BUS 352 Final Exam Concepts
Which of the following correlation coefficients will produce the least diversification benefit? -.6 0 .8 -.3
.8
What is the alpha of a portfolio with a beta of 2 and actual return of 15%? 13% 0% 17% 15%
0% CAPM E(ri) = 5% + 2(10% - 5%) = 15%; Alpha = Actual return - Expected return = 15% - 15% = 0% A portfolio with a return of 15% and a beta of 2 lies on the SML and therefore has an alpha of zero.
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? .8 1 1.5 1.2
1
The market portfolio has a beta of _________. 0 1 -1 .5
1
Under SEC rules, the managers of certain funds are allowed to deduct charges for advertising, brokerage commissions, and other sales expenses directly from the fund assets rather than billing investors. These fees are known as ____________. direct operating expenses 12b-1 charges back-end loads front-end loads
12b-1 charges
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% less slightly more 20% more slightly less
20% more
The duration of a 5-year zero-coupon bond is ____ years. 4.5 5.5 5 3.5
5
__________ fund is defined as one in which the fund charges a sales commission to either buy into or exit from the fund. An index A load A no-load A specialized-sector
A load
Which of the following is not a true statement regarding municipal bonds? The interest income from a municipal bond is exempt from federal income taxation. The interest income from a municipal bond is exempt from state and local taxation in the issuing state. A municipal bond is a debt obligation issued by the federal government. A municipal bond is a debt obligation issued by state or local governments.
A municipal bond is a debt obligation issued by the federal government.
____ is not a derivative security. None of the options (All of the answers are derivative securities.) A futures contract A share of common stock A call option
A share of common stock
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 B was better because she generated a larger alpha. Advisor A was better because he generated a higher return. Advisor B was better because she achieved a good return with a lower beta. Advisor A was better because he generated a larger alpha.
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%
__________ are examples of financial intermediaries. Investment companies Commercial banks All of the options Insurance companies
All of the options
The CAPM _______. helps us make an educated guess as to expected return on assets that have not yet traded in the marketplace predicts the relationship between risk and expected return of an asset provides a benchmark rate of return for evaluating possible investments All of the options.
All of the options.
The CAL provided by combinations of 1-month T-bills and a broad index of common stocks is called the ______. CML CAPM total return line SML
CML
__________ represents an ownership share in a corporation. Preferred stock A fixed-income security Common stock A call option
Common stock
______________ is an important characteristic of the relationship between bond prices and yields. Convexity Concavity Linearity Complexity
Convexity
Advantages of ETFs over mutual funds include all but which one of the following? ETFs trade continuously, so investors can trade throughout the day. ETFs can be sold short or purchased on margin, unlike fund shares. ETF providers do not have to sell holdings to fund redemptions. ETF values can diverge from NAV.
ETF values can diverge from NAV.
Which of the following funds are usually most tax-efficient? equity funds bond Funds specialized-sector funds ETFs
ETFs
Debt securities promise: I. A fixed stream of income. II. A stream of income that is determined according to a specific formula. III. A share in the profits of the issuing entity.
I or II only
Active trading in markets and competition among securities analysts helps ensure that: I. Security prices approach informational efficiency. II. Riskier securities are priced to offer higher potential returns. III. Investors are unlikely to be able to consistently find under- or overvalued securities.
