Module 1 - FP513, Module 2 - FP513, Module 3 FP513 - Equity Investments & Managed Assets , Module 4 - Bond & Stock Valuation Concepts, Module 5 - FP513 | Alternative Investments & Derivatives, Module 6 - FP513, Module 7 - FP513, Module 8 - FP513, Mod…

Kinzie owns a stock that consistently pays a $.50 dividend. Assuming Kinzie's required rate of return is 9.5%, calculate the intrinsic value of the stock. A) $5.26 B) $5.76 C) $4.75 D) $10.00

A) $5.26 Using the no-growth (perpetuity) dividend discount model: V = D1 ÷ r = 0.50 ÷ 0.095 = 5.2632, or $5.26

Alice Vinton began purchasing a mutual fund several years ago. She has followed a dollar-cost averaging approach by investing $2,400 each year for five years. The following data depict Alice's purchases: Year | Investment | Share Price 1 | $2,400 | $65 2 | $2,400 | $70 3 | $2,400 | $75 4 | $2,400 | $66 5 | $2,400 | $77 What is Alice's average cost per share? A) $70.28 B) $70.60 C) $96.58 D) $36.92

A) $70.28 Year | Investment | Share Price | Shares 1 | $2,400 $65 = 36.92 2 | 2,400 ÷ $70 = 34.29 3 | 2,400 ÷ $75 = 32.00 4 | 2,400 ÷ $66 = 36.36 5 | 2,400 ÷ $77 = 31.17 $12,000 170.74 $12,000 ÷ 170.74 = $70.28

Ellen purchased a BB rated convertible bond of TCD Corporation that has a 10% coupon and matures in nine years. Comparable debt (BB rated, nine years to maturity) yields 12%. The bonds are convertible at $32 per share of common stock, and the current market price of TCD common stock is $25. What is the conversion value of this bond? A) $781.25 B) $893.50 C) $800.00 D) $916.25

A) $781.25 The conversion value = conversion ratio × market price of common stock. Therefore, the conversion value equals ($1,000 ÷ $32) × $25 = $781.25.

A wash sale is deemed to have occurred within which of the following time frames? A) 61 days B) 30 days C) 31 days D) 60 days

A) 61 days 30 days before + date of sale + 30 days after = 61 total days.

Choose the agency issue which historically did NOT have an indirect backing and guarantee of the U.S. government. A) Government National Mortgage Association B) Federal Home Loan Mortgage Corporation C) Student Loan Marketing Association D) Federal National Mortgage Association

A) Government National Mortgage Association Historically, only GNMA had a direct backing and guarantee from the U.S. government.

Identify which of these statements concerning technical analysis is CORRECT. I. Technical analysis is focused on the process by which stock prices rapidly adjust to new information. II. Technical analysis is based on the underlying fundamentals of a stock's value. III. The focus of technical analysis is market timing with an emphasis on price changes. IV. Technicians concentrate on past stock price movements to forecast future stock price movements. A) III and IV B) I and II C) II only D) I, III, and IV

A) III and IV Statements I and II are incorrect. Fundamental analysis is based on the underlying fundamentals of a stock's value. Technicians concentrate on the short run, looking for short-term price movements. The focus of technical analysis is the gradual process whereby stock prices adjust to new information. Technical analysis involves analyzing past stock prices to forecast future prices.

All of the following statements concerning bond yield measurements are CORRECT except A) if the current yield is less than the yield to maturity (YTM), the bond is selling at par. B) if the current yield is 7% and the coupon rate is 6%, the bond is selling at a discount. C) if the bond is selling at a discount, the market price is less than the par value. D) if the bond is selling at a premium, the coupon rate is greater than the YTM.

A) if the current yield is less than the yield to maturity (YTM), the bond is selling at par. A bond is selling at par when the current yield equals the YTM.

A wash sale for tax purposes occurs when a person sells a security and repurchases it within ___ days before or after the sale. A) 61 B) 30 C) 60 D) 90

B) 30 A wash sale occurs if the taxpayer sells or exchanges stock or securities for a loss and, within 30 days before or after the date of the sale or exchange, acquires similar securities. If this event occurs, the basis of the new stock or securities will include the unrecovered portion of the basis of the formerly held stock or securities.

Your client, Jackson, is considering adding XYZ Mutual Fund to his portfolio. The fund has a correlation coefficient of 0.55 with the S&P 500, and he wants to know how much systematic risk the fund has when compared to this benchmark. You would advise him that the percentage of systematic risk is A) 70% B) 30% C) 55% D) 45%

B) 30% You have been provided with the correlation coefficient (R) and what you need is the coefficient of determination (R2). Keystrokes are 0.55, DOWNSHIFT, "+" key = 0.3025. This means that 30% of the price movement of the fund is explained by the S&P 500, and the other 70% is not. Stated another way, there is 30% systematic risk, and 70% unsystematic risk.

The Gemini Fund has a correlation coefficient of 0.80 with the S&P 500 Index. How much of the price movement of the Gemini Fund can be explained by the S&P 500 Index? A) 75% B) 64% C) 100% D) 80%

B) 64% The correlation coefficient (R) has been given, so it needs to be squared (R2) in order to come up with the coefficient of determination (0.802 = 0.64).

The top 10 shareholders of publicly held Emax, Inc., are selling 10 million shares they personally own through a public offering. The investment banker will offer these shares as part of which of the following offerings? A) A third-market offering B) A secondary offering C) An initial public offering D) A green shoes offering

B) A secondary offering If a company has already issued shares but wants to raise additional capital through the sale of more stock, it does so by what is called a secondary or seasoned offering.

Which type of hedge should a wheat farmer select? A) A long hedge—buy wheat futures contracts as a hedge against a decline in the price of wheat. B) A short hedge—sell wheat futures contracts as a hedge against a decline in the price of wheat. C) A long hedge—buy wheat futures contracts as a hedge against an increase in the price of wheat. D) A short hedge—sell wheat futures contracts as a hedge against an increase in the price of wheat.

B) A short hedge—sell wheat futures contracts as a hedge against a decline in the price of wheat. Because the wheat farmer is long wheat, he would be interested in a short hedge to protect against a decline in the price of wheat.

Lou owns a stock that consistently pays a $1.50 dividend. If his required rate of return is 8.5%, what is the intrinsic value of the stock? A) $16.39 B) $17.65 C) $12.75 D) $13.73

B) $17.65 Using the no-growth (perpetuity) dividend discount model: V = D1 ÷ r = 1.50 ÷ 0.085 = $17.65

Keegan is an analyst for Global Growth and Income Mutual Fund. For the past five years, the fund has returned -20%, 17%, 5%, 15%, and -7%, respectively. Calculate the geometric mean of these returns. A) 5.1105% B) 1.0018% C) 2.0000% D) 1.0221%

B) 1.0018% The geometric mean return is calculated using the following TVM inputs: PV = -1 FV = (1 - 0.20)(1 + 0.17)(1 + 0.05)(1 + 0.15)(1 - 0.07) = 1.0511 N = 5 Solve for I/YR = 1.0018, or 1.0018%

A stock that you are researching has an expected return of 22%, a beta of 1.2, a correlation coefficient of 0.65 with the Russell 2000, an R2 of 0.38 with the S&P 500, and a standard deviation of 28%. Which one of these is the stock's coefficient of variation? A) 33.85 B) 1.27 C) 0.38 D) 18.33

B) 1.27 CV = standard deviation of asset ÷ expected return of asset, 28% ÷ 22% = 1.27.

Select the entity that issues guaranteed investment contracts (GICs). A) Commercial banks B) Insurance companies C) Credit unions D) Open-end investment companies

B) Insurance companies GICs are issued by insurance companies. They are called guaranteed investment contracts because their rate of return is guaranteed by the insurance company for a fixed period. They are not guaranteed by the FDIC.

Immunization offsets which two risks in a bond portfolio? A) Interest rate risk and default risk B) Interest rate risk and reinvestment rate risk C) Reinvestment rate risk and call risk D) Liquidity risk and market risk

B) Interest rate risk and reinvestment rate risk Immunization offsets interest rate risk and reinvestment rate risk.

A fund that invests in both U.S. stocks and international stocks is called A) a balanced fund. B) a global fund. C) an international fund. D) an asset allocation fund.

B) a global fund. A global fund invests in U.S. stocks and in international stocks.

When using a security market index to represent a market's performance, the performance of that market over time is best represented by A) the change in the standard deviation of the index. B) the percent change in the index value. C) the change in the index value. D) the index value.

B) the percent change in the index value. Percentage changes in the value of a security market index over time represent the performance of the market, segment, or asset class from which the securities are chosen.

The market designed to facilitate the initial sale of securities to the public is referred to as the A) secondary market. B) primary market. C) third market. D) fourth market.

B) primary market. The purpose of the primary market is to facilitate the sale of initial public offerings (IPOs) of securities to the public.

Yield curves are constructed from daily information published on U.S. Treasury bond A) current yields. B) yields-to-maturity. C) yields-to-call. D) coupon payments.

B) yields-to-maturity. Yields-to-maturity represent a bond's promised yield if held to maturity.

Choose the best measure of risk for an asset held in a well-diversified portfolio. A) Covariance B) Beta C) Semivariance D) Correlation coefficient

B) Beta Beta is the best measure of risk for an asset held in a well-diversified portfolio.

Jack is interested in purchasing LFM stock. LFM has an estimated free cash flow to equity (FCFE) for the next year of $2.75 per share, which is expected to grow at a constant rate of 3.5% per year. Jack's required rate of return is 12%. Using the FCFE valuation model, calculate the intrinsic value of LFM stock. A) $23.71 B) $33.48 C) $32.35 D) $81.32

C) $32.35 Using the model V = FCFE1 ÷ (r - g), the intrinsic value of the stock is $32.35 [$2.75 ÷ (0.12 - 0.035)].

An investor has purchased $500 of additional shares in a mutual fund each month for the past five months at the following prices: Month | Price Per Share | Investment Jan. | $35 | $500 Feb. | $37 | $500 Mar. | $ 38 | $500 Apr. | $ 32 | $500 May | $33 | $500 What is the average cost per share? A) $33.00 B) $31.25 C) $34.85 D) $35.00

C) $34.85 Month | Investment | Price Per Share | Shares Purchased Jan. | $500 | $35 = 14.2857 Feb. | $500 | $37 = 13.5135 Mar. | $ 500 | $38 = 13.1579 Apr. | $ 500 | $32 = 15.6250 May | $500 | $33 = 15.1515 = $2,500 / 71.7336 = $34.85

Mike expects a certain stock to significantly rise in value in the near future. He is expecting a bond to mature in two months and does not want to miss out on any appreciation on the stock while waiting for the funds to become available. Which of these option strategies should be recommended to Mike? A) Buy a put option B) Sell a call option C) Buy a call option D) Sell a put option

C) Buy a call option Mike can lock in the price of the stock by purchasing a call option with an expiration date exceeding two months.

Which of these statements are CORRECT of mutual fund dividend distributions? I. The fund pays dividends from net investment income. II. A single taxpayer may exclude $100 worth of dividend income from taxes annually. III. An investor is liable for taxes on distributions whether a dividend is a cash distribution or is reinvested in the fund. IV. An investor is not liable for taxes if he or she automatically reinvests distributions. A) I, II and III B) I and II C) I and III D) II and IV

C) I and III Mutual funds pay dividends from net investment income, and shareholders are liable for taxes on all distributions, whether reinvested or taken in cash.

Grace's portfolio is comprised of 40% U.S. corporate bond fund, 50% U.S. growth and income equity fund, and 10% municipal bond fund. Grace would like to reduce her portfolio's level of risk and maintain or improve return. Which of these could be recommended to Grace to achieve her goal? I. Global equity fund II. Biotechnology sector equity fund III. Louisiana municipal bond fund IV. Emerging market fund A) I only B) II, III, and IV C) I and IV D) III only

C) I and IV Adding foreign investments could reduce her portfolio's level of risk and possibly improve return. Foreign investments have a low correlation with U.S. securities and thus provide diversification benefits. Additional investment in U.S. equities or bonds will not provide as much diversification as international investing.

ABC Company common stock is currently trading at $75 per share. Joe owns a $1,000 par value bond convertible into ABC common stock with a conversion ratio of 15. What is the conversion value of Joe's bond? A. $875 B. $1,000 C. $1,125 D. $1,500

C. $1,125 The conversion value of Joe's bond is $1,125, or 15 × $75 per share. This is the minimum value for which the convertible bond will sell in the secondary market.

Jane's portfolio consists of two stocks, each comprising 50% of the portfolio. Stock 1 has an expected return of 4.5%, a standard deviation of 1.5%, and a beta of 0.65. Stock 2 has an expected return of 8%, a standard deviation of 3%, and a beta of 0.82. If the correlation coefficient between Stock 1 and Stock 2 is 0.75, what is the beta for Jane's portfolio? A. 0.01 B. 0.63 C. 0.74 D. 2.25

C. 0.74 The portfolio beta is a weighted average: (0.50 × 0.65) + (0.50 × 0.82) = 0.74.

Which of the following statements regarding certificates of deposit (CDs) is CORRECT? I. CDs are deposits made with a bank or savings and loan for a specified period, commonly one month to five years. II. Negotiable CDs are deposits of $100,000 or more placed with commercial banks at a specified interest rate for a term of up to one year. A) I only B) II only C) Neither I nor II D) Both I and II

D) Both I and II Both of these statements accurately describe CDs.

Identify which of these statements regarding rights and warrants is CORRECT. I. Rights provide current common stockholders with the ability to retain their ownership percentage when new shares of stock are issued. II. Warrants are typically attached to new bond issues to attract investors. A) II only B) I only C) Neither I nor II D) Both I and II

D) Both I and II Rights provide current stockholders with the ability to maintain their percentage ownership interest in the corporation when new stock is issued. Warrants give the bond purchasers a sweetener, making the issue more attractive to buyers.

Chuck owns a convertible bond that has a conversion price of $40 per share and a coupon of 5.5%. Interest is paid semiannually. The current market price of the stock is $41 per share. The investment value of the bond is $940, and the bond currently sells for a market price of $1,120. What is the downside risk of this bond? A) $95 B) $120 C) $85 D) $180

D) $180 The downside risk of a convertible bond is the dollar or percentage decline from the current market price of the convertible bond to the investment value of the bond: $1,120 - $940 = $180.

Tripp is an investor in the 32% marginal tax bracket. If he invests in a 4.75% municipal bond, his taxable equivalent yield (TEY) would be A) 3.23%. B) 6.27%. C) 4.75%. D) 6.99%.

D) 6.99%. taxable equivalent yield = tax-exempt yield ÷ (1 − marginal tax rate) = 4.75% ÷ (1 − 0.32) = 6.99%

Which of the following are considered bond classifications for multisector bond funds? I. Foreign bonds II. High-dividend-paying common stocks III. Commodities A) II and III B) I, II, and III C) I and II D) I only

D) I only Multisector bond funds typically purchase three types of bonds: U.S. government bonds, high-yield corporate bonds, and foreign bonds.

Equity income funds may hold which of these types of securities? I. Income-producing common stocks II. Convertible bonds III. Convertible preferred stocks A) I and II B) II and III C) I and III D) I, II, and III

D) I, II, and III All three types of securities may be in an equity income fund.

Which of the following regarding mutual fund performance is CORRECT? I. Past performance is a reliable predictor of future performance. II. Past performance offers some indication as to the competency of fund managers. A) Both I and II B) Neither I nor II C) I only D) II only

D) II only Numerous studies have confirmed that past performance is not a reliable predictor of future performance. Statement II is correct.

LFM Corporation declared a record date of Wednesday, May 16, for its next quarterly cash dividend. Determine the last day an investor can purchase LFM stock and receive the current dividend. A) Tuesday, May 15 B) Wednesday, May 16 C) Friday, May 11 D) Monday, May 14

D) Monday, May 14 To receive a cash dividend, an investor must be owner of record as of the close of business on the record date. The record date is the first business day after the ex-dividend date. To be listed as an owner, the investor must purchase the stock before the ex-dividend date, or May 15. Hence, the investor must purchase the stock no later than Monday, May 14, to be entitled to receive the dividend.

Select the term that measures how far the actual outcomes of a probability distribution deviate from the arithmetic mean. A) Kurtosis B) Lognormal C) Variability D) Skewness

D) Skewness Skewness measures how far the median return is from the mean return in decimal terms.

RNO Mutual Fund invests in domestic debt and equity securities. The fund's current bond holdings are valued at $63 million, and its equity holdings are valued at $85 million. RNO currently has 3 million outstanding shares; although it is not limited in the number of shares it may sell. Which of these statements is CORRECT? A) RNO shares are priced at $49.33 per share. B) RNO is a closed-end investment company. C) RNO shares are traded on the major exchanges. D) RNO is a money market mutual fund.

A) RNO shares are priced at $49.33 per share. Because RNO invests in both bonds and equities, it is not a money market mutual fund. RNO's shares are valued at NAV, calculated as follows: ($63 million + $85 million) ÷ 3 million shares = $49.33 per share. Mutual fund shares are sold and redeemed directly by the mutual fund company and do not trade on the major exchanges. RNO is an example of an open-end investment company.

Under the efficient market hypothesis, which of the following terms best describes the movement of stock prices? A) Random B) Statistical C) Diverse D) Predictable

A) Random Random walk is the term used to describe the pattern of movement of stock prices. Because only new information, which is unpredictable and random, will affect the price of a security, the pattern of price movements for a stock will be random.

A strategy where investors with relatively large amounts of money to invest purchase multiple certificates with varying terms to maturity is A) laddering. B) bulleting. C) staging. D) swapping.

A) laddering. As each CD matures, a CD is purchased with a maturity equal to the longest in the ladder. This strategy is used to manage interest rate risk.

Investors who want to bear the least amount of risk should acquire stocks with beta coefficients A) less than 0.5. B) greater than 1.5. C) greater than 1.0. D) less than 1.0.

A) less than 0.5. When seeking investments having the least amount of risk, the lowest beta should be selected.

The risk level of a typical guaranteed investment contract (GIC) with an insurance company is best described as A. conservative. B. aggressive. C. extremely risky. D. default-risk free.

A. conservative. A guaranteed investment contract (GIC) is regarded as a conservative investment; however, it is not free of default risk.

All of the following are examples of nondiversifiable risks except A. liquidity risk. B. market risk. C. interest rate risk. D. purchasing power risk.

A. liquidity risk. Liquidity risk is a type of unsystematic, or diversifiable, risk.

What is the taxable equivalent yield on a municipal bond with an 8.75% return for an investor in the 24% marginal tax bracket? A) 11.51% B) 6.65% C) 8.75% D) 2.10%

A) 11.51% The formula for solving this problem is 8.75% ÷ (1 - 0.24) = 8.75% ÷ 0.76 = 11.51%.

Kellie purchased a five-year bond with a coupon rate of 2.50% paid semiannually. The bond has a current market price of $985. Calculate the yield to maturity (YTM) for Kellie's bond. A) 2.8238% B) 2.8259% C) 2.5000% D) 2.8990%

A) 2.8238% The bond's YTM is calculated using the following TVM inputs in the financial calculator: PV = −$985 FV = $1,000 PMT = 2.50% × $1,000 = $25 / 2 = $12.50 N = 10 (5 x 2 periods per year) Solve for I/YR = 2.8238% The YTM for Kellie's bond is higher than its coupon rate because the bond is trading at a discount.

Rose purchased TRM stock for $40. A year later the stock paid a dividend of $4. At the end of the second year, Rose sold her TRM stock for $60 per share. What is the time-weighted return for TRM stock for the two-year period? A) 27.58% B) 20.81% C) 18.56% D) 23.26%

A) 27.58% Time-weighted return is calculated as follows: CF0 = (40) CF1 = 4 CF2 = 60 IRR/YR = 27.58%

The Mountain Fund has a standard deviation of 22, a mean return of 15%, and a correlation coefficient with the S&P 400 Mid-Cap Index of 0.85. Mountain Fund is subject to how much systematic risk? A) 72% B) 22% C) 85% D) 90%

A) 72% R-squared gives us the amount of systematic risk, and we have been given R (correlation coefficient). So, we square 0.85 to come up with an R-squared of 0.7225, or 72%.

When investment bankers absorb the loss on an initial public offering, which one of the following terms represents this type of offering? A) Firm commitment B) Secondary offering C) Green shoes D) Best efforts

A) Firm commitment Firm commitment underwriting occurs when investment bankers purchase all shares from a company and resell them to the public at their own risk.

Advantages of unit investment trusts include which of these? I. Stable periodic income II. Diversification III. Active management of the portfolio A) I and II B) I and III C) I, II, and III D) II and III

A) I and II Because the portfolio is fixed, the income stream is predictable. The number of different bonds in the portfolio provides investors with a diversified portfolio.

Which of the following statements concerning a knowledge of the risk/return relationship is CORRECT? I. Future risk/return relationships are not guaranteed to match past risk/return relationships. II. Chances are that past relative relationships will not continue into the future. III. A reduction in risk also means a reduction in the possible return on the investment. IV. The smaller the dispersion of returns, the greater the risk associated with a particular investment. A) I and III B) I only C) II and III D) II, III, and IV

A) I and III Chances are that past relative relationships will continue into the future. The smaller the dispersion of returns, the lower the risk associated with a particular investment.

Which one of these is a measure of a security's risk-adjusted return? A) Covariance B) Coefficient of variation C) Coefficient of determination D) Correlation coefficient

B) Coefficient of variation The coefficient of variation is one of several ways to compute a security's risk-adjusted return. The coefficient of determination measures how much of the movement of a security is attributable to a second security. The correlation coefficient measures the strength of the relationship between two securities. Covariance is used in the computation of a portfolio's standard deviation.

Distributions of dividend and capital gains in cash to mutual fund investors I. are fully taxable to the investor. II. are added to the tax basis of the shares once taxes on the distributions are paid. III. decrease the taxable gain or increase the loss on sale of the shares after taxes are paid. IV. decrease the cost basis of the shares whether or not taxes are paid. A) I, II, and III B) I only C) I and II D) IV only

B) I only If the dividends and capital gains are reinvested, the individual receives an increased tax basis. If the distributions are made in cash, there is no increase in the tax basis of the underlying securities.

Wendy is concerned that her investment's actual return will not equal its expected return. Point out the type of risk that she is concerned about regarding her investment. A) Purchasing power risk B) Investment risk C) Tax risk D) Business risk

B) Investment risk Investment risk is the uncertainty that an investment's actual, or realized, return will not equal its expected return.

Identify the incorrect statement regarding savings accounts. A) Accounts are established with a commercial bank or savings and loan B) They require a minimum balance of $500 C) Depositors are permitted to withdraw their savings at any time without penalty D) They offer a relatively low interest rate

B) They require a minimum balance of $500 Money market deposit accounts (MMDAs) would require a minimum balance.

When a company issues long-term debt securities instead of common stock, which one of these outcomes is the company most likely trying to achieve? A) To increase the company's financial risk B) To increase the company's return on equity C) To increase the company's fixed asset turnover rate D) To increase the company's taxable income

B) To increase the company's return on equity When debt, instead of equity capital, is issued by a company, its shareholder's equity portion of the balance sheet remains constant. If the additional capital raised increases net income, then return on equity will rise, and the company will see a positive effect from the issuance of debt. Leverage, properly employed, helps a company increase its return on equity.

Gold mining stocks are approximately how volatile in comparison to U.S. large-cap stocks? A) Cannot be determined B) Twice as volatile C) Equally volatile D) Half as volatile

B) Twice as volatile Gold mining stocks are roughly twice as volatile as large-cap U.S. stocks.

CAL stock has a current annual dividend of $1.25 that has been growing at a constant rate of 4.5% per year. Assuming the stock is currently selling for $40, and your required rate of return is 7.5%, should you buy the stock at today's price? A) No, because the stock is not a good investment on the basis of its variance. B) Yes, because the stock is undervalued. C) No, because the stock is overvalued. D) Yes, because the stock is a good buy on the basis of its risk-return relationship.

B) Yes, because the stock is undervalued. On the basis of the constant growth dividend discount model, the intrinsic value of CAL stock is $43.54, calculated as follows: V = [$1.25 × (1 + 0.045)] ÷ (0.075 - 0.045) V = $1.30625 ÷ 0.03 V = $43.54 Because CAL stock is currently selling for $40 per share, it is undervalued in the secondary market and worthy of a purchase.

In analyzing the position of a portfolio in terms of risk/return on the capital market line (CML), superior performance exists if the fund's position is ________ the CML, inferior performance exists if the fund's position is ________ the CML, and equilibrium position exists if it is ________ the CML. A) above; on; below B) above; below; on C) below; above; on D) below; on; above

B) above; below; on According to modern portfolio theory, the CML defines performance of a portfolio. All portfolios should plot on the CML in proportion to the risk of the portfolio. The Y axis is return and the X axis is the risk level. If a fund has superior performance, its return will be above the return level for the given risk level; if inferior, its return will be below the return level for the given risk level; and if it is in equilibrium, then it will plot exactly on the CML.

One implication of the efficient market hypothesis is that A) technical analysis, when combined with fundamental analysis, can lead to higher investment returns. B) although security markets are efficient, they are not necessarily equally efficient. C) nonfinancial markets are efficient. D) using public information can provide superior investment results.

B) although security markets are efficient, they are not necessarily equally efficient. Markets are efficient when many analysts follow a company, when information about a company is rapidly disseminated, and when no individual investor or analyst has information not readily available to any other investor or analyst. Some markets (e.g., foreign markets) may be less efficient, as may the markets for companies where few analysts follow a company, such as a small company that has few shares available for purchase by large institutional investors.

Your client has established a balanced portfolio with various amounts allocated to different asset classes, and periodically she rebalances the portfolio to keep the same approximate percentages in these asset classes. Her approach is A) tactical asset allocation. B) strategic asset allocation. C) dynamic asset allocation. D) core-satellite asset allocation

B) strategic asset allocation. Strategic asset allocation involves re-balancing back to the original allocation and adjusting the allocation based on changing client circumstances. Tactical asset allocation involves choosing various sectors that you believe will do best, and changing as you believe is necessary. Dynamic asset allocation changes the allocation amounts as the market changes, typically used by institutional investors. Core-satellite asset allocation is a combination of strategic and tactical.

A general risk component representing the variability of a stock's total return as it directly relates to overall movements in the general economy is known as A) business risk. B) systematic risk. C) reinvestment rate risk. D) financial risk.

B) systematic risk. Systematic risk, also referred to as market risk, is the variability in a stock's total return that is directly associated with overall movements in the general economy and cannot be eliminated through diversification.

All of the following correctly explain advantages of investing in real estate investment trusts (REITs) except A) diversification. B) tax deferral. C) liquidity. D) professional management.

B) tax deferral. Tax deferral is not an advantage of investing in REITs. REITs are professionally managed assets investing in a diversified portfolio of real estate holdings. Many REITs trade on the exchanges and over the counter, thereby providing investors with liquidity.

Anita bought ULA stock for $25,000 six years ago. Today, she sold the stock for $67,000. Calculate Anita's holding period return on ULA. A) 16.80% B) 168.00% C) 28.00% D) 8.40%

B) 168.00% Anita's holding period rate of return was 168% {[(67,000 - 25,000) ÷ 25,000] × 100

Which of the following types of orders does NOT restrict the price at which an order is executed? A. Limit B. Stop C. Market D. Stop limit

C. Market A market order does not reflect or restrict the price at which a security is executed. A limit order limits the amount to be paid or received for securities. A limit order becomes a market order if the stock reaches or goes through the stop price. A stop-limit order becomes a limit order if the stock hits or goes through the trigger price.

Which of the following is the best reason for an import company to use banker's acceptances? A. The company is seeking the use of a secured line of credit. B. The company is looking to raise long-term capital for a new product line. C. The company needs to finance international purchases. D. The company needs to provide collateral for a bond issue.

C. The company needs to finance international purchases. Banker's acceptances are similar to unsecured lines of credit and are not used as collateral for other loans or new product development.

Investors will typically choose a fund of funds (FOF) to A. avoid the double layer of management fees. B. focus solely on coinvestment opportunities. C. benefit from diversification across many private equity funds. D. exercise more control over individual portfolio companies.

C. benefit from diversification across many private equity funds. The diversification benefit of investing through FOFs (into multiple private equity funds) is one of the primary advantages of this investment program. The double layer of management fees and the loss of control over the individual portfolio companies are considered disadvantages. Coinvestments are just one of the activities managed by FOFs (along with primary and secondary investments).

All of the following are factors used in determining the price of a call option under the Black-Scholes option valuation model except A. time to expiration. B. risk-free rate. C. call money rate. D. exercise price.

C. call money rate. The call money rate is a rate of interest charged by broker-dealers on borrowed money and is not a factor used in determining the price of a call option under Black-Scholes.

Cosmo has a margin account with a balance of $50,000 with a national broker-dealer. The initial margin requirement on this account is 50%. Cosmo is interested in purchasing shares of Aardvark Inc., which is currently selling at $40 per share. Assuming the maintenance margin is 40%, what would the price of Aardvark be before Cosmo would receive a margin call? A) $16.00 B) $37.50 C) $33.33 D) $24.00

C) $33.33 Margin call = (50% × $40) ÷ (1 - 0.40) = $33.33.

Calculate the expected rate of return for a stock with a beta of 2.0 when the risk-free rate is 6% and the return on the market is 12%. A) 24% B) 10% C) 18% D) 12%

C) 18% Using the capital asset pricing model (CAPM), the expected rate of return is 18% [6% + (12% - 6%)2.0].

Myles purchased 1,000 shares of XYZ growth fund for $15 per share. At the end of the two years, he sold all of the shares for $22 per share. At the end of each year, the fund paid a dividend of $0.50 per share. Calculate the fund's time-weighted return over the two-year period. A) 18.07% B) 13.62% C) 24.15% D) 20.82%

C) 24.15% The fund produced a 24.15% time-weighted rate of return over the two-year period, calculated as follows: CF0 = -15 × 1,000 = −15,000 CF1 = 0.50 × 1,000 = 500 CF2 = (0.50 × 1,000) + (22 × 1,000) = 22,500 Solve for the internal rate of return (IRR/YR) = 24.1525% (rounded to 24.15%)

Tom owns a taxable investment that earns 8% interest annually. Tom pays taxes at a marginal rate of 24%. Calculate the after-tax rate of return that Tom will receive on this investment. A) 6.25% B) 6.30% C) 6.08% D) 2.24%

C) 6.08% The after-tax return is 8% × (1 − 0.24) = 6.08%.

Steve and Haley, ages 48 and 45 respectively, invest in large-cap stocks, international stock mutual funds, and rental real estate. They consider themselves moderately aggressive investors. Their investment portfolio is subject to which of these investment risks? I. Investment manager risk II. Financial risk III. Exchange rate risk IV. Default risk A) I only B) II and IV C) I, II, and III D) I, II, III, and IV

C) I, II, and III Their investment portfolio is subject to all of these risks except default risk. Investment manager risk is associated with the skills and philosophy of their mutual fund portfolio managers. Financial risk is the risk that a company's financial structure may negatively affect the value of an equity investment. By holding investments in international stock mutual funds, they are subject to exchange rate risk.

Candi purchases a 30-year zero-coupon corporate bond. The bond was issued by ABC Company, a Fortune 500 company. Her investment is subject to which of these risks? I. Default risk II. Reinvestment rate risk III. Purchasing power risk IV. Interest rate risk A) I, II, and III B) II and III C) I, III, and IV D) I, II, III, and IV

C) I, III, and IV Zero-coupon bonds are not subject to reinvestment rate risk. However, they are subject to purchasing power, interest rate, and default risk.

Which of these are nondiversifiable risks? I. Business risk II. Interest rate risk III. Market risk IV. Purchasing power risk A) I, II, III, and IV B) III only C) II, III, and IV D) I and II

C) II, III, and IV Business risk is a type of diversifiable, or unsystematic, risk.

Which of the following combinations will result in a bond with the greatest price volatility? A) High coupon and long maturity B) High coupon and short maturity C) Low coupon and long maturity D) Low coupon and short maturity

C) Low coupon and long maturity The answer is low coupon and long maturity. Price volatility is measured by duration. Duration is inversely related to the bond's coupon rate and directly related to the bond's term to maturity.

Which of the following best illustrates characteristics of mortgage and equity real estate investment trusts (REITs)? Mortgage REITs | Equity REITs A. Generates capital gains | Generates interest income B. Generates rental income | Generates capital gains C. Similar to a bond fund | Similar to a stock fund D. Also known as a FREIT | Also known as a hybrid REIT A) Option D B) Option A C) Option C D) Option B

C) Option C Equity REITs own property and receive all income from the property rentals, making them more like a stock fund; they also are more volatile than mortgage REITs, and they provide more capital gain opportunity then do mortgage REITs. Mortgage REITs own the mortgages used to finance real estate properties, making them more like a bond fund.

