Investments Midterm
put option
A __________ gives its holder the right to sell an asset for a specified exercise price on or before a specified expiration date.
hedge fund
A __________ is a private investment pool open only to wealthy or institutional investors that is exempt from SEC regulation and can therefore pursue more speculative policies than mutual funds.
back-end load
A contingent deferred sales load is commonly called a ____.
eurodollars
A dollar-denominated deposit at a London bank is called _____.
repurchase agreement
A firm that has large securities holdings and wishes to raise money for a short length of time may be able to find the cheapest financing from which of the following?
.42 Average yearly return - T-bill/ standard deviation = 0.15-0.045/0.25 = 0.42
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 ____.
I, II, and III
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.
up, left
Adding additional risky assets to the investment opportunity set will generally move the efficient frontier _____ and to the ______.
ability to handle very large orders
Advantages of ECNs over traditional markets include all but which one of the following?
guaranteed rates of return
Advantages of investment companies to investors include all but which one of the following?
commits to delivering the underlying commodity at contract maturity
An individual who goes short in a futures position _____.
11.32% (1.1*1.15*.88)-1
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 ______.
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 .50. The risk-free rate of return is 10%. The proportion of the optimal risky portfolio that should be invested in stock A is _________.
16% =(21*.29) + (14*.71)
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.)
buying the bill at a discount from the face value to be received at maturity
An investor in a T-bill earns interest by _________.
optimal mix of the risk-free asset and risky asset
An investor's degree of risk aversion will determine his or her ______.
market order
An order to buy or sell a security at the current price is a ______________.
asset A reward to variability ratio = return/σ for asset A,σ = 15/0.4 = 37.5 for asset B,σ = 20/0.3 = 66.67 since deviation(volatility) is lesser for asset A,a risk investor would prefer 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 ______.
the allocation of the investment portfolio across broad asset classes
Asset Allocation refers to ______
$9 =(500-50)/50
Assume that you have just purchased some shares in an investment company reporting $500 million in assets, $50 million in liabilities, and 50 million shares outstanding. What is the net asset value (NAV) of these shares?
8000 =(500*40)*.4
Assume you purchased 500 shares of XYZ common stock on margin at $40 per share from your broker. If the initial margin is 60%, the amount you borrowed from the broker is _________.
large well known companies
Commercial paper is a short-term security issued by __________ to raise funds.
Security A
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 _________.
15.64% 300 x 1.18 = 354 354 x 0.02 = 7.08 354- 7.08 = 346.92 346.92/300 = 15.64% 15.64%
Consider a mutual fund with $300 million in assets at the start of the year and 12 million shares outstanding. If the gross return on assets is 18% and the total expense ratio is 2% of the year-end value, what is the rate of return on the fund?
23.75% 200/10=20 250-(250*1%)=22.5 (22.5-20+2+.25)/20 .2375 or 23.75%
Consider a no-load mutual fund with $200 million in assets and 10 million shares at the start of the year and with $250 million in assets and 11 million shares at the end of the year. During the year investors have received income distributions of $2 per share and capital gain distributions of $.25 per share. Assuming that the fund carries no debt, and that the total expense ratio is 1%, what is the rate of return on the fund?
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 _________.
40.25 or less
Consider the following limit order book of a specialist. The last trade in the stock occurred at a price of $40. If a market buy order for 100 shares comes in, at what price will it be filled?
federal funds
Deposits of commercial banks at the Federal Reserve are called _____.
negatively correlated
Diversification is most effective when security returns are _________.
allow most participants to routinely earn high returns with low risk
Financial markets allow for all but which one of the following?
Investment Banks
Firms that specialize in helping companies raise capital by selling securities to the public are called _________.
stop-loss; buy stop
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.
Financial Markets
In a market economy, capital resources are primarily allocated by ____________
higher
In securities markets, there should be a risk-return trade-off with higher-risk assets having _________ expected returns than lower-risk assets.
underpriced
Initial public offerings (IPOs) are usually ___________ relative to the levels at which their prices stabilize after they begin trading in the secondary market.
sell their shares on the open market
Investors who want to liquidate their holdings in a closed-end fund may ___________________.
They are safe and marketable
Money market securities are sometimes referred to as cash equivalents because _____.
market value of assets minus liabilities divided by shares outstanding
Net asset value is defined as ________________________.
it promises to pay to its holder a fixed stream of income each year
Preferred stock is like long-term debt in that ___________.
in the primary market
Purchases of new issues of stock take place _________.
common stock
Real assets in the economy include all but which one of the following?
unique firm-specific diversifiable
Risk that can be eliminated through diversification is called ______ 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 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.
choice of specific securities within each asset class
Security Selection refers to the ____
13.17 (10000/9400)^2 - 1
Suppose you pay $9,400 for a $10,000 par Treasury bill maturing in 6 months. What is the effective annual rate of return for this investment?
Required that firms could no longer employ investment bankers to sell securities to the public.
The Sarbanes-Oxley Act tightened corporate governance rules by requiring all but which one of the following? -Required that corporations have more independent directors. -Required that the CFO personally vouch for the corporation's financial statements. -Required that firms could no longer employ investment bankers to sell securities to the public. -Required the creation of a new board to oversee the auditing of public companies.
a value-
The Standard & Poor's 500 is __________ weighted index.
arithmetic average
The ______ measure of returns ignores compounding.
bid
The _________ price is the price at which a dealer is willing to purchase a security.