I, II, and III
Money market securities are characterized by: I. Maturity less than 1 year II. Safety of the principal investment III. Low rates of return
I, II, and III
Which of the following are financial assets? I. Debt securities II. Equity securities III. Derivative securities
I, II, and III
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
Financial intermediaries exist because small investors cannot efficiently _________. gather information diversify their portfolios assess and monitor the credit risk of borrowers all of the options
all of the options
Mutual funds provide the following for their shareholders. professional management diversification all of these options record keeping and administration
all of these options
The semistrong form of the EMH states that ________ must be reflected in the current stock price. all information, including inside information all publicly available information all costless information all security price and volume data
all publicly available information
Because of convexity, when interest rates change, the actual bond price will ____________ the bond price predicted by duration. always be higher than sometimes be higher than always be lower than sometimes be lower than
always be higher than
The _________ price is the price at which a dealer is willing to sell a security. clearing settlement ask bid
ask
After considering current market conditions, an investor decides to place 60% of her funds in equities and the rest in bonds. This is an example of _____ . passive management top-down portfolio management asset allocation security analysis
asset allocation
An investment adviser has decided to purchase gold, real estate, stocks, and bonds in equal amounts. This decision reflects which part of the investment process? asset allocation portfolio analysis investment analysis security selection
asset allocation
The _______ decision should take precedence over the _____ decision. stock selection; mutual fund selection bond selection; mutual fund selection stock selection; asset allocation asset allocation; stock selection
asset allocation; stock selection
Which one of the following performance measures is the Sharpe ratio? average excess return to standard deviation ratio average excess return to beta ratio average return minus required return alpha to standard deviation of residuals ratio
average excess return to standard deviation ratio
In the context of the capital asset pricing model, the systematic measure of risk is captured by _________. the variance of returns the standard deviation of returns unique risk beta
beta
The _________ price is the price at which a dealer is willing to purchase a security. clearing ask bid settlement
bid
The difference between the price at which a dealer is willing to buy and the price at which a dealer is willing to sell is called the _________. bid-ask gap market variation bid-ask spread market spread
bid-ask spread
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 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 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 B will decrease more than bond A
An investor in a T-bill earns interest by _________. receiving dividend payments every 30 days buying the bill at a discount from the face value to be received at maturity receiving interest payments every 90 days converting the T-bill at maturity into a higher-valued T-note
buying the bill at a discount from the face value to be received at maturity
Security selection refers to the ________. analysis of the value of securities allocation of the investment portfolio across broad asset classes choice of specific securities within each asset class top-down method of investing
choice of specific securities within each asset class
Real assets in the economy include all but which one of the following? common stock land buildings consumer durables
common stock
Floating-rate bonds have a __________ that is adjusted with current market interest rates. maturity date coupon rate dividend yield coupon payment date
coupon rate
According to the CAPM, the risk premium an investor expects to receive on any stock or portfolio is _______________. inversely related to the alpha of the stock inversely related to the risk aversion of the particular investor directly related to the risk aversion of the particular investor directly related to the beta of the stock
directly related to the beta of the stock
Risk that can be eliminated through diversification is called ______ risk. unique diversifiable all of these options firm-specific
diversifiable
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 __________. index return arithmetic average return geometric average return dollar-weighted return
dollar-weighted return
A firm cuts its dividend payout ratio. As a result, you know that the firm's _______. return on assets will increase stock price will fall earnings growth rate will fall earnings retention ratio will increase
earnings retention ratio will increase
A dollar-denominated deposit at a London bank is called _____. fed funds bankers' acceptance eurodollars LIBOR
eurodollars
Deposits of commercial banks at the Federal Reserve are called _____. time deposits bankers' acceptances federal funds repurchase agreements
federal funds
In a market economy, capital resources are primarily allocated by ____________. investment bankers financial markets corporation CEOs governments
financial markets
Published data on past returns earned by mutual funds are required to be ______. index returns excess returns dollar-weighted returns geometric returns
geometric returns
Advantages of investment companies to investors include all but which one of the following? guaranteed rates of return record keeping and administration professional management low-cost diversification
guaranteed rates of return
In securities markets, there should be a risk-return trade-off with higher-risk assets having _________ expected returns than lower-risk assets. the same The answer cannot be determined from the information given. lower higher
higher
