finc 351

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

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 60 days ago and the coupon rate is 6%, the invoice price of the bond will be ________. (The number of period between coupon payment: 180 days)

$1,180

You short sell 200 shares of Google stock at a price of $23 per share, using the full initial margin of 55%. After a surprisingly positive earnings announcement, the stock price rises to $31 per share. Your broker immediately gives you a margin call and requests that you add additional cash to your position to get back to the required maintenance margin level of 35%. How much cash do you need to add to your account?

$1,240

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.)

$12.57

The holding-period return on a stock was 25%. Its ending price was $18, and its beginning price was $16. Its cash dividend must have been ________.

$2

Assume you purchased 200 shares of ABC common stock on margin at $30 per share from your broker. If the initial margin is 60% and the maintenance margin is 35%, the amount you borrowed from the broker is ________.

$2400

Nice, Inc., has expected earnings of $5 per share for next year. The firm's ROE is 15%, and its earnings retention ratio is 40%. If the firm's market capitalization rate is 10%, what is the present value of its growth opportunities?

$25

In an efficient market the correlation coefficient between stock returns for two non-overlapping time periods should be ________.

0

The complete portfolio is composed of a risky asset with an expected rate of return of 16% and a standard deviation of 20% and a Treasury bill with a rate of return of 6%. The slope of the capital allocation line formed with the risky asset and the risk-free asset is approximately ________.

0.5

The complete portfolio is composed of a risky asset with an expected rate of return of 16% and a standard deviation of 20% and a Treasury bill with a rate of return of 6%. The slope of the capital allocation line formed with the risky asset and the risk-free asset is approximately ________.

0.50

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, risk-free rate is 6%, and the market risk premium is 10%. What is the stock's alpha (i.e., stock's abnormal return)?

1%

An 8%, 30-year bond has a yield to maturity of 10% and a modified duration of 8 years. If the market yield drops by 0.2%, there will be a ________ in the bond's price.

1.60% increase

A 12% coupon bond with semi-annual payments is callable in five years. The call price is $1,120. If the bond is selling today for $1,110, what is the yield to call?

10.95%

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 rate of return for stocks A and B is 20% and 10% respectively. The standard deviation of return on the minimumvariance portfolio is ________.

12%

The risk premium for exposure to aluminum commodity prices is 4%, and the firm has a beta relative to aluminum commodity prices of .6. The risk premium for exposure to GDP changes is 6%, and the firm has a beta relative to GDP of 1.2. If the risk-free rate is 4%, what is the expected return on this stock?

13.6%

You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40%, respectively. X has an expected rate of return of 14%, and Y has an expected rate of return of 10%. To form a complete portfolio with an expected rate of return of 11%, you should invest ________ of your complete portfolio in Treasury bills.

19%

The two-factor model on a stock provides a risk premium for exposure to market risk of 12%, a risk premium for exposure to silver commodity prices of 3.5%, and a risk-free rate of 4%. The beta for exposure to market risk is 1, and the beta for exposure to commodity prices is also 1. What is the expected return on the stock?

19.5%

The expected return on the market is 15% and the risk-free rate is 5%. The expected return on Apple is 25%. Assuming CAPM holds and the market is in equilibrium, what must be the Beta on Apple?

2.00

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 _________.

21.28%

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 5% 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?

37.50%

A 10% coupon bond maturing in 10 years that requires annual payments is expected to make all coupon payments but to pay only 50% of par value at maturity. What is the expected yield on this bond if the bond is purchased for $975?

6.68%

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

7.5%

Consider the single factor APT. Portfolio A has a beta of 0.5 and an expected return of 12%. Portfolio B has a beta of 0.4 and an expected return of 13%. 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; B

The expected return on the market portfolio is 15%. The risk-free rate is 8%. The expected return on Aggies Corp. common stock is 16%. The beta of Aggies Corp. common stock is 1.25. Within the context of the capital asset pricing model, ________.

Aggies Corp. stock's alpha is -.75%

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 are mean-variance optimizers

All

Chris, James, and Mellisa are all interested in buying the same stock that pays dividends. Chris plans on holding the stock for 1 year. James plans on holding the stock for 3 years. Mellisa plans on holding the stock until she retires in 10 years. Which one of the following statements is correct?

All three should be willing to pay the same amount for the stock regardless of their holding period

Consider the single factor APT. Portfolio A has a beta of .2 and an expected return of 13%. Portfolio B has a beta of .4 and an expected return of 15%. The risk-free rate of return is 10%. If you wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio ________ and a long position in portfolio ________.

B; A

Which of the following statements is NOT true if CAPM holds? A) The expected excess returns of a security are proportional to the beta of the security. B) Market portfolio lies on the capital market line and the security market line. C) A fairly priced security has an alpha of zero. D) Stocks with a beta of zero offer an expected rate of return of zero.

