FINA 469 Exam Reviews

A covered call strategy benefits from what environment? Question 13 options: Falling interest rates Price stability Price volatility Unexpected events

Price stability

The ________ reward-to-variability ratio is found on the ________ capital market line.

highest; steepest

A coupon bond that pays semiannual interest is reported in the Wall Street Journal as having an ask price of 107% of its $1,000 par value. If the last interest payment was made 3 months ago and the coupon rate is 5.00%, the invoice price of the bond will be _________.

$1,082.50 Invoice price = 1.07(1,000) + 25.00(3/6) = 1,082.50

A 6% coupon US treasury not pays interest on May 31 and November 30 and is traded for settlement on August 10. The accrued interest on the $100,000 face amount of this note is

$1,170.33

A coupon bond that pays semiannual interest is reported in the Wall Street Journal as having an ask price of 117% of its $1,000 par value. If the last interest payment was made 2 months ago and the coupon rate is 6%, the invoice price of the bond will be _________.

$1,180 Invoice price = 1.17(1,000) + 30(2/6) = 1,180

Interior Airline is expected to pay a dividend of $3 in the upcoming year. Dividends are expected to grow at the rate of 10% per year. The risk-free rate of return is 4%, and the expected return on the market portfolio is 13%. The stock of Interior Airline has a beta of 4. Using the constant-growth DDM, the intrinsic value of the stock is _________.

$10 k = .04 + .4(.13 − .04) = .4V0 = [3/(.4 − .1)] = 10

A preferred share of Coquihalla Corporation will pay a dividend of $8 in the upcoming year and every year thereafter; that is, dividends are not expected to grow. You require a return of 7% on this stock. Using the constant-growth DDM to calculate the intrinsic value, a preferred share of Coquihalla Corporation is worth _________.

$114.29 8.00/.07

A bond pays a semiannual coupon, and the last coupon was paid 61 days ago. If the annual coupon payment is 75, what is the accrued interest?

$12.57

The EBIT of a firm is $300, the tax rate is 35%, the depreciation is $20, capital expenditures are $60, and the increase in net working capital is $30. What is the free cash flow to the firm?

$125 FCFF = 300(1 - .35) + 20 - 60 - 30 = $125 million

A firm is planning on paying its first dividend of $2 three years from today. After that, dividends are expected to grow at 6% per year indefinitely. The stock's required return is 14%. What is the intrinsic value of a share today?

$19.24 Intrinsic value at time 2 = $2/(.14 - .06) = $25Intrinsic value today = $25/(1.14)2 = $19.24

A common stock pays an annual dividend per share of $1.80. The risk-free rate is 5%, and the risk premium for this stock is 4%. If the annual dividend is expected to remain at $1.80 per share, what is the value of the stock?

$20 P = $1.80/.09 = $20

You purchase one IBM July 120 call contract for a premium of $5. You hold the option until the expiration date, when IBM stock sells for $123 per share. You will realize a ______ on the investment. Question 1 options: $200 profit $200 loss $300 profit $300 loss

$200 loss

A convertible bond has a par value of $1,000 and a current market price of $850. The current price of the issuing firm's stock is $29 and the conversion ratio is 30 shares. The bond's market conversion value is ________________.

$870 Solution: 30 shares X $29/share = $870

A convertible bond has par value of $1,000, but its current market price is $975. The current price of the issuing company's stock is $26, and the conversion ratio is 34 shares. The bond's market conversion value is ______.

$884

A coupon bond that pays interest annually has a par value of $1,000, matures in 5 years, and has a yield to maturity of 12%. If the coupon rate is 9%, the intrinsic value of the bond today will be _________.

$891.86 = Calculator entries are N = 5, I/Y = 12, PMT = 90, FV = 1,000, CPT PV -891.86

$1,000 par value zero-coupon bonds (ignore liquidity premiums) BondYears to MaturityYield to MaturityA16.00%B27.50%C37.99%D48.49%E510.70% One year from now bond C should sell for ________ (to the nearest dollar).

$894

If the quote for a Treasury bond is listed in the newspaper as 98:2812 bid, 98:4062 ask, the actual price at which you can purchase this bond given a $10,000 par value is _____________.

$9,840.62

Assuming semiannual compounding, a 20-year zero coupon bond with a par value of $1,000 and a required return of 12% would be priced at _________. Question 7 options: $97.22 $104.49 $364.08 $732.14

$97.22

A convertible bond has a par value of $1,000, but its current market price is $975. The current price of the issuing company's stock is $26, and the conversion ratio is 34 shares. The bond's market conversion value is _________.

($26)(34) = $884

If the quote for a Treasury bond is listed in the newspaper as 99:08 bid, 99:11 ask, the actual price at which you can sell this bond given a $10,000 par value is _____________.

((99+[08/32])/100)*10,000=9,925

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 proportion of the optimal risky portfolio that should be invested in stock B is approximately _________. 29% 44% 56% 71%

(.14-.05)(.39^2)-(.21-.05)(.20)(.39)(.4)/(.14-.05)(.39^2)+(.21-.05)(.20)(.39)- (.14-.05+.21-.05)(.20)(.39)(.4) =71%

Assuming semiannual compounding, a 10-year zero coupon bond with a par value of $1,000 and a required return of 13.6% would be priced at _________.

$268.27 N = 20, I/Y = 6.8, PMT = 0, FV = 1,000, CPT PV → 268.27

You purchase one IBM July 120 put contract for a premium of $3. You hold the option until the expiration date, when IBM stock sells for $123 per share. You will realize a ______ on the investment. Question 2 options: $300 profit $300 loss $500 loss $200 profit

$300 loss

You write one IBM July 120 call contract for a premium of $4. You hold the option until the expiration date, when IBM stock sells for $121 per share. You will realize a ______ on the investment. Question 3 options: $300 profit $200 loss $600 loss $200 profit

$300 profit

c. Consider a five-year bond with a 10% coupon selling at a yield to maturity of 8%. If interest rates remain constant, one year from now the price of this bond will be: (1) Higher (2) Lower (3) The same (4) Par

(2) Lower

What is yield to maturity?

- Definition: is the discount rate that makes the present value of the bond's cash flows equal to price. - For bonds it is more common to follow bond's yield-to-maturity (YTM) implied by its price. (Note: IMPLIED means something that you do not observe directly, you have to calculate it.)

Consider the liquidity preference theory of the term structure of interest rates. On average, one would expect investors to require ________.

a higher yield on long-term bonds than on short-term bonds

What is an speculative grade or junk bond?

- a high-yield, high-risk security, typically issued by a company seeking to raise capital quickly in order to finance a takeover. - Rated BB or lower ('B', 'CCC) by S&P, Ba or lower by Moody's, or unrated.

Some corporate bonds are callable and can be repurchased by the issue at?

- a specified call price - during a call period.

Whats an investment grade bond?

- relatively low risk -Rated BBB (medium)and AAA (above) by S&P or Baa and above by Moody's.

Which of the following correlation coefficients will produce the most diversification benefits?

-.9

To construct a riskless portfolio using two risky stocks, one would need to find two stocks with a correlation coefficient of ________.

-1

You own a bond that has a duration of 6 years. Interest rates are currently 7%, but you believe the Fed is about to increase interest rates by 25 basis points. Your predicted price change on this bond is ________. Question 14 options: +1.4% -1.4% -2.51% +2.51%

-1.4%

A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 24%, while stock B has a standard deviation of return of 18%. Stock A comprises 60% of the portfolio, while stock B comprises 40% of the portfolio. If the variance of return on the portfolio is .0380, the correlation coefficient between the returns on A and B is _________.

.0380 = (.62)(.242) + (.42)(.182) + 2(.6)(.4)(.24)(.18) ρ; ρ = .583

The expected return of a portfolio is 8.9%, and the risk-free rate is 3.5%. If the portfolio standard deviation is 12%, what is the reward-to-variability ratio of the portfolio? 0 .45 .74 1.35

.45 Reward-to-variability ratio = (.089 - .035)/.12 = .45

A 15-Year bond with par of $1,000, and a coupon rate of 10% with interest paid semiannually. If the current market price is $900, what is the capital gain yield of this bond over the next year? Interest rates remain unchanged.

0.3 %

The issuer of ________ bond may choose to pay interest either in cash or in additional bonds.

a pay-in-kind

The market portfolio has a beta of

1

The market portfolio has a beta of _________

1

Using the index model, the alpha of a stock is 3%, the beta is 1.1, and the market return is 10%. What is the residual given an actual return of 15%? Multiple Choice .0% 1% 2% 3%

1% Residual = 15 - (3 + 1.1 × 10) = 1%

A bond has a flat price of 985, and it pays an annual coupon. The last coupon payment was made 90 days ago. What is the invoice price if the annual coupon is $69?

1,002.01

D. All of the above

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

The market portfolio has a beta of __________.

1.0

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?

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

You have a $53,000 portfolio consisting of Intel, GE, and Con Edison. You put $21,200 in Intel, $13,200 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?

1.050 (21.2/53)(1.3) + (13.2/53)(1) + (18.6/53)(.8) = 1.050

The price on a treasury bond is 104.3625, with a yield to maturity of 3.45%. The price on a comparable maturity corporate bond is 103.75, with a yield to maturity of 4.59%. What is the approximate percentage value of credit risk of the corporate bond?

1.14%

The risk-free rate, average returns, standard deviations, and betas for three funds and the S&P 500 are given below. Picture What is the M2 measure for portfolio B? Question 5 options: .43% 1.25% 1.77% 1.43%

1.43%

What is the expected return on the market?

10%

What is the expected return on the market? A) 5% B) 10% C) 15% D) none of the above

10%

A 1% decline in yield will have the least effect on the price of a bond with a

10-year maturity, selling at 100

A 1% decline in yield will have the least effect on the price of a bond with a ________.

10-year maturity, selling at 100

A 1% decline in yield will have the least effect on the price of a bond with a _________.

10-year maturity, selling at 100

If the price of a $10,000 par Treasury bond is $10,237.50, the quote would be listed in the newspaper as ________.

102 + (.375* [32/32]) = 102 + (12/32) = 102:12

If the price of a 10,000 par treasury bond is 10,237.50, the quote would be listed in the newspaper as_____-.

102.375

B. Negatively correlated

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

An investment earns 10% the first year, 15% the second year and loses 12% the third year. Your total compound return over the three years was _______.

11.32%

Consider the following information: Portfolio Expected Return Beta Risk-free 10 % 0 Market 18 1.0 A 16 1.5 a. Calculate the expected return of portfolio A with a beta of 1.5. b. What is the alpha of portfolio A. c. If the simple CAPM is valid, state whether the above situation is possible?

a) ER 22% b) Alpha -6% c) no

_______________ percent of the variance is explained by this regression.

12

A perpetuity pays $100 each and every year forever. The duration of this perpetuity will be __________ if its yield is 9%.

12.11

The risk-free rate, average returns, standard deviations, and betas for three funds and the S&P 500 are given below. Picture What is the Treynor measure for portfolio A? Question 4 options: 12.38% 2.38% .91% 3.64%

12.38%

Suppose you pay $9,800 for a $10,000 par Treasury bill maturing in two months. What is the effective annual rate of return for this investment?

12.89%

According to the CAPM, what is the expected market return given an expected return on a security of 17.2%, a stock beta of 1.6, and a risk-free interest rate of 6%? Multiple Choice 10.8% 17.9% 9.6% 13%

13% 17.2 = 6 + 1.6(MRP) MRP = 9.60% Expected market return= 6+9.60

C. Market risk

13. Beta is a measure of __________. a. Firm specific risk b. Diversifiable risk c. Market risk d. Unique risk

Suppose the yield on short-term government securities (perceived to be risk-free) is about 6%. Suppose also that the expected return required by the market for a portfolio with a beta of 1 is 13.0%. According to the capital asset pricing model: What is the expected return on the market portfolio?

13.0% Since the market portfolio, by definition, has a beta of 1, its expected rate of return is 13.0%

According to the CAPM, what is the market risk premium given an expected return on a security of 13.6%, a stock beta of 1.2, and a risk-free interest rate of 4%?

13.6 = 4 + 1.2 × (MRP); MRP = 8%

B. Firm specific risk

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

According to the CAPM, what is the expected market return given an expected return on a security of 15.8%, a stock beta of 1.2, and a risk-free interest rate of 5%?

15.8 = 5 + 1.2 × (MRP); MRP = 9%; Expected market return = 5 + 9 = 14%

The expected 1-year interest rate 4 years from now should be _________.

16%

What is the expected rate of return for a stock that has a beta of 1 if the expected return on the market is 16%? 16% More than 16% Cannot be determined without the risk-free rate

16%

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%?

17% = 5% + [15% - 5%]βs; βs = 1.2

B. Systematic risk, nondiversifiable risk

17. Market risk is also called __________ and __________. a. Systematic risk, diversifiable risk b. Systematic risk, nondiversifiable risk c. Unique risk, nondiversifiable risk d. Unique risk, diversifiable risk

Consider the CAPM. The risk-free rate is 3%, and the expected return on the market is 15%. What is the expected return on a stock with a beta of 1.2?

17.4% E[rs] = 3% + 1.2[15% - 3%] = 17.4%

D. Unique risk, diversifiable risk

18. Firm specific risk is also called __________ and ___________. a. Systematic risk, diversifiable risk b. Systematic risk, non-diversifiable risk c. Unique risk, non-diversifiable risk d. Unique risk, diversifiable risk

C. Average return

19. Which one of the following stock return statistics is usually the least stable over time? a. Covariance of returns b. Variance of returns c. Average return d. Correlation coefficient

You consider buying a share of stock at a price of $29. The stock is expected to pay a dividend of $1.64 next year, and your advisory service tells you that you can expect to sell the stock in 1 year for $32. The stock's beta is 1.0, rf is 4%, and E[rm] = 14%. What is the stock's abnormal return?

2% (32-29+1.64) / 29 = .16 abnormal= .16-.14(required) = .02

Stock A has a beta of 1.2, and stock B has a beta of 1. The returns of stock A are ______ sensitive to changes in the market than are the returns of stock B. 20% more slightly more 20% less slightly less

20% more sens to change in mkt

B. Techniques used to identify efficient portfolios of risky assets

20. Harry Markowitz is best known for his Nobel prize winning work on ______________. a. Strategies for active securities trading b. Techniques used to identify efficient portfolios of risky assets c. Techniques used to measure the systematic risk of securities d. Techniques used in valuing securities options

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 _________.

21.4%

B. Located on the capital market line to those located on the efficient frontier

25. Rational risk-averse investors will always prefer portfolios ______________. a. Located on the efficient frontier to those located on the capital market line b. Located on the capital market line to those located on the efficient frontier c. At or near the minimum variance point on the efficient frontier d. That are risk-free to all other asset choices

C. III and IV only

26. 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 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

A. Lower

27. Reward-to-variability ratios are ________ on the capital market line than (as) on the efficient frontier. a. Lower b. Higher c. The same d. Indeterminate

Suppose the yield on short-term government securities (perceived to be risk-free) is about 6%. Suppose also that the expected return required by the market for a portfolio with a beta of 1 is 13.0%. Suppose you consider buying a share of stock at a price of $25. The stock is expected to pay a dividend of $6 next year and to sell then for $26. The stock risk has been evaluated at β = -0.5. Calculate the expected rate of return, using the expected price and dividend for next year.

28% E(r) = ($26 + $6)/$25 - 1 = 0.2800 = 28.00%

A. 0.583

28. A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 24% while stock B has a standard deviation of return of 18%. Stock A comprises 60% of the portfolio while stock B comprises 40% of the portfolio. If the variance of return on the portfolio is .0380, the correlation coefficient between the returns on A and B is __________. a. 0.583 b. 0.225 c. 0.327 d. 0.128

You have an investment that in today's dollars returns 15% of your investment in year 1, 12% in year 2, 9% in year 3, and the remainder in year 4. What is the duration of this investment? Question 16 options: 4 years 3.5 years 3.22 years 2.95 years

3.22 years

B. 19.76%

30. A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 35% while stock B has a standard deviation of return of 15%. The correlation coefficient between the returns on A and B is 0.45. Stock A comprises 40% of the portfolio while stock B comprises 60% of the portfolio. The standard deviation of the return on this portfolio is __________. a. 23.00% b. 19.76% c. 18.45% d. 17.67%

Multiple R 0.35 R-Square 0.12 Adjusted R-Square 0.02 Standard Error 38.45 Observations 12 Coefficients: Intercept 4.05 Market 1.32 Standard Error: Intercept 15.44 Market 0.97 t-Stat Intercept 0.26 Market 1.36 p-Value Intercept 0.80 Market 0.10 The stock is ______ riskier than the typical stock. Multiple Choice 32% 15.44% 12% 38%

32% Beta of 1.32 means that this stock is 32% riskier than the market.

B. 5%

35. The risk-free rate of return is 10%. The standard deviation of return on the optimal risky portfolio is__________. a. 0% b. 5% c. 7%

B. 71%

36. The proportion of the optimal risky portfolio that should be invested in stock B is approximately __________. a. 29% b. 71% c. 44% d. 56%

D. 16%

37. The expected return on the optimal risky portfolio is __________. a. 17% b. 15% c. 18% d. 16%

The yield to maturity of a 10-year zero-coupon bond with a par value of $1,000 and a market price of $625 is ____.

4.8%

the yield to maturity of a 10-year zero-coupon bond with par value of 1000 and a market price of 625 is

4.8%

C. 12%

41. An investor can design a risky portfolio based on two stocks, A and B. The standard deviation of return on stock A is 20% while the standard deviation on stock B is 15%. The correlation coefficient between the return on A and B is 0%. The standard deviation of return on the minimum variance portfolio is __________. a. 0% b. 6% c. 12% d. 17%

B. Standard deviation

42. A measure of the riskiness of an asset held in isolation is _____________. a. Beta b. Standard deviation c. Covariance d. Semi-variance

D. 7.95%

43. Semitool Corp has an expected excess return of 5% for next year. However for every unexpected 1% change in the market, Semitool's return responds by a factor of 1.3. Suppose it turns out the economy and the stock market do better than expected by 1.5% and Semitool's products experience more rapid growth than anticipated, pushing up the stock price by another 1%. Based on this information what was Semitool's actual excess return? a. 7.50% b. 6.95% c. 8.25% d. 7.95%

A. 20% more

46. Stock A has a beta of 1.2 and Stock B has a beta of 1. The returns of Stock A are ______ sensitive to changes in the market as the returns of Stock B. a. 20% more b. Slightly more c. 20% less d. Slightly less

D. Fall; increasing

47. As additional securities are added to a portfolio, total risk will generally ________ at a _________ rate. a. Rise; decreasing b. Rise; increasing c. Fall; decreasing d. Fall; increasing

The risk-free rate of return is 10%. The standard deviation of return on the optimal risky portfolio is__________.

5%

During the 1926-2010 period the geometric mean return on Treasury bonds was _________.

5.12%

D. Usually positive, but are not restricted in any particular way

53. The values of beta coefficients of securities are ___________. a. Always positive b. Always negative c. Always between positive 1 and negative 1 d. Usually positive, but are not restricted in any particular way

A. Its returns are negatively correlated with market index returns

54. A security's beta coefficient will be negative if _____________. a. Its returns are negatively correlated with market index returns b. Its returns are positively correlated with market index returns c. Its stock price has historically been very stable d. Market demand for the firm's shares is very low

C. 1

55. The market value weighted average beta of firms included in the market index will always be ______________. a. 0 b. Between 0 and 1 c. 1 d. There is no particular rule concerning the average beta of firms included in the market index

C. Non-systematic

56. Diversification can reduce or eliminate __________ risk. a. All b. Systematic c. Non-systematic d. Only an insignificant

A coupon bond that pays interest of $60 annually has a par value of $1,000, matures in 5 years, and is selling today at a $5.25 discount from par value. The current yield on this bond is ___. (a) 6.53% (b) 6.03% (c) 6.83% (d) 6%

6.03%

A. Stock's standard deviation

60. If an investor does not diversify their portfolio and instead puts all of their money in one stock, the appropriate measure of security risk for that investor is the a. Stock's standard deviation b. Variance of the market c. Stock's beta d. Covariance with the market index

A. 0.50

65. This stock has greater systematic risk than a stock with a beta of ____. a. 0.50 b. 2.00 c. 4.00 d. 1.50

B. 4.05, 1.32

66. The characteristic line for this stock is Rstock = ___ + ___ Rmarket. a. 0.35, 0.12 b. 4.05, 1.32 c. 15.44, 0.97 d. 0.26, 1.36

A. 12

67. ____ percent of the variance is explained by this regression a. 12 b. 35 c. 4.05 d. 80

A. 32%

68. The stock is ______ riskier than the typical stock. a. 32% b. 15.44% c. 12% d. 38%

Assume both portfolios A and B are well diversified, that E(rA) = 15.2%and E(rB) = 17.6%. If the economy has only one factor, and βA = 1 while βB = 1.3, what must be the risk-free rate?

7.2% 15.2% = rf + 1 × (F - rf) 17.6% = rf + 1.3 × (F - rf) 17.6% = rf + 1.3 × (15.2% - rf) ⇒ rf = 7.2%

C. Calculate three covariances

70. If you want to know the portfolio standard deviation for a three stock portfolio you will have to a. Calculate two covariances and one trivariance b. Calculate only two covariances c. Calculate three covariances d. Average the variances of the individual stocks

C. 0.0

71. Which of the following correlations coefficients will produce the least diversification benefit? a. -0.6 b. -1.5 c. 0.0 d. 0.8

D. Unique risk

74. Investing in two assets with a correlation coefficient of -0.5 will reduce what kind of risk? a. Market risk b. Non-diversifiable risk c. Systematic risk d. Unique risk

D. With a correlation of 1.0, no risk will be reduced

75. Investing in two assets with a correlation coefficient of 1.0 will reduce which kind of risk? a. Market risk b. Unique risk c. Unsystematic risk d. With a correlation of 1.0, no risk will be reduced

D. I, II and III

78. You are considering adding a new security to your portfolio. In order to decide whether you should add the security you need to know the security's I. expected return II. standard deviation III. correlation with your portfolio a. I only b. I and II only c. I and III only d. I, II and III

A. 2rp < (W1212 + W1212)

79. Which of the following is a correct expression concerning the formula for the standard deviation of returns of a two asset portfolio where the correlation coefficient is between +1 and -1? a. 2rp < (W1212 + W1212) b. 2rp = (W1212 + W1212) c. 2rp = (W1212 - W1212) d. 2rp > (W1212 + W1212)

The arithmetic average of -11%, 15%, and 20% is ________.

8%

B. correlation coefficient

8. The ________ is equal to the square root of the systematic variance divided by the total variance. A. covariance B. correlation coefficient C. standard deviation D. reward-to- variability ratio

You buy an bond with a 1,000 par value today for a price of 875. The bond has 6 years to maturity and makes annual coupon payments of $75 per year. You hold the bond to maturity, but you do not reinvest any of your coupons. What was your effective EAR over the holding period?

8.78%

A corporate bond has a 11-year maturity and pays interest semiannually. The quoted coupon rate is 7%, and the bond is priced at par. The bond is callable in 5 years at 112% of par. What is the bond's yield to call?

8.95%

A corporate bond has a 10-year maturity and pays interest semi-annually. The quoted coupon rate is 6%, and the bond is priced at par. The bond is callable in 3 years at 110% of par. What is the bond's yield to call?

8.98%

B. 10.8%

81. What is the standard deviation of a portfolio of two stocks given the following data? Stock A has a standard deviation of 30%. Stock B has a standard deviation of 18%. The portfolio contains 60% of stock A and the correlation coefficient between the two stocks is -1.0. a. 0.0% b. 10.8% c. 18.0% d. 24.0%

B. 0.45

82. The expected return of portfolio is 8.9% and the risk free rate is 3.5%. If the portfolio standard deviation is 12.0%, what is the reward to variability ratio of the portfolio? a. 0.0 b. 0.45 c. 0.74 d. 1.35

B. Stock B is riskier

85. Which stock is riskier for an investor currently holding his portfolio in a well diversified portfolio of common stock? a. Stock A is riskier b. Stock B is riskier c. Both stocks are equally risky d. You cannot tell from the information given

Consider the following $1,000 par value zero-coupon bonds: BondYears to MaturityYield to MaturityA16.00%B27.00%C38.32%D48.49%E510.70% The expected 1-year interest rate 3 years from now should be _________.

9%

According to the CAPM, what is the market risk premium given an expected return on a security of 18.7%, a stock beta of 1.3, and a risk-free interest rate of 7%?

9% 18.7 = 7 + 1.3 × (MRP); MRP = 9.00%

If the quote for a Treasury bond is listed in the newspaper as 99.25 bid, 99.26 ask, the actual price at which you can sell this bond given at 10,000 par value is_____.

9,925

B. Variance

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

$1,000 par value zero-coupon bonds (ignore liquidity premiums) The expected 1-year interest rate 1 year from now should be about _________.

9.02%

Assuming semi-annual compounding, a 20-year zero coupon bond with a par value of $1,000 and a required return of 12% would be priced at _________.

9.22$

A coupon bond that pays interest of 4% annually has a par value of $1,000, matures in 5 years, and is selling today at $785. The actual yield to maturity on this bond is _________.

9.6%

If the quote for a Treasury bond is listed in the newspaper as 98:09 bid, 98:13 ask, the actual price for you to purchase this bond given a $10,000 par value is _____________.

98,840.62

A __________ bond gives the issuer an option to retire the bond before maturity at a specific price after a specific date. A. callable B. coupon C. puttable D. Treasury

A

A discount bond that pays interest semiannually will: I. Have a lower price than an equivalent annual payment bond II. Have a higher EAR than an equivalent annual payment bond III. Sell for less than its conversion value A. I and II only B. I and III only C. II and III only D. I, II, and III

A

A stock has a correlation with the market of .45. The standard deviation of the market is 21%, and the standard deviation of the stock is 35%. What is the stock's beta? A. .75 B. .55 C. 1 D. .60

A

A zero-coupon bond has a yield to maturity of 5% and a par value of $1,000. If the bond matures in 16 years, it should sell for a price of __________ today. A. $458.11 B. $641.11 C. $89.11 D. $1,100.11

A

An investor's degree of risk aversion will determine his or her ______. A. optimal mix of the risk-free asset and risky asset B. optimal risky portfolio C. risk-free rate D. capital allocation line

A

Assuming semiannual compounding, a 20-year zero coupon bond with a par value of $1,000 and a required return of 12% would be priced at _________. A. $9.22 B. $104.49 C. $364.08 D. $32.14

A

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. 40% B. 10% C. 60% D. 20%

A

Many current and retired Enron Corp. employees had their 401k retirement accounts wiped out when Enron collapsed because ________. A. their 401k accounts were not well diversified B. none of these options C. they had to pay huge fines for obstruction of justice D. their 401k accounts were held outside the company

A

Serial bonds are associated with _________. A. staggered maturity dates B. collateral C. coupon payment dates D. conversion features

A

The ___________ is the document that defines the contract between the bond issuer and the bondholder. A. indenture B. covenant agreement C. trustee agreement D. collateral statement

A

The correlation coefficient between two assets equals _________. A. their covariance divided by the product of their standard deviations B. their covariance divided by the product of their variances C. the sum of their expected returns divided by their covariance D. the product of their variances divided by their covariance

A

The invoice price of a bond is the ______. A. stated or flat price in a quote sheet plus accrued interest B. stated or flat price in a quote sheet minus accrued interest C. bid price D. average of the bid and ask price

A

The price of a bond (with par value of $1,000) at the beginning of a period is $980 and at the end of the period is $95. What is the holding-period return if the annual coupon rate is 4.5%? A. 4.08% B. 4.5% C. 5.1% D. 5.6%

A

The price on a Treasury bond is 104.3625, with a yield to maturity of 3.45%. The price on a comparable maturity corporate bond is 103.5, with a yield to maturity of 4.59%. What is the approximate percentage value of the credit risk of the corporate bond? A. 1.14% B. 3.45% C. 4.59% D. 8.04%

A

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

A

The term excess return refers to ______________. A. the difference between the rate of return earned and the risk-free rate B. returns earned illegally by means of insider trading C. the difference between the rate of return earned on a particular security and the rate of return earned on other securities of equivalent risk D. the portion of the return on a security that represents tax liability and therefore cannot be reinvested

A

The values of beta coefficients of securities are __________. A. usually positive but are not restricted in any particular way B. always between positive 1 and negative 1 C. always positive D. always negative

A

The yield to maturity of a 10-year zero-coupon bond with a par value of $1,000 and a market price of $625 is _____. A. 4.8% B. 6.1% C. .% D. 10.4%

A

Which of the following yield curves generally implies a normal healthy economy? A. positive slope B. negative slope C. flat D. hump-shaped curve

A

You are constructing a scatter plot of excess returns for stock A versus the market index. If the correlation coefficient between stock A and the index is -1, you will find that the points of the scatter diagram ___________ and the line of best fit has a ______________. A. all fall on the line of best fit; negative slope B. are widely scattered around the line; positive slope C. all fall on the line of best fit; positive slope D. are widely scattered around the line; negative slope

A

A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 35%, while stock B has a standard deviation of return of 15%. The correlation coefficient between the returns on A and B is .45. Stock A comprises 40% of the portfolio, while stock B comprises 60% of the portfolio. The standard deviation of the return on this portfolio is _________. A. 19.76% B. 18.45% C. 23% D. 17.67%

A σ2p = (.402)(.352) + (.602)(.15)2 + (2)(.4)(.6)(.35)(.15)(.45) σ2p = .039046 σp = 19.76%

All other things equal(YTM = 10%), which of the following has the shortest duration? A 30-year bond with a 10% coupon A 20-year bond with a 9% coupon A 20-year bond with a 7% coupon A 10-year zero-coupon bond

A 10-year zero-coupon bond

All other things equal, which of the following has the longest duration? Question 10 options: A 21-year bond with a 10% coupon yielding 10% A 20-year bond with a 10% coupon yielding 11% A 21-year zero-coupon bond yielding 10% A 20-year zero-coupon bond yielding 11% Save

A 21-year zero-coupon bond yielding 10%

What's a zero coupon bond and its equation?

A bond paying no coupon payments. It sells at a discount & provides only a payment of par value. Price zero-coupon bond = $1,000/〖(1+𝑟)〗^𝑇

What's a callable bond?

A bond that can be redeemed by the issuer prior to its maturity. Usually a premium is paid to the bond owner when the bond is called. Also known as a "redeemable bond."

A. 0.583 0.0380 = (.6 2 )(.24 2 ) + (.4 2 )(.18 2 ) + 2(.6)(.4)(.24)(.18) p; p = 0.583

A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 24% while stock B has a standard deviation of return of 18%. Stock A comprises 60% of the portfolio while stock B comprises 40% of the portfolio. If the variance of return on the portfolio is .0380, the correlation coefficient between the returns on A and B is _________. A. 0.583 B. 0.225 C. 0.327 D. 0.128

B. 19.76% D. 17.67% SD^2 p = (.40 2 )(.35 2 ) + (.60 2 )(.15) 2 + (2)(.4)(.6)(.35)(.15)(.45) SD^2p = .039046 SD^2p = 19.76%

A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 35% while stock B has a standard deviation of return of 15%. The correlation coefficient between the returns on A and B is 0.45. Stock A comprises 40% of the portfolio while stock B comprises 60% of the portfolio. The standard deviation of the return on this portfolio is _________. A. 23.00% B. 19.76% C. 18.45% D. 17.67%

60. You can be sure that a bond will sell at a premium to par when _________. A. its coupon rate is greater than its yield to maturity B. its coupon rate is less than its yield to maturity C. its coupon rate equal to its yield to maturity D. its coupon rate is less than its conversion value

A.

81. A bond has a 5% coupon rate. The coupon is paid semiannually, and the last coupon was paid 35 days ago. If the bond has a par value of $1,000, what is the accrued interest? A. $4.81 B. $14.24 C. $25 D. $50

A. $4.81 Accrued interest = (50/2) × (35/182) = 4.81

46. A zero-coupon bond has a yield to maturity of 5% and a par value of $1,000. If the bond matures in 16 years, it should sell for a price of __________ today. A. $458.00 B. $641.00 C. $789.00 D. $1,100.00

A. $458.00 PV = 1000/ (1.05)^16

46. A zero-coupon bond has a yield to maturity of 5% and a par value of $1,000. If the bond matures in 16 years, it should sell for a price of __________ today. A. $458.11 B. $641.11 C. $789.11 D. $1,100.11

A. $458.11 PV0 = Calculator entries are N = 16, I/Y = 5, PMT = 0, FV = 1,000, CPT PV 458.11

A zero-coupon bond has a yield to maturity of 5% and a par value of $1,000. If the bond matures in 16 years, it should sell for a price of __________ today. A. $458.11 B. $641.11 C. $789.11 D. $1,100.11

A. $458.11 look at homework

84. You buy an 8-year $1,000 par value bond today that has a 6% yield and a 6% annual payment coupon. In 1 year promised yields have risen to 7%. Your 1-year holding-period return was ___. A. .61% B. -5.39% C. 1.28% D. -3.25%

A. .61% This year's price is 1,000. since the YTM equals the coupon rate. Calculator entries for next year's price are N = 7, I/Y = 7, PMT = 60, FV = 1,000, CPT PV -46.11 At the end of 1 year you'll have 946.11 + 60 = 1,006.11 HPR = 1,006.11/1,000 - 1 = .6107%

Asset A has an expected return of 20% and a standard deviation of 25%. The risk-free rate is 10%. What is the reward-to-variability ratio? A. 0.40 B. 0.50 C. 0.75 D. 0.80

A. 0.40

A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 24%, while stock B has a standard deviation of return of 18%. Stock A comprises 60% of the portfolio, while stock B comprises 40% of the portfolio. If the variance of return on the portfolio is .0380, the correlation coefficient between the returns on A and B is _________. A. 0.583 B. 0.225 C. 0.327 D. 0.128

A. 0.583

84. You buy an 8 year $1000 par value bond today that has a 6% yield and a 6% annual payment coupon. In one year promised yields have risen to 7%. Your one year holding period return was ___. A. 0.61% B. -5.39% C. 1.28% D. -3.25%

A. 0.61% (look at doc)

You have a $58,000 portfolio consisting of Intel, GE, and Con Edison. You put $23,200 in Intel, $15,200 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. 1.052 B. 0.992 C. 0.810 D. 1.368

A. 1.052 look at homework

82. The price on a treasury bond is 104:21 with a yield to maturity of 3.45%. The price on a comparable maturity corporate bond is 103:11 with a yield to maturity of 4.59%. What is the approximate percentage value of the credit risk of the corporate bond? A. 1.14% B. 3.45% C. 4.59% D. 8.04%

A. 1.14% Credit Risk Premium = 4.59 - 3.45 = 1.14%

55. The expected one-year interest rate four years from now should be _________. A. 16.00% B. 18.00% C. 20.00% D. 22.00% ***needs a chart

A. 16.00% (look at doc)

46. Stock A has a beta of 1.2 and Stock B has a beta of 1. The returns of Stock A are ______ sensitive to changes in the market as the returns of Stock B. A. 20% more B. slightly more C. 20% less D. slightly less

A. 20% more

You consider buying a share of stock at a price of $22. The stock is expected to pay a dividend of $2.06 next year, and your advisory service tells you that you can expect to sell the stock in 1 year for $25. The stock's beta is 1.3, rf is 7%, and E[rm] = 17%. What is the stock's abnormal return? A. 3% B. 13% C. 9% D. 0%

A. 3% Look at homework

69. The yield to maturity of a 10-year zero-coupon bond with a par value of $1,000 and a market price of $625 is _____. A. 4.8% B. 6.1% C. 7.7% D. 10.4%

A. 4.8% Calculator entries are N = 10, PV = -625, PMT = 0, FV = 1,000, CPT I/Y 4.81

The yield to maturity of a 10-year zero-coupon bond with a par value of $1,000 and a market price of $625 is _____. A. 4.8% B. 6.1% C. 7.7% D. 10.4%

A. 4.8% look at homework

A callable bond pays annual interest of $60, has a par value of $1,000, matures in 20 years but is callable in 10 years at a price of $1,100, and has a value today of $1055.84. The yield to call on this bond is _________. A. 6% B. 6.58% C. 7.2% D. 8%

A. 6% Look at homework

41. A callable bond pays annual interest of $60, has a par value of $1,000, matures in 20 years but is callable in 10 years at a price of $1,100, and has a value today of $1055.84. The yield to call on this bond is _________. A. 6.00% B. 6.58% C. 7.20% D. 8.00%

A. 6.00% (look at doc)

19. Bonds issued in the currency of the issuer's country but sold in other national markets are called _____________. A. Eurobonds B. Yankee bonds C. Samurai bonds D. foreign bonds

A. Eurobonds

Bonds issued in the currency of the issuer's country but sold in other national markets are called _____________.

A. Eurobonds

67. A discount bond that pays interest semiannually will ______. I. have a lower price than an equivalent annual payment bond II. have a higher EAR than an equivalent annual payment bond III. sell for less than its conversion value A. I and II only B. I and III only C. II and III only D. I, II and III

A. I and II only

he formula E(rp) - rf / op is used to calculate the _____________. A. Sharpe ratio B. Treynor measure C. coefficient of variation D. real rate of return

A. Sharpe ratio

5. 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. can't tell from the data given

A. asset A

63. Under the pure expectations hypothesis and constant real interest rates for different maturities, an upward-sloping yield curve would indicate __________________. A. expected increases in inflation over time B. expected decreases in inflation over time C. the presence of a liquidity premium D. that the equilibrium interest rate in the short-term part of the market is lower than the equilibrium interest rate in the long-term part of the market

A. expected increases in inflation over time

62. Consider a 7-year bond with a 9% coupon and a yield to maturity of 12%. If interest rates remain constant, one year from now the price of this bond will be _________. A. higher B. lower C. the same D. indeterminate

A. higher

A stock has a beta of 1.3. The systematic risk of this stock is ____________ the stock market as a whole. A. higher than B. lower than C. equal to D. indeterminable compared to

A. higher than

91. The ___________ is the document defining the contract between the bond issuer and the bondholder. A. indenture B. covenant agreement C. trustee agreement D. collateral statement

A. indenture

60. You can be sure that a bond will sell at a premium to par when _________. A. its coupon rate is greater than its yield to maturity B. its coupon rate is less than its yield to maturity C. its coupon rate is equal to its yield to maturity D. its coupon rate is less than its conversion value

A. its coupon rate is greater than its yield to maturity

You can be sure that a bond will sell at a premium to par when _________. A. its coupon rate is greater than its yield to maturity B. its coupon rate is less than its yield to maturity C. its coupon rate is equal to its yield to maturity D. its coupon rate is less than its conversion value

A. its coupon rate is greater than its yield to maturity

54. A security's beta coefficient will be negative if ____________. A. its returns are negatively correlated with market index returns B. its returns are positively correlated with market index returns C. its stock price has historically been very stable D. market demand for the firm's shares is very low

A. its returns are negatively correlated with market index returns

24. On a standard expected return vs. standard deviation graph investors will prefer portfolios that lie to the _____________ of the current investment opportunity set. A. left and above B. left and below C. right and above D. right and below

A. left and above

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

A. maturity at issue

The efficient frontier represents a set of portfolios that A. maximize expected return for a given level of risk. B. minimize expected return for a given level of risk. C. maximize risk for a given level of return. D. None of the options.

A. maximize expected return for a given level of risk.

16. To eliminate the bias in calculating the variance and covariance of returns from historical data the average squared deviation must be multiplied by _________. A. n/(n - 1) B. n * (n - 1) C. (n - 1)/n D. (n - 1) * n

A. n/(n - 1)

3. A collateral trust bond is _______. A. secured by other securities held by the firm B. secured by equipment owned by the firm C. secured by property owned by the firm D. unsecured

A. secured by other securities held by the firm

3. A collateral trust bond is _______. A. secured by other securities held by the firm B. secured by equipment owned by the firm C. secured by property owned by the firm D. unsecured

A. secured by other securities held by the firm

In regard to bonds, convexity relates to the _______. A. shape of the bond price curve with respect to interest rates B. shape of the yield curve with respect to maturity C. slope of the yield curve with respect to liquidity premiums D. size of the bid-ask spread

A. shape of the bond price curve with respect to interest rates

Serial bonds are associated with _________.

A. staggered maturity dates

1. The invoice price of a bond is the ______. A. stated or flat price in a quote sheet plus accrued interest B. stated or flat price in a quote sheet minus accrued interest C. bid price D. average of the bid and ask price

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

1. The invoice price of a bond is the ______. A. stated or flat price in a quote sheet plus accrued interest B. stated or flat price in a quote sheet minus accrued interest C. bid price D. average of the bid and ask price

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

1. The invoice price of a bond is the ______.A. stated or flat price in a quote sheet plus accrued interestB. stated or flat price in a quote sheet minus accrued interestC. bid priceD. average of the bid and ask price

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

he 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

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?

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%

A. 0%

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 0.50. The risk-free rate of return is 10%. 33. The proportion of the optimal risky portfolio that should be invested in stock A is __________. a. 0% b. 40% c. 60% d. 100%

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

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

Consider two bonds, A and B. Both bonds presently are selling at their par value of $1,000. Each pays interest of $120 annually. Bond A will mature in 5 years while bond B will mature in 6 years. If the yields to maturity on the two bonds change from 12% to 10%, ______________________. a. both bonds will increase in value, but bond A will increase more than bond B b. both bonds will increase in value, but bond B will increase more than bond A c. both bonds will decrease in value, but bond A will decrease more than bond B d. both bonds will decrease in value, but bond B will decrease more than bond A

Answer: b. both bonds will increase in value, but bond B will increase more than bond A Solution: The longer the maturity, the greater the price change when interest rates change.

Which one of the following par value 12% coupon bonds experiences a price change of $23 when the market yield changes by 50 basis points? a. The bond with a duration of 6 years b. The bond with a duration of 5 years c. The bond with a duration of 2.7 years d. The bond with a duration of 5.15 years

Answer: d. The bond with a duration of 5.15 years Solution: DP/P = -D X [D(1+y)/(1+y)]; -.023 = -D X [.005/1.12]; D = 5.15

Some of the problems with immunization are: a. duration assumes that the yield curve is flat. b. duration assumes that if shifts in the yield curve occur, these shifts are parallel. c. immunization is valid for one interest rate change only. d. duration assumes that the yield curve is flat; duration assumes that if shifts in the yield curve occur, these shifts are parallel; and immunization is valid for one interest rate change only.

Answer: d. duration assumes that the yield curve is flat; duration assumes that if shifts in the yield curve occur, these shifts are parallel; and immunization is valid for one interest rate change only. Solution: Durations and horizon dates change with the passage of time, but not by the same amounts.

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 _______.

