Fin 310 Midterm

The 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

C. all information, including inside information

__________ is the return on a stock beyond what would be predicted from market movements alone. A. A normal return B. A subliminal return C. An abnormal return D. None of these options

C. An abnormal return

Insiders are able to profitably trade and earn abnormal returns prior to the announcement of positive news. This is a violation of which form of efficiency? A. Weak-form efficiency B. Semistrong-form efficiency C. Strong-form efficiency D. Technical analysis

C. Strong-form efficiency

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

Advantages of investment companies to investors include all but which one of the following? a. Record keeping and administration b. Low-cost diversification c. Professional management d. Guaranteed rates of return

d. Guaranteed rates of return

Which of the following is not a characteristic of a money market instrument? A) low risk B) maturity greater than 1 year C) marketability D) liquidity

B) maturity greater than 1 year

Security A has an expected rate of return of 12% and a beta of 1.1. The market expected rate of return is 8%, and the risk-free rate is 5%. The alpha of the stock is _________. A. -1.7% B. 3.7% C. 5.5% D. 8.7%

B. 3.7% a=.12-(.05+1.1(0.08-0.05))=0.037

________ assets generate net income to the economy, and ________ assets define allocation of income among investors. A) Real, real B) Financial, financial C) Real, financial D) Financial, real

C) Real, financial

Proponents of the EMH think technical analysts __________. A. should focus on relative strength B. should focus on resistance levels C. should focus on support levels D. are wasting their time

D. are wasting their time

Investors require a risk premium as compensation for bearing ______________. A. unsystematic risk B. alpha risk C. residual risk D. systematic risk

D. systematic risk

Random price movements indicate ________. A. irrational markets B. that prices cannot equal fundamental values C. that technical analysis to uncover trends can be quite useful D. that markets are functioning efficiently

D. that markets are functioning efficiently

In a well-diversified portfolio, __________ risk is negligible. A. nondiversifiable B. market C. systematic D. unsystematic

D. unsystematic

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

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% E[rs] = 6% + [18% - 6%](1.3) = 21.6%

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

Consider the CAPM. The risk-free rate is 5%, and the expected return on the market is 15%. What is the beta on a stock with an expected return of 17%? A..5 B..7 C.1 D. 1.2

D.1.2 17% = 5% + [15% - 5%]βs; βs = 1.2

You short-sell 200 shares of Rock Creek Fly Fishing Co., now selling for $50 per share. If you want to limit your loss to $2,500, you should place a stop-buy order at ____. a. $37.50 b. $62.50 c. $56.25 d. $59.75

b. $62.50 Amount received from short sale = 200 × $50 = $10,000Loss = $2,500 = 200P - 10,000$12,500 = 200P, so P = $62.50

Assume that you have just purchased some shares in an investment company reporting $500 million in assets, $50 million in liabilities, and 50 million shares outstanding. What is the net asset value (NAV) of these shares? a. $12 b. $9 c. $10 d. $1

b. $9 NAV = ($500 − $50)/50 = $9

An investment earns 10% the first year, earns 15% the second year, and loses 12% the third year. The total compound return over the 3 years was ______. a. 41.68% b. 11.32% c. 3.64% d. 13%

b. 11.32% (1.10)(1.15)(1 - .12) - 1 = 11.32%

Mutual funds that hold both equities and fixed-income securities in relatively stable proportions are called ____________________. a. income funds b. balanced funds c. asset allocation funds d. index funds

b. balanced funds

The process of polling potential investors regarding their interest in a forthcoming initial public offering (IPO) is called ________. a. interest building b. book building c. market analysis d. customer identification

b. book building

An order to buy or sell a security at the current price is a ______________. a. limit order b. market order c. stop-loss order d. stop-buy order

b. market order

Assume you purchased 500 shares of XYZ common stock on margin at $40 per share from your broker. If the initial margin is 60%, the amount you borrowed from the broker is _________. a. $20,000 b. $12,000 c. $8,000 d. $15,000

c. $8,000

The price of a stock is $55 at the beginning of the year and $50 at the end of the year. If the stock paid a $3 dividend and inflation was 3%, what is the real holding-period return for the year? a. -3.64% b. -6.36% c. -6.44% d. -11.74%

c. -6.44% Nominal return on stock: (50 + 3)/55 - 1 = −3.64%Real return: (1 + R) = (1 + r)(1 + i)1 + r = (1 - .0364)/(1.03) = .935R = .935 - 1 = -.0644

