FIN 401 Final

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 fund that invests in securities worldwide, including the United States, is called ______. A. an international fund B. an emerging market fund C. a global fund D. a regional fund

C. a global fund

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 type of mutual fund that primarily engages in market timing is called _______. A. a sector fund B. an index fund C. an ETF D. an asset allocation fund

D. an asset allocation fund

Mutual funds provide the following for their shareholders. A. diversification B. professional management C. record keeping and administration D. all of these options

D. all of these options

Risk that can be eliminated through diversification is called ______ risk. A. unique B. firm-specific C. diversifiable D. all of these options

D. all of these options

You sold short 300 shares of common stock at $30 per share. The initial margin is 50%. You must put up _________. A. $4,500 B. $6,000 C. $9,000 D. $10,000

A. $4,500

An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 18% and a standard deviation of return of 20%. Stock B has an expected return of 14% and a standard deviation of return of 5%. The correlation coefficient between the returns of A and B is .50. The risk-free rate of return is 10%. The proportion of the optimal risky portfolio that should be invested in stock A is _________. A. 0% B. 40% C. 60% D. 100%

A. 0%

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

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

The most marketable money market security is _____. A. Treasury bills B. bankers' acceptances C. certificates of deposit D. common stock

A. Treasury bills

_____ is a mechanism for mitigating potential agency problems. A. Tying income of managers to success of the firm B. Directors defending top management C. Antitakeover strategies D. All of the options.

A. Tying income of managers to success of the firm

Asset A has an expected return of 15% and a reward-to-variability ratio of .4. Asset B has an expected return of 20% and a reward-to-variability ratio of .3. A risk-averse investor would prefer a portfolio using the risk-free asset and ______. A. asset A B. asset B C. no risky asset D. The answer cannot be determined from the data given

A. asset A

After considering current market conditions, an investor decides to place 60% of her funds in equities and the rest in bonds. This is an example of _____ . A. asset allocation B. security analysis C. top-down portfolio management D. passive management

A. asset allocation

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 ________ the ratio of municipal bond yields to corporate bond yields, the _________ the cutoff tax bracket at which more individuals will prefer to hold municipal debt. A. higher; lower B. lower; lower C. higher; higher D. The answer cannot be determined without more information.

A. higher; lower

The primary measurement unit used for assessing the value of one's stake in an investment company is ___________________. A. net asset value B. average asset value C. gross asset value D. total asset value

A. net asset value

If you place an order to buy or sell a share of a mutual fund during the trading day, the order will be executed at _____. A. the NAV calculated at the market close at 4 pm New York time B. the real time NAV C. the NAV delayed 15 minutes D. the NAV calculated at the opening of the next day's trading

A. the NAV calculated at the market close at 4 pm New York time

The term complete portfolio refers to a portfolio consisting of _________________. A. the risk-free asset combined with at least one risky asset B. the market portfolio combined with the minimum-variance portfolio C. securities from domestic markets combined with securities from foreign markets D. common stocks combined with bonds

A. the risk-free asset combined with at least one risky asset

The reward-to-volatility ratio is given by _________. A. the slope of the capital allocation line B. the second derivative of the capital allocation line C. the point at which the second derivative of the investor's indifference curve reaches zero D. the portfolio's excess return

A. the slope of the capital allocation line

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

You purchased 200 shares of ABC common stock on margin at $50 per share. Assume the initial margin is 50% and the maintenance margin is 30%. You will get a margin call if the stock drops below ________. (Assume the stock pays no dividends, and ignore interest on the margin loan.) A. $26.55 B. $35.71 C. $28.95 D. $30.77

B. $35.71

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

Which of the following correlation coefficients will produce the most diversification benefits? A. -.6 B. -.9 C. 0 D. .4

B. -.9

If the beta of the market index is 1 and the standard deviation of the market index increases from 12% to 18%, what is the new beta of the market index? A. .8 B. 1 C. 1.2 D. 1.5

B. 1

An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 21% and a standard deviation of return of 39%. Stock B has an expected return of 14% and a standard deviation of return of 20%. The correlation coefficient between the returns of A and B is .4. The risk-free rate of return is 5%. The expected return on the optimal risky portfolio is approximately _________. (Hint: Find weights first.) A. 14% B. 16% C. 18% D. 19%

B. 16%

Consider a no-load mutual fund with $200 million in assets and 10 million shares at the start of the year and with $250 million in assets and 11 million shares at the end of the year. During the year investors have received income distributions of $2 per share and capital gain distributions of $.25 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? A. 11.19% B. 23.75% C. 24.64% D. The answer cannot be determined from the information given.