Asset A

A bond has a par value of $1,000, a time to maturity of 10 years, and a coupon rate of 8% with interest paid annually. If the current market price is $50, what is the capital gain yield of this bond over the next year? A. .2% B. 1.85% C. 2.58% D. 3.42%

B

An investor pays $989.40 for a bond. The bond has an annual coupon rate of 4.8%. What is the current yield on this bond? A. 4.8% B. 4.85% C. 9.6% D. 9.%

B

Analysis of bond returns over a multiyear horizon based on forecasts of the bond's yield to maturity and reinvestment rate of coupons is called ______. A. multiyear analysis B. horizon analysis C. maturity analysis D. reinvestment analysis

B

Approximately how many securities does it take to diversify almost all of the unique risk from a portfolio? A. 8 B. 20 C. 6 D. 2

B

Bonds rated _____ or better by Standard & Poor's are considered investment grade. A. AA B. BBB C. BB D. CCC

B

Consider the expectations theory of the term structure of interest rates. If the yield curve is downward-sloping, this indicates that investors expect short-term interest rates to __________ in the future. A. increase B. decrease C. not change D. change in an unpredictable manner

B

Investing in two assets with a correlation coefficient of 1 will reduce which kind of risk? A. Unsystematic risk B. None of these options (With a correlation of 1, no risk will be reduced.) C. Unique risk D. Market risk

B

To earn a high rating from the bond rating agencies, a company would want to have: I. A low times-interest-earned ratio II. A low debt-to-equity ratio III. A high quick ratio A. I only B. II and III only C. I and III only D. I, II, and III

B

Which of the following bonds would most likely sell at the lowest yield? A. a callable debenture B. a puttable mortgage bond C. a callable mortgage bond D. a puttable debenture

B

Which of the following rates represents a bond's annual interest payment per dollar of par value? A. holding period return B. coupon rate C. IRR D. YTM

B

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 12%? A) .5 B) .7 C) 1.2 D) 1.4

B) .7

Stocks A, B, C and D have betas of 1.5, 0.4, 0.9 and 1.7 respectively. What is the beta of an equally weighted portfolio of A, B and C? A) .25 B) .93 C) 1.00 D) 1.13

B) .93

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

B) beta

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) the SEC discovers evidence of insider trading D) None of the above answers are correct

B) mis-pricing among securities creates opportunities for riskless profits

79. A bond has a flat price of $985, and it pays an annual coupon. The last coupon payment was made 90 days ago. What is the invoice price if the annual coupon is $69? A. $999.55 B. $1,002.01 C. $1,007.45 D. $1,012.13

B. $1,002.01 Invoice = 985 + (69)(90/365) = $1,002.01

A coupon bond that pays interest semiannually has a par value of $1,000, matures in 8 years, and has a yield to maturity of 6%. If the coupon rate is 7%, the intrinsic value of the bond today will be __________. A. $1,000 B. $1,062.81 C. $1,081.82 D. $1,100.03

B. $1,062.81

42. A coupon bond which pays interest semi-annually has a par value of $1,000, matures in 8 years, and has a yield to maturity of 6%. If the coupon rate is 7%, the intrinsic value of the bond today will be __________ (to the nearest dollar). A. $1,000 B. $1,063 C. $1,081 D. $1,100

B. $1,063 (look at doc)

68. A 6% coupon U.S. Treasury note pays interest on May 31 and November 30 and is traded for settlement on August 10. The accrued interest on the $100,000 face amount of this note is _________. A. $581.97 B. $1,163.93 C. $2,327.87 D. $3,000

B. $1,163.93 Accrued interest = 100,000(.06/2)(71/183) = 1163.93

78. A bond pays a semiannual coupon, and the last coupon was paid 61 days ago. If the annual coupon payment is $75, what is the accrued interest? (Assume 182 days in the 6-month period.) A. $13.21 B. $12.57 C. $15.44 D. $16.32

B. $12.57 (75/2) × (61/182) = $12.57

78. A bond pays a semi-annual coupon and the last coupon was paid 61 days ago. If the annual coupon payment is $75, what is the accrued interest? A. $13.21 B. $12.57 C. $15.44 D. $16.32

B. $12.57 75/2 + 61/182 = $12.57

The EBIT of a firm is $300, the tax rate is 35%, the depreciation is $20, capital expenditures are $60, and the increase in net working capital is $30. What is the free cash flow to the firm? A. $85 B. $125 C. $185 D. $305

B. $125 FCFF = 300(1 - .35) + 20 - 60 - 30 = $125 million

37. A convertible bond has a par value of $1,000, but its current market price is $950. The current price of the issuing company's stock is $19, and the conversion ratio is 40 shares. The bond's conversion premium is _________. A. $50 B. $190 C. $200 D. $240

B. $190 Conversion premium = 950 - 40(19) = 190

A convertible bond has a par value of $1,000, but its current market price is $950. The current price of the issuing company's stock is $19, and the conversion ratio is 40 shares. The bond's conversion premium is _________. A. $50 B. $190 C. $200 D. $240

B. $190 Conversion premium = 950 - 40(19) = 190

37. A convertible bond has a par value of $1,000 but its current market price is $950. The current price of the issuing company's stock is $19 and the conversion ratio is 40 shares. The bond's conversion premium is _________. A. $50.00 B. $190.00 C. $200.00 D. $240.00

B. $190.00 Conversion Premium = 950 - 40(19) = 190.00

A common stock pays an annual dividend per share of $1.80. The risk-free rate is 5%, and the risk premium for this stock is 4%. If the annual dividend is expected to remain at $1.80 per share, what is the value of the stock? A. $17.78 B. $20 C. $40 D. none of these options

B. $20 P = $1.80/.09 = $20

51. One year from now Bond C should sell for ________ (to the nearest dollar). A. $857 B. $842 C. $835 D. $821 ***needs a chart

B. $842 1.0799^3 = (1.06)(1 + 1F3)^2; (1 + 1F3)^2 = 1.188 P1 = 1000/1.188 = $841.69

36. A convertible bond has a par value of $1,000, but its current market price is $975. The current price of the issuing company's stock is $26, and the conversion ratio is 34 shares. The bond's market conversion value is _________. A. $1,000 B. $884 C. $933 D. $980

B. $884 ($26)(34) = $884

36. A convertible bond has a par value of $1,000 but its current market price is $975. The current price of the issuing company's stock is $26 and the conversion ratio is 34 shares. The bond's market conversion value is _________. A. $1,000 B. $884 C. $933 D. $980

B. $884 ($26)(34) = $884

43. A coupon bond that pays interest annually has a par value of $1,000, matures in 5 years, and has a yield to maturity of 12%. If the coupon rate is 9%, the intrinsic value of the bond today will be _________. A. $856.04 B. $891.86 C. $926.47 D. $1,000

B. $891.86 PV0 = Calculator entries are N = 5, I/Y = 12, PMT = 90, FV = 1,000, CPT PV -891.86

80. If the quote for a Treasury bond is listed in the newspaper as 99:08 bid, 99:11 ask, the actual price you can sell this bond given a $10,000 par value is _____________. A. $9,828.12 B. $9,925.00 C. $9,934.37 D. $9,955.43

B. $9,925.00 (look at doc)

71. Which of the following correlation coefficients will produce the most diversification benefits? A. -0.6 B. -0.9 C. 0.0 D. 0.4

B. -0.9

Most studies indicate that investors' risk aversion is in the range _____. A. 1-3 B. 1.5-4 C. 3-5.2 D. 4-6

B. 1.5-4

54. A bond has a par value of $1,000, a time to maturity of 10 years, and a coupon rate of 8% with interest paid annually. If the current market price is $750, what is the approximate capital gain yield of this bond over the next year? A. 0.7% B. 1.8% C. 2.5% D. 3.4%

B. 1.8% (look at doc)

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%

Following the last problem, if the stock and bond portfolios have a correlation of .55. how much is the portfolio's standard deviation? A. 15% B. 15.81% C. 14% D. None of the above **don;'t use percents for stnd dev***

B. 15.81%

A project has a 50% chance of doubling your investment in 1 year and a 50% chance of losing half your money. What is the expected return on this investment project? A. 0% B. 25% C. 50% D. 75%

B. 25%

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%

87. An investor pays $989.40 for a bond. The bond has an annual coupon rate of 4.8%. What is the current yield on this bond? A. 4.8% B. 4.85% C. 9.6% D. 9.7%

B. 4.85% Current yield = 48/989.4 = .0485

87. An investor pays $989.40 for a bond. The bond has an annual coupon rate of 4.8%. What is the current yield on this bond? A. 4.80% B. 4.85% C. 9.60% D. 9.70%

B. 4.85% Current Yield = 48/989.4 = 0.0485

A coupon bond that pays interest of $60 annually has a par value of $1,000, matures in 5 years, and is selling today at a $75.25 discount from par value. The current yield on this bond is _________. A. 6% B. 6.49% C. 6.73% D. 7%

B. 6.49% Current price = $1,000 - 75.25 = $924.75, so Current yield = $60/$924.75 = 6.49%

The arithmetic average of -11%, 15%, and 20% is ________. A. 15.67% B. 8% C. 11.22% D. 6.45%

B. 8%

Which of the following bonds would most likely sell at the lowest yield?

B. A puttable mortgage bond

Consider the single factor APT. Portfolio A has a beta of 1.4 and an expected return of 20%. Portfolio B has a beta of .8 and an expected return of 16%. The risk-free rate of return is 5%. If you wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio __________ and a long position in portfolio _________. A. A;A B. A;B C. B;B D. B;A

B. A;B look at homework

22. Bonds rated _____ or better by Standard & Poor's are considered investment grade. A. AA B. BBB C. BB D. CCC

B. BBB

22. Bonds rated _____ or better by Standard and Poor's are considered investment grade. A. AA B. BBB C. BB D. CCC

B. BBB

35. Consider the expectations theory of the term structure of interest rates. If the yield curve is downward sloping, this indicates that investors expect short-term interest rates to __________ in the future. A. increase B. decrease C. not change D. change in an unpredictable manner

B. Decrease

90. A bond was purchased at a premium and is now selling at a discount because of a change in market interest rates. If the bond pays a 4% annual coupon, what is the likely impact on the holding period return in an investor decides to sell now? A. Increased B. Decreased C. Stayed the same D. Can not be determined

B. Decreased

The rate of return on _____ is known at the beginning of the holding period, while the rate of return on ____ is not known until the end of the holding period. A. risky assets; Treasury bills B. Treasury bills; risky assets C. excess returns; risky assets D. index assets; bonds

B. Treasury bills; risky assets

23. Consider the liquidity preference theory of the term structure of interest rates. On average, one would expect investors to require _________. A. a higher yield on short term bonds than long term bonds B. a higher yield on long term bonds than short term bonds C. the same yield on both short term bonds and long term bonds D. the liquidity preference theory cannot be used to make any of the other statements.

B. a higher yield on long term bonds than short term bonds

56. Which of the following bonds would most likely sell at the lowest yield? A. A callable debenture B. A putable mortgage bond C. A callable mortgage bond D. A putable debenture

B. a potable mortgage bond

You put half of your money in a stock portfolio that has an expected return of 14% and a standard deviation of 25%. You put the rest of your money in a risky bond portfolio that has an expected return of 6% and a standard deviation of 10%. If the correlation between the two is 1, the standard deviation of the resulting portfolio will be A. more than 14% but less than 25% B. equal to 17.5% C. more than 25% D. equal to 10%

B. equal to 17.5%

15. The risk that can be diversified away is __________. A. beta B. firm specific risk C. market risk D. systematic risk

B. firm specific risk

49. Analysis of bond returns over a multiyear horizon based on forecasts of the bond's yield to maturity and reinvestment rate of coupons is called ______. A. multiyear analysis B. horizon analysis C. maturity analysis D. reinvestment analysis

B. horizon analysis

49. Analysis of bond returns over a multiyear horizon based on forecasts of the bond's yield to maturity and reinvestment rate of coupons is called ______. A. multiyear analysis B. horizon analysis C. maturity analysis D. reinvestment analysis

B. horizon analysis

58. Some diversification benefits can be achieved by combining securities in a portfolio as long as the correlation between the securities is _____________. A. 1 B. less than 1 C. between 0 and 1 D. less than or equal to 0

B. less than 1

26. Rational risk-averse investors will always prefer portfolios _____________. A. located on the efficient frontier to those located on the capital market line B. located on the capital market line to those located on the efficient frontier C. at or near the minimum variance point on the efficient frontier D. that are risk-free to all other asset choices

B. located on the capital market line to those located on the efficient frontier

29. Everything else equal the __________ the maturity of a bond and the __________ the coupon the greater the sensitivity of the bond's price to interest rate changes. A. longer; higher B. longer; lower C. shorter; higher D. shorter; lower

B. longer; lower

Everything else equal, the __________ the maturity of a bond and the __________ the coupon, the greater the sensitivity of the bond's price to interest rate changes. A. longer; higher B. longer; lower C. shorter; higher D. shorter; lower

B. longer; lower

43. A measure of the riskiness of an asset held in isolation is ____________. A. beta B. standard deviation C. covariance D. semi-variance

B. standard deviation

6. Adding additional risky assets to the investment opportunity set will generally move the efficient frontier _____ and to the ______. A. up, right B. up, left C. down, right D. down, left

B. up, left

Bonds rated ________ or better by Standard & Poor's are considered investment grade.

BBB

Why do bond quotes typically include the bond's yield in addition to its coupon rate?

Because when you purchase a bond after it has been issued, the yield-to-maturity gives you a better indication of the return that you can expect from a buy-and-hold strategy than the coupon rate

Consider the following table, which gives a security analyst's expected return on two stocks for two particular market returns: Market Return: 6% 16 Agressive Stock: 2.1%. 25 Defensive Stock: 3.6%. 10 What are the betas of the two stocks?

Beta A 2.29 Beta D 0.64 BA = (2.1-25)/(6-16) =2.29 BD = (3.6-10)/(6-16) =0.64

The _______ of the bond or ________ is the lender.

Buyer, Bondholder

$1,000 par value zero-coupon bonds (ignore liquidity premiums) The expected 2-year interest rate 3 years from now should be _________. A. 9.55% B. 11.4% C. 14.89% D. 13.3%

C

1,000 par value zero-coupon bonds (ignore liquidity premiums) The expected 1-year interest rate 1 year from now should be about _________. A. 6% B. .5 % C. 9.02% D. 10.08%

C

A Japanese firm issued and sold a pound-denominated bond in the United Kingdom. A U.S. firm issued bonds denominated in dollars but sold the bonds in Japan. Which one of the following statements is correct? A. Both bonds are examples of Eurobonds. B. The Japanese bond is a Eurobond, and the U.S. bond is termed a foreign bond. C. The U.S. bond is a Eurobond, and the Japanese bond is termed a foreign bond. D. Neither bond is a Eurobond.

C

A mortgage bond is _______. A. secured by other securities held by the firm B. secured by equipment owned by the firm C. secured by property owned by the firm D. unsecured

C

A project has a 60% chance of doubling your investment in 1 year and a 40% chance of losing half your money. What is the standard deviation of this investment? A. 25% B. 50% C. 73% D. 62%

C

As you lengthen the time horizon of your investment period and decide to invest for multiple years, you will find that: I. The average risk per year may be smaller over longer investment horizons. II. The overall risk of your investment will compound over time. III. Your overall risk on the investment will fall. A. I, II, and III B. I only C. I and II only D. III only

C

Consider two bonds, X and Y. Both bonds presently are selling at their par value of $1,000. Each pays interest of $150 annually. Bond X will mature in 6 years while bond Y will mature in 7 years. If the yields to maturity on the two bonds decrease from 15% to 12% A)both bonds will increase in value, but bond X will increase more than bond Y. B)both bonds will decrease in value, but bond X will decrease more than bond Y. C)both bonds will increase in value, but bond Y will increase more than bond X. D)both bonds will decrease in value, but bond Y will decrease more than bond X. E)none of the above

C

If you want to know the portfolio standard deviation for a three-stock portfolio, you will have to ______. A. calculate two covariances and one trivariance B. calculate only two covariances C. calculate three covariances D. average the variances of the individual stocks

C

In an era of particularly low interest rates, which of the following bonds is most likely to be called? A. zero-coupon bonds B. coupon bonds selling at a discount C. coupon bonds selling at a premium D. floating-rate bonds

C

To construct a riskless portfolio using two risky stocks, one would need to find two stocks with a correlation coefficient of ________. A. 1 B. .5 C. -1 D. 0

C

Which type of risk is most significant for bonds? A. maturity risk B. default risk C. interest rate risk D. reinvestment rate risk

C

Yields on municipal bonds are generally lower than yields on similar corporate bonds because of differences in _________. A. marketability B. risk C. taxation D. call protection

C

Consider a 5-year bond with a 10% coupon that has a present yield to maturity of 8%. If interest rates remain constant, one year from now the price of this bond will be A)$1,000. B)higher. C)lower. D)the same. E)cannot be determined

C If interest rates remain constant, one year from now the price of this bond will be lower. The bonds is currently selling at a premium to par. To prevent arbitrage, the bond must sell at par when it matures. Thus, each year, the premium decreases (price declines toward par).

44. A coupon bond that pays semiannual interest is reported in the Wall Street Journal as having an ask price of 117% of its $1,000 par value. If the last interest payment was made 2 months ago and the coupon rate is 6%, the invoice price of the bond will be _________. A. $1,140 B. $1,170 C. $1,180 D. $1,200

C. $1,180 Invoice price = 1.17(1,000) + 30(2/6) = 1180

44. A coupon bond pays semi-annual interest is reported as having an ask price of 117% of its $1,000 par value in the Wall Street Journal. If the last interest payment was made 2 months ago and the coupon rate is 6%, the invoice price of the bond will be _________. A. $1,140 B. $1,170 C. $1,180 D. $1,200

C. $1,180 Invoice Price = 1,000(1.17) + 60(2/12) = 1,180

A firm is planning on paying its first dividend of $2 three years from today. After that, dividends are expected to grow at 6% per year indefinitely. The stock's required return is 14%. What is the intrinsic value of a share today? A. $25 B. $16.87 C. $19.24 D. $20.99

C. $19.24 Intrinsic value at time 2 = $2/(.14 - .06) = $25 Intrinsic value today = $25/(1.14)^2 = $19.24

86. You buy a 10 year $1,000 par 4% annual payment coupon bond priced to yield 6%. You do not sell the bond at year end. If you are in a 15% tax bracket at year end you will owe taxes on this investment equal to _______. A. $9.10 B. $4.25 C. $7.68 D. $5.20

C. $7.68 (look at doc)

76. If the quote for a Treasury bond is listed in the newspaper as 98:09 bid, 98:13 ask, the actual price for you to purchase this bond given a $10,000 par value is _____________. A. $9,828.12 B. $9,809.38 C. $9,840.62 D. $9,813.42

C. $9,840.62 (look at doc)

55. The market value weighted average beta of firms included in the market index will always be _____________. A. 0 B. between 0 and 1 C. 1 D. There is no particular rule concerning the average beta of firms included in the market index

C. 1

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

C. 1.0

52. The expected two year interest rate three years from now should be _________. A. 9.55% B. 11.74% C. 14.89% D. 13.73% ***needs a chart

C. 14.89%

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%

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%

75. One, two and three year maturity, default-free, zero-coupon bonds have yields-to-maturity of 7%, 8% and 9% respectively. What is the implied one-year forward rate, one year from today? A. 2.0% B. 8.0% C. 9.0% D. 11.1%

C. 9.0% (look at doc)

50. The expected one-year interest rate one year from now should be about _________. A. 6.00% B. 7.50 % C. 9.00% D. 10.00% **** this noe uses a chart that isn't on here

C. 9.00%

The expected one-year interest rate three years from now should be _________. A. 7.00% B. 8.00% C. 9.00% D. 10.00% **needs a chart

C. 9.00% (look at doc)

The expected one-year interest rate two years from now should be _________. A. 7.00% B. 8.00% C. 9.00% D. 10.00% **needs a chart

C. 9.00% (look at doc)

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

C. 9.7%

20. Which one of the following stock return statistics fluctuates the most over time? A. Covariance of returns B. Variance of returns C. Average return D. Correlation coefficient

C. Average return

95. What is the lowest grade a bond can receive and still be considered investment grade? A. AAA B. A C. BBB D. BB

C. BBB

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

C. Holder

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

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

92. You hold a subordinated debenture in a firm. In the event of bankruptcy you will be paid off before which one of the following? A. Mortgage bonds B. Senior debentures C. Preferred stock D. Equipment obligation bonds

C. Preferred Stock

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

16. __________ are examples of synthetically created zero-coupon bonds. A. COLTS B. OPOSSMS C. STRIPS D. ARMs

C. STRIPS

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

C. holder

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

C. indexed bonds

93. Which type of risk is most significant for bonds? A. maturity risk B. default risk C. interest rate risk D. reinvestment rate risk

C. interest rate risk

26. Bonds with coupon rates that fall when the general level of interest rates rise are called _____________. A. asset-backed bonds B. convertible bonds C. inverse floaters D. index bonds

C. inverse floaters

25. You hold a subordinated debenture in a firm. In the event of bankruptcy you will be paid off before which one of the following? A. mortgage bonds B. senior debentures C. preferred stock D. equipment obligation bonds

C. preferred stock

A __________ bond gives the bondholder the right to cash in the bond before maturity at a specific price after a specific date. A. callable B. coupon C. puttable D. Treasury

C. puttable

What is the alpha of a portfolio with a beta of 2 and actual return of 15%?

CAPM E(ri) = 5% + 2(10% - 5%) = 15%; Alpha = Actual return - Expected return = 15% - 15% = 0%

The CAL provided by combinations of 1-month T-bills and a broad index of common stocks is called the ______.

CML

A bond has a par value of $1,000, a time to maturity of 10 years, and a coupon rate of 8% with interest paid annually. If the current market price is $750, what is the capital gain yield of this bond over the next year?

Calculator entries to find the YTM are N = 10, PV = -750, PMT = 80, FV = 1,000, CPT = I/Y 12.52 The current yield = 80/750 = 10.67% Then we use the relationship YTM = Current yield + Capital gain yield 12.52% = 10.67% + Capital gain yield, so Capital gain yield = 1.85%

_______ bonds represent a novel way of obtaining insurance from capital markets against specified disasters.

Catastrophe

________ bonds represent a novel way of obtaining insurance from capital markets against specified disasters.

Catastrophe

According to historical data, over the long run which of the following assets has the best chance to provide the best after-inflation, after-tax rate of return?

Common stocks

Nearly half of all professionally managed mutual funds are able to outperform the S&P 500 in a typical year. Consistent Violation

Consistent

Stock prices tend to be predictably more volatile in January than in other months. Consistent Violation

Consistent

______________ is an important characteristic of the relationship between bond prices and yields. Convexity Concavity Complexity Linearity

Convexity

What are corporate bonds subject to in terms of risk?

Corporate bonds (and other-than-U.S. Treasury bonds) are subject to credit risk or default risk

In an era of particularly low interest rates, which of the following bonds is most likely to be called?

Coupon bonds selling at a premium

In an era of particularly low interest rates, which of the following bonds is most likely to be called? Zero-coupon bonds Coupon bonds selling at a discount Coupon bonds selling at a premium Floating-rate bonds

Coupon bonds selling at a premium

The price on a Treasury bond is 104:21, with a yield to maturity of 3.45%. The price on a comparable maturity corporate bond is 103:11, with a yield to maturity of 4.59%. What is the approximate percentage value of the credit risk of the corporate bond?

Credit risk premium = 4.59 - 3.45 = 1.14%

A coupon bond that pays interest of 4% annually has a par value of $1,000, matures in 5 years, and is selling today at $85. The actual yield to maturity on this bond is _________. A. .2% B. 8.8% C. 9.1% D. 9.6%

D

A stock has a correlation with the market of .45. The standard deviation of the market is 21%, and the standard deviation of the stock is 35%. What is the stock's beta? A. .60 B. 1 C. .55 D. .75

D

Market risk is also called __________ and _________. A. unique risk; diversifiable risk B. systematic risk; diversifiable risk C. unique risk; nondiversifiable risk D. systematic risk; nondiversifiable risk

D

To earn a high rating from the bond rating agencies, a firm should have A)a low times interest earned ratio. B)a low debt to equity ratio. C)a high quick ratio. D)B and C E)A and C

D

What is the beta for a portfolio with an expected return of 15% A) 0 B) 1 C) 1.5 D) none of the above

D

What is the standard deviation of a portfolio of two stocks given the following data: Stock A has a standard deviation of 18%. Stock B has a standard deviation of 14%. The portfolio contains 40% of stock A, and the correlation coefficient between the two stocks is -.23. A. 12.2% B. 15.6% C. 14% D. 9.7%

D

Which of the following provides the best example of a systematic-risk event? A. A strike by union workers hurts a firm's quarterly earnings. B. A senior executive at a firm embezzles $10 million and escapes to South America. C. Mad Cow disease in Montana hurts local ranchers and buyers of beef. D. The Federal Reserve increases interest rates 50 basis points.

D

Which of the following statements is (are) true regarding time diversification? I. The standard deviation of the average annual rate of return over several years will be smaller than the 1-year standard deviation. II. For a longer time horizon, uncertainty compounds over a greater number of years. III. Time diversification does not reduce risk. A. I, II, and III B. II only C. I only D. II and III only

D

You are considering adding a new security to your portfolio. To decide whether you should add the security, you need to know the security's: I. Expected return II. Standard deviation III. Correlation with your portfolio A. I and III only B. I and II only C. I only D. I, II, and III

D

You are recalculating the risk of ACE stock in relation to the market index, and you find that the ratio of the systematic variance to the total variance has risen. You must also find that the ____________. A. covariance between ACE and the market has fallen B. correlation coefficient between ACE and the market has fallen C. unsystematic risk of ACE has risen D. correlation coefficient between ACE and the market has risen

D

You are recalculating the risk of ACE stock in relation to the market index, and you find that the ratio of the systematic variance to the total variance has risen. You must also find that the ____________. A. unsystematic risk of ACE has risen B. covariance between ACE and the market has fallen C. correlation coefficient between ACE and the market has fallen D. correlation coefficient between ACE and the market has risen

D

You buy a bond with a $1,000 par value today for a price of $85. The bond has 6 years to maturity and makes annual coupon payments of $5 per year. You hold the bond to maturity, but you do not reinvest any of your coupons. What was your effective EAR over the holding period? A. 10.4% B. 9.5% C. .45% D. 8.8%

D

If the simple CAPM is valid and all portfolios are priced correctly, which of the situations below is possible? Consider each situation independently, and assume the risk-free rate is 5%. A) Expected Return A : 11% Market: 11% Beta A: 1.1 Market: 1.0 B) Expected Return A : 14% Market: 9% Standard Deviation A: 11% Market: 19% C) Expected Return A : 14% Market: 9% Beta A: 1.1 Market: 1.0 D) Expected Return A : 17.6% Market: 11% Beta A: 2.1 Market: 1.0

D) Expected Return A : 17.6% Market: 11% Beta A: 2.1 Market: 1.0 (18-5)/2.1 = (11-5)/1.0

The CAPM is a ____ factor model, whereas the APT is a ____ factor model. A) 1 ; 2 B) 1 ; 3 C) 1 ; 4 D) 1 ; potentially many

D) 1 ; potentially many

The market portfolio has a beta of __________. A) -1.0 B) 0 C) 0.5 D) 1.0

D) 1.0

45. A Treasury bond due in 1 year has a yield of 6.3%, while a Treasury bond due in 5 years has a yield of 8.8%. A bond due in 5 years issued by High Country Marketing Corp. has a yield of 9.6%, while a bond due in 1 year issued by High Country Marketing Corp. has a yield of 6.8%. The default risk premiums on the 1-year and 5-year bonds issued by High Country Marketing Corp. are, respectively, __________ and _________. A. .4%; .3% B. .4%; .5% C. .5%; .5% D. .5%; .8%

D. .5%; .8% Default premium for 1-year bond = .068 - .063 = .005 Default premium for 5-year bond = .096 - .088 = .008

45. A treasury bond due in one year has a yield of 6.3% while a treasury bond due in 5 years has a yield of 8.8%. A bond due in 5 years issued by High Country Marketing Corporation has a yield of 9.6% while a bond due in one year issued by High Country Marketing Corporation has a yield of 6.8%. The default risk premiums on the one-year and 5-year bonds issued by High Country Marketing Corp. are respectively __________ and _________. A. 0.4%, 0.3% B. 0.4%, 0.5% C. 0.5%, 0.5% D. 0.5%, 0.8%

D. 0.5%, 0.8% Default premium for 1-Year Bond = .068 - .063 = .005 Default premium for 5-Year Bond = .096 - .088 = .008

The market portfolio has a beta of _________. A. -1 B. 0 C. 0.5 D. 1

D. 1

According to the CAPM, what is the expected market return given an expected return on a security of 18.8%, a stock beta of 1.8, and a risk-free interest rate of 8%? A. 10.4% B. 19.4% C. 14.4% D. 14%

D. 14% 18.8 = 8 + 1.8 × (MRP); MRP = 14.40%; Expected market return = 8 + 14.40 = 14.00%

Consider the CAPM. The risk-free rate is 7%, and the expected return on the market is 17%. What is the expected return on a stock with a beta of 1.6? A. 34% B. 31.4% C. 13.3% D. 23.0%

D. 23.0% E[rs] = 7% + 1.6[17% - 7%] = 23.0%

According to the CAPM, what is the market risk premium given an expected return on a security of 11.8%, a stock beta of 1.7, and a risk-free interest rate of 5%? A. 8.50% B. 9.35% C. 5.00% D. 4.00%

D. 4.00% 11.8 = 5 + 1.7 × (MRP); MRP = 4.00%

According to the CAPM, what is the market risk premium given an expected return on a security of 13.6%, a stock beta of 1.2, and a risk-free interest rate of 4%? A. 4% B. 4.8% C. 6.6% D. 8%

D. 8%

83. You buy a bond with a $1,000 par today for a price of $875. The bond has 6 years to maturity and makes annual coupon payments of $75 per year. You hold the bond to maturity but you do not reinvest any of your coupons. What was your effective EAR over the holding period? A. 10.40% B. 9.57% C. 7.45% D. 8.78%

D. 8.78% (look at doc)

61. A corporate bond has a 10 year maturity and pays interest semiannually. The quoted coupon rate is 6% and the bond is priced at par. The bond is callable in 3 years at 110% of par. What is the bond's yield to call? A. 6.72% B. 9.17% C. 4.49% D. 8.98%

D. 8.98% (look at doc)

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%

38. A coupon bond that pays interest of 4% annually has a par value of $1,000, matures in 5 years, and is selling today at $785. The actual yield to maturity on this bond is _________. A. 7.2% B. 8.8% C. 9.1% D. 9.6%

D. 9.6%

38. A coupon bond which pays interest of 4% annually, has a par value of $1,000, matures in 5 years, and is selling today at $785. The actual yield to maturity on this bond is _________. A. 7.2% B. 8.8% C. 9.1% D. 9.6%

D. 9.6% (look at doc)

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

D. A price-earnings ratio

The CAPM _______. A. predicts the relationship between risk and expected return of an asset B. provides a benchmark rate of return for evaluating possible investments C. helps us make an educated guess as to expected return on assets that have not yet traded in the marketplace D. All of the options.

D. All of the options.

47. Which risk can be diversified away as additional securities are added to a portfolio? I. Total risk II. Systematic risk III. Firm specific risk A. I only B. I and II only C. I, II, and III D. I and III

D. I and III

Which one of the following statement is correct A. Minimum Variance portfolio has the best return risk ratio among all portfolios along the investment opportunity set. B. Given different level of risk aversion and hold everything else the same, given the investment opportunity set of risky portfolios, investors should invest in a portfolio that he/she deems appropriate for his risk tolerance level. C. Investor should consider investing in portfolios that lies below the Minimum Variance portfolio. D. Single index model assume the security co-moves with only one single factor, usually the market index. Stocks do not correlate with each other. E. With n assets to form portfolios, the efficient frontier dominate the other portfolios, we can invest in any portfolio on the efficient frontier.

D. Single index model assume the security co-moves with only one single factor, usually the market index. Stocks do not correlate with each other.

73. Investing in two assets with a correlation coefficient of -0.5 will reduce what kind of risk? A. Market risk B. Non-diversifiable risk C. Systematic risk D. Unique risk

D. Unique risk

74. Investing in two assets with a correlation coefficient of 1.0 will reduce which kind of risk? A. Market risk B. Unique risk C. Unsystematic risk D. With a correlation of 1.0, no risk will be reduced

D. With a correlation of 1.0, no risk will be reduced

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

D. a price-earnings ratio

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

D. all of the above

1. Risk that can be eliminated through diversification is called ______ risk. A. unsystematic B. firm-specific C. diversifiable D. all of the above

D. all of the above

15. According to the liquidity preference theory of the term structure of interest rates, an increase in the yield on long-term corporate bonds versus short-term bonds could be due to _______. A. declining liquidity premiums B. an expectation of an upcoming recession C. a decline in future inflation expectations D. an increase in expected interest rate volatility

D. an increase in expected interest rate volatility

24. Consider two bonds, A and B. Both bonds presently are selling at their par value of $1,000. Each pay interest of $120 annually. Bond A will mature in 5 years while bond B will mature in 6 years. If the yields to maturity on the two bonds change from 12% to 14%, _________. A. both bonds will increase in value but bond A will increase more than bond B B. both bonds will increase in value but bond B will increase more than bond A C. both bonds will decrease in value but bond A will decrease more than bond B D. both bonds will decrease in value but bond B will decrease more than bond A

D. both bonds will decrease in value but bond B will decrease more than bond A

When all investors analyze securities in the same way and share the same economic view of the world, we say they have ____________________. A. heterogeneous expectations B. equal risk aversion C. asymmetric information D. homogeneous expectations

D. homogeneous expectations

15. According to the liquidity preference theory of the term structure of interest rates an increase in the yield on long term corporate bonds versus short term bonds could be due to _______. A. declining liquidity premiums B. expectation of an upcoming recession C. a decline in future inflation expectations D. increase in expected interest rate volatility

D. increase in expected interest rate volatility

11. The correlation coefficient between two assets equals to _________. A. their covariance divided by the product of their variances B. the product of their variances divided by their covariance C. the sum of their expected returns divided by their covariance D. their covariance divided by the product of their standard deviations

D. their covariance divided by the product of their standard deviations

5. A debenture is _________. A. secured by other securities held by the firm B. secured by equipment owned by the firm C. secured by property owned by the firm D. unsecured

D. unsecured

5. A debenture is _________. A. secured by other securities held by the firm B. secured by equipment owned by the firm C. secured by property owned by the firm D. unsecured

D. unsecured

53. The values of beta coefficients of securities are __________. A. always positive B. always negative C. always between positive 1 and negative 1 D. usually positive, but are not restricted in any particular way

D. usually positive, but are not restricted in any particular way

A Treasury bond due in 1 year has a yield of 6.3%, while a Treasury bond due in 5 years has a yield of 8.8%. A bond due in 5 years issued by High Country Marketing Corp. has a yield of 9.6%, while a bond due in 1 year issued by High Country Marketing Corp. has a yield of 6.8%. The default risk premiums on the 1-year and 5-year bonds issued by High Country Marketing Corp. are, respectively, __________ and _________.

Default premium for 1-year bond = .068 - .063 = .005 Default premium for 5-year bond = .096 - .088 = .008

There are two independent economic factors, M1 and M2. The risk-free rate is 5%, and all stocks have independent firm-specific components with a standard deviation of 25%. Portfolios A and B are well diversified. Given the data below, which equation provides the correct pricing model? Beta on M1 A: 1.5 B:1.0 Beta on M2 A: 1.75 B:0.65 E[rp] A: 35% B: 20% Multiple Choice E(rP) = 5 + 1.12βP1 + 11.86βP2 E(rP) = 5 + 4.96βP1 + 13.26βP2 E(rP) = 5 + 3.23βP1 + 8.46βP2 E(rP) = 5 + 8.71βP1 + 9.68βP2

E(rP) = 5 + 8.71βP1 + 9.68βP2 35 = 5 + 1.5 γ1 + 1.75 γ2; solve for γ1 γ1 = 20 - 1.1667γ2 20 = 5 + γ1 + .65γ2; sub in γ1 20 = 5 + 20 - 1.1667 γ2 + .65 γ2 γ2 = 9.68% γ1 = 8.71%

The risk-free rate and the expected market rate of return are 6% and 16%, respectively. According to the capital asset pricing model, the expected rate of return on security X with a beta of 1.2 is equal to _________.

E(rx)=.06+1.2(.16-.06)=.18

A project has a 50% chance of doubling your investment in 1 year and a 50% chance of losing half your money. What is the expected return on this investment project?

E[rp] = (.5)(100) + (.5)(-50) = 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?

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

The risk-free rate and the expected market rate of return are 6% and 16%, respectively. According to the capital asset pricing model, the expected rate of return on security X with a beta of 1.2 is equal to

Er = 6 + 1.2(16 - 6) = 18

What is the expected return on a stock with a beta of .8, given a risk-free rate of 3.5% and an expected market return of 15.5%?

Expected return = 3.5 + (.8)(15.5 - 3.5) = 13.1%

Stocks with a beta of zero offer an expected rate of return of zero.

False

The CAPM implies that investors require a higher return to hold highly volatile securities.

False

You can construct a portfolio with beta of .75 by investing .75 of the investment budget in T-bills and the remainder in the market portfolio.

False

The risk that can be diversified away is __________. beta firm-specific risk market risk systematic risk

Firm Specific risk

Which one of the following measures time-weighted returns and allows for compounding?

Geometric average return

You have calculated the historical dollar-weighted return, annual geometric average return, and annual arithmetic average return. You always reinvest your dividends and interest earned on the portfolio. Which method provides the best measure of the actual average historical performance of the investments you have chosen?

Geometric average return

Consider a -year bond with a 9% coupon and a yield to maturity of 12%. If interest rates remain constant, 1 year from now the price of this bond will be _________.

Higher

Portfolio performance is often decomposed into various subcomponents, such as the return due to: I. Broad asset allocation across security classes II. Sector weightings within equity markets III. Security selection with a given sector The one decision that contributes most to the fund performance is _____. Question 12 options: I II III All contribute equally to fund performance.

I

A discount bond that pays interest semi-annually will: I. Have a lower price than an equivalent annual payment bond. II. Have a higher EAR than an equivalent annual payment bond. III. Sell for less than its conversion value.

I and II only

A discount bond that pays interest semiannually will ______. I. have a lower price than an equivalent annual payment bond II. have a higher EAR than an equivalent annual payment bond III. sell for less than its conversion value

I and II only

A discount bond that pays interest semiannually will: I. Have a lower price than an equivalent annual payment bond II. Have a higher EAR than an equivalent annual payment bond III. Sell for less than its conversion value

I and II only

A discount bond that pays interest semiannually will: I. Have a lower price than an equivalent annual payment bond II. Have a higher EAR than an equivalent annual payment bond III. Sell for less than its conversion value

I and II only

As you lengthen the time horizon of your investment period and decide to invest for multiple years, you will find that: I. The average risk per year may be smaller over longer investment horizons. II. The overall risk of your investment will compound over time. III. Your overall risk on the investment will fall.

I and II only

Based on the outcomes in the following table, choose which of the statements below is (are) correct? I. The covariance of security A and security B is zero. II. The correlation coefficient between securities A and C is negative. III. The correlation coefficient between securities B and C is positive.

I and II only

Security A has a higher standard deviation of returns than security B. We would expect that: I. Security A would have a higher risk premium than security B. II. The likely range of returns for security A in any given year would be higher than the likely range of returns for security B. III. The Sharpe ratio of A will be higher than the Sharpe ratio of B.

I and II only

The part of a stock's return that is systematic is a function of which of the following variables? I. Volatility in excess returns of the stock market II. The sensitivity of the stock's returns to changes in the stock market III. The variance in the stock's returns that is unrelated to the overall stock market

I and II only

The part of a stock's return that is systematic is a function of which of the following variables? I. Volatility in excess returns of the stock market II. The sensitivity of the stock's returns to changes in the stock market III. The variance in the stock's returns that is unrelated to the overall stock market I only I and II only II and III only I, II, and III

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.

I and II only

You invest all of your money in 1-year T-bills. Which of the following statements is (are) correct? I. Your nominal return on the T-bills is diskless. II. Your real return on the T-bills is riskless. III. Your nominal Sharpe ratio is zero.

I and III only

The duration of a bond normally increases with an increase in: I. Term to maturity II. Yield to maturity III. Coupon rate

I only

You are considering adding a new security to your portfolio. In order to decide whether you should add the security you need to know the security's _______. I. expected return II. standard deviation III. correlation with your portfolio

I, II and III

Which of the following are assumptions of the simple CAPM model?

I, II and III only: 1. 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.

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.

I, II, III, and IV

In a simple CAPM world which of the following statements is (are) correct?

I, II, III, and IV: 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, an it will be the optimal risky portfolio.

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. Multiple Choice I only II only I and III only I, II, and III

I, II, and III

The yield to maturity on a bond is: I. Above the coupon rate when the bond sells at a discount and below the coupon rate when the bond sells at a premium II. The discount rate that will set the present value of the payments equal to the bond price III. Equal to the true compound return on investment only if all interest payments received are reinvested at the yield to maturity

I, II, and III

The yield to maturity on a bond is:I. Above the coupon rate when the bond sells at a discount and below the coupon rate when the bond sells at a premiumII. The discount rate that will set the present value of the payments equal to the bond priceIII. Equal to the true compound return on investment only if all interest payments received are reinvested at the yield to maturity

I, II, and III

You are considering adding a new security to your portfolio. To decide whether you should add the security, you need to know the security's: I. Expected return II. Standard deviation III. Correlation with your portfolio

I, II, and III

You are considering adding a new security to your portfolio. To decide whether you should add the security, you need to know the security's: I. Expected return II. Standard deviation III. Correlation with your portfolio

I, II, and III

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.

I, II, and III 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. Multiple Choice I, II, and IV only I, II, and III only II, III, and IV only I, II, III, and IV

I, II, and III only

Rank the following from highest average historical return to lowest average historical return from 1926 to 2010. I. Small stocks II. Long-term bonds III. Large stocks IV. T-bills

I, III, II, IV

Rank the following from highest average historical standard deviation to lowest average historical standard deviation from 1926 to 2010.

I, III, II, IV

According to Tobin's separation property, portfolio choice can be separated into two independent tasks consisting of __________ and __________. identifying all investor imposed constraints; identifying the set of securities that conform to the investor's constraints and offer the best risk-return trade-offs identifying the investor's degree of risk aversion; choosing securities from industry groups that are consistent with the investor's risk profile identifying the optimal risky portfolio; constructing a complete portfolio from T-bills and the optimal risky portfolio based on the investor's degree of risk aversion choosing which risky assets an investor prefers according to the investor's risk-aversion level; minimizing the CAL by lending at the risk-free rate

IDing opt risky port., constructing complete portfolio from t bills and optimal risky port based on investors degree of risk aversion

To earn a high rating from the bond rating agencies, a company would want to have: I. A low times-interest-earned ratio II. A low debt-to-equity ratio III. A high quick ratio

II and III only

To earn a high rating from the bond rating agencies, a company would want to have: I. A low times-interest-earned ratio II. A low debt-to-equity ratio III. A high quick ratio

II and III only

Which of the following statements is (are) true regarding time diversification? I. The standard deviation of the average annual rate of return over several years will be smaller than the 1-year standard deviation. II. For a longer time horizon, uncertainty compounds over a greater number of years. III. Time diversification does not reduce risk.

II and III only

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

III and IV only

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

III and IV only

Par value bond XYZ has a modified duration of 6. Which one of the following statements regarding the bond is true? a. If the market yield increases by 1%, the bond's price will decrease by $60. b. If the market yield increases by 1%, the bond's price will increase by $50. c. If the market yield increases by 1%, the bond's price will decrease by $50. d. If the market yield increases by 1%, the bond's price will increase by $60.

If the market yield increases by 1%, the bond's price will decrease by $60. Solution: DP/P = -D*Dy; -$60 = -6(0.01) X $1,000

A bond's price volatility _________ at _________ rate as maturity increases.

Increases; a decreasing

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

Individual trades of investors do not affect a stock's price All investors plan for one identical holding period All investors analyze securities in the same way and share the same economic view of the world

The duration of a perpetuity varies _______ with interest rates.

Inversely

A bond has a flat price of $985, and it pays an annual coupon. The last coupon payment was made 90 days ago. What is the invoice price if the annual coupon is $69?

Invoice = 985 + (69)(90/365) = $1,002.01

Which one of the following statements is correct?

Invoice price = Flat price + Accrued interest

Which of the following statements are true if the efficient market hypothesis holds? It implies that future events can be forecast with perfect accuracy. It implies that prices reflect all available information. It implies that security prices change for no discernible reason. It implies that prices do not fluctuate.

It implies that prices reflect all available information

According to the CAPM, which of the following is not a true statement regarding the market portfolio.

It is always the minimum-variance portfolio on the efficient frontier.

During the 1926-2010 period which one of the following asset classes provided the lowest real return?

Long-term U.S. Treasury bonds

During the 1985-2010 period the Sharpe ratio was lowest for which of the following asset classes?

Long-term U.S. Treasury bonds

Everything else equal, the __________ the maturity of a bond and the __________ the coupon, the greater the sensitivity of the bond's price to interest rate changes. longer; higher longer; lower shorter; higher shorter; lower

Longer, Lower

Beta is a measure of security responsiveness to _________.

Market Risk

Consider the following information: Risk-free: Expected return 10%, St dev 0 Market: Expected return 10.4%, st dev 1.0 A: Expected return 9%, st dev 0.8 If the simple CAPM is vaild, is the above situation possible?

No Not possible. Here, the required expected return for Portfolio A is: 10% + (0.8 × .4%) = 10.32% This is still higher than 9.0%. Portfolio A is overpriced, with alpha equal to: -1.32%

What is the standard deviation of a portfolio of two stocks given the following data: Stock A has a standard deviation of 18%. Stock B has a standard deviation of 14%. The portfolio contains 40% of stock A, and the correlation coefficient between the two stocks is -.23.

O(std dev) SQRT(.40)^2(.18)^2+(.6)^2(.14)^2+2(-.23)(.18)(.14)(.40)(.6) = .097 or 9.7%

Suppose that, after conducting an analysis of past stock prices, you come up with the following observations. Which would appear to contradict the weak form of the efficient market hypothesis? The average rate of return is significantly greater than zero. The correlation between the return during a given week and the return during the following week is zero. One could have made superior returns by buying stock after a 10% rise in price and selling after a 10% fall. One could have made higher-than-average capital gains by holding stocks with low dividend yields.

One could have made superior returns by buying stock after a 10% rise in price and selling after a 10% fall.

An investor's degree of risk aversion will determine his or her _______.

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

The __________ or ______ of a bond is the entity who creates the bond and sells it to the public or an institution.

Original Seller, Issuer

This is the amount that the bondholder will receive when the bond matures i.e. reaches the end of its life

Par Value

What is Face value (or par value)?

Payment to bondholder at maturity of bond, typically $1,000.

What is a coupon?

Periodic interest payments. The coupon rate is expressed as an annual rate per dollar of par value.

What strategy could be considered insurance for an investment in a portfolio of stocks? Question 14 options: Covered call Protective put Short put Straddle

Protective put

They are hard as f***

Questions 33-42 on the chapter 6 test bank

Consider the following table, which gives a security analyst's expected return on two stocks for two particular market returns: Market Return: 6% 16 Agressive Stock: 2.1%. 25 Defensive Stock: 3.6%. 10 What is the expected rate of return on each stock if the market return is equally likely to be 6% or 16%?

Rate of return on A: 13.55% Rate of return on D: 6.80% E(rA) = 0.5 × (2.1% + 25%) = 13.55% E(rD) = 0.5 × (3.6% + 10%) = 6.80%

The measure of unsystematic risk can be found from an index model as

Residual standard deviation

Assume both portfolios A and B are well diversified, that E(rA) = 14% and E(rB) = 14.8%. If the economy has only one factor, and βA = 1 while βB = 1.1,What must be the risk-free rate?

Risk-free rate 6%

The _________ could be used in an index model to represent common or systematic risk factors.

S&P 500 index

The expected return on the market portfolio is 16%. The risk-free rate is 8%. The expected return on SDA Corp. common stock is 15%. The beta of SDA Corp. common stock is 1.70. Within the context of the capital asset pricing model, _________.

SDA Corp. stock's alpha is -6.60% α = 0.15 - [0.08 + 1.70(0.16 - 0.08)] = -0.0660

The expected return on the market portfolio is 15%. The risk-free rate is 6%. The expected return on SDA Corp. common stock is 14%. The beta of SDA Corp. common stock is 1.40. Within the context of the capital asset pricing model, _________.

SDA corp. stock's alpha is -4.6% α = 0.14 - [0.06 + 1.40(0.15 - 0.06)] = -0.0460

The graph of the relationship between expected return and beta in the CAPM context is called the

SML

________ are examples of synthetically created zero-coupon bonds.

STRIPS

Which coupon rate is most common?

Semi-annual coupons are most common. In that case, the semi-annual payments are equal to half of the annual coupon rate, times the par value.

Which of the following strategies makes a profit if the stock price stays stable? Question 15 options: Long call and short put Long call and long put Short call and short put Short call and long put Save

Short call and short put

Which of the following possible provisions of a bond indenture is designed to ease the burden of principal repayment by spreading it out over several years? Callable feature Convertible feature Subordination clause Sinking fund

Sinking fund

A project has a .7 chance of doubling your investment in a year and a .3 chance of halving your investment in a year. What is the standard deviation of the rate of return on this investment?

Std. Dev. 68.74%

The figures below show plots of monthly excess returns for two stocks plotted against excess returns for a market index. Which stock is likely to further reduce risk for an investor currently holding her portfolio in a well-diversified portfolio of common stock?