A portfolio with a 25% standard deviation generated a return of 15% last year when T-bills were paying 4.5%. This portfolio had a Sharpe ratio of ____. a. .22 b. .60 c. .42 d. .25

c. .42

An investor invests 70% of her wealth in a risky asset with an expected rate of return of 15% and a variance of 5%, and she puts 30% in a Treasury bill that pays 5%. Her portfolio's expected rate of return and standard deviation are __________ and __________ respectively. a. 10%; 6.7% b. 12%; 22.4% c. 12%; 15.7% d. 10%; 35%

c. 12%; 15.7%

Under SEC rules, the managers of certain funds are allowed to deduct charges for advertising, brokerage commissions, and other sales expenses directly from the fund assets rather than billing investors. These fees are known as ____________. a. direct operating expenses b. back-end loads c. 12b-1 charges d. front-end loads

c. 12b-1 charges

An investor buys $16,000 worth of a stock priced at $20 per share using 60% initial margin. The broker charges 8% on the margin loan and requires a 35% maintenance margin. The stock pays a $.50-per-share dividend in 1 year, and then the stock is sold at $23 per share. What was the investor's rate of return? a. 17.5% b. 19.67% c. 23.83% d. 25.75%

c. 23.83%

You purchased a share of stock for $29. One year later you received $2.25 as dividend and sold the share for $28. Your holding-period return was _________. a. -3.57% b. -3.45% c. 4.31% d. 8.03%

c. 4.31%

__________ funds stand ready to redeem or issue shares at their net asset value. a. Closed-end b. Index c. Open-end d. Hedge

c. Open-end

You have calculated the historical dollar-weighted return, annual geometric average return, and annual arithmetic average return. If you desire to forecast performance for next year, the best forecast will be given by the ________. a. dollar-weighted return b. geometric average return c. arithmetic average return d. index return

c. arithmetic average return

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

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. a. stop-buy; stop-loss b. market; limit c. stop-loss; stop-buy d. limit; market

c. stop-loss; stop-buy

Initial public offerings (IPOs) are usually ___________ relative to the levels at which their prices stabilize after they begin trading in the secondary market. a. overpriced b. correctly priced c. underpriced d. mispriced, but without any particular bias

c. underpriced

Higher portfolio turnover: I. Results in greater tax liability for investors II. Results in greater trading costs for the fund, which investors have to pay for III. Is a characteristic of asset allocation funds a. I only b. II only c. I and II only d. I, II, and III

d. I, II, and III

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 a. I and II only b. II and III only c. I and III only d. I, II, and III

d. I, II, and III

Which one of the following would be considered a risk-free asset in real terms as opposed to nominal? a. Money market fund b. U.S. T-bill c. Short-term corporate bonds d. U.S. T-bill whose return was indexed to inflation

d. U.S. T-bill whose return was indexed to inflation

The SML is valid for _______________, and the CML is valid for ______________. A. only individual assets; well-diversified portfolios only B. only well-diversified portfolios; only individual assets C. both well-diversified portfolios and individual assets; both well-diversified portfolios and individual assets D. both well-diversified portfolios and individual assets; well-diversified portfolios only

d. both well-diversified portfolios and individual assets; well-diversified portfolios only

According to multiple studies by Ritter, 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