B. 23.75%

An investor purchases one municipal bond and one corporate bond that pay rates of return of 5% and 6.4%, respectively. If the investor is in the 15% tax bracket, his aftertax rates of return on the municipal and corporate bonds would be, respectively, _____. A. 5% and 6.4% B. 5% and 5.44% C. 4.25% and 6.4% D. 5.75% and 5.44%

B. 5% and 5.44%

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%

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 A. I only B. I and II only C. II and III only D. I, II, and III

B. I and II only

Which of the following arguments supporting passive investment strategies is (are) correct? I. Active trading strategies may not guarantee higher returns but guarantee higher costs. II. Passive investors can free-ride on the activity of knowledge investors whose trades force prices to reflect currently available information. III. Passive investors are guaranteed to earn higher rates of return than active investors over sufficiently long time horizons. A. I only B. I and II only C. II and III only D. I, II, and III

B. I and II only

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

Which one of the following is a true statement regarding the Dow Jones Industrial Average? 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 Stock Exchange. D. It is a value-weighted average of all stocks traded on the New York Stock Exchange.

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

__________ is (are) real assets. A. Bonds B. Production equipment C. Stocks D. Life insurance

B. Production equipment

According to the capital asset pricing model, in equilibrium _________. A. all securities' returns must lie below the capital market line B. all securities' returns must lie on the security market line C. the slope of the security market line must be less than the market risk premium D. any security with a beta of 1 must have an excess return of zero

B. all securities' returns must lie on the security market line

The ______ measure of returns ignores compounding. A. geometric average B. arithmetic average C. IRR D. dollar-weighted

B. arithmetic average

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

B. fall

Which of the following funds invest specifically in stocks of fast-growing companies? A. balanced funds B. growth equity funds C. REITs D. equity income funds

B. growth equity funds

Purchases of new issues of stock take place _________. A. at the desk of the Fed B. in the primary market C. in the secondary market D. in the money markets

B. in the primary market

A mutual fund that attempts to hold quantities of shares in proportion to their representation in the market is called an __________ fund. A. stock B. index C. hedge D. money market

B. index

Underwriting is one of the services provided by _____. A. the SEC B. investment bankers C. publicly traded companies D. FDIC

B. investment bankers

Firms that specialize in helping companies raise capital by selling securities to the public are called _________. A. pension funds B. investment banks C. savings banks D. REITs

B. investment banks

During the 1926-2013 period the Sharpe ratio was greatest for which of the following asset classes? A. small U.S. stocks B. large U.S. stocks C. long-term U.S. Treasury bonds D. bond world portfolio return in U.S. dollars

B. large U.S. stocks

Diversification is most effective when security returns are _________. A. high B. negatively correlated C. positively correlated D. uncorrelated

B. negatively correlated

A major cause of the mortgage market meltdown in 2007 and 2008 was linked to ________. A. private equity investments B. securitization C. negative analyst recommendations D. online trading

B. securitization

Suppose that a stock portfolio and a bond portfolio have a zero correlation. This means that ______. A. the returns on the stock and bond portfolios tend to move inversely B. the returns on the stock and bond portfolios tend to vary independently of each other C. the returns on the stock and bond portfolios tend to move together D. the covariance of the stock and bond portfolios will be positive

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

Which of the following statistics cannot be negative? A. covariance B. variance C. E(r) D. correlation coefficient

B. variance

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

You invest $1,000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 16% and a standard deviation of 20% and a Treasury bill with a rate of return of 6%. The slope of the capital allocation line formed with the risky asset and the risk-free asset is approximately _________. A. 1.040 B. .80 C. .50 D. .25

C. .50

The standard deviation of return on investment A is 10%, while the standard deviation of return on investment B is 5%. If the covariance of returns on A and B is .0030, the correlation coefficient between the returns on A and B is _________. A. .12 B. .36 C. .60 D. .77