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

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

False

An increase in a bond's yield to maturity results in a larger price change than a decrease of equal magnitude (i.e., convexity).

False

An investor's degree of risk aversion will determine his or her optimal risky portfolio

False

As maturity decreases, price sensitivity increases at a decreasing rate.

False

Diversification works only when asset returns are negatively correlated.

False

In the mean standard deviation graph, the line that connects the risk-free rate and the optimal risky portfolio, P, is called the investor's utility curve.

False

Interest rate risk is not inversely related to the bond's coupon rate.

False

Long-term bonds tend to be less price sensitive than short-term bonds.

False

Price sensitivity is not inversely related to the yield to maturity at which the bond is selling.

False

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

False

The main difference between the three forms of market efficiency is that the definition of excess return differs.

False

The normal distribution is completely described by its median and standard deviation.

False

Which of the following statements is(are) true? I) Risk-averse investors reject investments that are fair games. II) Risk-neutral investors judge risky investments only by the expected returns. III) Risk-averse investors judge investments only by their riskiness. IV) Risk-loving investors will not engage in fair games.

I and II only

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 reward 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

Which of the following is(are) true regarding the APT? I. The security market line does not apply to the APT. II. More than one factor can be important in determining returns. III. All individual securities satisfy the APT relationship. IV. It doesn't assume all investors to be mean-variance optimizers.

II and IV

Security A has a higher standard deviation of returns than security B. We would expect that: I. Security A would have a risk premium equal to 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

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

One of your high school classmates corners you at your class reunion and lets you know that he is now a successful investment advisor. He tells you that he has discovered a foolproof investment strategy that you just have to get in on. The strategy involves buying any stock that announces a dividend increase and selling it as soon as it increases in value by 25%. If this strategy earns risk‐adjusted profits after accounting for transaction costs, which form(s) of the efficient markets hypothesis would be violated?

Semi-strong form and strong form

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 scattered and stock B is on the line)

Stock A is riskier.

Consider a portfolio formed by placing a portion of your investment in Apple and the rest in Google. Assume that the correlation between returns on Apple and Google is 0.5. Which of the following statements regarding the expected return and the standard deviation of your portfolio is correct? A. The portfolio expected return will be the weighted average of the expected returns on Apple and Google. The portfolio standard deviation will also be the weighted average of the standard deviations of the returns on Apple and Google. B. The portfolio expected return will be the weighted average of the expected returns on Apple and Google. The portfolio standard deviation will be less than the weighted average of the standard deviations of the returns on Apple and Google. C. The portfolio expected return will be less than the weighted average of the expected returns on Apple and Google. The portfolio standard deviation will be the weighted average of the standard deviations of the returns on Apple and Google. D. The portfolio expected return will be less than the weighted average of the expected returns on Apple and Google. The portfolio standard deviation will be less than the weighted average of the standard deviations of the returns on Apple and Google.

The portfolio expected return will be the weighted average of the expected returns on Apple and Google. The portfolio standard deviation will be less than the weighted average of the standard deviations of the returns on Apple and Google.

A short seller must pay dividends, if any are paid, to the stock lender.

True

An increase in a bond's yield to maturity results in a smaller price change than a decrease of equal magnitude (i.e., convexity).

True

As maturity increases, price sensitivity increases at a decreasing rate.

True

Bond prices and yields are inversely related

True

In his famous critique of the CAPM, Roll argued that the CAPM is not testable because the true market portfolio can never be observed

True

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.

True

Interest rate risk is inversely related to the bond's coupon rate.

True

Long-term bonds tend to be more price sensitive than short-term bonds.

True

Price sensitivity is inversely related to the yield to maturity at which the bond is selling.

True

The arithmetic average measure of returns ignores compounding.

True

The normal distribution is completely described by its mean and standard deviation.

True

If a stock lies below the security market line, it is overpriced.

True.

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

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

According to the capital asset pricing model, in equilibrium ________.

all securities' returns must lie on the security market line

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

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

Some diversification benefits can be achieved by combining securities in a portfolio as long as the correlation between the securities is ________.

less than 1

The possibility of arbitrage arises when ________.

mispricing among securities creates opportunities for riskless profits

Insiders are able to profitably trade and earn abnormal returns prior to the announcement of positive news. This is a violation of which form of efficiency?

strong-form efficiency

Market risk is also referred to as ________.

systematic risk or nondiversifiable risk

Random price movements indicate ________.

that markets are functioning efficiently

Adding additional risky assets to the investment opportunity set will generally move the efficient frontier ________ and to the ________.

up; left