0, it means that a. the stock's return is more volatile than that of the market portfolio. b. an investor can eliminate the risk by combining it with another stock that has a negative beta. c. an investor will earn a higher return on his stock than that on the market portfolio. d. the stock is less risky than the market portfolio.
A
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
In a semi-strong form efficient market, investors are not able to use publicly available financial statement data to earn abnormal returns. a. TRUE b. FALSE
A
Investors gravitate towards the latest hot stock even though it has never paid a dividend. Even though net income is projected to fall over the current and next several years, the price of the stock continues to rise. What behavioral concept may explain this price pattern? a. Overconfidence b. Loss aversion c. Mental accounting d. Calendar bias
A
Relative valuation measures commonly used by market participants today include: A. P/E ratio, Price/Book Value, and Sales/Price ratios B. Earnings per Share ratio C. Discounted Cash Flow D. Residual Income Valuation
A
The beta of a security is equal to _________. a. the covariance between the security and market returns divided by the variance of the market's returns b.the covariance between the security and market returns divided by the standard deviation of the market's returns c. the variance of the security's returns divided by the covariance between the security and market returns d. the variance of the security's returns divided by the variance of the market's returns
A
The efficiency of markets is driven largely by the vast number of participants and their quick and Easy access to information. a. TRUE b. FALSE
A
The estimated value of common stock is the: A. present value of all expected cash flows. B. present value of all dividend payments. C. future value of all dividend payments. D. present value of all capital gains.
A
The trin statistic is a ______ indicator. a. sentiment b. flow of funds c. market structure d. fundamental
A
There are many ways to measure Earnings Per Share. A. TRUE B. FALSE
A
Under the weak form of the EMH, technical analysis relying on the history of price information, e.g. charting, is of no value in trying to outperform the future market. a. TRUE b. FALSE
A
What is the result of the widespread usage of the Internet with regards to efficient markets? a. It makes information cheaper and more accessible thus making markets more efficient. b. It is subject to new regulation thus marking markets less efficient. c. It increases the volatility of security prices thus making markets less efficient. d. It increases competition among brokers thus making markets more efficient.
A
Which of the following bonds would you expect to have the largest change in price after a decrease in rates? A. 10 year AAA bond with 5% coupon and 5% YTM B. 10 year BBB bond with 8% coupon and 9% YTM C. 10 year BB bond with 7% coupon and 10% YTM D. 10 year CCC bond with zero coupons and 13% YT
A
Which of the following is NOT a test of semi-strong form efficiency? a. Insider transactions b. Stock splits c. Accounting changes d. Dividend announcements
A
An important assumption underlying the use of technical analysis techniques is that ___________________. a. security prices adjust rapidly to new information b. security prices adjust gradually to new information c. security dealers will provide enough liquidity to keep price changes relatively small d. all investors have immediate and costless access to information
B
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 all her friends. Both Bill and Shelly's stocks fall 15%. According to regret theory _________________________________________. a. Bill will have more regret over the loss than Shelly b. Shelly will have more regret over the loss than Bill c. Bill and Shelly will have equal regret over their losses d. Bill and Shelly's risk aversion will increase in the future
B
Bonds called in are likely to be: A. bonds already in default B. reissued as new bonds with a lower interest rate C. reissued as new bonds with a D. higher interest rate junk bonds
B
Convexity is used to correct the approximate percentage change in bond value, calculated using modified duration. A. TRUE B. FALSE
B
Duration is useful in assessing a bond's _________. A. changes in credit rating B. sensitivity to changes in interest rates C. likelihood of default D. increase in price after an increase in expected yield E. time to pay investors the par value
B
For a zero coupon bond, duration will always be less than the time to maturity. A. TRUE B. FALSE
B
I. highly significant in predicting future stock returns II. relatively useless in predicting future stock returns III. a good predictor of firm's specific risk a. I only b. II only c. I and III only d. I, II and III
B
If all investors use the constant growth dividend model to value the same stock, they will all arrive at the same estimate of value. A. TRUE B. FALSE
B
Most bonds are: A. Secured B. Backed by the full-faith and credit of the issuer C. Collateralized by mortgages D. High-yield E. Zero coupon
B
Securities with betas greater than 1.0 should have: a. expected returns higher than the market. b. required returns higher than the market return. c. required returns lower than the market return. d. no systematic risk.
B
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
The Capital Asset Pricing Model: a. has serious flaws because of its complexity. b. measures relevant risk of a security and shows the relationship between risk and expected return. c. was developed by Markowitz in the 1930s. d. discounts almost all of the Markowitz portfolio theory.
B
The arbitrage pricing theory was developed by _________. a. Kenneth French b. Stephen Ross c. William Sharpe d. Eugene Fama e. Mike Jensen
B
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
An efficient market is defined as one in which: a. all participants have the same opportunity to make the same returns. b. all participants have the same legal rights and transactions costs. c. securities prices quickly and fully reflect all available information. d. securities prices are completely in line with the intrinsic value.
C
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
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
For the EMH, all "known" information means: a. past information only. b. past and current information. c. past, current, and inferred information. d. past, current, inferred and relative information.
C
If a market is inefficient, as new information is received about a security: a. nothing will happen. b. the stock price will fall at first and then later rise. c. there will be a lag in the adjustment of the stock price d. there will be negative demand for the stock.