When an analyst divides the P/E ratio by the earnings growth rate, which one of these ratios is being used? A) P/B ratio B) P/S ratio C) PEG ratio D) P/E ratio

C) PEG ratio This identifies the P/E to Growth (PEG) ratio. P/B is price to book; P/E is price to earnings; P/S is price to sales; DDM is dividend discount model.

As a result of a market correction, your client's portfolio mix has changed substantially from the desired allocation. What portfolio management technique could be used to bring the allocation back to the desired mix? A) Replication B) Market timing C) Portfolio rebalancing D) Indexing

C) Portfolio rebalancing Rebalancing refers to adjusting the weights of securities in a portfolio to their target weights after price changes have affected the weights.

Expecting rising interest rates, an investor sells his BB rated, 3.5% coupon bonds with 20-year maturities and purchases A rated, 6% coupon bonds with maturities of four years. The investor has executed A) a pure yield pickup swap. B) an intermarket swap. C) a rate anticipation swap. D) a tax swap.

C) a rate anticipation swap. A rate anticipation swap seeks to take advantage or avoid the impact of expected changes in interest rates.

Diversification reduces A) market risk. B) unsystematic risk. C) purchasing power risk. D) systematic risk.

B) unsystematic risk. Unsystematic risk can be diversified away by investing in approximately 10-15 large company stocks in different industries and 25-30 small company stocks in different industries. Systematic risk cannot be reduced by diversification.

Joseph Brown follows a dollar cost averaging approach to purchase shares of XYZ Corporation. What is his average cost per share of XYZ? Year Investment Stock Price 1 800 $75 2 800 $78 3 800 $80 4 800 $70 5 800 $68 A. $70.50 B. $73.80 C. $75.00 D. $78.50

B. $73.80 To solve for the average cost per share, calculate the number of shares purchased each year. Then divide the total amount invested over the five years by the total number of shares purchased. $800 ÷ 75 = 10.7 $800 ÷ 78 = 10.3 $800 ÷ 80 = 10.0 $800 ÷ 70 = 11.4 $800 ÷ 68 = 11.8 $4,000 ÷ 54.2 = $73.80 average cost per share

The duration of a zero-coupon bond is A) less than the bond's maturity. B) greater than the bond's maturity. C) equal to the bond's maturity. D) equal to zero.

C) equal to the bond's maturity. The duration of a zero-coupon bond is equal to the bond's maturity.

DIV Corporation's current market value is $50 million, with 2 million shares outstanding. The board of directors votes to pay a stock dividend of 10%. Which of the following statements is correct? A) DIV Corporation's overall market value will be $55 million following the stock dividend. B) DIV Corporation's per-share stock price will be adjusted upward following the stock dividend. C) DIV Corporation will have 2 million shares outstanding following the stock dividend. D) DIV Corporation's per-share stock price will be $22.73 following the stock dividend.

D) DIV Corporation's per-share stock price will be $22.73 following the stock dividend. The answer is DIV Corporation's per-share stock price will be $22.73 following the stock dividend. DIV Corporation's overall market value will remain unchanged at $50 million, with 2.2 million shares outstanding. The stock price per share will be adjusted downward to $22.73 ($50,000,000 ÷ 2,200,000).

Which of the following are risks associated with tangible assets? I. Price fluctuations II. Higher front-end costs III. Loss from fraud and theft IV. Lack of liquidity and marketability A) III and IV B) I and IV C) I and II D) I, II, III, and IV

D) I, II, III, and IV All of these are potential risks from investing in nonfinancial assets.

Identify the CORRECT statements regarding a 2-for-1 stock split. I. The total market value of the outstanding stock decreases. II. The total number of shares outstanding doubles. III. The share price is reduced by one-half. IV. The shareholder will own a higher proportion of the company. A) II, III, and IV B) I and II C) I and III D) II and III

D) II and III In a 2-for-1 stock split, the number of outstanding shares is doubles and the share price is reduced by one-half. The total market value of the company's stock and the shareholder's interest remains the same.

JK Mutual Fund has a return of 15.5% and a beta of 1.1. If the market return is 14%, and the risk-free rate is 4%, what is the alpha for JK Mutual Fund? A) -0.50 B) +1.00 C) 0.00 D) +0.50

D) +0.50 The answer is +0.50. Calculate alpha: 15.5 - [4 + (14 - 4)1.1] = +0.50.

Janice, who is in the 35% marginal income tax bracket, would like to purchase a bond for her investment portfolio. Assuming all of the bonds are of similar investment quality, which would produce the highest after-tax yield? A) 2.25% U.S. Treasury note B) 5.25% corporate bond C) 2.75% U.S. Treasury bond D) 3.55% municipal bond

D) 3.55% municipal bond Janice should purchase the municipal bond based on the following after-tax yield calculations: U.S. Treasury bond [2.75% × (1 − 0.35)] 1.79% Corporate bond [5.25% × (1 − 0.35)] 3.41% Municipal bond (tax-free) 3.55% U.S Treasury note [2.25% × (1 − 0.35)] 1.46%

Select the INCORRECT statement regarding a company's book value. A) Different inventory accounting methods may yield a different value for company assets, thereby affecting the book value of the corporation. B) Book value is determined by subtracting company liabilities from company assets. C) Book value per share may be derived by dividing the stockholder's equity portion by the total number of common shares outstanding. D) Book value represents an accurate measure of the fair market value of the company.

D) Book value represents an accurate measure of the fair market value of the company. Generally, book value does not represent an accurate measure of the fair market value of the company because this value is determined using historical costs.

An investor should choose index funds if he or she believes in A) technical analysis. B) fundamental analysis. C) specialized investing. D) a passive investment strategy.

D) a passive investment strategy. Index funds are used in a passive investment strategy. The purpose of an indexed portfolio is not to beat the targeted index (e.g., S&P 500 Index) but merely to match its long-term performance, less any management fees and administrative costs.

An investor fearing a bear market would hedge his or her position by A) buying a call. B) writing a put. C) selling a put. D) buying a put.

D) buying a put. Buying a put is bearish. All the other choices are bullish.

All of the following statements correctly illustrate convexity and duration relationships except A) convexity has an inverse relationship with the coupon rate. B) duration has an inverse relationship with the yield to maturity. C) duration has an inverse relationship with the coupon rate. D) convexity has a direct relationship with the yield to maturity.

D) convexity has a direct relationship with the yield to maturity. Convexity has an inverse relationship with yield to maturity. Convexity relationships are the same as those for duration.

Advantages of investing in exchange-traded funds (ETFs) include all of the following except A) tax efficiency. B) ability to sell short. C) low expense ratios. D) daily pricing.

D) daily pricing. ETFs are continually priced during a trading day, just like stocks.

Which of these valuation methods is the most appropriate to use when analyzing a stock? A) Non-constant dividend growth model B) Dividend discount model C) P/E ratio D) Multiple methods

D) Multiple methods No single equity valuation method should be used alone—an analyst should use various valuation methods and compare the results of each.

An investor pays a premium for a convertible bond because A) the investor is buying a straight bond and selling a put option. B) the investor is buying a straight bond and buying a put option. C) the investor is buying a straight bond and selling a call option. D) the investor is buying a straight bond and buying a call option.

D) the investor is buying a straight bond and buying a call option. The investor is long the straight bond (bought) and long the call option (bought).

On December 17 of last year Henry sells XYZ stock for a loss at $25 a share that he originally purchased for $42 per share. On January 4 of this year he repurchases the shares for $26 per share. What is his cost basis on the repurchased shares? A. $1 B. $16 C. $25 D. $43

D. $43 This is a wash sale because the shares were repurchased within 30 days of their sale. The loss is then disallowed for tax purposes, and the disallowed loss is added to the repurchase price to determine the new cost basis ($42 - $25 = $17 disallowed loss, so $17 + $26 = $43 new cost basis).

Robert wishes to short ABC stock. He places a market order to sell short 100 shares of ABC stock, and the order is filled at a price of $45 per share. If Robert later buys 100 shares of ABC stock at $40 per share, what is his gross profit, if any? A. $0 B. $350 C. $450 D. $500

D. $500 Robert will make $500 on the shares of ABC stock that he sells short, calculated as follows: $45 proceeds - $40 cost = $5 gain × 100 shares = $500.

A large-cap mutual fund has an average annual return of 11%, a beta of 1.05, and a standard deviation of 16%. What is the coefficient of variation (CV) of this fund? A. 0.12 B. 0.15 C. 0.69 D. 1.45

D. 1.45 The CV is the standard deviation divided by the average annual return. Therefore, 16 ÷ 11 = 1.45.

An individual who is a proponent of the efficient market hypothesis (EMH) will likely invest in which of the following? A. Growth mutual funds B. Sector mutual funds C. Balanced mutual funds D. Index funds

D. Index funds An individual who believes in the EMH will likely invest in index funds. Inherent in this strategy is a belief that an investor cannot outperform the market with active portfolio management techniques. The remaining choices all incorporate an active portfolio management philosophy

Which of the following forms of the efficient market hypothesis (EMH) supports technical analysis? A. Weak B. Semistrong C. Strong D. None of these

D. None of these The EMH is in direct contradiction to technical analysis because the hypothesis is founded on the belief that all historical price and volume data (which are used by technical analysts) is already accounted for in the current stock price.

All of the following are examples of assets unique to a business except A. accounts receivable. B. inventory. C. machinery and equipment. D. notes payable.

D. notes payable. Notes payable are an example of a business liability

All of the following are attributes of an economy that is coming out of recession except A. interest rates are rising. B. cyclical stocks are beginning to increase in price. C. personal incomes are increasing. D. unemployment is increasing.

D. unemployment is increasing. When an economy is coming out of a recession, hiring would be increasing and unemployment claims would be decreasing. All of the other choices are attributes of a recovering economy.

The current yield of an 8% coupon bond, maturing in five years, and selling currently for $850 is A) 9.41%. B) 8.56%. C) 6.73%. D) 10.14%

A) 9.41%. The answer is 9.41%. Current yield = annual interest payment ÷ current market price = $80 ÷ $850 = 0.09412, or 9.41%.

Which of these statements regarding Eurodollar CDs is CORRECT? I. Eurodollar CDs are obligations of non-U.S. banks. II. Eurodollar CDs are more liquid than domestic CDs. III. Eurodollar CDs offer a slightly higher yield than domestic CDs. IV. Eurodollar CDs are only used to settle transactions in the U.S. A) I and III B) II and IV C) I only D) I, II, and III

A) I and III Eurodollar CDs are less liquid than domestic CDs and are used to settle international transactions.

An active approach to portfolio management is more likely to reward investors in which of the following asset classes? I. Emerging market equities II. U.S. large-cap stocks III. U.S. small-cap stocks IV. European large-cap stocks A) I and III B) I and II C) I only D) I, III, and IV

A) I and III Investors who follow an active approach to portfolio management will benefit most from a portfolio containing emerging market equities and U.S. small-cap stocks, which tend to be more volatile investments.

Select the CORRECT statements concerning the analysis of portfolio risk. I. Investors estimate the risk of a portfolio on the basis of the variability of returns. II. Markowitz used risk and expected return as the basis for determining efficient combinations of assets. III. For a given level of risk, investors prefer lower returns to higher returns. IV. Investors base decisions solely on expected return and risk. A) I, II, and IV B) II, III, and IV C) I only D) II and III

A) I, II, and IV Only statement III is incorrect. For a given level of risk, investors prefer higher returns to lower returns.

The intrinsic value of a preferred stock with an 8% dividend ($100 par stock) and a market interest rate of 7.5% is A) $107.50. B) $106.67. C) $100.00. D) $108.00.

B) $106.67. The preferred stock is a perpetuity and priced by the equation: P = D ÷ r = $8.00 ÷ 0.075 = $106.67.

Which of the following occurs when a 10% stock dividend is paid? A) The firm's retained earnings decrease. B) The stock's price is increased. C) The stock's par value is decreased. D) The firm's equity is increased.

A) The firm's retained earnings decrease. The firm's equity and par value are unchanged. The stock price will drop by the amount of the dividend.

Which of the following is considered to be both liquid and marketable? A) U.S. Treasury bills B) Antique jewelry C) Passbook savings accounts D) Blue-chip stocks

A) U.S. Treasury bills Passbook savings accounts are liquid but not marketable. Neither blue-chip stocks nor antique jewelry is assured of being both liquid and marketable.

Which of the following is the risk that disappears in the portfolio construction process? A) Unsystematic risk B) Systematic risk C) Interest rate risk D) Purchasing power risk

A) Unsystematic risk Unsystematic risk (diversifiable risk) is the risk that is eliminated when the investor builds a well-diversified portfolio.

A well-crafted investment policy statement will take all of the following into account except A) hobbies the client intends to pursue in retirement. B) the client's time horizon. C) investments the client is especially interested in considering for her portfolio. D) anticipated liquidity needs.

A) hobbies the client intends to pursue in retirement. A properly crafted IPS will keep both the client and the advisor on track, and minimize any disagreements or confusion.

An investor who creates a long straddle most likely expects the underlying security to A) increase in volatility. B) decrease in volatility. C) increase in price. D) remain near its current price.

A) increase in volatility. Long straddle profits if the volatility of the underlying security increases more than is reflected in current option prices, which would increase the value of both the call option and the put option. Either a significant increase or a significant decrease in the underlying price would benefit the holder of a long straddle. If the investor was expecting only an increase in price, long call would be a better choice of investment (as the premium paid on the long put would be a waste).

All of the following correctly identify advantages of U.S. Treasury bills except A) interest income is not subject to federal income tax. B) they are not subject to default risk. C) investors can tailor purchases to meet short-term goals and obligations. D) investors are provided a high degree of safety.

A) interest income is not subject to federal income tax. Interest income from U.S. Treasury bills is taxed at ordinary federal income tax rates but is not subject to state income tax.

The risk associated with volatility in the price of securities due to shifts in the yield curve is A) interest rate risk B) financial risk C) unsystematic risk D) liquidity risk

A) interest rate risk When a yield curve shifts, that means that interest rates have changed. When interest rates change, bond prices change. If rates rise, bond prices fall; if rates fall, bond prices rise.

The minimum price at which an option will trade on an exchange is identified as the A) intrinsic value. B) future value. C) premium. D) exercise price.

A) intrinsic value. The minimum price at which an option will trade on an exchange is known as the intrinsic value.

What is the downside risk of a 6% coupon convertible bond currently trading at $1,040 with a maturity of 12 years and a conversion value of $950? The current interest rate on comparable debt is 7.5%. A) $50 B) $157 C) $40 D) $90

B) $157 The downside risk of a convertible bond is the difference between the market price and its investment value. To determine the investment value, calculate what the bond would be worth based just on interest rates. Use a financial calculator with the following inputs: $1,000 = FV $1000 x 6% = $60/2 = $30 = PMT N = 24 (12 x 2 periods per year) 7.5% = I/YR Solve for PV = $882.66. The current market price of the bond is $1,040, so $1,040 - $882.66 = $157.33. The conversion value, which is higher ($950), is not relevant in determining downside risk. NOTE: there are several examples on bond calculations in the blue boxes in Module 2; however, it may be beneficial to skip ahead to Module 7 for some additional practice.

What is the duration of a zero-coupon bond yielding 9%, maturing in 10 years, and selling for $422.41? A) 9 years B) 10 years C) 8 years D) 7 years

B) 10 years Because the bond is a zero-coupon bond, the duration must be 10 years.

ABC Corporation has issued a 30-year callable bond with a 5.75% coupon at par. The current market price of the bond is $989.50. Calculate the current yield of this bond. A) 5.75% B) 5.81% C) 5.69% D) 2.91%

B) 5.81% The current yield is calculated as follows: $57.50 ÷ $989.50 = 0.05811, or 5.81%.

Which of the following is a risk involved in an investment in undeveloped land? A) Access to the investor's land may be restricted by adjacent landowners. B) All of these. C) The investor may not be able to obtain permits to build on the land. D) The land may be adversely rezoned.

B) All of these. An investment in undeveloped land may be subject to all of these risks.

Which of these combinations of events is likely to cause the largest loss on a transaction for a German investor who invests in a Japanese stock? Gain/Loss on Japanese Stock | Gain/Loss on Euro vs. Yen A. 5% gain | 10% devaluation of euro vs. yen B. 5% loss | 10% revaluation of euro vs. yen C. 5% gain | 10% revaluation of euro vs. yen D. 5% loss | 10% devaluation of euro vs. yen A) Option D B) Option B C) Option C D) Option A

B) Option B One of the options with the 5% loss on the stock is likely to provide the largest loss if there also is a loss on the currency translation. When a German investor buys a Japanese stock, he or she wants the euro to depreciate against the yen; therefore, a revaluation of the euro vs. the yen will cause a currency loss in addition to the stock loss, providing the greatest overall loss.

If interest rates are expected to decrease in the near future, which of the following combinations of strategies is recommended? A Buy bonds with shorter maturities Buy bonds with lower coupons B Buy bonds with higher coupons Buy bonds with longer maturities C Buy zero-coupon bonds Buy bonds with longer maturities A) Option A B) Option C C) None of these D) Option B

B) Option C When rates are expected to decline, low-coupon bonds with long maturities have the highest duration and can be expected to increase in price more than any other type of bond.

Which of the following statements regarding the efficient frontier is CORRECT? A) Combines all assets that can be held in a portfolio B) Shows all portfolios that offer the highest expected returns for each level of risk C) Represents an inferior set of assets or asset combinations available to investors D) Represents the assets or asset combinations with the least return for the given level of risk

B) Shows all portfolios that offer the highest expected returns for each level of risk Efficient frontiers take all of the possible combinations of assets that can be held in a portfolio into account in order to represent the set of portfolios that offer the highest expected return for a given amount of risk.

An investor who is interested in developing a portfolio of collectibles should probably do which one of these? A) Buy relatively inexpensive collectibles B) Specialize in a type of collectibles C) Avoid buying through knowledgeable dealers D) Diversify over a variety of types of collectibles

B) Specialize in a type of collectibles Specializing in a type of collectible would give an investor a better knowledge of that collectible and its market direction and worth.

Greg calls his broker and tells her to sell his XYZ stock if it falls to $20, but he does not want less than $19.50 for his shares. What type of order should his broker recommend to sell the stock? A) Good-till-canceled order B) Stop limit order C) Market order D) Limit order

B) Stop limit order The stop limit order turns into a limit order when triggered (both the stop order price and the limit order price are specified). However, this type of order will not guarantee execution if the stock leapfrogs below the $19.50 mark.

On January 1, one U.S. dollar could buy 105 Japanese yen; on December 31 in the same year, one U.S. dollar could buy 121 Japanese yen. Which one of these statements best illustrates what happened to the U.S. dollar during the year? A) The U.S. dollar was above parity. B) The U.S. dollar was revalued. C) The U.S. dollar was devalued. D) The U.S. dollar was hedged.

B) The U.S. dollar was revalued. A revaluation occurs to a U.S. investor when the U.S. dollar can buy more of a foreign currency today than it could buy last year. A devaluation occurs when the U.S. dollar can buy less of a foreign currency today than it could buy last year.

To have the right to the next dividend payment of a stock, an investor must purchase the stock A) after the record date but before the distribution date. B) at least two days before the record date. C) on the corporation's record date. D) within two business days after the ex-dividend date.

B) at least two days before the record date. In order to receive the next dividend, an investor must purchase the stock at least two days before the record date.

Brantley recently purchased a new video game system on his credit card. Assuming the nominal annual percentage rate (APR) is 14.95% (compounded daily), calculate the effective annual rate (EAR). A) 15.02% B) 14.95% C) 16.12% D) 13.26%

C) 16.12% The answer is 16.12%. The effective annual rate on his credit card is 16.12%, calculated as follows: EAR = [1 + (0.1495 ÷ 365)]365 - 1 = 0.1612, or 16.12%.

Jack has $50,000 to invest in a portfolio of bonds. He decides to invest $25,000 into bonds with a two-year maturity and $25,000 into bonds with a 10-year maturity. His portfolio illustrates what type of bond strategy? A) Bond swaps B) Bond ladders C) Bond barbells D) Bond bullets

C) Bond barbells Bond barbells is a strategy for investing in both short-term and long-term bond issues.

What kind of investment company has no provision for redemption of outstanding shares? A) Mutual fund B) Unit investment trust C) Closed-end company D) Open-end company

C) Closed-end company The closed-end company has a fixed capitalization and, like regular corporations, outstanding shares trade on the open market.

Which combination of the following statements is true regarding the investment strategy known as dollar cost averaging? I. Invests the same dollar amount each month over a period of time II. Purchases the same number of shares each month over a period of time III. Lowers average cost per share over a period of time (assuming share price fluctuations) IV. Invests the same dollar amount each month to protect the investment from loss of capital A) I, II, III, and IV B) II and III C) I and III D) I and II

C) I and III The purpose of using dollar cost averaging is to lower the average price paid for a stock as a consequence of taking advantage of price fluctuations, especially when the stock price moves downward in a temporary correction. The strategy may lower the average cost, but does not protect against losses, especially if the stock is on a strong downward trend instead of the more normal upward trend.

A client of yours, George, wants to maximize his return on an intermediate-term bond that he plans to hold until maturity. You have gathered information on these two bonds, both of which have a $1,000 par value: - Bond 1: A rated; coupon rate of 6%; matures in six years and pays interest semiannually; currently selling for $850; duration is 5.16 years. - Bond 2: A rated; coupon rate of 10%; matures in eight years and pays interest semiannually; currently selling for $1,100; duration is 7.15 years. Which of these bonds would you recommend to George and why? I. Bond 1 because it has a higher yield to maturity than Bond 2 II. Bond 2 because its higher coupon rate gives it a superior total return to Bond 1 III. Bond 2 because it has a higher duration than Bond 1 A) II and III B) II only C) I only D) III only

C) I only Bond 1's YTM (9.32%) is higher than Bond 2's YTM (8.26%) For both calculations use the following TVM inputs: Bond 1: PV = -$850 FV = $1,000 PMT = $30 (6% × $1,000 ÷ 2) N = 12 (6 x 2 periods per year) Solve for I/YR = 9.32% Bond 2: PV = -$1,100 FV = $1,000 PMT = $50 (10% × 1,000 ÷ 2) N = 16 (8 x 2 periods per year) Solve for I/YR = 8.26%.

Which of the following accurately describes the certificate of deposit investment strategy known as laddering? A) Purchasing certificates in progressively increasing deposit amounts B) Immediately purchasing another certificate as one certificate matures C) Purchasing multiple certificates, rather than just one, with differing terms of maturity D) Redeeming a certificate of deposit and reinvesting in a new certificate when interest rates increase

C) Purchasing multiple certificates, rather than just one, with differing terms of maturity Laddering is the procedure of purchasing multiple CDs with differing terms of maturity.

The duration of a bond is inversely related to its A) term to maturity. B) par value. C) coupon rate. D) rating by independent evaluation services.

C) coupon rate. Duration is directly related to term to maturity and inversely related to coupon rate and yield to maturity.

To be eligible for preferential dividend tax rates A) the stock must be held for more than 60 days during the 121-day period beginning 60 days AFTER the ex- dividend date. B) the stock must have paid dividends for four consecutive quarters. C) the stock must be held for more than 60 days during the 121-day period beginning 60 days BEFORE the ex-dividend date. D) the taxpayer must make an election to waive tax deferral on the dividend.

C) the stock must be held for more than 60 days during the 121-day period beginning 60 days BEFORE the ex-dividend date. Investors should take special note of the holding period requirement for a stock in order for the dividend to qualify for the preferential rates. The stock must be held for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date.

Larry invested $5,000 in the ABC mutual fund one year ago. The fund paid dividends of $100, $150, $50, and $100 at the end of each quarter, all of which were distributed to Larry. At the time of the last dividend payment, his fund had grown to $5,175. What was the dollar-weighted return for this investment? A. 2.85% B. 3.50% C. 11.38% D. 14.00%

C. 11.38% The dollar-weighted rate of return equals 11.38%, calculated as follows: CF0 = (5,000), CF1 = 100, CF2 = 150, CF3 = 50, and CF4 = 5,275 (5,175 + 100). Solve for IRR (DOWNSHIFT, IRR/YR) IRR/YR = 2.8455 × 4 = 11.3821, or 11.38%.

Susan is earning a before-tax (nominal) return of 10% on a recently purchased investment. Her combined federal and state marginal income tax rate is 37%. What is her after-tax rate of return on this investment? A. 2.7% B. 3.7% C. 6.3% D. 6.7%

C. 6.3% Susan's after-tax rate of return on the investment is 6.3%, calculated as follows: 0.10 × (1 - 0.37) = 0.10 × 0.63 = 0.063, or 6.3%.

An investor who is looking for the opportunity to buy an investment that generates consistent income with no portfolio turnover, no management fee, and low operating expenses would choose which of these? A) Guaranteed investment contract (GIC) B) Closed-end fund C) Open-end fund D) Unit investment trust

D) Unit investment trust Unit investment trusts are fixed portfolios of securities, most frequently in fixed income that an investor pays a load upfront to own, but have no turnover because it is a fixed portfolio of self-liquidating securities that have no management fee.

Which of the following forms of the efficient market hypothesis suggests that fundamental analysis and insider information may produce above-market returns? A) All of these B) Strong C) Semistrong D) Weak

D) Weak The weak form holds that current stock prices reflect all historical market data and that historical price trends are, therefore, of no value in predicting future prices. However, this form holds that credible fundamental analysis and insider information may produce above-market returns.

Which of the following correctly presents the relationships that exist between different yield measures? I. For a premium bond: coupon rate > current yield > yield to maturity II. For a par bond: coupon rate = current yield = yield to maturity III. For a discount bond: coupon rate < current yield < yield to maturity IV. For a premium bond: current yield < yield to maturity < coupon rate A. IV only B. I and II C. II and IV D. I, II, and III

D. I, II, and III Only Statement IV is incorrectly stated. Certain relationships exist between different yield measures depending on whether the bond is trading at par, at a discount, or at a premium.

Which of the following would be the best choice for a client to use in order to finance an unanticipated financial crisis? A. None of these B. Retirement plan loan C. Personal line of credit D. Money market account

D. Money market account Clients should establish an emergency fund, generally funded with highly liquid and marketable investments such as a money market account, to finance any unanticipated financial emergencies.

Which of these risks is diversifiable? A) Purchasing power risk B) Market risk C) Interest rate risk D) Default risk

D) Default risk Default risk is diversifiable (unsystematic) risk. The others are examples of systematic risk, or nondiversifiable risk.

Which of the following correctly describes the efficient frontier in portfolio theory? A) It identifies the optimal portfolio for the investor. B) It illustrates the optimal tradeoff between long- and short-term capital gains. C) It quantifies systematic and unsystematic risk. D) It indicates the highest returns for given levels of risk

D) It indicates the highest returns for given levels of risk The optimal portfolio is the point on the efficient frontier that intersects with the investor's indifference curve.

John sells a naked call option for a $3 premium. The call option has an exercise price of $20. Which of these statements is CORRECT? A) The call will likely not be exercised while the stock is trading at $23. B) John's loss is limited to $20. C) The option will not be exercised until the market price is $17. D) John's maximum gain is $3.

D) John's maximum gain is $3. John's maximum loss is unlimited. Because the call option was written as a naked call option, the seller (John) will have to buy the stock at the prevailing market price if the call option is exercised by the buyer. The buyer would exercise the call option when the stock price exceeds $20. Any price level over $20 begins to reduce the call option buyer's potential loss, and at $23 the seller and buyer break even.

Alice uses a stockbroker to borrow shares of stock from another investor's account and then sells the borrowed stock in the open market. She later repurchases the stock in the open market and replaces, or covers, the borrowed stock. Identify the type of transaction that she used in her account. A) Protective put B) Wash sale C) Zero-cost collar D) Short sale

D) Short sale A short sale allows an investor to take advantage of falling stock prices.

Darla, a U.S. citizen and resident of Georgia, owns a 5% coupon corporate bond, a 4% coupon State of Georgia municipal bond, and a 3% coupon U.S. Treasury note. Darla's marginal state income tax rate is 6% and federal tax rate is 24%. If Darla invested equal amounts in each of the three bonds, what is her after-tax rate of return on the portfolio? A) 3.26% B) 2.86% C) 4.00% D) 4.91%

A) 3.26% Because the corporate bond is taxable by the state and the federal government, its after-tax return is 3.5% [5% × (1 - 0.30)]. The State of Georgia municipal is not taxable by either government entity. The Treasury note is taxable by the federal government; therefore, its after-tax return is 2.28% [3% × (1 - 0.24)]. Averaging the three rates equals 3.26% [(3.5% + 4% + 2.28%) ÷ 3].

Harry has an investment that has produced the following returns: Year 1: 10%, Year 2: 5%, Year 3: -7%, Year 4: -3%, Year 5: 12%. Calculate the arithmetic mean return on this investment. A) 3.40% B) 6.75% C) 8.50% D) 17.00%

A) 3.40% The arithmetic mean is calculated by dividing the sum of the periodic returns by the total number of periods being evaluated. Therefore, Harry earned an average of 3.40% [(10% + 5% - 7% - 3% + 12%) ÷ 5] per year on his investment.

Eight years ago, ABC Company issued a 20-year bond with a 4% coupon rate. Due to a recent decline in market interest rates, the company decided to call the bonds for 103% of par value. Calculate the rate of return for an investor who purchased the bond at issue for par and surrendered it today for the call price. A) 4.32% B) 4.44% C) 4.00% D) 4.10%

A) 4.32% The yield to call on this issue is calculated using the following TVM inputs: PV = -$1000 FV = $1,030 PMT = 4% x 1000 ÷ 2 = $20 N = 16 (8 x 2 periods per year) Solve for I/YR = 4.32%

Nancy bought $4,000 worth of common stock two years ago. She received dividends of $30 each quarter for the first year and $35 each quarter for the second year. The stock currently is worth $4,100. The graph below summarizes inflows and outflows. What is the internal rate of return that the stock has earned? A) 4.45% B) 1.11% C) 0.99% D) 3.61%

A) 4.45% Below are the keystrokes for the HP 10BII+; refer to the Financial Calculator Workbook to figure inputs for the TI BAII+: HP 10bII+ (set for 4 P/YR) 4000,+/-, CFj 30, CFj, 4, SHIFT, Nj 35,CFj, 3, SHIFT, Nj 4100,+, 35, =, CFj SHIFT, IRR/YR

Assume the nominal return on 30-year U.S. T-bonds is 6.5%, and the inflation rate is 1.75%. Which of the following is the real rate of return on the T-bonds? A) 4.67% B) 8.36% C) 3.71% D) 4.75%

A) 4.67% The real rate of return is 4.67%, calculated as follows: {[(1 + 0.065) ÷ (1 + 0.0175)] -1} × 100 = 0.0467, or 4.67%

Jefferson originally purchased 100 shares of XYZ stock for $45 per share. The stock is currently trading at $60 per share. The stock paid dividends of $2 per share in year 1 and $2.30 per share in year 2 (all paid at year end). If Jefferson has held the stock for two years, what is his holding period return? A) 42.9% B) 19.0% C) 23.5% D) 22.0%

A) 42.9% This is calculated as: [($60 - $45) + $2 + $2.30] ÷ $45 = 42.9%.

XYZ Corporation issues a 20-year callable bond paying a 6% coupon (semiannual payments) selling at par ($1,000). XYZ Corporation has the option to call the bonds in five years for 105% of par value. Calculate the bond's nominal yield. A) 6.00% B) 6.86% C) 5.00% D) 4.86%

A) 6.00% The nominal yield (coupon rate) is 6%. The nominal yield is stated as a percentage of the par value of the bond.

If the market interest rate is 7.27%, the current yield of a bond with a 9% coupon, $1,000 par, selling for $1,120, and maturing in 10 years is A) 8.04%. B) 7.27%. C) 9.00%. D) 6.49%.

A) 8.04%. The current yield is the coupon payment divided by the market price of the bond: ($90 ÷ $1,120) x 100 = 8.04%.