Specialized-sector funds concentrate their investments in _________________. a. bonds of a particular maturity b. geographic segments of the real estate market c. government securities d. securities issued by firms in a particular industry

d. securities issued by firms in a particular industry

You purchased XYZ stock at $50 per share. The stock is currently selling at $65. Your gains could be protected by placing a _________. a. limit buy order b. limit sell order c. market order d. stop-loss order

d. stop-loss order

Consider the following limit order book of a specialist. The last trade in the stock occurred at a price of $40. If a market buy order for 100 shares comes in, at what price will it be filled? ***SEE IMAGE Q3-Securities and Mutual Funds*** a. $39.75 b. $40.25 c. $40.375 d. $40.25 or less

*d. $40.25 or less In this case the specialist would have the option of matching the buy order with the lowest limit sell order ($40.25) or setting an ask price lower than $40.25 ($40 for example) and trading the order from her own stock.

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? a. 12.8% b. 11% c. 8.9% d. 9.2%

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

Your investment has a 40% chance of earning a 15% rate of return, a 50% chance of earning a 10% rate of return, and a 10% chance of losing 3%. What is the standard deviation of this investment? a. 5.14% b. 7.59% c. 9.29% d. 8.43%

*a. 5.14%

You have an EAR of 9%. The equivalent APR with continuous compounding is _____. a. 8.47% b. 8.62% c. 8.88% d. 9.42%

*b. 8.62% LN[1 + .09] = 8.62%

The geometric average of -12%, 20%, and 25% is _________. a. 8.42% b. 11% c. 9.7% d. 18.88%

*c. 9.7% [(1 + −.12)(1 + .20)(1 + .25)]1/3 - 1 = 9.70%

Currently, the Dow Jones Industrial Average is computed by ________. A) adding the prices of 30 large "blue-chip" stocks and dividing by a divisor adjusted for stock splits and large stock dividends B) adding the prices of 30 large "blue-chip" stocks and dividing by 30 C) measuring the current total market value of the 30 stocks in the index relative to the total value on the previous day D) calculating the total market value of the 30 firms in the index and dividing by 30

A) adding the prices of 30 large "blue-chip" stocks and dividing by a divisor adjusted for stock splits and large stock dividends

According to the Flow of Funds Accounts of the United States, the largest single asset of U.S. households is ________. A) real estate B) mutual fund shares C) pension reserves D) corporate equity

A) real estate

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

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

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 covariance between the security and market returns divided by the variance of the market's returns

What is the alpha of a portfolio with a beta of 2 and actual return of 15%? A. 0% B. 13% C. 15% D. 17%

A. 0% CAPM E(ri) = 5% + 2(10% - 5%) = 15%; Alpha = Actual return - Expected return = 15% - 15% = 0%A portfolio with a return of 15% and a beta of 2 lies on the SML and therefore has an alpha of zero.

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, and .8, respectively. What is your portfolio beta? A. 1.048 B. 1.033 C. 1 D. 1.037

A. 1.048 (20/50)(1.3) +(12/50)(1.0) + (18/50)(0.8)=1.048

Two investment advisers are comparing performance. Adviser A averaged a 20% return with a portfolio beta of 1.5, and adviser B averaged a 15% return with a portfolio beta of 1.2. If the T-bill rate was 5% and the market return during the period was 13%, which adviser was the better stock picker? A. Advisor A was better because he generated a larger alpha. B. Advisor B was better because she generated a larger alpha. C. Advisor A was better because he generated a higher return. D. Advisor B was better because she achieved a good return with a lower beta.

A. Advisor A was better because he generated a larger alpha. Required return A = 5% + (13% - 5%)(1.5) = 17%Required return B = 5% + (13% - 5%)(1.2) = 14.6%αA = Actual return A - Required return A = 20% - 17% = 3%αB = Actual return B - Required return B = 15% - 14.6% = .4%

Value stocks usually exhibit ______ price-to-book ratios and ______ price-to-earnings ratios. A. low; low B. low; high C. high; low D. high; high

A. low; low

In a single-factor market model the beta of a stock ________. A. measures the stock's contribution to the standard deviation of the market portfolio B. measures the stock's unsystematic risk C. changes with the variance of the residuals D. measures the stock's contribution to the standard deviation of the stock

A. measures the stock's contribution to the standard deviation of the market portfolio

Which of the following is not a true statement regarding municipal bonds? A) The interest income from a municipal bond is exempt from state and local taxation in the issuing state. B) A municipal bond is a debt obligation issued by the federal government. C) A municipal bond is a debt obligation issued by state or local governments. D) The interest income from a municipal bond is exempt from federal income taxation.