The Vanguard 500 Index Fund tracks the performance of the S&P 500. To do so, the fund buys shares in each S&P 500 company __________. by purchasing an equal number of shares of each stock in the S&P 500 in proportion to the market value weight of the firm's equity in the S&P 500 by purchasing an equal dollar amount of shares of each stock in the S&P 500 in proportion to the price weight of the stock in the S&P 500
in proportion to the market value weight of the firm's equity in the S&P 500
Which type of fund generally has the lowest average expense ratio? actively managed bond funds actively managed international funds indexed funds hedge funds
indexed funds
Suppose that over the same time period two portfolios have the same average return and the same standard deviation of return, but portfolio A has a higher beta than portfolio B. According to the Sharpe ratio, the performance of portfolio A __________. is the same as the performance of portfolio B cannot be measured since there is no data on the alpha of the portfolio is poorer than the performance of portfolio B is better than the performance of portfolio B
is the same as the performance of portfolio B
The yield on tax-exempt bonds is ______. usually less than 50% of the yield on taxable bonds greater than the yield on taxable bonds normally about 90% of the yield on taxable bonds less than the yield on taxable bonds
less than the yield on taxable bonds
The market risk premium is defined as __________. the difference between the return on the highest-yielding asset and the return on the lowest-yielding asset the difference between the return on the risky asset with the lowest returns and the return on Treasury bills the difference between the return on a small-firm mutual fund and the return on the Standard & Poor's 500 Index the difference between the return on an index fund and the return on Treasury bills
the difference between the return on an index fund and the return on Treasury bills
The success of common stock investments depends on the success of _________. the firm and its real assets fixed-income securities government methods of allocating capital derivative securities
the firm and its real assets
Suppose that a stock portfolio and a bond portfolio have a zero correlation. This means that ______. the covariance of the stock and bond portfolios will be positive the returns on the stock and bond portfolios tend to move inversely the returns on the stock and bond portfolios tend to move together the returns on the stock and bond portfolios tend to vary independently of each other
the returns on the stock and bond portfolios tend to vary independently of each other
If a stock is correctly priced, then you know that ____________. the dividend payout ratio is optimal the sum of the stock's expected capital gain and dividend yield is equal to the stock's required rate of return the present value of growth opportunities is equal to the value of assets in place the stock's required return is equal to the growth rate in earnings and dividends
the sum of the stock's expected capital gain and dividend yield is equal to the stock's required rate of return
The expected rate of return of a portfolio of risky securities is _________. the weighted sum of the securities' expected returns the weighted sum of the securities' variance the sum of the securities' covariance the sum of the securities' variance
the weighted sum of the securities' expected returns
Standard deviation of portfolio returns is a measure of ___________. relative nonsystematic risk relative systematic risk total risk relative business risk
total risk
You short-sell 200 shares of Tuckerton Trading Co., now selling for $50 per share. What is your maximum possible loss? $10,000 $150 unlimited $50
unlimited
Which of the following is not a characteristic of common stock ownership? unlimited liability residual claimant voting rights right to any dividend paid by the corporation.
unlimited liability
A debenture is _________. secured by property owned by the firm secured by equipment owned by the firm unsecured secured by other securities held by the firm
unsecured
In a well-diversified portfolio, __________ risk is negligible. systematic unsystematic market nondiversifiable
unsystematic
All else equal, bond price volatility is greater for __________. higher coupon rates lower default risk lower coupon rates shorter maturity
lower coupon rates
An order to buy or sell a security at the current price is a ______________. stop-buy order limit order market order stop-loss order
market order
Net asset value is defined as ________________________. market value of assets minus liabilities divided by shares outstanding market value of assets divided by shares outstanding book value of assets divided by shares outstanding book value of assets minus liabilities divided by shares outstanding
market value of assets minus liabilities divided by shares outstanding
If an investor uses the full amount of margin available, the equity in a margin account used for a stock purchase can be found as ________. margin loan × market value of the stock market value of the stock + amount owed on the margin loan market value of the stock - amount owed on the margin loan market value of the stock ÷ margin loan
market value of the stock - amount owed on the margin loan
Banks and other financial institutions can best manage interest rate risk by _____________. matching the maturities of their assets and liabilities maximizing the duration of assets and minimizing the duration of liabilities matching the durations of their assets and liabilities minimizing the duration of assets and maximizing the duration of liabilities
matching the durations of their assets and liabilities
The primary difference between Treasury notes and bonds is ________. tax status maturity at issue default risk coupon rate
maturity at issue
The efficient frontier represents a set of portfolios that None of the options. maximize risk for a given level of return. minimize expected return for a given level of risk. maximize expected return for a given level of risk.