C. .60

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%

Suppose you pay $9,400 for a $10,000 par Treasury bill maturing in 6 months. What is the effective annual rate of return for this investment? A. 6.38% B. 12.77% C. 13.17% D. 14.25%

C. 13.17%

Consider the multifactor APT with two factors. Portfolio A has a beta of .5 on factor 1 and a beta of 1.25 on factor 2. The risk premiums on the factor 1 and 2 portfolios are 1% and 7%, respectively. The risk-free rate of return is 7%. The expected return on portfolio A is __________ if no arbitrage opportunities exist. A. 13.5% B. 15% C. 16.25% D. 23%

C. 16.25%

Treasury bills are paying a 4% rate of return. A risk-averse investor with a risk aversion of A = 3 should invest entirely in a risky portfolio with a standard deviation of 24% only if the risky portfolio's expected return is at least ______. A. 8.67% B. 9.84% C. 21.28% D. 14.68%

C. 21.28%

An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 21% and a standard deviation of return of 39%. Stock B has an expected return of 14% and a standard deviation of return of 20%. The correlation coefficient between the returns of A and B is .4. The risk-free rate of return is 5%. The standard deviation of returns on the optimal risky portfolio is _________. A. 25.5% B. 22.3% C. 21.4% D. 20.7%

C. 21.4%

Consider two perfectly negatively correlated risky securities, A and B. Security A has an expected rate of return of 16% and a standard deviation of return of 20%. B has an expected rate of return of 10% and a standard deviation of return of 30%. The weight of security B in the minimum-variance portfolio is _________. A. 10% B. 20% C. 40% D. 60%

C. 40%

The margin requirement on a stock purchase is 25%. You fully use the margin allowed to purchase 100 shares of MSFT at $25. If the price drops to $22, what is your percentage loss? A. 9% B. 15% C. 48% D. 57%

C. 48%

The geometric average of -12%, 20%, and 25% is _________. A. 8.42% B. 11% C. 9.7% D. 18.88%

C. 9.7%

__________ 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

The optimal risky portfolio can be identified by finding: I. The minimum-variance point on the efficient frontier II. The maximum-return point on the efficient frontier and the minimum-variance point on the efficient frontier III. The tangency point of the capital market line and the efficient frontier IV. The line with the steepest slope that connects the risk-free rate to the efficient frontier A. I and II only B. II and III only C. III and IV only D. I and IV only

C. III and IV only

Which one of the following statements about IPOs is not true? A. IPOs generally have been poor long-term investments. B. IPOs often provide very good initial returns to investors. C. IPOs generally provide superior long-term performance as compared to other stocks. D. Shares in IPOs are often primarily allocated to institutional investors.

C. IPOs generally provide superior long-term performance as compared to other stocks.

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

C. Real, financial

The graph of the relationship between expected return and beta in the CAPM context is called the _________. A. CML B. CAL C. SML D. SCL

C. SML

The Fama and French evidence that high book-to-market firms outperform low bookto-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

You run a regression of a stock's returns versus a market index and find the following: Coefficients Lower 95% Upper 95% Intercept 0.789 -1.556 3.457 Slope 0.890 0.6541 1.465 Based on the data, you know that the stock _____. A. earned a positive alpha that is statistically significantly different from zero B. has a beta precisely equal to .890 C. has a beta that is likely to be anything between .6541 and 1.465 inclusive D. has no systematic risk

C. has a beta that is likely to be anything between .6541 and 1.465 inclusive

If all investors become more risk averse, the SML will _______________ and stock prices will _______________. A. shift upward; rise B. shift downward; fall C. have the same intercept with a steeper slope; fall D. have the same intercept with a flatter slope; rise

C. have the same intercept with a steeper slope; fall

A __________ is a private investment pool open only to wealthy or institutional investors that is exempt from SEC regulation and can therefore pursue more speculative policies than mutual funds. A. commingled pool B. unit trust C. hedge fund D. money market fund

C. hedge fund

Which type of fund generally has the lowest average expense ratio? A. actively managed bond funds B. hedge funds C. indexed funds D. actively managed international funds