A $1,000 U.S. Treasury note maturing in eight years is selling for $938.12. The semiannual coupon payment is $35. What is the yield to maturity (YTM) for the note? A) 8.06% B) 8.33% C) 4.03% D) 6.26%

A) 8.06% The note's YTM is computed using the following TVM inputs: PV = −$938.12 PMT = $35 FV = $1,000 N = 16 (8 x 2 periods per year) Solve for I/YR = 8.06%

Angela purchased a corporate bond currently selling for $925 in the secondary market. The bond has a coupon rate of 7.75% and matures in 12 years. Which of these is the yield to maturity on this bond? A) 8.77% B) 15.50% C) 8.49% D) 4.39%

A) 8.77% The yield to maturity on this bond is calculated using the following inputs: PV = -$925 PMT = 7.75% × 1,000 ÷ 2 = $38.75 FV = $1,000 N = 24 (12 x 2 periods per year) Solve for I/YR = 8.77%

Jill is in the 24% marginal tax bracket. She owns a $1,000 par value public purpose municipal bond that pays $35 interest semiannually. What pretax yield on corporate bonds would be comparable to the yield on Jill's current investment? A) 9.21% B) 6.28% C) 5.32% D) 8.96%

A) 9.21% pretax yield = after tax yield / (1 −marginal tax rate) $35 × 2 = $70 annual interest = 7.0% coupon rate taxable equivalent yield (TEY) = 7.0% ÷ (1 - .24) = 7.0% ÷ 0.76 = 9.21%

Which of these best describes a futures contract? A) A futures contract is an agreement between two parties to make or take delivery of a specified amount of a commodity or financial asset at a future time, place, and unit price. B) A futures contract is a derivative characterized by low risk and the potential for high return. C) A futures contract seeks to invest in an industry sector or index that is undervalued, but is expected to rise in value in the future. D) A futures contract is a self-liquidating, flow-through entity that invests exclusively in mortgage-backed securities.

A) A futures contract is an agreement between two parties to make or take delivery of a specified amount of a commodity or financial asset at a future time, place, and unit price. To complete the futures contract, delivery of the commodity or asset may be made, but more often, the buyer (or holder) simply purchases an offsetting contract and cancels the original position.

LTD Inc., a candy manufacturer, is considering the use of sugar futures contracts because sugar is a major ingredient in the manufacturing process. What type of hedge position should LTD take in the sugar futures market, and why? A) A long hedge; the company should purchase sugar futures contracts because it is hedging against higher sugar prices. B) A long hedge; the company should purchase sugar futures contracts because it is hedging against lower sugar prices. C) A short hedge; the company should sell sugar futures contracts because it is hedging against lower sugar prices. D) A short hedge; the company should sell sugar futures contracts because it is hedging against higher sugar prices.

A) A long hedge; the company should purchase sugar futures contracts because it is hedging against higher sugar prices. An investor or producer who enters into a short hedge sells a futures contract; one who enters into a long hedge purchases a futures contract. A grower owns crops in the field and enters into a short hedge to hedge against declining prices. A user of the commodity, like LTD, is concerned about rising prices and, therefore, enters into a long hedge to lock in the current price of the commodity.

Which of these is NOT correct when defining an accredited investor under Rule 501 of Regulation D? A) A natural person who has individual net worth, or joint net worth with the person's spouse, that exceeds $1 million at the time of the purchase, including the equity in a primary residence. B) A charitable organization, corporation, or partnership with assets exceeding $5 million C) A director, executive officer, or general partner of the company selling the securities D) A natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year

A) A natural person who has individual net worth, or joint net worth with the person's spouse, that exceeds $1 million at the time of the purchase, including the equity in a primary residence. The $1 million net worth requirement excludes the equity in the investor's primary residence.

Terri has been an active investor for many years, and her present portfolio consists of listed stocks, penny stocks, and options. She earns approximately $175,000 annually, has $35,000 in cash to invest, and is in the 32% marginal income tax bracket. Terri is interested in accumulating wealth for the future and does NOT need current income. Which one of these fixed-income securities best suits Terri's needs at this time? A) A rated, discount, long-term, tax-free, municipal revenue bond B) AAA ra

A) A rated, discount, long-term, tax-free, municipal revenue bond Because Terri is in a high income tax bracket, an investment-grade municipal bond would be the best choice. The long-term nature of this bond may afford Terri a higher net interest payment than the other bonds.

Which of these strategies is considered a protective strategy? A) Buying a put option on a stock already owned B) Buying stock index futures C) Purchasing a hedge fund D) Purchasing a call option on a stock already owned

A) Buying a put option on a stock already owned A protective strategy limits downside risk. The purchase of a put option on a stock that is already owned reduces downside risk. If the price of a stock declines, the value of the put option increases and protects an investor holding a long position in the underlying stock.

Which of these statements concerning portfolio diversification is CORRECT? A) By increasing the number of securities in a portfolio, the total risk would be expected to fall at a decreasing rate. B) Diversification reduces the portfolio's expected return because diversification reduces a portfolio's total risk. C) Only systematic risk is reduced as diversification is increased. D) The benefits of diversification are not realized until at least 25 individual securities are included in the portfolio

A) By increasing the number of securities in a portfolio, the total risk would be expected to fall at a decreasing rate. As more and more securities are added to a portfolio, diversification benefits begin to diminish. The main attraction of diversification is the reduction of risk without an accompanying loss of return.

All of the following statements correctly describe certificates of deposit (CDs) except A) CDs typically pay a variable interest rate. B) CDs are eligible for FDIC coverage. C) CDs are commonly referred to as time deposits. D) redemption prior to maturity typically results in an early withdrawal penalty.

A) CDs typically pay a variable interest rate. CDs typically pay a fixed interest rate, with higher interest rates offered for longer-term certificates.

Choose the statement regarding the correlation coefficient that is NOT correct. A) Combining assets with less than perfect positive correlation will not reduce the total risk of the portfolio. B) Perfectly negatively correlated assets have a correlation coefficient of -1.0. C) A correlation coefficient of 0.0 means there is no relationship between the returns of the assets. D) Perfectly positively correlated assets have a correlation coefficient of +1.0.

A) Combining assets with less than perfect positive correlation will not reduce the total risk of the portfolio. Combining assets with less than perfect positive correlation can reduce the total risk of the portfolio. The further the correlation coefficient between the two assets is away from +1.0, the greater the diversification benefits that may be attained.

During a period of increasing inflation, which one of the following investments might be appropriate? A) Common stock of energy firms B) Common stock of financial firms C) None of these D) Long-term bonds

A) Common stock of energy firms Rising inflation causes interest rates to rise, which causes financial firms' cost of sales to rise, thereby restricting these firms' profits and depressing their stock prices. Rising inflation helps companies that hold and/or sell real assets, such as commodities and real estate, thereby causing these companies' stock prices to rise. Long-term bond prices fall as interest rates rise, which they generally do during periods of rising inflation.

Which one of these factors has the greatest impact on the standard deviation of a two-asset portfolio? A) Covariance B) The weight of each security in the portfolio C) The portfolio's beta D) The standard deviation of each security in the portfolio

A) Covariance Covariance is the most important variable in minimizing the standard deviation of a portfolio. The weight and standard deviation are not as critical as the covariance of the two securities. Beta is not used in the formula to compute a portfolio's standard deviation.

Select the incorrect statement regarding foreign bonds. A) Eurodollar bonds must be registered with the Securities and Exchange Commission (SEC). B) Yankee bonds are not subject to exchange rate risk, but they are subject to default risk. C) Yankee bonds are sold in the United States by companies outside of the United States and provide all interest payments in U.S. dollars. D) Foreign bonds may provide an investor with portfolio diversification benefits

A) Eurodollar bonds must be registered with the Securities and Exchange Commission (SEC). Eurodollar bonds do not have to be registered with the SEC.

Which of the following is not a type of money market mutual fund? A) Federally insured money market mutual fund B) Taxable money market fund C) Tax-exempt money market fund - national D) Tax-exempt money market fund- state

A) Federally insured money market mutual fund All of the other funds are types of money market mutual funds.

Which of these choices correctly illustrates the relationship between a bond's price and various yields? A) For a discount bond: coupon rate < current yield < yield to maturity B) For a premium bond: coupon rate > yield to maturity > current yield C) For a discount bond: yield to maturity > coupon rate > current yield D) For a premium bond: current yield > yield to maturity > coupon rate

A) For a discount bond: coupon rate < current yield < yield to maturity When a bond trades at a discount, its yield to maturity will be greater than its current yield, which will be greater than its coupon rate.

If an investor is looking to purchase bonds that are free from default risk, which of these should be purchased? A) Government bonds B) Municipal bonds C) Corporate bonds D) Revenue bonds

A) Government bonds Unlike corporate, revenue, and municipal bonds, government bonds are free from default risk.

Which of the following would least likely be included as a constraint in an investment policy statement (IPS)? A) How funds are spent after being withdrawn from the portfolio B) The global issue of taxation C) Any unique needs or preferences an investor may have D) Constraints put on investment activities by regulatory agencies

A) How funds are spent after being withdrawn from the portfolio This would not be a constraint of an IPS.

Which of these statements concerning technical analysis is CORRECT? I. The focus of technical analysis is market timing with an emphasis on likely price changes. II. Technicians tend to concentrate on the past price movements to forecast future price movements. III. The focus of technical analysis is the process by which stock prices rapidly adjust to new information. IV. Technical analysis is based on the underlying fundamentals of a stock's value. A) I and II B) II and III C) III and IV D) I, II, and IV

A) I and II Technicians tend to concentrate on the short run, looking for short-term price movements. The focus of technical analysis is the gradual process whereby stock prices adjust to new information. Fundamental analysis is based on the underlying fundamentals of a stock's value. Technical analysis involves analyzing past stock prices to forecast future prices.

Which of the following statements correctly describe differences between corporate preferred stock and long-term bonds? I. Bonds represent a creditor position; preferred stock represents an equity position. II. Bonds pay a fixed amount of interest; preferred stock pays a fluctuating dividend based on earnings. III. Interest paid by firms is a tax-deductible expense; dividends paid on preferred stock are not tax deductible. IV. Bonds usually are not rated; preferred stock usually is rated. A) I and III B) I and IV C) II and III D) III and IV

A) I and III Option IV is not correct because almost all bonds, except some municipal and all U.S. government bonds, are rated.

Which of these statements pertaining to the various types of money market investments is CORRECT? I. Commercial paper offers higher yields than T-bills. II. Eurodollars are U.S. dollar-denominated deposits at banks outside of the United States. III. Banker's acceptances are short-term drafts drawn by a private company on a major bank to finance imports and exports. IV. T-bills are subject to default risk and a lack of marketability. A) I, II, and III B) II, III, and IV C) II and IV D) IV only

A) I, II, and III T-bills are not subject to default risk and exhibit a high degree of marketability. As a result, the 90-day T-bill is often used as a proxy for the risk-free investment.

According to the unbiased expectations theory of interest rates, A) the current long-term rate is the average of today's short-term rate and expected future short-term rates. B) investors require a higher yield on long-term bonds because they are riskier. C) yields are a function of the supply and demand of funds in each maturity segment of the market. D) an upward sloping yield curve indicates that investors require a yield premium to invest in long-term securities.

A) the current long-term rate is the average of today's short-term rate and expected future short-term rates. The other statements relate to the liquidity premium theory and the market segmentation theory. Under the unbiased expectations theory, an upward sloping yield curve indicates increasing inflation expectations.

The current risk-free rate of return is 4%, and the market risk premium is 5%. One stock under consideration for investment has a beta of 1.3. Calculate the expected rate of return for both the market portfolio and the individual stock. A) Market = 9.00%; Stock = 10.50% B) Market = 11.70%; Stock = 10.50% C) Market = 6.92%; Stock = 11.70% D) Market = 10.50%; Stock = 9.00%

A) Market = 9.00%; Stock = 10.50% The answer is Market = 9.00%; Stock = 10.50%. The expected rate of return for the market portfolio is 9%, calculated as follows: Using the capital asset pricing model (CAPM), rp = 4% + (5% × 1.0). The market has a beta of 1.0 and the market risk premium, rather than the market return, is given. The expected rate of return for the stock is 10.50%, calculated as follows: Using CAPM, ri = 4% + (5% × 1.3) = 10.50%.

All of the following are features of limited partnerships except A) the limited partners may participate in the management of the partnership. B) the general partner determines when distributions are made to the limited partners. C) the limited partners have limited liability. D) the general partner controls the business activities of the partnership.

A) the limited partners may participate in the management of the partnership. The disadvantages of limited partnerships include: (1) they are generally riskier than bonds or exchange-traded equities; (2) they are generally illiquid; (3) limited partners cannot participate in the management; and (4) the sale of partnership interest may be restricted. In addition, the general partner has unlimited liability.

All of the following statements regarding modern portfolio theory are correct except A) the optimal portfolio will always lie above the efficient frontier. B) the optimal portfolio has the lowest risk for a given level of return. C) the optimal portfolio offers the highest return for a given level of risk. D) the optimal portfolio for an investor depends upon the investor's ability to assume risk.

A) the optimal portfolio will always lie above the efficient frontier. The optimal portfolio will always lie on the investor's efficient frontier. This portfolio is found at the point of tangency of the investor's indifference curve and the efficient frontier.

Exchange rate risk refers to fluctuations in A) the price of one currency relative to other currencies. B) the value of an investor's portfolio. C) the prices of stocks on the New York Stock Exchange. D) the values of bonds and other debt instruments.

A) the price of one currency relative to other currencies. Relative currency prices and changes to them are the basis of exchange rate risk.

All of the following are primary factors in the arbitrage pricing theory (APT) except A) unemployment rate. B) interest rates. C) inflation rate. D) changes in GDP

A) unemployment rate. These factors might include inflation, growth in GDP, major political upheavals, or changes in interest rates.

The issuer-specific component of the variability in a stock's total return that is unrelated to overall market variability is known as A) unsystematic risk. B) nondiversifiable risk. C) systematic risk. D) fundamental risk

A) unsystematic risk. Unsystematic risk is unique to a single security, business, industry, or country and may be reduced by diversification.

Which of the following describes the flow of the top-down valuation process? A. Economic analysis, industry analysis, company analysis B. Company analysis, industry analysis, economic analysis C. Economic analysis, company analysis, industry analysis D. Picking the best stocks regardless of the industry or economic conditions

A. Economic analysis, industry analysis, company analysis Top-down analysis works from the macro to the micro level—economic analysis, industry analysis, company analysis.

A portfolio consisting of 30% bonds, 20% growth stocks, 40% blue-chip conservative stocks, and 10% cash is most representative of which type of investment objective? A. Growth and income B. Current income C. Aggressive growth D. Capital preservation

A. Growth and income A portfolio consisting of 30% bonds, 20% growth stocks, 40% blue-chip conservative stocks, and 10% cash is most representative of a growth and income investment objectiv

Which of the following statements regarding strategic and tactical asset allocation (TAA) is CORRECT? I. Strategic asset allocation involves selecting the proper asset allocation based on the risk tolerance of the client and rebalancing to keep the portfolio within the parameters of the desired strategic mix. II. TAA involves evaluating asset classes or industries with respect to their value and selling undervalued classes and purchasing overvalued classes. A. I only B. II only C. Both I and II D. Neither I nor II

A. I only TAA involves buying undervalued classes and selling overvalued classes.

A pooled investment with a share price significantly different from its net asset value (NAV) per share is most likely A. a closed-end fund. B. an open-end fund. C. an exchange-traded fund (ETF). D. a unit investment trust (UIT).

A. a closed-end fund. Closed-end funds' share prices can differ significantly from their NAVs. Open-end fund shares can be purchased and redeemed at their NAVs. Market forces keep exchange-traded fund (ETF) share prices close to their NAVs because arbitrageurs can profit by trading when there are differences. UIT investors purchase units, which are sold at the NAV plus a broker's commission.

An assumption of technical analysis is that market prices A. exhibit identifiable trends and patterns that persist and repeat. B. are the only information necessary to analyze a freely trading market. C. reflect supply and demand conditions because actual transactions reflect rational decisions by buyers and sellers. D. reflect only irrational investor behavior.

A. exhibit identifiable trends and patterns that persist and repeat. Technical analysis assumes persistent trends and repeating patterns in market prices can be used to forecast price behavior. Technical analysts believe prices reflect supply and demand but that buying and selling can be motivated by both rational and irrational causes. Volume, along with price, is important information to a technical analyst.

An investor in a separately managed account versus a mutual fund has the advantage of A. maintaining an individual cost basis in the securities within the portfolio, thereby making it easier to income tax plan. B. the investment manager purchasing securities for the benefit of the fund. C. owning a set proportion of the securities in the account. D. owning a percentage of the total pooled assets of the fund.

A. maintaining an individual cost basis in the securities within the portfolio, thereby making it easier to income tax plan. The investment manager purchases securities for the benefit of the investor, not the fund. The investor owns 100% of the securities in the account, while a mutual fund owner only owns a percentage of the total pooled assets of the fund.

Adding investments with a negative beta to a well-diversified portfolio that currently has a beta of +1.0 will cause A. the expected performance of the portfolio to improve in bear markets. B. the expected performance of the portfolio to decline in bear markets. C. the portfolio to experience more volatility in times of a bull market. D. the portfolio to experience more volatility in times of a bear market.

A. the expected performance of the portfolio to improve in bear markets. A negative beta means that the investment will move in an opposite direction from the overall market. Therefore, if the market is declining, then the asset should increase in value—thereby increasing the expected performance of the portfolio.

All of these statements correctly describe the price-to-earnings divided by growth (PEG) ratio except A) PEG is an indication of how much an investor is paying for a specific revenue stream. B) PEG is used to compare companies with different growth rates. C) PEG is calculated by dividing a firm's P/E ratio by the firm's expected growth rate of earnings. D) companies with a lower PEG ratio have higher expected rates of return.

A) PEG is an indication of how much an investor is paying for a specific revenue stream. Companies with a lower PEG ratio have a higher expected rate of return and vice versa. The PEG ratio is a measure of relative valuation that can be used to compare companies with different growth rates. Proponents of the PEG ratio believe that companies with a low PEG ratio will have higher rates of return. The price-to-sales ratio is an indication of how much an investor is paying for a specific revenue stream.

Which one of these risks is specifically related to mortgage pass-through securities? A) Prepayment risk B) Default risk C) Credit risk D) Liquidity risk

A) Prepayment risk The payments received from mortgage-backed securities consist of both interest and principal payments. When interest rates fall, homeowners refinance their homes, thereby paying off the principal on the original mortgages. This prepayment of principal is called prepayment risk.

Select the CORRECT statement regarding hedge funds. A) Purchasers of hedge funds are required to be accredited investors. B) Short sales by the fund are not allowed. C) Hedge fund managers are paid on a commission basis. D) The fund is required to register with FINRA prior to soliciting potential clients.

A) Purchasers of hedge funds are required to be accredited investors. A hedge fund is an unregistered, privately offered, managed pool of capital for wealthy investors. In addition to short selling, a hedge fund will implement a wide array of risky trading strategies in order to exploit market inefficiencies. Hedge fund managers are paid based on fund performance.

A risk-averse client, living in Iowa, holds a high proportion of his investment portfolio in cash and cash equivalents in U.S. financial institutions in dollars. The advisor should point out to the client that the portfolio is most subject to which of the following risks? A) Purchasing power risk B) Market risk C) Reinvestment rate risk D) Exchange rate risk

A) Purchasing power risk Although these vehicles may assist in managing liquidity risk, they do have purchasing power risk because they have limited opportunity for capital appreciation. Exchange rate risk does not apply because this is a U.S. client with investments denominated in dollars.

An investor has a portfolio diversified among many different asset classes. If there was an immediate need for cash, which of the following would probably be the most liquid? A) QRS Money Market Mutual Fund B) XYZ International Stock Mutual Fund C) CDL Common Stock Mutual Fund D) Cash value from a universal life insurance policy

A) QRS Money Market Mutual Fund Money market funds generally come with a check-writing privilege offering investors the opportunity to convert the asset to cash at once. Although all mutual funds are readily redeemable, under the investment company Act of 1940, the fund has seven days to redeem. One must request the cash value from the insurance company.

You own a small-cap fund and are trying to compare its performance to an appropriate benchmark. Which of the following benchmarks would be the best to use? A) Russell 2000 B) Treasury bills C) CS First Boston High Yield D) The S&P 500 Index

A) Russell 2000 The Russell 2000 is generally considered the benchmark for small-cap funds.

Select the type of mutual fund that generally focuses its investment objective in a narrow area such as natural resources, technology, or health care. A) Sector funds B) Growth funds C) Income funds D) Balanced funds

A) Sector funds Sector funds tend to limit their investments to one sector of the economy, such as natural resources, technology, or health care.

George owns 1,000 shares of XYZ stock. Based on recent analyst projections and George's own research, he believes XYZ's price will remain flat over the next few months. Accordingly, which strategy would George likely employ if one of his objectives was to increase his portfolio's income stream? A) Sell 10 XYZ call option contracts B) Buy an index future C) Buy a warrant D) Buy 10 XYZ put option contracts

A) Sell 10 XYZ call option contracts This is known as the covered call strategy and is used to increase the income of the portfolio when the price of the underlying stock is expected to remain flat for a period of time. Assuming the price of the underlying stock continues to remain flat, there is little chance of the option being exercised and the stock being called away.

If a company has a stock split, which of these occurs? A) Shareholders own more shares after the split than before the split. B) Fewer investors will be interested in the stock. C) Shareholders are taxed on the number of shares received. D) The per-share market value of the stock stays the same after the split.

A) Shareholders own more shares after the split than before the split. Shareholders are not taxed on the shares they receive. The number of shares is increased and the per-share market value of the stock is decreased. Shareholders own more shares, but the market value of their holdings does not change. One of the reasons for having a stock split is to encourage more investors to be interested in purchasing the stock.

Your client has just experienced an unanticipated financial emergency resulting in an immediate need of $25,000. Which of your client's assets would you advise be sold to cover this expense? A) Short-Term U.S. Treasury ETF B) Collection of gold coins C) BioTech Mutual Fund D) S&P 500 Index ETF

A) Short-Term U.S. Treasury ETF The other three choices may exhibit either liquidity risk or marketability risk or both. The U.S. Treasury ETF would be the least susceptible to these risks and highly liquid and accessible.

Which of the following statements best describes banker's acceptances? A) Short-term drafts drawn by a private company on a major bank used to finance imports and exports B) Promissory notes traded at a premium from their face value in the secondary market C) Negotiable, short-term, unsecured promissory notes issued by large corporations D) U.S. dollar-denominated deposits at banks outside the United States

A) Short-term drafts drawn by a private company on a major bank used to finance imports and exports Eurodollars are U.S. dollar-denominated deposits at banks outside the United States.

Which one of these statements is CORRECT regarding exchange-traded funds (ETFs)? A) They also have lower turnover of assets than mutual funds and are, as a result, more tax efficient B) In-kind exchanges typically are made in blocks of 10,000 shares. C) An ETF that buys all the securities in an index uses representative sampling. D) Because of their unique structure, ETFs cannot offer currency ETFs.

A) They also have lower turnover of assets than mutual funds and are, as a result, more tax efficient An ETF that buys all the securities in an index is called a replicate index-based ETF. Futures contracts are taxed at year-end on appreciation at rates of 60% for long-term gains and 40% for short-term gains. ETFs can and do offer currency ETFs.

Which of the following statements regarding cash distributions of ordinary and capital gains dividend distributions to mutual fund investors is CORRECT? A) They are fully taxable to the investor B) They decrease the taxable gain or increase the loss on sale of the shares after taxes are paid C) They are added to the tax basis of the shares once taxes on the distributions are paid D) They decrease the cost basis of the shares whether or not taxes are paid

A) They are fully taxable to the investor Ordinary and capital gain dividend distributions are taxable. If these distributions are reinvested, the individual receives an increased tax basis. If the distributions are made in cash, there is no increase in the tax basis of the underlying securities.

Which of the following is NOT a characteristic of negotiable CDs? A) They are used as short-term drafts drawn to finance imports and exports. B) They are deposits of $100,000 or more placed with commercial banks at a specified interest rate. C) Negotiable CDs are bought most often by institutional investors rather than by individuals. D) Negotiable CDs are bought and sold in the secondary market at a market-determined price.

A) They are used as short-term drafts drawn to finance imports and exports. Banker's acceptances are short-term drafts drawn by a private company on a major bank used to finance imports and exports.

Which of the following best represents a characteristic of balanced mutual funds? A) They combine debt and equity securities. B) They combine income and growth stock. C) They combine domestic and international securities. D) They combine high- and low-risk stock.

A) They combine debt and equity securities. Income securities can be high-dividend paying stocks or bonds. Capital gains securities generally are stocks. Most balanced funds contain some combination of both stocks and bonds (often 60% stocks and 40% bonds).

Select the INCORRECT statement regarding futures contracts. A) To complete a futures contract, the delivery of the commodity is required. B) Purchasing a contract for future delivery is considered taking a long position. C) Futures contracts may be written on financial assets or commodities. D) A short position will increase in value if the underlying commodity or asset declines in value.

A) To complete a futures contract, the delivery of the commodity is required. To complete the futures contract, delivery of the commodity may be made, but usually the holder will purchase an offsetting contract and cancel the original position.

Which of the following statements best describes Eurodollars? A) U.S. dollar-denominated deposits at banks outside the United States B) Short-term drafts drawn by a private company on a major bank used to finance imports and exports C) Deposits of $100,000 or more placed with commercial banks at a specified interest rate D) Negotiable, short-term, unsecured promissory notes issued by large corporations

A) U.S. dollar-denominated deposits at banks outside the United States In addition, the average deposit is very large (in the millions) and has a maturity of less than six months.

An investor analyzing a particular security is generally concerned with A) expected return. B) trailing P/E ratio of the stock. C) historical return. D) actual return.

A) expected return. Expected return is what determines an asset's value. The expected return must be greater than the investor's required return to induce the investor to make the investment. Historical return is only important to the extent that it may impact future return.

An investor considering investing in a particular security is more concerned with A) expected return. B) actual return. C) trailing P/E ratio of the stock. D) historical return.

A) expected return. Expected return is what determines an asset's value. The expected return must be greater than the investor's required return to induce the investor to make the investment. Historical return is only important to the extent that it may impact future return.

One of the characteristics of real estate investment trusts (REITs) is that they generally A) have a high degree of marketability. B) offer new shares continually to investors. C) pay federal income tax on their earnings. D) reinvest most of their income.

A) have a high degree of marketability. Therefore, an investor in real estate can generally expect some difficulty in converting a property to cash if cash is needed quickly. However, a REIT securitizes real estate properties, thereby allowing REIT investors to easily sell REIT shares in the open market. REITs must flow through at least 90% their income to investors; therefore the investors and not the REITs pay tax on these distributions.

Brett bought 500 shares of WCA stock at $27 per share on margin (50% initial margin percentage) with an annual margin interest rate of 5.25%. After one year, he sold the shares for $44 per share. The stock did not pay dividends during his holding period. Calculate Brett's holding period rate of return using margin. A) 120.68% B) 57.42% C) 125.93% D) 60.00%

A) 120.68% Brett's holding period rate of return using margin is 120.68% [($22,000 - $13,500 - $354.38) ÷ $6,750]. With a margin account, Brett's initial investment will be 50% of the total purchase price of $13,500. Margin interest for the year is $354.38 ($6,750 × 0.0525).

Michael purchased 800 shares of ABC stock for $75 per share. The stock paid a $1.20 dividend per share at the end of the year, and there was a 2-for-1 stock split during the year. Assuming the value of his investment at the end of the year was $66,000, calculate the holding period return for the investment. A) 13.2% B) 8.3% C) 14.0% D) 12.0%

A) 13.2% The investment's holding period return is calculated as [($66,000 − $60,000) + ($1.20 × 800 × 2)] ÷ $60,000 = 13.2%. The dividend is based on 1,600 shares because of the 2-for-1 stock split.

Stock XYZ has an average return of 12%; its returns fall within a range of -2% to +26% approximately 68% of the time. Which one of these numbers is closest to the standard deviation of returns of Stock XYZ? A) 14% B) 19% C) 28% D) 8%

A) 14% A standard deviation of 14% means an investor can expect a return on an investment to vary ±14 from the average return approximately 68% of the time.

Harry purchased 100 shares of MNL common stock five years ago at a cost of $4,300. The stock paid these dividends: Year | Amount 1 | $180 2 | $180 3 | $200 4 | $225 5 | $230 At the time the fifth-year dividend was paid, Harry sold the stock for $8,900. What was Harry's average annual compound rate of return (IRR) on MNL stock? A) 19.21% B) 15.66% C) 12.68% D) 9.35%

A) 19.21% The answer is 19.21%. Calculation follows: Financial Calculator Inputs 4,300 (+/-) = CF0 180 = CF1 180 = CF2 200 = CF3 225 = CF4 230 + 8,900 =, CF5 Solve for IRR/YR(Answer = 19.21%)

Kumar purchased 100 shares of YTR stock from his broker. He earned returns of 7%, -3%, 8%, -10%, and 12% in years 1 through 5 respectively. Calculate Kumar's geometric mean return on his investment over the five-year period. A) 2.47% B) 2.80% C) 2.26% D) 1.40%

A) 2.47% First, calculate the future value per $1 of Kumar's investment: (1.07)(0.97)(1.08)(0.90)(1.12) = 1.13. Next, calculate the geometric mean: PV = -1, FV = 1.13, N = 5, solve for I/YR = 2.4745, or 2.47%.

Johnny owns a municipal bond with a coupon rate of 4.25%. Assuming the annual inflation rate is 1.65%, calculate Johnny's real rate of return on his bond. A) 2.56% B) 1.58% C) 2.60% D) 4.25%

A) 2.56% Johnny realized a real rate of return of 2.56%. Real rate of return = {[(1 + 0.0425) ÷ (1 + 0.0165)] - 1} × 100 = 2.5578, or 2.56%.

JEM Technologies, Inc. has assets of $500 million and $50 million in liabilities. For the past year the company earned $125 million, and paid out $50 million in dividends. Calculate the company's return on equity (ROE). A) 28% B) 20% C) 52% D) 38%

A) 28% The answer is 28%. $500,000,000 - $50,000,000 = $450,000,000 in equity. $125,000,000 profit ÷ $450,000,000 equity = 0.2778, or 28% ROE.

If two stocks have positive covariance, which of these statements is CORRECT? A) The two stocks must be in the same industry. B) The rates of return tend to move in the same direction relative to their individual means. C) If one stock doubles in price, the other will also double in price. D) The rates of return tend to move in the opposite direction relative to their individual means.

B) The rates of return tend to move in the same direction relative to their individual means. If one stock doubles in price, the other will also double in price is true if the correlation coefficient = 1. The two stocks need not be in the same industry.

An active portfolio strategy is based on which of the following premises? A) The portfolio manager's access to corporate management B) The stock market is inefficient C) The investor's ability to obtain public information D) The stock market is efficient

B) The stock market is inefficient If the market is efficient, then a buy-and-hold strategy would be best. Only if the market is inefficient is it worth the costs involved in active management to attempt to generate superior returns.

Which of the following is the most appropriate and accurate indicator for determining a client's risk tolerance level? A) Beta B) There is no single appropriate method for determining risk tolerance. C) Questionnaire D) Standard deviation

B) There is no single appropriate method for determining risk tolerance. A client's risk tolerance level is an intangible and subjective factor. No single method accurately determines that risk level.

Which of these is NOT a characteristic of negotiable certificates of deposit (CDs)? A) Negotiable CDs are bought and sold in the secondary market at a market-determined price. B) They are used as short-term drafts drawn to finance imports and exports. C) They are deposits of $100,000 or more placed with commercial banks at a specified interest rate. D) Negotiable CDs are bought most often by institutional investors rather than by individuals.

B) They are used as short-term drafts drawn to finance imports and exports. Banker's acceptances, not Negotiable CDs, are short-term drafts drawn by a private company on a major bank used to finance imports and exports. The rest are characteristics of negotiable CDs.

Which of the following is NOT an advantage of purchasing American Depositary Receipts (ADRs)? A) Foreign taxes withheld can be claimed as a credit to offset income taxes on dividends received. B) They eliminate exchange rate risk. C) Transactions are done on an organized exchange in the United States. D) They allow U.S. investors to buy foreign country stock denominated in dollars.

B) They eliminate exchange rate risk. ADRs are priced in U.S. dollars and therefore have exchange rate risk.

Which of the following statements is CORRECT regarding hedge funds? A) They are available for any investor with $500,000 of net worth. B) They often make extensive use of derivatives. C) The fund manager's fee is usually 10% of the hedge fund's profits. D) A fund of hedge funds will have a higher minimum investment requirement than a hedge fund.

B) They often make extensive use of derivatives. Hedge funds may employ a variety of investment strategies in an attempt to achieve a superior return for investors and, as such, can be conservative investments or very aggressive investments.

Greg and Elizabeth are discussing their retirement plan with Jack, a financial advisor with an investment advisory firm. They would like Jack to reposition a portion of their assets into an investment that would provide them a monthly income with minimal risk. Which of the following choices would be the best for Jack to recommend to his clients? A) Foreign bond fund B) U.S. government bond fund C) Sector fund D) Small-cap fund

B) U.S. government bond fund The answer is U.S. government bond fund. Of the available choices, only the U.S. government bond fund would offer the client monthly income.