B) A municipal bond is a debt obligation issued by the federal government.

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

B) Treasury bonds that protect investors from inflation

The systemic risk that led to the financial crisis of 2008 was increased by ________. A) collateralized debt obligations B) all of the options C) credit default swaps D) subprime mortgages

B) all of the options

In an efficient market and for an investor who 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. No need for a portfolio manager

B. Diversification

The semistrong 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

In the context of the capital asset pricing model, the systematic measure of risk is captured by _________. A. unique risk B. beta C. the standard deviation of returns D. the variance of returns

B. beta

When the market risk premium rises, stock prices will ________. A. rise B. fall C. recover D. have excess volatility

B. fall

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

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 these answers

B. overpriced In equilibrium, E(rX) = 5% + 1.15(15% - 5%) = 16.5%.

________ represents an ownership share in a corporation. A) Preferred stock B) A call option C) Common stock D) A fixed-income security

C) Common stock

10) Which of the following are true statements about T-bills? I. T-bills typically sell in denominations of $10,000. II. Income earned on T-bills is exempt from all federal taxes. III. Income earned on T-bills is exempt from state and local taxes. A) I and II only B) I, II, and III C) I and III only D) I only

C) I and III only

Money market securities are characterized by: I. Maturity less than 1 year II. Safety of the principal investment III. Low rates of return A) I and II only B) I only C) I, II, and III D) I and III only

C) I, II, and III

The Fama and French evidence that high book-to-market firms outperform low book-to-market firms even after adjusting for beta means that _________. A. high book-to-market firms are underpriced or the book-to-market ratio is a proxy for a unique risk factor B. low book-to-market firms are underpriced or the book-to-market ratio is a proxy for a systematic risk factor C. either high book-to-market firms are underpriced or the book-to-market ratio is a proxy for a systematic risk factor D. high book-to-market firms have more post-earnings drift

C. either high book-to-market firms are underpriced or the book-to-market ratio is a proxy for a systematic risk factor

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

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

The term random walk is used in investments to refer to ______________. A. stock price changes that are random but predictable B. stock prices that respond slowly to both old and new information C. stock price changes that are random and unpredictable D. stock prices changes that follow the pattern of past price changes

C. stock price changes that are random and unpredictable

Consider two stocks, A and B. Stock A has an expected return of 10% and a beta of 1.2. Stock B has an expected return of 14% and a beta of 1.8. The expected market rate of return is 9% and the risk-free rate is 5%. Security __________ would be considered the better buy because _________. A. A; it offers an expected excess return of .2% B. A; it offers an expected excess return of 2.2% C. B; it offers an expected excess return of 1.8% D. B; it offers an expected return of 2.4%

C. B; it offers an expected excess return of 1.8% a(a)=.10-(.05+1.2(.09-.05))=.002 a a(b)=.14-(.05+1.8(.09-.05))=.018

Evidence supporting semistrong-form market efficiency suggests that investors should _________________________. A. rely on technical analysis to select securities B. rely on fundamental analysis to select securities C. use a passive trading strategy such as purchasing an index fund or an ETF D. select securities by throwing darts at the financial pages of the newspaper

C. use a passive trading strategy such as purchasing an index fund or an ETF

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

D) allow most participants to routinely earn high returns with low risk

Real assets in the economy include all but which one of the following? A) buildings B) land C) consumer durables D) common stock

D) common stock

In a ________ index, changes in the value of the stock with the greatest market value will move the index value the most, everything else equal. A) equally weighted index B) price-weighted index C) bond price index D) value-weighted index