Stock A

Which stock is likely to further reduce risk for an investor currently holding her portfolio in a well-diversified portfolio of common stock?

Stock A

The figures below show plots of monthly excess returns for two stocks plotted against excess returns for a market index. Stock A has excess retuns all the graph, stock Bs returns Which stock is riskier to a nondiversified investor who puts all his money in only one of these stocks?

Stock A is riskier.

Which stock is riskier to a nondiversified investor who puts all his money in only one of these stocks?

Stock A is riskier.

Inflation-indexed Treasury securities are commonly called ____.

TIPS

Inflation-indexed Treasury securities are commonly called ________.

TIPS

Inflation-indexed treasury securities are commonly called

TIPS

Which of the following provides the best example of a systematic risk event?

The Federal Reserve increases interest rates 50 basis points.

A Japanese firm issued and sold a pound-denominated bond in the UK. A US firm issued bonds denominated in dollars but sold the bonds in Japan. Which one of the following statements is correct?

The US bond is a Eurobond, and the Japanese bond is termed a foreign bond

An important characteristic of market equilibrium is ________________.

The absence of arbitrage opportunities

The expected return of the risky-asset portfolio with minimum variance is _________.

The answer cannot be determined from the information given.

Consider the following information: Portfolio Expected Return Beta Risk-free 10 % 0 Market 18 1.0 A 16 .9 a. Calculate the expected return of portfolio A with a beta of .9. Expected return % b. What is the alpha of portfolio A. (Negative value should be indicated by a minus sign.) Alpha % c. If the simple CAPM is valid, state whether the above situation is possible? Yes No

a. 10 + .9(18 - 10) = 17.2% 18 - 10 = 8 Risk Free = 10 Beta .9 Expected Return on stock = Risk-free rate + Equity risk premium * Beta for stock 10 + (8 x .9) = 17.2 b. Alpha of Stock = Actual Return - Expected Return 16 -17.2 = -1.2 c. NO

The following diagram shows the value of a put option at expiration: Ignoring transaction costs, which of the following statements about the value of the put option at expiration is true?

The long put has a positive expiration value when the stock price is below $80. "The long put has a positive expiration value when the stock price is below $80" is the only correct statement.The value of the short position in the put is -$4 if the stock price is $76.The value of the long position in the put is $4 if the stock price is $76.The value of the short position in the put is zero for stock prices equaling or exceeding $80, the exercise price.

What happens to the market value of bonds once the coupon is paid?

The market value of bonds is reduced by the coupon every time a coupon is paid resulting in a seesaw pattern for the market value of the bond.

On May 1, 2007, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds. Suppose market interest rates decline by 100 basis points (i.e., 1%). The effect of this decline would be ______.

The price of the Wildwood bond would increase by more than the price of the Asbury bond.

Many current and retired Enron Corp. employees had their 401k retirement accounts wiped out when Enron collapsed because ____.

Their 401k accounts were not well diversified

Municipal Bonds

These are issued by local governments such as Municipalities.

Price

This is the actual price paid by the bondholder when he buys the bond.

Quoted Price

This the price that we calculate using the current market interest rate, the bond coupon payment, maturity etc.

Suppose the yield on short-term government securities (perceived to be risk-free) is about 6%. Suppose also that the expected return required by the market for a portfolio with a beta of 1 is 13.0%. Suppose you consider buying a share of stock at a price of $25. The stock is expected to pay a dividend of $6 next year and to sell then for $26. The stock risk has been evaluated at β = -0.5. Is the stock overpriced or underpriced?

Underpriced Because the expected return exceeds the fair return, the stock must be underpriced.

Debentures

Unsecured bonds, i.e. the loan represented by the bonds is not secured by any collateral.

Money managers that outperform the market (on a risk-adjusted basis) in one year are likely to outperform in the following year. Consistent Violation

Violation

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

Wb= (.20)^2 -(.3)(.20)(-1)/ (.3)^2 +(.20)^2 -2(.3)(.20)(-1) = .40

Invoice Price, Full Price or Dirty Price:

When a bond is bought in the secondary market i.e. one bondholder buys the bond from another, the coupon payment is made to the current holder on the coupon due date. If the bond is bought between coupon payment periods (which is usually the case) it is unfair to the previous bondholder.

1. Annual interest rate = {[$100,000 - 97,645]/97,645} x 12/3 = 9.65% Effective annual interest = (1 + {.0965/4})^4 -1 = 10% 2. Effective annual interest = (1+[.1/2])^2 -1 = 10.25%

Which Security has a higher effective annual interest rate? 1. 3-month T-bill with face value of $100,000 currently selling at $97,645 2. a coupon bond selling at par and paying a 10% coupon semiannually

The capital asset pricing model was developed by _________.

William Sharpe

Annual percentage rates can be converted to effective annual rates by means of the following formula:

[1 + (APR/n)]n - 1

3. A collateral trust bond is _______. A. secured by other securities held by the firm B. secured by equipment owned by the firm C. secured by property owned by the firm D. unsecured

a

33. Serial bonds are associated with _________. A. staggered maturity dates B. collateral C. coupon payment dates D. conversion features

a

46. A zero-coupon bond has a yield to maturity of 5% and a par value of $1,000. If the bond matures in 16 years, it should sell for a price of __________ today. A. $458.11 B. $641.11 C. $789.11 D. $1,100.11 PV0 = Calculator entries are N = 16, I/Y = 5, PMT = 0, FV = 1,000, CPT PV 458.11

a

Which of the following yield curves generally implies a normal healthy economy? a. positive slope b. hump-shaped curve c. negative slope d. flat

a. positive slope

A stock's alpha measures the stock's ____________________. Multiple Choice expected return abnormal return excess return residual return

abnormal return

The writer of a put option _______________. Question 6 options: agrees to sell shares at a set price if the option holder desires agrees to buy shares at a set price if the option holder desires has the right to buy shares at a set price has the right to sell shares at a set price

agrees to buy shares at a set price if the option holder desires

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

all securities' returns must lie on the security market line

7. According to the capital asset pricing model, a fairly priced security will plot _________. A. above the security market line B. along the security market line C. below the security market line D. at no relation to the security market line

along sml

According to the capital asset pricing model, a fairly priced security will plot

along the security market line

According to the capital asset pricing model, a fairly priced security will plot ___.

along the security market line

According to the capital asset pricing model, a fairly priced security will plot _________.

along the security market line

According to the liquidity preference theory of the term structure of interest rates, an increase in the yield on long-term corporate bonds versus short-term bonds could be due to ________.

an increase in expected interest rate volatility

The ______ measure of returns ignores compounding.

arithmetic average

30. Which one of the following statements is correct? A. Invoice price = Flat price - Accrued interest B. Invoice price = Flat price + Accrued interest C. Flat price = Invoice price + Accrued interest D. Invoice price = Settlement price - Accrued interest

b

43. A coupon bond that pays interest annually has a par value of $1,000, matures in 5 years, and has a yield to maturity of 12%. If the coupon rate is 9%, the intrinsic value of the bond today will be _________. A. $856.04 B. $891.86 C. $926.47 D. $1,000 PV0 = Calculator entries are N = 5, I/Y = 12, PMT = 90, FV = 1,000, CPT PV -891.86

b

56. Which of the following bonds would most likely sell at the lowest yield? A. A callable debenture B. A puttable mortgage bond C. A callable mortgage bond D. A puttable debenture

b

68. A 6% coupon U.S. Treasury note pays interest on May 31 and November 30 and is traded for settlement on August 10. The accrued interest on the $100,000 face amount of this note is _________. A. $581.97 B. $1,163.93 C. $2,327.87 D. $3,000 Accrued interest = 100,000(.06/2)(71/183) = 1163.93

b

79. A bond has a flat price of $985, and it pays an annual coupon. The last coupon payment was made 90 days ago. What is the invoice price if the annual coupon is $69? A. $999.55 B. $1,002.01 C. $1,007.45 D. $1,012.13 Invoice = 985 + (69)(90/365) = $1,002.01

b

80. If the quote for a Treasury bond is listed in the newspaper as 99:08 bid, 99:11 ask, the actual price at which you can sell this bond given a $10,000 par value is _____________. A. $9,828.12 B. $9,925 C. $9,934.37 D. $9,955.43

b

87. An investor pays $989.40 for a bond. The bond has an annual coupon rate of 4.8%. What is the current yield on this bond? A. 4.8% B. 4.85% C. 9.6% D. 9.7% Current yield = 48/989.4 = .0485

b

You purchased a 5-year annual-interest coupon bond 1 year ago. Its coupon interest rate was 6%, and its par value was $1,000. At the time you purchased the bond, the yield to maturity was 4%. If you sold the bond after receiving the first interest payment and the bond's yield to maturity had changed to 3%, your annual total rate of return on holding the bond for that year would have been approximately ________. a. 5% b. 7.6% c. 8.9% d. 5.5%

b. 7.6% Calculator entries for purchase price are N = 5, I/Y = 4, PMT = 60, FV = 1,000, CPT PV 1,089.04 Calculator entries for ending price are N =4, I/Y = 3, PMT = 60, FV = 1,000, CPT PV 1,111.51 Total ending cash = 1,111.51 + 60 = 1,171.51 HPR= (1,171.51/1,089.04) - 1 = 7.57%

Indexed bond

bond which pays inflation-adjusted interest payment to the investors.

Convertible Bond

bonds that have the option to exchange bonds in place of certain number of equity shares of issuer of such bonds

Serial Bonds

bonds which mature gradually over a period of time in installments

76. If the quote for a Treasury bond is listed in the newspaper as 98:09 bid, 98:13 ask, the actual price at which you can purchase this bond given a $10,000 par value is _____________. A. $9,828.12 B. $9,809.38 C. $9,840.62 D. $9,813.42

c

77. If the price of a $10,000 par Treasury bond is $10,237.50, the quote would be listed in the newspaper as ________. A. 102:10 B. 102:11 C. 102:12 D. 102:13

c

8. Inflation-indexed Treasury securities are commonly called ____. A. PIKs B. CARs C. TIPS D. STRIPS

c

A bond has a 5% coupon rate. The coupon is paid semiannually, and the last coupon was paid 35 days ago. If the bond has a par value of $1,000, what is the accrued interest? a. $25 b. $50 c. $4.81 d. $14.24

c. $4.81 Accrued interest = (50/2) × (35/182) = 4.81

44. A __________ bond gives the issuer an option to retire the bond before maturity at a specific price after a specific date. a. puttable b. Treasury c. callable d. coupon

c. callable

What is a Credit Default Swap (CDS)?

can be purchased to protect a bondholder against the default risk of an issuer. They can be viewed as insurance policies against default risk.

If you are holding a premium bond, you must expect a _______ each year until maturity. If you are holding a discount bond, you must expect a _______ each year until maturity. (In each case assume that the yield to maturity remains stable over time.)

capital loss; capital gain

If you are holding a premium bond, you must expect a _______ each year until maturity. If you are holding a discount bond, you must expect a _______ each year until maturity. (In each case assume that the yield to maturity remains stable over time.) capital gain; capital loss capital gain; capital gain capital loss; capital gain capital loss; capital loss

capital loss; capital gain

If you are holding a premium bond, you must expect a ________ each year until maturity. If you are holding a discount bond, you must expect a ________ each year until maturity. (In each case assume that the yield to maturity remains stable over time.)

capital loss; capital gain

The ________ is equal to the square root of the systematic variance divided by the total variance. Multiple Choice covariance correlation coefficient standard deviation reward-to-variability ratio

correlation coefficient

The ________ of a bond is computed as the ratio of the annual coupon payment to the market price.

current yield

61. A corporate bond has a 10-year maturity and pays interest semiannually. The quoted coupon rate is 6%, and the bond is priced at par. The bond is callable in 3 years at 110% of par. What is the bond's yield to call? A. 6.72% B. 9.17% C. 4.49% D. 8.98% 1,000 = r/2 = 4.489% r = YTC = 8.98% Calculator entries are N = 6, PV = -1,000, PMT = 30, FV = 1,100, CPT I/Y 4.4892 (semiannual) Annual YTC = 2 × 4.4892 = 8.9784

d

Consider the expectations theory of the term structure of interest rates. If the yield curve is downward-sloping, this indicates that investors expect short-term interest rates to __________ in the future.

decrease

The _________ reward-to-variability ratio is found on the ________ capital allocation line.

highest; steepest

The _________ reward-to-variability ratio is found on the ________ capital market line.

highest; steepest

The _________ reward-to-variability ratio is found on the ________ capital market line. (a) lowest; steepest (b) highest; flattest (c) highest; steepest (d) lowest; flattest

highest; steepest

Sinking funds are commonly viewed as protecting the ________ of the bond.

holder

TIPS are an example of ________.

indexed bonds

The bondholder can buy the bond from the _____ when it was first issued

issuer

You can be sure that a bond will sell at a premium to par when ________.

its coupon rate is greater than its yield to maturity

Everything else equal, the ________ the maturity of a bond and the ________ the coupon, the greater the sensitivity of the bond's price to interest rate changes.

longer; lower

to earn a high rating from bond rating agencies , a company would want to have: 1. a low times interest earned ratio 2. a low debt-to-equity ratio 3. a high quick ratio

low debt to equity and a high quick ratio

All other things equal, a bond's duration is _________. higher when the coupon rate is higher lower when the coupon rate is higher the same when the coupon rate is higher indeterminable when the coupon rate is high

lower when the coupon rate is higher

All other things equal, a bond's duration is _________. higher when the yield to maturity is higher lower when the yield to maturity is higher the same at all yield rates indeterminable when the yield to maturity is high

lower when the yield to maturity is higher

From 1926 to 2010 the world stock portfolio offered _____ return and _____ volatility than the portfolio of large U.S. stocks.

lower; lower

Beta is a measure of security responsiveness to ________.

market risk

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

maturity at issue

In a single-factor market model the beta of a stock ________.

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

The possibility of arbitrage arises when ____________. Multiple Choice there is no consensus among investors regarding the future direction of the market, and thus trades are made arbitrarily mispricing among securities creates opportunities for riskless profits two identically risky securities carry the same expected returns investors do not diversify

mispricing among securities creates opportunities for riskless profits

An investor's degree of risk aversion will determine his _______.

mix of the riskfree asset and risky asset

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 ________________.

more than 12% but less than 18% σ2p = .02592 = (.52)(.242) + (.52)(.122) + 2(.5)(.5)(.24)(.12).55 = .02592; σ = 16.1%

All else the same, an American style option will be ______ valuable than a ______ style option. Question 5 options: more; European- less; European- more; Canadian- less; Canadian-

more; European-

Diversification is most effective when security returns are ________.

negatively correlated

Diversification is most effective when security returns are _________.

negatively correlated

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

negatively correlated

Diversification is most effective when security returns are __________.

negatively correlated

Fundamental analysis is likely to yield best results for _______. Multiple Choice NYSE stocks neglected stocks stocks that are frequently in the news fast-growing companies

neglected stocks

Two assets have the following expected returns and standard deviations when the risk-free rate is 5%: An investor with a risk aversion of A = 3 would find that _________________ on a risk-return basis.

neither asset A nor asset B is acceptable

18. In a CAPM world, 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 the market portfolio D. capital allocation line

opt mix of risk free asset and mkt port

An investor's degree of risk aversion will determine his or her ______.

optimal mix of the risk-free asset and risky asset

An investor's degree of risk aversion will determine his or her ______. (a) risk-free rate (b) optimal mix of the risk-free asset and risky asset (c) capital allocation line (d) optimal risky portfolio

optimal mix of the risk-free asset and risky asset

An investor's degree of risk aversion will determine his or her ________.

optimal mix of the risk-free asset and risky asset

According to the capital asset pricing model, a security with a

positive alpha is considered underpriced

According to the capital asset pricing model, a security with a ___.

positive alpha is considered underpriced

According to the capital asset pricing model, a security with a _________.

positive alpha is considered underpriced

Duration is a concept that is useful in assessing a bond's _________. Question 13 options: credit risk liquidity risk price volatility convexity risk

price volatility

A ________ bond gives the bondholder the right to cash in the bond before maturity at a specific price after a specific date.

puttable

A __________ bond gives the bondholder the right to cash in the bond before maturity at a specific price after a specific date.

puttable

The excess return is the _________.

rate of return in excess of the Treasury-bill rate

Both investors and gamblers take on risk. The difference between an investor and a gambler is that an investor _______.

requires a risk premium to take on the risk

14. According to the CAPM, investors are compensated for all but which of the following? A. Expected inflation B. Systematic risk C. Time value of money D. Residual risk

resid risk

15. The measure of unsystematic risk can be found from an index model as _________. A. residual standard deviation B. R-square C. degrees of freedom D. sum of squares of the regression

resid sd

beta of greater than 1 is

riskier than average/ more sens to changes in mkt

A collateral trust bond is

secured by other securities held by the firm

In regard to bonds, convexity relates to the

shape of the bond price curve with respect to interest rates

In regards to bonds, convexity relates to the __________

shape of the bond price curve with respect to interest rates

Historically, small-firm stocks have earned higher returns than large-firm stocks. When viewed in the context of an efficient market, this suggests that ___________.

small firms are riskier than large firms

A measure of the riskiness of an asset held in isolation is ________.

standard deviation

A measure of the riskiness of an asset held in isolation is ____________.

standard deviation

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

stated or flat price in a quote sheet plus accrued interest

The invoice price of a bond is the ________.

stated or flat price in a quote sheet plus accrued interest

The term random walk is used in investments to refer to ______________.

stock price changes that are random and unpredictable

If an investor does not diversify his portfolio and instead puts all of his money in one stock, the appropriate measure of security risk for that investor is the (a) stock's beta (b) variance of the market (c) covariance with the market index (d) stock's standard deviation

stock's standard deviation

If an investor does not diversify his portfolio and instead puts all of his money in one stock, the appropriate measure of security risk for that investor is the ________.

stock's standard deviation

If an investor does not diversify their portfolio and instead puts all of their money in one stock, the appropriate measure of security risk for that investor is the

stock's standard deviation

if an investor does not diversify his portfolio and instead puts all of his money in one stock, the appropriate measure of security risk for that investor is the ________.

stock's standard deviation

if an investor does not diversify his portfolio and instead puts all of his money in one stock, the appropriate measure of security risk for that investor is the ________. stock's standard deviation variance of the market stock's beta covariance with the market index

stocks SD

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

syst risk

Which risk can NOT be partially or fully diversified away as additional securities are added to a portfolio? I. Total risk II. Systematic risk III. Firm-specific risk

syst risk

Investors require a risk premium as compensation for bearing

systematic risk

Market risk is also called __________ and _________.

systematic risk; nondiversifiable risk

Yields on municipal bonds are generally lower than yields on similar corporate bonds because of differences in ________.

taxation

Harry Markowitz is best known for his Nobel Prize-winning work on ________.

techniques used to identify efficient portfolios of risky assets

Harry Markowitz is best known for his Nobel Prize-winning work on _____________.

techniques used to identify efficient portfolios of risky assets

Harry Markowitz is best known for his Nobel prize winning work on ______________.

techniques used to identify efficient portfolios of risky assets

The beta, of a security is equal to __________.

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

The term complete portfolio refers to a portfolio consisting of ________.

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

Given its time to maturity, the duration of a zero-coupon bond is _________. higher when the discount rate is higher higher when the discount rate is lower lowest when the discount rate is equal to the risk-free rate the same regardless of the discount rate

the same regardless of the discount rate

The reward-to-volatility ratio is given by _________.

the slope of the capital allocation line

According to capital asset pricing theory, the key determinant of portfolio returns is

the systematic risk of the portfolio

The expected rate of return of a portfolio of risky securities is ________.

the weighted sum of the securities' expected returns

The expected rate of return of a portfolio of risky securities is _________.

the weighted sum of the securities' expected returns

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

total risk

Standard deviation of portfolio returns is a measure of ___________.

total risk

Firm-specific risk is also called ________ and ________.

unique risk; diversifiable risk

Firm-specific risk is also called __________ and __________.

unique risk; diversifiable risk

A debenture is ________.

unsecured

A debenture is _________.

unsecured

In a well-diversified portfolio, ___ risk is negligible.

unsystematic

In a well-diversified portfolio, __________ risk is negligible.

unsystematic

In a well-diversified portfolio, __________ risk is negligible

unsystematic risk

Which of the following statistics cannot be negative?

variance

The tendency when the ______ performing stocks in one period are the best performers in the next and the current ________ performers are lagging the market later is called the reversal effect. Multiple Choice worst; best worst; worst best; worst best; best

worst; best

This stock has greater systematic risk than a stock with a beta of ___.

.50

According to the CAPM, investors are compensated for all but which of the following?

Residual risk

4. A 1% decline in yield will have the least effect on the price of a bond with a _________. a. 20-year maturity, selling at 80 b. 10-year maturity, selling at 100 c. 10-year maturity, selling at 80 d. 20-year maturity, selling at 100

b. 10-year maturity, selling at 100

The systematic risk of a security __________.

cannot be diversified away

Sinking funds are commonly viewed as protecting the _______ of the bond.

holder

The Coupon Rate is only used to calculate...

the periodic payments

Random price movements indicate ________.

that markets are functioning efficiently

You buy a TIPS at issue at par for $1,000. The bond has a 3% coupon. Inflation turns out to be 2%, 3%, and 4% over the next 3 years. The total annual coupon income you will receive in year 3 is _________.

($30)(1.02)(1.03)(1.04) = $32.78

The stock is ______ riskier than the typical stock.

32%

The expected 1-year interest rate 3 years from now should be

9%

The price that is quoted is called a..

A flat price, DO NOT include accrued interest.

Inflation-indexed Treasury securities are commonly called ____. A. PIKs B. CARs C. TIPS D. STRIPS

C

You put up $50 at the beginning of the year for an investment. The value of the investment grows 4% and you earn a dividend of $3.50. Your HPR was ____.

11%

You would typically find all but which one of the following in a bond contract?

A price-earnings ratio

42. A coupon bond that pays interest semiannually has a par value of $1,000, matures in 8 years, and has a yield to maturity of 6%. If the coupon rate is 7%, the intrinsic value of the bond today will be __________. A. $1,000 B. $1,062.81 C. $1,081.82 D. $1,100.03

B. $1,062.61 Calculator entries are N = 16, I/Y = 3, PMT = 35, FV = 1,000, CPT PV -1,062.81

What is the most likely correlation coefficient between a stock-index mutual fund and the S&P 500? A. -1 B. 0 C. 1 D. 0.5

C. 1

48. You purchased a 5-year annual interest coupon bond one year ago. Its coupon interest rate was 6% and its par value was $1,000. At the time you purchased the bond, the yield to maturity was 4%. If you sold the bond after receiving the first interest payment and the bond's yield to maturity had changed to 3%, your annual total rate of return on holding the bond for that year would have been approximately _________. A. 5.0% B. 5.5% C. 7.6% D. 8.9%

C. 7.6% (look at doc)

39. A coupon bond which pays interest of $60 annually, has a par value of $1,000, matures in 5 years, and is selling today at a $84.52 discount from par value. The approximate yield to maturity on this bond is _________. A. 6% B. 7% C. 8% D. 9%

C. 8% (look at doc)

39. A coupon bond that pays interest of $60 annually has a par value of $1,000, matures in 5 years, and is selling today at an $84.52 discount from par value. The yield to maturity on this bond is _________. A. 6% B. 7.23% C. 8.12% D. 9.45%

C. 8.12% Calculator entries are N = 5, PV = -915.48, PMT = 60, FV = 1,000, CPT I/Y 8.12

A coupon bond that pays interest of $60 annually has a par value of $1,000, matures in 5 years, and is selling today at an $84.52 discount from par value. The yield to maturity on this bond is _________. A. 6% B. 7.23% C. 8.12% D. 9.45%

C. 8.12% Calculator entries are N = 5, PV = -915.48, PMT = 60, FV = 1,000, CPT I/Y ---> 8.12

Consider a newly issued TIPS bond with a 3-year maturity, par value of $1,000, and coupon rate of 5%. Assume annual coupon payments. What is the nominal rate of return on the TIPS bond in the first year? A. 5% B. 5.15% C. 8.15% D. 9%

C. 8.15% look at homework

70. What is the nominal rate of return on the TIPS bond in the first year? A. 5.00% B. 5.15% C. 8.15% D. 9.00% **needs a chart

C. 8.15% (look at doc)

The expected 1-year interest rate 2 years from now should be _________.

C. 9%

65. Yields on municipal bonds are generally lower than yields on similar corporate bonds because of differences in _________. A. marketability B. risk C. taxation D. call protection

C. Taxation

10. A Japanese firm issued and sold a pound denominated bond in the United Kingdom. A U.S. firm issued bonds denominated in dollars but sold the bonds in Japan. Which one of the following statements is correct? A. Both bonds are examples of Eurobonds. B. The Japanese bond is a Eurobond and the U.S. bond is termed a foreign bond. C. The U.S. bond is a Eurobond and the Japanese bond is termed a foreign bond. D. Neither bond is a Eurobond.

C. The U.S. bond is a Eurobond and the Japanese bond is termed a foreign bond.

10. A Japanese firm issued and sold a pound-denominated bond in the United Kingdom. A U.S. firm issued bonds denominated in dollars but sold the bonds in Japan. Which one of the following statements is correct? A. Both bonds are examples of Eurobonds. B. The Japanese bond is a Eurobond, and the U.S. bond is termed a foreign bond. C. The U.S. bond is a Eurobond, and the Japanese bond is termed a foreign bond. D. Neither bond is a Eurobond.

C. The U.S. bond is a Eurobond, and the Japanese bond is termed a foreign bond.

Following the last problem, if the correlation is less than 1, regarding the portfolio's standard deviation which one of the following statement is most correct? A. higher than 17.5% B. lower than 10% C. between 10% and 17.5% D. between 10% and 25%

C. between 10% and 17.5%

51. You are recalculating the risk of ACE stock in relation to the market index and you find the ratio of the systematic variance to the total variance has risen. You must also find that the ____________. A. covariance between ACE and the market has fallen B. correlation coefficient between ACE and the market has fallen C. correlation coefficient between ACE and the market has risen D. unsystematic risk of ACE has risen

C. correlation coefficient between ACE and the market has risen

12. TIPS offer investors inflation protection by ______________ by the inflation rate each year. A. increasing only the coupon rate B. increasing only the par value C. increasing both the par value and the coupon payment D. increasing the promised yield to maturity

C. increasing both the par value and the coupon payment

12. TIPS offer investors inflation protection by ______________ by the inflation rate each year. A. increasing only the coupon rate B. increasing only the par value C. increasing both the par value and the coupon payment D. increasing the promised yield to maturity

C. increasing both the par value and the coupon payment

If a active portfolio manager thinks interest rates will decrease he will he use a shorter or longer duration?

Choose a longer duration if he thinks interest rates will decrease

A debenture is _________. A. secured by other securities held by the firm B. secured by equipment owned by the firm C. secured by property owned by the firm D. unsecured

D

57. In order to construct a riskless portfolio using two risky stocks, one would need to find two stocks with a correlation coefficient of ________. A. 1.0 B. 0.5 C. 0 D. -1.0

D. -1.0

61. A corporate bond has a 10-year maturity and pays interest semiannually. The quoted coupon rate is 6%, and the bond is priced at par. The bond is callable in 3 years at 110% of par. What is the bond's yield to call? A. 6.72% B. 9.17% C. 4.49% D. 8.98%

D. 8.98% 1,000 = r/2 = 4.489% r = YTC = 8.98% Calculator entries are N = 6, PV = -1,000, PMT = 30, FV = 1,100, CPT I/Y 4.4892 (semiannual) Annual YTC = 2 × 4.4892 = 8.9784

19. Firm specific risk is also called __________ and __________. A. systematic risk, diversifiable risk B. systematic risk, non-diversifiable risk C. unique risk, non-diversifiable risk D. unique risk, diversifiable risk

D. unique risk, diversifiable risk

Which country experienced the largest-ever sovereign default in 2012?

Greece

What is the expected return for a portfolio with a beta of .5?

Rp=Rf+.5(Rm+Rf) =5%+.5(10%-5%) =7.5%

Which one of the following would be considered a risk-free asset in real terms as opposed to nominal?

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

Consider the liquidity preference theory of the term structure of interest rates. On average, one would expect investors to require _________.

a higher yield on long-term bonds than on short-term bonds

A ____ bond gives the issuer an option to retire the bond before maturity at a specific price after a specific date.

callable

In the mean standard deviation graph, the line that connects the risk-free rate and the optimal risky portfolio, P, is called the _________.

capital allocation line

Floating-rate bonds have a ________ that is adjusted with current market interest rates.

coupon rate

15. According to the liquidity preference theory of the term structure of interest rates, an increase in the yield on long-term corporate bonds versus short-term bonds could be due to _______. A. declining liquidity premiums B. an expectation of an upcoming recession C. a decline in future inflation expectations D. an increase in expected interest rate volatility

d

21. The bonds of Elbow Grease Dishwashing Company have received a rating of C by Moody's. The C rating indicates that the bonds are _________. A. high grade B. intermediate grade C. investment grade D. junk bonds

d

32. Which of the following possible provisions of a bond indenture is designed to ease the burden of principal repayment by spreading it out over several years? A. Callable feature B. Convertible feature C. Subordination clause D. Sinking fund

d

38. A coupon bond that pays interest of 4% annually has a par value of $1,000, matures in 5 years, and is selling today at $785. The actual yield to maturity on this bond is _________. A. 7.2% B. 8.8% C. 9.1% D. 9.6% $785 = Calculator entries are N = 5, PV = -785, PMT = 40, FV = 1,000, CPT I/Y 9.62

d

45. A Treasury bond due in 1 year has a yield of 6.3%, while a Treasury bond due in 5 years has a yield of 8.8%. A bond due in 5 years issued by High Country Marketing Corp. has a yield of 9.6%, while a bond due in 1 year issued by High Country Marketing Corp. has a yield of 6.8%. The default risk premiums on the 1-year and 5-year bonds issued by High Country Marketing Corp. are, respectively, __________ and _________. A. .4%; .3% B. .4%; .5% C. .5%; .5% D. .5%; .8% Default premium for 1-year bond = .068 - .063 = .005 Default premium for 5-year bond = .096 - .088 = .008

d

5. A debenture is _________. A. secured by other securities held by the firm B. secured by equipment owned by the firm C. secured by property owned by the firm D. unsecured

d

A coupon bond that pays interest semiannually has a par value of $1,000, matures in 8 years, and has a yield to maturity of 6%. If the coupon rate is 7%, the intrinsic value of the bond today will be ________. a. $1,100.03 b. $1,000 c. $1,081.82 d. $1,062.81

d. $1,062.81 Calculator entries are N = 16, I/Y = 3, PMT = 35, FV = 1,000, CPT PV -1,062.81

26. You can be sure that a bond will sell at a premium to par when _________. a. its coupon rate is equal to its yield to maturity b. its coupon rate is less than its yield to maturity c. its coupon rate is less than its conversion value d. its coupon rate is greater than its yield to maturity

d. its coupon rate is greater than its yield to maturity

42. Yields on municipal bonds are typically ___________ yields on corporate bonds of similar risk and time to maturity. a. slightly higher than b. twice as high as c. identical to d. lower than

d. lower than

14. A __________ bond gives the bondholder the right to cash in the bond before maturity at a specific price after a specific date. a. coupon b. Treasury c. callable d. puttable

d. puttable

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

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

2. Yields on municipal bonds are generally lower than yields on similar corporate bonds because of differences in _________. a. call protection b. marketability c. risk d. taxation

d. taxation

Consider the expectations theory of the term structure of interest rates. If the yield curve is downward-sloping, this indicates that investors expect short-term interest rates to ________ in the future.

decrease

Samurai Bonds

denominated in J yen and issued by non-japanese issuers in J country.

11. According to the CAPM, the risk premium an investor expects to receive on any stock or portfolio is _______________. A. directly related to the risk aversion of the particular investor B. inversely related to the risk aversion of the particular investor C. directly related to the beta of the stock D. inversely related to the alpha of the stock

dir rel to beta of stock

According to the CAPM, the risk premium an investor expects to receive on any stock or portfolio is

directly related to the beta of the stock

According to the CAPM, the risk premium an investor expects to receive on any stock or portfolio is _______________.

directly related to the beta of the stock

Under the pure expectations hypothesis and constant real interest rates for different maturities, an upward-sloping yield curve would indicate __________________. expected increases in inflation over time expected decreases in inflation over time the presence of a liquidity premium that the equilibrium interest rate in the short-term part of the market is lower than the equilibrium interest rate in the long-term part of the market

expected increases in inflation over time

If enough investors decide to purchase stocks they are likely to drive up stock prices thereby causing _____________ and ___________.

expected returns to fall; risk premiums to fall

If enough investors decide to purchase stocks, they are likely to drive up stock prices, thereby causing _____________ and ___________. Multiple Choice expected returns to fall; risk premiums to fall expected returns to rise; risk premiums to fall expected returns to rise; risk premiums to rise expected returns to fall; risk premiums to rise

expected returns to fall; risk premiums to fall

The risk that can be diversified away is ________.

firm-specific risk

The risk that can be diversified away is __________.

firm-specific risk

As a result of bond convexity, an increase in a bond's price when yield to maturity falls is ________ the price decrease resulting from an increase in yield of equal magnitude. greater than equivalent to smaller than The answer cannot be determined from the information given.

greater than

You run a regression of a stock's returns versus a market index and find the following: Based on the data, you know that the stock _____.

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

Original Issued discount bond

have low coupon rates so that later on these can be sold at a price below their par value

Rational investors will always prefer portfolios ______________.

located on the capital market line to those located on the efficient frontier

Beta is a measure of security responsiveness to

market risk

Interest rate risks in long term bonds?

most sensitive - If interest rates go down, they gain the most. If interest rates go up, they lose the most.

Money travels from the buyer to the issuer

on the original sale

Beta is a measure of

relative systematic risk

In regard to bonds, convexity relates to the _______. (a) shape of the bond price curve with respect to interest rates (b) size of the bid-ask spread (c) slope of the yield curve with respect to liquidity premiums (d) shape of the yield curve with respect to maturity

shape of the bond price curve with respect to interest rates

In regard to bonds, convexity relates to the ________.

shape of the bond price curve with respect to interest rates

Serial bonds are associated with ________.

staggered maturity dates

A debenture is

unsecured

According to the capital asset pricing model, fairly priced securities have

zero alphas

A coupon bond that pays interest semiannually has a par value of $1,000, matures in 8 years, and has a yield to maturity of 6%. If the coupon rate is 7%, the intrinsic value of the bond today will be (a) $1,062.10 (b) $1,100.03 (c) $1,081.82 (d) $1,000

$1,062.10

A zero- coupon bond has a yield to maturity of 5% and a par value of $1,000. If the bond matures in 16 years, it should sell for a price of ______ today.

$458.11

A zero-coupon bond has a yield to maturity of 5% and a par value of $1,000. If the bond matures in 16 years, it should sell for a price of __________ today. Question 4 options: $458.11 $641.11 $789.11 $1,100.11

$458.11

A zero-coupon bond has a yield to maturity of 5% and a par value of $1,000. If the bond matures in 16 years, it should sell for a price of __________ today.

$458.11 PV= 1000/1.05^16 = 458.11

You buy a TIPS at issue at par for $1,000. The bond has a 4.5% coupon. Inflation turns out to be 3.5%, 4.5%, and 5.5% over the next 3 years. The total annual coupon income you will receive in year 3 is _________.

$51.35 ($45)(1.035)(1.045)(1.055) = $51.35

You are an investment manager who is currently managing assets worth $6 billion. You believe that active management of your fund could generate an additional one-tenth of 1% return on the portfolio. If you want to make sure your active strategy adds value, how much can you spend on security analysis? Multiple Choice $12,000,000 $6,000,000 $3,000,000 $0

$6,000,000 (.001)($6 billion) = $6,000,000

An investor buys a call at a price of $6.10 with an exercise price of $56. At what stock price will the investor break even on the purchase of the call?

$62.10 The price has to be at least as much as the sum of the exercise price and the premium of the option to break even: $56 + $6.10 = $62.10

You purchase one Microsoft June 70 put contract for a premium of $.24. What is your maximum possible profit?

$6976 f the stock price drops to zero, you will make $70 − $0.24 per stock, or $69.76. Given 100 units per contract, the total potential profit is $6,976.

You buy a 10 year $1,000 par 4% annual payment coupon bond priced to yield 6%. You do not sell the bond at year end. If you are in a 15% tax bracket at year end you will owe taxes on this investment equal to _______.

$7.68

The following price quotations are for exchange-listed options on Primo Corporation common stock. CompanyStrikeExpirationCallPutPrimo 61.1254Feb7.160.47 With transaction costs ignored, how much would a buyer have to pay for one call option contract. Assume each contract is for 100 shares.

$716 Each contract is for 100 shares: $7.16 × 100 = $716

A share of stock is now selling for $75. It will pay a dividend of $6 per share at the end of the year. Its beta is 1. What must investors expect the stock to sell for at the end of the year? Assume the risk-free rate is 5% and the expected rate of return on the market is 13%

$78.75 E(r) = (D+P1-P0)/P0 13%=(6+P1-75)/75 = p1 =$78.75

$1,000 par value zero-coupon bonds (ignore liquidity premiums) One year from now bond C should sell for ________ (to the nearest dollar).

$842

A coupon bond that pays interest annually has a par value of $1,000, matures in 5 years, and has a yield to maturity of 12%. If the coupon rate is 9%, the intrinsic value of the bond today will be _________. Question 3 options: $856.04 $891.86 $926.47 $1,000

$891.86

a coupon bond that pays interest annually has a par value of 1000, matures in 5 years, and has a yield to maturity of 12% if the coupon rate is 9%, the intrinsic value of the bond today will be______

$891.86. N= 5 I/Y=12 PMT=.09*1000=90 FV=1000 PV=-891.86

The market portfolio has a beta of _________.

1

During the 1926-2010 period the geometric mean return on small-firm stocks was ______.

11.80%

The expected 2-year interest rate 3 years from now should be _________.

14.89%

The characteristic line for this stock is Rstock = ___ + ___ Rmarket.

4.05; 1.32

The duration of a 5-year zero-coupon bond is ____ years. 4.5 5 5.5 3.5

5

The duration of a 5-year zero-coupon bond is ____ years. Question 12 options: 4.5 5 5.5 3.5

5

C. 1.32

64. The beta of this stock is _____. a. 0.12 b. 0.35 c. 1.32 d. 4.05

Under the pure expectations hypothesis and constant real interest rates for different maturities, an upward-sloping yield curve would indicate __________________. A. expected increases in inflation over time B. expected decreases in inflation over time C. the presence of a liquidity premium D. that the equilibrium interest rate in the short-term part of the market is lower than the equilibrium interest rate in the long-term part of the market

A

______ option can only be exercised on the expiration date. Question 4 options: A Mexican An Asian An American A European

A European

Standard deviation is a measure of ____________. A) total risk B) relative systematic risk C) relative non-systematic risk D) relative business risk

A) total risk

Security X has an expected rate of return of 13% and a beta of 1.15. The risk-free rate is 5% and the market expected rate of return is 15%. According to the capital asset pricing model, security X is __________. A) fairly priced B) overpriced C) underpriced D) None of the above answers are correct

B) overpriced

53. The __________ of a bond is computed as the ratio of coupon payments to market price. A. nominal yield B. current yield C. yield to maturity D. yield to call

B. current yield

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

B. systematic risk

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

B; it offers an expected excess return of 1.8%

Bonds rated _____ or better by Standard & Poor's are considered investment grade.

BBB

You invest $600 in security A with a beta of 1.5 and $400 in security B with a beta of .90. The beta of this portfolio is _________.

Betap=600/1000(1.5)+400/1000(.9)=1.26

Equipment Obligation Bond

Bond in which is issued with specific equipment being pledged as collateral against the bond.

What are discount bonds and example?

Bonds selling below par value - Example: zero coupon bonds

Zero-Coupon Bonds

Bonds that do not pay any interests. Issued at discount and paid at face value at the time of maturity

Junk Bond

Bonds which have high probably of default

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

Book to market ratio Firm size

Firm-specific risk is also called __________ and __________. A. systematic risk; nondiversifiable risk B. systematic risk; diversifiable risk C. unique risk; diversifiable risk D. unique risk; nondiversifiable risk

C

If the price of a $10,000 par Treasury bond is $10,23.50, the quote would be listed in the newspaper as ________. A.102.23 B.102.102 C.102.35 D.102.50

C

If the quote for a Treasury bond is listed in the newspaper as 98:2812 bid, 98:4062 ask, the actual price at which you can purchase this bond given a $10,000 par value is _____________. A. $9,828.12 B. $9,809.38 C. $9,840.62 D. $9,813.42

C

If you are holding a premium bond, you must expect a _______ each year until maturity. If you are holding a discount bond, you must expect a _______ each year until maturity. (In each case assume that the yield to maturity remains stable over time.) A. capital gain; capital loss B. capital gain; capital gain C. capital loss; capital gain D. capital loss; capital loss

C

You buy a 10-year $1,000 par value zero-coupon bond priced to yield 6%. You do not sell the bond. If you are in a 28% tax bracket, you will owe taxes on this investment after the first year equal to _______. A. $0 B. $4.2 C. $9.38 D. $33.51

C

According to the capital asset pricing model, the expected rate of return on any security is equal to __________. A) [(the risk-free rate) + (beta of the security)] x (market risk premium) B) (the risk-free rate) + [(variance of the security's return) x (market risk premium)] C) (the risk-free rate) + [(security's beta) x (market risk premium)] D) (market rate of return) + (the risk-free rate)

C) (the risk-free rate) + [(security's beta) x (market risk premium)]

You invest $600 in security A with a beta of 1.5 and $400 in security B with a beta of .90. The beta of this formed portfolio is __________. A) 1.14 B) 1.20 C) 1.26 D) 2.40

C) 1.26

Consider the CAPM. The expected return on the market is 18%. The expected return on a stock with a beta of 1.2 is 20%. What is the risk-free rate? A) 2% B) 6% C) 8% D) 12%

C) 8%

Consider the following two stocks, A and B. Stock A has an expected return of 10% and a beta of 1.20. Stock B has an expected return of 14% and a beta of 1.80. The expected market rate of return is 9% and the risk-free rate is 5%. Security __________ would be considered a good buy because __________. A) A, it offers an expected excess return of 0.8%. 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%.

According to the CAPM, the risk premium an investor expects to receive on any stock or portfolio is ________________. A) directly related to the risk aversion of the particular investor B) inversely related to the risk aversion of the particular investor C) directly related to the beta of the stock D) inversely related to the alpha of the stock

C) directly related to the beta of the stock

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

A coupon bond that pays semiannual interest is reported in the Wall Street Journal as having an ask price of 117% of its $1,000 par value. If the last interest payment was made 2 months ago and the coupon rate is 6%, the invoice price of the bond will be _________. A. $1,140 B. $1,170 C. $1,180 D. $1,200

C. $1,180

69. If you want to know the portfolio standard deviation for a three stock portfolio you will have to A. calculate two covariances and one trivariance B. calculate only two covariances C. calculate three covariances D. average the variances of the individual stocks

C. calculate three covariances

7. Floating rate bonds have a __________ that is adjusted with current market interest rates. A. maturity date B. coupon payment date C. coupon rate D. dividend yield

C. coupon rate

TIPS offer investors inflation protection by ______________ by the inflation rate each year. A. increasing only the coupon rate B. increasing only the par value C. increasing both the par value and the coupon payment D. increasing the promised yield to maturity

C. increasing both the par value and the coupon payment

Beta is a measure of security responsiveness to _________. A. firm-specific risk B. diversifiable risk C. market risk D. unique risk

C. market risk

56. Diversification can reduce or eliminate __________ risk. A. all B. systematic C. non-systematic D. only an insignificant

C. non-systematic

7. 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

_____ bonds represent a novel way of obtaining insurance from capital markets against specified disasters.

Catastrophe

An investor pays $989.40 for a bond. The bond has an annual coupon rate of 4.8%. What is the current yield on this bond?