Which of these statements regarding warrants is CORRECT? A) Warrants are safer than corporate bonds. B) Warrants are issued with other securities to make the offering more attractive. C) The term of a warrant is generally shorter than the term of a right. D) Warrants give the holder a perpetual interest in the issuer's stock.

B) Warrants are issued with other securities to make the offering more attractive. Warrants are generally issued with bond offerings as sweetener. Warrants are long-term options to buy stock and, because, they are equity securities, warrants are junior in safety to bonds.

To design a market capitalization weighted index, which of the following approaches should be used? A) Weight the components by their intrinsic value B) Weight the components by the total fair market value of their outstanding shares C) Weight the components by their geometric mean return over the past year D) Weight the components by their per share market prices

B) Weight the components by the total fair market value of their outstanding shares A stock with a market capitalization value of $50 million will have 10 times the impact of a stock with a market capitalization value of a $5 million company.

All of these statements correctly describe yield curves except A) a normal yield curve occurs during periods of economic expansion and generally predicts that market interest rates will rise in the future. B) a positive yield curve can signal an upcoming economic recession. C) a flat yield curve occurs when the economy is peaking and, therefore, no change in future interest rates is expected. D) an inverted yield curve occurs when the Federal Reserve has tightened credit in an overheating econom

B) a positive yield curve can signal an upcoming economic recession. A positive (or normal) yield curve occurs during periods of economic expansion and generally predicts that market interest rates will rise.

A transaction whereby an investor sells a bond for a loss, in order to reduce capital gains, while investing the proceeds of the sale in a bond of similar quality and maturity is considered A) a substitution swap. B) a tax swap. C) a pure yield pickup swap. D) an intermarket spread swap.

B) a tax swap. A tax swap results in a tax savings generated by the realized loss.

An investor is interested in holding a diversified portfolio to reduce unsystematic risk. This can best be accomplished by buying stock in A) foreign companies. B) companies with low correlation coefficients between them. C) companies with strong earnings and revenue growth. D) companies with low betas.

B) companies with low correlation coefficients between them. Holding stocks that have a low correlation coefficient between them will result in a diversified portfolio that reduces and virtually eliminates the degree of unsystematic (business) risk in the portfolio. Buying stocks in international companies and stocks with low betas can help to reduce systematic risk, but only if they have low correlations with other stocks. Buying stocks in companies with strong revenue and earnings growth often results in acquiring significant company-specific risk that is attributable to the underlying business.

The risk associated with the amount of debt a company has issued is A) interest rate risk. B) financial risk. C) systematic risk. D) business risk.

B) financial risk. Financial risk is the risk related to the amount of debt a company has. Business risk is the risk associated with the nature of the business. Interest rate risk is the risk that as interest rates increase, bond prices decrease. Systematic risk is the risk associated with all factors affecting all comparable investments.

A mutual fund investor who does NOT specify a method to calculate basis must use the A) average basis, double category method. B) first in, first out (FIFO) method. C) average basis method. D) specific identification method.

B) first in, first out (FIFO) method. The IRS requires the FIFO method of determining basis for a mutual fund in the absence of another method being designated by the shareholder. The average basis, double category method is no longer in use.

Bonds issued by state and local governments that are backed by the full faith and credit of the issuing government and repaid by the issuing municipality's taxing power are categorized as A) revenue bonds. B) general obligation bonds. C) revenue anticipation bonds. D) tax anticipation notes.

B) general obligation bonds. Municipalities may increase taxes to make principal and interest payments on any debt issue; therefore, a voter referendum is usually required to approve their issuance.

If information is generated randomly and information announcements are independent A) price changes will be independent of each other and tend to move in a predictable fashion. B) prices will change quickly in response to the new random information. C) price changes will be influenced by the information about past prices and volume. D) prices will not reflect all fully available information.

B) prices will change quickly in response to the new random information. If information is generated randomly and information announcements are independent, prices will tend to fully reflect all available information. In addition, price changes will be independent of one another and tend to occur in random patterns.

If information is generated randomly and information announcements are independent, A) price changes will be independent of each other and tend to move in a predictable fashion. B) prices will change very quickly in response to the new random information. C) price changes will be influenced by the information about past prices and volume. D) prices will not reflect all fully available information.

B) prices will change very quickly in response to the new random information If information is generated randomly and information announcements are independent, prices will tend to fully reflect all available information. In addition, price changes will be independent of one another and tend to occur random patterns.

Which of the following is a characteristic of preferred stock? A) pays interest based on current market interest rates B) represents equity ownership C) offers guaranteed income D) is issued for a fixed period of time

B) represents equity ownership Preferred stocks possess features of both stocks and bonds. However, they represent equity ownership with no maturity date and pay dividends, though payment may be suspended if earnings are poor. Preferred stocks trade on the exchanges.

A mutual fund with an investment objective of growth and income has an alpha of +4, a beta of 1.5, and a Sharpe ratio of 1.15. The fund A) should be purchased, because it has a relatively low level of risk in relation to return. B) should be purchased, because the rate of return is high in relation to risk. C) should not be purchased, because it has a low level of return in relation to risk. D) should not be purchased even though the rate of return compensates for the level of risk.

B) should be purchased, because the rate of return is high in relation to risk. A positive alpha indicates the fund performed better than it should have on a risk-adjusted basis. Also, an alpha of +4, which is very high, means it performed 4% better than expected.

All of these statements explain the attributes of technical analysis except A) technical analysts attempt to predict the future movement of stock prices based on past trends. B) technical analysts rely heavily on financial ratios in their analysis of stocks. C) technical analysts use terms such as "trendline," "support," and "resistance" in analyzing stocks. D) technical analysts rely on charts to predict the future prices of stocks.

B) technical analysts rely heavily on financial ratios in their analysis of stocks. Analysts do not rely on financial ratios in their analysis of stocks. Instead, they rely on charts of past price history and volume to predict future price movements.

Which of the following correctly identifies an issue with the Dow Jones Industrial Average (DJIA)? A) the S&P 500 Index and the DJIA have a correlation coefficient of only 95%, indicating that the DJIA is not a fair representation of the overall market. B) the DJIA fails to account for the number of shares outstanding. C) the DJIA reflects the payment of cash dividends. D) the DJIA considers stock dividends of less than 10%.

B) the DJIA fails to account for the number of shares outstanding. Although the DJIA has fundamental problems, it is highly correlated with other broader market indexes such as the S&P 500 Index. A high correlation indicates that the DJIA is an adequate representation of the market in spite of its fundamental weaknesses. The DJIA ignores stock dividends of less than 10% and fails to reflect the payment of cash dividends.

Cheryl is in a 24% federal marginal income tax bracket and resides in a state with a flat 5% state income tax rate. She has $50,000 to invest and wants to invest the entire sum in a single bond issue. Which bond should Cheryl choose? A. Taxable corporate bond with a rate of 6% B. Another state's municipal bond with a rate of 5% C. Her city's municipal bond with a rate of 3% D. Her state's municipal bond with a rate of 4%

B. Another state's municipal bond with a rate of 5% The answer is another state's municipal bond with a rate of 5%. The other state's municipal bond will generate the highest after-tax yield of 4.75% for Cheryl, calculated as 5% × (1 - 0.05) = 5% × 0.95 = 4.75%. The after-tax yield for the taxable corporate bond is only 4.26%, or 6% × (1 - 0.29).

August Corporation's common stock experienced the following returns over the past three years: 6%, −10%, 20%. Which is CORRECT in identifying the August Corporation's arithmetic and geometric mean? A. Arithmetic mean: 4.61%; geometric mean: 5.33% B. Arithmetic mean: 5.33%; geometric mean: 4.61% C. Arithmetic mean: 7.00%; geometric mean: 12.00% D. Arithmetic mean: 12.00%; geometric mean: 7.00%

B. Arithmetic mean: 5.33%; geometric mean: 4.61% This is solved as follows: (6% − 10% + 20%) ÷ 3 = 5.33%. Geometric mean: PV = −1, N = 3, PMT = 0, FV = (1.06)(0.90)(1.20) = 1.1448. Solve for I/YR = 0.0461, or 4.61%.

Henry, age 46, has $250,000 to invest in a long-term investment portfolio. He has come to his financial planner, Robbie, to ask for advice. He wants a diversified portfolio while simultaneously limiting risk, minimizing transaction costs, and managing taxes. Also, he desires a portfolio that is based on a passive management approach, but he would still like to include an active management component. Which of the following investment approaches would best suit Henry? A. Index funds B. Core and satellite C. Commodities D. Emerging markets

B. Core and satellite The core and satellite approach is the best choice for Henry. Emerging markets and commodities may be used in the satellite portion of the portfolio. Index funds generally are used in a passive portfolio approach.

Which of the following bonds would you recommend if the investor's time horizon is 10 years? A. ABC bond: AAA rated, 5% coupon, 12-year maturity, duration 8.15 years B. DEF bond: AAA rated, 4% coupon, 10-year maturity, duration 9.50 years C. JKL bond: AAA rated, 4.5% coupon, 15-year maturity, duration 9.25 years D. XYZ bond: AAA rated, 5% coupon, 15-year maturity, duration 9.35 years

B. DEF bond: AAA rated, 4% coupon, 10-year maturity, duration 9.50 years The DEF bond, with a duration of 9.50 years, is the closest to the investor's time horizon of 10 years.

Which of the following approaches would be emphasized by an investor who believes in the importance of fundamental security analysis? A. Support and resistance levels B. Financial statement review C. The strong form of the efficient market hypothesis (EMH) D. Indexing

B. Financial statement review Fundamental analysts attempt to determine the intrinsic value of a security and, therefore, review the financial statements of companies to help them determine this value. If an investor believes in the strong form of EMH, fundamental analysis is of no use. Support and resistance levels are used by technical analysts.

Dale is concerned about a decline in the stock market. He has many holdings in growth stock mutual funds and would like to diversify his portfolio into an investment that offers a hedge against a bearish market. Which of the following investments would be the most appropriate for Dale? A. Fine art and paintings B. Gold coins C. Oil and gas futures D. Savings bonds

B. Gold coins Precious metals derive their value from factors that are external to the financial markets. As a result, the price of precious metals often moves inversely (i.e., has a negative correlation) with the market prices of stocks. Therefore, investing in gold coins may be used as a hedge against a declining, or bearish, stock market.

Which of the following risks would be of greatest concern to a holder of ADRs? I. Currency II. Liquidity III. Market IV. Purchasing power A. I and II B. I and III C. II and IV D. III and IV

B. I and III ADRs represent ownership in a foreign security that subjects the holder to currency risk. Since most ADRs are traded on the exchanges, they are subject to little liquidity risk, and, because they represent equity, they are usually a good hedge against inflation.

Which of following are reasons why an investor would choose stocks over bonds? I. A stockholder is not entitled to share in the earnings of the company. II. Bondholders do not have an ownership interest in the company. III. A stockholder has the right above a bondholder to assets of the corporation in case of liquidation. IV. A stockholder is entitled to a proportionate share of the assets of the company. A. I and III B. II and IV C. I, II, and IV D. II, III, and IV

B. II and IV A stockholder is entitled to share in the earnings of the company. A bondholder has the right above a stockholder to assets of the corporation in case of liquidation.

Which of the following statements regarding kurtosis is CORRECT? I. Kurtosis describes the degree to which a distribution is not symmetric about its mean. II. Kurtosis measures the peakedness of a distribution reflecting a greater or lesser concentration of returns around the mean. A. I only B. II only C. Both I and II D. Neither I nor II

B. II only The degree to which a distribution is not symmetric about its mean is measured by skewness. Excess kurtosis, which is measured relative to a normal distribution, indicates the peakedness of a distribution, and it reflects the probability of extreme outcomes.

Which type of bond is typically collateralized by the issuer? A. High-yield B. Mortgage C. Zero-coupon D. Debenture

B. Mortgage High-yield, zero-coupon, and debenture bonds are generally not collateralized by the issuer. Alternatively, a mortgage bond or secured bond is collateralized with (typically) either real property or equipment of the issuer.

Which of the following assets are liquid but NOT marketable? A. Personal residence B. Personal checking account C. U.S. Treasury bills D. Stock in a privately owned corporation

B. Personal checking account A personal checking account cannot be traded or sold and, therefore, is not marketable. The account can be turned into cash quickly without penalty. A personal residence and stock in a privately owned corporation are illiquid but marketable. U.S. Treasury bills are both liquid and marketable

Myron, age 68, enjoys participating in an investment club. The club actively trades securities for its members, with the goal of modest capital appreciation. In which market do the club's trades take place? A. Primary B. Secondary C. Futures D. Currency

B. Secondary The answer is secondary. The purpose of the secondary market is to provide investors with a method of buying and selling previously issued securities. The purpose of the primary market is to facilitate the initial sale of securities issued to the public

Kim owns a Marina Limited Partnership worth $25,000. She is interested in selling her interest in order to raise money for a down payment on a new rental property. Which of the following are NOT characteristics of her investment in the limited partnership? A. Kim's investment is managed by someone other than herself. B. Tax-free income is provided by the partnership to Kim. C. Her interest may be subject to liquidity and marketability risk. D. The sale of her interest may be restricted.

B. Tax-free income is provided by the partnership to Kim. The answer is tax-free income is provided by the partnership to Kim. The income from limited partnerships is not tax exempt. An investor, however, may use a tax loss from a partnership to offset the income from another passive investment

Which of the following statements best describes money market mutual funds? A. They allow up to six withdrawals per month and are insured by the FDIC. B. They are an asset that provides a modest rate of return, diversification, and liquidity. C. They are used primarily to finance imports and exports. D. The average maturity date of the investments within these types of funds is 270 days.

B. They are an asset that provides a modest rate of return, diversification, and liquidity. Unlike an MMDA, the fund is not insured by the FDIC. The average maturity date of the investments in the fund is usually less than 60 days. Banker's acceptances are used primarily to finance imports and exports.

The basic premise of the risk-return tradeoff suggests that risk-averse individuals purchasing investments with higher nondiversifiable risk should expect to earn A. lower rates of return. B. higher rates of return. C. rates of return equal to the market. D. rates of return lower than the market.

B. higher rates of return. Investors are risk averse and require higher rates of return for assuming greater investment risk.

The basic premise of the risk-return tradeoff suggests that risk-averse individuals purchasing investments with higher nondiversifiable risk should expect to earn A. lower rates of return. B. higher rates of return. C. rates of return equal to the market. D. rates of return lower than the market.

B. higher rates of return. The answer is higher rates of return. Investors are risk averse and require higher rates of return for assuming greater investment risk.

The area of the investment policy statement (IPS) that provides the specified return on an inflation-adjusted basis is best described as A. time horizon. B. return requirement. C. liquidity. D. unique preferences and circumstances.

B. return requirement The return requirement might include absolute or relative dollar or percentage returns on a before-tax or after-tax basis. Also included might be the requirement to provide the specified return on an inflation-adjusted basis.

In a repurchase agreement, the percentage difference between the repurchase price and the amount borrowed is most accurately described as A. the haircut. B. the repo rate. C. the repo margin. D. the federal funds rate.

B. the repo rate. The repo rate is the percentage difference between the repurchase price and the amount borrowed. The repo margin, or haircut, is the percentage difference between the amount borrowed and the value of the collateral.

All of the following are reasons for a corporation to issue a warrant except A. as an incentive for investors to purchase preferred stock. B. to allow for standardization of terms among all potential investors. C. to lower the cost of capital necessary to float an issue. D. as an incentive for investors to purchase corporate debentures

B. to allow for standardization of terms among all potential investors. Warrants are essentially customized (not standardized) call options issued to meet the needs of both the issuing corporation and the investor.

XYZ Corporation issued bonds with a 25-year maturity, $1,000 par value, and 5.75% coupon (paid semiannually). Five years after issue, interest rates on similar bonds fell to 4.75%. Calculate the price that XYZ bonds should sell for in the marketplace. A) $1,000.00 B) $1,128.20 C) $1,189.84 D) $882.05

B) $1,128.20 XYZ bonds should sell for $1,128.20, calculated using the following inputs: FV = $1,000 PMT = (57.50 ÷ 2) = $28.75 N = 40 (20 x 2 periods per year) I/YR = 4.75% Solve for PV = -1,128.1979, or $1,128.20

Tim began purchasing BLT, Inc., mutual fund shares several years ago. He has followed a dollar-cost averaging approach by investing $1,000 each year for five years. The following data depicts Tim's purchases: Year | Investment | Share Price 1 $1,000 $120 2 $1,000 $100 3 $1,000 $118 4 $1,000 $97 5 $1,000 $130 What is Tim's average cost per share? A) $106.32 B) $111.58 C) $118.23 D) $126.10

B) $111.58 Calculate the number of shares purchased each year, then total the shares purchased. The total investment is then divided by the total number of shares purchased ($5,000 ÷ 44.809 = $111.58).

Caralla Foods produced before-tax earnings of $15 million last year. A large institutional investor has determined an appropriate capitalization for valuing this company is 8%. In addition, the risk-free rate of return is 5%. Based on this information, calculate the value of Caralla Foods using the discounted earnings model. A) $500,000,000 B) $187,500,000 C) $300,000,000 D) Not enough information is provided.

B) $187,500,000 The formula for the discounted earnings model: V = E ÷ RD = 15,000,000 ÷ 0.08 = 187,500,000 Using the discounted earnings method produces a current corporate valuation of $187,500,000.

Your client, Ralph, has $15,000 of capital gains and $20,000 of capital losses in the current tax year. How much unused loss may Ralph carry forward to the following tax year? A) $3,000 B) $2,000 C) $12,000 D) $0

B) $2,000 After netting capital gain and losses, the client has a net capital loss of $5,000. Because $3,000 of net losses can be deducted during any one tax year, the client will carry over the remaining $2,000 capital loss.

Jordan has the following gains and losses from the previous year: I. $10,000 long-term capital gain II. $6,000 long-term capital loss III. $7,500 short-term capital gain IV. $15,000 short-term capital loss What is the tax ramification of these transactions? A) $3,500 deductible loss B) $3,000 deductible loss, $500 carryover loss C) $6,000 deductible loss, $1,500 carryover loss D) $4,000 long-term capital gain

B) $3,000 deductible loss, $500 carryover loss First, net the long-term gains and losses, and the short-term gains and losses. A $10,000 long-term capital gain with a $6,000 long-term capital loss equals a net long-term capital gain of $4,000. For short-term capital gains and losses, net the $7,500 short-term capital gain with the $15,000 short-term capital loss, which comes to a $7,500 short-term capital loss. Then, take the $4,000 long-term capital gain, and offset it against the $7,500 short-term capital loss, for a net short-term capital loss of $3,500. When Jordan files his tax return he will be able to deduct $3,000 of the $3,500 loss, and will carry forward to the next tax year the remaining $500 short-term loss.

Carly purchased $80,000 of JEM stock for $40 per share utilizing her margin account. She used $40,000 in her money market fund plus she borrowed $40,000 from her broker. She acquired a total of 2,000 shares of JEM stock. JEM stock is currently trading at $39.65 per share. Calculate the stock price that Carly would receive a margin call from her broker. Assume a maintenance margin requirement of 35% and an initial margin requirement of 50%. A) $30.23 B) $30.77 C) $30.50 D) $29.68

B) $30.77 Carly would receive a margin call when the stock fell to $30.77 per share. Margin call = [(1 − initial margin percentage) ÷ (1 − maintenance margin)] × purchase price of the stock = [(1 - 0.50) ÷ (1 - 0.35)] × 40 = 30.7692, or $30.77.

Alex owns a put option with an exercise price of $51. The underlying stock is currently trading at $48 in the secondary market. Assuming the put option is currently trading at $6 and has three months until expiration, calculate the intrinsic value of the put option. A) $100 B) $300 C) -$400 D) -$600

B) $300 The price the put option is currently trading at in the secondary market and the premium paid for the put option are both ignored when determining the intrinsic value of the put option. The two factors that matter are the exercise price of the put option and the price that the underlying stock is currently trading at in the secondary market. Therefore, the intrinsic value of this put option is $300 ($51 − $48 × 100 shares), which is the exercise price of the put option minus the price the underlying stock is currently trading at in the secondary market multiplied by 100 shares. Each option contract represents 100 shares of the underlying stock.

On December 27, 20X0, Jackie sells ABC stock for a loss at $12 a share that she originally purchased for $28 per share. On January 9, 20X1, she repurchases the shares for $15 per share. What is her cost basis on the repurchased shares? A) $40 B) $31 C) $27 D) $16

B) $31 This is a wash sale because the shares were repurchased within 30 days of their sale. The loss is then disallowed for tax purposes, and the disallowed loss is added to the repurchase price to determine the new cost basis. $28 - $12 = $16 disallowed loss, so $16 + $15 = $31 new basis.

Jennifer owns a state public purpose bond. She sells the bond and realizes a capital gain of $4,000. Prior to selling the bond, the total interest she had earned for the year was $99. Considering the sale and the interest amount, calculate the amount she must include in gross income. A) $99 B) $4,000 C) $3,901 D) $4,099

B) $4,000 Only the capital gain realized on the sale is subject to income taxation.

Your client began purchasing shares of GRO mutual fund two years ago. She has followed a dollar-cost averaging approach by investing $2,000 every six months for the last two years. The following data depict her purchases. Date | Net Asset Value of Fund | Number of Shares Purchased October 1, 20X6 | $44.44 | 45 April 1, 20X7 | $38.46 | 52 October 1, 20X8 | $33.90 | 59 April 1, 20X9 | $48.78 | 41 What is your client's average cost per share of GRO? A) $48.32 B) $40.61 C) $41.40 D) $42.78

B) $40.61 Period | Investment | Shares Purchased 1 | $2,000 | 45 2 | 2,000 | 52 3 | 2,000 | 59 4 | 2,000 | 41 = $8,000 ÷ 197 = 40.6091

Your client has just opened a margin account with your brokerage firm and purchased 500 shares of stock for $60 per share. The firm has a 55% initial margin and 35% maintenance margin policy. Calculate the stock price at which your client will receive a margin call. A) $27.00 B) $41.54 C) $50.76 D) $31.43

B) $41.54 The client will receive a margin call when the price of the stock drops to $41.54, calculated as follows: margin call = ($60 × 0.45) ÷ (1 - 0.35) margin call = $27.00 ÷ 0.65 = $41.5385, or $41.54

Last year, Patrice began investing in the Apex Fund. She is investing $500 every quarter and wants to know what her average cost per share (basis) has been. These are the prices of the Apex Fund at the end of each quarter when she made her purchases: $35.50, $38.90, $65.70, $72.50, and $89.00. What is her average cost per share? A) $60.32 B) $53.12 C) $41.44 D) $63.88

B) $53.12 Calculated as follows: $ Amount | Share Price | # of Shares Purchased $500 ÷ $35.50 = 14.0845 $500 ÷ $38.90 = 12.8535 $500 ÷ $65.70 = 7.6104 $500 ÷ $72.50 = 6.8966 $500 ÷ $89.00 = 5.6180 TOTAL 47.063 shares $2,500 ÷ 47.063 shares = $53.12

Strahan Corporation's current annual common stock dividend is $3 and is expected to grow by 15% during the next year. The stock's current market price is $35 per share. If Strahan stock had a $30 market price one year ago, calculate the stock's total return. A) 14.29% B) 26.67% C) 22.86% D) 8.57%

B) 26.67% A stock's total return (TR) = (the dividend received during a given period + the change in the stock's price during the same period) ÷ by the stock's current market value at the beginning of the period. Therefore, TR = ($3 + $5) ÷ $30 = 26.67%.

Jack sells short 200 shares of ABC stock at $38.50 with a 50% initial margin. ABC pays a dividend of $0.50 per share after he sells the stock. Jack then buys back the stock for $32. Calculate his percent gain or loss. A) 33.77% gain B) 31.17% gain C) 16.21% gain D) 16.88% loss

B) 31.17% gain Jack had a total percent gain of 31.17%, calculated as follows: Jack's investment: 200 × $38.50 × 0.50 = $3,850 Proceeds: $7,700 Cost: (6,400) Gain: $1,300 Less dividend payment: (100) Net gain: $1,200 $1,200 ÷ $3,850 = 31.17% gain

ABC Technologies, Inc., a publicly-traded company, uses both equity and debt to finance its operations. The company's stock is currently trading for $52.50 per share and has earnings of $1.50 per share. Calculate ABC's price-to-earnings (P/E) ratio. A) 25 B) 35 C) 5 D) 52

B) 35 ABC Technologies, Inc. has a P/E ratio of 35 ($52.50 ÷ $1.50).

Five years ago, XYZ Company issued a 20-year bond with a 4.75% coupon paid semiannually. The bond may be called at 104% of par, 10 years after issue. Assuming the bond is currently selling for $990, calculate the bond's yield to call. A) 5.18% B) 5.68% C) 4.95% D) 2.84%

B) 5.68% The bond's yield to call is calculated using the following TVM inputs on the financial calculator: Note: XYZ Company has the option to call the issue in five years. PV = -$990 N = 10 (5 x 2 periods per year) PMT = $23.75 (4.75% x $1,000 = $47.50 ÷ 2) FV = $1,040 ($1,000 × 1.04) Solve for I/YR = 5.68%

Security A has a standard deviation of 12% and the market has a standard deviation of 16%. The correlation coefficient between Security A and the market is 0.75. What percent of the change in Security A's price can be explained by changes in the market? A) 44% B) 56% C) 12% D) 75%

B) 56% Because the correlation coefficient is 0.75, the coefficient of determination (R2) is 0.5625, or 56%. Therefore, only 56% of investment returns can be explained by changes in the market (i.e., systematic risk represents 56%).

Michael owns a municipal bond, trading at par, with a 4.25% coupon rate and is in the 32% federal marginal income tax bracket. Calculate the taxable equivalent yield (TEY) for this bond. A) 2.85% B) 6.25% C) 12.88% D) 5.65%

B) 6.25% TEY = tax-exempt yield ÷ (1 − marginal tax rate) = 0.0425 ÷ (1 − 0.32) = 0.0625, or 6.25%. Therefore, the TEY for Michael's bond is 6.25%. Michael would require this rate of return or higher for an equivalent taxable bond.

Andy purchased a four-year bond with a coupon rate of 7.5% paid semiannually. The bond is trading for $1,025 in the secondary market. Calculate the bond's yield to maturity (YTM). A) 3.39% B) 6.78% C) 8.05% D) 4.34%

B) 6.78% The bond's YTM is calculated using the following TVM inputs on the financial calculator: PV = -$1,025 FV = $1,000 PMT = $37.50 (1,000 × 7.5% = $75 ÷ 2) N = 8 (4 x 2 periods per year) Solve for I/YR = 6.78%.

Al Jenkins owns a corporate bond that currently sells for $1,175. The coupon rate is 9%, interest is paid semiannually, and the bond matures in 20 years. The bond is callable in 11 years at $1,050. What is the yield to call on this bond? A) 7.32% B) 7.00% C) 7.42% D) 6.72%

B) 7.00% The yield to call is calculated using the following TVM inputs in the financial calculator: N = 22 (11 x 2 periods per year) PV = -$1,175 FV= $1,000 PMT = 9% x $1,000 = $90 / 2 = $45 Solve for I/YR = 7.00%

The coupon rate or nominal yield of a bond is the stated annual interest rate that will be paid each period for the term of the bond. Select the statement that best describes how the coupon rate is stated. A) As a percentage of the discount rate of the bond B) As a percentage of the par value of the bond C) As a percentage of the intrinsic value of the bond D) As a percentage of the annuitized value of the bond

B) As a percentage of the par value of the bond The coupon rate is stated as a percentage of the par value.

Which of these statements regarding unit investment trusts (UITs) is CORRECT? A) The majority of UIT offerings are listed on the major stock exchanges. B) At the maturity date of the portfolio, the securities are generally liquidated, and the proceeds are distributed to the investors or trust beneficiaries. C) UITs are actively managed, as portfolio managers typically attempt to match the return of a stated index. D) Units in a UIT are priced in the secondary market at a premium or discount to NAV.

B) At the maturity date of the portfolio, the securities are generally liquidated, and the proceeds are distributed to the investors or trust beneficiaries. UITs are considered unmanaged or passively managed because the initial securities (usually bonds) included in the portfolio are typically held until maturity. UIT units are sold at NAV plus a commission. Units are sold in the secondary market but not on the major exchanges.

An investor is considering the following three bonds: | Rating | Coupon | Maturity Bond 1 | AA rated | 7% | 6 years Bond 2 | AAA rated | 8% | 5 years Bond 3 | BBB rated | 7% | 5 years All of the following statements correctly assess these bonds except A) Bond 2 is least susceptible to price fluctuations because of its coupon rate and maturity. B) Bond 2 is more susceptible to price fluctuations than Bond 3 because it has a larger coupon. C) Bond 2 is less susceptible to price fluctuations than Bond 1 because it has a shorter maturity. D) Bond 1 is more susceptible to price fluctuations than Bond 3 because it has a longer maturity.

B) Bond 2 is more susceptible to price fluctuations than Bond 3 because it has a larger coupon. A low-coupon bond is more susceptible to price fluctuations than a high-coupon bond, everything else being equal. A long-term bond is more susceptible to price fluctuations than a short-term bond, everything else being equal.

You want to generate additional income from your portfolio, and are considering purchasing either bonds or preferred stocks. Which of the following statements is NOT correct concerning the characteristics of bonds and preferred stocks? A) In the event of a company's bankruptcy, bondholders would be paid first ahead of preferred stock shareholders. B) Bonds are subject to more interest rate risk than preferred stocks. C) Bonds pay interest while preferred stocks pay dividends. D) Corporations pay taxes on preferred stock dividends prior to distribution to preferred shareholders, whereas interest on bonds is a deductible expense.

B) Bonds are subject to more interest rate risk than preferred stocks. Because preferred stock does not have a maturity date, it is subject to more interest rate risk than bonds.

Which of the following statements regarding wash sales is CORRECT? I. A wash sale occurs if the taxpayer sells or exchanges stock or securities for a loss and, within 30 days before or after the date of the sale or exchange, acquires similar securities. II. The wash sale rules are easily avoided in the case of fixed-income securities by substituting a bond with the same or similar characteristics as long as it is issued by a different company. A) II only B) Both I and II C) I only D) Neither I nor II

B) Both I and II Both of these statements describe characteristics of wash sales.

Rhett recently purchased a bond with attached warrants that afford him the opportunity to participate in the appreciation of the underlying stock. Which of the following statements correctly describes warrants? Warrants are customized to fit the needs of the issuing corporation. Warrants typically have a maturity date of several years. A) Neither I nor II B) Both I and II C) I only D) II only

B) Both I and II If corporations issue warrants, they usually do so in conjunction with new bond issues or preferred stock issues. These warrants give the bond or stock purchaser a sweetener or equity kicker, making the issue more attractive to buyers.

Which of the following statements is CORRECT? I. If an investor expects a decline in market interest rates, she should attempt to construct a portfolio of long maturity bonds with low coupon rates. II. If the investor expects an increase in market interest rates, he should attempt to construct a portfolio of short maturity bonds with high coupon rates. A) Neither I nor II B) Both I and II C) II only D) I only

B) Both I and II The portfolio in Statement I will provide the investor with a portfolio that has the maximum interest rate sensitivity to take advantage of the capital gains experienced by bonds from the decrease in market interest rates. The portfolio in Statement II will provide the investor with a portfolio that has the minimum interest rate sensitivity to minimize the capital losses experienced by bonds from the increase in market interest rates.

Which of the following is a characteristic of American depositary receipts (ADRs)? A) Dividends are declared in the foreign currency, so exchange-rate risk is completely eliminated. B) Information regarding the foreign company is often more easily attainable with ADRs because the entity holding the security generally has access to that information. C) They are not relatively liquid and marketable investments. D) ADRs are denominated and pay dividends in foreign currencies.

B) Information regarding the foreign company is often more easily attainable with ADRs because the entity holding the security generally has access to that information ADRs are trust receipts issued by a U.S. bank for shares of a foreign company purchased and held by a foreign branch of the bank. They are an alternative to investing directly in foreign companies or foreign mutual funds. Dividends are declared in the local currency, so exchange-rate risk is not completely eliminated.

Which of the following is a written document that sets forth a client's objectives, sets limitations on the portfolio manager, provides guidance to the portfolio manager, and provides a means for evaluating performance? A) Risk-profile questionnaire B) Investment policy statement C) Financial planning disclosure D) New account form

B) Investment policy statement The investment policy statement sets forth a client's objectives, sets limitations on the portfolio manager, provides guidance to the portfolio manager, and provides a means for evaluating performance.