C. indexed funds

Commercial paper is a short-term security issued by __________ to raise funds. A. the Federal Reserve B. the New York Stock Exchange C. large well-known companies D. all of these options

C. large well-known companies

You put half of your money in a stock portfolio that has an expected return of 14% and a standard deviation of 24%. You put the rest of your money in a risky bond portfolio that has an expected return of 6% and a standard deviation of 12%. The stock and bond portfolios have a correlation of .55. The standard deviation of the resulting portfolio will be ________________. A. more than 18% but less than 24% B. equal to 18% C. more than 12% but less than 18% D. equal to 12%

C. more than 12% but less than 18%

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 risky asset D. capital allocation line

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

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

Surf City Software Company develops new surf forecasting software. It sells the software to Microsoft in exchange for 1,000 shares of Microsoft common stock. Surf City Software has exchanged a _____ asset for a _____ asset in this transaction. A. real; real B. financial; financial C. real; financial D. financial; real

C. real; financial

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

Historically, small-firm stocks have earned higher returns than large-firm stocks. When viewed in the context of an efficient market, this suggests that ___________. A. small firms are better run than large firms B. government subsidies available to small firms produce effects that are discernible in stock market statistics C. small firms are riskier than large firms D. small firms are not being accurately represented in the data

C. small firms are riskier than large firms

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

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

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

The return on the risky portfolio is 15%. The risk-free rate, as well as the investor's borrowing rate, is 10%. The standard deviation of return on the risky portfolio is 20%. If the standard deviation on the complete portfolio is 25%, the expected return on the complete portfolio is _________. A. 6% B. 8.75% C. 10% D. 16.25%

D. 16.25%

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%

__________ are examples of financial intermediaries. A. Commercial banks B. Insurance companies C. Investment companies D. All of the options

D. All of the options

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

D. All of the options are examples of agency problems.

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

D. all of the options

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

An example of a real asset is: I. A college education II. Customer goodwill III. A patent A. I only B. II only C. I and III only D. I, II, and III

D. I, II, and III

Restrictions on trading involving insider information apply to: I. Corporate officers and directors II. Major stockholders III. Relatives of corporate directors and officers A. I only B. I and II only C. II and III only D. I, II, and III

D. I, II, and III

Which of the following are financial assets? I. Debt securities II. Equity securities III. Derivative securities A. I only B. I and II only C. II and III only D. I, II, and III

D. I, II, and III

Which of the following indexes are market value-weighted? I. The NYSE Composite II. The S&P 500 III.The Wilshire 5000 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 of the following result in a taxable event for investors? I. Short-term capital gain distributions from the fund II. Dividend distributions from the fund III. Long-term capital gain distributions from the fund A. I only B. II only C. I and II only D. I, II, and III

D. I, II, and III

Which of the following is not an example of a financial intermediary? A. Goldman Sachs B. Allstate Insurance C. First Interstate Bank D. IBM

D. IBM

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

An investor in a T-bill earns interest by _________. A. receiving interest payments every 90 days B. receiving dividend payments every 30 days C. converting the T-bill at maturity into a higher-valued T-note D. buying the bill at a discount from the face value to be received at maturity

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

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

Most tests of semistrong efficiency are _________. A. designed to test whether inside information can be used to generate abnormal returns B. based on technical trading rules C. unable to generate any evidence of market anomalies D. joint tests of market efficiency and the risk-adjustment measure

D. joint tests of market efficiency and the risk-adjustment measure

Market signals will help to allocate capital efficiently only if investors are acting _____ . A. on the basis of their individual hunches B. as directed by financial experts C. as dominant forces in the economy D. on accurate information

D. on accurate information

Market anomaly refers to _______. A. an exogenous shock to the market that is sharp but not persistent B. a price or volume event that is inconsistent with historical price or volume trends C. a trading or pricing structure that interferes with efficient buying and selling of securities D. price behavior that differs from the behavior predicted by the efficient market hypothesis

D. price behavior that differs from the behavior predicted by the efficient market hypothesis

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

Fama and French have suggested that many market anomalies can be explained as manifestations of ____________. A. regulatory effects B. high trading costs C. information asymmetry D. varying risk premiums

D. varying risk premiums

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