Current yield = 48/989.4 = .0485

A corporate bond has a 10-year maturity and pays interest semiannually. The quoted coupon rate is 6%, and the bond is priced at par. The bond is callable in 3 years at 110% of par. What is the bond's yield to call? A. 6.2% B. 9.1% C. 4.49% D. 8.98%

D

A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 24%, while stock B has a standard deviation of return of 18%. Stock A comprises 60% of the portfolio, while stock B comprises 40% of the portfolio. If the variance of return on the portfolio is .0380, the correlation coefficient between the returns on A and B is _________. A. .128 B. .327 C. .225 D. .583

D

A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 35%, while stock B has a standard deviation of return of 15%. The correlation coefficient between the returns on A and B is .45. Stock A comprises 40% of the portfolio, while stock B comprises 60% of the portfolio. The standard deviation of the return on this portfolio is _________. A. 17.67% B. 18.45% C. 23% D. 19.76%

D

A project has a 50% chance of doubling your investment in 1 year and a 50% chance of losing half your money. What is the expected return on this investment project? A. 0% B. 75% C. 50% D. 25%

D

A security's beta coefficient will be negative if ____________. A. its returns are positively correlated with market-index returns B. market demand for the firm's shares is very low C. its stock price has historically been very stable D. its returns are negatively correlated with market-index returns

D

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 proportion of the optimal risky portfolio that should be invested in stock B is approximately _________. A. 56% B. 44% C. 29% D. 71%

D

An investor can design a risky portfolio based on two stocks, A and B. The standard deviation of return on stock A is 20%, while the standard deviation on stock B is 15%. The correlation coefficient between the returns on A and B is 0%. The standard deviation of return on the minimum-variance portfolio is _________. A. 6% B. 0% C. 17% D. 12%

D

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. no risky asset B. The answer cannot be determined from the data given. C. asset B D. asset A

D

Beta is a measure of security responsiveness to _________. A. diversifiable risk B. firm-specific risk C. unique risk D. market risk

D

Consider an investment opportunity set formed with two securities that are perfectly negatively correlated. The global minimum-variance portfolio has a standard deviation that is always _________. A. equal to -1 B. greater than 0 C. equal to the sum of the securities' standard deviations D. equal to 0

D

Consider two bonds, A and B. Both bonds presently are selling at their par value of $1,000. Each pays interest of $120 annually. Bond A will mature in 5 years, while bond B will mature in 6 years. If the yields to maturity on the two bonds change from 12% to 14%, _________. A. both bonds will increase in value but bond A will increase more than bond B B. both bonds will increase in value but bond B will increase more than bond A C. both bonds will decrease in value but bond A will decrease more than bond B D. both bonds will decrease in value but bond B will decrease more than bond A

D

Decreasing the number of stocks in a portfolio from 50 to 10 would likely ________________. A. decrease the variation in returns the investor faces in any one year B. increase the systematic risk of the portfolio C. increase the return of the portfolio D. increase the unsystematic risk of the portfolio

D

Diversification can reduce or eliminate __________ risk. A. systematic B. only an insignificant C. all D. nonsystematic

D

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

D

Harry Markowitz is best known for his Nobel Prize-winning work on _____________. A. techniques used in valuing securities options B. strategies for active securities trading C. techniques used to measure the systematic risk of securities D. techniques used to identify efficient portfolios of risky assets

D

Investing in two assets with a correlation coefficient of -.5 will reduce what kind of risk? A. Nondiversifiable risk B. Market risk C. Systematic risk D. Unique risk

D

The issuer of ________ bond may choose to pay interest either in cash or in additional bonds. A. an asset-backed B. a TIPS C. a catastrophe D. a pay-in-kind

D

The yield to maturity on a bond is: I. Above the coupon rate when the bond sells at a discount and below the coupon rate when the bond sells at a premium II. The discount rate that will set the present value of the payments equal to the bond price III. Equal to the true compound return on investment only if all interest payments received are reinvested at the yield to maturity A. I only B. II only C. I and II only D. I, II, and III

D

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

D

Which of the following is a correct expression concerning the formula for the standard deviation of returns of a two-asset portfolio where the correlation coefficient is positive? A. σ2rp < (W12σ12 + W22σ22) B. σ2rp = (W12σ12 + W22σ22) C. σ2rp = (W12σ12 - W22σ22) D. σ2rp > (W12σ12 + W22σ22)

D

Which of the following possible provisions of a bond indenture is designed to ease the burden of principal repayment by spreading it out over several years? A. callable feature B. convertible feature C. subordination clause D. sinking fund

D

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

D

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%

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

D) unsystematic

The yield to maturity on a bond is: I. Above the coupon rate when the bond sells at a discount and below the coupon rate when the bond sells at a premium II. The discount rate that will set the present value of the payments equal to the bond price III. Equal to the true compound return on investment only if all interest payments received are reinvested at the yield to maturity A. I only B. II only C. I and II only D. I, II, and III

D. I, II, and III

64. The yield to maturity on a bond is: I. Above the coupon rate when the bond sells at a discount and below the coupon rate when the bond sells at a premium II. The discount rate that will set the present value of the payments equal to the bond price III. Equal to the true compound return on investment only if all interest payments received are reinvested at the yield to maturity A. I only B. II only C. I and II only D. I,II and III

D. I,II and III

21. The bonds of Elbow Grease Dishwashing Company have received a rating of "C" by Moody's. The "C" rating indicates the bonds are _________. A. high grade B. intermediate grade C. investment grade D. junk bonds

D. Junk Bonds

According to the CAPM, investors are compensated for all but which of the following? A. Expected inflation B. Systematic risk C. Time value of money D. Residual risk

D. Residual risk

According to the liquidity preference theory of the term structure of interest rates, an increase in the yield on long-term corporate bonds versus short-term bonds could be due to _______.

D. an increase in expected interest rate volatility

Your timing was good last year. You invested more in your portfolio right before prices went up, and you sold right before prices went down. In calculating historical performance measures, which one of the following will be the largest?

Dollar-weighted return

The risk-free rate is 4%. The expected market rate of return is 11%. If you expect stock X with a beta of .8 to offer a rate of return of 12%, then you should

Er = 4 + .8(11 - 4) 9.6 buy stock x b/c it is underpriced

Bonds issued in the currency of the issuer's country but sold in other national markets are called ________.

Eurobonds

Bonds issued in the currency of the issuer's country but sold in other national markets are called _____________. (a) Eurodollar bonds (b) Eurobonds (c) Yankee bonds (d) Samurai bonds

Eurobonds

When a zero coupon bond is reinvested, the yield to maturity is always the same as realized compounded yield to maturity.

The stated yield to maturity and realized compound yield to maturity of a (default free) zero-coupon bond will always be equal. Why?

You buy an 8-year $1,000 par value bond today that has a 6% yield and a 6% annual payment coupon. In 1 year promised yields have risen to 7%. Your 1-year holding-period return was ___.

This year's price is 1,000. since the YTM equals the coupon rate. Calculator entries for next year's price are N = 7, I/Y = 7, PMT = 60, FV = 1,000, CPT PV -46.11 At the end of 1 year you'll have 946.11 + 60 = 1,006.11 HPR = 1,006.11/1,000 - 1 = .6107%

You buy a bond with a $1,000 par value today for a price of $875. The bond has 6 years to maturity and makes annual coupon payments of $75 per year. You hold the bond to maturity, but you do not reinvest any of your coupons. What was your effective EAR over the holding period?

Total value in 6 years = 1,000 + 6(75) = 1,450 Calculator entries for EAR are N = 6, PV = -875, PMT = 0, FV = 1,450, CPT I/Y 8.78, or (875)(1 + EAR)6 = 1,000 + (75)(6); EAR = 8.78%

Consider the Sharpe and Treynor performance measures. When a pension fund is large and well diversified in total and it has many managers, the __________ measure is better for evaluating individual managers while the __________ measure is better for evaluating the manager of a small fund with only one manager responsible for all investments, which may not be fully diversified. Multiple Choice Sharpe; Sharpe Sharpe; Treynor Treynor; Sharpe Treynor; Treynor

Treynor; Sharpe

You buy an 9-year $1,000 par value bond today that has a 7% yield and a 7% annual payment coupon. In 1 year promised yields have risen to 10%. What is your 1-year holding-period return

We lost 9%.

r = 7% PMT = $60 FV = $1,000 n = 7 Pv = ? PV = 946.11 Holding Period = [60 + (946.11 - 1,000)]/[1,000] = .61% gain

You buy an eight- year bond that has a 6% current yield and a 6% coupon. In one year, promised yields to maturity have risen to 7%. What is the holding-period return?

59. Consider the following $1,000 par value zero-coupon bonds: The expected 1-year interest rate 4 years from now should be _________. A. 16% B. 18% C. 20% D. 22%

a

60. You can be sure that a bond will sell at a premium to par when _________. A. its coupon rate is greater than its yield to maturity B. its coupon rate is less than its yield to maturity C. its coupon rate is equal to its yield to maturity D. its coupon rate is less than its conversion value

a

62. Consider a 7-year bond with a 9% coupon and a yield to maturity of 12%. If interest rates remain constant, 1 year from now the price of this bond will be _________. A. higher B. lower C. the same D. indeterminate

a

63. Under the pure expectations hypothesis and constant real interest rates for different maturities, an upward-sloping yield curve would indicate __________________. A. expected increases in inflation over time B. expected decreases in inflation over time C. the presence of a liquidity premium D. that the equilibrium interest rate in the short-term part of the market is lower than the equilibrium interest rate in the long-term part of the market

a

66. Assuming semiannual compounding, a 20-year zero coupon bond with a par value of $1,000 and a required return of 12% would be priced at _________. A. $97.22 B. $104.49 C. $364.08 D. $732.14 Calculator entries are N = 40, I/Y = 6, PMT = 0, FV = 1,000, CPT PV -97.22

a

67. A discount bond that pays interest semiannually will: I. Have a lower price than an equivalent annual payment bond II. Have a higher EAR than an equivalent annual payment bond III. Sell for less than its conversion value A. I and II only B. I and III only C. II and III only D. I, II, and III

a

69. The yield to maturity of a 10-year zero-coupon bond with a par value of $1,000 and a market price of $625 is _____. A. 4.8% B. 6.1% C. 7.7% D. 10.4% Calculator entries are N = 10, PV = -625, PMT = 0, FV = 1,000, CPT I/Y 4.81

a

71. Consider a newly issued TIPS bond with a 3-year maturity, par value of $1,000, and coupon rate of 5%. Assume annual coupon payments. What is the real rate of return on the TIPS bond in the first year? A. 5% B. 8.15% C. 7.15% D. 4% HPRnom = HPRreal =

a

9. In regard to bonds, convexity relates to the _______. A. shape of the bond price curve with respect to interest rates B. shape of the yield curve with respect to maturity C. slope of the yield curve with respect to liquidity premiums D. size of the bid-ask spread

a

91. The ___________ is the document that defines the contract between the bond issuer and the bondholder. A. indenture B. covenant agreement C. trustee agreement D. collateral statement

a

A pension fund has an average duration of its liabilities equal to 15 years. The fund is looking at 5-year maturity zero-coupon bonds and 4% yield perpetuities to immunize its interest rate risk. How much of its portfolio should it allocate to the zero-coupon bonds to immunize if there are no other assets funding the plan? a. 52% b. 48% c. 33% d. 25%

a (Duration of the perpetuity = 1.04/.04 = 26 years Duration of the zero = 5 years 15 = (wz)(5) + (1 - wz)26; wz = 52.38%)

Flanders, Inc., has expected earnings of $4 per share for next year. The firm's ROE is 8%, and its earnings retention ratio is 40%. If the firm's market capitalization rate is 15%, what is the present value of its growth opportunities? a. -$6.33 b. $0 c. $20.34 d. $26.67

a (Value with no growth = $4/.15 = $26.67 Growth rate = .4 × 8% = 3.2% Value with growth = $4 × (1 - .4)/(.15 - .032) = $20.34 PVGO = $20.34 - 26.67 = -$6.33)

Consider the following information: Portfolio Expected Return Beta Risk-free 10 % 0 Market 18 1.0 A 16 .9 a. Calculate the expected return of portfolio A with a beta of .9. b. What is the alpha of portfolio A. c. If the simple CAPM is valid, state whether the above situation is possible?

a) ER 17.2% b) alpha -1.2% c) no

You buy a TIPS at issue at par for $1,000. The bond has a 3% coupon. Inflation turns out to be 2%, 3%, and 4% over the next 3 years. The total annual coupon income you will receive in year 3 is ________. a. $32.78 b. $33 c. $30.90 d. $30

a. $32.78 ($30)(1.02)(1.03)(1.04) = $32.78

A zero-coupon bond has a yield to maturity of 5% and a par value of $1,000. If the bond matures in 16 years, it should sell for a price of ________ today. a. $458.11 b. $789.11 c. $641.11 d. $1,100.11

a. $458.11 Calculator entries are N = 16, I/Y = 5, PMT = 0, FV = 1,000, CPT PV 458.11

Are the following statements true or false? a. Stocks with a beta of zero offer an expected rate of return of zero. True False b. The CAPM implies that investors require a higher return to hold highly volatile securities. True False c. You can construct a portfolio with beta of .75 by investing .75 of the investment budget in T-bills and the remainder in the market portfolio. True False

a. False b. False c. False

25. The __________ of a bond is computed as the ratio of the annual coupon payment to the market price. a. current yield b. nominal yield c. yield to call d. yield to maturity

a. current yield

36. In regard to bonds, convexity relates to the _______. a. shape of the bond price curve with respect to interest rates b. shape of the yield curve with respect to maturity c. slope of the yield curve with respect to liquidity premiums d. size of the bid-ask spread

a. shape of the bond price curve with respect to interest rates

A stock's alpha measures the stock's

abnormal return

A stock's alpha measures the stock's ____________________.

abnormal return

You are constructing a scatter plot of excess returns for stock A versus the market index. If the correlation coefficient between stock A and the index is -1, you will find that the points of the scatter diagram ________ and the line of best fit has a ________.

all fall on the line of best fit; negative slope

You are constructing a scatter plot of excess returns for stock A versus the market index. If the correlation coefficient between stock A and the index is -1, you will find that the points of the scatter diagram ___________ and the line of best fit has a ______________.

all fall on the line of best fit; negative slope

Risk that can be eliminated through diversification is called ________ risk.

all of these options (unique,firm-specific,diversifiable)

The _______ decision should take precedence over the _____ decision.

asset allocation; stock selection

74. On May 1, 2007, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds. If the volatility of interest rates is expected to increase, then Joe Hill should __. A. prefer the Wildwood bond to the Asbury bond B. prefer the Asbury bond to the Wildwood bond C. be indifferent between the Wildwood bond and the Asbury bond D. The answer cannot be determined from the information given.

b

Consider two bonds, A and B. Both bonds presently are selling at their par value of $1,000. Each pays interest of $120 annually. Bond A will mature in 5 years, while bond B will mature in 6 years. If the yields to maturity on the two bonds change from 12% to 14%, _________.

both bonds will decrease in value but bond B will decrease more than bond A

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

c

50. $1,000 par value zero-coupon bonds (ignore liquidity premiums) The expected 1-year interest rate 1 year from now should be about _________. A. 6% B. 7.5 % C. 9.02% D. 10.08% 1.0752 = 1.06(1 + f2) 1.155625 = 1.06(1 + f2) 1 + f2 = 1.55625/1.06 = 1.0902123 f2 = 9.02%

c

7. Floating-rate bonds have a __________ that is adjusted with current market interest rates. A. maturity date B. coupon payment date C. coupon rate D. dividend yield

c

15. Bonds rated _____ or better by Standard & Poor's are considered investment grade. a. CCC b. BB c. BBB d. AA

c. BBB

5. Bonds issued in the currency of the issuer's country but sold in other national markets are called _____________. a. Yankee bonds b. foreign bonds c. Eurobonds d. Samurai bonds

c. Eurobonds

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

c. indexed bonds

Equation for Holding Period Return (HPR)

change in price +coupon payments/initial price

which of the following rates represents a bonds annual interest payment per dollar of par value

coupon rate

A writer of a call option will want the value of the underlying asset to __________, and a buyer of a put option will want the value of the underlying asset to _________. Question 12 options: decrease; decrease decrease; increase increase; decrease increase; increase

decrease; decrease

Published data on past returns earned by mutual funds are required to be ______.

geometric returns

Option in a callable bond

gives an option to the issuer of such bonds to call for redemption from investors before its maturity.

The portfolio with the lowest standard deviation for any risk premium is called the_______.

global minimum variance portfolio

17. A stock has a beta of 1.3. The unsystematic risk of this stock is ____________ the stock market as a whole. A. higher than B. lower than C. equal to D. indeterminable compared to

higher than

A stock has a beta of 1.3. The systematic risk of this stock is ____________ the stock market as a whole.

higher than

The _________ reward-to-variability (Sharpe Ratio) ratio is found on the ________ capital market line.

highest; steepest

The _______ is the document that defines the contract between the bond issuer and the bondholder.

indenture

Bonds with coupon rates that fall when the general level of interest rates rise are called

inverse floaters

A security's beta coefficient will be negative if ________.

its returns are negatively correlated with market-index returns

beta of less than 1

less risky than avg/ less sens to changes in mkt

Rational risk-averse investors will always prefer portfolios _____________. located on the risky asset efficient frontier to those located on the capital market line located on the capital market line to those located on the risky asset efficient frontier at or near the minimum-variance point on the risky asset efficient frontier that are risk-free to all other asset choices

located on cap mkt line rather than risky asset frontier

Rational risk-averse investors will always prefer portfolios ________.

located on the capital market line to those located on the efficient frontier

You buy a call option and a put option on General Electric. Both the call option and the put option have the same exercise price and expiration date. This strategy is called a _________. Question 7 options: time spread long straddle short straddle money spread

long straddle

Everything else equal, the _____ maturity of a bond and the _____ the coupon, the greater the sensitivity of the bond's price to interest rate changes.

longer; lower

Beta is a measure of security responsiveness to _________. Multiple Choice firm-specific risk diversifiable risk market risk unique risk

market risk

Banks and other financial institutions can best manage interest rate risk by _____________. maximizing the duration of assets and minimizing the duration of liabilities minimizing the duration of assets and maximizing the duration of liabilities matching the durations of their assets and liabilities matching the maturities of their assets and liabilities

matching the durations of their assets and liabilities

Banks and other financial institutions can best manage interest rate risk by _____________. Question 19 options: maximizing the duration of assets and minimizing the duration of liabilities minimizing the duration of assets and maximizing the duration of liabilities matching the durations of their assets and liabilities matching the maturities of their assets and liabilities

matching the durations of their assets and liabilities

The primary difference between Treasury notes and bonds is ________.

maturity at issue

current yield

of a bond is computed as the ratio of the annual coupon payment to the market price. = annual coupon payment/market price

A _______ bond gives the bondholder the right to cash in the bond before maturity at a specific price after a specific date

puttable

Consider a Treasury bill with a rate of return of 5% and the following risky securities: Security A: E(r) = .15; variance = .0400 Security B: E(r) = .10; variance = .0225 Security C: E(r) = .12; variance = .1000 Security D: E(r) = .13; variance = .0625 The investor must develop a complete portfolio by combining the risk-free asset with one of the securities mentioned above. The security the investor should choose as part of her complete portfolio to achieve the best CAL would be _________.

security A

The plot of a security's excess return relative to the market's excess return is called the _______. Multiple Choice efficient frontier security characteristic line capital allocation line capital market line

security characteristic line

If you believe in the __________ form of the EMH, you believe that stock prices reflect all publicly available information but not information that is available only to insiders. Multiple Choice semistrong strong weak perfect

semistrong

The holding period return on a stock is equal to _________.

the capital gain yield over the period plus the dividend yield

Maturity

the date when the bond reaches the end of its life.

The expected rate of return of a portfolio of risky securities is _________. Multiple Choice the sum of the securities' covariance the sum of the securities' variance the weighted sum of the securities' expected returns the weighted sum of the securities' variance

the weighted sum of the securities' expected returns

Many current and retired Enron Corp. employees had their 401k retirement accounts wiped out when Enron collapsed because ________.

their 401k accounts were not well diversified

What is one of the main strategies for an active bond portfolio manager?

to predict how interest rates will move and adjust the duration of the portfolio in consequence

Investing in two assets with a correlation coefficient of -.5 will reduce what kind of risk?

unique risk

According to the capital asset pricing model, fairly priced securities have _________.

zero alphas

What's the relation between bonds and interest rates?

Bond prices are inversely related to interest rates - Low interest rate, bond is worth more - High interest rate, bond is worth less

Which risk can be partially or fully diversified away as additional securities are added to a portfolio? I. Total risk II. Systematic risk III. Firm-specific risk

I and III

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

I and III only

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.

I, II, III, and IV

10. In a world where the CAPM holds which one of the following is not a true statement regarding the capital market line? A. The capital market line always has a positive slope B. The capital market line is also called the security market line C. The capital market line is the best attainable capital allocation line D. The capital market line is the line from the risk-free rate through the market portfolio

the cal is also called the sml

The beta of a security is equal to

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

The beta of a security is equal to _________.

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

The term excess return refers to ________.

the difference between the rate of return earned and the risk-free rate

The term excess return refers to ______________.

the difference between the rate of return earned and the risk-free rate

The market risk premium is defined as __________.

the difference between the return on an index fund and the return on Treasury bills

One of the main problems with the arbitrage pricing theory is __________. Multiple Choice its use of several factors instead of a single market index to explain the risk-return relationship the introduction of nonsystematic risk as a key factor in the risk-return relationship that the APT requires an even larger number of unrealistic assumptions than does the CAPM the model fails to identify the key macroeconomic variables in the risk-return relationship

the model fails to identify the key macroeconomic variables in the risk-return relationship

Which of the following is a correct expression concerning the formula for the standard deviation of returns of a two-asset portfolio where the correlation coefficient is positive?

σ2rp > (W12σ12 + W22σ22)

A collateral trust bond is _______.

secured by other securities held by the firm

A collateral trust bond is ________.

secured by other securities held by the firm

A mortgage bond is

secured by property owned by the firm

A mortgage bond is _______.

secured by property owned by the firm

A mortgage bond is ________.

secured by property owned by the firm

What is the most likely correlation coefficient between a stock-index mutual fund and the S&P 500?

1

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?

1 Market beta always equals 1 regardless of market volatility.

A coupon bond that pays interest semiannually has a par value of $1,000, matures in 8 years, and has a yield to maturity of 6%. If the coupon rate is 7%, the intrinsic value of the bond today will be __________. $1,000 $1,062.81 $1,081.82 $1,100.03

$1,062.81

A coupon bond that pays interest semiannually has a par value of $1,000, matures in 8 years, and has a yield to maturity of 6%. If the coupon rate is 7%, the intrinsic value of the bond today will be __________.

$1,062.81 = Calculator entries are N = 16, I/Y = 3, PMT = 35, FV = 1,000, CPT PV -1,062.81

Par Value is usually _____ for corporate bonds

$1000

A convertible bond has a par value of $1,000, but its current market price is $950. The current price of the issuing company's stock is $19, and the conversion ratio is 40 shares. The bond's conversion premium is _________.

$190 Conversion premium = 950 - 40(19) = 190

One year from now bond C should sell for ________ (to the nearest dollar).

$842

If the quote for a Treasury bond is listed in the newspaper as 98:09 bid, 98:13 ask, the actual price at which you can purchase this bond given a $10,000 par value is _____________.

$9,840.62

A share of stock is now selling for $90. It will pay a dividend of $10 per share at the end of the year. Its beta is 1. What do investors expect the stock to sell for at the end of the year? Assume the risk-free rate is 4% and the expected rate of return on the market is 18%.

$96.20 Since the stock's beta is equal to 1, its expected rate of return should be equal to that of the market, that is, 18%. .18 = (10 + P1 - 90)/90 -> P1 = $96.20

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 the returns on the optimal risky portfolio is _________. 25.5% 22.3% 21.4% 20.7%

(.14-.05)(.39^2)-(.21-.05)(.20)(.39)(.4)/(.14-.05)(.39^2)+(.21-.05)(.20)(.39)- (.14-.05+.21-.05)(.20)(.39)(.4) =71% WB = 71% and WA = 29% σ2rp = (.292)(.392) + (.712)(.202) + 2(.29)(.71)(.39)(.20).4 σ2rp = .045804 σrp = 21.4%

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.) 14% 16% 18% 19%

(.14-.05)(.39^2)-(.21-.05)(.20)(.39)(.4)/(.14-.05)(.39^2)+(.21-.05)(.20)(.39)- (.14-.05+.21-.05)(.20)(.39)(.4) =71% Wb= 71% WA = 29% E[rp] = (.29)(.21) + (.71)(.14) = 16.03%

The geometric average of -12%, 20%, and 25% is _________.

(1+ .2 ) x (1+ .25) x(1 - .12) (1.32)^.3333 9.7%

Asset A has an expected return of 20% and a standard deviation of 25%. The risk-free rate is 10%. What is the reward-to-variability ratio?

(20%-10%)/25%=40%

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?

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

A bond pays a semiannual coupon, and the last coupon was paid 61 days ago. If the annual coupon payment is $75, what is the accrued interest? (Assume 182 days in the 6-month period.)

(75/2) × (61/182) = $12.57

The price of a bond (with par value of $1,000) at the beginning of a period is $980 and at the end of the period is $95. What is the holding-period return if the annual coupon rate is 4.5%?

(95 + 45 - 980)/980) - 1 = 4.08%

Assume both portfolios A and B are well diversified, that E(rA) = 14% and E(rB) = 14.8%. If the economy has only one factor, and βA = 1 while βB = 1.1,What must be the risk-free rate? Risk-free rate

(E(rA) - rf) / (βA) = (E(rB) - rf) / (βB) and solve for rf = 6%. (14 - Rf) / 1 = (14.8 - Rf) / 1.1 = 6%

If the quote for a Treasury bond is listed in the newspaper as 98:09 bid, 98:13 ask, the actual price at which you can purchase this bond given a $10,000 par value is

([98+(13/32)]/100)*10,000 = 9840.62

5. A 1% decline in yield will have the least effect on the price of a bond with a _________. A. 10-year maturity, selling at 80 B. 10 year maturity, selling at 100 C. 20-year maturity, selling at 80 D. 20-year maturity, selling at 100

...B. 10 year maturity, selling at 100

Consider the following table, which gives a security analyst's expected return on two stocks for two particular market returns: Market Return Aggressive Stock Defensive Stock 5% 2% 3.5% 20 32 14 a. What are the betas of the two stocks? (Round your answers to 2 decimal places.) Beta A Beta D b. What is the expected rate of return on each stock if the market return is equally likely to be 5% or 20%? (Round your answers to 2 decimal places.) Rate of return on A % Rate of return on D % d. If the T-bill rate is 8%, and the market return is equally likely to be 5% or 20%, what are the alphas of the two stocks? (Leave no cells blank - be certain to enter "0" wherever required. Negative values should be indicated by a minus sign. Round your answers to 1 decimal place.) Alpha A % Alpha D %

(a) The beta is the sensitivity of the stock return to the market return movements. Let A be the aggressive stock and D be the defensive one. Then beta is the change in the stock return per change in the market return. Therefore, we compute each stock's beta by calculating the difference in its return across the two scenarios divided by the difference in the market return. βA = (2 - 32)/(5 - 20) = 2.00 βD = (3.5 - 14)/(5 - 20) = 0.70 (b) With equal likelihood of either scenarios, the expected return is an average of the two possible outcomes. E(RA) = 0.5 (2 + 32) = 17% E(RD) = 0.5 (3.5 + 14) = 8.75% (c) The SML is determined by the market expected return of 0.5 x (20 + 5) = 12.5%, with a beta of 1, and the T-bill return of 8% with a beta of zero. The equation for the security market line is: E(R) = 8% + β(12.5% - 8%) (graph to be sketched). (d) The aggressive stock has a fair expected return of: E(RA) = 8% + 2(12.5% - 8%) = 17%, and the expected return by the analyst also is 17%. Thus, its alpha is zero. Similarly, the required return on the defensive stock is: E(RD) = 8% + 0.7(12.5% - 8%) = 11.5%, but the analyst's expected return on Stock D is only 8.75%, and hence, αD = actual expected return - required return given risk) = 8.75% - 11.15% = -2.4%.

The table presents the actual return of each sector of the manager's portfolio in column (1), the fraction of the portfolio allocated to each sector in column (2), the benchmark or neutral sector allocations in column (3), and the returns of sector indexes in column 4. Picture What is the contribution of security selection to relative performance? Question 16 options: -.15% .15% -.3% .3% Save

-.15%

A stock has an expected return of 6%. What is its beta? Assume the risk-free rate is 8% and the expected rate of return on the market is 18%. (Negative value should be indicated by a minus sign. Round your answer to 2 decimal places.) Beta

-.2

Consider the following information: Risk-free: Expected return 10%, St dev 0 Market: Expected return 10.4%, st dev 1.0 A: Expected return 9%, st dev 0.8 What is the alpha of portfolio A?

-1.32%

A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 25% while stock B has a standard deviation of return of 5%. Stock A comprises 20% of the portfolio while stock B comprises 80% of the portfolio. If the variance of return on the portfolio is .0050, the correlation coefficient between the returns on A and B is __________.

.0050 (.2) (.25) (.8) (.05) 2(.2)(.8)(.25)(.05)Corr 2 2 2 2 = + + Corr = .225

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 _________. 10% 20% 40% 60%

.20^2- (.20)(.30)(-1)/(.30^2)+(.20^2)-.2(.30)(.20(-1)= 40%

Asset A has an expected return of 20% and a standard deviation of 25%. The risk free rate is 10%. What is the reward-to-variability ratio?

.4 (20-10)/25

Asset A has an expected return of 20% and a standard deviation of 25%. The risk-free rate is 10%. What is the reward-to-variability (Sharpe Ratio) ratio?

.40

A portfolio generates an annual return of 16%, a beta of 1.2, and a standard deviation of 19%. The market index return is 12% and has a standard deviation of 16%. What is the Sharpe ratio of the portfolio if the risk-free rate is 6%? Question 11 options: .4757 .5263 .6842 .7252

.5263

Which of the following correlation coefficients will produce the least diversification benefit?

.8

Which of the following correlation coefficients will produce the least diversification benefit? -.6 -.3 0 .8

.8

Stocks A, B, C and D have betas of 1.5, 0.4, 0.9 and 1.7 respectively. What is the beta of an equally weighted portfolio of A, B and C?

.93

Here are data on two companies. The T-bill rate is 4% and the market risk premium is 6%. Company $1 Discount Store Everything $5 Forecast return 12% 11% Standard deviation of returns 8% 10% Beta 1.5 1.0 Characterize each company in the above table as underpriced, overpriced, or properly priced. Company $1 Discount Store Everything $5

0.04 + 1.5(0.10 - 0.04) = 13% -- overpriced 0.04 + 1.0(0.10 - 0.04) = 10% -- underpriced

You invest $600 in security A with a beta of 1.5 and $400 in security B with a beta of .90. The beta of this portfolio is

0.6 * 1.5 + 0.4 * 0.9 = 1.26

portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 24%, while stock B has a standard deviation of return of 18%. Stock A comprises 60% of the portfolio, while stock B comprises 40% of the portfolio. If the variance of return on the portfolio is .0380, the correlation coefficient between the returns on A and B is _________.

0380 = (.6^2)(.24^2) + (.4^2)(.18^2) + 2(.6)(.4)(.24)(.18) ρ; ρ = .583

The market value weighted-average beta of firms included in the market index will always be ________.

1

The market value weighted-average beta of firms included in the market index will always be _____________.

1

The market value weighted-average beta of firms included in the market index will always be _____________. 0 between 0 and 1 1 none of these options (There is no particular rule concerning the average beta of firms included in the market index.)

1

You have a $50,000 portfolio consisting of Intel, GE and Con Edison. You put $20,000 in Intel, $12,000 in GE and the rest in Con Edison. Intel, GE and Con Edison have betas of 1.3, 1.0 and 0.8 respectively. What is your portfolio beta?

1.048

You have a $54,000 portfolio consisting of Intel, GE, and Con Edison. You put $21,600 in Intel, $13,600 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? Multiple Choice 1.050 0.995 0.808 1.365

1.050 (216/54)(1.3) + (13.6/54)(1.0) + (18.8/54)(0.8) = 1.050

You have a $56,000 portfolio consisting of Intel, GE, and Con Edison. You put $22,400 in Intel, $14,400 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?

1.051

One-, two-, and three-year maturity, default-free, zero-coupon bonds have yields to maturity of 7%, 8%, and 9%, respectively. What is the implied 1-year forward rate 1 year from today?

1.07(1 + f2) = 1.082 = 1.1664 (1 + f2) = 1.1664/1.07 = 1.0900935 f2 = 9.01%

You have a $42,000 portfolio consisting of Intel, GE, and Con Edison. You put $22,400 in Intel, $8,800 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?

1.109 (22.442)(1.3)+(8.842)(1.0)+(10.842)(0.8)=1.109

The beta of this stock is ____.

1.32

What must be the beta of a portfolio with E(rP) = 20%, if rf = 5% and E(rM) = 15%?

1.5 E(rP) = rf + β[E(rM) - rf] Given rf = 5% and E(rM)= 15%, we can calculate β: 20% = 5% + β(15% - 5%) -> β = 1.5

Most studies indicate that investors' risk aversion is in the range _____

1.5-4

In the article "Danger: High Levels of Company Stock," what is the maximum amount of your employer's stock that the author recommends you hold in your retirement account?

10%

A __________ bond gives the issuer an option to retire the bond before maturity at a specific price after a specific date. A. callable B. coupon C. puttable D. Treasury

A. callable

A 1% decline in yield will have the least effect on the price of a bond with a _________. Question 5 options: 10-year maturity, selling at 80 10-year maturity, selling at 100 20-year maturity, selling at 80 20-year maturity, selling at 100

10-year maturity, selling at 100

All other things equal (YTM = 10%), which of the following has the shortest duration?

10-year zero-coupon bond

A. .40

10. Asset A has an expected return of 20% and a standard deviation of 25%. The risk free rate is 10%. What is the reward-to-variability ratio? a. .40 b. .50 c. .75 d. .80

Consider the following information: Risk-free: Expected return 10%, St dev 0 Market: Expected return 10.4%, st dev 1.0 A: Expected return 9%, st dev 0.8 Calculate the expected return of portfolio A with a beta of 0.8.

10.32%

Gagliardi Way Corporation has an expected ROE of 15%. If it pays out 30% of its earnings as dividends, its dividend growth rate will be _____.

10.5% b = 1 - .3 = .7g = b × ROE = .7 × 15% = 10.5%

Based on current dividend yields and expected capital gains, the expected rates of return on portfolios A and B are 11% and 14%, respectively. The beta of A is .8 while that of B is 1.5. The T-bill rate is currently 6%, while the expected rate of return of the S&P 500 Index is 12%. The standard deviation of portfolio A is 10% annually, while that of B is 31%, and that of the index is 20%. Calculate the return predicted by CAPM for a portfolio with a beta of 0.8.

10.8% E(rA) = 6% + 0.8 × (12% - 6%) = 10.8%

assuming semiannual compounding, a 10 year zero coupon bond with a par value of 1000, and a required return of 13.0% would be priced at

1000/(1.065)^40 = 80.52

If the price of a $10,000 par Treasury bond is $10,243.75, the quote would be listed in the newspaper as

102:14 $10243.75/10000*100=102.4375 44*32=1408 102.14

According to the CAPM, what is the expected market return given an expected return on a security of 15.0%, a stock beta of 1.8, and a risk-free interest rate of 6%?

11% 15.0 = 6 + 1.8 × (MRP); MRP = 10.80%; Expected market return = 6 + 10.80 = 11.00%

a coupon bond that pays semiannual interest is reported in the wall street journal as having an ask price of 113% of its 1000 par value. if the last interest payment was made 3 months ago and the coupon rate is 5.60%. the invoice price of the bond will be______

1144

A managed portfolio has a standard deviation equal to 22% and a beta of .9 when the market portfolio's standard deviation is 26%. The adjusted portfolio P* needed to calculate the M2 measure will have ________ invested in the managed portfolio and the rest in T-bills. Multiple Choice 84.6% 118% 18% 15.4%

118% w(σP) = σM, or 22w = 26, so the weight in the managed portfolio is 26/22 = 118%.

C. The weighted sum of the securities' covariances

12. The variance of a portfolio of risky securities is __________. a. The sum of the securities' covariances b. The sum of the securities' variances c. The weighted sum of the securities' covariances d. The weighted sum of the securities' variances

The market capitalization rate on the stock of Aberdeen Wholesale Company is 13%. Its expected ROE is 15%, and its expected EPS is $6. If the firm's plowback ratio is 70%, its P/E ratio will be _________.

12.00 Dividend payout ratio = 1 - 0.70 = 0.30 Expected dividend = 0.30 × $6 = $1.80 Growth rate = 0.70 × 15% = 10.50% Value = $1.80/(0.13 - 0.105) = $72.00 P/E = $72.00/$6 = 12.00

Research has identified two systematic factors that affect U.S. stock returns. The factors are growth in industrial production and changes in long-term interest rates. Industrial production growth is expected to be 3%, and long-term interest rates are expected to increase by 1%. You are analyzing a stock that has a beta of 1.2 on the industrial production factor and .5 on the interest rate factor. It currently has an expected return of 12%. However, if industrial production actually grows 5% and interest rates drop 2%, what is your best guess of the stock's return? Multiple Choice 15.9% 12.9% 13.2% 12%

12.9% E[rnew] = 12% + (5% - 3%)(1.2) + (-2% - 1%)(.5) = 12.9%

$1,000 par value zero-coupon bonds (ignore liquidity premiums) BondYears to MaturityYield to MaturityA16.00%B27.50%C37.99%D48.49%E510.70% The expected 2-year interest rate 3 years from now should be _________.

14.89%

$1,000 par value zero-coupon bonds (ignore liquidity premiums) The expected 2-year interest rate 3 years from now should be _________.

14.89%

Based on current dividend yields and expected capital gains, the expected rates of return on portfolios A and B are 11% and 14%, respectively. The beta of A is .8 while that of B is 1.5. The T-bill rate is currently 6%, while the expected rate of return of the S&P 500 Index is 12%. The standard deviation of portfolio A is 10% annually, while that of B is 31%, and that of the index is 20%. Calculate the return predicted by CAPM for a portfolio with a beta of 1.5.

15% E(rB) = 6% + 1.5 × (12% - 6%) = 15.0%

A. N / (n-1)

15. To eliminate the bias in calculating the variance and covariance of returns from historical data the average squared deviation must be multiplied by __________. a. N / (n-1) b. N * (n-1) c. (n-1) / n d. (n-1) * n

Consider the following information: Portfolio Expected Return Standard Deviation Risk-free 10 % 0 % Market 18 24 A 16 12 a. Calculate the sharpe ratios for the market portfolio and portfolio A. (Round your answers to 2 decimal places.) Sharpe Ratio Market portfolio Portfolio A b. If the simple CAPM is valid, state whether the above situation is possible? Yes No

16 - 10 / 12 = .5 18 - 10 / 24 = .33 No

Consider the following $1,000 par value zero-coupon bonds: Bond Years to Mature YTM A 1 6% B 2 7% C 3 7.99% D 4 9.41% E 5 10.70% The expected 1-year interest rate 4 years from now should be _________.

16%

Consider the following $1,000 par value zero-coupon bonds: BondYears to MaturityYield to MaturityA16.00%B27.00%C37.99%D49.41%E510.70% The expected 1-year interest rate 4 years from now should be _________.

16%

Consider the following $1,000 par value zero-coupon bonds: The expected 1-year interest rate 4 years from now should be _________.

16%

C. Equal to 0

16. Consider an investment opportunity set formed with two securities that are perfectly negatively correlated. The global minimum variance portfolio has a standard deviation that is always __________. a. Equal to the sum of the securities standard deviations b. Equal to -1 c. Equal to 0 d. Greater than 0

Suppose two factors are identified for the U.S. economy: the growth rate of industrial production, IP, and the inflation rate, IR. IP is expected to be 6% and IR 7%. A stock with a beta of 1 on IP and 0.7 on IR currently is expected to provide a rate of return of 15%. If industrial production actually grows by 7%, while the inflation rate turns out to be 9%, what is your best guess for the rate of return on the stock?

17.4% Revised estimate = 15% + [(1 × 1%) + (0.7 × 2%)] = 17.4%

Consider the following information: Portfolio Expected Return Beta Risk-free 10 % 0 Market 18 1.0 A 16 1.5 a. Calculate the expected return of portfolio A with a beta of 1.5. Expected return % b. What is the alpha of portfolio A. (Negative value should be indicated by a minus sign.) Alpha % c. If the simple CAPM is valid, state whether the above situation is possible? Yes No

18 - 10 = 8 Er = 10 + 1.5(18 - 10) = 22% b. 16 - 22 = -6 c. NO

According to the CAPM, what is the market risk premium given an expected return on a security of 18.8%, a stock beta of 1.6, and a risk-free interest rate of 6%?

18.8-6/1.6=8

In a particular year, Salmon Arm Mutual Fund earned a return of 16% by making the following investments in asset classes: Picture The return on a bogey portfolio was 12%, based on the following: Picture The contribution of asset allocation across markets to the total excess return was __________. Question 14 options: 1.5% 2% 2.5% 3.5%

2%

In the context of the capital asset pricing model, the systematic measure of risk is captured by ___.

beta

A. Asset allocation, stock selection

2. The _______ decision should take precedence over the _____ decision. a. Asset allocation, stock selection b. Choice of fad, mutual fund selection c. Stock selection, asset allocation d. Stock selection, mutual fund selection

Compute the modified duration of a 9% coupon, 3-year corporate bond with a yield to maturity of 12%.

2.45

Suppose the yield on short-term government securities (perceived to be risk-free) is about 6%. Suppose also that the expected return required by the market for a portfolio with a beta of 1 is 13.0%. Suppose you consider buying a share of stock at a price of $25. The stock is expected to pay a dividend of $6 next year and to sell then for $26. The stock risk has been evaluated at β = -0.5. Using the SML, calculate the fair rate of return for a stock with a B = -0.5.

2.5% E(r) = 6% + (-0.5) × (13.0% - 6%) = 2.5%

Approximately how many securities does it take to diversify almost all of the unique risk from a portfolio?

20

Consider the CAPM. The expected return on the market is 18%. The expected return on a stock with a beta of 1.2 is 20%. What is the risk-free rate?

20% = rF + (18 - rF)(1.2); rF = 8%

Stock A has a beta of 1.2, and stock B has a beta of 1. The returns of stock A are ______ sensitive to changes in the market than are the returns of stock B

20% more

Stock A has a beta of 1.2, and stock B has a beta of 1. The returns of stock A are ______ sensitive to changes in the market than are the returns of stock B.

20% more

Stock A has a beta of 1.2, and stock B has a beta of 1. The returns of stock A are ________ sensitive to changes in the market than are the returns of stock B.

20% more

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

21. Suppose that a stock portfolio and a bond portfolio have a zero correlation. This means that a. The returns on the stock and bond portfolio tend to move inversely b. The returns on the stock and bond portfolio tend to vary independently of each other c. The returns on the stock and bond portfolio tend to move together d. The covariance of the stock and bond portfolio will be positive

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?

21.6%

C. Less than 18%

22. 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 you money in a risky bond portfolio that has an expected return of 6% and a standard deviation of 12%. The stock and bond portfolio have a correlation 0.55. The standard deviation of the resulting portfolio will be _________________. a. More than 18% but less than 24% b. Equal to 18% c. Less than 18% d. Zero

Consider the CAPM. The risk-free rate is 6%, and the expected return on the market is 15%. What is the expected return on a stock with a beta of 1.8? Multiple Choice 33% 31.8% 11.0% 22.2%

22.2% E[rs] = 6% + 1.8[15% - 6%] = 22.2%

Consider the CAPM. The risk-free rate is 5%, and the expected return on the market is 17%. What is the expected return on a stock with a beta of 1.5?

23% E[rs] = 5% + 1.5[17% - 5%] = 23.0%

A. Northeast

23. On a standard expected return vs standard deviation graph investors will prefer portfolios that lie to the a. Northeast b. Northwest c. Southeast d. Southwest

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

24. 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

C. .60

29. The standard deviation of return on investment A is .10 while the standard deviation of return on investment B is .05. 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

b. In which one of the following cases is the bond selling at a discount? (1) Coupon rate is greater than current yield, which is greater than yield to maturity. (2) Coupon rate, current yield, and yield to maturity are all the same. (3) Coupon rate is less than current yield, which is less than yield to maturity. (4) Coupon rate is less than current yield, which is greater than yield to maturity.

3) Coupon rate is less than current yield, which is less than yield to maturity.

a. A bond with a call feature: (1) Is attractive because the immediate receipt of principal plus premium produces a high return. (2) Is more apt to be called when interest rates are high because the interest saving will be greater. (3) Will usually have a higher yield to maturity than a similar noncallable bond. (4) None of the above.

3) Will usually have a higher yield to maturity than a similar noncallable bond. The yield on the callable bond must compensate the investor for the risk of call. Choice

B. Correlation coefficient

8. The ________ is equal to the square root of the systematic variance divided by the total variance. a. Covariance b. Correlation coefficient c. Standard deviation d. Reward-to-variability ratio

C. Their 401k accounts were not well diversified

3. Many current and retired Enron Corp. employees had their 401k retirement accounts wiped out when Enron collapsed because ____. a. They had to pay huge fines for obstruction of justice b. They had purchased fines for obstruction of justice c. Their 401k accounts were not well diversified d. None of the above

d. Which of the following statements is true? (1) The expectations hypothesis indicates a flat yield curve if anticipated future short-term rates exceed current short-term rates. (2) The basic conclusion of the expectations hypothesis is that the long-term rate is equal to the anticipated short-term rate. (3) The liquidity hypothesis indicates that, all other things being equal, longer maturities will have higher yields. (4) The liquidity preference theory states that a rising yield curve necessarily implies that the market anticipates increases in interest rates.

3. The liquidity hypothesis indicates that, all other things being equal, longer maturities will have higher yields.

You find that the annual Sharpe ratio for stock A returns is equal to 1.8. For a 3-year holding period, the Sharpe ratio would equal ________.

3.12 The Sharpe ratio grows at a rate of S1 so the 3-year Sharpe ratio would be 1.8 × Squareroot 3 = 3.12.

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

3.7% .12-[.05+1.1(.08-.05)

B. -.0020

31. The standard deviation of return on investment A is .10 while the standard deviation of return on investment B is .04. If the correlation coefficient between the returns on A and B is -.50, the covariance of returns on A and B is __________. a. -.0447 b. -.0020 c. .0020 d. .0447

C. 40%

32. 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 10% and a standard deviation of return of 30%. The weight of security B in the global minimum variance is __________. a. 10% b. 20% c. 40% d. 60%

C. 21.4%

38. The standard deviation of the returns on the optimal risky portfolio is __________. a. 25.5% b. 22.3% c. 21.4% d. 20.7%

C. 85%

39. An investor can design a risky portfolio based on two stocks, A and B. The standard deviation of return on stock A is 24% while the standard deviation on stock B is 14%. The correlation coefficient between the return on A and B is 0.35. The expected return on stock A is 25% while on stock B it is 11%. The proportion of the minimum variance portfolio that would be invested in stock B is __________. a. 45% b. 67% c. 85% d. 92%

You consider buying a share of stock at a price of $11. The stock is expected to pay a dividend of $1.41 next year, and your advisory service tells you that you can expect to sell the stock in 1 year for $13. The stock's beta is 1.1, rf is 16%, and E[rm] = 26%. What is the stock's abnormal return? Multiple Choice 4% 11% 13% 0%

4% E[r] = [(13-11+1.41)/11](100%) = 31% Required return= 16%+1.1(26%-16%) = 27% Abnormal Return = 31% -27% = 4%

According to the CAPM, what is the market risk premium given an expected return on a security of 18.0%, a stock beta of 1.5, and a risk-free interest rate of 12%?

4.00% 18.0 = 12 + 1.5 × (MRP); MRP = 4.00%

The price of a bond (with par value of $1,000) at the beginning of a period is $980 and at the end of the period is $975. What is the holding-period return if the annual coupon rate is 4.5%?

4.08% HPR = [(975 + 45 - 980)/980] - 1 = 4.08%

If the coupon rate on a bond is 4.5% and the bond is selling at a premium, which of the following is the most likely yield to maturity on the bond? (a) 5.2% (b) 4.5% (c) 5.5% (d) 4.2%

4.2%

Compute the duration of an 8%, 5-year corporate bond with a par value of $1,000 and yield to maturity of 10%. Question 15 options: 3.92 4.28 4.55 5

4.28

If the coupon rate on a bond is 4.5% , and the bond is selling at a premium, which of the following is the most likely yield to maturity on the bond?