Which of the following are reasons an investor might buy a stock index call option instead of an individual stock call option? A) The investor is more confident about the performance of an individual stock than the market as a whole. B) It is the best way to be fully diversified against unsystematic risk. C) It reduces the level of systematic risk. D) The investor wants to hedge his existing stock portfolio against a market decline.

B) It is the best way to be fully diversified against unsystematic risk. Buying an index option means the risk associated with any one company (business risk) is avoided. An index option can be used to participate in a broad market advance, but still has systematic risk. One would buy a put to hedge against a market decline.

Which of the following statements regarding performance measures is CORRECT? A) The reliability of their betas is important for the Jensen and Sharpe performance measures. B) Jensen's alpha may be used by itself to judge an investment. C) A negative alpha indicates the investment lost money. D) The Sharpe ratio uses beta as its measure of risk.

B) Jensen's alpha may be used by itself to judge an investment. Beta is the risk measure for alpha, but Sharpe uses standard deviation as its risk measure. Therefore, the reliability of beta is relevant for alpha. Jensen's alpha can be used by itself to judge an investment; the Sharpe ratio must be used in comparison with another Sharpe ratio in judging an investment. A negative alpha indicates the investment did not perform as well as expected given the risk taken. For example, an alpha of -1 means the investment underperformed by 1% compared to what it was expected to return. Accordingly, a negative alpha does not necessarily mean the investment lost money.

You have narrowed your choice down to these investments with the following characteristics: JJJ | LLL | NNN | YYY Mean return 10 18 7 11 Standard deviation 17 25 10 19 Which fund has the least risk per unit of return? A) YYY Fund B) LLL Fund C) JJJ Fund D) NNN Fund

B) LLL Fund Using the coefficient of variation (CV). JJJ Fund: 17 ÷ 10 = 1.70 LLL Fund: 25 ÷ 18 = 1.39 NNN Fund 10 ÷ 7 = 1.43 YYY Fund 19 ÷ 11 = 1.73 The stock with the lowest CV has the least amount of total risk per unit of expected return.

Which of these investments should be recommended during periods of falling interest rates? A) Short-term bonds B) Long-term bonds C) U.S. Treasury bills D) Money market mutual funds

B) Long-term bonds If an investor anticipates a drop in interest rates, he or she should take a more bullish attitude toward interest-sensitive investments like long-term bonds.

Barbara, a Louisiana resident, is in the 35% marginal federal income tax bracket and the 6% marginal state income tax bracket. Select the bond that would provide Barbara with the highest after-tax rate of return. A) U.S. Treasury bond with a coupon rate of 6% B) Louisiana municipal bond with a coupon rate of 5.5% C) Corporate bond with a coupon rate of 8% D) Texas municipal bond with a coupon rate of 5.8%

B) Louisiana municipal bond with a coupon rate of 5.5% The answer is Louisiana municipal bond with a coupon rate of 5.5%. U.S. Treasury bond (exempt from state income tax): 6% × (1 - 0.35) = 3.90% Corporate bond: 8% × [1 - (0.35 + 0.06)] = 4.72% Texas municipal bond (exempt from federal income tax): 5.8% × (1 - 0.06) = 5.45% Louisiana municipal bond (exempt from both federal and state income tax): 5.5%

Which of the following would be an appropriate index to track an investment in an international developed markets mutual fund? A) IFC Investable B) MSCI EAFE C) IFC Emerging Markets Free Global D) Russell 2000

B) MSCI EAFE The MSCI EAFE Index tracks markets in Europe, Australasia, and the Far East (primarily Japan).

Your client is concerned that the stock market is overvalued and may experience a large market correction within the next year. The client is 45 years old, has significant retirement savings, little debt, and no dependents. The current retirement portfolio mix is 80% stock/20% fixed-income. What is the best course of action for your client to take regarding this concern? A) Liquidate the retirement portfolio and reposition the proceeds into cash. B) Maintain a long-term perspective and consider keeping the current portfolio allocation. C) Reposition all stock investments into fixed-income investments. D) Reallocate the retirement plan proceeds into a conservative target asset allocation portfolio focused on U.S. Treasuries.

B) Maintain a long-term perspective and consider keeping the current portfolio allocation. When confronted with financial or economic crisis events, the best course of action is for clients to keep a long-term perspective and focus on long time horizons rather than reacting negatively to market events.

Which of these is NOT an unsystematic risk? A) Liquidity risk B) Market risk C) Default risk D) Business risk

B) Market risk Unsystematic risk is the risk that affects only one company, country, or sector and its securities. Market risk is an example of a systematic risk.

Identify the yield-curve theory that relies on the laws of supply and demand for various maturities of borrowing and lending. A) Liquidity premium theory B) Market segmentation theory C) Unbiased expectations theory D) Brownian theory

B) Market segmentation theory Market segmentation theory relies on the laws of supply and demand for various maturities of borrowing and lending. Unbiased expectations theory states that long-term rates consist of many short-term rates and that long-term rates will be the average of short-term rates. The liquidity premium theory is based on the unbiased expectations theory but incorporates a liquidity premium into the model.

Which statement regarding the concepts of modern portfolio theory (MPT) is NOT correct? A) For any given level of risk, investors prefer higher returns to lower returns. B) Markowitz used risk (as measured by beta) and expected return as the basis for determining appropriate assets or portfolios. C) Indifference curves represent the risk-reward trade-off that investors are willing to make. D) An infinite number of portfolios exist on the efficient frontier.

B) Markowitz used risk (as measured by beta) and expected return as the basis for determining appropriate assets or portfolios. The answer is Markowitz used risk (as measured by beta) and expected return as the basis for determining appropriate assets or portfolios. Harry Markowitz's theory uses standard deviation as a measure of portfolio risk.

Francis and William would like to place $5,000 into an account that would be used primarily for emergencies. Which of the following investment choices should be recommended for an emergency fund? A) Guaranteed investment contracts B) Money market mutual funds C) U.S. Treasury bonds D) Series I savings bonds

B) Money market mutual funds Money market mutual funds are used by many investors as their emergency fund because the funds are extremely liquid.

Which of the following stock market anomaly descriptions is CORRECT? A) Size effect: big-company stocks outperform small-company stocks over time B) Neglected firm effect: buy stocks followed by few analysts C) January effect: buy stocks in January D) BVMV: buy stocks with high market value relative to book value

B) Neglected firm effect: buy stocks followed by few analysts Buying stocks in December and selling them in January is the January effect. Buying stocks with high book value to market value is BVMV. Small-company stocks outperforming large-company stocks over time is the size effect.

Which statement concerning an active portfolio management strategy is CORRECT? A) An actively managed portfolio has lower risk than a passive benchmark portfolio in most cases. B) The goal of active portfolio management is to earn a return that exceeds the risk-adjusted return of a passive benchmark portfolio. C) The key to success for an actively managed portfolio is to minimize trading activity. D) An actively managed portfolio has low total transaction costs.

B) The goal of active portfolio management is to earn a return that exceeds the risk-adjusted return of a passive benchmark portfolio. The answer is the goal of active portfolio management is to earn a return that exceeds the risk-adjusted return of a passive benchmark portfolio. This is net of transaction costs. Such a strategy also involves higher transaction costs and, usually, risk.

Which statement regarding portfolio theory is NOT correct? A) The optimal portfolio offers the highest return for a given level of risk. B) The optimal portfolio will always lie above the efficient frontier. C) The optimal portfolio has the lowest risk for a given level of return. D) The optimal portfolio for an investor depends upon the investor's ability to assume risk.

B) The optimal portfolio will always lie above the efficient frontier. The optimal portfolio is found at the point of tangency of the investor's indifference curve and the efficient frontier.

Jensen's alpha is an absolute measurement. What does it tell you? A) The percentage of return that can be attributed to systematic risk B) The percentage a manager over- or underperformed based on the amount of risk taken C) The percentage by which a manager beat the market D) The percentage of return that can be attributed to unsystematic risk

B) The percentage a manager over- or underperformed based on the amount of risk taken Jensen's alpha is a measure of the risk-adjusted value added by a portfolio manager. Specifically, alpha is measured as the portfolio's actual or realized return in excess of (or deficient to) the expected return calculated by the capital asset pricing model (CAPM).

Juliet owns a PRT Inc. bond with a par value of $1,000. PRT is a AA rated bond maturing in seven years. Juliet receives $55 of interest income from PRT semiannually. Comparable debt, i.e., AA rated, seven-year maturity, yields 12%. The bond's duration is five years. Assume the Fed is concerned about inflation and increases the discount rate. As a consequence, market interest rates on seven-year AA rated bonds change from 12% to 13%. How will the price of Juliet's bond change? A) The price will increase by approximately 5%. B) The price will decrease by approximately 5%. C) The price will increase by approximately 7%. D) The price will decrease by approximately 7%.

B) The price will decrease by approximately 5%. The bond's duration can be seven years only if it is a zero-coupon bond. No information in the facts states that it is a zero-coupon bond. The facts do state that the bond has a coupon. Therefore, its duration will be less than seven years. The only other indicated possibility is a five-year duration. So, a five-year duration multiplied by an interest rate change of 1% results in a price change of 5%. Because rates rose, the price of the bond must decrease.

The exercise price of a put is $25 and the market price of the stock is $18. Which of the following statements is true? A) The put is out of the money. B) The put is in the money. C) The put is a covered put. D) The put is a naked put.

B) The put is in the money. An investor who purchases a put option makes a profit only if the market price of the stock is lower than the exercise (strike) price of the option. Until the market price drops below the strike price, the option is said to be out of the money. It is in the money when the market price drops below the strike price. This put is in the money by $7.

What type of index is the Dow Jones Industrial Average (DJIA)? A) Equal-weighted B) Capitalization-weighted C) Price-weighted D) Value-weighted

C) Price-weighted The DJIA is price-weighted, meaning that higher-priced stocks will have more impact on the average than lower-priced stocks. Cap-weighted, which is the same as value-weighted, means the prices of stocks with the largest capitalization relative to the market capitalization of the entire index will have the greatest impact on the index. Equally weighted means that the price movement of each stock in an index has the same impact as that of any other stock in the index.

Which of the following statements regarding the capital market line (CML) is CORRECT? A) Uses beta as a risk measure B) Is not useful for diversified portfolios C) Provides a direct relationship between the risk and return for a well-diversified portfolio D) Describes the required return of individual stocks

C) Provides a direct relationship between the risk and return for a well-diversified portfolio The capital market line (CML) graphically depicts the relationship of risk and return for efficient well-diversified portfolios. The CML uses standard deviation as a risk measure.

Choose the risk that is attributable to cash and cash equivalents. A) Marketability risk B) None of these because cash and cash equivalents are considered risk-free C) Purchasing power risk D) Liquidity risk

C) Purchasing power risk Cash and cash equivalents are subject to purchasing power (inflation) risk because they offer limited potential for growth.

Choose the risk that is attributable to cash and cash equivalents. A) None of these because cash and cash equivalents are considered risk-free B) Liquidity risk C) Purchasing power risk D) Marketability risk

C) Purchasing power risk Cash and cash equivalents are subject to purchasing power (inflation) risk because they offer limited potential for growth.

Mildred manages a mutual fund whose goal is to provide a return similar to the U.S. small capitalization market. Choose the index that would provide the best benchmark for Mildred's fund. A) Wilshire 5000 B) S&P 500 C) Russell 2000 D) Dow Jones Industrial Average (DJIA)

C) Russell 2000 The Russell 2000 is an index of small capitalization U.S. stocks. The DJIA represents 30 major blue-chip stocks. The S&P 500 is an index of 500 large capitalization U.S. stocks. The Wilshire 5000 is a broad market index.

Identify the efficient market hypothesis that suggests an investor can achieve above-market returns by only utilizing insider information. A) Strong B) Weak C) Semistrong D) All of these forms

C) Semistrong The semistrong form suggests that fundamental analysis is of no value and only through the use of insider information can an investor achieve above-market returns.

An investor who owns a sector fund that has substantial unsystematic risk and would like to know how a portfolio manager performed on a risk-adjusted basis would use which of the following indicators? A) Jensen's alpha B) Treynor ratio C) Sharpe ratio D) Beta

C) Sharpe ratio Sharpe uses standard deviation and assumes the portfolio is not well diversified and measures total risk.

An individual with a short-term investment time horizon would choose what type of bonds when interest rates are expected to rise? A) High-yield bonds B) Long-term bonds C) Short-term bonds D) Low-coupon, long-term bonds

C) Short-term bonds Long-term bonds are affected by interest rate changes more than short-term bonds. If interest rates are expected to rise, an investor should invest in short-term bonds until rates peak. Risk of default of high-yield bonds increases when rates rise.

Which of the following statements best describes banker's acceptances? A) Negotiable, short-term, unsecured promissory notes issued by large corporations B) Promissory notes traded at a premium from their face value in the secondary market C) Short-term drafts drawn by a private company on a major bank used to finance imports and exports D) U.S. dollar-denominated deposits at banks outside the United States

C) Short-term drafts drawn by a private company on a major bank used to finance imports and exports Banker's acceptances are typically traded at a discount from their face value in the secondary market. Eurodollars are U.S. dollar-denominated deposits at banks outside the United States.

Which statement regarding single-country, closed-end funds is NOT correct? A) After the initial public offering, the fund will generally not issue additional shares. B) Capital appreciation is the primary objective of single-country funds. C) Single-country funds trade at the fund's NAV. D) Professional management of the fund and portfolio diversification within the selected market are available with single-country funds.

C) Single-country funds trade at the fund's NAV. Single-country funds are closed-end funds and, like other closed-end funds, generally trade at a discount to NAV.

Sinowe purchased a Treasury-issued security for its par value of $1,000. The security has a coupon rate of 6%, and the last semiannual interest payment he received was $36. The security recently matured, and Sinowe received $1,200. What type of Treasury security did he own? A) Treasury bill B) Series I bond C) Treasury Inflation-Protected Securities (TIPS) D) U.S. Treasury STRIPS

C) Treasury Inflation-Protected Securities (TIPS) Sinowe owned a TIPS. The security was issued at par with a 6% coupon. The principal value is inflation-adjusted every six months, and one-half of the stated coupon rate is paid semiannually on the inflation-adjusted principal. The last interest payment of $36 and the paid maturity value of $1,200 reflect the inflation-adjusted principal.

Which of the following statements best describes Eurodollars? A) Deposits of $100,000 or more placed with commercial banks at a specified interest rate B) Short-term drafts drawn by a private company on a major bank used to finance imports and exports C) U.S. dollar-denominated deposits at banks outside the United States D) Negotiable, short-term, unsecured promissory notes issued by large corporations

C) U.S. dollar-denominated deposits at banks outside the United States In addition, the average deposit is very large (in the millions) and has a maturity of less than six months.

Richard has become very interested in the stock market and enjoys spending his spare time researching companies in the medical field. He believes studying and analyzing the industry, combined with his advanced exposure to trends and new innovations in medicine, will give him an advantage in achieving superior performance in medical stock investment opportunities. Choose the form of the efficient market hypothesis (EMH), if any, that Richard is considered subscribing to. A) Semistrong form B) None of these C) Weak form D) Strong form

C) Weak form Richard is subscribing to the weak form of the EMH because he believes fundamental analysis and insider information will yield superior performance.

Yvette is saving for her son's college education. Her son is expected to start college in 8 years. Choose the bond portfolio that would most likely be immunized with respect to this goal. A) Weighted average time to maturity of bonds is 6 years with coupon of 8%. B) Weighted average time to maturity of bonds is 10 years with coupon of 0%. C) Weighted average time to maturity of bonds is 10 years with coupon of 5%. D) Weighted average time to maturity of bonds is 8 years with coupon of 3%.

C) Weighted average time to maturity of bonds is 10 years with coupon of 5%. To immunize the portfolio, the duration of the portfolio should match the investor's time horizon. Coupon-paying bonds have durations that are less than their time to maturity. Zero-coupon bonds have durations equal to their time to maturity.

Quincy has narrowed his choice down to the following four mid-cap funds, which is a category he wants to add to his portfolio. Which fund should Quincy choose? A Fund | J Fund | Q Fund | Z Fund Return 12% | 9% | 13% | 11% Alpha 0.52 | -1.04 | 0.66 | 1.10 Treynor 0.68 | 0.21 | 0.58 | 0.62 Sharpe 0.44 | 0.32 | 0.21 | 0.37 R-squared 0.88 | 0.78 | 0.82 | 0.84 A) A Fund B) Q Fund C) Z Fund D) J Fund

C) Z Fund The R-squared for all four funds is greater than 0.70, meaning beta is reliable. Alpha uses beta, and is a measure of absolute return, and the best measure to use if beta is reliable. The fund with the highest alpha is the Z fund.

If all of these bonds are of similar credit risk, choose which will be the least sensitive to interest rate changes. A) 3% coupon bond maturing in six years B) Zero-coupon bond maturing in eight years C) Zero-coupon bond maturing in six months D) 8% coupon bond maturing in six years

C) Zero-coupon bond maturing in six months Coupon-paying bonds have durations that are less than their time to maturity. Zero-coupon bonds have durations that are equal to their time to maturity. Bonds with shorter durations are less sensitive to changes in interest rates. Thus, the six-month zero-coupon bond is the least sensitive to changes in interest rates.

A firm declares a $3.00 cash dividend to its shareholders. The firm has issued dividends of only $0.07 per share for each of the last 15 quarters, and market analysts anticipate a similar dividend this quarter. In an efficient market, one would expect A) a price increase before the announcement. B) no price change before or after the announcement. C) a price change upon the announcement. D) a price decrease after the announcement.

C) a price change upon the announcement. In an efficient market, the price of the stock will represent all public information. Because the increase in the dividend was not public knowledge until it was declared, no price change would take place before the announcement. A price change, representing the increase in dividends, would be expected immediately after the information became public.

When a taxpayer sells or exchanges stock or securities for a loss and, within 30 days before or after the date of the sale or exchange, acquires similar securities, this transaction is classified as A) a substitution swap. B) an equity swap. C) a wash sale. D) a repurchase agreement.

C) a wash sale. The wash sale rule is intended to prevent a claim of a tax loss on specific security transactions. This rule will postpone the capital loss if a substantially identical security is purchased within 30 days before or after the sale. If this event occurs, the basis of the new stock or securities will include the unrecovered portion of the basis of the formerly held stock or securities.

All of these statements correctly describe international investing except A) an international investor faces the additional risks of foreign currency risk and country risk. B) international investing offers diversification and potentially higher returns. C) an emerging market is a market in a highly developed foreign economy with stable political and social institutions. D) one method to engage in international investing is through American depositary receipts.

C) an emerging market is a market in a highly developed foreign economy with stable political and social institutions. Emerging markets are markets in lesser developed countries.

All of the following correctly describe disadvantages of cash and cash equivalents except A) investments in money market mutual funds are not insured or guaranteed by the U.S. government. B) investors choosing to redeem their certificates of deposit (CDs) prior to maturity may be subject to a substantial penalty. C) an investor may quickly convert a money market deposit account to cash to meet short-term needs. D) the rate of return on passbook savings accounts is relatively low when compared to higher risk alternatives such as government bonds.

C) an investor may quickly convert a money market deposit account to cash to meet short-term needs. One of the advantages of money market deposit accounts is their liquidity. They may be used by investors as a source of funds to meet emergencies and other short-term obligations.

The anticipation of inflation suggests that the investor should A) sell stocks of gold companies. B) avoid real estate investments. C) anticipate higher interest rates. D) buy bonds.

C) anticipate higher interest rates. Real assets, which includes gold and real estate, should do well in inflationary times. Bonds do poorly because interest rates will increase to fight inflation, and increases in interest rates cause bond prices to fall.

You are considering purchase of a stock that is currently selling for $23 and pays a dividend of $1.15 per share. The dividend is expected to grow at a rate of 15% per year for the next three years. After that, the dividend is expected to grow at a constant rate of 8%. Your required return is 13%. The maximum price you should pay for this stock is A) $26.74. B) $33.62. C) $30.22. D) $29.76.

D) $29.76. The value is calculated on the HP 10bII+ by solving for the NPV of uneven cash flows as follows: 13 = I/YR 0 = CF0 1.3225 = CF1 1.5209 = CF2 1.7490 + 37.7784 = CF3 SHIFT, NPV = 29.7559 The 37.7784 is calculated from the constant growth DDM, starting at the end of the third year: [1.7490(1.08)] ÷ (0.13 - 0.08) = 37.7784

Consider CPM stock with a current dividend of $1.05 per share and a market price of $46.65 per share. The current dividend is expected to grow for three years at a rate of 2% and then 3% thereafter. Assume the required rate of return is 6%. Using the multistage growth dividend discount model, calculate the intrinsic value of CPM stock. (Round all numbers to the nearest cent.) A) $29.09 B) $41.38 C) $32.00 D) $34.82

D) $34.82 Compute the value of each future dividend until the growth rate stabilizes (years 1 through 3). D1 = $1.05 × 1.02 = $1.07 D2 = $1.07 × 1.02 = $1.09 D3 = $1.09 × 1.02 = $1.11 Use the constant growth dividend discount model to compute the remaining intrinsic value of the stock at the beginning of the year when the dividend growth rate stabilizes (year 4). D4 = $1.11 × 1.03 = $1.14 V = $1.14 ÷ (0.06 - 0.03) = $38.00 Use the uneven cash flow method to solve for the net present (intrinsic) value of the stock. CF0 = $0 CF1 = $1.07 CF2 = $1.09 CF3 = $1.11 + $38.00 = $39.11 I/YR = 6% Solve for NPV = 34.8170, or $34.82

ABC Corporation pays a current annual dividend of $0.75 per share. This dividend is expected to grow at a 30% rate per year during Years 1 and 2. After Year 2, the company's dividend is expected to grow at a constant rate of 8%. What is the value of the stock today, assuming a required rate of return of 10%? A) $54.64 B) $56.57 C) $58.81 D) $58.50

D) $58.50 Using the multistage growth dividend discount model, the value of the stock equals $58.50. Compute the value of each future dividend until the growth rate stabilizes (Years 1-2). D1 = $0.75 × 1.30 = $0.9750 D2 = $0.9750 × 1.30 = $1.2675 Use the constant growth dividend discount model to compute the remaining intrinsic value of the stock at the beginning of the year when the dividend growth rate stabilizes (Year 3). D3 = $1.2675 × 1.08 = $1.3689 V = $1.3689 ÷ (0.10 - 0.08) = $68.4450 Use the uneven cash flow method to solve for the net present (intrinsic) value of the stock. CF0 = $0 CF1 = $0.9750 CF2 = $1.2675 + $68.4450 = $69.7125 I/YR = 10% Solve for NPV = $58.50

The conversion value of a convertible bond with a conversion ratio of 25, a conversion price of $40, and a market price of the underlying stock of $32 is A) $1,000. B) $200. C) $900. D) $800.

D) $800. The conversion value is the value if converted and is determined by multiplying the market price of the underlying stock by the conversion ratio: $32 × 25 = $800

Lawrence purchases a 20-year corporate bond with a coupon rate of 7.5% paid semiannually. Assuming the comparable yield for this type of bond is 9.5%, calculate the intrinsic value of his bond. A) $872.69 B) $823.75 C) $410.78 D) $822.37

D) $822.37 Intrinsic value is calculated using the following inputs on a semiannual basis: N = 40 (20 x 2 periods per year) I/YR = 9.5 ÷ 2 = 4.75% PMT = $37.50 (7.5% × 1,000 ÷ 2) FV = $1,000 Solve for PV = 822.37 or $822.37.

Jose owns a 30-year corporate bond with 22 years remaining until maturity, featuring a coupon rate of 6.25% (paid semiannually). Assuming the comparable yield for this quality bond is currently 7%, calculate the intrinsic value of his bond. A) $1,138.38 B) $906.46 C) $1,000.00 D) $916.44

D) $916.44 Jose's bond has an intrinsic value of $916.44, calculated using the following inputs: FV = $1,000 PMT = (6.25% × 1,000 ÷ 2) = $31.25 N = 44 (22 x 2 periods per year) I/YR =7% Solve for PV = -916.4395, or $916.44

Springfield municipal bonds have 12 years remaining to maturity. The bonds pay interest semiannually at an annual coupon rate of 4.25%. The bonds have a yield to maturity of 5%. Calculate the current market price of these bonds. A) $961.53 B) $1,039.35 C) $933.53 D) $932.93

D) $932.93 The current market price of these bonds is $932.93, calculated using the following inputs on a semiannual basis: FV = $1,000 PMT = 4.25% x 1000 ÷ 2 = $21.25 N = 24 (12 x 2 periods per year) I/YR = 5% ÷ 2 = 2.5% Solve for PV = -932.9313, or $932.93

Henry owns a 10-year bond with a coupon rate of 4.85% (paid semiannually). Assuming the comparable yield for this quality bond is currently 5.5%, calculate the intrinsic value of his bond. A) $929.67 B) $930.51 C) $847.03 D) $950.51

D) $950.51 The intrinsic value of his bond is $950.51, calculated using the following inputs: N = 20 (10 x 2 periods per year) I/YR = 5.5% PMT = (4.85% × 1,000 ÷ 2) = $24.25 FV = $1,000 Solve for PV = -950.51, or $950.51.

Lauren's bond has a current market value of $987.56 and Macaulay duration of 3.2. Assuming the bond's yield to maturity (YTM) changes from 6.5% to 6%, calculate the estimated percent change in the price of the bond and the new expected market price of the bond. A) +3.0%, $1,017.19 B) −3.0%, $957.93 C) −1.5%, $972.75 D) +1.5%, $1,002.37

D) +1.5%, $1,002.37 The formula for determining the change in the price of the bond: ΔP/P = −D[Δy ÷ (1 + y)] ΔP/P = −3.2[(0.06 − 0.065) ÷ (1 + 0.065)] ΔP/P = −3.2(-0.004695) = 0.01502, or 1.5% This means that the bond's price should increase by 1.5% and sell for $1,002.37 (a slight premium to par) in the secondary market.

Calculate the estimated change in the price of a bond with a present value of $987.56 and Macaulay duration of 4.8 years when its YTM changes from 7% to 6%. A) +4.53% B) -4.53% C) -4.49 D) +4.49%

D) +4.49% Given the inverse relationship between bond prices and market interest rates, the price of the bond must increase by 4.49%, calculated as follows: ΔP/P = -4.8 × [(0.06 - 0.07) ÷ (1 + 0.07)] = 0.0449, or 4.49%.

All of these statements concerning the use of the correlation coefficient in reducing portfolio risk are CORRECT except A) combining two securities with zero correlation (statistical independence) reduces portfolio risk, but cannot eliminate it. B) because securities typically have some positive correlation with each other, risk can be reduced, but seldom eliminated. C) combining two securities with perfect negative correlation provides no portfolio risk reduction. D) combining securities with perfect positive correlation provides no portfolio risk reduction.

C) combining two securities with perfect negative correlation provides no portfolio risk reduction. Combining two securities with perfect negative correlation could eliminate risk altogether. This is the principle behind hedging strategies.

When considering the purchase of a limited partnership interest, an investor should be most concerned with A) potential tax shelter. B) loss pass-through. C) economic viability. D) short-term trading opportunities.

C) economic viability. Economic viability is the number one reason for the purchase of an interest in a limited partnership. Tax sheltering and loss pass-through are also considerations but should not be the primary motive to invest. Short-term trading opportunities do not exist. The investor should expect to hold the interest until the partnership is dissolved or liquidated.

You are considering buying a stock that has a mean return of 14% and a standard deviation of 20. You can expect the return to fall within what range 95% of the time? A) -0.06 to 0.34 B) Cannot be determined from the information given C) -0.46 to 0.74 D) -0.26 to 0.54

D) -0.26 to 0.54 A stock with a standard deviation of 20 will deviate from the mean by one standard deviation 68% of the time, two standard deviations 95% of the time, and three standard deviations 99% of the time. So for this stock, plus or minus 40 from the mean of 14% would be -26% and +54%.

Klaus Copenhagen's objective is to receive income, and he is considering a preferred stock with a $1.50 dividend that is currently trading at $25. What would be the approximate price movement of this preferred stock if interest rates were to rise 1%? A) -7% B) -4% C) -10% D) -14%

D) -14% Now, determine the percentage price movement if interest rates climb 1%—$1.50 ÷ 0.07 = $21.43. This is a decline of $3.57, or 14.28%.

A collateralized mortgage obligation (CMO) differs from other mortgage-backed securities in that the cash flows associated with the CMO's pool of underlying mortgages are divided into repayment periods known as A) conversion privileges. B) pre-retirement provisions. C) tranches. D) guaranteed remittance provisions.

C) tranches. A CMO differs from mortgage-backed securities in that the cash flows associated with the CMO's pool of underlying mortgages are divided into repayment periods known as tranches.

An analysis of the monthly returns for the past year of a mutual fund portfolio consisting of two funds revealed these statistics Fund A | Fund B Total return 12% 15% Standard deviation 9% 26% Percentage of portfolio 35% 65% Correlation coefficient (R)0.32 What is the coefficient of determination (R2) of Fund A and Fund B? A) 0.17 B) 0.15 C) 0.90 D) 0.10

D) 0.10 The coefficient of determination is the square of the correlation coefficient (0.32)2 = 0.32 × 0.32 = 0.1024, or 10%.

What is the coefficient of variation for an investment with a standard deviation of 8.65%, an expected return of 11.5%, and a beta of 1.25? A) 1.3290 B) 0.9402 C) 0.1438 D) 0.7522

D) 0.7522 CV = standard deviation of asset ÷ expected return of asset, 8.65% ÷ 11.5% = 0.7522.

Assume your client's portfolio contains these: - $20,000 of Stock A with a beta of 0.90 - $50,000 of Stock B with a beta of 1.20 - $30,000 of stock C with a beta of 1.10 What is the beta coefficient for this portfolio? A) 1.16 B) 1.00 C) 1.05 D) 1.11

D) 1.11 The answer is 1.11. Calculated as follows: 0.20 × 0.90 = 0.18 0.50 × 1.20 = 0.60 0.30 × 1.10 = 0.33 0.18 + 0.60 + 0.33 = 1.11 Using the HP 10bII+: 0.9, INPUT, 20,000, Σ+ 1.2, INPUT, 50,000, Σ+ 1.1, INPUT, 30,000, Σ+ SHIFT, 6 key (x̅w,b) = 1.11

Brenda is interested in calculating the inflation-adjusted rate of return of a recent investment. Assuming the after-tax return on her investment is 6.25% and the inflation rate is 5%, calculate the inflation-adjusted rate of return. A) 1.25% B) 12.25% C) 11.25% D) 1.19%

D) 1.19% The inflation-adjusted rate of return is calculated as follows: [(1.0625 ÷ 1.05) − 1] × 100 = 1.19%

Assuming JHG and DSA stocks have standard deviations of 6.23% and 10.78%, respectively, and a correlation coefficient of 0.17, calculate the covariance between the two stocks. A) 95.06 B) 25.34 C) 26.76 D) 11.42

D) 11.42 The covariance between the two stocks is a positive 11.42 (6.23 × 10.78 × 0.17). Covariance measures the extent to which two variables move together, either positively (together) or negatively (opposite).

Robinson owns a municipal bond with a coupon rate of 2.75%. He is currently in the 32% federal marginal income tax bracket and resides in a state that does not impose a state income tax. Calculate his municipal bond's taxable equivalent yield (TEY). A) 2.75% B) 3.66% C) 6.75% D) 4.04%

D) 4.04% The bond's TEY is calculated as follows: 2.75% ÷ (1 - 0.32).

Steve has an AA rated bond with an annual coupon rate of 4.35% that is currently trading for $965. Calculate the bond's current yield. A) 4.20% B) 3.50% C) 4.35% D) 4.51%

D) 4.51% The bond's current yield is calculated as $43.50 ÷ $965. Annual interest payment as a percent of par equals $43.50 ($1,000 × 4.35%) divided by the current market price of $965.

An investor might use a stock index option instead of an individual stock option if the investor A) wants to reduce the level of systematic risk. B) wants to reduce the level of market risk. C) wants to avoid business risk. D) is proficient at stock selection. Explanation

C) wants to avoid business risk. Buying an index option means the risk associated with any one company (business risk) is avoided. An index option can be used to protect against market or sector swings, and the investor need not be concerned with individual companies.