D) value-weighted index

In a simple CAPM world which of the following statements is (are) correct? I. All investors will choose to hold the market portfolio, which includes all risky assets in the world. II. Investors' complete portfolio will vary depending on their risk aversion. III. The return per unit of risk will be identical for all individual assets.IV. The market portfolio will be on the efficient frontier, and it will be the optimal risky portfolio. A. I, II, and III only B. II, III, and IV only C. I, III, and IV only D. I, II, III, and IV

D. I, II, III, and IV

Which of the following statements is (are) correct? A. If a market is weak-form efficient, it is also semistrong- and strong-form efficient. B. If a market is semistrong-form efficient, it is also strong-form efficient. C. If a market is strong-form efficient, it is also semistrong- but not weak-form efficient. D. If a market is strong-form efficient, it is also semistrong- and weak-form efficient.

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

The market portfolio has a beta of _________. A. -1 B. 0 C. .5 D. 1

D. 1

Which of the following contradicts the proposition that the stock market is weakly efficient? A. Over 25% of mutual funds outperform the market on average. B. Insiders earn abnormal trading profits. C. Every January, the stock market earns above-normal returns. D. Applications of technical trading rules fail to earn abnormal returns.

Every January, the stock market earns above-normal returns

Even if the markets are efficient, professional portfolio management is still important because it provides investors with: I. Low-cost diversification II. A portfolio with a specified risk level III. Better risk-adjusted returns than an index

I and II only

Among the important characteristics of market efficiency is (are) that:I. There are no arbitrage opportunities.II. Security prices react quickly to new information.III. Active trading strategies will not consistently outperform passive strategies.

I, II, and III

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? a. 5.48% b. 8.74% c. 9% d. 12%

b. 8.74% Real rate = (1.12/1.03) - 1 = 8.74%

Your investment has a 40% chance of earning a 15% rate of return, a 50% chance of earning a 10% rate of return, and a 10% chance of losing 3%. What is the standard deviation of this investment? a. 5.14% b. 7.59% c. 9.29% d. 8.43%

a. 5.14%

_____ is an example of an exchange-traded fund. a. An SPDR or spider b. A samurai c. A Vanguard d. An open-end fund

a. An SPDR or spider

Assume that a company announces unexpectedly high earnings in a particular quarter. In an efficient market one might expect _____________. A. an abnormal price change immediately after the announcement B. an abnormal price increase before the announcement C. an abnormal price decrease after the announcement D. no abnormal price change before or after the announcement

an abnormal price change immediately after the announcement

If you invested $1,000 at the beginning of 2008, your investment at the end of 2011 would be worth ___________. a. $2,176.60 b. $1,785.56 c. $1,645.53 d. $1,247.87

b. $1,785.56 $1,000(1.3523)(1.1867)(1 + -.0987)(1.2345) = $1,785.56

You are considering investing in one of several mutual funds. All the funds under consideration have various combinations of front-end and back-end loads and/or 12b-1 fees. The longer you plan on remaining in the fund you choose, the more likely you will prefer a fund with a __________ rather than a __________, everything else equal. a. 12b-1 fee; front-end load b. front-end load; 12b-1 fee c. back-end load; front-end load d. 12b-1 fee; back-end load

b. front-end load; 12b-1 fee

The buyer of a new home is quoted a mortgage rate of .5% per month. What is the APR on the loan? a. .50% b. 5% c. 6% d. 6.5%

c. 6% APR = .5% × 12 = 6%

You short-sell 200 shares of Tuckerton Trading Co., now selling for $50 per share. What is your maximum possible loss? a. $50 b. $150 c. $10,000 d. Unlimited

d. Unlimited

The semistrong form of the efficient market hypothesis implies that ____________ generate abnormal returns and ____________ generate abnormal returns. A. technical analysis cannot; fundamental analysis can B. technical analysis can; fundamental analysis can C. technical analysis can; fundamental analysis cannot D. technical analysis cannot; fundamental analysis cannot

technical analysis cannot; fundamental analysis cannot