4.3%

If the coupon rate on a bond is 4.5% and the bond is selling at a premium, which of the following is the most likely yield to maturity on the bond?

4.3% *A bond sells at a premium when the coupon rate > YTM.*

The yield to maturity of a 10-year zero-coupon bond with a par value of $1,000 and a market price of $625 is _____.

4.8% YTM= (1000/625)^1/10 - 1

A bond has a 5% coupon rate. The coupon is paid semiannually, and the last coupon was paid 35 days ago. If the bond has a par value of 1,000, what is the accrued interest?

4.81

An investor pays 989.40 for a bond. the bond has an annual coupon rate of 4.8%. What is the current yield on the bond?

4.85%

A coupon bond that pays interest of 4% annually has a par value of $1,000, matures in 5 years, and is selling today at $785. The actual yield to maturity on this bond is _________. Question 9 options: 7.2% 8.8% 9.1% 9.6%

9.6%

B. 13.60%

40. An investor can design a risky portfolio based on two stocks, A and B. The standard deviation of return on stock A is 20% while the standard deviation on stock B is 15%. The expected return on stock A is 20% while on stock B it is 10%. The correlation coefficient between the return on A and B is 0%. The expected return on the minimum variance portfolio is approximately __________. a. 10.00% b. 13.60% c. 15.00% d. 19.41%

D. Beta

45. 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

C. Identifying the optimal risky portfolio; constructing a complete portfolio from T-bills and the optimal risky portfolio based on the investor's degree of risk aversion

48. According to Tobin's separation property, portfolio choice can be separated into two independent tasks consisting of __________ and ___________. a. Identifying all investor imposed constraints; identifying the set of securities that conform to the investor's constraints and offer the best risk-return tradeoffs b. Identifying the investor's degree of risk aversion; choosing securities from industry groups that are consistent with the investor's risk profile c. Identifying the optimal risky portfolio; constructing a complete portfolio from T-bills and the optimal risky portfolio based on the investor's degree of risk aversion d. Choosing which risky assets an investor prefers according to their risk aversion level; minimizing the CAL by lending at the risk-free rate

B. All fall on the line of best fit; negative slope

49. You are constructing a scatter plot of excess returns for Stock A versus the market index. If the correlation coefficient between Stock A and the index is -1 you will find that the points of the scatter diagram ______________________ and the line of best fit has a _______________. a. All fall on the line of best fit; positive slope b. All fall on the line of best fit; negative slope c. Are widely scattered around the line; positive slope d. Are widely scattered around the line; negative slope

Consider a newly issued TIPS bond with a 3-year maturity, par value of $1,000, and coupon rate of 5%. Assume annual coupon payments.

5%

Consider a newly issued TIPS bond with a 3-year maturity, par value of $1,000, and coupon rate of 5%. Assume annual coupon payments. TimeInflation in year just ended Par value Coupon payment+Principal repayment=Total payment 0 $1000.00 1 3% $1030.00 $51.50 0 $51.50 2 2% $1050.60 $52.53 0 $52.53 3 4% $1092.62 $54.63 $1092.62 $1,147.25 What is the real rate of return on the TIPS bond in the first year?

5%

Consider a newly issued TIPS bond with a 3-year maturity, par value of $1,000, and coupon rate of 5%. Assume annual coupon payments. What is the real rate of return on the TIPS bond in the first year?

5%

Consider a newly issued TIPS bond with a 3-year maturity, par value of $1,000, and coupon rate of 5%. Assume annual coupon payments. What is the real rate of return on the TIPS bond in the first year?

5% (1.0815/1.03) - 1 *see chart for numbers*

A. Asset A

5. 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. Can't tell from the data given

B. The difference between the rate of return earned and the risk-free rate

50. The term excess-return refers to _______________. a. Returns earned illegally by means of insider trading b. The difference between the rate of return earned and the risk-free rate c. The difference between the rate of return earned on a particular security and the rate of return earned on other securities of equivalent risk d. The portion of the return on a security which represents tax liability and therefore cannot be reinvested

C. Correlation coefficient between ACE and the market has risen

51. You are recalculating the risk of ACE stock in relation to the market index and you find the ratio of the systematic variance to the total variance has risen. You must also find that the _____________. a. Covariance between ACE and the market has fallen b. Correlation coefficient between ACE and the market has fallen c. Correlation coefficient between ACE and the market has risen d. Unsystematic risk of ACE has risen

B. 0.75

52. A stock has a correlation with the market of 0.45. The standard deviation of the market is 21% and the standard deviation of the stock is 35%. What is the stock's beta? a. 1.00 b. 0.75 c. 0.60 d. 0.55

D. Engaging in active portfolio management to enhance returns

57. According to Markowitz and other proponents of modern portfolio theory which of the following activities would not be expected to produce any benefits? a. Diversification b. Investing in Treasury bills c. Investing in stocks of utility companies d. Engaging in active portfolio management to enhance returns

D. -1.0

58. In order to construct a riskless portfolio using two risky stocks, one would need to find two stocks with a correlation coefficient of _________. a. 1.0 b. 0.5 c. 0 d. -1.0

B. Less than 1

59. Some diversification benefits can be achieved by combining securities in a portfolio as long as the correlation between the securities is ______________. a. 1 b. Less than 1 c. Between 0 and 1 d. Less than or equal to 0

A callable bond pays annual interest of $60, has a par value of $1,000, matures in 20 years but is callable in 10 years at a price of $1,100, and has a value today of $1055.84. The yield to call on this bond is _________.

6% 1,055.84 = 60 Calculator entries are N = 10, PV = -1,055.84, PMT = 60, FV = 1,100, CPT I/Y 6

Suppose the yield on short-term government securities (perceived to be risk-free) is about 6%. Suppose also that the expected return required by the market for a portfolio with a beta of 1 is 13.0%. According to the capital asset pricing model: What would be the expected return on a zero-beta stock?

6% β = 0 means the stock has no systematic risk. Hence, the portfolio's expected rate of return is the risk-free rate, 6%

Semitool Corp. has an expected excess return of 6% for next year. However, for every unexpected 1% change in the market, Semitool's return responds by a factor of 1.2. Suppose it turns out that the economy and the stock market do better than expected by 1.5% and Semitool's products experience more rapid growth than anticipated, pushing up the stock price by another 1%. Based on this information, what was Semitool's actual excess return?

6% + (1.5%)(1.2) + 1% = 8.8%

B. Up, left

6. Adding additional risky assets to the investment opportunity set will generally move the efficient frontier _____ and to the _______. a. Up, right b. Up, left c. Down, right d. Down, left

A coupon bond that pays interest of $60 annually has a par value of $1,000, matures in 5 years, and is selling today at a $5.25 discount from par value. The current yield on this bond is _________.

6.49%

A coupon bond that pays interest of $60 annually has a par value of $1,000, matures in 5 years, and is selling today at a $75.25 discount from par value. The current yield on this bond is _________.

6.49% Current price = $1,000 - 75.25 = $924.75, so Current yield = $60/$924.75 = 6.49%

A coupon bond that pays interest of $64 annually has a par value of $1,000, matures in 5 years, and is selling today at a $76.25 discount from par value. The current yield on this bond is _________.

6.93% Current price = $1,000 - 76.25 = $923.75, so current yield = $64/$923.75 = 6.93%

the coupon bond that pays interest of 64 annually has a par value of 1000, matures in 5 years, and is selling today at a 76.25 discount from par value. the current yield on this bond is

6.93% Current price = $1,000 - 76.25 = $923.75, so current yield = $64/$923.75 = 6.93%

C. The Federal Reserve increases interest rates 50 basis points

61. Which of the following provides the best example of a systematic risk event? a. A strike by union workers hurts a firm's quarterly earnings b. Mad Cow disease in Montana hurts local ranchers and buyers of beef c. The Federal Reserve increases interest rates 50 basis points d. A senior executive at a firm embezzles $10 million and escapes to South America

C. 43%

63. You find that the annual standard deviation of a stock's returns is equal to 25%. For a 3 year holding period the standard deviation of your total return would equal ________. a. 75% b. 25% c. 43% d. 55%

B. Increase the unsystematic risk of the portfolio

69. Decreasing the number of stocks in a portfolio from 50 to 10 would likely __________________________. a. Increase the systematic risk of the portfolio b. Increase the unsystematic risk of the portfolio c. Increase the return of the portfolio d. Decrease the variation in returns the investor faces in any one year

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

7. An investor's degree of risk aversion will determine his or her _______. a. Optimal risky portfolio b. Risk-free rate c. Optimal mix of the risk-free asset and optimal risky asset d. Capital allocation line

B. I and II only

7. As you lengthen the time horizon of your investment period and decide to invest for multiple years you will find that I. the average risk per year may be smaller over longer investment horizons II. the variance of the total rate of return on your investment will be larger III. your overall risk on the investment will fall a. I only b. I and II only c. III only d. I, II and III

B. -0.9

72. Which of the following correlation coefficients will produce the most diversification benefits? a. -0.6 b. -0.9 c. 0.0 d. 0.4

C. 1.0

73. What is the most likely correlation coefficient between a stock index mutual fund and the S&P 500? a. -1.0 b. 0.0 c. 1.0 d. 0.50

B. Systematic risk

76. A portfolio of stocks fluctuates when the treasury yields change. Since this risk can not be eliminated through diversification, it is called a. Firm specific risk b. Systematic risk c. Unique risk d. None of the above

66. Assuming semiannual compounding, a 20-year zero coupon bond with a par value of $1,000 and a required return of 12% would be priced at _________. A. $97 B. $104 C. $364 D. $732

A. $97 (look at doc)

A bond currently has a price of $1,050. The yield on the bond is 6%. If the yield increases 25 basis points, the price of the bond will go down to $1,030. The duration of this bond is _________years.

8.08

A coupon bond that pays interest of $60 annually has a par value of $1,000, matures in 5 years, and is selling today at an $84.52 discount from par value. The yield to maturity on this bond is ____. (a) 9.45% (b) 7% (c) 6% (d) 8.12%

8.12%

A coupon bond that pays interest of $60 annually has a par value of $1,000, matures in 5 years, and is selling today at an $84.52 discount from par value. The yield to maturity on this bond is _________.

8.12% N = 5, PV = -915.48, PMT = 60, FV = 1,000, CPT I/Y 8.12

Consider a newly issued TIPS bond with a 3-year maturity, par value of $1,000, and coupon rate of 5%. Assume annual coupon payments. What is the nominal rate of return on the TIPS bond in the first year?

8.15

Consider a newly issued TIPS bond with a 3-year maturity, par value of $1,000, and coupon rate of 5%. Assume annual coupon payments. TimeInflation in year just ended Par value Coupon payment+Principal repayment=Total payment 0 $1000.00 1 3% $1030.00 $51.50 0 $51.50 2 2% $1050.60 $52.53 0 $52.53 3 4% $1092.62 $54.63 $1092.62 $1,147.25 What is the nominal rate of return on the TIPS bond in the first year?

8.15%

Consider a newly issued TIPS bond with a 3-year maturity, par value of $1,000, and coupon rate of 5%. Assume annual coupon payments. What is the nominal rate of return on the TIPS bond in the first year?

8.15%

Consider a newly issued TIPS bond with a 3-year maturity, par value of $1,000, and coupon rate of 5%. Assume annual coupon payments. What is the nominal rate of return on the TIPS bond in the first year?

8.15% (1030+51.50-1000) / 1000 *see chart for numbers*

An investor pays $750.40 for a bond. The bond has an annual coupon rate of 6.2%. What is the current yield on this bond?

8.26%

Consider a newly issued TIPS bond with a 3-year maturity, par value of $1,000, and coupon rate of 5.40%. Assume annual coupon payments. Time Inflation in Year Just Ended Par Value Coupon Payment + Principal Repayment = Total Payment 0 $ 1,000.00 1 3.4 % $ 1,034.00 $ 55.84 0 $ 55.84 2 2.4 % $ 1,058.82 $ 57.18 0 $ 57.18 3 4.4 % $ 1,105.41 $ 59.69 $ 1,105.41 $ 1,165.10 What is the nominal rate of return on the TIPS bond in the first year?

8.98% HPRnom = 1,034.00 + 55.84 - 1,000 ---------------------------------- = 8.98% 1,000

A. 9.7%

80. What is the standard deviation of a portfolio of two stocks given the following data? Stock A has a standard deviation of 18%. Stock B has a standard deviation of 14%. The portfolio contains 40% of stock A and the correlation coefficient between the two stocks is -.23. a. 9.7% b. 12.2% c. 14.0% d. 15.6%

B. 73%

83. A project has a 60% chance of doubling your investment in one year and a 40% chance of losing half your money. What is the standard deviation of this investment? a. 62% b. 73% c. 50% d. 25%

D. 0.69

84. Which of the following is the most likely reward to variability ratio for a capital allocation line that is optimal, assuming all ratios are generated from the same set of potential assets? a. 0.45 b. 0.56 c. 0.65 d. 0.69

A. Stock A is riskier

86. Which stock is riskier to a non-diversified investor who puts all his money in only one of these stocks? a. Stock A is riskier b. Stock B is riskier c. Both stocks are equally risky d. You cannot tell from the information given

Consider the following $1,000 par value zero-coupon bonds: BondYears to MaturityYield to MaturityA16.00%B27.50%C38.00%D48.50%E510.25% The expected 1-year interest rate 2 years from now should be _________.

9%

Consider the following $1,000 par value zero-coupon bonds: The expected 1-year interest rate 2 years from now should be _________.

9%

Consider the following $1,000 par value zero-coupon bonds: The expected 1-year interest rate 3 years from now should be _________.

9%

One, two and three year maturity, default-free, zero-coupon bonds have yields-to-maturity of 7%, 8% and 9% respectively. What is the implied one-year forward rate, one year from today?

9.01%

1,000 par value zero-coupon bonds (ignore liquidity premiums) BondYears to MaturityYield to MaturityA16.00%B27.50%C37.99%D48.49%E510.70% The expected 1-year interest rate 1 year from now should be about _________.

9.02%

The expected 1-year interest rate 1 year from now should be about _________.

9.02%

A coupon bond that pays interest of 4% annually has a par value of $1,000, matures in 5 years, and is selling today at $785. The actual yield to maturity on this bond is

9.6%= Calculator entries are N = 5, PV = -785, PMT = 40, FV = 1,000, CPT I/Y 9.62

Recent analysis indicates that the style of investing is a critical component of fund performance. In fact, on average about _____ of fund performance is attributable to the asset allocation decision. Question 13 options: 68% 74% 88% 97%

97%

Here are data on two companies. The T-bill rate is 4% and the market risk premium is 6%. Company $1 Discount Store Everything $5 Forecast return 12% 11% Standard deviation of returns 8% 10% Beta 1.5 1.0 What would be the fair return for each company, according to the capital asset pricing model (CAPM)? Company Expected Return $1 Discount Store % Everything $5 %

= 0.04 + 1.5(0.10 - 0.04) = 13% = 0.04 + 1.0(0.10 - 0.04) = 10% =

A bond has a 5% coupon rate. The coupon is paid semiannually, and the last coupon was paid 35 days ago. If the bond has a par value of $1,000, what is the accrued interest? A. $4.81 B. $14.24 C. $25 D. $50

A

A callable bond pays annual interest of $60, has a par value of $1,000, matures in 20 years but is callable in 10 years at a price of $1,100, and has a value today of $1055.84. The yield to call on this bond is _________. A. 6% B. 6.58% C. .2% D. 8%

A

A collateral trust bond is _______. A. secured by other securities held by the firm B. secured by equipment owned by the firm C. secured by property owned by the firm D. unsecured

A

A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 24%, while stock B has a standard deviation of return of 18%. Stock A comprises 60% of the portfolio, while stock B comprises 40% of the portfolio. If the variance of return on the portfolio is .0380, the correlation coefficient between the returns on A and B is _________. A. .583 B. .225 C. .128 D. .327

A

According to Tobin's separation property, portfolio choice can be separated into two independent tasks consisting of __________ and __________. A. identifying the optimal risky portfolio; constructing a complete portfolio from T-bills and the optimal risky portfolio based on the investor's degree of risk aversion B. identifying all investor imposed constraints; identifying the set of securities that conform to the investor's constraints and offer the best risk-return trade-offs C. choosing which risky assets an investor prefers according to the investor's risk-aversion level; minimizing the CAL by lending at the risk-free rate D. identifying the investor's degree of risk aversion; choosing securities from industry groups that are consistent with the investor's risk profile

A

Adding additional risky assets to the investment opportunity set will generally move the efficient frontier _____ and to the ______. A. up; left B. up; right C. down; left D. down; right

A

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 standard deviation of return on the optimal risky portfolio is _________. A. 5% B. 20% C. 7% D. 0%

A

Bonds issued in the currency of the issuer's country but sold in other national markets are called _____________. A. Eurobonds B. Yankee bonds C. Samurai bonds D. foreign bonds

A

Ceteris paribus, the price and yield on a bond are A)negatively related. B)positively related. C)sometimes positively and sometimes negatively related. D)not related. E)indefinitely related

A

Consider a -year bond with a 9% coupon and a yield to maturity of 12%. If interest rates remain constant, 1 year from now the price of this bond will be _________. A. higher B. lower C. the same D. indeterminate

A

Consider a newly issued TIPS bond with a 3-year maturity, par value of $1,000, and coupon rate of 5%. Assume annual coupon payments. What is the real rate of return on the TIPS bond in the first year? A. 5% B. 8.15% C. .15% D. 4%

A

Consider the following $1,000 par value zero-coupon bonds: The expected 1-year interest rate 4 years from now should be _________. A. 16% B. 18% C. 20% D. 22%

A

If the coupon rate on a bond is 4.5% and the bond is selling at a premium, which of the following is the most likely yield to maturity on the bond? A. 4.3% B. 4.5% C. 5.2% D. 5.5%

A

In regard to bonds, convexity relates to the _______. A. shape of the bond price curve with respect to interest rates B. shape of the yield curve with respect to maturity C. slope of the yield curve with respect to liquidity premiums D. size of the bid-ask spread

A

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

A

Stock A has a beta of 1.2, and stock B has a beta of 1. The returns of stock A are ______ sensitive to changes in the market than are the returns of stock B. A. 20% more B. slightly less C. slightly more D. 20% less

A

The current yield on a bond is equal to ________. A)annual interest payment divided by the current market price B)the yield to maturity C)annual interest divided by the par value D)the internal rate of return E)none of the above

A

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. III and IV only B. II and III only C. I and IV only D. I and II only

A

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

A

You buy an 8-year $1,000 par value bond today that has a 6% yield and a 6% annual payment coupon. In 1 year promised yields have risen to %. Your 1-year holding-period return was ___. A. .61% B. -5.39% C. 1.28% D. -3.25%

A

You can be sure that a bond will sell at a premium to par when _________. A. its coupon rate is greater than its yield to maturity B. its coupon rate is less than its yield to maturity C. its coupon rate is equal to its yield to maturity D. its coupon rate is less than its conversion value

A

Annual Coupon Amount = $1,000 * .06 = $60 Last interest payment made = 1 month or 30 days Flat Price = $1000(117/100) = $1,170 Accrued interest = (60/2) (30/182) = $4.945 Invoice = $1,170 + $4.945 = $1,174.95

A coupon bond paying a semiannual interest is reported as having an ask price of 117% of its $1,000 par value. If the last interest payment was made one month ago and the coupon rate is 6%, what is the invoice price of the bond?

Which of the following set of conditions will result in a bond with the greatest price volatility? A high coupon and a short maturity A high coupon and a long maturity A low coupon and a short maturity A low coupon and a long maturity

A low coupon and a long maturity

Which of the following set of conditions will result in a bond with the greatest price volatility? Question 18 options: A high coupon and a short maturity A high coupon and a long maturity A low coupon and a short maturity A low coupon and a long maturity

A low coupon and a long maturity

FV = 1,000 PV = -746.22 N = 5 years I/Y = ?

A zero-coupon bond with face value $1,000 and maturity of five years sells for $746.22. What is its yield to maturity? What will happen to its yield to maturity of its price falls immediately to $730?

Assume that both X and Y are well-diversified portfolios and the risk-free rate is 8%. Portfolio X has an expected return of 14% and a beta of 1.00. Portfolio Y has an expected return of 9.5% and a beta of 0.25. In this situation, you would conclude that portfolios X and Y __________. A) are in equilibrium B) offer an arbitrage opportunity C) are both underpriced D) are both fairly priced

A) are in equilibrium

1. 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) can't tell from the data given

A) asset A

Arbitrage is based on the idea that __________. A) assets with identical risks must have the same expected rate of return B) securities with similar risk should sell at different prices C) the expected returns from equally risky assets are different D) none of the above

A) assets with identical risks must have the same expected rate of return

Interior Airline is expected to pay a dividend of $3 in the upcoming year. Dividends are expected to grow at the rate of 10% per year. The risk-free rate of return is 4%, and the expected return on the market portfolio is 13%. The stock of Interior Airline has a beta of 4. Using the constant-growth DDM, the intrinsic value of the stock is _________. A. $10 B. $22.73 C. $27.78 D. $41.67

A. $10 k = .04 + .4(.13 − .04) = .4 V0 = [3/(.4 − .1)] = 10

A zero-coupon bond has a yield to maturity of 5% and a par value of $1,000. If the bond matures in 16 years, it should sell for a price of __________ today. A. $458.11 B. $641.11 C. $789.11 D. $1,100.11

A. $458.11

66. Assuming semiannual compounding, a 20-year zero coupon bond with a par value of $1,000 and a required return of 12% would be priced at _________. A. $97.22 B. $104.49 C. $364.08 D. $732.14

A. $97.22 Calculator entries are N = 40, I/Y = 6, PMT = 0, FV = 1,000, CPT PV -97.22

A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 24%, while stock B has a standard deviation of return of 18%. Stock A comprises 60% of the portfolio, while stock B comprises 40% of the portfolio. If the variance of return on the portfolio is .0380, the correlation coefficient between the returns on A and B is _________. A. .583 B. .225 C. .327 D. .128 ############?????????

A. .583

82. The price on a Treasury bond is 104:21, with a yield to maturity of 3.45%. The price on a comparable maturity corporate bond is 103:11, with a yield to maturity of 4.59%. What is the approximate percentage value of the credit risk of the corporate bond? A. 1.14% B. 3.45% C. 4.59% D. 8.04%

A. 1.14% Credit risk premium = 4.59 - 3.45 = 1.14%

89. The price of a bond (with par value of $1,000) at the beginning of a period is $980 and at the end of the period is $975. What is the holding-period return if the annual coupon rate is 4.5%? A. 4.08% B. 4.5% C. 5.1% D. 5.6%

A. 4.08% HPR = [(975 + 45 - 980)/980] - 1 = 4.08%

The price of a bond (with par value of $1,000) at the beginning of a period is $980 and at the end of the period is $975. What is the holding-period return if the annual coupon rate is 4.5%? A. 4.08% B. 4.5% C. 5.1% D. 5.6%

A. 4.08% HPR = [(975 + 45 - 980)/980] - 1 = 4.08%

89. The price of a bond at the beginning of a period is $980.00 and $975.00 at the end of the period. What is the holding period return if the annual coupon rate is 4.5%? A. 4.08% B. 4.50% C. 5.10% D. 5.6%

A. 4.08% HPR = (975 - 980 + 45)/980 = 4.08%

88. If the coupon rate on a bond is 4.5% and the bond is selling at a premium, which of the following is the most likely yield to maturity on the bond? A. 4.3% B. 4.5% C. 5.2% D. 5.5%

A. 4.3% A bond sells at a premium when the coupon rate > YTM.

If the coupon rate on a bond is 4.5% and the bond is selling at a premium, which of the following is the most likely yield to maturity on the bond? A. 4.3% B. 4.5% C. 5.2% D. 5.5%

A. 4.3% A bond sells at a premium when the coupon rate > YTM.

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

A. 4.30% A bond sells at premium when coupon rate > YTM

69. The yield to maturity of an 10-year zero coupon bond, with a par value of $1,000 and a market price of $625, is _____. A. 4.8% B. 6.1% C. 7.7% D. 10.4%

A. 4.8% YTM = (1000/625) ^1/10 - 1 = 0.048

Consider a newly issued TIPS bond with a 3-year maturity, par value of $1,000, and coupon rate of 5%. Assume annual coupon payments. What is the real rate of return on the TIPS bond in the first year? A. 5% B. 8.15% C. 7.15% D. 4%

A. 5% look at homework

71. What is the real rate of return on the TIPS bond in the first year? A. 5.00% B. 8.15% C. 7.15% D. 4.00%

A. 5.00% (look at doc)

41. A callable bond pays annual interest of $60, has a par value of $1,000, matures in 20 years but is callable in 10 years at a price of $1,100, and has a value today of $1055.84. The yield to call on this bond is _________. A. 6% B. 6.58% C. 7.2% D. 8%

A. 6% 1,055.84 = Calculator entries are N = 10, PV = -1,055.84, PMT = 60, FV = 1,100, CPT I/Y 6

19. Bonds issued in the currency of the issuer's country but sold in other national markets are called _____________. A. Eurobonds B. Yankee bonds C. Samurai bonds D. foreign bonds

A. Eurobonds

67. A discount bond that pays interest semiannually will: I. Have a lower price than an equivalent annual payment bond II. Have a higher EAR than an equivalent annual payment bond III. Sell for less than its conversion value A. I and II only B. I and III only C. II and III only D. I, II, and III

A. I and II only

11. Asset A has an expected return of 15% and a reward-to-variability ratio of .5. Asset B has an expected return of 20% and a reward-to-variability ratio of .4. 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. can't tell from the data given

A. asset A

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

2. The _______ decision should take precedence over the _____ decision. A. asset allocation, stock selection B. bond selection, mutual fund selection C. stock selection, asset allocation D. stock selection, mutual fund selection

A. asset allocation, stock selection

31. A __________ bond gives the issuer an option to retire the bond before maturity at a specific price after a specific date. A. callable B. coupon C. puttable D. Treasury

A. callable

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

A. callable

25. Everything else equal _________ bonds will require a higher promised YTM than ________ bonds. A. catastrophe; standard B. non-callable; callable C. mortgage; debenture D. AAA rated; BAA rated

A. catastrophe; standard

63. Under the pure expectations hypothesis and constant real interest rates for different maturities, an upward sloping yield curve would indicate __________________. A. expected increases in inflation over time B. expected decreases in inflation over time C. the presence of a liquidity premium D. that the equilibrium interest rate in the short term part of the market is lower than the equilibrium interest rate in the long-term part of the market

A. expected increases in inflation over time

Consider a 7-year bond with a 9% coupon and a yield to maturity of 12%. If interest rates remain constant, 1 year from now the price of this bond will be _________. A. higher B. lower C. the same D. indeterminate

A. higher

You can be sure that a bond will sell at a premium to par when _________. A. its coupon rate is greater than its yield to maturity B. its coupon rate is less than its yield to maturity C. its coupon rate is equal to its yield to maturity D. its coupon rate is less than its conversion value

A. its coupon rate is greater than its yield to maturity

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

A. lower than

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

A. lower than

28. Reward-to-variability ratios are ________ on the ________ capital market line. A. lower; steeper B. higher; flatter C. higher; steeper D. the same; flatter

A. lower; steeper

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

A. maturity at issue

9. In regard to bonds, convexity relates to the _______. A. shape of the bond price curve with respect to interest rates B. shape of the yield curve with respect to maturity C. slope of the yield curve with respect to liquidity premiums D. size of the bid-ask spread

A. shape of the bond price curve with respect to interest rates

9. When discussing bonds, convexity relates to the _______. A. shape of the bond price curve with respect to interest rates B. shape of the yield curve with respect to maturity C. slope of the yield curve with respect to liquidity premiums D. size of the bid-ask spread

A. shape of the bond price curve with respect to interest rates

33. Serial bonds are associated with _________. A. staggered maturity dates B. collateral C. coupon payment dates D. conversion features

A. staggered maturity dates

59. If an investor does not diversify their portfolio and instead puts all of their money in one stock, the appropriate measure of security risk for that investor is the ________. A. stock's standard deviation B. variance of the market C. stock's beta D. covariance with the market index

A. stock's standard deviation

25. 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

tandard deviation of portfolio returns is a measure of ___________. A. total risk B. relative systematic risk C. relative nonsystematic risk D. relative business risk

A. total risk

Consider the single factor APT. Portfolio A has a beta of 1.1 and an expected return of 22%. Portfolio B has a beta of .5 and an expected return of 18%. The risk-free rate of return is 8%. If you wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio __________ and a long position in portfolio _________.

A;B A - (.22-.08)/1.1 = .127 B - (.18-.08)/.5 = .2 A(.127) < B(.2) short the small and long the large

Consider the single factor APT. Portfolio A has a beta of 1.7 and an expected return of 21%. Portfolio B has a beta of .5 and an expected return of 17%. The risk-free rate of return is 11%. If you wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio __________ and a long position in portfolio _________. Multiple Choice A;A A;B B;B B;A

A;B A: (0.21-0.11)/1.7 = .6 B: (0.17-0.11)/0.5 = .12 A<B Short A & BUY B

81. A bond has a 5% coupon rate. The coupon is paid semi-annually and the last coupon was paid 35 days ago. If the bond has a par value of $1,000, what is the accrued interest? A. $4.81 B. $14.24 C. $25.00 D. $50.00

Accrued interest = (50/2) * (35/182) = 4.81

A bond has a 5% coupon rate. The coupon is paid semiannually, and the last coupon was paid 35 days ago. If the bond has a par value of $1,000, what is the accrued interest?

Accrued interest = (50/2) × (35/182) = 4.81

A 6% coupon U.S. Treasury note pays interest on May 31 and November 30 and is traded for settlement on August 10. The accrued interest on the $100,000 face amount of this note is _________.

Accrued interest = 100,000(.06/2)(71/183) = 1163.93

B. up, left

Adding additional risky assets to the investment opportunity set will generally move the efficient frontier _____ and to the ______. A. up, right B. up, left C. down, right D. down, left

Some diversification benefits can be achieved by combining securities in a portfolio as long as the correlation between the securities is _____________. A. between 0 and 1 B. less than 1 C. less than or equal to 0 D. 1

B

The CAPM _______. Multiple Choice predicts the relationship between risk and expected return of an asset provides a benchmark rate of return for evaluating possible investments helps us make an educated guess as to expected return on assets that have not yet traded in the marketplace All of the options.

All of the options.

Consider the following table, which gives a security analyst's expected return on two stocks for two particular market returns: Market Return: 6% 16 Agressive Stock: 2.1%. 25 Defensive Stock: 3.6%. 10 If the T-bill rate is 8%, and the market return is equally likely to be 6% or 16%, what are the alphas of the two stocks?

Alpha A: (1.32)% Alpha D: (3.12)% Expected return is the T-bill rate = 8% when beta equals zero; beta for the market is 1.0; and the expected rate of return for the market is: 0.5 × (16% + 6%) = 11.0% The aggressive stock has a fair expected rate of return of: E(rA) = 8% + 2.29 × (11.0% - 8%) = 14.87% The security analyst's estimate of the expected rate of return is also 14.87%. Thus the alpha for the aggressive stock is -1.32%. Similarly, the required return for the defensive stock is: E(rD) = 8% + 0.64 × (11.0% - 8%) = 9.92% The security analyst's estimate of the expected return for D is only 6.80%, and hence: αA = actual expected return - required return predicted by CAPM= 13.55% - 14.87% = -1.32% αD = actual expected return - required return predicted by CAPM= 6.80% - 9.92% = -3.12%

A. 14.0%

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 0.50. The risk-free rate of return is 10%. 34. The expected return on the optimal risky portfolio is __________. a. 14.0% b. 15.6% c. 16.4% d. 18.0%

1. Which one of the following correlation is best for diversification? A) 1 B) -1 C) 0 D) -2

Answer B (correlation can't be -2)

. The current yield on a bond is equal to _________________________. a. annual interest payment divided by the current market price b. the yield to maturity c. annual interest divided by the par value d. the internal rate of return

Answer: a. annual interest payment divided by the current market price Solution: Current yield is equal to the annual interest payment divided by current market price.

: A 7%, 14-year bond has a yield to maturity of 6% and duration of 7 years. If the market yield changes by 44 basis points, how much change will there be in the bond's price? a. 1.85% b. 2.91% c. 3.27% d. 6.44%

Answer: b. 2.91% Solution: DP/P = (-7 X 0.0044)/1.06 = 2.91%

Q14. Which of the following is not true? a. Holding other things constant, the duration of a bond increases with time to maturity. b. Given time to maturity, the duration of a zero-coupon decreases with yield to maturity. c. Given time to maturity and yield to maturity, the duration of a bond is higher when the coupon rate is lower. d. Duration is a better measure of price sensitivity to interest rate changes than is time to maturity.

Answer: b. Given time to maturity, the duration of a zero-coupon decreases with yield to maturity. Solution: The duration of a zero-coupon bond is equal to time to maturity and is independent of yield to maturity.

Which one of the following statements about convertibles is true? a. The longer the call protection on a convertible, the less the security is worth. b. The more volatile the underlying stock, the greater the value of the conversion feature. c. The smaller the spread between the dividend yield on the stock and the yield-to-maturity on the bond, the more the convertible is worth. d. The collateral that is used to secure a convertible bond is one reason convertibles are more attractive than the underlying stock.

Answer: b. The more volatile the underlying stock, the greater the value of the conversion feature. Solution: The longer the call protection the more attractive the bond. The smaller the spread, the less the bond is worth. Convertibles are debentures (unsecured bonds). All convertibles are callable at the option of the issuer.

. The yield to maturity on a bond is _________________________________________________. a. below the coupon rate when the bond sells at a discount, and equal to the coupon rate when the bond sells at a premium b. the discount rate that will set the present value of the payments equal to the bond price c. based on the assumption that any payments received are reinvested at the coupon rate d. the discount rate that will set the present value of the payments equal to the bond price, and based on the assumption that any payments received are reinvested at the coupon rate

Answer: b. the discount rate that will set the present value of the payments equal to the bond price Solution: The yield to maturity on a bond is the discount rate that will set the present value of the payments equal to the bond price.

. An 8%, 30-year corporate bond was recently being priced to yield 10%. The Macaulay duration for the bond is 10.20 years. Given this information, the bond's modified duration would be _____________. a. 8.05 b. 9.44 c. 9.27 d. 11.22

Answer: c. 9.27 Solution: D* = D/(1 + y); D* = 10.2/(1.1) = 9.27

Which of the following two bonds is more price sensitive to changes in interest rates? 1) A par value bond, A, with a 12-year-to-maturity and a 12% coupon rate. 2) A zero-coupon bond, B, with a 12-year-to-maturity and a 12% yield-to-maturity. a. Bond A because of the higher yield to maturity b. Bond A because of the longer time to maturity c. Bond B because of the longer duration d. Both have the same sensitivity because both have the same yield to maturity.

Answer: c. Bond B because of the longer duration Solution: Duration is the best measure of bond price sensitivity; the longer the duration, the higher the price sensitivity.

Which of the following two bonds is more price sensitive to changes in interest rates? 1) A par value bond, X, with a 5-year-to-maturity and a 10% coupon rate. 2) A zero-coupon bond, Y, with a 5-year-to-maturity and a 10% yield-to-maturity. a. Bond X because of the higher yield to maturity. b. Bond X because of the longer time to maturity. c. Bond Y because of the longer duration. d. Both have the same sensitivity because both have the same yield to maturity.

Answer: c. Bond Y because of the longer duration. Solution: Duration is the best measure of bond price sensitivity; the longer the duration, the higher the price sensitivity. Bond Y has a longer duration.

Which of the following are true about the interest-rate sensitivity of bonds? I) Bond prices and yields are inversely related. II) Prices of long-term bonds tend to be more sensitive to interest rate changes than prices of short-term bonds. III) Interest-rate risk is directly related to the bond's coupon rate. IV) The sensitivity of a bond's price to a change in its yield to maturity is inversely related to the yield to maturity at which the bond is currently selling. a. I and II b. I and III c. I, II, and IV d. II, III, and IV

Answer: c. I, II, and IV Solution: Number III is incorrect because interest-rate risk is inversely related to the bond's coupon rate.

Callable bonds... a. have a call price that declines as time passes and are called when interest rates increase appreciably. b. have a call price that declines as time passes. c. are called when interest rates increase appreciably. d. are called when interest rates decline appreciably and have a call price that declines as time passes.

Answer: d. are called when interest rates decline appreciably and have a call price that declines as time passes. Solution: Callable bonds often are refunded (called) when interest rates decline appreciably. The call price of the bond (approximately par and one year's coupon payment) declines to par as time passes and maturity is reached.

Consider two bonds, F and G. Both bonds presently are selling at their par value of $1,000. Each pays interest of $90 annually. Bond F will mature in 15 years while bond G will mature in 26 years. If the yields to maturity on the two bonds change from 9% to 10%, then a. both bonds will increase in value, but bond F will increase more than bond G. b. both bonds will increase in value, but bond G will increase more than bond F. c. both bonds will decrease in value, but bond F will decrease more than bond G. d. both bonds will decrease in value, but bond G will decrease more than bond F.

Answer: d. both bonds will decrease in value, but bond G will decrease more than bond F. Solution: The longer the maturity, the greater the price change when interest rates change.

The basic purpose of immunization is to... a. produce a zero net interest-rate risk. b. offset price and reinvestment risk. c. eliminate default risk and produce a zero net interest-rate risk. d. produce a zero net interest-rate risk and offset price and reinvestment risk.

Answer: d. produce a zero net interest-rate risk and offset price and reinvestment risk. Solution: When a portfolio is immunized, price risk and reinvestment risk exactly offset each other, resulting in zero net interest-rate risk.

A. asset A

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. can't tell from the data given

A. .40 (20%-10%)/25% = .4

Asset A has an expected return of 20% and a standard deviation of 25%. The risk free rate is 10%. What is the reward-to- variability ratio? A. .40 B. .50 C. .75 D. .80

14. To earn a high rating from the bond rating agencies, a company would want to have _________. I. a low times interest earned ratio II. a low debt to equity ratio III. a high quick ratio A. I only B. II and III only C. I and III only D. I, II and III

B. II and III only

1,000 par value zero-coupon bonds (ignore liquidity premiums) One year from now bond C should sell for ________ (to the nearest dollar). A. $85 B. $842 C. $835 D. $821

B

A 1% decline in yield will have the least effect on the price of a bond with a _________. A. 10-year maturity, selling at 80 B. 10-year maturity, selling at 100 C. 20-year maturity, selling at 80 D. 20-year maturity, selling at 100

B

A 6% coupon U.S. Treasury note pays interest on May 31 and November 30 and is traded for settlement on August 10. The accrued interest on the $100,000 face amount of this note is _________. A. $581.9 B. $1,163.93 C. $2,32.8 D. $3,000

B

A bond has a flat price of $985, and it pays an annual coupon. The last coupon payment was made 90 days ago. What is the invoice price if the annual coupon is $69? A. $999.55 B. $1,002.01 C. $1,00.45 D. $1,012.13

B

A bond pays a semiannual coupon, and the last coupon was paid 61 days ago. If the annual coupon payment is $5, what is the accrued interest? (Assume 182 days in the 6-month period.) A. $13.21 B. $12.5 C. $15.44 D. $16.32

B

A bond was purchased at a premium and is now selling at a discount because of a change in market interest rates. If the bond pays a 4% annual coupon, what is the likely impact on the holding-period return if an investor decides to sell now? A. increased B. decreased C. stayed the same D. The answer cannot be determined from the information given.

B

A convertible bond has a par value of $1,000, but its current market price is $95. The current price of the issuing company's stock is $26, and the conversion ratio is 34 shares. The bond's market conversion value is _________. A. $1,000 B. $884 C. $933 D. $980

B

A convertible bond has a par value of $1,000, but its current market price is $950. The current price of the issuing company's stock is $19, and the conversion ratio is 40 shares. The bond's conversion premium is _________. A. $50 B. $190 C. $200 D. $240

B

A coupon bond is a bond that A)does not pay interest on a regular basis but pays a lump sum at maturity. B)pays interest on a regular basis (typically every six months). C)can always be converted into a specific number of shares of common stock in the issuing company. D)always sells at par. E)none of the above

B

A coupon bond that pays interest annually has a par value of $1,000, matures in 5 years, and has a yield to maturity of 12%. If the coupon rate is 9%, the intrinsic value of the bond today will be _________. A. $856.04 B. $891.86 C. $926.4 D. $1,000

B

A coupon bond that pays interest of $60 annually has a par value of $1,000, matures in 5 years, and is selling today at a $5.25 discount from par value. The current yield on this bond is _________. A. 6% B. 6.49% C. 6.3% D. %

B

Consider the liquidity preference theory of the term structure of interest rates. On average, one would expect investors to require _________. A. a higher yield on short-term bonds than on long-term bonds B. a higher yield on long-term bonds than on short-term bonds C. the same yield on both short-term bonds and long-term bonds D. none of these options (The liquidity preference theory cannot be used to make any of the other statements.)

B

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

B

Everything else equal, the __________ the maturity of a bond and the __________ the coupon, the greater the sensitivity of the bond's price to interest rate changes. A. longer; higher B. longer; lower C. shorter; higher D. shorter; lower

B

If the quote for a Treasury bond is listed in the newspaper as 99.25 bid, 99.26 ask, the actual price at which you can sell this bond given a $10,000 par value is _____________. A. $9,828.12 B. $9,925 C. $9,934.3 D. $9,955.43

B

Many current and retired Enron Corp. employees had their 401k retirement accounts wiped out when Enron collapsed because ________. A. they had to pay huge fines for obstruction of justice B. their 401k accounts were not well diversified C. their 401k accounts were held outside the company D. none of these options

B

On May 1, 200, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds. If interest rates are expected to rise, then Joe Hill should ____. A. prefer the Wildwood bond to the Asbury bond B. prefer the Asbury bond to the Wildwood bond C. be indifferent between the Wildwood bond and the Asbury bond D. The answer cannot be determined from the information given.

B

On May 1, 200, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds. If the volatility of interest rates is expected to increase, then Joe Hill should __. A. prefer the Wildwood bond to the Asbury bond B. prefer the Asbury bond to the Wildwood bond C. be indifferent between the Wildwood bond and the Asbury bond D. The answer cannot be determined from the information given.

B

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 covariance of the stock and bond portfolios will be positive D. the returns on the stock and bond portfolios tend to move together

B

The ________ is equal to the square root of the systematic variance divided by the total variance. A. standard deviation B. correlation coefficient C. covariance D. reward-to-variability ratio

B

The _________ reward-to-variability ratio is found on the ________ capital market line. A. lowest; flattest B. highest; steepest C. lowest; steepest D. highest; flattest

B

The __________ of a bond is computed as the ratio of the annual coupon payment to the market price. A. nominal yield B. current yield C. yield to maturity D. yield to call

B

The standard deviation of return on investment A is .10, while the standard deviation of return on investment B is .05. If the covariance of returns on A and B is .0030, the correlation coefficient between the returns on A and B is _________. A. .36 B. .60 C. .12 D. .77

B

Which one of the following statements is correct? A. invoice price = flat price - accrued interest B. invoice price = flat price + accrued interest C. flat price = invoice price + accrued interest D. invoice price = settlement price - accrued interest

B

Semitool Corp. has an expected excess return of 6% for next year. However, for every unexpected 1% change in the market, Semitool's return responds by a factor of 1.2. Suppose it turns out that the economy and the stock market do better than expected by 1.5% and Semitool's products experience more rapid growth than anticipated, pushing up the stock price by another 1%. Based on this information, what was Semitool's actual excess return? A. 8.5% B. 8.8% C. 9.25% D. 7%

B 6% + (1.5%)(1.2) + 1% = 8.8%

Consider the multi-factor APT with two factors. The risk premiums on the factor 1 and factor 2 portfolios are respectively 5% and 3%. Stock A has a beta of 1.4 on factor 1, and a beta of 0.5 on factor 2. The expected return on stock A is 14%. If no arbitrage opportunities exist, the risk-free rate of return is __________. A) 5.0% B) 5.5% C) 6.0% D) 6.5%

B) 5.5%

What is the expected return for a portfolio with a beta of 0.5? A) 5% B) 7.5% C) 12.5% D) none of the above

B) 7.5%

Consider the single factor APT. Portfolio A has a beta of 1.3 and an expected return of 21%. Portfolio B has a beta of 0.7 and an expected return of 17%. The risk-free rate of return is 8%. If you wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio __________ and a long position in portfolio __________. A) A, A B) A, B C) B, A D) B, B

B) A, B

According to the capital asset pricing model, __________. A) all securities must lie on the capital market line B) all securities must lie on the security market line C) underpriced securities lie below the security market line D) overpriced securities lie above the security market line

B) all securities must lie on the security market line

Consider the following two stocks, A and B. Stock A has an expected return of 10% and a beta of 1.20. Stock B has an expected return of 14% and a beta of 1.80. The expected market rate of return is 9% and the risk-free rate is 5%. Security __________ would be considered a good buy because __________.