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 _____. must have had superior asset allocation ability must have had superior stock selection ability may or may not have outperformed the S&P 500 on a risk-adjusted basis must have had superior timing ability
may or may not have outperformed the S&P 500 on a risk-adjusted basis
Consider the theory of active portfolio management. Stocks A and B have the same beta and the same positive alpha. Stock A has higher nonsystematic risk than stock B. You should want __________ in your active portfolio. equal proportions of stocks A and B The answer cannot be determined from the information given. more of stock A than stock B more of stock B than stock A
more of stock B than stock A
Diversification is most effective when security returns are _________. positively correlated negatively correlated high uncorrelated
negatively correlated
The primary measurement unit used for assessing the value of one's stake in an investment company is ___________________. gross asset value average asset value total asset value net asset value
net asset value
An investor's degree of risk aversion will determine his or her ______. optimal risky portfolio capital allocation line optimal mix of the risk-free asset and risky asset risk-free rate
optimal mix of the risk-free asset and risky asset
The ratio of trading activity of a portfolio to the assets of the portfolio is called the ____________. portfolio turnover tax yield reinvestment ratio trading rate
portfolio turnover
The material wealth of society is determined by the economy's _________, which is a function of the economy's _________. investment bankers; financial assets productive capacity; real assets productive capacity; financial assets investment bankers; real assets
productive capacity; real assets
Transactions that do not involve the original issue of securities take place in _________. over-the-counter markets secondary markets primary markets institutional markets
secondary markets
Investors who want to liquidate their holdings in a closed-end fund may ___________________. sell their shares on the open market sell their shares back to the fund at net asset value sell their shares back to the fund at a discount if they wish sell their shares at a premium to net asset value if they wish
sell their shares on the open market
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? subordination clause sinking fund callable feature convertible feature
sinking fund
An increase in a bond's yield to maturity results in a price decline that is ________ the price increase resulting from a decrease in yield of equal magnitude. The answer cannot be determined. greater than equivalent to smaller than
smaller than
The invoice price of a bond is the ______. average of the bid and ask price stated or flat price in a quote sheet plus accrued interest stated or flat price in a quote sheet minus accrued interest bid price
stated or flat price in a quote sheet plus accrued interest
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 ____. Treasury bills stocks bonds money market funds
stocks
If an investor places a _________ order, the stock will be sold if its price falls to the stipulated level. If an investor places a __________ order, the stock will be bought if its price rises above the stipulated level. stop-buy; stop-loss market; limit limit; market stop-loss; stop-buy
stop-loss; stop-buy
Choosing stocks by searching for predictable patterns in stock prices is called ________. index management random-walk investing fundamental analysis technical analysis
technical analysis
Random price movements indicate ________. irrational markets that technical analysis to uncover trends can be quite useful that markets are functioning efficiently that prices cannot equal fundamental values
that markets are functioning efficiently
If you place an order to buy or sell a share of a mutual fund during the trading day, the order will be executed at _____. the NAV calculated at the market close at 4 pm New York time the NAV calculated at the opening of the next day's trading the NAV delayed 15 minutes the real time NAV
the NAV calculated at the market close at 4 pm New York time
Asset allocation refers to _________. the choice of specific assets within each asset class the analysis of the value of securities none of the options the allocation of the investment portfolio across broad asset classes
the allocation of the investment portfolio across broad asset classes
New-economy companies generally have higher _______ than old-economy companies. book value per share profits asset values P/E multiples
P/E multiples
__________ assets generate net income to the economy, and __________ assets define allocation of income among investors. Real, real Real, financial Financial, real Financial, financial
Real, financial
__________ often accompany short sales and are used to limit potential losses from the short position. Limit loss orders Restricted orders Limit orders Stop-buy orders
Stop-buy orders
Look Table questions from exam #2
There is 5 to six of them
The most marketable money market security is _____. Treasury bills common stock bankers' acceptances certificates of deposit
Treasury bills
TIPS are ______. Treasury bonds that pay no interest and are sold at a discount Treasury bonds that protect investors from inflation U.K. bonds that protect investors from default risk securities that trade on the Toronto stock index
Treasury bonds that protect investors from inflation
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. Treynor; Treynor Sharpe; Sharpe Treynor; Sharpe Sharpe; Treyno
Treynor; Sharpe
All other things equal (YTM = 10%), which of the following has the shortest duration? a 30-year bond with a 10% coupon a 10-year zero-coupon bond a 20-year bond with a 7% coupon a 20-year bond with a 9% coupon
a 10-year zero-coupon bond
All other things equal (YTM = 10%), which of the following has the longest duration? a 30-year bond with a 10% coupon a 20-year bond with a 7% coupon a 10-year zero-coupon bond a 20-year bond with a 9% coupon
a 30-year bond with a 10% coupon
A fund that invests in securities worldwide, including the United States, is called ______. a regional fund a global fund an international fund an emerging market fund
a global fund
Proponents of the EMH typically advocate __________. a conservative investment strategy an aggressive investment strategy a passive investment strategy a liberal investment strategy
a passive investment strategy