Crowder made an investment that paid him an 8% nominal rate of return for the year in which he held the investment. During that year, the inflation rate was 3%. Based on this information, calculate Crowder's inflation-adjusted return (real return). A) 3.08% B) 2.67% C) 5.10% D) 4.85%

D) 4.85% The inflation-adjusted return (IAR) is computed as: IAR = [((1 + nominal rate of return) ÷ (1 + inflation rate)) − 1] × 100 = ((1.08 ÷ 1.03) − 1) × 100 = 4.8544, or 4.85%

Billie purchased a 10-year U.S. Treasury bond with a 6.5% coupon paid semiannually. Assuming the bond is currently trading at $1,075, calculate its yield to maturity (YTM). A) 6.50% B) 2.76% C) 3.25% D) 5.51%

D) 5.51% Use the following TVM inputs in the financial calculator: PV = -$1,075 FV = $1,000 PMT = $32.50 (6.5% × $1,000 = $65 ÷ 2) N = 20 (10 x 2 periods per year) Solve for I/YR = 5.51%. The YTM on the bond is 5.51%, which is lower than the coupon rate of 6.5%, further validating that the bond is trading at a premium.

LMN Company has assets of $250 million and $100 million in liabilities. For the past year the company earned $75 million, and paid out $10 million in dividends. What is the company's return on equity (ROE)? A) 30% B) 40% C) 25% D) 50%

D) 50% $250,000,000 - $100,000,000 = $150,000,000 in equity. $75,000,000 profit ÷ $150,000,000 equity = 0.50, or 50% ROE.

An analysis of the monthly returns for the past year of a mutual fund portfolio consisting of two funds revealed these statistics: Fund A | Fund B Total return 18% 11% Standard deviation 23% 16% Percentage of portfolio 35% 65% Correlation coefficient (R) 0.25 What is the coefficient of determination (R2) of Fund A and Fund B? A) 84.64% B) 21.49% C) 50.00% D) 6.25%

D) 6.25% The coefficient of determination is the square of the correlation coefficient (0.25)2 = 0.25 × 0.25 = 0.0625, or 6.25%.

U.S. Treasury bills would be most appropriate for which of the following investors? A. John, age 25, single, no dependents, aggressive risk tolerance, need for growth and speculation B. Mary and Ed, ages 43 and 41, moderate risk takers, need for college funding in 8 years for their 10-year-old daughter, Megan C. Jack and Krissy, ages 65 and 63, conservative risk tolerance, need for liquidity and safety of principal D. Lucy, age 54, divorced, moderate to aggressive risk tolerance, need for retirement funding in 11 years, provides some financial support for her 78-year-old mother

C. Jack and Krissy, ages 65 and 63, conservative risk tolerance, need for liquidity and safety of principal Investors seeking diversification, liquidity, and safety of principal are the best candidates for U.S. Treasury bills. In this case, the best choice is Jack and Krissy

Stewart, age 29, is seeking an investment that offers the potential for long-term growth based on a broad market index representative of the largest domestic and international nonfinancial companies. He considers himself a moderate to aggressive risk taker and is interested in a low-cost, tax-efficient portfolio. Which of the following would be the best investment for Stewart? A. Long-Term Corporate Bond ETF B. Green Energy Mutual Fund C. Nasdaq 100 ETF D. Pacific Rim Growth ETF

C. Nasdaq 100 ETF Based on his investment objectives and risk tolerance, the Nasdaq 100 ETF is the best choice for Stewart. The Long-Term Corporate Bond ETF does not meet his need for a long-term growth investment. The Pacific Rim Growth ETF and the Green Energy Mutual Fund would be too concentrated in one market segment.

Chris owns a bond that is convertible into common stock at $38 per share and has a coupon of 6.0%. Interest is paid semiannually. The current market price of the stock is $42 per share. The investment value of the bond is $1,050, and the bond currently sells for a market price of $1,225. Which one of these percentages is closest to the downside risk of this bond? A) 18.37% B) 9.80% C) 14.29% D) 4.98%

C) 14.29% The downside risk of the bond is $175 ($1,225 current market price - $1,050 investment value). This translates into 14.29% ($175 downside risk ÷ $1,225 current market value).

Rex, Ltd., has assets of $400 million and liabilities of $200 million. Last year, the company earned $45 million and paid out $15 million in dividends. Using the formula g = return on equity × retention rate, what is the growth rate for Rex, Ltd.? A) 12.0% B) 7.5% C) 15.0% D) 22.5%

C) 15.0% $400,000,000 - $200,000,000 = $200,000,000 of equity; $45,000,000 earnings ÷ $200,000,000 equity = 0.225, or 22.50% ROE $45,000,000 earnings - $15,000,000 paid out in dividends = $30,000,000 of retained earnings; $30,000,000 ÷ $45,000,000 = 0.6667 retention rate g = ROE × RR g = 0.2250 × 0.6667 = 0.15, or 15%

Mike, a stock analyst, has determined several factors affecting the expected return on a stock. In addition, he has estimated their sensitivity coefficients and associated risk premiums. Factor | Sensitivity Coefficient | Risk Premium Unemployment 0.7 6% Inflation 0.8 4% Demand 1.2 5% Assuming the current risk-free rate of return is 3%, calculate the expected return of the stock using the arbitrage pricing theory (APT). A) 18.00% B) 13.40% C) 16.40% D) 12.20%

C) 16.40% The stock has an expected return of 16.40%, calculated as follows: using APT, ri = 0.03 + (0.7 × 0.06) + (0.8 × 0.04) + (1.2 × 0.05) = 0.1640, or 16.40%.

Assume a 3-year, $1,000 par value corporate bond is currently trading for $959.53. The bond has a coupon rate of 4% (paid once per year) and a yield to maturity of 5.50%. Calculate the duration for this bond. A) 3.5871 years B) 1.4418 years C) 2.8835 years D) 3.4680 years

C) 2.8835 years The duration for this bond is 2.8835 years, calculated as follows: Year | Cash Flow(CF) | Present Value(PV) of CF | PV × Year 1 | 40.00 | 37.91 | 37.91 2 | 40.00 | 35.94 | 71.88 3 | 1,040.00 | 885.68 | 2,657.04 - 959.53 | 2,766.83 To solve for the PV of a given CF (example Year 1): FV = 40, N = 1, PMT = 0, 5.5 = I/YR, solve for PV. Divide the sum in the last column (2,766.83) by the total PV/market price of the bond (959.53) to derive the duration of 2.8835 years.

Javier has just been informed that his XYZ stock will be incurring a 2-for-1 stock split. How many additional shares will Javier acquire if he already owns 200 shares of XYZ? A) 50 B) 100 C) 200 D) 400

C) 200 Javier will acquire 200 additional shares, and therefore, will own a total of 400 shares of XYZ stock. In a stock split, the par value of each share of stock is reduced, and the number of shares is increased proportionately.

Given a required rate of return of 8%, a growth rate of 4%, a beta of 1.25, and a standard deviation of 2.5%, calculate the price-to-free-cash flow for this particular investment. A) 28.0 B) 20.8 C) 26.0 D) 16.6

C) 26.0 The formula for price-to-free-cash flow: P/FCF = (1 + G) ÷ (r - g) = (1 + 0.04) ÷ (0.08 - 0.04) = 1.04 ÷ 0.04 = 26.0 After calculating this ratio, an investor would compare this P/FCF to other investments to see whether a purchase is warranted.

Leslie purchased a 10-year bond with a coupon rate of 4.75% paid semiannually. The bond has a current market price of $1,035. Calculate the yield to maturity (YTM) for Leslie's bond. A) 4.7500% B) 4.3118% C) 4.3154% D) 4.4520%

C) 4.3154% The bond's YTM is calculated using the following TVM inputs on a financial calculator: PV = −$1,035 FV = $1,000 PMT = 4.75% × 1000 = $47.50 ÷ 2 = $23.75 N = 20 (10 x 2 periods per year) Solve for I/YR = 4.3154% The YTM for Leslie's bond is lower than its coupon rate because the bond is trading at a premium.

Ashley purchased a five-year corporate bond with a 6.25% coupon paid semiannually. The bond is callable after three years for a price of $1,025. Assuming the bond is currently trading at $1,045, calculate its yield to call. A) 2.31% B) 2.69% C) 5.38% D) 4.62%

C) 5.38% Yield to call can be calculated using the following TVM inputs on the financial calculator: PV = -$1,045 FV = $1,025 PMT = $31.25 (6.25% × $1,000 = $62.50 ÷ 2) N = 6 (3 x 2 periods per year) Solve for I/YR = 5.38% The yield to call is 5.38%, which is lower than the coupon rate of 6.25%, further validating that the bond is trading at a premium.

Assuming Von made a $10,000 investment four years ago that presently has a value of $31,500, calculate the geometric mean return over the four-year investment period. A) 78.75% B) 33.22% C) 53.75% D) 57.50%

C) 53.75% An investment growing from $10,000 to $31,500 over a four-year period has a geometric mean return equal to 33.22%, calculated as follows: PV = −10,000 FV = 31,500 N = 4 Solve for I/YR = 33.2225, or 33.22%

Your client purchased a call of KLN Corp. for $800. The exercise price was $35, and the market price of KLN Corp. stock was $38. Six months later, the market price of KLN Corp. stock was $40 and the client sold the call for $1,250. What was the holding period return on this investment? A) 63.82% B) 8.57% C) 56.25% D) 14.28%

C) 56.25% HPR = sale price − purchase price / purchase price = 1,250−800 / 800 = 56.25%

Sammy owns a 7% corporate bond that is currently trading at $1,040. The bond matures in 22 years; however, it is callable in nine years at a 3% premium over par. What is the yield-to-call on Sammy's bond? A) 6.57% B) 6.97% C) 6.65% D) 6.82%

C) 6.65% The call premium is 3%, which would be a price of $1,030. The inputs can be used on the financial calculator: TVM Inputs- $1,040 PV $1,030 FV $35 = $1,000 x 7% = $70 / 2 PMT N = 18 (9 x 2 periods per year) N Solve for I/YR= 6.65%

Seven years ago, KLO Industries issued a 15-year bond with a 6% coupon rate. The bonds are currently rated BB+. Due a decline in interest rates, the company decided to call the bonds for 106% of par value. Calculate the rate of return for an investor who purchased the bond at issue for par and surrendered it today for the call price. A) 5.74% B) 6.00% C) 6.69% D) 6.25%

C) 6.69% The answer is 6.69%. The yield to call on this issue is calculated using the following TVM inputs on the financial calculator: FV = $1,060 PV = −$1,000 PMT = $30 (6% x $1,000 = $60 ÷ 2) N =14 (7 x 2 periods per year) Solve for I/YR = 6.69%

Seven years ago, KLO Industries issued a 15-year bond with a 6% coupon rate. The bonds are currently rated BB+. Due a decline in interest rates, the company decided to call the bonds for 106% of par value. Calculate the rate of return for an investor who purchased the bond at issue for par and surrendered it today for the call price. A) 6.25% B) 6.00% C) 6.69% D) 5.74%

C) 6.69% The yield to call on this issue is 6.69%, calculated using the following TVM inputs: FV = $1,060 PV = −$1,000 PMT = $30 (6% x $1,000 = $60 ÷ 2) N = 14 (7 x 2 periods per year) Solve for I/YR = 6.69%

A stock fund had these yearly returns: 20X5 - 14% 20X6 = 7% 20X7 = -3% 20X8 = 18% 20X9 = 9% What is the standard deviation of the returns? A) 6.04 B) 7.13 C) 7.97 D) 8.43

C) 7.97 Calculation as follows for the TI BA II+: Step 1: press "2nd" then "7". This activates the data screen. Step 2: press "2nd" then "CE/C" to clear all your existing work. Step 3: enter the first return "14" into the first "X01" screen and press enter. Step 4: hit the down arrow button "↓" and scroll past "Y01" and hit "↓" one more time until you get to "X02". Step 5: input the next return value which would be "7" and hit enter. Follow this process until you input all 5 values. Step 6: press "2nd" then "8" which is the "STAT" screen. Step 7: press "2nd" then "enter" which is the "SET" screen. Keep hitting the "2nd" and "enter" button until you see "1-V". Step 8: press "↓" to scroll through the calculated statistics. You will hit the "↓" button 3 times before you reach the standard deviation screen which will start with "Sx" and should equal "7.97".

Zenith Mutual Fund has had the following annual returns: +12%, +18%, +22%, and -13%. What is the Zenith Fund's geometric mean return? A) 9.75% B) 11.66% C) 8.83% D) 10.17%

C) 8.83% The simplest way to do this problem is to see how much $1 would have grown to over the four years, and then do a simple time value of money calculation. $1.00 × 1.12 × 1.18 × 1.22 × 0.87 = $1.4027. (1) PV, 1.4027 FV, 4 N, I/YR = 8.8281%.

A call option with an exercise price of $105 is selling in the open market for $4.25 when the market price of the underlying stock is $102. What is the intrinsic value of this option? A) $3.00 B) $4.25 C) -$3.00 D) $0

D) $0 This call option is out-of-the-money; thus, its intrinsic value is zero.

Which of these best describes a real estate mortgage conduit (REMIC)? A) None of these describes a REMIC. B) Like other open-end companies, a REMIC issues shares that are redeemed directly by the issuer. C) A REMIC is a self-liquidating, flow-through entity that invests exclusively in real estate mortgages or mortgage-backed securities. D) A REMIC is an agreement between two parties to make or take delivery of a specified amount of a financial asset at a future time, place, and unit price.

C) A REMIC is a self-liquidating, flow-through entity that invests exclusively in real estate mortgages or mortgage-backed securities. Typically, a REMIC issues debt securities to investors in the form of publicly traded REMIC bonds. A futures contract is an agreement between two parties to make or take delivery of a specified amount of a commodity or financial asset at a future time, place, and unit price.

Jim is a paper maker who purchases lumber from tree farmers around his state. Which of these hedge positions should Jim consider if he is concerned with rising lumber prices? A) A short hedge; Jim should buy lumber futures contracts to protect against rising lumber prices. B) A short hedge; Jim should sell lumber futures contracts to protect against rising lumber prices. C) A long hedge; Jim should buy lumber futures contracts to protect against rising lumber prices. D) A long hedge; Jim should sell lumber futures contracts to protect against rising lumber prices.

C) A long hedge; Jim should buy lumber futures contracts to protect against rising lumber prices. The answer is a long hedge; Jim should buy lumber futures contracts to protect against rising lumber prices. A long hedge uses a long futures position to hedge a short position (purchasing lumber).

Investors may use P/E ratios and price/sales ratios to value stocks. If this analysis is used, which of the following is desirable? A) A high P/E and a high price/sales ratio B) A high P/E and a low price/sales ratio C) A low P/E and a low price/sales ratio D) A low P/E and a high price/sales ratio

C) A low P/E and a low price/sales ratio Low prices to either earnings or sales might indicate an undervalued stock.

You are about to recommend the purchase of an additional mutual fund to add to a client's portfolio, with the objective of reducing the portfolio's total risk. Upon analysis of several funds, you determine that the standard deviations of the current portfolio and each of the potential new funds are equal, but that the correlation coefficients of these funds with the current portfolio are as shown in the answer choices below. Which of the funds should you recommend? A) Fund B: correlation coefficient = +0.65 B) Fund A: correlation coefficient = +0.91 C) Fund D: correlation coefficient = -0.08 D) Fund C: correlation coefficient = 0.00

C) Fund D: correlation coefficient = -0.08 According to modern portfolio theory, total portfolio risk, as measured by standard deviation, is lowered by combining securities in a portfolio so that individual securities have negative (or low positive) correlations between each other's rates of return.

Bill and Jane are considering adding additional assets to their investment portfolio. They consider themselves moderate-to-high-risk investors. Based on safety of principal, point out the investment that would offer the couple the least amount of protection from risk. A) Real estate B) High-grade common stock C) Futures D) Balanced mutual funds

C) Futures Based on the risk-return pyramid, futures will offer the couple the least amount of protection. However, due to their high risk, futures may offer the greatest amount of return.

A client has $40,000 in cash in a money market that she would like to invest in the stock market, but she is concerned that the market might not have hit bottom. You have convinced her of the merits of investing for the long term and she has decided to use a systematic approach to investing in mutual funds. She has decided that after her initial investment of $5,000, she will invest $4,000 at the end of each quarter provided that the NAV of the fund is less than her cumulative average cost basis. This is an example of which of the following strategies? A) Dollar cost averaging B) Share averaging C) Averaging down D) Averaging up

C) Averaging down Dollar cost averaging utilizes a fixed dollar amount at regular intervals regardless of price. Share averaging purchases the same number of shares and requires different dollar amounts. Averaging up is not a viable strategy; the idea is to buy low and sell high.

Which one of the following statements CORRECTLY matches a technical indicator to the information it provides in signaling a change from a bear to a bull market? A) Most financial advisers become bullish. B) A moving average chart indicates that actual prices have dropped through the average. C) Barron's Confidence Index indicates that the yield differential between low-quality bonds and high-quality bonds is decreasing. D) Odd lot sales exceed purchases.

C) Barron's Confidence Index indicates that the yield differential between low-quality bonds and high-quality bonds is decreasing. In a bull market, there is less fear so there is a lower spread between high-quality and lower-quality bonds.

Which of the following factors is NOT necessary for calculating the measure of risk that is used in Markowitz's efficient frontier? A) Correlation between each asset class and every other asset class B) The percentage of the portfolio invested in each asset class C) Beta for each asset class D) Standard deviation for each asset

C) Beta for each asset class The efficient frontier consists of efficient portfolios. An efficient portfolio has the highest return for a given level of risk. The risk measure is standard deviation; specifically, the standard deviation of a multi-asset portfolio. The other choices represent inputs needed to determine the standard deviation of a multi-asset portfolio. Beta is not used in the calculation.

Which of the following statements regarding asset allocation is CORRECT? I. Asset allocation is the main determinant of a portfolio's total return. II. The purpose of strategic asset allocation is to determine an appropriate allocation based on the long-term financial goals of the client. A) II only B) Neither I nor II C) Both I and II D) I only

C) Both I and II Both of these statements are correct.

Mike places a market order to sell short 200 shares of ABC stock. The order is filled at $23.45 per share. Assuming he can cover the short by purchasing the shares at $20 per share, calculate his gain or loss. A) Gain of $850 B) Loss of $690 C) Gain of $690 D) Loss of $345

C) Gain of $690 Mike will have a gain of $690 on the shares of XYZ stock. $23.45 proceeds - $20.00 cost $3.45 gain × 200 shares = $690

Which of these is an example of a defensive stock? A) Restaurant stock B) Computer stock C) Grocery store stock D) Airline stock

C) Grocery store stock Companies that provide non-cyclical consumer products (i.e., food, consumer staples, pharmaceuticals, and tobacco) typically do well despite general economic downturns. A computer stock, an airline stock, and a restaurant stock are types of companies that sell luxury products and services, purchases of which may be reduced during an economic downturn.

Which of the following statements regarding duration is CORRECT? I. Risk-averse investors should consider bonds with low durations. II. Aggressive investors should consider bonds with low durations when they anticipate that interest rates will rise. A) I only B) Neither I nor II C) Both I and II D) II only

C) Both I and II Risk-averse investors should consider bonds with low durations. Aggressive investors should consider bonds with high durations when they anticipate that interest rates will decline, and they should consider bonds with low durations when they anticipate that interest rates will rise.

Revenue bonds are used to finance any municipal facility that generates sufficient income to satisfy the ongoing debt obligation. Which of these is NOT a type of revenue bond? A) Special assessment bonds B) Industrial development revenue bond C) Housing debentures D) Special tax bonds

C) Housing debentures New housing authority (or Section 8) bonds are an example of a revenue bond.

Debbie owns a five-year AAA rated municipal bond with a coupon rate of 3.50% (paid semiannually). If the comparable yield for this quality bond is currently 2.75%, what is the present value of her bond? A) $966.14 B) $823.27 C) $1,064.80 D) $1,034.81

D) $1,034.81 The present value of her bond is $1,034.81, calculated using the following inputs on a semiannual basis: N = 10 (5 x 2 periods per year) I/YR = 1.375% (2.75 ÷ 2) PMT = $17.50 (3.50% × 1,000 ÷ 2) FV = $1,000 Solve for PV = -1,034.81, or $1,034.81

Calculate the present value of a five-year bond with a coupon rate of 5.50% (paid semiannually) if similar quality bonds are currently yielding 4.35%. A) $950.32 B) $929.47 C) $1,026.97 D) $1,051.18

D) $1,051.18 The present value of the bond is $1,051.18, calculated using the following inputs: N = 10 (5 x 2 periods per year) I/YR = 4.35% PMT = (5.50% × 1,000 ÷ 2) = $27.50 FV = $1,000 Solve for PV = -1,051.18, or $1,051.18.

Identify which of the following statements regarding the risk premiums associated with the capital asset pricing model (CAPM) are CORRECT. I. The stock risk premium is the inducement necessary to entice the individual to invest in a given stock. II. The market risk premium is the incentive required for the individual to invest in the securities market. A) I only B) Neither I nor II C) Both I and II D) II only

C) Both I and II Statements I and II are both correct. The stock risk premium is the inducement necessary to entice the individual to invest in a particular stock, whereas the market risk premium is the incentive required for the individual to invest in the securities market in general.

Which of these statements pertaining to the capital market line (CML) is CORRECT? I. Lending portfolio—As the investor proceeds back along the CML toward the risk-free rate of return, he is becoming conservative in making investments and is investing more in risk-free government securities II. Borrowing portfolio—As the investor proceeds along the CML, he is becoming more aggressive in making investments, including making use of margin and leverage A) II only B) Neither I nor II C) Both I and II D) I only

C) Both I and II The development of the capital market line allows investors to see that the risk and the potential return of various asset classes do increase along a relatively straight line.

Identify which of these is NOT a source of systematic risk. A) Market risk B) Reinvestment rate risk C) Business risk D) Purchasing power risk

C) Business risk Business risk is a type of unsystematic risk. Unsystematic risks only affect one company, country, or sector and its related securities.

Which of the following is a general characteristic of hedge funds? A) High marketability B) Full transparency and disclosure C) Charge both a management fee and a carried interest fee D) Little or no use of leverage

C) Charge both a management fee and a carried interest fee Hedge funds have few public disclosure requirements, may lack marketability, and use leverage.

Daniel has several investment company products within his retirement portfolio. One of these investments trades on an exchange, may trade at a premium or discount to its net asset value, and has a fixed capital structure. These features illustrate which of these investments? A) Hedge fund B) Unit investment trust C) Closed-end investment company D) Open-end investment company

C) Closed-end investment company A closed-end investment company (closed-end fund) is a type of company whose shares trade in the secondary market.

A financial reporter notices that the quoted price of one investment company's shares is at a 22% discount from the NAV. From this information, it can be deduced that the company is likely which of the following? A) Open-end investment company B) Unit investment trust C) Closed-end investment company D) Contractual plan of a mutual fund

C) Closed-end investment company If the selling price of an investment company is less than the NAV, the fund is likely a closed-end investment company.

A money market mutual fund manager recently purchased negotiable, short-term, unsecured promissory notes issued by a number of large corporations for the portfolio. Select the type of investment the money manager purchased. A) Reverse repurchase agreements B) Banker's acceptances C) Commercial paper D) Repurchase agreements

C) Commercial paper Commercial paper is usually issued in denominations of $100,000 or more and is a substitute for short-term bank financing. Commercial paper is normally sold at a discount and is rated for quality by a rating service.

Which of the following are attributes of an economy that is coming out of recession? A) Interest rates are falling. B) Unemployment is increasing. C) Cyclical stocks will begin to move up in price. D) Personal incomes are in decline.

C) Cyclical stocks will begin to move up in price. Once the economy starts to recover, the unemployment rate will decline, interest rates will fall, and personal income will grow. Then cyclical stocks will begin to move up in price.

ABC Corporation is a manufacturer of electronic devices used in the manufacturing of airplanes. Five years ago, the corporation floated a $100 million bond issue that would be used to finance improvements at its main manufacturing and distribution center. However, orders for its products have dropped dramatically due to much lower than anticipated demand. The company believes it may miss paying the coupon payment on the bond issue in the upcoming fiscal year. Which of these risks may the owners of ABC Corporation bonds be subject to by holding the bonds? A) Reinvestment rate risk B) Market risk C) Default risk D) Regulation risk

C) Default risk Default risk is the risk that a business will be unable to service its debt obligations.

Bobby has these securities in his portfolio: ABC common stock, XYZ common stock, PQR mutual fund (domestic small cap), DEZ mutual fund (foreign small cap), 30-year Treasury bond, and 5-year Treasury note. Point out the risk that should NOT concern Bobby. A) Reinvestment rate risk B) Systematic risk C) Default risk D) Financial risk

C) Default risk Treasuries are considered default risk-free. Financial risk is the uncertainty introduced from the method by which a firm finances its assets (i.e., debt versus equity financing). Reinvestment rate risk is the risk that as cash flows are received they will be reinvested at lower rates of return than the investment that generated the cash flows. Systematic risk is the risk that all securities are subject to and typically cannot be eliminated through diversification.

Select a benefit of investing in foreign markets. A) Currency fluctuations B) Reinvestment rate risk C) Diversification D) Portfolio rebalancing

C) Diversification Diversification is one of the major reasons to invest in foreign markets. In addition, these markets tend to have a low correlation to the U.S. market.

Interest in gold as an investment increases during periods of which of these? A) Economic growth B) Deflation C) Economic or political uncertainty D) Recession

C) Economic or political uncertainty Economic or political uncertainty causes the demand for gold to grow.

All of the following statements correctly describe a type of money market instrument except A) negotiable CDs are deposits of $100,000 or more and are traded in the open market. B) banker's acceptances are short-term drafts drawn on major banks to finance imports and exports. C) Eurodollars are Eurodollar-denominated deposits maintained at banks within the United States. D) commercial paper is a short-term, unsecured promissory note issued by large firms and offers a nominally higher yield than T-bills.

C) Eurodollars are Eurodollar-denominated deposits maintained at banks within the United States. Eurodollars are U.S. dollar-denominated deposits in banks outside the United States. The average deposit is in the millions and has a maturity of less than six months.

Which of these is NOT a type of unsystematic risk? A) Financial risk B) Default risk C) Exchange rate risk D) Country risk

C) Exchange rate risk Exchange rate risk is a type of systematic risk. Systematic risks are those risks that affect the entire market. Systematic risks include market risk, interest rate risk, purchasing power risk, reinvestment rate risk, and exchange rate risk.

Andy owns a yen-denominated bond that matures in 15 years. Andy's bond is subject to which one of these combinations of systematic risk? A) Financial risk and purchasing power risk B) Interest rate risk and default risk C) Exchange rate risk and reinvestment rate risk D) Market risk and business risk

C) Exchange rate risk and reinvestment rate risk Because Andy owns a foreign investment, he would be subject to exchange rate risk. Also, coupon-paying bonds are subject to reinvestment rate risk.

Jay has recently learned that foreign investments are a good way to diversify a portfolio. Select which of these statements regarding the risks and benefits of foreign investments, specifically American depositary receipts (ADRs), is CORRECT. A) Because ADRs are only available through private placements, they are relatively illiquid and nonmarketable investments. B) ADRs are receipts for investments placed with foreign mutual funds. C) Foreign taxes paid on income earned from an ADR are eligible for the foreign tax credit. D) ADRs are free of exchange rate risk but are subject to market risk.

C) Foreign taxes paid on income earned from an ADR are eligible for the foreign tax credit. Although ADRs are dollar denominated, they are still subject to exchange rate risk because the dividends are declared in the local currency and converted to U.S. dollars. ADRs are receipts for shares of a foreign company, not shares of a mutual fund. Because ADRs are traded in the secondary market, they are relatively liquid and marketable investments. Foreign taxes paid are eligible for the foreign income tax credit.

You are choosing between two investments: Mutual Fund A with a return of 12% and a standard deviation of 18%, and Mutual Fund B with a return of 8% with a standard deviation of 12%. If the risk-free rate is 3%, which fund should you choose based upon one of the risk-adjusted return measurements? A) Either Fund A or Fund B B) Not enough information is provided C) Fund A D) Fund B

C) Fund A Enough information is given to calculate the Sharpe ratio for each investment. For Fund A (12 - 3) ÷ 18 = 0.50. For Fund B (8 - 3) ÷ 12 = 0.42. The higher the ratio, the better, so Fund A is the best choice.

Gordon, age 40, wants to invest in a mutual fund that will provide capital appreciation. He wants a fund that will do as well as the overall market and has a low expense ratio, but he does not want to assume a high risk to achieve his objective. He is considering purchasing one of the following mutual funds: - Fund A: a growth mutual fund that has a beta of 1.10 and invests in medium- to high-grade common stock - Fund B: an index mutual fund that has a beta of 1.00 and invests in common stock that mirrors the S&P 500 Index Which of these funds would best meet Gordon's objective? A) neither alternative is appropriate for his objective B) Fund A, because it can be expected to outperform the market and has an acceptable level of risk C) Fund B, because it has a beta of 1.00, has low expenses, and is less risky D) Fund A, because it invests in lower-risk stocks than Fund B

C) Fund B, because it has a beta of 1.00, has low expenses, and is less risky Fund B can be expected to do as well as the overall market, will have a low expense ratio, and is less risk, as measured by beta, than Fund A.

The random walk hypothesis is supported when I. future price changes are not correlated with past price changes. II. stock price changes are random but predictable. III. stock prices respond rapidly to new information. IV. past information is not useful in predicting future price changes. A) III only B) II, III, and IV C) I, III, and IV D) I, II, and IV

C) I, III, and IV The random walk hypothesis assumes that stock price changes are essentially random, and therefore unpredictable; or that successive stock returns are independent of past returns. Stock prices react quickly to new information. Past information is not relevant when predicting future price changes, hence, future price changes are not correlated with past price changes.

Which of these describe differences between preferred stock and long-term bonds? I. Preferred stock usually has a shorter maturity than long-term bonds. II. Corporations receive more favorable tax treatment when investing in preferred stock than when investing in long-term bonds. III. Preferred stock dividends are a stronger legal obligation to the firm than interest payments on long-term bonds. IV. The market price of preferred stock tends to fluctuate more than the market price of long-term bo

C) II and IV Corporations receive preferential tax treatment when investing in preferred stock. The market price of preferred stocks is more volatile than long-term bonds when interest rates fluctuate.

Amber purchased a bond for $1,038.90 exactly two years ago. At that time, the bond had a maturity of five years and a coupon rate of 10% (paid semiannually). Assuming the rates below are the prevailing rates for this type of bond at different maturities, calculate the price that Amber could sell her bond for today. Maturities | 1 year | 3 years | 5 years | 10 years |30 years Interest rates | 6% | 7% | 8.5% | 10% | 12% A) $1,060.08 B) $1,038.31 C) $1,078.73 D) $1,079.93

D) $1,079.93 Using the 3-year rate of 7% for the calculation on a semiannual basis: FV = $1,000 I/YR = 7% PMT = $50 (10% x 1000 = 100 ÷ 2) N = 6 (3 x 2 periods per year) PV = -1,079.9283, or $1,079.93

A convertible bond has a par value of 1,000, a current market value of $1,200, and an investment value of $1,050. The bond is convertible into 25 shares of common stock. What is the investment premium of this bond? A) $100 B) $75 C) $200 D) $150

D) $150 The investment premium is a measure of the downside risk of the bond and is the difference between the current market value and the investment value. $1,200 - $1,050 = $150 investment premium.

Select which of these statements regarding Treasury notes and Treasury bonds is CORRECT. I. Both Treasury notes' and bonds' interest payments are income tax free at the state and federal level. II. Treasury notes and bonds are considered default risk free. III. If held for more than one year, interest paid on Treasury bonds is eligible for long-term capital gain treatment. IV. Both Treasury notes and bonds are not traded in the secondary market. A) I, III, and IV B) I and II C) II only D) III and IV

C) II only Both Treasury notes and bonds are considered default risk free. Both obligations trade in the secondary market and pay interest, which is income tax free at both the state and local level, but taxed as ordinary income in the year earned at the federal level.

Chelsea purchases a warrant for $2 per share that gives her the right to buy 80 shares of XYZ stock at $20 per share for a period of five years from date of purchase. Assume XYZ stock goes up to $25 per share after three years and Chelsea exercises the warrant. What profit does she make on the 80 shares? A) $210 B) $180 C) $150 D) $240

D) $240 profit = (gain on stock - cost of warrant) × number of shares; ($5/share - $2/share) × 80 shares = $240

The weak form of the efficient market hypothesis I. reinforces the value of technical analysis. II. implies that technical analysis is not worthwhile. III. implies that fundamental analysis is not worthwhile. IV. implies that inside traders cannot earn superior risk-adjusted returns. A) II and III B) I and IV C) II only D) I, III, and IV

C) II only The weak form implies that information contained in historical stock prices is fully incorporated into current stock prices; therefore, technical analysis (the study of historical prices and volume) is not worthwhile in predicting future prices. This form neither refutes fundamental analysis nor implies that traders using insider information cannot earn superior profits.