B, it offers an expected excess return of 1.8%

68. A 6% coupon U.S. treasury note pays interest on May 31 and November 30 and is traded for settlement on August 10. The accrued interest on $100,000 face amount of this note is _________. A. $581.97 B. $1,163.93 C. $2,327.87 D. $3,000.00

B. $1, 163. 93 Accrued Interest = 100,000(0.06/2) (71/183) = 1163.93

79. A bond has a flat price of $985 and it pays an annual coupon. The last coupon payment was made 90 days ago. What is the invoice price if the annual coupon is $69? A. $999.55 B. $1,002.01 C. $1,007.45 D. $1,012.13

B. $1,002. 01 Invoice = 985 + (69) ^ (90/365) = $1,002.01

43. A coupon bond which pays interest annually, has a par value of $1,000, matures in 5 years and has a yield to maturity of 12%. If the coupon rate is 9%, the intrinsic value of the bond today will be approximately _________. A. $856 B. $892 C. $926 D. $1,000

B. $892 (look at doc)

54. A bond has a par value of $1,000, a time to maturity of 10 years, and a coupon rate of 8% with interest paid annually. If the current market price is $750, what is the capital gain yield of this bond over the next year? A. .72% B. 1.85% C. 2.58% D. 3.42%

B. 1.85% Calculator entries to find the YTM are N = 10, PV = -750, PMT = 80, FV = 1,000, CPT = I/Y 12.52 The current yield = 80/750 = 10.67% Then we use the relationship YTM = Current yield + Capital gain yield 12.52% = 10.67% + Capital gain yield, so Capital gain yield = 1.85%

57. A 1% decline in yield will have the least effect on the price of the bond with a _________. A. 10-year maturity, selling at 80 B. 10-year maturity, selling at 100 C. 20-year maturity, selling at 80 D. 20-year maturity, selling at 100

B. 10-year maturity, selling at 100

Gagliardi Way Corporation has an expected ROE of 15%. If it pays out 30% of its earnings as dividends, its dividend growth rate will be _____. A. 4.5% B. 10.5% C. 15% D. 30%

B. 10.5% b = 1 - .3 = .7 g = b × ROE = .7 × 15% = 10.5%

A coupon bond that pays interest of $60 annually has a par value of $1,000, matures in 5 years, and is selling today at a $75.25 discount from par value. The current yield on this bond is _________. A. 6% B. 6.49% C. 6.73% D. 7%

B. 6.49%

40. A coupon bond that pays interest of $60 annually has a par value of $1,000, matures in 5 years, and is selling today at a $75.25 discount from par value. The current yield on this bond is _________. A. 6% B. 6.49% C. 6.73% D. 7%

B. 6.49% Current price = $1,000 - 75.25 = $924.75, so Current yield = $60/$924.75 = 6.49%

40. A coupon bond which pays interest of $60 annually, has a par value of $1,000, matures in 5 years, and is selling today at a $75.25 discount from par value. The current yield on this bond is _________. A. 6.00% B. 6.49% C. 6.73% D. 7.00%

B. 6.49% Current Yield = 60/ (1000 - 75.25) = 6.49%

The market capitalization rate on the stock of Aberdeen Wholesale Company is 13%. Its expected ROE is 14%, and its expected EPS is $3. If the firm's plowback ratio is 50%, its P/E ratio will be _________. A. 5.56 B. 8.33 C. 15.56 D. 16.67

B. 8.33 Dividend payout ratio = 1 - 0.50 = 0.50 Expected dividend = 0.50 × $3 = $1.50 Growth rate = 0.50 × 14% = 7.00% Value = $1.50/(0.13 - 0.070) = $25.00 P/E = $25.00/$3 = 8.33

45. The part of a stock's return that is systematic is a function of which of the following variables? I. Volatility in excess returns of the stock market II. The sensitivity of the stock's returns to changes in the stock market III. The variance in the stock's returns that is unrelated to the overall stock market A. I only B. I and II only C. II and III only D. I, II and III

B. I and II only

76. As you lengthen the time horizon of your investment period and decide to invest for multiple years you will find that ________. I. the average risk per year may be smaller over longer investment horizons II. the overall risk of your investment will compound over time III. your overall risk on the investment will fall A. I only B. I and II only C. III only D. I, II and III

B. I and II only

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

C

14. To earn a high rating from the bond rating agencies, a company would want to have: I. A low times-interest-earned ratio II. A low debt-to-equity ratio III. A high quick ratio A. I only B. II and III only C. I and III only D. I, II, and III

B. II and III only

30. Which one of the following statements is correct? A. Invoice price = Flat price - Accrued Interest B. Invoice price = Flat price + Accrued Interest C. Flat price = Invoice price + Accrued Interest D. Invoice price = Settlement price - Accrued Interest

B. Invoice price = Flat price + Accrued Interest

which one of the following is correct? A. Diversification is most effective when security returns are not correlated. B. The expected rate of return of a portfolio of risky securities is the weighted average of the securities' expected returns. C. The standard deviation of a portfolio of risky securities is the weighted average of the securities' standard deviation. D. Firm-specific risk is also called nondiversifiable risk.

B. The expected rate of return of a portfolio of risky securities is the weighted average of the securities' expected returns.

9. Which of the following statistics cannot be negative? A. Covariance B. Variance C. E[r] D. Correlation coefficient

B. Variance

23. Consider the liquidity preference theory of the term structure of interest rates. On average, one would expect investors to require _________. A. a higher yield on short-term bonds than on long-term bonds B. a higher yield on long-term bonds than on short-term bonds C. the same yield on both short-term bonds and long-term bonds D. none of these options (The liquidity preference theory cannot be used to make any of the other statements.)

B. a higher yield on long-term bonds than on short-term bonds

Consider the liquidity preference theory of the term structure of interest rates. On average, one would expect investors to require _________. A. a higher yield on short-term bonds than on long-term bonds B. a higher yield on long-term bonds than on short-term bonds C. the same yield on both short-term bonds and long-term bonds D. none of these options (The liquidity preference theory cannot be used to make any of the other statements.)

B. a higher yield on long-term bonds than on short-term bonds

56. Which of the following bonds would most likely sell at the lowest yield? A. a callable debenture B. a puttable mortgage bond C. a callable mortgage bond D. a puttable debenture

B. a puttable mortgage bond

49. You are constructing a scatter plot of excess returns for Stock A versus the market index. If the correlation coefficient between Stock A and the index is -1 you will find that the points of the scatter diagram ______________________ and the line of best fit has a ______________. A. all fall on the line of best fit; positive slope B. all fall on the line of best fit; negative slope C. are widely scattered around the line; positive slope D. are widely scattered around the line; negative slope

B. all fall on the line of best fit; negative slope

According to the capital asset pricing model, a fairly priced security will plot _________. A. above the security market line B. along the security market line C. below the security market line D. at no relation to the security market line

B. along the security market line

8. The ________ is equal to the square root of the systematic variance divided by the total variance. A. covariance B. correlation coefficient C. standard deviation D. reward-to-variability ratio

B. correlation coefficient

92. Which of the following rates represents a bond's annual interest payment per dollar of par value? A. holding period return B. coupon rate C. IRR D. YTM

B. coupon rate

35. Consider the expectations theory of the term structure of interest rates. If the yield curve is downward-sloping, this indicates that investors expect short-term interest rates to __________ in the future. A. increase B. decrease C. not change D. change in an unpredictable manner

B. decrease

Consider the expectations theory of the term structure of interest rates. If the yield curve is downward-sloping, this indicates that investors expect short-term interest rates to __________ in the future. A. increase B. decrease C. not change D. change in an unpredictable manner

B. decrease

he risk that can be diversified away is __________. A. beta B. firm-specific risk C. market risk D. systematic risk

B. firm-specific risk

68. Decreasing the number of stocks in a portfolio from 50 to 10 would likely _________________________. A. increase the systematic risk of the portfolio B. increase the unsystematic risk of the portfolio C. increase the return of the portfolio D. decrease the variation in returns the investor faces in any one year

B. increase the unsystematic risk of the portfolio

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

C

Everything else equal, the __________ the maturity of a bond and the __________ the coupon, the greater the sensitivity of the bond's price to interest rate changes. A. longer; higher B. longer; lower C. shorter; higher D. shorter; lower

B. longer; lower

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

B. negatively correlated

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

73. If interest rates are expected to rise, then Joe Hill should ____. A. prefer the Wildwood bond to the Asbury bond B. prefer the Asbury bond to the Wildwood bond C. be indifferent between the Wildwood bond and the Asbury bond D. there is not enough information given to tell **needs chart

B. prefer the Asbury bond to the Wildwood bond

On May 1, 2007, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds. If interest rates are expected to rise, then Joe Hill should ____. A. prefer the Wildwood bond to the Asbury bond B. prefer the Asbury bond to the Wildwood bond C. be indifferent between the Wildwood bond and the Asbury bond D. The answer cannot be determined from the information given.

B. prefer the Asbury bond to the Wildwood bond look at homework for graph

74. If the volatility of interest rates is expected to increase, the Joe Hill should __. A. prefer the Wildwood bond to the Asbury bond B. prefer the Asbury bond to the Wildwood bond C. be indifferent between the Wildwood bond and the Asbury bond D. there is not enough information given to tell

B. prefer the asbury bond to the wildwood bond

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

B. registered bonds; bearer bonds

18. Market risk is also called __________ and _________. A. systematic risk, diversifiable risk B. systematic risk, nondiversifiable risk C. unique risk, nondiversifiable risk D. unique risk, diversifiable risk

B. systematic risk, nondiversifiable risk

21. Harry Markowitz is best known for his Nobel prize winning work on _____________. A. strategies for active securities trading B. techniques used to identify efficient portfolios of risky assets C. techniques used to measure the systematic risk of securities D. techniques used in valuing securities options

B. techniques used to identify efficient portfolios of risky assets

The holding period return on a stock is equal to _________. A. the capital gain yield over the period plus the inflation rate B. the capital gain yield over the period plus the dividend yield C. the current yield plus the dividend yield D. the dividend yield plus the risk premium

B. the capital gain yield over the period plus the dividend yield

50. The term excess-return refers to ______________. A. returns earned illegally by means of insider trading B. the difference between the rate of return earned and the risk-free rate C. the difference between the rate of return earned on a particular security and the rate of return earned on other securities of equivalent risk D. the portion of the return on a security which represents tax liability and therefore cannot be reinvested

B. the difference between the rate of return earned and the risk-free rate

The term excess return refers to ______________. A. returns earned illegally by means of insider trading B. the difference between the rate of return earned and the risk-free rate C. the difference between the rate of return earned on a particular security and the rate of return earned on other securities of equivalent risk D. the portion of the return on a security that represents tax liability and therefore cannot be reinvested

B. the difference between the rate of return earned and the risk-free rate

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

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

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 _________.

B; it offers an expected excess return of 1.8% alphaA=.10-[.05+1.2(.9-.05)]=.002 alphaB=.14-[.05+1.8(.9-.05)]=.018

What is the lowest grade a bond can receive and still be considered investment grade?

BBB

what is the lowest grade a bond can receive and still be an investment grade bond

BBB

10. A bond has a current yield of 9% and a yield to maturity of 10%. Is the bond selling above or below par value? Above par value Below par value

Below par value

The measure of risk used in the capital asset pricing model is

Beta

A stock has an expected return of 6%. What is its beta? Assume the risk-free rate is 8% and the expected rate of return on the market is 18%

Beta -.20

What must be the beta of a portfolio with E(rP) = 20%, if rf = 5% and E(rM) = 15%? (Round your answer to 1 decimal place.)

Beta of portfolio 1.5%

A stock has a correlation with the market of .45. The standard deviation of the market is 21%, and the standard deviation of the stock is 35%. What is the stock's beta?

Beta=COVrirm/Stddev^2rm=PStddevristddevrm/stddev^2/rm= (0.45)(.35)(.21)/.21^2= 0.75

What are premium bonds?

Bonds selling above par value

The Seller or issuer is a ________ of funds or capital.

Borrower

You know that firm XYZ is very poorly run. On a scale of 1 (worst) to 10 (best), you would give it a score of 3. The market consensus evaluation is that the management score is only 2. Should you buy or sell the stock? Buy Sell

Buy

You find a 5-year AA Xerox bond priced to yield 6%. You find a similar-risk 5-year Canon bond priced to yield 6.5%. If you expect interest rates to rise, which of the following should you do? Short the Canon bond, and buy the Xerox bond. Buy the Canon bond, and short the Xerox bond. Short both the Canon bond and the Xerox bond. Buy both the Canon bond and the Xerox bond.

Buy the Canon bond, and short the Xerox bond.

A __________ bond gives the bondholder the right to cash in the bond before maturity at a specific price after a specific date. A. callable B. coupon C. puttable D. Treasury

C

A coupon bond that pays interest of $60 annually has a par value of $1,000, matures in 5 years, and is selling today at an $84.52 discount from par value. The yield to maturity on this bond is _________. A. 6% B. .23% C. 8.12% D. 9.45%

C

A coupon bond that pays interest semiannually has a par value of $1,000, matures in 8 years, and has a yield to maturity of 6%. If the coupon rate is 7%, the intrinsic value of the bond today will be________. A) $1,000 B) $1,081.82 C) $1,062.81 D) $1,100.03

C

A coupon bond that pays semiannual interest is reported in the Wall Street Journal as having an ask price of 11% of its $1,000 par value. If the last interest payment was made 2 months ago and the coupon rate is 6%, the invoice price of the bond will be _________. A. $1,140 B. $1,10 C. $1,180 D. $1,200

C

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 the returns on the optimal risky portfolio is _________. A. 22.3% B. 20.7% C. 21.4% D. 25.5%

C

Bonds with coupon rates that fall when the general level of interest rates rise are called _____________. A. asset-backed bonds B. convertible bonds C. inverse floaters D. index bonds

C

Consider a newly issued TIPS bond with a 3-year maturity, par value of $1,000, and a coupon rate of 5%. Assume annual coupon payments. What is the nominal rate of return on the TIPS bond in the first year? A. 5% B. 5.15% C. 8.15% D. 9%

C

Consider the following $1,000 par value zero-coupon bonds: The expected 1-year interest rate 3 years from now should be _________. A. % B. 8% C. 9% D. 10%

C

Consider the following $1,000 par value zero-coupon bonds: The expected 1-year interest rate 2 years from now should be _________. A. % B. 8% C. 9% D. 10%

C

Floating-rate bonds have a __________ that is adjusted with current market interest rates. A. maturity date B. coupon payment date C. coupon rate D. dividend yield

C

Market risk is also called __________ and _________. A. unique risk; nondiversifiable risk B. unique risk; diversifiable risk C. systematic risk; nondiversifiable risk D. systematic risk; diversifiable risk

C

On May 1, 200, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds. Suppose market interest rates decline by 100 basis points (i.e., 1%). The effect of this decline would be ______. A. the price of the Wildwood bond would decline by more than the price of the Asbury bond B. the price of the Wildwood bond would decline by less than the price of the Asbury bond C.the price of the Wildwood bond would increase by more than the price of the Asbury bond D. the price of the Wildwood bond would increase by less than the price of the Asbury bond

C

On a standard expected return versus standard deviation graph, investors will prefer portfolios that lie to the _____________ of the current investment opportunity set. A. right and below B. right and above C. left and above D. left and below

C

One-, two-, and three-year maturity, default-free, zero-coupon bonds have yields to maturity of %, 8%, and 9%, respectively. What is the implied 1-year forward rate 1 year from today? A. 2.0% B. 8.03% C. 9.01% D. 11.12%

C

Rational risk-averse investors will always prefer portfolios _____________. A. located on the efficient frontier to those located on the capital market line B. that are risk-free to all other asset choices C. located on the capital market line to those located on the efficient frontier D. at or near the minimum-variance point on the efficient frontier

C

TIPS offer investors inflation protection by ______________ by the inflation rate each year. A. increasing only the coupon rate B. increasing only the par value C. increasing both the par value and the coupon payment D. increasing the promised yield to maturity

C

The _______ decision should take precedence over the _____ decision. A. stock selection; mutual fund selection B. bond selection; mutual fund selection C. asset allocation; stock selection D. stock selection; asset allocation

C

The expected return of a portfolio is 8.9%, and the risk-free rate is 3.5%. If the portfolio standard deviation is 12%, what is the reward-to-variability ratio of the portfolio? A. 0 B. 1.35 C. .45 D. .74

C

The part of a stock's return that is systematic is a function of which of the following variables? I. Volatility in excess returns of the stock market II. The sensitivity of the stock's returns to changes in the stock market III. The variance in the stock's returns that is unrelated to the overall stock market A. I only B. II and III only C. I, II, and III D. I and II only

C

What is the lowest grade a bond can receive and still be considered investment grade? A.AAA B. A C. BBB D. BB

C

What is the standard deviation of a portfolio of two stocks given the following data: Stock A has a standard deviation of 30%. Stock B has a standard deviation of 18%. The portfolio contains 60% of stock A, and the correlation coefficient between the two stocks is -1. A. 24% B. 18% C. 10.8% D. 0%

C

When a bond indenture includes a sinking fund provision A)firms must establish a cash fund for future bond redemption. B)bondholders always benefit, because principal repayment on the scheduled maturity date is guaranteed. C)bondholders may lose because their bonds can be repurchased by the corporation at below-market prices. D)both A and B are true. E)none of the above are true.

C

Which country experienced the largest-ever sovereign default in 2012? A. Germany B. Ireland C. Greece D. Portugal

C

Which of the following correlation coefficients will produce the least diversification benefit? A. -.3 B. -.6 C. .8 D. 0

C

Which of the following statements is (are) true regarding time diversification? I. The standard deviation of the average annual rate of return over several years will be smaller than the 1-year standard deviation. II. For a longer time horizon, uncertainty compounds over a greater number of years. III. Time diversification does not reduce risk. A. I, II, and III B. II only C. II and III only D. I only

C

You buy a 10-year $1,000 par value 4% annual-payment coupon bond priced to yield 6%. You do not sell the bond at year-end. If you are in a 15% tax bracket, at year-end you will owe taxes on this investment equal to _______. A. $9.10 B. $4.25 C. $.68 D. $5.20

C

You buy a TIPS at issue at par for $1,000. The bond has a 3% coupon. Inflation turns out to be 2%, 3%, and 4% over the next 3 years. The total annual coupon income you will receive in year 3 is _________. A. $30 B. $33 C. $32.8 D. $30.90

C

You hold a subordinated debenture in a firm. In the event of bankruptcy you will be paid off before which one of the following? A. mortgage bonds B. senior debentures C. preferred stock D. equipment obligation bonds

C

You purchased a 5-year annual-interest coupon bond 1 year ago. Its coupon interest rate was 6%, and its par value was $1,000. At the time you purchased the bond, the yield to maturity was 4%. If you sold the bond after receiving the first interest payment and the bond's yield to maturity had changed to 3%, your annual total rate of return on holding the bond for that year would have been approximately _________. A. 5% B. 5.5% C. .6% D. 8.9%

C

_______ bonds represent a novel way of obtaining insurance from capital markets against specified disasters. A. Asset-backed bonds B. TIPS C. Catastrophe D. Pay-in-kind

C

__________ are examples of synthetically created zero-coupon bonds. A. COLTS B. OPOSSMS C. STRIPS D. ARMs

C

Consider the multi-factor APT with two factors. Portfolio A has a beta of 0. 5 on factor 1 and a beta of 1.25 on factor 2. The risk premiums on the factors 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) 15.0% C) 16.25% D) 23.0%

C) 16.25%

1. Which one of the following statement is NOT correct? A) Minimum Variance portfolio has the lowest risk among all portfolios along the investment opportunity set. B) Single index model assume the security co-moves with one single factor. C) Given different level of risk aversion and hold everything else the same, given the investment opportunity set of risky portfolios, investors should invest in a portfolio that he/she deems appropriate for his risk tolerance level. D) Investor should not invest in any portfolio that lies below the Minimum Variance portfolio. E) None of the above

C) Given different level of risk aversion and hold everything else the same, given the investment opportunity set of risky portfolios, investors should invest in a portfolio that he/she deems appropriate for his risk tolerance level.

__________ is not a true statement regarding the market portfolio. A) All securities in the market portfolio are held in proportion to their market values B) It includes all assets of the universe C) It is the tangency point between the capital market line and the indifference curve D) It lies on the efficient frontier

C) It is the tangency point between the capital market line and the indifference curve

The expected return on the market portfolio is 15%. The risk-free rate is 8%. The expected return on SDA Corp. common stock is 16%. The beta of SDA Corp. common stock is 1.25. Within the context of the capital asset pricing model, __________. A) SDA Corp. stock is underpriced B) SDA Corp. stock is fairly priced C) SDA Corp. stock's alpha is -0.75% D) SDA Corp. stock alpha is 0.75%

C) SDA Corp. stock's alpha is -0.75%

__________ is a true statement regarding the variance of risky portfolios.

C) The degree to which the portfolio variance is reduced depends on the degree of correlation between securities

In the context of the capital asset pricing model, the systematic measure of risk is captured by _________.

beta

A coupon bond that pays semiannual interest is reported in the Wall Street Journal as having an ask price of 117% of its $1,000 par value. If the last interest payment was made 2 months ago and the coupon rate is 6%, the invoice price of the bond will be _________. A. $1,140 B. $1,170 C. $1,180 D. $1,200

C. $1,180 Invoice price = 1.17(1,000) + 30(2/6) = 1,180

You buy a TIPS at issue at par for $1,000. The bond has a 3% coupon. Inflation turns out to be 2%, 3%, and 4% over the next 3 years. The total annual coupon income you will receive in year 3 is _________. A. $30 B. $33 C. $32.78 D. $30.90

C. $32.78

20. You buy a TIPS at issue at par for $1,000. The bond has a 3% coupon. Inflation turns out to be 2%, 3% and 4% over the next three years. The total annual coupon income you will receive in year three is _________. A. $30.00 B. $33.00 C. $32.78 D. $30.90

C. $32.78 ($30)(1.02)(1.03)(1.04) = $32.78

ART has come out with a new and improved product. As a result, the firm projects an ROE of 25%, and it will maintain a plowback ratio of 0.35. Its earnings this year will be $3.5 per share. Investors expect a 17% rate of return on the stock. What price do you expect ART shares to sell for in 4 years? A. $35.47 B. $73.66 C. $38.57 D. $42.07

C. $38.57 check hw

Next year's earnings are estimated to be $2. The company plans to reinvest 20% of its earnings at 15%. If the cost of equity is 8%, what is the present value of growth opportunities? A. $6.00 B. $8.00 C. $7.00 D. $8.08

C. $7.00 g = 0.20 × 0.15 = 0.03 Value with growth = ($2 × 0.80)/(0.08 - 0.03) = 32.00 Value without growth = $2/0.08 = $25.00 PVGO = $32 - 25.00 = $7.00

86. You buy a 10-year $1,000 par value 4% annual-payment coupon bond priced to yield 6%. You do not sell the bond at year-end. If you are in a 15% tax bracket, at year-end you will owe taxes on this investment equal to _______. A. $9.10 B. $4.25 C. $7.68 D. $5.20

C. $7.68 Calculator entries for this year's price are N = 10, I/Y = 6, PMT = 40, FV = 1,000, CPT PV 852.80 Calculator entries for next year's price are N = 9, I/Y = 6, PMT = 40, FV = 1,000, CPT PV 863.97 Taxes owed are ($863.97 - $852.80 + $40)(.15) = $7.68

85. You buy a 10-year $1,000 par value zero-coupon bond priced to yield 6%. You do not sell the bond. If you are in a 28% tax bracket, you will owe taxes on this investment after the first year equal to _______. A. $0 B. $4.27 C. $9.38 D. $33.51

C. $9.38 Taxes owed ($591.90 - $558.39)(.28) = $9.38

85. You buy a 10 year $1,000 par zero coupon bond priced to yield 6%. You do not sell the bond. If you are in a 28% tax bracket you will owe taxes on this investment after the first year equal to _______. A. $0 B. $4.27 C. $9.38 D. $33.51

C. $9.38 (look at doc)

The standard deviation of return on investment A is .10, while the standard deviation of return on investment B is .05. 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

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. 0.22 B. 0.60 C. 0.42 D. 0.25

C. 0.42

77. If the price of a $10,000 par Treasury bond is $10,237.50 the quote would be listed in the newspaper as ________. A. 102:10 B. 102:11 C. 102:12 D. 102:13

C. 102:12 (look at doc)

48. You purchased a 5-year annual-interest coupon bond 1 year ago. Its coupon interest rate was 6%, and its par value was $1,000. At the time you purchased the bond, the yield to maturity was 4%. If you sold the bond after receiving the first interest payment and the bond's yield to maturity had changed to 3%, your annual total rate of return on holding the bond for that year would have been approximately _________. A. 5% B. 5.5% C. 7.6% D. 8.9%

C. 7.6% PV0 = PV1 = Calculator entries for purchase price are N = 5, I/Y = 4, PMT = 60, FV = 1,000, CPT PV 1,089.04 Calculator entries for ending price are N =4, I/Y = 3, PMT = 60, FV = 1,000, CPT PV 1,111.51 Total ending cash = 1,111.51 + 60 = 1,171.51 HPR= (1,171.51/1,089.04) - 1 = 7.57%

75. One-, two-, and three-year maturity, default-free, zero-coupon bonds have yields to maturity of 7%, 8%, and 9%, respectively. What is the implied 1-year forward rate 1 year from today? A. 2.07% B. 8.03% C. 9.01% D. 11.12%

C. 9.01% 1.07(1 + f2) = 1.082 = 1.1664 (1 + f2) = 1.1664/1.07 = 1.0900935 f2 = 9.01%

Which one of the following is NOT true? A. Risk that can be eliminated through diversification is called firm-specific risk B. The lower the correlation among assets, the lower the risk to a portfolio. C. As we randomly add assets to a portfolio (or increase the number of assets in the portfolio), portfolios risk increases. D. A correlation of -1 between two assets will reduce or eliminate their portfolio's risk.

C. As we randomly add assets to a portfolio (or increase the number of assets in the portfolio), portfolios risk increases.

27. 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 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

The expected return on the market portfolio is 20%. The risk-free rate is 11%. The expected return on SDA Corp. common stock is 19%. The beta of SDA Corp. common stock is 1.80. Within the context of the capital asset pricing model, _________. A. SDA Stock is underpriced B. SDA stock is fairly priced C. SDA Corp. stock's alpha is -8.20% D. SDA stock's alpha is 8.2%

C. SDA Corp. stock's alpha is -8.20% α = 0.19 - [0.11 + 1.80(0.20 - 0.11)] = -0.0820

16. __________ are examples of synthetically created zero coupon bonds. A. COLTS B. OPOSSMS C. STRIPS D. ARMs

C. STRIPS

8. Inflation-indexed Treasury securities are commonly called ____. A. PIKs B. CARs C. TIPS D. STRIPS

C. TIPS

Which of the following provides the best example of a systematic-risk event? A. A strike by union workers hurts a firm's quarterly earnings. B. Mad Cow disease in Montana hurts local ranchers and buyers of beef. C. The Federal Reserve increases interest rates 50 basis points. D. A senior executive at a firm embezzles $10 million and escapes to South America.

C. The Federal Reserve increases interest rates 50 basis points.

72. Suppose market interest rates decline by 100 basis points (i.e., 1%). The effect of this decline would be: A. The price of Wildwood bond would decline by more than the Asbury bond. B. The price of Wildwood bond would decline by less than the Asbury bond. C. The price of Wildwood bond would increase by more than the Asbury bond. D. The price of Wildwood bond would increase by less than the Asbury bond. **needs a chart

C. The price of Wildwood bond would increase by more than the Asbury bond.

6. If you are holding a premium bond, you must expect a _______ each year until maturity. If you are holding a discount bond, you must expect a _______ each year until maturity. (In each case assume that the yield to maturity remains stable over time.) A. capital gain; capital loss B. capital gain; capital gain C. capital loss; capital gain D. capital loss; capital loss

C. capital loss; capital gain

93. If you are holding a premium bond you must expect a _______ each year until maturity. If you are holding a discount bond you must expect a _______ each year until maturity. A. capital gain; capital loss B. capital gain; capital gain C. capital loss; capital gain D. capital loss; capital loss

C. capital loss; capital gain

27. _______ bonds represent a novel way of obtaining insurance from capital markets against specified disasters. A. Asset backed bonds B. TIPS C. Catastrophe D. Pay in Kind

C. catastrophe

34. In an era of particularly low interest rates, which of the following bonds is most likely to be called? A. Zero coupon bonds B. Coupon bonds selling at a discount C. Coupon bonds selling at a premium D. Floating rate bonds

C. coupon bonds selling at a premium

7. Floating-rate bonds have a __________ that is adjusted with current market interest rates. A. maturity date B. coupon payment date C. coupon rate D. dividend yield

C. coupon rate

According to the CAPM, the risk premium an investor expects to receive on any stock or portfolio is _______________. A. directly related to the risk aversion of the particular investor B. inversely related to the risk aversion of the particular investor C. directly related to the beta of the stock D. inversely related to the alpha of the stock

C. directly related to the beta of the stock

17. Consider an investment opportunity set formed with two securities that are perfectly negatively correlated. The global minimum variance portfolio has a standard deviation that is always _________. A. equal to the sum of the securities standard deviations B. equal to -1 C. equal to 0 D. greater than 0

C. equal to 0

he _________ reward-to-variability ratio is found on the ________ capital allocation line. A. lowest; steepest B. highest; flattest C. highest; steepest D. none of the above

C. highest; steepest

48. According to Tobin's separation property, portfolio choice can be separated into two independent tasks consisting of __________ and __________. A. identifying all investor imposed constraints; identifying the set of securities that conform to the investor's constraints and offer the best risk-return tradeoffs B. identifying the investor's degree of risk aversion; choosing securities from industry groups that are consistent with the investor's risk profile C. identifying the optimal risky portfolio; constructing a complete portfolio from T-bills and the optimal risky portfolio based on the investor's degree of risk aversion D. choosing which risky assets an investor prefers according to their risk aversion level; minimizing the CAL by lending at the risk-free rate

C. identifying the optimal risky portfolio; constructing a complete portfolio from T-bills and the optimal risky portfolio based on the investor's degree of risk aversion

According to the liquidity preference theory of the term structure of interest rates, an increase in the yield on long-term corporate bonds versus short-term bonds could be due to _______. A. declining liquidity premiums B. an expectation of an upcoming recession C. a decline in future inflation expectations D. an increase in expected interest rate volatility

D

According to Tobin's separation property, portfolio choice can be separated into two independent tasks consisting of __________ and __________. A. identifying all investor imposed constraints; identifying the set of securities that conform to the investor's constraints and offer the best risk-return trade-offs B. identifying the investor's degree of risk aversion; choosing securities from industry groups that are consistent with the investor's risk profile C. identifying the optimal risky portfolio; constructing a complete portfolio from T-bills and the optimal risky portfolio based on the investor's degree of risk aversion D. choosing which risky assets an investor prefers according to the investor's risk-aversion level; minimizing the CAL by lending at the risk-free rate

C. identifying the optimal risky portfolio; constructing a complete portfolio from T-bills and the optimal risky portfolio based on the investor's degree of risk aversion

14. Beta is a measure of security responsiveness to _________. A. firm specific risk B. diversifiable risk C. market risk D. unique risk

C. market risk

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

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

1. A __________ bond gives the bondholder the right to cash in the bond before maturity at a specific price after a specific date. A. callable B. coupon C. puttable D. Treasury

C. puttable

17. A __________ bond is a bond where the bondholder has the right to cash in the bond before maturity at a specific price after a specific date. A. callable B. coupon C. puttable D. treasury

C. puttable

4. A mortgage bond is _______. A. secured by other securities held by the firm B. secured by equipment owned by the firm C. secured by property owned by the firm D. unsecured

C. secured by property owned by the firm

4. A mortgage bond is _______. A. secured by other securities held by the firm B. secured by equipment owned by the firm C. secured by property owned by the firm D. unsecured

C. secured by property owned by the firm

Yields on municipal bonds are generally lower than yields on similar corporate bonds because of differences in _________. A. marketability B. risk C. taxation D. call protection

C. taxation

On May 1, 2007, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds. Suppose market interest rates decline by 100 basis points (i.e., 1%). The effect of this decline would be ______. A. the price of the Wildwood bond would decline by more than the price of the Asbury bond B. the price of the Wildwood bond would decline by less than the price of the Asbury bond C. the price of the Wildwood bond would increase by more than the price of the Asbury bond D. the price of the Wildwood bond would increase by less than the price of the Asbury bond

C. the price of the Wildwood bond would increase by more than the price of the Asbury bond look at homework for graph

13. The expected rate of return of a portfolio of risky securities is _________. A. the sum of the securities' covariances B. the sum of the securities' variances C. the weighted sum of the securities' expected returns D. the weighted sum of the securities' variances

C. the weighted sum of the securities' expected returns

3. Many current and retired Enron Corp. employees had their 401k retirement accounts wiped out when Enron collapsed because ___. A. they had to pay huge fines for obstruction of justice B. their 401k accounts were held outside the company C. their 401k accounts were not well diversified D. none of the above

C. their 401k accounts were not well diversified

Assuming semiannual compounding, a 20-year zero coupon bond with a par value of $1,000 and a required return of 12% would be priced at _________.

Calculator entries are N = 40, I/Y = 6, PMT = 0, FV = 1,000, CPT PV -97.22

A corporate bond has a 10-year maturity and pays interest semiannually. The quoted coupon rate is 6%, and the bond is priced at par. The bond is callable in 3 years at 110% of par. What is the bond's yield to call?

Calculator entries are N = 6, PV = -1,000, PMT = 30, FV = 1,100, CPT I/Y 4.4892 (semiannual) Annual YTC = 2 × 4.4892 = 8.9784

You purchased a 5-year annual-interest coupon bond 1 year ago. Its coupon interest rate was 6%, and its par value was $1,000. At the time you purchased the bond, the yield to maturity was 4%. If you sold the bond after receiving the first interest payment and the bond's yield to maturity had changed to 3%, your annual total rate of return on holding the bond for that year would have been approximately _________.

Calculator entries for purchase price are N = 5, I/Y = 4, PMT = 60, FV = 1,000, CPT PV 1,089.04 Calculator entries for ending price are N =4, I/Y = 3, PMT = 60, FV = 1,000, CPT PV 1,111.51 Total ending cash = 1,111.51 + 60 = 1,171.51 HPR= (1,171.51/1,089.04) - 1 = 7.57%

You buy a 10-year $1,000 par value 4% annual-payment coupon bond priced to yield 6%. You do not sell the bond at year-end. If you are in a 15% tax bracket, at year-end you will owe taxes on this investment equal to _______.

Calculator entries for this year's price are N = 10, I/Y = 6, PMT = 40, FV = 1,000, CPT PV 852.80 Calculator entries for next year's price are N = 9, I/Y = 6, PMT = 40, FV = 1,000, CPT PV 863.97 Taxes owed are ($863.97 - $852.80 + $40)(.15) = $7.68

Two investment advisers are comparing performance. One averaged a 19% return and the other a 16% return. However, the beta of the first adviser was 1.5, while that of the second was 1. Can you tell which adviser was a better selector of individual stocks (aside from the issue of general movements in the market)?

Cannot be determined Without information about the parameters of this equation (i.e., the risk-free rate and the market rate of return), we cannot determine which investment adviser is the better selector of individual stocks.

If a active portfolio manager thinks interest rates will increase he will he use a shorter or longer duration?

Choose a shorter duration if he thinks interest rates will increase

Bonds with less than one year of maturity when issued are called

Commercial Paper

Here are data on two companies. The T-bill rate is 4% and the market risk premium is 6%. Company $1 Discount Store Everything $5 Forecast return 12% 11% Standard deviation of returns 8% 10% Beta 1.5 1.0 Characterize each company in the above table as underpriced, overpriced, or properly priced.

Company $1 Discount Store Overpriced Everything $5 Underpriced

Here are data on two companies. The T-bill rate is 4% and the market risk premium is 6%. Company $1 Discount Store Everything $5 Forecast return 12% 11% Standard deviation of returns 8% 10% Beta 1.5 1.0 What would be the fair return for each company, according to the capital asset pricing model (CAPM)?

Company Expected Return $1 Discount Store 13 % Everything $5 10%

The standard deviation of return on investment A is .10, while the standard deviation of return on investment B is .05. If the covariance of returns on A and B is .0030, the correlation coefficient between the returns on A and B is _________.

Correlation= .0030/[.10(.05)]=.60

The standard deviation of return on investment A is .10, while the standard deviation of return on investment B is .04. If the correlation coefficient between the returns on A and B is -.50, the covariance of returns on A and B is _________.

Covariance= -.50(.10)(.04)= -.0020

A Treasury bond due in 1 year has a yield of 6.3%, while a Treasury bond due in 5 years has a yield of 8.8%. A bond due in 5 years issued by High Country Marketing Corp. has a yield of 9.6%, while a bond due in 1 year issued by High Country Marketing Corp. has a yield of 6.8%. The default risk premiums on the 1-year and 5-year bonds issued by High Country Marketing Corp. are, respectively, __________ and _________. A. .4%; .3% B. .4%; .5% C. .5%; .5% D. .5%; .8%

D

An investor can design a risky portfolio based on two stocks, A and B. The standard deviation of return on stock A is 24%, while the standard deviation on stock B is 14%. The correlation coefficient between the returns on A and B is .35. The expected return on stock A is 25%, while on stock B it is 11%. The proportion of the minimum-variance portfolio that would be invested in stock B is approximately _________. A. 92% B. 67% C. 45% D. 85%

D

Rational risk-averse investors will always prefer portfolios _____________. A. that are risk-free to all other asset choices B. located on the efficient frontier to those located on the capital market line C. at or near the minimum-variance point on the efficient frontier D. located on the capital market line to those located on the efficient frontier

D

The bonds of Elbow Grease Dishwashing Company have received a rating of C by Moody's. The C rating indicates that the bonds are _________. A. high grade B. intermediate grade C. investment grade D. junk bonds

D

The expected rate of return of a portfolio of risky securities is _________. A. the sum of the securities' variances B. the weighted sum of the securities' variances C. the sum of the securities' covariances D. the weighted sum of the securities' expected returns

D

The market value weighted-average beta of firms included in the market index will always be _____________. A. between 0 and 1 B. none of these options (There is no particular rule concerning the average beta of firms included in the market index.) C. 0 D. 1

D

Which risk can be partially or fully diversified away as additional securities are added to a portfolio? I. Total risk II. Systematic risk III. Firm-specific risk A. I and II only B. I, II, and III C. I only D. I and III

D

One year ago, you purchased a newly issued TIPS bond that has a 6% coupon rate, five years to maturity, and a par value of $1,000. The average inflation rate over the year was 4.2%. What is the amount of the coupon payment you will receive and what is the current face value of the bond? A)$60.00, $1,000 B)$42.00, $1,042 C)$60.00, $1,042 D)$62.52, $1,042 E)$102.00, $1,000

D The bond price, which is indexed to the inflation rate, becomes $1,000 × 1.042 = $1,042. The interest payment is based on the coupon rate and the new face value. The interest amount equals $1,042 × .06 = $62.52.

1. The market portfolio has a beta of __________. A) -1.0 B) 0 C) 0.5 D) 1.0

D) 1.0

1. Investing in two assets with a correlation coefficient of 1.0 will reduce which kind of risk? A) Market risk B) Unique risk C) Unsystematic risk D) None of the above

D) None of the above

1. The security characteristic line is ________________. A) the trend line representing the security's tendency to advance or decline in the market over some period of time B) the "best fit" line representing the regression of the market's excess returns on the security excess returns over some period of time C) another term for the capital allocation line representing the set of complete portfolios that can be constructed by combining the security with T-bill holdings D) None of the above answers is correct

D) None of the above answers is correct

__________ is a true statement regarding the multi-factor arbitrage pricing theory. A) Only the stock beta affects the stock price B) Only the stock unique risk affects the stock price C) Only the stock variance and beta affect the stock price D) Several systematic factors affect the stock price

D) Several systematic factors affect the stock price

The expected return of the risky asset portfolio with minimum variance is __________. A) the market rate of return B) zero C) the risk-free rate D) There is not enough information to answer this question

D) There is not enough information to answer this question

The Security Market Line (SML) _____. A) provides a benchmark for evaluating expected investment return B) leads all investors to invest in the same portfolio of risky assets C) is a graphic representation of the relationship between expected return and beta D) all of the above

D) all of the above

1. The systematic risk of a security __________. A) is likely to be higher in a rising market B) results from its own unique factors C) depends upon market volatility D) cannot be diversified away

D) cannot be diversified away

What is the alpha of a portfolio with a beta of 2 and actual return of 15%? A) 5% B) 10% C) 15% D) none of the above

D) none of the above

Empirical results estimated from historical data indicate that betas __________. A) are always close to zero B) are constant over time C) of all securities are always greater than one D) seem to regress toward one over time

D) seem to regress toward one over time

1. In a well diversified portfolio, __________ risk is negligible. A) non-diversifiable 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

A preferred share of Coquihalla Corporation will pay a dividend of $8 in the upcoming year and every year thereafter; that is, dividends are not expected to grow. You require a return of 7% on this stock. Using the constant-growth DDM to calculate the intrinsic value, a preferred share of Coquihalla Corporation is worth _________. A. $13.50 B. $45.50 C. $91 D. $114.29

D. $114.29 check hw

Which of the following correlations coefficients will produce the least diversification benefit? A. -0.6 B. -0.3 C. 0.0 D. 0.8

D. 0.8

83. You buy a bond with a $1,000 par value today for a price of $875. The bond has 6 years to maturity and makes annual coupon payments of $75 per year. You hold the bond to maturity, but you do not reinvest any of your coupons. What was your effective EAR over the holding period? A. 10.4% B. 9.57% C. 7.45% D. 8.78%

D. 8.78% Total value in 6 years = 1,000 + 6(75) = 1,450 Calculator entries for EAR are N = 6, PV = -875, PMT = 0, FV = 1,450, CPT I/Y 8.78, or (875)(1 + EAR)6 = 1,000 + (75)(6); EAR = 8.78%

61. Which of the following statements is true regarding time diversification? I. The standard deviation of the average annual rate of return over several years will be smaller than the one-year standard deviation. II. For a longer time horizon, uncertainty compounds over a greater number of years. III. Time diversification does not reduce risk. A. I only B. II only C. II and III only D. I, II and III E. None of the statements are correct

D. I, II and III

64. The yield to maturity on a bond is ________. I. above the coupon rate when the bond sells at a discount, and below the coupon rate when the bond sells at a premium II. the discount rate that will set the present value of the payments equal to the bond price III. equal to the true compound return on investment only if all interest payments received are reinvested at the yield to maturity A. I only B. II only C. I and II only D. I, II and III

D. I, II and III

77. You are considering adding a new security to your portfolio. In order to decide whether you should add the security you need to know the security's _______. I. expected return II. standard deviation III. correlation with your portfolio A. I only B. I and II only C. I and III only D. I, II and III

D. I, II and III

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

The part of a stock's return that is systematic is a function of which of the following variables? I. Volatility in excess returns of the stock market II. The sensitivity of the stock's returns to changes in the stock market III. The variance in the stock's returns that is unrelated to the overall stock market

I and II only

According to the liquidity preference theory of the term structure of interest rates, an increase in the yield on long-term corporate bonds versus short-term bonds could be due to _______. A. declining liquidity premiums B. an expectation of an upcoming recession C. a decline in future inflation expectations D. an increase in expected interest rate volatility

D. an increase in expected interest rate volatility

24. Consider two bonds, A and B. Both bonds presently are selling at their par value of $1,000. Each pays interest of $120 annually. Bond A will mature in 5 years, while bond B will mature in 6 years. If the yields to maturity on the two bonds change from 12% to 14%, _________. A. both bonds will increase in value but bond A will increase more than bond B B. both bonds will increase in value but bond B will increase more than bond A C. both bonds will decrease in value but bond A will decrease more than bond B D. both bonds will decrease in value but bond B will decrease more than bond A

D. both bonds will decrease in value but bond B will decrease more than bond A

Consider two bonds, A and B. Both bonds presently are selling at their par value of $1,000. Each pays interest of $120 annually. Bond A will mature in 5 years, while bond B will mature in 6 years. If the yields to maturity on the two bonds change from 12% to 14%, _________. A. both bonds will increase in value but bond A will increase more than bond B B. both bonds will increase in value but bond B will increase more than bond A C. both bonds will decrease in value but bond A will decrease more than bond B D. both bonds will decrease in value but bond B will decrease more than bond A

D. both bonds will decrease in value but bond B will decrease more than bond A

Consider two bonds, A and B. Both bonds presently are selling at their par value of $1,000. Each pays interest of $120 annually. Bond A will mature in 5 years, while bond B will mature in 6 years. If the yields to maturity on the two bonds change from 12% to 14%, _________. A. both bonds will increase in value but bond A will increase more than bond B B. both bonds will increase in value but bond B will increase more than bond A C. both bonds will decrease in value but bond A will decrease more than bond B D. both bonds will decrease in value but bond B will decrease more than bond A

D. both bonds will decrease in value but bond B will decrease more than bond A

21. The bonds of Elbow Grease Dishwashing Company have received a rating of C by Moody's. The C rating indicates that the bonds are _________. A. high grade B. intermediate grade C. investment grade D. junk bonds

D. junk bonds

28. The issuer of a/an ________ bond may choose to pay interest either in cash or in additional bonds. A. asset backed bonds B. TIPS C. catastrophe D. pay in kind

D. pay in kind

32. Which of the following possible provisions of a bond indenture is designed to ease the burden of principal repayment by spreading it out over several years? A. Callable feature B. Convertible feature C. Subordination clause D. Sinking fund

D. sinking fund

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

D. unsystematic

A bond was purchased at a premium and is now selling at a discount because of a change in market interest rates. If the bond pays a 4% annual coupon, what is the likely impact on the holding-period return if an investor decides to sell now?

Decreased

What is a bond indenture?

Definition: Is the contract between the issuer and the bondholder. It specifies a set of restrictions (covenants) that protect the rights of the bondholders. Like: Sinking fund, Subordination of, further debt, Dividend restrictions, Collateral

Bond analysts might be more interested in a bond's yield to call if A)the bond's yield to maturity is insufficient. B)the firm has called some of its bonds in the past. C)the investor only plans to hold the bond until its first call date. D)interest rates are expected to rise. E)interest rates are expected to fall.

E

Which risk can be partially or fully diversified away as additional securities are added to a portfolio? I. Total risk II. Systematic risk III. Firm-specific risk

I and III

Which one of the following statements about convertibles is true? A)The longer the call protection on a convertible, the less the security is worth. B)Convertibles are never callable. C)The smaller the spread between the dividend yield on the stock and the yield-to-maturity on the bond, the more the convertible is worth. D)The collateral that is used to secure a convertible bond is one reason convertibles are more attractive than the underlying stock. E)The more volatile the underlying stock, the greater the value of the conversion feature

E

1. The optimal risky portfolio can be identified by finding _____________. A) the minimum variance point on the efficient frontier B) the maximum return point on the efficient frontier C) the tangency point of the capital market line and the efficient frontier D) the line with the steepest slope that connects the risk free rate to the efficient frontier E) C and D

E) C and D

1. Which one of the following statement is NOT correct? A) A security's beta coefficient will be negative if its returns are negatively correlated with market index returns. B) Some diversification benefits can be achieved by combining securities in a portfolio as long as the correlation between the securities is less than 1 C) The term excess-return refers to the difference between the rate of return on a risky asset and the risk-free rate D) You are considering adding a new security to your portfolio. In order to decide whether you should add the security you need to know the security's expected return, risk and correlation with your portfolio. E) If a risky portfolio consists of the a bond and a stock, then investors with higher degree of risk aversion should invest more in the bond.