8%
The arithmetic average of -11%, 15%, and 20% is ________.
institutional investors
The bulk of most initial public offerings (IPOs) of equity securities goes to ___________.
I, II, and III
The cost of buying and selling a stock includes: I. Broker's commissions II. Dealer's bid-asked spread III. Price concessions that investors may be forced to make
rate of return in excess of the Treasury-bill rate
The excess return is the _________.
the weighted sum of the securities' expected returns
The expected rate of return of a portfolio of risky securities is _________.
9.7% (.88*1.2*1.25)^1/3 1.0969-1 .0969 or 9.7%
The geometric average of -12%, 20%, and 25% is _________.
Purchase = 100 * 25 = $2500 ; 0.25*2500 = $625 Loss = (25-22)*100 = 300 % loss = 300/625 = 48 %
The margin requirement on a stock purchase is 25%. You fully use the margin allowed to purchase 100 shares of MSFT at $25. If the price drops to $22, what is your percentage loss?
Treasury Bills (T-Bills)
The most marketable money market security is _____.
federal funds rate
The rate of interest on short-term loans among financial institutions is _____.
Treasury bills; risky assets
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.
the slope of the capital allocation line
The reward-to-volatility ratio is given by _________.
The firm and its real assets
The success of common stock investments depends on the success of _________.
depends on the value of another related security
The value of a derivative security _________.
39 (12+75+30)/3
Three stocks have share prices of $12, $75, and $30 with total market values of $400 million, $350 million, and $150 million, respectively. If you were to construct a price-weighted index of the three stocks, what would be the index value?
the federal government
Treasury bills are financial instruments issued by __________ to raise funds.
21.28 3=(r-4%)/(24%^2)
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 ______.
12b-1 charges
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 ____________.
Investment Bankers
Underwriting is one of the services provided by _____.
increase, as the spread usually increases in response to a crisis
What would you expect to have happened to the spread between yields on commercial paper and Treasury bills immediately after September 11, 2001?
highest outstanding bid price and lowest outstanding ask price
When matching orders from the public, a specialist is required to use the _______.
I, II, and III
Which of the following are financial assets? I. Debt securities II. Equity securities III. Derivative securities
I, II, and III
Which of the following is (are) true about dark pools? I. They allow anonymity in trading. II. They often involve large blocks of stocks. III. Trades made through them might not be reported.
They offer investors a guaranteed rate of return.
Which of the following is a false statement regarding open-end mutual funds?
All of the above are correct
Which of the following is an example of an agency problem? Managers engage in empire building. Managers protect their jobs by avoiding risky projects. Managers over consume luxuries such as corporate jets.
repurchase agreement
Which of the following is most like a short-term collateralized loan?
maturity greater than 1 year
Which of the following is not a characteristic of a money market instrument?
Preferred Stock
Which of the following is not a money market instrument?
I, II, and III
Which of the following result in a taxable event for investors? I. Short-term capital gain distributions from the fund II. Dividend distributions from the fund III. Long-term capital gain distributions from the fund
Specialists cannot trade their own accounts
Which one of the following is a false statement regarding NYSE specialists?
It is a price-weighted average of 30 large industrial stocks.
Which one of the following is a true statement regarding the Dow Jones Industrial Average?
front-end load; 12b-1 fee
You are considering investing in one of several mutual funds. All the funds under consideration have various combinations of front-end and back-end loads and/or 12b-1 fees. The longer you plan on remaining in the fund you choose, the more likely you will prefer a fund with a __________ rather than a __________, everything else equal.
6,000 11%=15%R+5%-5%R R=6%/10% =60.00% 10000 x 60%= 6,000
You invest $10,000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 15% and a standard deviation of 21% and a Treasury bill with a rate of return of 5%. How much money should be invested in the risky asset to form a portfolio with an expected return of 11%?
stop loss order
You purchased XYZ stock at $50 per share. The stock is currently selling at $65. Your gains could be protected by placing a _________.
more than 12% but less than 18% [(.5x.24)^2 + (.5x.12)^2 + 2x(.5)(.5)(.24)(.12)(.55)]^(1/2) (.02592)^ 1/2
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 ________________.
11% (3.5/50)=.07 .07+.04=.11 11%
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 ____.
62.50
You short-sell 200 shares of Rock Creek Fly Fishing Co., now selling for $50 per share. If you want to limit your loss to $2,500, you should place a stop-buy order at ____.
unlimited
You short-sell 200 shares of Tuckerton Trading Co., now selling for $50 per share. What is your maximum possible loss?
9.2%
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?
5.14%
Your investment has a 40% chance of earning a 15% rate of return, a 50% chance of earning a 10% rate of return, and a 10% chance of losing 3%. What is the standard deviation of this investment?
a share of common stock
____ is not a derivative security.
Real, Financial
__________ assets generate net income to the economy, and __________ assets define allocation of income among investors.
open-end
__________ funds stand ready to redeem or issue shares at their net asset value.
Bottom-Up
__________ portfolio construction starts with selecting attractively priced securities.
Passive
__________ portfolio management calls for holding diversified portfolios without spending effort or resources attempting to improve investment performance through security analysis.
Common Stock
__________ represents an ownership share in a corporation.