Which of the following steps are involved in the investment planning process? I. Establishment of a brokerage account II. Selection of assets for investment III. Implementation of investment plan IV. Determination of ability to invest A) I, II, and III B) I, III, and IV C) II, III, and IV D) I, II, and IV

C) II, III, and IV Establishing a brokerage account is not a necessary step in the investment process; however, it may be included in the implementation phase.

JEM stock has a beta coefficient of 1.35 and the market has a rate of return of 8.50%. The 90-day U.S. Treasury bill rate of return is 1.75%. Based on the information provided, choose the CORRECT statements. I. The stock risk premium is 6.75%. II. The market risk premium is 9.11%. III. The expected rate of return is 10.86%. A) I, II, and III B) I and II C) III only D) I and III

C) III only The expected rate of return based on the capital asset pricing model is 10.86%, calculated as follows: ri = 0.0175 + (0.085 - 0.0175)1.35 = 10.86, or 10.86% The stock risk premium is 9.11%, (0.085 - 0.0175)1.35. The market risk premium is 6.75%, (0.085 - 0.0175).

Assume that Zephyr stock pays a dividend of $1.75 per share in the current year, and that the dividend is expected to grow by 2% per year. Calculate the price of the stock, assuming an investor has a required rate of return of 8%. A) $21.88 B) $29.16 C) $23.62 D) $29.75

D) $29.75 The formula for the constant growth dividend discount model: V = D1 ÷ (r - g) Therefore, the intrinsic value of Zephyr stock equals $29.75 [(1.75 × 1.02) ÷ (0.08 - 0.02)].

American Depositary Receipts (ADRs) are used to I. finance foreign exports. II. eliminate currency risk. III. sell U.S. securities in overseas markets. IV. trade foreign securities in U.S. markets. A) I and IV B) I, II, and III C) IV only D) II and IV

C) IV only ADRs are used to trade foreign securities in the United States. ADRs are trust receipts issued by a U.S. bank for shares of a foreign company that are held by a foreign branch of the bank. ADRs are legal claims against the equity interest that the bank holds. ADRs do not eliminate currency risk.

The Nelsons, a family of modest means, are preparing to implement their financial plan. As part of their plan, they need to place more cash into a convenient emergency fund. Determine which of the following investments would be most suitable for the Nelsons' emergency fund. A) Negotiable certificates of deposit (CDs) B) U.S. Treasury bills C) Money market mutual fund D) Banker's acceptances

C) Money market mutual fund Money market mutual funds typically invest in high quality, short-term investments, such as Treasury bills, commercial paper, and negotiable CDs. The typical minimum investment is $1,000, and funds may be withdrawn from the account at any time without penalty by writing a check on the account. Money market mutual funds are heavily used by prudent investors as part of their emergency fund.

Choose the REITs that are used to finance real estate ventures that develop property or finance construction. A) Equity REITs B) Hybrid REITs C) Mortgage REITs D) Government REITs

C) Mortgage REITs Mortgage REITs are in the business of financing real estate ventures. They make loans to develop property or finance construction.

Income or dividends produced by which of the following securities is exempt from federal income tax? A) Corporate debt B) U.S. Treasuries C) Municipal bonds D) Common stock

C) Municipal bonds Income produced by municipal bonds is exempt from federal income tax.

Mysterious Company stock has a mean return of 9% and a standard deviation of 3%. Based on this information, which of the following statements is CORRECT? A) Five percent of Mysterious Company's returns will be greater than 15%. B) Half of Mysterious Company's returns will fall below 6%. C) Mysterious Company is unlikely to experience a negative return. D) Approximately 68% of Mysterious Company's returns will fall between 3% and 15%.

C) Mysterious Company is unlikely to experience a negative return. With a normal probability distribution, 68% of the returns fall within one standard deviation of the mean, 95% within two standard deviations, and 99% within three standard deviations. Therefore, Mysterious Company has less than a 0.5% chance of experiencing a negative return.

Choose the form of the efficient market hypothesis that supports technical analysis. A) Weak B) Strong C) None of these D) Semistrong

C) None of these The efficient market hypothesis is in direct contradiction to technical analysis because the efficient market hypothesis is founded on the notion that all historical price and volume data, which is used by technical analysts, is already accounted for in the current stock price.

Which one of the following options is true? Closed-End Funds | Open-End Funds A. Bought and sold in secondary market | Often sell at discount to NAV B. Often sell at premium to NAV | NAV computed daily C. Sector funds not permitted | Also known as unit trusts D. Fixed number of shares sold | Shares purchased directly from fund company A) Option B B) Option A C) Option D D) Option C

C) Option D Investors purchase shares of open-end funds directly from investment companies.

Assume an option writer buys a stock for $75 and immediately sells a call option on the stock for a premium of $5 at a strike price of $75. What is the maximum gain to the call writer and the maximum loss to the call buyer? Maximum Gain to Call Writer | Maximum Loss to Call Buyer A. $5 | $80 B. $80 | $5 C. $80 | $80 D. $5 | $5 A) Option C B) Option B C) Option D D) Option A

C) Option D The maximum gain for the option writer is the call premium received; the maximum loss for the option buyer is the call premium paid.

You are about to analyze a growth company that has chosen to retain all of its earnings for growth and has had a positive cash flow, but a negative earnings per share, for the past several years. Which of the following valuation approaches would you consider when analyzing the company? A) Constant growth dividend discount model B) Price/earnings-to-growth (PEG) ratio C) Price-to-sales (P/S) ratio D) Price-to-earnings (P/E) ratio

C) Price-to-sales (P/S) ratio The P/S ratio is an indication of how much an investor is willing to pay for a specific revenue stream, in this case the company's annual sales.

Which of the following statements regarding the various performance measures are CORRECT? I. A positive alpha indicates that the manager consistently underperformed the market on a risk-adjusted basis. II. Jensen's alpha indicates how much the realized return differs from the expected return, as per the capital asset pricing model (CAPM). III. The Sharpe ratio is not useful for evaluating the performance of nondiversified portfolios. IV. The Treynor ratio does not indicate whether a portfolio manager outperformed or underperformed the market portfolio. A) II, III, and IV B) I and III C) I and II D) II and IV

D) II and IV A positive alpha indicates that the manager outperformed the market on a risk-adjusted basis. The Sharpe ratio uses total risk, as measured by standard deviation, and is useful for evaluating the performance of both nondiversified and well-diversified portfolios.

The weak form of the efficient market hypothesis: I. reinforces the value of technical analysis. II. implies that technical analysis is not worthwhile. III. implies that fundamental analysis is not worthwhile. IV. implies that inside traders cannot earn superior risk-adjusted returns. A) I and IV B) II and III C) I, III, and IV D) II only

D) II only The weak form implies that information contained in historical stock prices is fully incorporated into current stock prices; therefore, technical analysis (the study of historical prices and volume) is not worthwhile in predicting future prices. This form neither refutes fundamental analysis nor implies that traders using insider information cannot earn superior profits.

When working with anxious clients who are concerned about widely fluctuating stock market prices, what is the most important service you can provide to them? A) Discussing their risk tolerance B) Referring them to a financial counselor C) Guaranteeing them a profit on their investments D) Managing their expectations

D) Managing their expectations Unrealistic expectations can be a function of a client's ignorance about financial markets and securities. By using your knowledge, you can educate clients about markets and securities so that expectations are realistic. Doing so also strengthens the client/planner relationship and allows you to demonstrate your expertise.

Which of the following is NOT considered a constraint when developing an investment policy statement? A) Time horizon B) Taxes C) Liquidity needs D) Market conditions

D) Market conditions An investment policy statement is a written document that sets forth a client's objectives and establishes certain limitations on the investment manager. The following are constraints of the investment policy statement: time horizon, liquidity needs, taxes, laws and regulations, and unique circumstances/preferences. Market conditions are not a constraint when developing an investment policy statement.

To immunize a bond portfolio over a specific investment horizon, an investor would do which of the following? A) Match the average weighted maturity of the portfolio to the investment horizon. B) Match the duration of each bond to the investment horizon. C) Match the maturity of each bond to the investment horizon. D) Match the average weighted duration of the bond portfolio to the investment horizon.

D) Match the average weighted duration of the bond portfolio to the investment horizon. When a portfolio is immunized, its liabilities and expected future cash outflows are funded by making sure that the cash flow from investments (income and principal) will be there at the time that the cash outflow is needed. That is done by matching the duration, not the maturity, of the bond portfolio to the number of years until the cash outflow will occur. The duration of the portfolio as a whole should be matched, not the duration of each bond in the portfolio.

The Galaxy Fund has a standard deviation of 15, and a mean return of 9%. The Universe Fund has a standard deviation of 22, and a mean return of 13%. The Milky Way Fund has a standard deviation of 18, and a mean return of 11%. Which fund should you choose in order to minimize the risk per unit of return? A) Each fund offers the same risk per unit of return. B) Universe Fund C) Galaxy Fund D) Milky Way Fund

D) Milky Way Fund The Galaxy Fund has a coefficient of variation of 1.67, the Universe Fund has a coefficient of variation of 1.69, and the Milky Way Fund has a coefficient of variation of 1.64. Coefficient of variation = standard deviation ÷ mean return, select the lowest number.

Which of the following statements regarding the arbitrage pricing theory (APT) is CORRECT? A) Inflation is not a pricing factor. B) The risk-free rate of return does not affect the return. C) Beta is a pricing factor. D) Multiple factors affect the return of a security.

D) Multiple factors affect the return of a security. The APT determines returns based on multiple factors. These factors might include inflation, growth in GDP, major political upheavals, or changes in interest rates.

PQR stock has a current dividend of $1.75 that has been growing at a constant rate of 8% per year. If the stock is currently selling for $100 and your required rate of return is 10%, would you buy the stock at today's price? A) Yes, because the stock is a good buy on the basis of its risk-return relationship. B) Yes, because the stock is undervalued on the basis of the constant growth dividend discount model. C) No, because the stock is not a good investment on the basis of its risk-return relationship. D) No, because the stock is overvalued on the basis of the constant growth dividend discount model.

D) No, because the stock is overvalued on the basis of the constant growth dividend discount model. On the basis of the constant growth dividend discount model, the intrinsic value of XYZ stock is $94.50, calculated as follows: D0(1 + g) ÷ (r - g) = $1.75(1.08) ÷ (0.10 - 0.08) = $94.50. Because XYZ stock is currently selling for $100 per share, it is overvalued in the market and the investor should not buy the stock.

Art and oriental rugs may not be sold through which of the following methods? A) Privately B) Through dealers C) At auctions D) On the NYSE

D) On the NYSE Art and oriental rugs are not sold on the New York Stock Exchange (NYSE). Art and oriental rugs are usually sold through dealers. Art and oriental rugs are frequently sold through auctions, especially in estate sales. Art and oriental rugs may be privately sold.

Which one of these is CORRECT regarding preferred stock? A) Failure to pay preferred stock dividends results in bankruptcy. B) Preferred stockholders have voting rights. C) Preferred stock's dividends are tax deductible for corporations. D) Preferred stock's value is based on prevailing interest rates.

D) Preferred stock's value is based on prevailing interest rates. The value for a preferred stock is its dividend divided by prevailing interest rates.

Which of the following is NOT likely to be an advantage of a valid investment policy statement? A) Identifies and documents investment objectives and constraints B) Allows for a continual dynamic process in meeting investor objectives C) Promotes long-term discipline in investment decisions D) Provides for short-term strategy shifts in response to short-term dramatic value declines

D) Provides for short-term strategy shifts in response to short-term dramatic value declines The answer is provides for short-term strategy shifts in response to short-term dramatic value declines. The investment policy statement does not provide for shifts in strategy due to short-term value declines.

Due to an inheritance, Danielle now owns a large position in XYZ stock. She is concerned that the stock may decline in the upcoming months while she is deciding what to do with the investment. What type of investment strategy could her financial planner propose to protect the stock from substantial downside risk? A) Write a call option B) Zero-cost collar C) Purchase an index future D) Purchase a put option

D) Purchase a put option Danielle should purchase a put option (referred to as protective put or portfolio insurance) to protect herself from possible loss. Thereby, the portfolio is protected and the investor's loss on the option is limited to the amount of the premium paid for the put.

Which of the following accurately describes the certificate of deposit investment strategy known as laddering? A) Immediately purchasing another certificate as one certificate matures B) Purchasing certificates in progressively increasing deposit amounts C) Redeeming a certificate of deposit and reinvesting in a new certificate when interest rates increase D) Purchasing multiple certificates of deposit (CDs), rather than just one, with equally spaced terms of maturity

D) Purchasing multiple certificates of deposit (CDs), rather than just one, with equally spaced terms of maturity The answer is purchasing multiple certificates of deposit (CDs), rather than just one, with differing terms of maturity. Investors with relatively large amounts of money to invest should purchase multiple certificates with equally spaced terms to maturity, a strategy known as laddering.

Xavier is concerned that his investment portfolio is too concentrated in only a few stocks. He meets with his financial advisor for advice. The advisor recommends that Xavier diversify his portfolio among many different types of issues. Which of the following is the primary goal of this strategy? A) Decrease marketability B) Increase portfolio return C) Increase liquidity D) Reduce portfolio risk

D) Reduce portfolio risk Diversification aims to reduce unsystematic risk, not necessarily increase portfolio returns.

Which statement regarding indifference curves is CORRECT? A) Reflect happier investors when the curve is lower B) For risk-averse investors, show decreasing returns for increases in risk C) Represent the return patterns of two or more equally attractive stocks D) Represent all points where an investor is equally satisfied with the risk/return trade-off

D) Represent all points where an investor is equally satisfied with the risk/return trade-off Indifference curves express an individual's preference regarding two items: risk and return. The more risk averse an investor is, the steeper the slope is for that investor's indifference curve. Conversely, the less risk averse an investor is, the flatter the slope for that investor's indifference curve.

Lloyd is a dealer in government securities. He has purchased government securities from another dealer, Fred, and has agreed to sell them back at a later date. From Lloyd's perspective, which transaction has been executed? A) Repurchase agreement B) Promissory note C) Commercial paper investment D) Reverse repurchase agreement

D) Reverse repurchase agreement Lloyd, as the buyer, has entered into a reverse repurchase agreement, and Fred, as the seller, has entered into a repurchase agreement.

Select the investment that gives the shareholder a short-term opportunity to buy new shares of the new stock issue, thereby maintaining the shareholder's respective overall percentage ownership in the corporation. A) Warrants B) Call options C) Preferred stock D) Rights

D) Rights Rights are a purchase option for stock that allows a shareholder the opportunity to buy shares of the new stock issue, thereby maintaining the overall percentage ownership in the corporation.

Connie, 45, has an extensive amount of assets in a separately managed account. The account is mostly compromised of small-cap growth companies. What is the best benchmark to analyze the performance of her account? A) Wilshire 5000 Index B) Value Line Index C) MSCI EAFE Index D) Russell 2000 Index

D) Russell 2000 Index Connie should use the Russell 2000 Index to compare her investment portfolio's performance to a benchmark. This index is used to benchmark small-capitalization companies.

Which of the following bond strategies should not be recommended if an investor expects interest rates to increase? A) Sell U.S. Treasury bonds and buy U.S. Treasury bills. B) Sell low-coupon bonds and buy bonds with high coupons. C) Sell long-term bonds and buy short-term bonds. D) Sell low-duration bonds and buy longer duration bonds.

D) Sell low-duration bonds and buy longer duration bonds. Prices decline when interest rates rise. An investor expecting an increase in interest rates should sell more volatile bonds and purchase less volatile bonds. Bonds with large coupons and short durations are less price volatile than low-coupon, long-term, and long duration bonds.

If an investor has a net short-term capital loss of $1,200 and a net long-term capital gain of $2,500, which of the following statements is true? A) The client has an ordinary loss deduction of $1,200 and pays tax on a long-term capital gain of $2,500. B) The client pays tax on a long-term capital gain of $2,500 and carries over the net short-term capital loss to future years until it can offset a short-term capital gain. C) None of these statements are true. D) The client pays tax on a net long-term capital gain of $1,300.

D) The client pays tax on a net long-term capital gain of $1,300. Short-term losses are then netted with long-term gains, with ultimate tax treatment being determined by the result of the final netting. In this case, the final net is $1,300 and is treated as a net long-term capital gain for tax purposes.

Martha owns a convertible bond that has a current market value of $1,200. The bond's conversion ratio is 22 shares, and its conversion value is $1,100. The bond has a coupon of 8%, payable semiannually, and matures in 16 years. With market interest rates currently at 7.5%, the bond's investment value is $1,050. Martha wants to sell the convertible bond if, assuming the stock falls in price, her risk of loss exceeds 10%. Which one of these statements about this convertible bond is CORRECT? A) The downside risk is between 5% and 10%, and the bond should be retained. B) Downside risk is not a factor when the conversion price exceeds the investment value of the bond. C) Downside risk cannot be calculated because the price of the stock is not given. D) The downside risk exceeds 10%, and the bond should be sold.

D) The downside risk exceeds 10%, and the bond should be sold. The downside risk of the bond is $170 ($1,200 current market value - $1,050 investment value). This translates into 14.17% ($170 downside risk ÷ $1,200 current market value). Therefore, the bond should be sold.

If a U.S. resident buys a Japanese auto stock that subsequently rises in price while the Japanese currency weakens relative to the U.S. currency, which one of these situations is most likely to occur when the investor sells the stock at a gain? A) None of these. B) The net gain will be increased due to the currency change. C) The net gain will be the same regardless of the currency change. D) The net gain will be decreased due to the currency change.

D) The net gain will be decreased due to the currency change. A strong U.S. currency decreases the gain from a sale of a foreign stock.

If a U.S. resident buys a Japanese bank stock that subsequently rises in price, while the Japanese currency strengthens relative to the U.S. currency, which of these situations is most likely to occur when the investor sells the stock at a gain? A) The net gain will be the same regardless of the currency change. B) None of these. C) The net gain will be decreased due to the currency change. D) The net gain will be increased due to the currency change.

D) The net gain will be increased due to the currency change. Strong Japanese currency means a weak U.S. currency, which increases the net gain on the transaction.

If the intrinsic value of a call option is $3, which of these statements is CORRECT? A) The option is at-the-money. B) The option is out-of-the-money. C) The option is covered. D) The option is in-the-money.

D) The option is in-the-money. When the intrinsic value of an option is positive, the option is in-the-money.

Which of the following is CORRECT with respect to convertible bonds and convertible preferred stock if the value of the common stock rises? A) The value of convertible bonds rises, but convertible preferred stock falls. B) The value of convertible bonds and convertible preferred stock declines. C) The value of convertible bonds falls, but convertible preferred stock rises. D) The value of convertible bonds and convertible preferred stock rises.

D) The value of convertible bonds and convertible preferred stock rises. The convertibles will not necessarily have the same gain; it will depend on their premium and conversion terms.

Which of the following is true of warrants? A) They increase the cost of capital necessary to float an issue B) There are incentives for investors to purchase the corporation's preferred stock C) They are incentives for investors to purchase futures contracts D) They allow for customization of terms among all potential investors

D) They allow for customization of terms among all potential investors Warrants are essentially customized (not standardized) call options issued to meet the needs of both the issuing corporation and the investor.

Which of the following statements is CORRECT regarding exchange-traded funds (ETFs)? A) They can be exchanged for other ETFs in the same family. B) They trade right at net asset value due to arbitrage transactions. C) They are usually tax-inefficient. D) They are permitted to sample an index.

D) They are permitted to sample an index. Rather than buy every security in an index, some ETFs only sample the index, called representative sampling, especially when the index contains a very large number of issues.

Which of these statements correctly explain zero-coupon bonds? A) They have low interest rate risk. B) They sell at a premium. C) They offer minimum price volatility. D) They eliminate reinvestment rate risk.

D) They eliminate reinvestment rate risk. Zero-coupon bonds are sold at a deep discount from par value and have no coupon payments. They are redeemed for their face value at maturity. These bonds have maximum price volatility and respond sharply to interest rate changes.

Select the CORRECT statement regarding investors who only purchase high-beta stocks. A) They prefer stocks with low risk and low positive skewness. B) They prefer stocks with high risk and low positive skewness. C) They prefer stocks with low risk and high positive skewness. D) They prefer stocks with high risk and high positive skewness.

D) They prefer stocks with high risk and high positive skewness. Generally, these types of investors would prefer stocks with high risk (high beta) and high positive skewness that provide the opportunity for high rates of return. Stocks exhibiting high positive skewness have a larger than average number of positive price movements.

Which of the following is CORRECT with regard to the purchasers of gold futures contracts? A) They are considered to be unleveraged positions. B) They have less speculative positions. C) They do not have to meet margin requirements. D) They run the risk of government intervention altering the supply and demand for gold.

D) They run the risk of government intervention altering the supply and demand for gold. Government intervention has always been an issue for gold. The price was fixed for years and Americans were forbidden from owning gold. Although this has changed, the possibility of government intervention does exist. These positions are very speculative and are highly leveraged and risky.

Select the repayment period that subjects the investor to least amount of interest rate risk. A) Tranche B B) Tranche Z C) Tranche C D) Tranche A

D) Tranche A Once all of the obligations of Tranche A are satisfied, all principal payments are made to the second tranche (Tranche B) and so on until all of the tranches are repaid. As a result, the holders of Tranche A have less interest rate risk than do the holders of all the other tranches, because the maturity date (or repayment period) of the mortgage principal obligation is the shortest.

Louis owns an investment that is an unmanaged portfolio in which the money manager initially selects the securities to be included in the portfolio and then holds those securities until they mature or the investment portfolio terminates. This statement best describes which type of investment? A) Open-end investment company B) Hedge fund C) Closed-end investment company D) Unit investment trust

D) Unit investment trust A unit investment trust (UIT) is an investment company whose units are sold in the secondary market and is generally unmanaged, or passively managed as the money manager initially selects the securities to be included in the portfolio and then holds those securities until they mature or the UIT terminates.

Reham Corporation has declared a record date of Friday, August 1, for its next quarterly dividend. Which of the following is the last day an investor can purchase the stock and still qualify for the dividend? A) Tuesday, July 29 B) Monday, July 28 C) Thursday, July 31 D) Wednesday, July 30

D) Wednesday, July 30 The record date is the first business day after the ex-dividend date. On the record date, trades are settled and reflected on the corporation's books. Accordingly, to be listed as a shareholder of record, the investor must purchase the stock before the ex-dividend date of Thursday, July 31.

Mimi, a client of Osborne Capital, Inc., believes her portfolio should be adjusted. She supports her claim by stating that she just won the lottery and wants to retire 10 years earlier than originally planned. Does she have a valid claim? A) Yes, her time horizon has changed. B) No, not enough information is given to determine. C) No, too much information is given to determine. D) Yes, her wealth and time horizon have changed.

D) Yes, her wealth and time horizon have changed. Changes in wealth, time horizon, and liquidity requirements all dictate the need to rebalance. Taxes, laws, regulations, and unique circumstances also play into this decision.

Which of these is a correct justification for use of an investment in a client's portfolio? I. Blue chip common stocks because they provide a hedge against inflation II. FNMA (Federal National Mortgage Association) securities because they are backed by the full faith and credit of the U.S. government III. Aggressive growth stocks because they perform better during economic contractions A) I and II B) II and III C) I and III D) I only

D) I only Stocks generally are considered an inflation hedge; in periods of hyper-inflation, this may not be true, but the question does not ask about periods of hyper-inflation. FNMA securities are not backed by the full faith of the government (the government did step in as a result of the credit crisis of 2008, but there has not been a commitment to permanently back FNMAs in the same way that GNMAs (Government National Mortgage Association) have historically been backed).

Bobby owns ABC stock that has mean return of 10.65%, a beta of 1.12, and a standard deviation of 9.05%. He decides to purchase MEJ stock that has a mean return of 11.5%, a beta of 0.98, and a standard deviation of 12.3%. Assume these stocks are weighted in the portfolio 70% for ABC and 30% for MEJ. Also, these stocks exhibit a covariance of 19.86. Calculate the standard deviation for this two-asset portfolio. A) 1.16% B) 10.02% C) 3.23% D) 7.88%

D) 7.88% The answer is 7.88%. To determine the standard deviation of a two-asset portfolio, use this formula: [W2Aσ2A + W2Bσ2B + 2WAWB(COVAB)]1/2 [(0.72 × 9.052) + (0.32 × 12.32) + (2 × 0.7 × 0.3 × 19.86)]1/2 [(0.49 × 81.90) + (0.09 × 151.29) + (8.3412)]1/2 [40.1310 + 13.6161 + 8.3412]1/2 62.08831/2 = 7.8796, or 7.88% Note the standard deviation for the portfolio is lower than the standard deviations for each security. This result directly supports the low correlation between the returns of ABC and MEJ.

The Finite Mutual Fund has a correlation coefficient of 0.90 with the S&P 500 Index. How much of the price movement of the Finite Mutual Fund is explained by the S&P 500 Index? A) 75% B) 100% C) 90% D) 81%

D) 81% R-squared gives us the amount of systematic risk, and we have been given R (correlation coefficient). So, we square 0.90 to come up with an R-squared of 0.81, or 81%.

What is the covariance between OPC and NIR stocks with a standard deviation of 9.13% and 11%, respectively, and a correlation coefficient of 0.85? A) 23.77 B) 28.69 C) 29.05 D) 85.37

D) 85.37 The covariance between the two stocks is 85.37 (9.13 × 11 × 0.85). Covariance measures the extent to which two variables move together, either positively (together) or negatively (opposite).

ABC Mutual Fund has a correlation coefficient of 0.93 with the S&P 500 Index. How much of the price movement of the fund can be explained by the S&P 500 Index? A) 14% B) 7% C) 93% D) 86%

D) 86% The correlation coefficient (R) has been given, so it needs to be squared (R2) in order to come up with the coefficient of determination. (0.932 = 0.8649, or 86%)

Choose the CORRECT statements concerning the futures market. I. A futures contract is a standardized, transferable agreement providing for the deferred delivery of either a designated commodity or financial instrument (or its cash value). II. Although a buy or sell commitment in futures trading is binding, a buyer or seller can eliminate the commitment by taking an opposite position in the same commodity or financial instrument for the same futures month. A) I only B) II only C) Neither I nor II D) Both I and II

D) Both I and II Both statements I and II are correct.

Which of the following factors should be considered when investing in antiques? I. Supply II. Marketability III. Inflation IV. Dealer reputation A) III and IV B) I, III, and IV C) I and II D) I, II, III and IV

D) I, II, III and IV The antique/collectibles markets are inefficient, where supply is frequently limited, making supply an important consideration. Some rare and famous antiques may be in great demand and be marketable; for many, however, no, or a limited, market and demand may exist. Rising inflation generally encourages investors to purchase tangibles. Dealer reputation is important in the collectibles market to minimize fraud.

Companies A and B have exactly the same dollar amount of assets and net income. Company A has a capitalization structure of 70% equity and 30% debt; Company B has a capitalization structure of 40% equity and 60% debt. Which of the following statements is CORRECT? A) Company B has a higher return on assets (ROA) than Company A. B) Company A has a higher earnings before interest, tax, depreciation, and amortization (EBITDA) than Company B. C) Company A has a higher debt-to-equity ratio than Company B. D) Company B has a higher return on equity (ROE) than Company A.

D) Company B has a higher return on equity (ROE) than Company A. If income is the same for both companies, then the only difference is the percentage of equity. With a lower equity, Company B will have a higher return on equity. EBITDA and ROA would be equal, and Company B has a higher debt-to-equity ratio.

Select which of these is NOT a primary risk associated with a coupon-paying bond. A) Default risk B) Interest rate risk C) Purchasing power risk D) Debenture risk

D) Debenture risk A coupon-paying bond is also subject to reinvestment rate risk.

Which one of these conclusions regarding fundamental analysis will an investor reach if he or she believes in the weak form of the efficient market hypothesis? A) Fundamental analysis cannot be used to identify undervalued securities. B) Fundamental analysis must be combined with technical analysis to identify undervalued securities. C) Fundamental analysis, applied in a top-down manner, can be used to identify undervalued securities. D) Fundamental analysis can be used to identify undervalued securities.

D) Fundamental analysis can be used to identify undervalued securities. An investor subscribing to the weak form of the EMH believes that fundamental analysis can be used to identify undervalued securities.

Identify those risks that pertain to hedge funds. I. Overuse of leverage II. Excessive short selling III. Lack of transparency IV. Lack of regulation A) I and IV B) II, III, and IV C) II and III D) I, II, III, and IV

D) I, II, III, and IV A hedge fund is subject to all these risks. In addition, hedge funds are usually subject to higher investment risk than other types of funds.

Which of the following statements regarding an efficient portfolio is CORRECT? I. Provides the highest return for a given level of risk II. Has the greatest risk for a given level of expected return III. Shows an investor's willingness to bear risk IV. Can be created with minimum transaction costs A) I, II, and III B) II and III C) III and IV D) I only

D) I only An investor should try to assemble an investment portfolio containing the optimum combination of risk and return. An efficient portfolio offers maximum return for a given level of risk. An investor's willingness to bear risk is reflected in indifference curves.

Which of these are correctly defined bond classifications? I. Short-term - maturities up to five years II. Intermediate-term - maturities of five to seven years III. Long-term - maturities longer than seven years A) None of these B) I, II, and III C) III only D) I only

D) I only Intermediate-term bonds have maturities five to 10 years. Long-term bonds have maturities of longer than 10 years.

Which of these factors should an investor consider when investing in mutual funds? I. Fund performance II. Consistency of performance III. Management continuity IV. Fund age A) I and II B) I, II, and III C) III and IV D) I, II, III, and IV

D) I, II, III, and IV All four factors, among others, are important to consider when selecting funds.

Fred Smith, your client, has consulted you regarding increasing the overall yield on his portfolio while simultaneously reducing his risk exposure to the stock market. You have suggested real estate investment trusts (REITs) and explain that there are several different kinds of REITs. Which of the following accurately describe the characteristics of equity REITs? I. Earn rental income from leasing properties they own II. Earn interest income from mortgages on real estate properties III. Are designed to be liquidated in a specific future year IV. Are similar to open-end mutual funds A) I, III, and IV B) II only C) I and II D) I only

D) I only Mortgage REITs receive interest income from mortgages they own. Finite life REITs liquidate in a future year. REITs are closed-end funds.

Limited partnerships are distinguished by which of the following? I. The general partner controls the business activities of the partnership. II. The limited partners participate in the business venture with limited liability. III. The general partner determines when distributions are made to the limited partners. IV. The limited partners may have difficulty selling their interests. A) I, II, and III B) II and IV C) I and III D) I, II, III, and IV

D) I, II, III, and IV Limited partnerships are characterized by a partnership entity that consists of a general partner and limited partners.

Which of the following methods can be used in determining the basis in a mutual fund when the shares were acquired at different times? I. Specific identification II. First in, first out (FIFO) III. Average cost method A) II and III B) I and III C) II only D) I, II, and III

D) I, II, and III All of these can be used to make this determination.

Which of the following would be held in a money market portfolio? I. Treasury bill II. Negotiable CDs III. Commercial paper A) I only B) II and III C) I and II D) I, II, and III

D) I, II, and III All of these financial instruments would be held in a money market portfolio.

Identify which of these statements regarding bonds is CORRECT. I. If a bond is issued in registered form, payments will be made to the owner of record. II. If a bond is issued in bearer form, payments will be made to whoever holds or possesses the bond. III. A bond acquired in the secondary market at a discount is called a market discount bond. IV. The amount attributable to a market discount is always includable in income in the year of acquisition. A) II, III, and IV B) II and IV C) I only D)

D) I, II, and III Only statement IV is incorrect. A bond is a debt security obligating the issuer to make periodic interest payments and to repay the principal at the time of maturity. The amount attributable to a market discount is generally not includable in income until sale or disposition of the bond, and then it is treated as interest income.

Top-down analysis includes which of these? I. Economic and market factors II. Industry analysis III. Company analysis A) II and III B) I and II C) I and III D) I, II, and III

D) I, II, and III Top-down analysis includes all these elements. Top-down analysis allows investors to look at the big picture first and then work their way down to the details.

Which of the following statements correctly explain real estate investing? I. Real estate allows investors to use substantial leverage when acquiring property. II. Real estate may be used as a hedge against inflation. III. Real estate offers high liquidity to investors. IV. Real estate owned can be used as collateral for loans and offers investors tax write-offs. A) I and II B) III only C) II, III, and IV D) I, II, and IV

D) I, II, and IV Real estate is an illiquid investment and involves high transaction costs.