E) If a risky portfolio consists of the a bond and a stock, then investors with higher degree of risk aversion should invest more in the bond.

You consider buying a share of stock at a price of $25. The stock is expected to pay a dividend of $1.50 next year, and your advisory service tells you that you can expect to sell the stock in 1 year for $28. The stock's beta is 1.1, rf is 6%, and E[rm] = 16%. What is the stock's abnormal return?

E[r]=[(28-25+1.5/25)-1](100%)=18% Required return = 6% + (16% - 6%)(1.1) = 17% Abnormal return = 18% - 17% = 1%

A project has a 60% chance of doubling your investment in 1 year and a 40% chance of losing half your money. What is the standard deviation of this investment?

E[rp] = (.60)(1) + (.40)(-.5) = .40 σ2rp = (.60)(1 - .40)2 + (.40)(-.5 - .40)2 = .54 σrp = .73

A share of stock is now selling for $100. It will pay a dividend of $9 per share at the end of the year. Its beta is 1. What do investors expect the stock to sell for at the end of the year? Assume the risk-free rate is 8% and the expected rate of return on the market is 18%.

Expected Selling Price $109

Suppose there are two independent economic factors, M1 and M2. The risk-free rate is 6%, and all stocks have independent firm-specific components with a standard deviation of 46%. Portfolios A and B are both well diversified. Beta on M1 A: 1.5 B: 2.0 Beta on M2 A: 2.1 B: -0.6 Expected Return (%) A: 36% B: 14%

Expected return-beta relationship E(rP) = 6.00% + 6.83 E(rP) = rf + βP1[E(r1) - rf] + βP2[E(r2) - rf] We need to find the risk premium for these two factors: γ2 = [E(r1) - rf] γ2 = [E(r2) - rf] 36% = 6% + 1.5 γ1 + 2.1 γ2 14% = 6% + 2.0 γ1 + (-0.6) γ2 The solutions are: γ2 = 6.83% and γ2 = 9.41% Thus, the expected return-beta relationship is: E(rP) = 6% + 6.83βP1 + 9.41βP2

The yield to maturity on a bond is: I. Above the coupon rate when the bond sells at a discount and below the coupon rate when the bond sells at a premium II. The discount rate that will set the present value of the payments equal to the bond price III. Equal to the true compound return on investment only if all interest payments received are reinvested at the yield to maturity

I II and III

As you lengthen the time horizon of your investment period and decide to invest for multiple years, you will find that: I. The average risk per year may be smaller over longer investment horizons. II. The overall risk of your investment will compound over time. III. Your overall risk on the investment will fall.

I and II only

As you lengthen the time horizon of your investment period and decide to invest for multiple years, you will find that: I. The average risk per year may be smaller over longer investment horizons. II. The overall risk of your investment will compound over time. III. Your overall risk on the investment will fall.

I and II only

Based on the outcomes in the following table, choose which of the statements below is (are) correct? Picture I. The covariance of security A and security B is zero. II. The correlation coefficient between securities A and C is negative. III. The correlation coefficient between securities B and C is positive.

I and II only

Based on the outcomes in the following table, choose which of the statements below is (are) correct? I. The covariance of security A and security B is zero. II. The correlation coefficient between securities A and C is negative. III. The correlation coefficient between securities B and C is positive

I and II only

Based on the outcomes in the following table, choose which of the statements below is (are) correct? Scenario Security A Security B Security C Recession Return > E(r) Return = E(r) Return < E(r) Normal Return = E(r) Return = E(r) Return = E(r) Boom Return < E(r) Return = E(r) Return > E(r) I. The covariance of security A and security B is zero. II. The correlation coefficient between securities A and C is negative. III. The correlation coefficient between securities B and C is positive.

I and II only

In calculating the variance of a portfolio's returns, squaring the deviations from the mean results in: I. Preventing the sum of the deviations from always equaling zero II. Exaggerating the effects of large positive and negative deviations III. A number for which the unit is percentage of returns

I and II only

The part of a stock's return that is systematic is a function of which of the following variables? I. Volatility in excess returns of the stock market II. The sensitivity of the stock's returns to changes in the stock market III. The variance in the stock's returns that is unrelated to the overall stock market

I and II only

Which risk can be partially or fully diversified away as additional securities are added to a portfolio? I. Total risk II. Systematic risk III. Firm-specific risk

I and III

You are considering adding a new security to your portfolio. To decide whether you should add the security, you need to know the security's: I. Expected return II. Standard deviation III. Correlation with your portfolio

I, II, and III

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.

I, II, and III only

Rank the following from highest average historical return to lowest average historical return from 1926 to 2013. I. Small stocks II. Long-term bonds III. Large stocks IV. T-bills

I, III, II, IV

The yield to maturity on a bond is: I. Above the coupon rate when the bond sells at a discount and below the coupon rate when the bond sells at a premium II. The discount rate that will set the present value of the payments equal to the bond price III. Equal to the true compound return on investment only if all interest payments received are reinvested at the yield to maturity

I,II,III

The yield to maturity on a bond is:

I. Above the coupon rate when the bond sells at a discount and below the coupon rate when the bond sells at a premium II. The discount rate that will set the present value of the payments equal to the bond price III. Equal to the true compound return on investment only if all interest payments received are reinvested at the yield to maturity

A discount bond that pays interest semiannually will

I. Have a lower price than an equivalent annual payment bond II. Have a higher EAR than an equivalent annual payment bond

Which of the following statements is (are) true regarding time diversification? I. The standard deviation of the average annual rate of return over several years will be smaller than the 1-year standard deviation. II. For a longer time horizon, uncertainty compounds over a greater number of years. III. Time diversification does not reduce risk.

II and III only

Which of the following statements is (are) true regarding time diversification? I. The standard deviation of the average annual rate of return over several years will be smaller than the 1-year standard deviation. II. For a longer time horizon, uncertainty compounds over a greater number of years. III. Time diversification does not reduce risk.

II and III only

Fama and French claim that after controlling for firm size and the ratio of firm's book value to market value, beta is ______________. 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

II only

Security A has a higher standard deviation of returns than security B. We would expect that: I. Security A would have a higher risk premium than security B. II. The likely range of returns for security A in any given year would be higher than the likely range of returns for security B. III. The Sharpe ratio of A will be higher than the Sharpe ratio of B.

II only

To earn a high rating from the bond rating agencies, a company would want to have

II. A low debt-to-equity ratio III. A high quick ratio

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

III and IV only

Rank the interest sensitivity of the following from the most sensitive to an interest rate change to the least sensitive: I. 8% coupon, noncallable 20-year maturity par bond II. 9% coupon, currently callable 20-year maturity premium bond III. Zero-coupon 30-year maturity bond

III, I, II

Rank the interest sensitivity of the following from the most sensitive to an interest rate change to the least sensitive: I. 8% coupon, noncallable 20-year maturity par bond II. 9% coupon, currently callable 20-year maturity premium bond III. Zero-coupon 30-year maturity bond I, II, III II, III, I III, I, II III, II, I

III, I, II

The market price of a security is $56. Its expected rate of return is 12%. The risk-free rate is 5%, and the market risk premium is 9%. What will the market price of the security be if its beta doubles (and all other variables remain unchanged)? Assume the stock is expected to pay a constant dividend in perpetuity.

If the beta of the security doubles, then so will its risk premium. The current risk premium for the stock is: (12% - 5%) = 7%, so the new risk premium would be 14%, and the new discount rate for the security would be: 14% + 5% = 19% If the stock pays a constant dividend in perpetuity, then we know from the original data that the dividend (D) must satisfy the equation for a perpetuity: Price = Dividend/Discount rate 56 = D/0.12 ⇒⇒ D = 56 × 0.12 = $6.72 At the new discount rate of 19%, the stock would be worth: $6.72/0.19 = $35.37 The increase in stock risk has lowered the value of the stock by 36.84%.

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 _________.

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

What is TIPS?

It provide protection against inflation. The principal of a TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index. When a TIPS matures, you are paid the adjusted principal or original principal, whichever is greater.

What is the yield curve?

It's the graph of the yields-to-maturity as a function of the term to maturity. - Usually upward sloping: investors want to be compensated for the greater risk and illiquidity of long-term bonds.

During the 1926-2010 period the Sharpe ratio was greatest for which of the following asset classes?

Large U.S. stocks

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 you money in a risky bond portfolio that has an expected return of 6% and a standard deviation of 12%. The stock and bond portfolio have a correlation 0.55. The standard deviation of the resulting portfolio will be _________________.

Less than 18%

You establish a straddle on Walmart using September call and put options with a strike price of $89. The call premium is $7.45 and the put premium is $8.20.

Maximum Loss: $15.65 Loss of $8.65 Break even Prices: $104.65 and $73.35 Maximum loss happens when the stock price is the same to the strike price upon expiration. Both the call and the put expire worthless, and the investor's outlay for the purchase of both options is lost: $7.45 + $8.20 = $15.65 Loss: Final value - Original investment = (ST − X) − (C + P) = $7 − $15.65 = −$8.65 There are two break even prices: ST > X(ST − X) − (C + P) = (ST − 89) − $15.65 = $0 ⇒⇒ ST = $104.65 ST < X(X - ST) − (C + P) = (89 − ST) − $15.65 = $0 ⇒⇒ ST = $73.35

An investor purchases a stock for $41 and a put for $0.65 with a strike price of $36. The investor sells a call for $0.65 with a strike price of $46. What is the maximum profit and loss for this position?

Maximum profit: $5 Maximum loss: $5 The initial outlay of this position is $41, the purchase price of the stock, and the payoff of such position will be between two boundaries, $36 and $46. The maximum profit will thus be: $46 - $41 = $5, and the maximum loss will be: $36 - $41 = -$5.

The possibility of arbitrage arises when _____________.

Mis-pricing among securities creates opportunities for riskless profit

Suppose you find that prices of stocks before large dividend increases show on average consistently positive abnormal returns. Is this a violation of the EMH? Yes No

No

If the simple CAPM is valid, is the following situation possible? Portfolio A: Expected return 20%, Beta 1.4 Portfolio B: Expected return 25%, Beta 1.2

No Not possible. Portfolio A has a higher beta than Portfolio B, but the expected return for Portfolio A is lower.

In the context of the capital asset pricing model, the systematic measure of risk is captured by _________. Multiple Choice unique risk beta the standard deviation of returns the variance of returns

beta

Coupon Rate

One of the conditions of normal bonds is that a periodic payment is paid by the issuer to the bondholder.

Which of the following statements is FALSE?

Only aggressive investors will choose to hold the portfolio of risky assets, the tangent or efficient portfolio. All investors will hold risky portfolio, the tangent or efficient portfolio. The aggressive investors put more weight on tangent portfolio, while the conservative investors put less weight on tangent portfolio.

Based on current dividend yields and expected capital gains, the expected rates of return on portfolios A and B are 11% and 14%, respectively. The beta of A is .8 while that of B is 1.5. The T-bill rate is currently 6%, while the expected rate of return of the S&P 500 Index is 12%. The standard deviation of portfolio A is 10% annually, while that of B is 31%, and that of the index is 20%. If instead you could invest only in bills and one of these portfolios, which would you choose?

Portfolio A S(S&P 500) = (12% - 6%)/20% = 6/20 S(A) = (11% - 6%)/10% = 5/10 > S(S&P 500) S(B) = (14% - 6%)/31% = 8/31 < S(S&P 500)

Which of the following portfolios cannot lie on the efficient frontier? Portfolio Expected Return Standard Deviation I 15 % 36 % J 12 % 15 % K 9 % 21 % L 5 % 7 %

Portfolio K

If the simple CAPM is valid and all portfolios are priced correctly, which of the situations below is possible? Consider each situation independently, and assume the risk-free rate is 5%.

Portfolio: Expected return 30%, Beta 2.5 Market: Expected return 15%, Beta 1.0 (30-5)/2.5 = (15 - 5)/1.0

Horizon Analysis?

Predicting your realized return by making assumptions about the rate at which coupons will be reinvested.

You hold a subordinated debenture in a firm. In the event of bankruptcy you will be paid off before which one of the following?

Preferred stock

You buy a 10-year $1,000 par value zero-coupon bond priced to yield 6%. You do not sell the bond. If you are in a 28% tax bracket, you will owe taxes on this investment after the first year equal to _______.

Present Value Year 10 = 1000/1.06^10 = 558.39 Present Value Year 9 = 1000/1.06^9 = 591.9 Taxes owed ($591.90 - $558.39)(.28) = $9.38

How to calculate bond value?

Present Value of Coupon + Present Value of Par Value = Bond Value OR coupon/(1+r)^t + par value/(1+r)^T

Investors expect the market rate of return this year to be 10%. The expected rate of return on a stock with a beta of 1.2 is currently 12%. If the market return this year turns out to be 8%, how would you revise your expectation of the rate of return on the stock?

Revised rate of return 9.6%

A. lower; steeper

Reward-to- variability ratios are ________ on the ________ capital market line. A. lower; steeper B. higher; flatter C. higher; steeper D. the same; flatter

In a world where the CAPM holds which one of the following is not a true statement regarding the capital market line?

The capital market line is also called the security market line

The expected return of a portfolio is 8.9%, and the risk-free rate is 3.5%. If the portfolio standard deviation is 12%, what is the reward-to-variability ratio of the portfolio?

Reward-to-variability ratio = (.089 - .035)/.12 = .45

The expected return on the market portfolio is 15%. The risk-free rate is 8%. The expected return on SDA Corp. common stock is 16%. The beta of SDA Corp. common stock is 1.25. Within the context of the capital asset pricing model

SDA Corp. stock's alpha is -.75%

The expected return on the market portfolio is 15%. The risk-free rate is 8%. The expected return on SDA Corp. common stock is 16%. The beta of SDA Corp. common stock is 1.25. Within the context of the capital asset pricing model, _________.

SDA Corp. stock's alpha is -.75% Alpha=.16-[.08+1.25(.15-.08)]=-.0075

The expected return on the market portfolio is 16%. The risk-free rate is 7%. The expected return on SDA Corp. common stock is 15%. The beta of SDA Corp. common stock is 1.90. Within the context of the capital asset pricing model, _________. Multiple Choice SDA Stock is underpriced SDA stock is fairly priced SDA Corp. stock's alpha is -9.10% SDA stock's alpha is 9.1%

SDA Corp. stock's alpha is -9.10% α = 0.15 - [0.07 + 1.90(0.16 - 0.07)] = -0.0910

The graph of the relationship between expected return and beta in the CAPM context is called the _________.

SML

_________ are examples of synthetically created zero-coupon bonds.

STRIPS

__________ are examples of synthetically created zero-coupon bonds.

STRIPS

Two investment advisers are comparing performance. One averaged a 19% return and the other a 16% return. However, the beta of the first adviser was 1.5, while that of the second was 1. If the T-bill rate were 6% and the market return during the period were 14%, which adviser would be the superior stock selector?

Second investment advisor If rf = 6% and rM = 14%, then (using alpha for the abnormal return): α1 = 19% - [6% + 1.5 × (14% - 6%)] = 19% - 18% = 1% α2 = 16% - [6% + 1.0 × (14% - 6%)] = 16% - 14% = 2% Here, the second investment adviser has the larger abnormal return and thus appears to be the better selector of individual stocks. By making better predictions, the second adviser appears to have tilted his portfolio toward under-priced stocks.

Two investment advisers are comparing performance. One averaged a 19% return and the other a 16% return. However, the beta of the first adviser was 1.5, while that of the second was 1. What if the T-bill rate were 3% and the market return 15%?

Second investment advisor If rf = 3% and rM = 15%, then: α1 = 19% - [3% + 1.5 × (15% - 3%)] = 19% - 21% = -2% α2 = 16% - [3% + 1.0 × (15% - 3%)] = 16% - 15% = 1% Here, not only does the second investment adviser appear to be a better stock selector, but the first adviser's selections appear valueless (or worse).

In a world where the CAPM holds, which one of the following is not a true statement regarding the capital market line?

The capital market line is also called the security market line.

The formula [E(r]p)-rf/sigmap is used to calculate the _____________.

Sharpe ratio

What is the beta for a portfolio with an expected return of 12.5%?

Since rf = 5% and E(rM) = 10%, from the CAPM we know that 12.5% = 5% + beta(10% - 5%), and therefore beta = 1.5.

Which of the following possible provisions of a bond indenture is designed to ease the burden of principal repayment by spreading it out over several years?

Sinking fund

What is the standard deviation of a portfolio of two stocks given the following data: Stock A has a standard deviation of 30%. Stock B has a standard deviation of 18%. The portfolio contains 60% of stock A, and the correlation coefficient between the two stocks is -1.

Std Dev= SQRT (.6)^2(.3)^2+(.4)^@(.18^2+2(-1)(.3)(.18)(.6)(.4)=.108

The figures below show plots of monthly excess returns for two stocks plotted against excess returns for a market index. Stock A has excess retuns all the graph, stock Bs returns form a nice diagonal Which stock is likely to further reduce risk for an investor currently holding her portfolio in a well-diversified portfolio of common stock?

Stock A

The figures below show plots of monthly excess returns for two stocks plotted against excess returns for a market index. Which stock is riskier to a nondiversified investor who puts all his money in only one of these stocks?

Stock A is riskier.

Historically, the best asset for the long-term investor wanting to fend off the threats of inflation and taxes while making his money grow has been ____.

Stocks

What does Treasury Inflation Protected Securities TIPS do for investors?

TIPS offer a fixed rate of return in real terms. They offer investors a true hedge against inflation: the more inflation increases, the more you receive in payments from the TIPS.

51. $1,000 par value zero-coupon bonds (ignore liquidity premiums) One year from now bond C should sell for ________ (to the nearest dollar). A. $857 B. $842 C. $835 D. $821 1.07993 = 1.06(1 + 1F3)2 1.2593621/1.06 = (1 + 1F3)2 1F3 = 11.81% Price of bond C in 1 year = 1,000/1.1181 = 841.69

b

Which of the following provides the best example of a systematic-risk event? A strike by union workers hurts a firm's quarterly earnings. Mad Cow disease in Montana hurts local ranchers and buyers of beef. The Federal Reserve increases interest rates 50 basis points. A senior executive at a firm embezzles $10 million and escapes to South America.

The Federal Reserve increases interest rates 50 basis points

Which of the following provides the best example of a systematic-risk event?

The Federal Reserve increases interest rates 50 basis points.

Which of the following provides the best example of a systematic-risk event? Multiple Choice A strike by union workers hurts a firm's quarterly earnings. Mad Cow disease in Montana hurts local ranchers and buyers of beef. The Federal Reserve increases interest rates 50 basis points. A senior executive at a firm embezzles $10 million and escapes to South America.

The Federal Reserve increases interest rates 50 basis points.

You find that the annual Sharpe ratio for stock A returns is equal to 1.8. For a 3-year holding period, the Sharpe ratio would equal _______.

The Sharpe ration grows at a rate of S1 * SQRT(I) the 3-year Sharpe ration would be 1.8 × Sqrt(3) = 3.12.

A Japanese firm issued and sold a pound-denominated bond in the United Kingdom. A U.S. firm issued bonds denominated in dollars but sold the bonds in Japan. Which one of the following statements is correct?

The U.S. bond is a Eurobond, and the Japanese bond is termed a foreign bond.

In a world where the CAPM holds, which one of the following is not a true statement regarding the capital market line? Multiple Choice The capital market line always has a positive slope. The capital market line is also called the security market line. The capital market line is the best-attainable capital allocation line. The capital market line is the line from the risk-free rate through the market portfolio.

The capital market line is also called the security market line.

Two bonds are selling at par value and each has 17 years to maturity. The first bond has a coupon rate of 6% and the second bond has a coupon rate of 13%. Which of the following is true about the durations of these bonds? a. The duration of the higher-coupon bond will be higher. b. The duration of the lower-coupon bond will be higher. c. The duration of the higher-coupon bond will equal the duration of the lower-coupon bond. d. There is no consistent statement that can be made about the durations of the bonds.

The duration of the lower-coupon bond will be higher. Solution: In general, duration is negatively related to coupon rate. The greater the cash flows from coupon interest, the lower the duration will be. Since the bonds have the same time to maturity, that isn't a factor. The duration of the 6% coupon bond equals (1.06/.06)*(1-(1/1.0617)) = 11.10. The duration of the 13% coupon bond equals (1.13/.13)*(1-(1/1.1317)) = 7.60.

What is a bond quote?

The price at which a bond is trading. Expressed as a % of par value, with the % converted to a point scale. The price that someone is willing to pay for the bond is always given in relation to 100, or par value. A bond quote above 100 means that the bond is trading above par, while a bond quote below 100 means that the bond is trading below par.

On May 1, 2007, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds. Suppose market interest rates decline by 100 basis points (i.e., 1%). The effect of this decline would be ______.

The price of the Wildwood bond would increase by more than the price of the Asbury bond.

What's an invoice price?

The price that is actually charged, adds accrued interest to the flat price.

B. -.0020 covariance = -.50(.10)(.04) = -.0020

The standard deviation of return on investment A is .10 while the standard deviation of return on investment B is .04. If the correlation coefficient between the returns on A and B is -.50, the covariance of returns on A and B is _________. A. -.0447 B. -.0020 C. .0020 D. .0447

C. .60 Correlation = .0030/(.05*.10)

The standard deviation of return on investment A is .10 while the standard deviation of return on investment B is .05. 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

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 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

The tangency point of the capital market line and the efficient frontier The line with the steepest slope that connects the risk free rate to the efficient frontier

Yield or Yield-to-Maturity (YTM):

This is the actual rate of return on the bond that the bondholder earns if he holds the bond until it matures.

The inverse relationship between price and interest rates of bonds

Why do bond prices go down when interest rates go up?

The rate of return on _____ is known at the beginning of the holding period, while the rate of return on ____ is not known until the end of the holding period.

Treasury bills; risky assets

Consider the Sharpe and Treynor performance measures. When a pension fund is large and well diversified in total and it has many managers, the __________ measure is better for evaluating individual managers while the __________ measure is better for evaluating the manager of a small fund with only one manager responsible for all investments, which may not be fully diversified. Question 3 options: Sharpe; Sharpe Sharpe; Treynor Treynor; Sharpe Treynor; Treynor

Treynor; Sharpe

In a well diversified portfolio, __________ risk is negligible.

Unsystematic

Investing in two assets with a correlation coefficient of 1 will reduce which kind of risk?

With a correlation of 1, no risk will be reduced

35. Consider a 7-year bond with a 9% coupon and a yield to maturity of 12%. If interest rates remain constant, 1 year from now the price of this bond will be _________. a. higher b. lower c. indeterminate d. the same

a. higher

38. Everything else equal, the __________ the maturity of a bond and the __________ the coupon, the greater the sensitivity of the bond's price to interest rate changes. a. longer; lower b. longer; higher c. shorter; lower d. shorter; higher

a. longer; lower

Stock prices of companies that announce increased earnings in January tend to outperform the market in February. Consistent Violation

Violation

Stocks that perform well in one week perform poorly in the following week. Consistent Violation

Violation

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 expected return on the optimal risky portfolio is _________.

Wa = (.18-.10)(.05)^2 - (.14-.10)(.20)(.50) Divided By (.18-.10)(.05)^2 + (.14-.10)(.20)^2 -(.18-.10+.14-.10)( .05)(020)(.5) Wa = 0 E(rp) = 1(.14) = .1400 Since WA = 0 and WB = 1, the risky portfolio's expected return is the same as asset B's expected return.

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 _________.

Wa = (.18-.10)(.05)^2 - (.14-.10)(.20)(.50) Divided By (.18-.10)(.05)^2 + (.14-.10)(.20)^2 -(.18-.10+.14-.10)( .05)(020)(.5) Wa=0

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 the returns on the optimal risky portfolio is _________.

Wb= (.14-.05)(.39^2)-(.21-.05)(.20)(.39)(.4) Divided by (.14-.05)(.39^2)+(.21-.05)(.20^2) - (.14-.05+.21-.05)(.20)(.39)(.4) WB = 71% and WA = 29% σ2rp = (.292)(.392) + (.712)(.202) + 2(.29)(.71)(.39)(.20).4 σ2rp = .045804 σrp = 21.4%

C. more than 12% but less than 18% SD^2 p = 0.02592 = (.5 2 )(.24 2 ) + (.5 2 )(.12 2 ) + 2(.5)(.5)(.24)(.12)0.55 ; SD = 16.1%

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 you money in a risky bond portfolio that has an expected return of 6% and a standard deviation of 12%. The stock and bond portfolio have a correlation 0.55. 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%

1. The invoice price of a bond is the ______. A. stated or flat price in a quote sheet plus accrued interest B. stated or flat price in a quote sheet minus accrued interest C. bid price D. average of the bid and ask price

a

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

a

19. Bonds issued in the currency of the issuer's country but sold in other national markets are called _____________. A. Eurobonds B. Yankee bonds C. Samurai bonds D. foreign bonds

a

31. A __________ bond gives the issuer an option to retire the bond before maturity at a specific price after a specific date. A. callable B. coupon C. puttable D. Treasury

a

41. A callable bond pays annual interest of $60, has a par value of $1,000, matures in 20 years but is callable in 10 years at a price of $1,100, and has a value today of $1055.84. The yield to call on this bond is _________. A. 6% B. 6.58% C. 7.2% D. 8% 1,055.84 = Calculator entries are N = 10, PV = -1,055.84, PMT = 60, FV = 1,100, CPT I/Y 6

a

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

a

81. A bond has a 5% coupon rate. The coupon is paid semiannually, and the last coupon was paid 35 days ago. If the bond has a par value of $1,000, what is the accrued interest? A. $4.81 B. $14.24 C. $25 D. $50 Accrued interest = (50/2) × (35/182) = 4.81

a

82. The price on a Treasury bond is 104:21, with a yield to maturity of 3.45%. The price on a comparable maturity corporate bond is 103:11, with a yield to maturity of 4.59%. What is the approximate percentage value of the credit risk of the corporate bond? A. 1.14% B. 3.45% C. 4.59% D. 8.04% Credit risk premium = 4.59 - 3.45 = 1.14%

a

84. You buy an 8-year $1,000 par value bond today that has a 6% yield and a 6% annual payment coupon. In 1 year promised yields have risen to 7%. Your 1-year holding-period return was ___. A. .61% B. -5.39% C. 1.28% D. -3.25% This year's price is 1,000. since the YTM equals the coupon rate. Calculator entries for next year's price are N = 7, I/Y = 7, PMT = 60, FV = 1,000, CPT PV -46.11 At the end of 1 year you'll have 946.11 + 60 = 1,006.11 HPR = 1,006.11/1,000 - 1 = .6107%

a

88. If the coupon rate on a bond is 4.5% and the bond is selling at a premium, which of the following is the most likely yield to maturity on the bond? A. 4.3% B. 4.5% C. 5.2% D. 5.5% A bond sells at a premium when the coupon rate > YTM.

a

89. The price of a bond (with par value of $1,000) at the beginning of a period is $980 and at the end of the period is $975. What is the holding-period return if the annual coupon rate is 4.5%? A. 4.08% B. 4.5% C. 5.1% D. 5.6% HPR = [(975 + 45 - 980)/980] - 1 = 4.08%

a

The expected return on the market portfolio is 21%. The risk-free rate is 12%. The expected return on SDA Corp. common stock is 20%. The beta of SDA Corp. common stock is 1.90. Within the context of the capital asset pricing model, _________.

a = 0.20 - [0.12 + 1.90(0.21 - 0.12)] = -0.0910

Catastrophe bond

a high yield bond which is issued to raise finance for catastrophes

Consider the liquidity preference theory of the term structure of interest rates. On average, one would expect investors to require _________. (a) a higher yield on long-term bonds than on short-term bonds (b) none of these options (The liquidity preference theory cannot be used to make any of the other statements.) (c) a higher yield on short-term bonds than on long-term bonds (d) the same yield on both short-term and long-term bonds

a higher yield on long-term bonds than on short-term bonds

Building a zero-investment portfolio will always involve _____________

a mixture of short and long positions

The comparison universe is __________. Question 1 options: the bogey portfolio a set of mutual funds with similar risk characteristics to your mutual fund the set of all mutual funds in the United States the set of all mutual funds in the world

a set of mutual funds with similar risk characteristics to your mutual fund

53. The __________ of a bond is computed as the ratio of the annual coupon payment to the market price. A. nominal yield B. current yield C. yield to maturity D. yield to call

b

Consider the following table, which gives a security analyst's expected return on two stocks for two particular market returns: Market Return Aggressive Stock Defensive Stock 5% 2% 3.5% 20 32 14 a. What are the betas of the two stocks? b. What is the expected rate of return on each stock if the market return is equally likely to be 5% or 20%? d. If the T-bill rate is 8%, and the market return is equally likely to be 5% or 20%, what are the alphas of the two stocks?

a) Beta A 2.00 Beta D 0.70 b) Rate of return on A 17% Rate of return on D 8.75% d) Alpha A 0% Alpha D -2.4%

Suppose the yield on short-term government securities (perceived to be risk-free) is about 4%. Suppose also that the expected return required by the market for a portfolio with a beta of 1 is 12%. According to the capital asset pricing model: a. What is the expected return on the market portfolio? b. What would be the expected return on a zero-beta stock? Suppose you consider buying a share of stock at a price of $40. The stock is expected to pay a dividend of $3 next year and to sell then for $41. The stock risk has been evaluated at β = -.5. c-1. Using the SML, calculate the fair rate of return for a stock with a β = -0.5. c-2. Calculate the expected rate of return, using the expected price and dividend for next year. c-3. Is the stock overpriced or underpriced?

a) Expected rate of return 12% b) ERR 4% c-1 Fair rate of return 0% c-2 ERR 10% c-3 Underpriced

You are a consultant to a large manufacturing corporation considering a project with the following net after-tax cash flows (in millions of dollars): Years from Now After-Tax CF 0 -20 1-9 10 10 20 The project's beta is 1.7. Assuming rf = 9% and E(rM) = 19%. a. What is the net present value of the project b. What is the highest possible beta estimate for the project before its NPV becomes negative?

a) NPV 15.64 b) highest possible beta value 4.055

Assume a 20-year $100 Par value bond with a semi-annual coupon rate of 12%. If what is the price of the bond if current market interest rates are a) 14%, b) 9% c) 12%

a) Price = 866.68. Discount Bond, Price less than Par since Coupon Rate less than YTM b) Price = 1276.02. Premium Bond, Price greater than Par since Coupon Rate greater than YTM c) Price = 1000. Par Bond, Price equal to Par since Coupon Rate equal YTM

Two investment advisers are comparing performance. One averaged a 19% return and the other a 16% return. However, the beta of the first adviser was 1.5, while that of the second was 1. a. Can you tell which adviser was a better selector of individual stocks (aside from the issue of general movements in the market)? b. If the T-bill rate were 6% and the market return during the period were 14%, which adviser would be the superior stock selector? c. What if the T-bill rate were 3% and the market return 15%?

a) cannot be determined b) second investment advisor c) second investment advisor

Are the following statements true or false? a. Stocks with a beta of zero offer an expected rate of return of zero. b. The CAPM implies that investors require a higher return to hold highly volatile securities. c. You can construct a portfolio with beta of .75 by investing .75 of the investment budget in T-bills and the remainder in the market portfolio.

a) false b) false c) false

Consider the following information: Portfolio Expected Return Standard Deviation Risk-free 10 % 0 % Market 18 24 A 16 12 a. Calculate the sharpe ratios for the market portfolio and portfolio A b. If the simple CAPM is valid, state whether the above situation is possible?

a) market portfolio 0.30 portfolio A 0.50 b) no

The following figure shows plots of monthly rates of return and the stock market for two stocks. a. Which stock is riskier to an investor currently holding her portfolio in a diversified portfolio of common stock? b. Which stock is riskier to an undiversified investor who puts all of his funds in only one of these stocks?

a) stock B b) stock A

A portfolio's expected return is 12%, its standard deviation is 20%, and the risk-free rate is 4%. Which of the following would make for the greatest increase in the portfolio's Sharpe ratio? (Select all that apply.) a)An increase of 1% in expected return. b)A decrease of 1% in the risk-free rate. c)A decrease of 1% in its standard deviation

a)An increase of 1% in expected return. b)A decrease of 1% in the risk-free rate.

Based on current dividend yields and expected capital gains, the expected rates of return on portfolios A and B are 11% and 14%, respectively. The beta of A is .8 while that of B is 1.5. The T-bill rate is currently 6%, while the expected rate of return of the S&P 500 Index is 12%. The standard deviation of portfolio A is 10% annually, while that of B is 31%, and that of the index is 20%. a-1. Calculate the expected return of portfolio A with a beta of .8. a-2. Calculate the expected return of portfolio B with a beta of 1.5 a-3. If you currently hold a market-index portfolio, which of the portfolio would you choose to add your holdings? b. If instead you could invest only in bills and one of these portfolios, which would you choose?

a-1 Expected Return 10.8% a-2 Expected Return 15% a-3 Portfolio A b. Portfolio A

According to the liquidity preference theory of the term structure of interest rates an increase in the yield on long-term corporate bonds versus short-term bonds could be due to ______.

an increase in expected interest rate volatility

Based on current dividend yields and expected capital gains, the expected rates of return on portfolios A and B are 11% and 14%, respectively. The beta of A is .8 while that of B is 1.5. The T-bill rate is currently 6%, while the expected rate of return of the S&P 500 Index is 12%. The standard deviation of portfolio A is 10% annually, while that of B is 31%, and that of the index is 20%. a-1. Calculate the expected return of portfolio A with a beta of .8. (Round your answer to 1 decimal place.) Expected return % a-2. Calculate the expected return of portfolio B with a beta of 1.5. Expected return % a-3. If you currently hold a market-index portfolio, which of the portfolio would you choose to add your holdings? Portfolio A Portfolio B Both Portfolio A&B Neither Portfolio A Nor Portfolio B b. If instead you could invest only in bills and one of these portfolios, which would you choose? Portfolio A Portfolio B Both Portfolio A&B Neither Portfolio A Nor Portfolio B

a. 6 + .8(12 - 6) = 10.8 b. 6 + 1.5(12 - 6) = 15 c. Portfolio A d. Portfolio A

Suppose the yield on short-term government securities (perceived to be risk-free) is about 4%. Suppose also that the expected return required by the market for a portfolio with a beta of 1 is 12%. According to the capital asset pricing model: (Leave no cells blank - be certain to enter "0" wherever required.) a. What is the expected return on the market portfolio? Expected rate of return % b. What would be the expected return on a zero-beta stock? Expected rate of return % Suppose you consider buying a share of stock at a price of $40. The stock is expected to pay a dividend of $3 next year and to sell then for $41. The stock risk has been evaluated at β = -.5. c-1. Using the SML, calculate the fair rate of return for a stock with a β = -0.5. Fair rate of return % c-2. Calculate the expected rate of return, using the expected price and dividend for next year. Expected rate of return % c-3. Is the stock overpriced or underpriced? Overpriced Underpriced

a. 12% b. 4% c. 4 + (-.5)(12 - 4) = 0 (40 + 1)/ 40 - 1 = 10% d. underpriced

8. If the coupon rate on a bond is 4.5% and the bond is selling at a premium, which of the following is the most likely yield to maturity on the bond? a. 4.3% b. 5.5% c. 5.2% d. 4.5%

a. 4.3%

A callable bond pays annual interest of $60, has a par value of $1,000, matures in 20 years but is callable in 10 years at a price of $1,100, and has a value today of $1055.84. The yield to call on this bond is ________. a. 6% b. 7.2% c. 8% d. 6.58%

a. 6% Calculator entries are N = 10, PV = -1,055.84, PMT = 60, FV = 1,100, CPT I/Y 6

A corporate bond has a 10-year maturity and pays interest semiannually. The quoted coupon rate is 6%, and the bond is priced at par. The bond is callable in 3 years at 110% of par. What is the bond's yield to call? a. 8.98% b. 6.72% c. 9.17% d. 4.49%

a. 8.98% Calculator entries are N = 6, PV = -1,000, PMT = 30, FV = 1,100, CPT I/Y 4.4892 (semiannual) Annual YTC = 2 × 4.4892 = 8.9784

One-, two-, and three-year maturity, default-free, zero-coupon bonds have yields to maturity of 7%, 8%, and 9%, respectively. What is the implied 1-year forward rate in the second year? a. 9.01% b. 8.03% c.. 11.12% d. 2.07%

a. 9.01% 1.07(1 + f2) = 1.082 = 1.1664 (1 + f2) = 1.1664/1.07 = 1.0900935 f2 = 9.01%

7. To earn a high rating from the bond rating agencies, a company would want to have: I. A low times-interest-earned ratio II. A low debt-to-equity ratio III. A high quick ratio a. II and III only b. I only c. I, II, and III d. I and III only

a. II and III only

34. A Japanese firm issued and sold a pound-denominated bond in the United Kingdom. A U.S. firm issued bonds denominated in dollars but sold the bonds in Japan. Which one of the following statements is correct? a. The U.S. bond is a Eurobond, and the Japanese bond is termed a foreign bond. b. The Japanese bond is a Eurobond, and the U.S. bond is termed a foreign bond. c. Neither bond is a Eurobond. d. Both bonds are examples of Eurobonds.

a. The U.S. bond is a Eurobond, and the Japanese bond is termed a foreign bond.

A ________ bond gives the issuer an option to retire the bond before maturity at a specific price after a specific date. a. callable b. Treasury c. puttable d. coupon

a. callable

Two investment advisers are comparing performance. One averaged a 19% return and the other a 16% return. However, the beta of the first adviser was 1.5, while that of the second was 1. a. Can you tell which adviser was a better selector of individual stocks (aside from the issue of general movements in the market)? First Investment Advisor Second Investment Advisor Cannot be determined b. If the T-bill rate were 6% and the market return during the period were 14%, which adviser would be the superior stock selector? First Investment Advisor Second Investment Advisor Cannot be determined c. What if the T-bill rate were 3% and the market return 15%? First Investment Advisor Second Investment Advisor Cannot be determined

a. cannot be determined b. If Rf = 6% and Rm = 14%, then (using the notation of alpha for the abnormal return): 1 = 19% - [6% + 1.5(14% - 6%)] = 19% - 18% = 1% 2 = 16% - [6% + 1(14% - 6%)] = 16% - 14% = 2%. Here, the second investor has the larger abnormal return and thus he appears to be a more accurate predictor. c. If Rf = 3% and Rm = 15%, then 1 = 19% - [3% + 1.5(15% - 3%)] = 19% - 21% = -2% 2 = 16% - [3% + 1(15% - 3%)] = 16% - 15% = 1%

The measure of risk used in the capital asset pricing model is ___________.

beta

You are constructing a scatter plot of excess returns for stock A versus the market index. If the correlation coefficient between stock A and the index is -1, you will find that the points of the scatter diagram ___________ and the line of best fit has a ______________. all fall on the line of best fit; positive slope all fall on the line of best fit; negative slope are widely scattered around the line; positive slope are widely scattered around the line; negative slope

all fall on line of best fit, neg slope

You are constructing a scatter plot of excess returns for stock A versus the market index. If the correlation coefficient between stock A and the index is -1, you will find that the points of the scatter diagram ___________ and the line of best fit has a ______________. Multiple Choice all fall on the line of best fit; positive slope all fall on the line of best fit; negative slope are widely scattered around the line; positive slope are widely scattered around the line; negative slope

all fall on the line of best fit; negative slope

5 conditions of CAPM equilibrium

all investors will hold same port of risky assets- mkt port, mkt port contains all secs and porportion of each sec is its mkt val as a perce of mkt val, mkt port on efficient frontier and will be opt risky port (so tangency pt of CAL to effic frontier), risk premium on mkt port depends on avg risk aversion of all mkt part., risk premium on an individ sec is a function of cov w mkt port

2. 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 systematic 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

all of above

The weak form of the EMH states that ________ must be reflected in the current stock price.

all past information, including security price and volume data

The semistrong form of the EMH states that ________ must be reflected in the current stock price.

all publicly available information

According to the capital asset pricing model, in equilibrium

all securities returns must lie on the security market line

According to the capital asset pricing model, in equilibrium _________.

all securities' returns must lie on the security market line

the yield to maturity on a bond is: 1. above the coupon rate when the bond sells at a discount and below the coupon rate when the bond sells at a premium 2. the discount rate that will set the present value of the payments equal to the bond price. 3. equal to the true compound return on investment only if all interest payments received are reinvested at the YTM

all three

According to the capital asset pricing model, a fairly priced security will plot _________. Multiple Choice above the security market line along the security market line below the security market line at no relation to the security market line

along the security market line

The critical variable in the determination of the success of the active portfolio is the stock's __________. Question 8 options: alpha/nonsystematic risk ratio alpha/systematic risk ratio delta/nonsystematic risk ratio delta/systematic risk ratio

alpha/nonsystematic risk ratio

The information ratio is equal to the stock's ____ divided by its ______. Question 10 options: diversifiable risk; beta beta; alpha alpha; beta alpha; diversifiable risk

alpha; diversifiable risk

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 _________.

alpha= .12-[.05+1.1(.08-.05)]=.037

According to the liquidity preference theory of the term structure of interest rates, an increase in the yield on long-term corporate bonds versus short-term bonds could be due to _______. declining liquidity premiums an expectation of an upcoming recession a decline in future inflation expectations an increase in expected interest rate volatility

an increase in expected interest rate volatility

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 ________.

arithmetic average return

According to the CAPM, what is the expected market return given an expected return on a security of 17.0%, a stock beta of 1.5, and a risk-free interest rate of 5%?

as per CAPM, expected market return on stock = risk free rate + beta* (market return - risk free rate) =>17% = 5% + 1.5 *( market return - 5%) =>17% - 5% => 1.5 market return - 7.5% => 12% + 7.5% = 1.5 market return =>19.5% = 1.5 market return =>market return = 19.5% /1.5 => expected market return = 13%.