C
If investors are too slow to update their beliefs about a stock's future performance when new evidence arises they are exhibiting _______. a. representativeness bias b. framing error c. conservatism d. memory bias
C
Immunizing a bond portfolio from interest rate risk is based on the concept of: A. buy and hold B. minimizing default risk C. duration D. convexity E. prices and yields changing in opposite directions
C
Inflation-indexed Treasury securities are commonly called ____. A. PIKs B. CARs C. TIPS D. STRIPS E. Callable
C
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
The capital asset pricing model was developed by _________. a. Kenneth French b. Stephen Ross c. William Sharpe d. Eugene Fama e. Mike Jensen
C
The constant growth dividend discount model (DDM) can be used only when the ___________. A. growth rate is less than or equal to the required return B. growth rate is greater than or C. equal to the required return D. growth rate is less than the required return
C
The pioneer of the duration concept was _________. A. Eugene Fama B. John Herzog C. Frederick Macaulay D. Harry Markowitz E. William Sharpe
C
Weak form market efficiency a. implies that the expected return on any security is zero. b. incorporates semi-strong form efficiency. c. involves price and volume information. d. is compatible with technical analysis.
C
What will a bond be worth on the day it matures? A. $0 B. $100 C. its face value (plus remaining coupon, if applicable) D. its remaining coupon, if applicable
C
Which of the following is NOT one of the assumptions of Capital Market Theory (CMT) a. All investors have the same one‐period time horizon. b. There are no personal income taxes. c. There is no interest rate charged on borrowing. d. There are no transaction costs.
C
Which of the following is a situation in which an investor will NOT receive the promised yield to maturity? A. The investor holds the bond until maturity, and reinvests coupon payment at the original yield to maturity. B. Interest rates do not change during the life of the bond. C. The issuer calls the bond prior to original maturity. D. The realized compound yield is equal to the promised yield to maturity.
C
Which of the following is a situation in which an investor will NOT receive the promised yield to maturity? A. The investor holds the bond until maturity, and reinvests coupon payment at the original yield to maturity. B. Interest rates do not change during the life of the bond. C. The issuer calls the bond prior to original maturity. D. The realized compound yield is equal to the promised yield to maturity.
C
Which of the following statements concerning price to book value is true? A. There is an inverse relationship between price to book values and market prices. B. It is calculated as the ratio of price to the book value of assets. C. There is supporting evidence that stocks with low price to D. book values significantly outperform the market D. Price to book value ratios for many stocks range from 5.5 to 10.5.
C
Which of the following statements is true regarding investments in bonds? A. shorter maturities should return more than longer maturities, in general B. Treasury bonds should return more than corporate bonds of the same maturity C. longer maturities should return more than shorter maturities, in general D. lower-rated issues should return less than higher rated issues at maturity.
C
Which of the following statements regarding intrinsic value and market price is true? A. If intrinsic value is greater than the current market price, the stock should be avoided or, if already held, sold B. If intrinsic value is less than the current market price, the stock is undervalued. C. If intrinsic value is equal to the current market price, the stock is correctly valued. D. If the intrinsic value is greater than the current market price, the stock is considered speculative.
C
A portfolio is said to be immunized if: A. the present value of the cashflows equals the principal. B. the duration of the portfolio is equal to the term. C. the present value of the cashflows is greater than the principal. D. the duration of the portfolio is equal to the investment horizon.
D
According to the weak form of the EMH, a. successive price changes are biased. b. successive price changes are dependent. c. specified trading rules can prove to be extremely useful in generating excess returns. d. successive price changes are independent.
D
Bill, Jim and Shelly are all looking to buy the same stock that pays dividends. Bill plans on holding the stock for one year. Jim plans on holding the stock for three years. Shelly plans on holding the stock until she retires in 10 years. Which one of the following statements is correct? A. Bill will be willing to pay the most for the stock because he will get his money back in one year when he B. Jim should be willing to pay three times as much for the stock as Bill because his expected holding C. Shelly should be willing to pay the most for the stock because she will hold it the longest and hence she D. All three should be willing to pay the same amount for the stock regardless of their holding period.
D
Bond investors can avoid the risk that interest rates will rise and incur capital losses by: A. buying zero coupon bonds. B. buying Treasury bonds with maturities of one year or longer. C. holding bond funds till maturity. D. holding individual bonds till maturity.
D
Evidence concerning the "overreaction hypothesis" indicates that a. most overreactions occur within the first two days of an economic event. b. investors are consistently risk-averse value maximizers. c. the market is even more efficient than the weak-form EMH proposes. d. investors sometimes act rationally.
D
Given its time to maturity the duration of a zero coupon bond is _________. A. higher when the discount rate is higher B. higher when the discount rate is lower C. lowest when the discount rate is equal to the risk free rate D. the same regardless of the discount rate
D
The value of internet companies is based primarily on _____. A. current profits B. Tobin's q C. replacement cost D. growth opportunities
D
Treasury STRIPS are most similar to which type of corporate security? A. preferred stock B. premium bond C. high-yield bond E. zero-coupon bond
D
Value Line's 1 to 5 stock ranking system of timeliness refers to: a. absolute return potential over a 10-year period b. probability of outperforming the market over a 3 to 5 year period c. probable total return including dividend yield d. probable relative price performance within the next 12 months
D
With regard to market efficiency, identify the INCORRECT statement. a. Information is the central issue of the efficient markets concept. b. The most stringent form of market efficiency is the strong form. c.The efficient market concept does not require a perfect adjustment in price following new information. d. Tests of the usefulness of price data are semi-strong form tests.
D
Alpha is a risk-adjusted performance measure developed by: a. Kenneth French b. Stephen Ross c. William Sharpe d. Eugene Fama e. Mike Jensen
E