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 ______.

asset

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

asset A

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 _______

asset A

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 ________.

asset A

Asset A has an expected return of 15% and a reward-to-variability ratio of 0.4. Asset B has an expected return of 20% and a reward-to-variability ratio of 0.3. A risk-averse investor would prefer a portfolio using the risk-free asset and (a) asset A (b) the answer cannot be determined from the data given. (c) asset B (d) no risky asset

asset A

The _______ decision should take precedence over the _____ decision. (a) stock selection; mutual fund selection (b) asset allocation; stock selection (c) bond selection; mutual fund selection (d) stock selection; asset allocation

asset allocation; stock selection

The ________ decision should take precedence over the ________ decision.

asset allocation; stock selection

One method of forecasting the risk premium is to use the _______.

average historical excess returns for the asset under consideration

Which one of the following stock return statistics fluctuates the most over time?

average return

14. To earn a high rating from the bond rating agencies, a company would want to have: I. A low times-interest-earned ratio II. A low debt-to-equity ratio III. A high quick ratio A. I only B. II and III only C. I and III only D. I, II, and III

b

22. Bonds rated _____ or better by Standard & Poor's are considered investment grade. A. AA B. BBB C. BB D. CCC

b

23. Consider the liquidity preference theory of the term structure of interest rates. On average, one would expect investors to require _________. A. a higher yield on short-term bonds than on long-term bonds B. a higher yield on long-term bonds than on short-term bonds C. the same yield on both short-term bonds and long-term bonds D. none of these options (The liquidity preference theory cannot be used to make any of the other statements.)

b

29. Everything else equal, the __________ the maturity of a bond and the __________ the coupon, the greater the sensitivity of the bond's price to interest rate changes. A. longer; higher B. longer; lower C. shorter; higher D. shorter; lower

b

35. Consider the expectations theory of the term structure of interest rates. If the yield curve is downward-sloping, this indicates that investors expect short-term interest rates to __________ in the future. A. increase B. decrease C. not change D. change in an unpredictable manner

b

36. A convertible bond has a par value of $1,000, but its current market price is $975. The current price of the issuing company's stock is $26, and the conversion ratio is 34 shares. The bond's market conversion value is _________. A. $1,000 B. $884 C. $933 D. $980 ($26)(34) = $884

b

37. A convertible bond has a par value of $1,000, but its current market price is $950. The current price of the issuing company's stock is $19, and the conversion ratio is 40 shares. The bond's conversion premium is _________. A. $50 B. $190 C. $200 D. $240 Conversion premium = 950 - 40(19) = 190

b

40. A coupon bond that pays interest of $60 annually has a par value of $1,000, matures in 5 years, and is selling today at a $75.25 discount from par value. The current yield on this bond is _________. A. 6% B. 6.49% C. 6.73% D. 7% Current price = $1,000 - 75.25 = $924.75, so Current yield = $60/$924.75 = 6.49%

b

42. A coupon bond that pays interest semiannually has a par value of $1,000, matures in 8 years, and has a yield to maturity of 6%. If the coupon rate is 7%, the intrinsic value of the bond today will be __________. A. $1,000 B. $1,062.81 C. $1,081.82 D. $1,100.03 Calculator entries are N = 16, I/Y = 3, PMT = 35, FV = 1,000, CPT PV -1,062.81

b

49. Analysis of bond returns over a multiyear horizon based on forecasts of the bond's yield to maturity and reinvestment rate of coupons is called ______. A. multiyear analysis B. horizon analysis C. maturity analysis D. reinvestment analysis

b

In the context of the capital asset pricing model, the systematic measure of risk is captured by

beta

54. A bond has a par value of $1,000, a time to maturity of 10 years, and a coupon rate of 8% with interest paid annually. If the current market price is $750, what is the capital gain yield of this bond over the next year? A. .72% B. 1.85% C. 2.58% D. 3.42% Calculator entries to find the YTM are N = 10, PV = -750, PMT = 80, FV = 1,000, CPT = I/Y 12.52 The current yield = 80/750 = 10.67% Then we use the relationship YTM = Current yield + Capital gain yield 12.52% = 10.67% + Capital gain yield, so Capital gain yield = 1.85%

b

57. A 1% decline in yield will have the least effect on the price of a bond with a _________. A. 10-year maturity, selling at 80 B. 10-year maturity, selling at 100 C. 20-year maturity, selling at 80 D. 20-year maturity, selling at 100

b

73. On May 1, 2007, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds. If interest rates are expected to rise, then Joe Hill should ____. A. prefer the Wildwood bond to the Asbury bond B. prefer the Asbury bond to the Wildwood bond C. be indifferent between the Wildwood bond and the Asbury bond D. The answer cannot be determined from the information given.

b

78. A bond pays a semiannual coupon, and the last coupon was paid 61 days ago. If the annual coupon payment is $75, what is the accrued interest? (Assume 182 days in the 6-month period.) A. $13.21 B. $12.57 C. $15.44 D. $16.32 (75/2) × (61/182) = $12.57

b

90. A bond was purchased at a premium and is now selling at a discount because of a change in market interest rates. If the bond pays a 4% annual coupon, what is the likely impact on the holding-period return if an investor decides to sell now? A. Increased B. Decreased C. Stayed the same D. The answer cannot be determined from the information given.

b

A 1% decline in yield will have the least effect on the price of a bond with a _________. a. 10-year maturity, selling at 80 b. 10-year maturity, selling at 100 c. 20-year maturity, selling at 80 d. 20-year maturity, selling at 100

b

Compute the duration of an 8%, 5-year corporate bond with a par value of $1,000 and yield to maturity of 10%. a. 3.92 b. 4.28 c. 4.55 d. 5

b

Everything else equal, the __________ the maturity of a bond and the __________ the coupon, the greater the sensitivity of the bond's price to interest rate changes. a. longer; higher b. longer; lower c. shorter; higher d. shorter; lower

b

You purchase one MBI July 120 call contract (equaling 100 shares) for a premium of $5. You hold the option until the expiration date, when MBI stock sells for $123 per share. You will realize a ______ on the investment. a. $200 profit b. $200 loss c. $300 profit d. $300 loss

b (Long call profit = Max [0, ($123 - $120)(100)] - $500 = -$200)

Cache Creek Manufacturing Company is expected to pay a dividend of $4.20 in the upcoming year. Dividends are expected to grow at the rate of 8% per year. The risk-free rate of return is 4%, and the expected return on the market portfolio is 14%. Investors use the CAPM to compute the market capitalization rate on the stock and use the constant-growth DDM to determine the intrinsic value of the stock. The stock is trading in the market today at $84. Using the constant-growth DDM and the CAPM, the beta of the stock is _________. a. 1.4 b. .9 c. .8 d. .5

b (k = $4.20/$84 + .08 = .13 .13 = .04 + β(.14 - .04) β = .09/.10 = .9)

Consider the following table: Stock Fund Bond Fund Scenario Probability Rate of Return Rate of Return Severe recession .05 -40% -9% Mild recession .25 -14% 15% Normal growth .40 17% 8% Boom .30 33% -5% b. Calculate the values of mean return and variance for the stock fund. c. Calculate the value of the covariance between the stock and bond funds.

b) Mean return 11.2% Variance 0.0446% c)covariance -0.0086%

Consider the following table: Stock Fund Bond Fund Scenario Probability Rate of Return Rate of Return Severe recession .10 -37% -9% Mild recession .20 -11% 15% Normal growth .35 14% 8% Boom .35 30% -5% b. Calculate the values of mean return and variance for the stock fund. c. Calculate the value of the covariance between the stock and bond funds.

b) Mean return 9.5% Variance 0.0545 c) Covariance -0.0043

Consider the following $1,000 par value zero-coupon bonds: Bond Years to Maturity Yield to Maturity A 1 6.00% B 2 7.50% C 3 8.00% D 4 8.50% E 5 10.25% The expected 1-year interest rate in the third year should be ________. a. 7% b. 9% c. 8% d. 10%

b. 9% ((1+.08)^3 / (1+0.75)^2 ) -1= .09

33. Consider the liquidity preference theory of the term structure of interest rates. On average, one would expect investors to require _________. a. none of these options (The liquidity preference theory cannot be used to make any of the other statements.) b. a higher yield on long-term bonds than on short-term bonds c. a higher yield on short-term bonds than on long-term bonds d. the same yield on both short-term bonds and long-term bonds

b. a higher yield on long-term bonds than on short-term bonds

37. If you are holding a premium bond, you must expect a _______ each year until maturity. If you are holding a discount bond, you must expect a _______ each year until maturity. (In each case assume that the yield to maturity remains stable over time.) a. capital gain; capital loss b. capital loss; capital gain c. capital gain; capital gain d. capital loss; capital loss

b. capital loss; capital gain

Which of the following rates represents a bond's annual interest payment per dollar of par value? a. IRR b. coupon rate c. YTM d. holding period return

b. coupon rate

Consider the expectations theory of the term structure of interest rates. If the yield curve is downward-sloping, this indicates that investors expect short-term interest rates to ________ in the future. a. not change b. decrease c. change in an unpredictable manner d. increase

b. decrease

20. The primary difference between Treasury notes and bonds is ________. a. tax status b. maturity at issue c. default risk d. coupon rate

b. maturity at issue

The primary difference between Treasury notes and bonds is ________. a. tax status b. maturity at issue c. default risk d. coupon rate

b. maturity at issue

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

beta

Puttable bond

bond which gives an option to the investors of such bonds to either continue with the bond or call for redemption before its maturity

Consider two bonds, A and B. Both bonds presently are selling at their par value of $1,000. Each pays interest of $120 annually. Bond A will mature in 5 years, while bond B will mature in 6 years. If the yields to maturity on the two bonds change from 12% to 14%, ________.

both bonds will decrease in value but bond B will decrease more than bond A

Consider two bonds, A and B. Both bonds presently are selling at their par value of $1,000. Each pays interest of $120 annually. Bond A will mature in 5 years, while bond B will mature in 6 years. If the yields to maturity on the two bonds change from 12% to 14%, _________. Question 8 options: both bonds will increase in value but bond A will increase more than bond B both bonds will increase in value but bond B will increase more than bond A both bonds will decrease in value but bond A will decrease more than bond B both bonds will decrease in value but bond B will decrease more than bond A

both bonds will decrease in value but bond B will decrease more than bond A

13. 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

both well divers and indivd assets, well divers ports only

The SML is valid for _______________ and the CML is valid for ______________.

both well diversified portfolios and individual assets; well diversified portfolios only

The SML is valid for _______________, and the CML is valid for ______________

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

The SML is valid for _______________, and the CML is valid for ______________.

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

The risk-free rate is 4%. The expected market rate of return is 11%. If you expect stock X with a beta of .8 to offer a rate of return of 12%, then you should _________.

buy stock X because it is underpriced E(rx) would normally be 0.04+.8(.11-.04)=.096

10. A Japanese firm issued and sold a pound-denominated bond in the United Kingdom. A U.S. firm issued bonds denominated in dollars but sold the bonds in Japan. Which one of the following statements is correct? A. Both bonds are examples of Eurobonds. B. The Japanese bond is a Eurobond, and the U.S. bond is termed a foreign bond. C. The U.S. bond is a Eurobond, and the Japanese bond is termed a foreign bond. D. Neither bond is a Eurobond.

c

12. TIPS offer investors inflation protection by ______________ by the inflation rate each year. A. increasing only the coupon rate B. increasing only the par value C. increasing both the par value and the coupon payment D. increasing the promised yield to maturity

c

16. __________ are examples of synthetically created zero-coupon bonds. A. COLTS B. OPOSSMS C. STRIPS D. ARMs

c

17. A __________ bond gives the bondholder the right to cash in the bond before maturity at a specific price after a specific date. A. callable B. coupon C. puttable D. Treasury

c

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

c

20. You buy a TIPS at issue at par for $1,000. The bond has a 3% coupon. Inflation turns out to be 2%, 3%, and 4% over the next 3 years. The total annual coupon income you will receive in year 3 is _________. A. $30 B. $33 C. $32.78 D. $30.90 ($30)(1.02)(1.03)(1.04) = $32.78

c

25. You hold a subordinated debenture in a firm. In the event of bankruptcy you will be paid off before which one of the following? A. Mortgage bonds B. Senior debentures C. Preferred stock D. Equipment obligation bonds

c

26. Bonds with coupon rates that fall when the general level of interest rates rise are called _____________. A. asset-backed bonds B. convertible bonds C. inverse floaters D. index bonds

c

27. _______ bonds represent a novel way of obtaining insurance from capital markets against specified disasters. A. Asset-backed bonds B. TIPS C. Catastrophe D. Pay-in-kind

c

34. In an era of particularly low interest rates, which of the following bonds is most likely to be called? A. Zero-coupon bonds B. Coupon bonds selling at a discount C. Coupon bonds selling at a premium D. Floating-rate bonds

c

39. A coupon bond that pays interest of $60 annually has a par value of $1,000, matures in 5 years, and is selling today at an $84.52 discount from par value. The yield to maturity on this bond is _________. A. 6% B. 7.23% C. 8.12% D. 9.45% Calculator entries are N = 5, PV = -915.48, PMT = 60, FV = 1,000, CPT I/Y 8.12

c

4. A mortgage bond is _______. A. secured by other securities held by the firm B. secured by equipment owned by the firm C. secured by property owned by the firm D. unsecured

c

44. A coupon bond that pays semiannual interest is reported in the Wall Street Journal as having an ask price of 117% of its $1,000 par value. If the last interest payment was made 2 months ago and the coupon rate is 6%, the invoice price of the bond will be _________. A. $1,140 B. $1,170 C. $1,180 D. $1,200 Invoice price = 1.17(1,000) + 30(2/6) = 1180

c

48. You purchased a 5-year annual-interest coupon bond 1 year ago. Its coupon interest rate was 6%, and its par value was $1,000. At the time you purchased the bond, the yield to maturity was 4%. If you sold the bond after receiving the first interest payment and the bond's yield to maturity had changed to 3%, your annual total rate of return on holding the bond for that year would have been approximately _________. A. 5% B. 5.5% C. 7.6% D. 8.9% PV0 = PV1 = Calculator entries for purchase price are N = 5, I/Y = 4, PMT = 60, FV = 1,000, CPT PV 1,089.04 Calculator entries for ending price are N =4, I/Y = 3, PMT = 60, FV = 1,000, CPT PV 1,111.51 Total ending cash = 1,111.51 + 60 = 1,171.51 HPR= (1,171.51/1,089.04) - 1 = 7.57%

c

52. $1,000 par value zero-coupon bonds (ignore liquidity premiums) The expected 2-year interest rate 3 years from now should be _________. A. 9.55% B. 11.74% C. 14.89% D. 13.73% (1 + 0R5)5 = (1 + 0R3)3(1 + 3F5)2 1.10705 = (1.07993)(1 + 3F5)2; 3F5 = 14.89%

c

55. Consider the following $1,000 par value zero-coupon bonds: The expected 1-year interest rate 2 years from now should be _________. A. 7% B. 8% C. 9% D. 10%

c

58. Consider the following $1,000 par value zero-coupon bonds: The expected 1-year interest rate 3 years from now should be _________. A. 7% B. 8% C. 9% D. 10%

c

6. If you are holding a premium bond, you must expect a _______ each year until maturity. If you are holding a discount bond, you must expect a _______ each year until maturity. (In each case assume that the yield to maturity remains stable over time.) A. capital gain; capital loss B. capital gain; capital gain C. capital loss; capital gain D. capital loss; capital loss

c

65. Yields on municipal bonds are generally lower than yields on similar corporate bonds because of differences in _________. A. marketability B. risk C. taxation D. call protection

c

70. Consider a newly issued TIPS bond with a 3-year maturity, par value of $1,000, and coupon rate of 5%. Assume annual coupon payments. What is the nominal rate of return on the TIPS bond in the first year? A. 5% B. 5.15% C. 8.15% D. 9% HPRnom =

c

72. On May 1, 2007, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds. Suppose market interest rates decline by 100 basis points (i.e., 1%). The effect of this decline would be ______. A. The price of the Wildwood bond would decline by more than the price of the Asbury bond. B. The price of the Wildwood bond would decline by less than the price of the Asbury bond. C. The price of the Wildwood bond would increase by more than the price of the Asbury bond. D. The price of the Wildwood bond would increase by less than the price of the Asbury bond.

c

75. One-, two-, and three-year maturity, default-free, zero-coupon bonds have yields to maturity of 7%, 8%, and 9%, respectively. What is the implied 1-year forward rate 1 year from today? A. 2.07% B. 8.03% C. 9.01% D. 11.12% 1.07(1 + f2) = 1.082 = 1.1664 (1 + f2) = 1.1664/1.07 = 1.0900935 f2 = 9.01%

c

85. You buy a 10-year $1,000 par value zero-coupon bond priced to yield 6%. You do not sell the bond. If you are in a 28% tax bracket, you will owe taxes on this investment after the first year equal to _______. A. $0 B. $4.27 C. $9.38 D. $33.51 Taxes owed ($591.90 - $558.39)(.28) = $9.38

c

86. You buy a 10-year $1,000 par value 4% annual-payment coupon bond priced to yield 6%. You do not sell the bond at year-end. If you are in a 15% tax bracket, at year-end you will owe taxes on this investment equal to _______. A. $9.10 B. $4.25 C. $7.68 D. $5.20 Calculator entries for this year's price are N = 10, I/Y = 6, PMT = 40, FV = 1,000, CPT PV 852.80 Calculator entries for next year's price are N = 9, I/Y = 6, PMT = 40, FV = 1,000, CPT PV 863.97 Taxes owed are ($863.97 - $852.80 + $40)(.15) = $7.68

c

You write a put option on a stock. The profit at contract maturity of the option position is ___________, where X equals the option's strike price, ST is the stock price at contract expiration, and P0 is the original premium of the put option. a. max (P0, X - ST - P0) b. min (-P0, X - ST - P0) c. min (P0, ST - X + P0) d. max (0, ST - X - P0)

c

You purchased a 5-year annual-interest coupon bond 1 year ago. Its coupon interest rate was 6%, and its par value was $1,000. At the time you purchased the bond, the yield to maturity was 4%. If you sold the bond after receiving the first interest payment and the bond's yield to maturity had changed to 3%, your annual total rate of return on holding the bond for that year would have been approximately _________. a. 5% b. 5.5% c. 7.6% d. 8.9%

c (Calculator entries for purchase price are N = 5, I/Y = 4, PMT = 60, FV = 1,000, CPT PV Picture1,089.04 Calculator entries for ending price are N =4, I/Y = 3, PMT = 60, FV = 1,000, CPT PV Picture1,111.51 Total ending cash = 1,111.51 + 60 = 1,171.51 HPR= (1,171.51/1,089.04) - 1 = 7.57%)

A coupon bond that pays semiannual interest is reported in the Wall Street Journal as having an ask price of 117% of its $1,000 par value. If the last interest payment was made 2 months ago and the coupon rate is 6%, the invoice price of the bond will be _________. a. $1,140 b. $1,170 c. $1,180 d. $1,200

c (Invoice price = 1.17(1,000) + 30(2/6) = 1,180)

You buy a 10-year $1,000 par value zero-coupon bond priced to yield 6%. You do not sell the bond. If you are in a 28% tax bracket, you will owe taxes on this investment after the first year equal to _______. a. $0 b. $4.27 c. $9.38 d. $33.51

c (p10: 1000/1.06^10 = $558.39 p9: 1000/1.06^9 = $591.90 Taxes owed ($591.90 - $558.39)(.28) = $9.38)

Rose Hill Trading Company is expected to have EPS in the upcoming year of $6. The expected ROE is 18%. An appropriate required return on the stock is 14%. If the firm has a plowback ratio of 70%, its intrinsic value should be _________. a. $20.93 b. $69.77 c. $128.57 d. $150

c (v0 = [6.00(1-.70)]/[.14-.18(.70)] = 128.57)

You buy a 10-year $1,000 par value 4% annual-payment coupon bond priced to yield 6%. You sell the bond at year-end. What is your holding period return (i.e., HPR)? a. 5.20% b. 3.34% c. 6.00% d. 4.00%

c. 6.00% Calculator entries for this year's price are N = 10, I/Y = 6, PMT = 40, FV = 1,000, CPT PV 852.80 Calculator entries for next year's price are N = 9, I/Y = 6, PMT = 40, FV = 1,000, CPT PV 863.97 HPR = ($863.97 - $852.80 + $40) / $852.80 = 6.00%

Which of the following rates represents a bond's annual interest payment per dollar of par value?

coupon rate

23. The yield to maturity on a bond is: I. Above the coupon rate when the bond sells at a discount and below the coupon rate when the bond sells at a premium II. The discount rate that will set the present value of the payments equal to the bond price III. Equal to the true compound return on investment only if all interest payments received are reinvested at the yield to maturity a. I only b. I and II only c. I, II, and III d. II only

c. I, II, and III

30. According to the liquidity preference theory of the term structure of interest rates, an increase in the yield on long-term corporate bonds versus short-term bonds could be due to _______. a. an expectation of an upcoming recession b. a decline in future inflation expectations c. an increase in expected interest rate volatility d. declining liquidity premiums

c. an increase in expected interest rate volatility

Floating-rate bonds have a ________ that is adjusted with current market interest rates. a. coupon payment date b. dividend yield c. coupon rate d. maturity date

c. coupon rate

13. The bonds of Elbow Grease Dishwashing Company have received a rating of C by Moody's. The C rating indicates that the bonds are _________. a. intermediate grade b. high grade c. junk bonds d. investment grade

c. junk bonds

If you want to know the portfolio standard deviation for a three-stock portfolio, you will have to ______.

calculate three covariances

If you want to know the portfolio standard deviation for a three-stock portfolio, you will have to ________.

calculate three covariances

A ________ bond gives the issuer an option to retire the bond before maturity at a specific price after a specific date.

callable

A __________ bond gives the issuer an option to retire the bond before maturity at a specific price after a specific date.

callable

A __________ bond gives the issuer an option to retire the bond before maturity at a specific price after a specific date. callable coupon puttable Treasury

callable

You are recalculating the risk of ACE stock in relation to the market index, and you find that the ratio of the systematic variance to the total variance has risen. You must also find that the ____________. covariance between ACE and the market has fallen correlation coefficient between ACE and the market has fallen correlation coefficient between ACE and the market has risen unsystematic risk of ACE has risen

correl coeff btwn ace and mkt has risen

The ________ is equal to the square root of the systematic variance divided by the total variance

correlation coefficient

The ________ is equal to the square root of the systematic variance divided by the total variance.

correlation coefficient

The ________ is the covariance divided by the product of the standard deviations of the returns on each fund.

correlation coefficient

You are recalculating the risk of ACE stock in relation to the market index and you find the ratio of the systematic variance to the total variance has risen. You must also find that the

correlation coefficient between ACE and the market has risen

You are recalculating the risk of ACE stock in relation to the market index, and you find that the ratio of the systematic variance to the total variance has risen. You must also find that the ________.

correlation coefficient between ACE and the market has risen

You are recalculating the risk of ACE stock in relation to the market index, and you find that the ratio of the systematic variance to the total variance has risen. You must also find that the ____________.

correlation coefficient between ACE and the market has risen

Floating-rate bonds have a __________ that is adjusted with current market interest rates.

coupon rate

Floating-rate bonds have a __________ that is adjusted with current market interest rates. (a) maturity date (b) coupon payment date (c) dividend yield (d) coupon rate

coupon rate

Which of the following rates represent a bond's annual interest payment per dollar of par value?

coupon rate

8. 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

covar betwn sec and mkt rets divided by var of mkt rets

You invest in the stock of Rayleigh Corp. and write a call option on Rayleigh Corp. This strategy is called a _________. Question 9 options: covered call long straddle naked call money spread

covered call

The ________ of a bond is computed as the ratio of the annual coupon payment to the market price

current yield

The __________ of a bond is computed as the ratio of the annual coupon payment to the market price.

current yield

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

d

24. Consider two bonds, A and B. Both bonds presently are selling at their par value of $1,000. Each pays interest of $120 annually. Bond A will mature in 5 years, while bond B will mature in 6 years. If the yields to maturity on the two bonds change from 12% to 14%, _________. A. both bonds will increase in value but bond A will increase more than bond B B. both bonds will increase in value but bond B will increase more than bond A C. both bonds will decrease in value but bond A will decrease more than bond B D. both bonds will decrease in value but bond B will decrease more than bond A

d

28. The issuer of ________ bond may choose to pay interest either in cash or in additional bonds. A. an asset-backed B. a TIPS C. a catastrophe D. a pay-in-kind

d

64. The yield to maturity on a bond is: I. Above the coupon rate when the bond sells at a discount and below the coupon rate when the bond sells at a premium II. The discount rate that will set the present value of the payments equal to the bond price III. Equal to the true compound return on investment only if all interest payments received are reinvested at the yield to maturity A. I only B. II only C. I and II only D. I, II, and III

d

83. You buy a bond with a $1,000 par value today for a price of $875. The bond has 6 years to maturity and makes annual coupon payments of $75 per year. You hold the bond to maturity, but you do not reinvest any of your coupons. What was your effective EAR over the holding period? A. 10.4% B. 9.57% C. 7.45% D. 8.78% Total value in 6 years = 1,000 + 6(75) = 1,450 Calculator entries for EAR are N = 6, PV = -875, PMT = 0, FV = 1,450, CPT I/Y 8.78, or (875)(1 + EAR)6 = 1,000 + (75)(6); EAR = 8.78%

d

Consider two bonds, A and B. Both bonds presently are selling at their par value of $1,000. Each pays interest of $120 annually. Bond A will mature in 5 years, while bond B will mature in 6 years. If the yields to maturity on the two bonds change from 12% to 14%, _________. a. both bonds will increase in value but bond A will increase more than bond B b. both bonds will increase in value but bond B will increase more than bond A c. both bonds will decrease in value but bond A will decrease more than bond B d. both bonds will decrease in value but bond B will decrease more than bond A

d

The ________ is the document that defines the contract between the bond issuer and the bondholder. a. trustee agreement b. covenant agreement c. collateral statement d. indenture

d. indenture

Decreasing the number of stocks in a portfolio from 50 to 10 would likely ________________. increase the systematic risk of the portfolio increase the unsystematic risk of the portfolio increase the return of the portfolio decrease the variation in returns the investor faces in any one year

dec UNSYSTEM. risk of port

According to the CAPM, the risk premium an investor expects to receive on any stock or portfolio is _______________. Multiple Choice directly related to the risk aversion of the particular investor inversely related to the risk aversion of the particular investor directly related to the beta of the stock inversely related to the alpha of the stock

directly related to the beta of the stock

If you want to measure the performance of your investment in a fund, including the timing of your purchases and redemptions, you should calculate the __________.

dollar-weighted return

In the context of a bond portfolio, price risk and reinvestment rate risk exactly cancel out at a time horizon equal to the ____. Question 20 options: average bond maturity in the portfolio duration of the portfolio difference between the shortest duration and longest duration of the individual bonds in the portfolio average of the shortest duration and longest duration of the bonds in the portfolio

duration of the portfolio

Consider an investment opportunity set formed with two securities that are perfectly negatively correlated. The global minimum variance portfolio has a standard deviation that is always

equal to 0

Consider an investment opportunity set formed with two securities that are perfectly negatively correlated. The global minimum-variance portfolio has a standard deviation that is always ________.

equal to 0

Consider an investment opportunity set formed with two securities that are perfectly negatively correlated. The global minimum-variance portfolio has a standard deviation that is always _________.

equal to 0

Consider an investment opportunity set formed with two securities that are perfectly negatively correlated. The global minimum-variance portfolio has a standard deviation that is always _________. (a) equal to -1 (b) equal to 0 (c) equal to the sum of the securities' standard deviations (d) greater than 0

equal to 0

The expected return on the market is the risk-free rate plus the

equilibrium risk premium

The expected return on the market is the risk-free rate plus the _____________.

equilibrium risk premium

The term alpha transport refers to _____. Question 9 options: establishing alpha and then using index products to hedge market exposure and reduce exposure to particular sectors. establishing alpha and then using sector mutual funds to hedge market exposure and reduce exposure to the general market. establishing alpha and then using sector mutual funds to hedge market exposure and gain exposure to the general market. establishing alpha and then using index products to hedge market exposure and gain exposure to particular sectors.

establishing alpha and then using index products to hedge market exposure and gain exposure to particular sectors.

4. 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

expect rets to fall, risk prems to fall

Under the pure expectations hypothesis and constant real interest rates for different maturities, an upward sloping yield curve would indicate __________________.

expected increases in inflation over time

Under the pure expectations hypothesis and constant real interest rates for different maturities, an upward-sloping yield curve would indicate ________.

expected increases in inflation over time

Under the pure expectations hypothesis and constant real interest rates for different maturities, an upward-sloping yield curve would indicate __________________.

expected increases in inflation over time

If enough investors decide to purchase stocks, they are likely to drive up stock prices, thereby causing _____________ and ___________.

expected returns to fall; risk premiums to fall

When the market risk premium rises, stock prices will ________. Multiple Choice rise fall recover have excess volatility

fall

The average returns, standard deviations, and betas for three funds are given below along with data for the S&P 500 Index. The risk-free return during the sample period is 6%. Picture You want to evaluate the three mutual funds using the Jensen measure for performance evaluation. The fund with the highest Jensen measure of performance is __________. Question 6 options: fund A fund B fund C S&P 500

fund B

If all investors become more risk averse the SML will _______________ and stock prices will _______________.

have the same intercept with a steeper slope; fall

If all investors become more risk averse, the SML will _______________ and stock prices will _______________.

have the same intercept with a steeper slope; fall

Consider a 7-year bond with a 9% coupon and a yield to maturity of 12%. If interest rates remain constant, 1 year from now the price of this bond will be ________.

higher

Consider a 7-year bond with a 9% coupon and a yield to maturity of 12%. If interest rates remain constant, 1 year from now the price of this bond will be _________.

higher

Consider a 7-year bond with a 9% coupon and a yield to maturity of 12%. If interest rates remain constant, 1 year from now the price of this bond will be _________. higher lower the same indeterminate

higher

Historical returns have generally been __________ for stocks of small firms as (than) for stocks of large firms.

higher

A stock has a beta of 1.3. The unsystematic risk of this stock is ____________ the stock market as a whole.

higher than

Sinking funds are commonly viewed as protecting the _______ of the bond. issuer underwriter holder dealer

holder

When all investors analyze securities in the same way and share the same economic view of the world, we say they have

homogeneous expectations

When all investors analyze securities in the same way and share the same economic view of the world, we say they have ____________________.

homogeneous expectations

Analysis of bond returns over a multiyear horizon based on forecasts of the bond's yield to maturity and reinvestment rate of coupons is called ______.

horizon analysis

Analysis of bond returns over a multiyear horizon based on forecasts of the bond's yield to maturity and reinvestment rate of coupons is called ________.

horizon analysis

You are a consultant to a large manufacturing corporation considering a project with the following net after-tax cash flows (in millions of dollars): Years from Now After-Tax CF 0 -20 1-9 10 10 20 The project's beta is 1.7. Assuming rf = 9% and E(rM) = 19%. a. What is the net present value of the project? (Enter your answer in millions rounded to 2 decimal places.) Net present value million b. What is the highest possible beta estimate for the project before its NPV becomes negative? (Round your answer to 3 decimal places.) Highest possible beta value

http://www.chegg.com/homework-help/consultant-large-manufacturing-corporation-considering-proje-chapter-7-problem-6p-solution-9780073382401-exc

12. 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

i and iii

The M2 measure is a variant of ________________. Multiple Choice the Sharpe measure the Treynor measure Jensen's alpha the appraisal ratio

the Sharpe measure

You are considering adding a new security to your portfolio. To decide whether you should add the security, you need to know the security's: I. Expected return II. Standard deviation III. Correlation with your portfolio I only I and II only I and III only I, II, and III

i,ii,andiii

According to Tobin's separation property, portfolio choice can be separated into two independent tasks consisting of ________ and ________.

identifying the optimal risky portfolio; constructing a complete portfolio from T-bills and the optimal risky portfolio based on the investor's degree of risk aversion

According to Tobin's separation property, portfolio choice can be separated into two independent tasks consisting of __________ and __________.

identifying the optimal risky portfolio; constructing a complete portfolio from T-bills and the optimal risky portfolio based on the investor's degree of risk aversion

A put option on Dr. Pepper Snapple Group, Inc., has an exercise price of $45. The current stock price is $41. The put option is _________. Question 8 options: at the money in the money out of the money knocked out

in the money

Decreasing the number of stocks in a portfolio from 50 to 10 would likely ________.

increase the unsystematic risk of the portfolio

Decreasing the number of stocks in a portfolio from 50 to 10 would likely ________________.

increase the unsystematic risk of the portfolio

Decreasing the number of stocks in a portfolio from 50 to 10 would likely ________________. (a) increase the unsystematic risk of the portfolio (b) decrease the variation in returns the investor faces in any one year (c) increase the return of the portfolio (d) increase the systematic risk of the portfolio

increase the unsystematic risk of the portfolio

TIPS offer investors inflation protection by ________ by the inflation rate each year.

increasing both the par value and the coupon payment

TIPS offer investors inflation protection by ______________ by the inflation rate each year.

increasing both the par value and the coupon payment

The ________ is the document that defines the contract between the bond issuer and the bondholder.

indenture

The ___________ is the document that defines the contract between the bond issuer and the bondholder.

indenture

TIPS are an example of _______________.

indexed bonds

Stock prices that are stable over time _______. Multiple Choice indicate that prices are useful indicators of true economic value indicate that the market is not incorporating new information into current stock prices ensure that an economy allocates its resources efficiently indicates that returns follow a random-walk process

indicate that the market is not incorporating new information into current stock prices

Which type of risk is most significant for bond?

interest rate risk

Which type of risk is most significant for bonds?

interest rate risk

The dollar-weighted return is the _________.

internal rate of return

Bonds with coupon rates that fall when the general level of interest rates rise are called ________.

inverse floaters

Bonds with coupon rates that fall when the general level of interest rates rise are called _____________.

inverse floaters

The duration of a perpetuity varies _______ with interest rates. Question 11 options: directly inversely convexly randomly

inversely

Euro Bond

issued in the currency other than the currency of the market in which the bond is issued

9. According to the CAPM which of the following is not a true statement regarding the market portfolio. A. All securities in the market portfolio are held in proportion to their market values B. It includes all risky assets in the world, including human capital C. It is always the minimum variance portfolio on the efficient frontier D. It lies on the efficient frontier

it is always the MVP on effic frontier

You can be sure that a bond will sell at a premium to par when _________.

its coupon rate is greater than its yield to maturity

You can be sure that a bond will sell at a premium to par when _________. (a) its coupon rate is less than its yield to maturity (b) its coupon rate is greater than its yield to maturity (c) its coupon rate is less than its conversion value (d) its coupon rate is equal to its yield to maturity

its coupon rate is greater than its yield to maturity

The efficient frontier represents a set of portfolios that (a) maximize expected return for a given level of risk. (b) minimize expected return for a given level of risk. (c) maximize risk for a given level of return. (d) None of the options.

maximize expected return for a given level of risk.

You can be sure that a bond will sell at a premium to par when _________. Question 6 options: its coupon rate is greater than its yield to maturity its coupon rate is less than its yield to maturity its coupon rate is equal to its yield to maturity its coupon rate is less than its conversion value Save

its coupon rate is greater than its yield to maturity

You can be sure that a bond will sell at a premium to par when _________. its coupon rate is greater than its yield to maturity its coupon rate is less than its yield to maturity its coupon rate is equal to its yield to maturity its coupon rate is less than its conversion value

its coupon rate is greater than its yield to maturity

A security's beta coefficient will be negative if ____________.

its returns are negatively correlated with market-index returns

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

joint tests of market efficiency and the risk-adjustment measure

The bonds of Elbow Grease Dishwashing Company have received a rating of C by Moody's. The C rating indicates that the bonds are _______.

junk bonds

The bonds of Elbow Grease Dishwashing Company have received a rating of C by Moody's. The C rating indicates that the bonds are ________.

junk bonds

The bonds of Elbow Grease Dishwashing Company have received a rating of C by Moody's. The C rating indicates that the bonds are _________.

junk bonds

Interest rate risks in short term bonds?

least sensitive - If interest rates go down, they gain the least. If interest rates go up, they lose the least.

On a standard expected return versus standard deviation graph, investors will prefer portfolios that lie to the ________ the current investment opportunity set.

left and above

On a standard expected return versus standard deviation graph, investors will prefer portfolios that lie to the _____________ of the current investment opportunity set.

left and above

Some diversification benefits can be achieved by combining securities in a portfolio as long as the correlation between the securities is ________.

less than 1

Some diversification benefits can be achieved by combining securities in a portfolio as long as the correlation between the securities is _____________.

less than 1

Some diversification benefits can be achieved by combining securities in a portfolio as long as the correlation between the securities is _____________. 1 less than 1 between 0 and 1 less than or equal to 0

less than 1

Rational risk-averse investors will always prefer portfolios _____________.

located on the capital market line to those located on the efficient frontier

Everything else equal, the __________ the maturity of a bond and the __________ the coupon, the greater the sensitivity of the bond's price to interest rate changes.

longer; lower

Everything else equal, the __________ the maturity of a bond and the __________ the coupon, the greater the sensitivity of the bond's price to interest rate changes. (a) longer; lower (b) shorter; higher (c) longer; higher (d) shorter; lower

longer; lower

Everything else equal, the __________ the maturity of a bond and the __________ the coupon, the greater the sensitivity of the bond's price to interest rate changes. Long or short, higher or lower?

longer; lower

Yields on municipal bonds are typically ________ yields on corporate bonds of similar risk and time to maturity.

lower than

Yields on municipal bonds are typically ___________ yields on corporate bonds of similar risk and time to maturity.

lower than

yields on muni bonds are typically _________ yields on corporate bonds of similar risk and time to maturity

lower than

The primary difference between Treasury notes and bonds is ______.

maturity at issue

the primary difference between treasury notes and bonds is

maturity at issue

The efficient frontier represents a set of portfolios that

maximize expected return for a given level of risk.

A mutual fund with a beta of 1.1 has outperformed the S&P 500 over the last 20 years. We know that this mutual fund manager _____. Multiple Choice must have had superior stock selection ability must have had superior asset allocation ability must have had superior timing ability may or may not have outperformed the S&P 500 on a risk-adjusted basis

may or may not have outperformed the S&P 500 on a risk-adjusted basis

A mutual fund with a beta of 1.1 has outperformed the S&P 500 over the last 20 years. We know that this mutual fund manager _____. Question 2 options: must have had superior stock selection ability. must have had superior asset allocation ability. must have had superior timing ability. may or may not have outperformed the S&P 500 on a risk-adjusted basis.

may or may not have outperformed the S&P 500 on a risk-adjusted basis.

The normal distribution is completely described by its _______.

mean and standard deviation

In performance measurement, the bogey portfolio is designed to _________. Question 15 options: measure the returns to a completely passive strategy measure the returns to a similar active strategy measure the returns to a given investment style equal the return on the S&P 500

measure the returns to a completely passive strategy

Diversification can reduce or eliminate __________ risk. all systematic nonsystematic only an insignificant

non systematic

Diversification can reduce or eliminate __________ risk. (a) non-systematic (b) systematic (c) all (d) only an insignificant

non-systematic

Used appropriately, diversification can reduce or eliminate __________ risk.

non-systemic

Investing in two assets with a correlation coefficient of 1 will reduce which kind of risk? market risk unique risk unsystematic risk none of these options (With a correlation of 1, no risk will be reduced.)

none of options

Diversification can reduce or eliminate ________ risk.

nonsystematic

Diversification can reduce or eliminate __________ risk.

nonsystematic

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

overpriced 5 + 1.15(15 - 5) = 16.5

Security X has an expected rate of return of 13% and a beta of 1.15. The risk-free ate is 5%, and the market expected rate of return is 15%. According to the capital asset pricing model, security X is ___.

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

Probably the biggest problem with evaluating the portfolio performance of actively managed funds is the assumption that __________________________. Question 7 options: the markets are efficient portfolio risk is constant over time diversification pays off security selection is more valuable than asset allocation

portfolio risk is constant over time

According to the capital asset pricing model, a security with a _________. Multiple Choice negative alpha is considered a good buy positive alpha is considered overpriced positive alpha is considered underpriced zero alpha is considered a good buy

positive alpha is considered underpriced

Which of the following yield curves generally implies a normal healthy economy?

positive slope

Which of the following yield curves implies a normal healthy economy?

positive slope

On May 1, 2007, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds. Description Coupon Price Callable Call Price Wildwood, due May 1, 2015 5 % 100 noncallable NA Asbury, due May 1, 2015 5.4 % 100 currently callable 102 If interest rates are expected to rise, then Joe Hill should ________.

prefer the Asbury bond to the Wildwood bond

On May 1, 2007, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds. Description Coupon Price Callable Call Price Wildwood, due May 1, 2015 5 % 100 noncallable NA Asbury, due May 1, 2015 5.4 % 100 currently callable 102 If the volatility of interest rates is expected to increase, then Joe Hill should ________.

prefer the Asbury bond to the Wildwood bond

On May 1, 2007, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds. DescriptionCoupon Price CallableCall PriceWildwood, due May 1, 20155% 100 noncallableNA Asbury, due May 1, 20155.4% 100 currently callable102 If interest rates are expected to rise, then Joe Hill should ____.

prefer the Asbury bond to the Wildwood bond

On May 1, 2007, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds. DescriptionCoupon Price CallableCall PriceWildwood, due May 1, 20155% 100 noncallableNA Asbury, due May 1, 20155.4% 100 currently callable102 The volatility of interest rates is expected to increase, then Joe Hill should ______.

prefer the Asbury bond to the Wildwood bond

On May 1, 2007, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds. If interest rates are expected to rise, then Joe Hill should ____.

prefer the Asbury bond to the Wildwood bond

On May 1, 2007, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds. If the volatility of interest rates is expected to increase, then Joe Hill should __.

prefer the Asbury bond to the Wildwood bond

On May 1, 2007, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds. If interest rates are expected to rise, then Joe Hill should ____.

prefer the Asbury bond to the Wildwood bond

On May 1, 2007, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds. If the volatility of interest rates is expected to increase, then Joe Hill should __.

prefer the Asbury bond to the Wildwood bond

On May 1, 2007, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds. If interest rates are expected to rise, then Joe Hill should ____.

prefer the Ashbury bond to the Wildwood bond

Bond portfolio immunization techniques balance ________ and ________ risk. price; reinvestment price; liquidity credit; reinvestment credit; liquidity

price; reinvestment

You invest in the stock of Valleyview Corp. and purchase a put option on Valleyview Corp. This strategy is called a _________. Question 10 options: long straddle naked put protective put short stroll

protective put

1. Fama and French claim that after controlling for firm size and the ratio of firm's book value to market value, beta is ______________. 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

rel useless in predicting fut stock rets

Beta is a measure of ______________.

relative systematic risk

The measure of unsystematic risk can be found from an index model as _________.

residual standard deviation

The measure of unsystematic risk can be found from an index model as _________. Multiple Choice residual standard deviation R-square degrees of freedom sum of squares of the regression

residual standard deviation

w CAPM risk premium for each unit of risk must be ________ and therefore the risk premium on mkt port tells us hw much we get for one unit of syst. risk or in other words the _____

same for all assets, beta

Consider a Treasury bill with a rate of return of 5% and the following risky securities: Security A: E(r) = .15; variance = .0400 Security B: E(r) = .10; variance = .0225 Security C: E(r) = .12; variance = .1000 Security D: E(r) = .13; variance = .0625 The investor must develop a complete portfolio by combining the risk-free asset with one of the securities mentioned above. The security the investor should choose as part of her complete portfolio to achieve the best CAL would be _________. security A security B security C security D

security A

The plot of a security's excess return relative to the market's excess return is called the ________.

security characteristic line

In regard to bonds, convexity relates to the _______.

shape of the bond price curve with respect to interest rates

A measure of the riskiness of an asset held in isolation is ____________. Multiple Choice beta standard deviation covariance alpha

standard deviation

A measure of the riskiness of an asset held in isolation is ____________. beta standard deviation covariance alpha

standard deviation

A measure of the riskiness of an asset held in isolation is _____________.

standard deviation

The invoice price of a bond is the ______.

stated or flat price in a quote sheet plus accrued interest

the invoice price of a bond is the

stated or flat price in a quote sheet plus accrued interest

5. 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

steeper slope, stock prices fall

The broadest information set is included in the _____. Multiple Choice weak-form efficiency argument semistrong-form efficiency argument strong-form efficiency argument technical analysis trading method

strong-form efficiency argument

A portfolio of stocks fluctuates when the Treasury yields change. Since this risk cannot be eliminated through diversification, it is called ________.

systematic risk

A portfolio of stocks fluctuates when the Treasury yields change. Since this risk cannot be eliminated through diversification, it is called __________.

systematic risk

Investors require a risk premium as compensation for bearing ______________.

systematic risk

Market risk is also called ________ and ________.

systematic risk; nondiversifiable risk

Yields on municipal bonds are generally lower than yields on similar corporate bonds because of differences in _________.

taxation

On May 1, 2007, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds. Description Coupon Price Callable Call Price Wildwood, due May 1, 2015 5 % 100 noncallable NA Asbury, due May 1, 2015 5.4 % 100 currently callable 102 Suppose market interest rates decline by 100 basis points (i.e., 1%). The effect of this decline would be ________.

the price of the Wildwood bond would increase by more than the price of the Asbury bond

On May 1, 2007, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds. Suppose market interest rates decline by 100 basis points (i.e., 1%). The effect of this decline would be ______.

the price of the Wildwood bond would increase by more than the price of the Asbury bond

On May 1, 2007, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds. DescriptionCoupon Price CallableCall PriceWildwood, due May 1, 20155% 100 noncallableNA Asbury, due May 1, 20155.4% 100 currently callable102 Suppose market interest rates decline by 100 basis points (i.e., 1%). The effect of this decline would be ______.

the price of the Wildwood bond would increase by more than the price of the Asbury bond

On May 1, 2007, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds. Suppose market interest rates decline by 100 basis points (i.e., 1%). The effect of this decline would be ______.

the price of the Wildwood bond would increase by more than the price of the Asbury bond *because the coupon rate is lower*

Suppose that a stock portfolio and a bond portfolio have a zero correlation. This means that ______.

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

Suppose that a stock portfolio and a bond portfolio have a zero correlation. This means that ________.

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

The complete portfolio refers to the investment in _________.

the risk-free asset and the risky portfolio combined

The term complete portfolio refers to a portfolio consisting of _________________.

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

According to capital asset pricing theory, the key determinant of portfolio returns is _________.

the systematic risk of the portfolio

The duration of a portfolio of bonds can be calculated as _______________. the coupon weighted average of the durations of the individual bonds in the portfolio the yield weighted average of the durations of the individual bonds in the portfolio the value weighted average of the durations of the individual bonds in the portfolio averages of the durations of the longest- and shortest-duration bonds in the portfolio

the value weighted average of the durations of the individual bonds in the portfolio

The correlation coefficient between two assets equals ________.

their covariance divided by the product of their standard deviations

The correlation coefficient between two assets equals _________.

their covariance divided by the product of their standard deviations

The correlation coefficient between two assets equals _________. Multiple Choice their covariance divided by the product of their variances the product of their variances divided by their covariance the sum of their expected returns divided by their covariance their covariance divided by the product of their standard deviations

their covariance divided by the product of their standard deviations

What is credit risk or default risk?

this is the risk that the issuer may not be able to make its coupon or principal payments.

Standard deviation of portfolio returns is a measure of

total risk

Firm-specific risk is also called __________ and __________. systematic risk; diversifiable risk systematic risk; nondiversifiable risk unique risk; nondiversifiable risk unique risk; diversifiable risk

unique risk; diversifiable risk

Risk that can be eliminated through diversification is called ______ risk.

unique, firm-specific, diversifiable

The potential loss for a writer of a naked call option on a stock is _________. Question 11 options: equal to the call premium larger the lower the stock price limited unlimited

unlimited

Adding additional risky assets to the investment opportunity set will generally move the efficient frontier _____ and to the ______. up; right up; left down; right down; left

up, left

Adding additional risky assets to the investment opportunity set will generally move the efficient frontier _____ and to the ______.

up; left

Adding additional risky assets to the investment opportunity set will generally move the efficient frontier ________ and to the ________.

up; left

the values of beta coefficients of securities are __________. always positive always negative always between positive 1 and negative 1 usually positive but are not restricted in any particular way

usually pos but not restricted in any way

The values of beta coefficients of securities are ________.

usually positive but are not restricted in any particular way

The values of beta coefficients of securities are __________.

usually positive but are not restricted in any particular way

The values of beta coefficients of securities are __________. always positive always negative always between positive 1 and negative 1 usually positive but are not restricted in any particular way

usually positive but are not restricted in any particular way

The values of beta coefficients of securities are

usually positive, but are not restricted in any particular way

The term efficient frontier refers to the set of portfolios that _________________.

yield the greatest return for a given level of risk involve the least risk for a given level of return Both a and b above

According to the capital asset pricing model, fairly priced securities have _________. Multiple Choice negative betas positive alphas positive betas zero alphas

zero alphas

According to the capital asset pricing model, fairly priced securities have __________.

zero alphas

An investor who expects declining interest rates would maximize her capital gain by purchasing a bond that has a _________ coupon and a _________ term to maturity. Question 17 options: low; long high; short high; long zero; long

zero; long

A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 35%, while stock B has a standard deviation of return of 15%. The correlation coefficient between the returns on A and B is .45. Stock A comprises 40% of the portfolio, while stock B comprises 60% of the portfolio. The standard deviation of the return on this portfolio is _________.

σ2p = (.402)(.352) + (.602)(.15)2 + (2)(.4)(.6)(.35)(.15)(.45) σ2p = .039046 σp = 19.76%

A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 35%, while stock B has a standard deviation of return of 15%. The correlation coefficient between the returns on A and B is .45. Stock A comprises 40% of the portfolio, while stock B comprises 60% of the portfolio. The standard deviation of the return on this portfolio is _________. 23% 19.76% 18.45% 17.67%

σ2p = (.402)(.352) + (.602)(.15)2 + (2)(.4)(.6)(.35)(.15)(.45) σ2p = .039046 σp = 19.76%

Which of the following is a correct expression concerning the formula for the standard deviation of returns of a two-asset portfolio where the correlation coefficient is less than 1?

σ2rp < (W12σ12 + W22σ22)