Exchange-traded funds (ETFs) generally offer which of these? I. Tax efficiency II. Low expense ratios III. Active professional management IV. Marketability A) I and II B) I, II, III, and IV C) I, II, and III D) I, II, and IV

D) I, II, and IV Tax efficiency, low expenses, and marketability are all characteristics of ETFs. Professional management is incorrect because virtually all ETFs are, in effect, index funds, which are passively managed.

The dollar has been declining against major world currencies for some time. A portion of your international equity holdings includes a sizable stake in Japanese stocks. As the dollar falls relative to the Japanese yen, which of these conditions would you expect to occur? I. U.S. investors in mutual funds that invest in Japanese securities increase their total returns. II. Companies that export products to Japan find that their products become more expensive to Japanese consumers. III. Japanese automobiles imported to the United States become more expensive to U.S. consumers. IV. The U.S. currency experiences a devaluation with respect to the yen. A) I, II, IV B) II and IV C) I and III D) I, III, and IV

D) I, III, and IV II is incorrect because exporters benefit from a devaluation of the U.S. dollar. Foreign products become more costly and foreign purchasers of U.S. products use fewer yen to purchase products sold in U.S. dollar terms.

Which of these describe similarities between preferred stock and long-term bonds? I. Both dividends and interest are tax-deductible expenses for the issuing corporations. II. Both generally pay a fixed periodic payment. III. Both preferred dividends and interest must be paid before common stock cash dividends are paid. A) I and III B) I and II C) III only D) II and III

D) II and III Both preferred stock and long-term bonds generally pay a fixed periodic payment, and both preferred dividends and interest must be paid before common stock cash dividends are paid.

Which of the following types of federal income tax treatment generally apply to municipal bonds? I. Ordinary income II. Tax-free income III. Capital gains or losses IV. Tax-deferred income A) II and IV B) I and IV C) I and III D) II and III

D) II and III Municipal bond interest is received federal income tax free by the bondholder. In addition, when a municipal bond is sold by the investor, the net proceeds above/below basis may be subject to capital gain/loss.

Identify the statement that best describes Treasury STRIPS (Separate Trading of Registered Interest and Principal of Securities). A) A trust receipt issued by a U.S. government agency for shares of a domestic company purchased and held by a credit union B) A negotiable, short-term, unsecured promissory note issued by a regional government agency C) A short-term draft drawn by a government agency on a major bank D) Zero-coupon bonds created by separating the semiannual coupon payments and the principal repayment portions of a U.S. Treasury note or bond

D) Zero-coupon bonds created by separating the semiannual coupon payments and the principal repayment portions of a U.S. Treasury note or bond Treasury note and bond. Although the securities underlying Treasury STRIPS are the U.S. government's direct obligation, major banks and dealers perform the actual separation and trading.

All of the following statements correctly explain investment risk except A) a stock's level of risk is a combination of market risk and diversifiable risk. B) investors expect to earn a higher rate of return for assuming a higher level of risk. C) the beta coefficient measures an individual stock's relative volatility to the market. D) systematic risk may be reduced or eliminated by effective portfolio diversification.

D) systematic risk may be reduced or eliminated by effective portfolio diversification. Unsystematic (diversifiable) risk may be effectively managed through portfolio diversification.

All of the following should be found in an investment policy statement (IPS) except A) the client's risk tolerance. B) the client's liquidity needs. C) the client's time frame. D) the actual investments.

D) the actual investments. Risk tolerance, time frame, and liquidity needs should all be found in the IPS; investments are not found in the IPS. The IPS is a roadmap and provides guidance for the adviser and client as to the type of investments that will be used (such as 15%-20% in large-cap U.S. stocks), but the actual investments are not specified in the IPS.

Robyn's bond has a current market value of $1,456.78 and a Macaulay duration of 12.5. Assuming the bond's yield to maturity (YTM) changes from 5.55% to 6.25%, calculate the estimated percent change in the price of the bond and the new expected market price of the bond (based on the percent change). A) +8.29%, $1,577.55 B) +3.48%, $1,507.48 C) −0.70%, $1,446.58 D) −8.29%, $1,336.01

D) −8.29%, $1,336.01 The formula for determining the change in the price of the bond: ΔP/P = −D(Δy ÷ (1 + y)) ΔP/P = −12.5[(0.0625 − 0.0555) ÷ 1+0.0555] ΔP/P = −12.5(0.0066) = −0.08290, or −8.29% The bond's price should decrease by 8.29% and, therefore, sell for $1,336.01 in the secondary market.

Wade purchased a noninvestment-grade bond for $1,038.90 exactly two years ago today. The bond had a maturity of five years and a coupon rate of 10% (paid semiannually). Assuming the following are the prevailing rates for this type of bond at different maturity dates, how much could Wade sell his bond for today? Maturity | 1 Year | 2 Years | 3 Years | 5 Years Interest Rate | 6% | 6.5% | 7% | 8.5% A. $1,038.90 B. $1,060.08 C. $1,078.73 D. $1,079.93

D. $1,079.93 The intrinsic value of Wade's bond (what it should sell for today) is $1,079.93. END Mode, 2 P/Yr N = 3, DOWNSHIFT, N = 6 (number of periodic payments remaining) I/YR = 7 (periodic interest rate based on comparable three-year-term bonds) PMT = 10% × 1,000 ÷ 2 = 50 (semiannual coupon payment) FV = 1,000 Solve for PV = -1,079.9283, or $1,079.93 With only three years remaining until the maturity date of Wade's bond, you must use the interest rate associated with a maturity date of three years provided in the table

Jeff is interested in BEC stock. BEC's earnings and dividends are expected to grow at a constant rate of 6% per year for the foreseeable future. If Jeff's required rate of return is 11%, what is the intrinsic value of BEC stock if it is currently paying a dividend of $1.20? A. $10.91 B. $20.00 C. $24.00 D. $25.44

D. $25.44 This is found by using the constant growth dividend discount model: intrinsic value = D0(1 + g) ÷ (r - g) = $1.20(1.06) ÷ (0.11 - 0.06) = $25.44.

Brandon is considering selling a piece of residential real estate that he has owned for 12 years. The apartment complex consists of 100 units with an average rental rate of $400 per month. Laundry and parking gross potential income is $20,000 per year. The vacancy rate is 7%, and operating expenses are 30% of potential gross income (PGI). Brandon takes $40,000 of depreciation each year, and his mortgage costs $6,000 per month. If the capitalization rate for comparable properties is 9%, what should be the selling price for Brandon's property? A. $2,256,000 B. $3,056,000 C. $3,472,000 D. $3,500,000

D. $3,500,000 PGI = $400 per month × 100 units × 12 months + $20,000 (laundry and parking) = $500,000. Net income after vacancy and expenses = $500,000 × [1 − (0.07 + 0.30)] = $500,000 × 0.63 = $315,000. Sales price = $315,000 ÷ 0.09 = $3,500,000. Depreciation and financing expenses are not considered.

Michael purchased 800 shares of ABC stock at $75 per share. The stock paid a $1.20 dividend per share at the end of the year. During this same year, there was a 2-for-1 stock split. If the value of Michael's investment at the end of the year was $66,000, what was his holding period return (HPR)? A. 8.3% B. 10.0% C. 12.0% D. 13.2%

D. 13.2% Michael's HPR was 13.2%, computed as follows: HPR =$66,000 − $60,000 + ( $1.20 × 800 × 2 ) ________________________________ $60,000 = $7,920 / $60,000 = 13.2% Note that the dividend (or positive cash flow) is based on 1,600 shares because of the subsequent 2-for-1 stock split after Michael purchased the initial shares of ABC stock.

Arthur purchases 200 shares of HMS stock for $23 per share. He then makes subsequent purchases at the end of the following years: Year 1: 50 shares at $26 per share Year 2: 75 shares at $29 per share Year 3: 25 shares at $36 per share At the end of the fourth year, HMS is trading at $41 per share. What is the annualized time-weighted return on the stock over the four-year period? (Assume that no dividends were paid over the four-year period.) A. 13.85% B. 14.25% C. 15.00% D. 15.55%

D. 15.55% Because time-weighted returns do not consider the cash flows of the investor (Arthur), only appreciation and dividends on the investment are relevant. CF0 = -23 (beginning share value), CF1 = 0, CF2 = 0, CF3 = 0, and CF4 = 41 (ending share value). IRR/YR = 15.5484, or 15.55%.

Company EHO has assets of $500 million and $125 million in liabilities. For the past year, the company earned $150 million and paid out $20 million in dividends. What is the company's return on equity (ROE)? A. 10% B. 25% C. 30% D. 40%

D. 40% $500 million - $125 million = $375 million in equity. $150 million profit ÷ $375 million equity = 0.40, or 40% ROE.

Which of the following statements regarding a bond ladder strategy is CORRECT? A. A bond ladder strategy involves the purchase of very long-term and very short-term bonds. B. A laddered portfolio of bonds will provide lower yields than a portfolio consisting entirely of short-term bonds. C. A bond ladder strategy is generally more aggressive than a bond barbell strategy. D. A bond ladder strategy is a relatively easy way to immunize a portfolio against interest rate risk.

D. A bond ladder strategy is a relatively easy way to immunize a portfolio against interest rate risk. By holding many positions across the yield curve, the individual is diversified in the event that yields behave differently in one part of the curve than in another. The laddered portfolio will generally provide higher (not lower) yields than a portfolio consisting entirely of short-term bonds.

John is interested in selling one of the municipal bonds in his portfolio. He is generally risk averse and wants to sell the bond with the most default or credit risk. Of the following four types of municipal bonds in his portfolio, which one do you recommend he sell? A. A general obligation bond B. A revenue bond C. An insured utility revenue bond D. A private activity bond

D. A private activity bond The bond with the most credit risk is the private activity bond; therefore, if John is generally risk averse, he should sell the private activity bond.

Which of the following clients would be the best candidate for a hedge fund? A. Marcy, age 23, recent college graduate, student debt, low net worth, entry-level position at a local law firm B. Bob and Carol, mid 30s, two young kids, homeowners, $50,000 net worth, long-term investment perspective C. Howard, age 78, widowed, conservative risk taker, $250,000 net worth, lives on a fixed income D. Drew and Fran, late 50s, no dependents, semiretired, $5 million net worth, moderate risk takers, divers

D. Drew and Fran, late 50s, no dependents, semiretired, $5 million net worth, moderate risk takers, diversified holdings The best choice for a hedge fund is Drew and Fran. They have no dependents, have a high net worth (diversified), and exhibit a moderate risk tolerance. The other clients would generally not be considered candidates for a hedge fund based on net worth and investment objectives.

John, age 47, is considering diversifying his large investment portfolio. He has contacted his financial advisor to discuss the merits of investing in a private placement. He meets the definition of an accredited investor. Which of the following are considerations to determine the suitability of a private placement for John? I. How much information regarding the company is available to John? II. How and when might he be able to liquidate the investment? III. What are the risk factors? IV. How does this investment mix with his current holdings? A. I only B. III and IV C. II, III, and IV D. I, II, III, and IV

D. I, II, III, and IV The answer is I, II, III, and IV. All of these are considerations for an investor when deciding on the purchase of a private placement.

Eos Company is a privately owned manufacturer of plastics used in the automotive industry. The company is currently financed with a mix of 90% equity and 10% debt. Which of the following risks is experienced by the shareholders of Eos Company? I. Liquidity risk II. Market risk III. Business risk IV. Default risk A. I only B. III only C. II and IV D. I, II, and III

D. I, II, and III Eos Company shareholders own equity in Eos and, therefore, are not subject to default risk. Because Eos is privately held, liquidity risk is relevant. Market risk is a systematic risk, and the automotive industry is particularly subject to market fluctuations. Business risk is the risk associated with individual businesses.

Your client, Mij Sato, is deeply concerned that the stock market will experience a correction next year. Mij is 40 years old, is married with no children and a significant amount of retirement savings already. He is concerned because his current portfolio allocation is 80% in stocks and 20% in fixed-income. What is the advisor's best course of action working with Mij? A. Move all stocks into fixed-income investments before the end of the year. B. Liquidate the stock positions in order to increase his cash position. C. Aim to target asset allocation strategies into a more conservative investment, like U.S. Treasuries. D. Keep a long-term perspective and maintain the current portfolio allocation strategy.

D. Keep a long-term perspective and maintain the current portfolio allocation strategy. When confronted with financial or economic crisis events, the best course of action is for clients to keep a long-term perspective and focus on long time horizons rather than reacting negatively to market events

Mysterious Company stock has a mean return of 9% and a standard deviation of 3%. Which statement is CORRECT? A. Approximately 68% of Mysterious Company's returns will fall between 3% and 15%. B. There are 5% of Mysterious Company's returns that will be greater than 15%. C. Half of Mysterious Company's returns will fall below 6%. D. Mysterious Company is unlikely to experience a negative return.

D. Mysterious Company is unlikely to experience a negative return. With a normal probability distribution, 68% of the returns fall within one standard deviation of the mean, 95% within two standard deviations, and 99% within three standard deviations. Therefore, Mysterious Company has less than a 1% chance of experiencing a negative return.

Bond ABC is selling at par, offers an 8% coupon, and matures in 20 years. Bond ABC has a call feature that allows the bond to be called after 10 years at a price of $1,050. Which of the following statements is CORRECT? A. The YTC for Bond ABC is 8.00%, which is equal to Bond ABC'S YTM. B. The YTC for Bond ABC is 8.00%, which is more than Bond ABC's YTM. C. The YTC for Bond ABC is 8.34%, which is less than Bond ABC's YTM. D. The YTC for Bond ABC is 8.34%, which is more than Bond ABC's YTM.

D. The YTC for Bond ABC is 8.34%, which is more than Bond ABC's YTM The answer is the YTC for Bond ABC is 8.34%, which is more than Bond ABC's YTM. Set the calculator in END Mode and 2 P/Yr. Because ABC is selling at par, its YTM = 8.0%. ABC's YTC is as follows: PV = −1,000; FV = 1,050; 10, DOWNSHIFT, N = 20; PMT = 8% × 1,000 ÷ 2 = 40. Solve for I/YR = 8.34%.

Which of the following applies to U.S. Treasury STRIPS? A. No taxable income is associated with these investments. B. These obligations do not subject purchasers to interest rate risk. C. Their price volatility is much less than that of coupon bonds of similar maturity. D. They are purchased through financial institutions and government securities brokers and dealers.

D. They are purchased through financial institutions and government securities brokers and dealers. The income from STRIPS is taxable annually as accrued interest to the purchaser. STRIPS prices are more volatile than those of coupon bonds of similar maturities, and they carry substantial interest rate risk for the purchaser.

Which tranche of a collateralized mortgage obligation (CMO) carries the greatest amount of interest rate risk? A. Tranche A B. Tranche B C. Tranche C D. Tranche Z

D. Tranche Z Tranche Z has the longest repayment period and receives no payments until the other tranches are repaid. Thus, Tranche Z carries the greatest amount of interest rate risk.

Mary and Ed, ages 62 and 68, would like to add a new mutual fund investment to their portfolio. They are seeking income along with a preservation of capital. Which of the following would be the best alternative based on their investment objectives? A. High-yield bond fund B. Asset allocation fund C. Russell 2000® Index fund D. U.S. government bond fund

D. U.S. government bond fund With investment objectives of income and capital preservation, they should choose the U.S. government bond fund. This type of fund is designed to offer an investor income. Also, the securities within this type of portfolio should provide the investor with principal stability.

Which of the following statements regarding unit investment trusts (UITs) is NOT correct? A. They do not have a board of directors. B. They do not employ an investment advisor. C. They do not actively manage their own portfolios. D. Unit holders are not taxed on capital gains, interest, or dividends until they dispose of their units or the trust terminates.

D. Unit holders are not taxed on capital gains, interest, or dividends until they dispose of their units or the trust terminates. During the term of the trust, capital gains, interest, and dividends earned by the trust and passed through to the unit holders are subject to taxation.

Your client has just opened a margin account with your brokerage firm and purchased 500 shares of stock for $60 per share. The firm has a 55% initial margin and 35% maintenance margin policy. Calculate the stock price at which your client will receive a margin call. A) $41.54 B) $27.00 C) $31.43 D) $50.76

A) $41.54 The client will receive a margin call when the price of the stock drops below $41.54, calculated as follows: Margin call = ($60 × 0.45) ÷ (1 - 0.35) Margin call = $27.00 ÷ 0.65 = $41.5385, or $41.54

A client has $12,000 of capital gains and $15,000 of capital losses. How much unused loss is carried forward to the following tax year? A) $0 B) $3,000 C) $12,000 D) $15,000

A) $0 After netting capital gain and losses, the client has a net capital loss of $3,000. Because $3,000 of net losses can be deducted during any one tax year, there is no carryforward.

Two months ago, an investor purchased a call option trading for $3 with an exercise price of $30. The stock's market price was $32. What was the time value of the call option? A) $1 B) $2 C) $6 D) $3

A) $1 time value = option premium − intrinsic value = option premium − (stock's market price − exercise price) = $3 − ($32 − $30) = $1

LAC Corporation stock is currently trading for $180 per share. If the company institutes a 3-for-2 stock split, calculate the company's stock price following the stock split. A) $120 B) $90 C) $100 D) $240

A) $120 The company's new stock price will be $120, calculated as follows: $180 ÷ 3 × 2 = $120.

Which of the following financial intermediaries would a business look to for startup capital? A) Investment bankers B) Credit unions C) Unit investment trusts D) Mutual funds

A) Investment bankers Startup capital is typically available at commercial banks and from investment bankers.

What is the intrinsic value of a put option with an exercise price of $45, when the stock is selling for $40? A) $4 B) $50 C) $1 D) $5

D) $5 intrinsic value of a put option = (exercise price − market price) = ($45 − $40) = $5

The technical analysis approach suggests that future stock prices are forecasted by A) fiscal policy. B) monetary policy. C) financial ratios. D) past stock prices.

D) past stock prices. Past stock price movements are used by technicians to forecast future price movements.

Gary Stevens would like to know the weighted beta for his portfolio. He owns 100 shares of ACE common stock with a beta of 1.1 and total current market value of $5,000; 400 shares of BDF common stock with a beta of 0.70 and total current market value of $8,000; and 200 shares of GIK common stock with a beta of 1.5 and total current market value of $10,000. What is the overall weighted beta coefficient for Gary's portfolio? A) 1.13 B) 1.05 C) 1.01 D) 1.22

A) 1.13 $5,000 + $8000 + $10,000 = $23,000 total value of the portfolio (1.1 x (5,000/23,000)) + (0.7 x (8,000/23,000)) + (1.5 x (10,000/23,000)) (1.1 x 0.217) + (0.7 x 0.347) + (1.5 x 0.4347) 0.2387 + 0.2429 + 0.6520 = 1.1336 = 1.13 Or, you can use these inputs for the HP10BII+: 1.1INPUT (ENTER)5Σ+0.7INPUT (ENTER)8Σ+1.5INPUT (ENTER)10Σ+SHIFT, xw,b = 1.13

Assume a $1,000 par value bond with three years until maturity is currently trading for $1,027.23. The bond has a coupon rate of 6% (annual coupon payments) and a current YTM of 5%. The bond has a duration of 2.51 years. Calculate what the new market price for the bond would be if the YTM changed from 5% to 4.5%. A) $1,041.66 B) $1,032.36 C) $1,053.01 D) $1,016.75

A) $1,041.66 The new price of the bond should be $1,041.23. Using a financial calculator, use the following inputs for semiannual payments: FV = $1,000 PMT = $1,000 x 6% = $60/2 = $30 I/YR = 4.5/2 = 2.25% N = 6 (3 x 2 periods per year) Solve for PV = -1,041.6586, or $1,041.66

ABC Corporation issued bonds with a 10-year maturity, $1,000 par value, and 7% coupon rate (paid semiannually). Two years after issue, interest rates on similar bonds fell to 5.75%. What price should ABC Corporation bonds sell for in the secondary market? A) $1,079.26 B) $942.50 C) $1,217.39 D) $1,057.50

A) $1,079.26 This answer is calculated using the following factors: FV = $1,000 PMT = 7% x 1000 ÷ 2 = $35 N = 16 semiannual periods (8 years x 2 periods per year) I/YR = 5.75% Solve for PV = -1,079.26, or $1,079.26

Richard is considering the purchase of an additional 500 shares of Stock E in a new investment which is currently trading for $18.02. He intends to purchase these shares on margin. The new brokerage firm has an initial margin percentage requirement of 50% and a maintenance margin percentage requirement of 35%. Calculate the market price at which Richard would expect a margin call if the shares decline in value after purchase. Assume he makes the purchase at the stock's current market price. A) $13.86 B) $9.01 C) $23.42 D) $6.31

A) $13.86 With a current market price of $18.02, Richard would expect a margin call if the market price of Stock E falls to $13.86 per share. (1 - initial margin percentage) ÷ (1 - maintenance margin) × purchase price of stock = margin call: (0.50 ÷ 0.65) × $18.02 = $13.86.

George Jones owns a convertible bond that has a conversion price of $50 per share and an annual coupon rate of 6.0%. Interest is paid semiannually. The current market price of the stock is $51 per share. The investment value of the bond is $890, and the bond currently sells for a market price of $1,080. What is the downside risk of this bond? A) $190 B) $155 C) $210 D) $130

A) $190 The downside risk of a convertible bond is the dollar or percentage decline from the current market price of the convertible bond to the investment value of the bond: $1,080 - $890 = $190.

Nellie has accumulated $500,000 in a money market deposit account at ABC Bank and Trust. She is worried about the number of bank failures in the recent years and transfers $250,000 into a money market mutual fund paying a slightly higher return offered by her friend's investment firm. Determine the amount she has insured by the Federal Deposit Insurance Corporation (FDIC). A) $250,000 B) $0 C) $200,000 D) $500,000

A) $250,000 The money market deposit account is insured up to $250,000, but the money market mutual fund is not FDIC insured.

Amelia is considering buying shares of HSO stock valued at $50 per share. She forecasts the stock to trade in excess of $75 per share over the next three years. During this time, she expects to receive annual dividends of $4.50 per share. Given a 10% required rate of return, calculate the intrinsic value of the stock. A) $45.00 B) $46.50 C) $29.50 D) $50.00

A) $45.00 The intrinsic value of the stock is $45, using the perpetuity dividend discount model, calculated as follows: $4.50 ÷ 0.10 = $45.

On December 18, 20X1, John sells some stock for a loss at $15 a share that he originally purchased for $40 per share. On January 9, 20X2, John repurchases the shares for $22 per share. What is his cost basis on the repurchased shares? A) $47 B) $15 C) $22 D) $40

A) $47 This is a wash sale because the shares were repurchased within 30 days of their sale. The loss is then disallowed for tax purposes, and the disallowed loss is added to the repurchase price to determine the new cost basis. $40 - $15 = $25 disallowed loss, so $25 + 22 = $47 new basis.

If a $100 par value preferred stock pays an annual dividend of $5 and comparable yields are 10%, the price of the preferred stock will be A) $50. B) $25. C) $100. D) $75.

A) $50. $5 ÷ 0.10 = $50 for preferred stocks, the zero-growth model is used because the preferred stock's dividend is fixed. The formula is V = D0/r, where D0 is the dividend and r is the required return.

Assume an investor has purchased a bond with these characteristics: - Seven years to maturity - $1,000 face value - 6% annual coupon (paid semiannually) - 8.43% current yield - $711.74 current market price Which of the following is the bond's yield to maturity? A) 12.25% B) 9.83% C) 4.92% D) 6.13%

A) 12.25% The bond's yield to maturity is calculated using the following inputs: PV = -$711.74 FV = $1,000 PMT = 6% × 1,000 ÷ 2 = $30 N = 14 (7 x 2 periods per year) I/YR = 12.2508, or 12.25%

Tate is considering the purchase of a stock that just paid a dividend of $0.30 in the last quarter. That dividend has been steady for all of the past year. The company is expected to grow the dividend at 15% per year for the next three years, after which it is expected to grow at a constant rate of 8%. The required return is 11%. What is the maximum price Tate should pay for this stock? (Select the closest answer.) A) $51.91 B) $11.30 C) $45.14 D) $12.98

A) $51.91 Using the three-step approach, first determine the dividend at the end of each of the first three years. The amount of $0.30 is a quarterly dividend and must be multiplied by 4 to get $1.20 for the current annual dividend. This amount is multiplied by 1.15 for each year in order to get: Year | Dividend 1 | 1.38 2 | 1.587 3 | 1.8251 Next determine the value of the stock at the end of year 3 based on the dividend at the end of year 4: [1.8251(1.08)] ÷ (0.11 - 0.08) = 65.70 Using the CFj keys on the calculator (with dividends rounded), solve as follows: 11 I/YR 0 CF0 1.38 CF1 1.59 CF2 1.83 + 65.70 CF3 SHIFT, NPV = 51.91

JEM Corporation always pays a dividend of $5.50 per share. Calculate the intrinsic value of the stock assuming a required rate of return of 8% and a risk-free rate of return of 4%. A) $68.75 B) $15.94 C) $137.50 D) $45.83

A) $68.75 The intrinsic value of the stock is $68.75 ($5.50 ÷ 0.08) using the no-growth (perpetuity) dividend discount model.

Today, a U.S. Treasury STRIP (Separate Trading of Registered Interest and Principal of Securities) bond has been created with a $100,000 par value, seven-year, 3% Treasury note. Assuming prevailing seven-year market rates are 4%, calculate the market value of the principal unit (rounded to nearest dollar). A) $75,992 B) $72,788 C) $82,772 D) $92,665

A) $75,992 If prevailing market interest rates are 4%, the principal unit is priced as follows: 100,000 = FV 7 = N 4 = I/YR 0 = PMT Solve for PV = 75,991.7813, or $75,992

A convertible bond has a 6.5% coupon rate, interest is paid semiannually, and the bond matures in five years. Comparable debt currently yields 7.5%. The bond is convertible into common stock at $25 per share. The current price of the stock is $28, and the current price of the convertible bond is $1,050. What is the investment value of the bond? A) $958.94 B) $968.95 C) $1,008.90 D) $1,000.00

A) $958.94 A bond's investment value is the same as its intrinsic value as a straight bond. Using a financial calculator, the bond price is determined using the following inputs: N = 10 (5 x 2 periods per year) I/YR = 7.5% PMT = 1000 x 6.5% / 2 = $32.5 FV = $1,000 Solve for PV = -958.94, or $958.94. NOTE: There are several examples on bond calculations in the blue boxes in the Module 2 text; however, it may be beneficial to skip ahead to Module 7 for some additional practice.

Wayne owns shares in the Big Value mutual fund. Last year, Big Value had a return of 18%, the S&P 500 Index had a return of 21%, and six-month Treasury bills averaged a return of 5%. Big Value's standard deviation was 14, the standard deviation of the S&P 500 index was 12, and Big Value's beta was 0.9. Which of the following is the Treynor ratio for Big Value last year? A) +14.44 B) +1.40 C) -0.21 D) +0.93

A) +14.44 The Treynor ratio for Big Value: (18 - 5) ÷ 0.9 = 14.44

A bond has a current yield to maturity (YTM) of 3.80%. Market interest rates are expected to rise to 4.50% soon. The bond has a duration of 5.5 years. Calculate the estimated price change of the bond. A) -3.71% B) +3.50% C) -2.18% D) +0.70%

A) -3.71% The market price of the bond is expected to decrease by 3.71%, calculated as follows: ΔP/P = −5.5[(0.045 − 0.038) ÷ (1 + 0.038)] ΔP/P = −5.5(0.007 ÷ 1.038) ΔP/P = −5.5(0.006745) ΔP/P = −0.0371, or −3.71%

Your client, Trace, owns a portfolio that earned 12% during the current year. His portfolio has a beta of 1.3 and a standard deviation of 14%. During the current year, the market (as represented by the S&P 500 index) earned 9%. If the current risk-free rate is 5%, which of the following accurately illustrates the Treynor ratios for Trace's portfolio and the market? A) 0.0538; 0.0400 B) 0.0050; 0.0400 C) 0.0538; 0.0100 D) 0.0050; 0.0100

A) 0.0538; 0.0400 The answer is 0.0538; 0.0400. Calculations are as follows. Trace's Treynor = (0.12 - 0.05) ÷ 1.3 = 0.0538 Market's Treynor = (0.09 - 0.05) ÷ 1 = 0.0400. The market has a beta of 1.0.

ABC Corporation has a P/E ratio of 5.00 and an expected growth rate in earnings for the next year of 9.5%. Assuming an investor's required rate of return is 12%, calculate the firm's PEG ratio. A) 0.5263 B) 0.4167 C) 0.8333 D) 0.1667

A) 0.5263 Calculate the firm's PEG ratio as follows: 5.00 ÷ (0.095 × 100) = 0.5263. After calculating this ratio, it then would be compared to ABC Corporation's peers to determine whether a purchase is warranted.

A client has a $1.2 million portfolio consisting of these four stocks: 1. $300,000 | ABC @ 1.1 beta 2. $225,000 | RTR @ 0.7 beta 3. $405,000 | XYZ @ 0.3 beta 4. $270,000 | PDQ @ 1.3 beta What is the beta of the portfolio as a whole? A) 0.8 B) 0.85 C) 1.0 D) 0.91

A) 0.8 The answer is 0.8. This is the weighted average of beta of components, which is calculated as follows: $300,000 ÷ 1,200,000 = 0.25 weighting × 1.1 beta =0.2750 $225,000 ÷ 1,200,000 = 0.1875 weighting × 0.7 beta =0.1313 $405,000 ÷ 1,200,000 = 0.3375 weighting × 0.3 beta =0.1013 $270,000 ÷ 1,200,000 = 0.225 weighting × 1.3 beta =0.2925 Weighted Average Beta: 0.8001

Shari would like to know the weighted beta coefficient for her portfolio. She owns 100 shares of BDL common stock with a beta of 1.3 and total current market value of $8,000; 400 shares of XTP common stock with a beta of 0.9 and total current market value of $13,000; and 200 shares of SPR common stock with a beta of 0.6 and total current market value of $10,000. What is the overall weighted beta coefficient for Shari's portfolio? A) 0.91 B) 1.26 C) 0.99 D) 0.93

A) 0.91 Calculations are shown below: Market Value | Weighting | Beta | Weighted Beta $8,000 ÷$31,000= 0.258 × 1.3 = 0.3354 $13,000 ÷$31,000= 0.419 × 0.9 = 0.3771 $10,000 ÷$31,000= 0.323 × 0.6 = 0.1938 $31,000 0.9063

What is the weighted average beta of a portfolio with 20% in Stock A with a beta of 0.9, 50% in Stock B with a beta of 1.2, and 30% in Stock C with a beta of 1.1? A) 1.11 B) 1.18 C) 1.14 D) 1.20

A) 1.11 You can complete this calculator long-hand in this way: (0.9 x .2) + (1.2 x .5) + (1.1 x .3) = (0.18) + (0.6) + (.33) = 1.11 You can also do this faster using the following keystrokes on the HP 10bII+ (see Financial Calculator Workbook for steps using TI BAII+): 0.9, INPUT, 20, ∑+, 1.2, INPUT, 50, ∑+, 1.1, INPUT, 30, ∑+, DOWNSHIFT, 6 (alternate function is weighted average) = 1.11.

Select which of these statements regarding Series I savings bonds is CORRECT. A) A semiannual inflation rate is combined with the fixed rate of return to determine the Series I bond's interest rate for the next six months. B) Series I bonds pay semiannual interest in cash. C) A fixed interest rate is paid on an inflation-adjusted principal amount every six months. D) Series I bonds are always subject to state and federal income taxation.

A) A semiannual inflation rate is combined with the fixed rate of return to determine the Series I bond's interest rate for the next six months. The interest rate is a combination of two separate rates: (1) a fixed rate of return that remains the same for the life of the bond and (2) a semiannual inflation rate based on changes in the Consumer Price Index (CPI) during the previous six-month period. The semiannual inflation rate is then combined with the fixed rate of return to determine the Series I bond's interest rate for the next six months.

Based on the desire for Larry to retire at age 62, the Pratts should consider preparing a comprehensive investment strategy. Which of the following steps should be included in the financial planning process? A) All of these. B) Match the appropriate investment vehicles to meet their needs and objectives. C) Prepare a complete and thorough investment policy statement detailing their financial goals and objectives. D) Review and examine their tax situation and personal financial statements.

A) All of these. The Pratts' financial plan should include all of these steps. Investment planning requires examining the client's financial situation to determine if the client's goals and objectives can be met while simultaneously meeting any investment needs and requirements. In order to do an effective job of investment counseling, the planner should examine and review the client's financial goals and time horizon, risk tolerance and risk exposure, tax situation, liquidity and marketability needs, and personal financial statements.

Which of the following is a disadvantage of investing in convertible bonds? A) All of these. B) The holder may be forced into conversion if the bond is callable. C) They are doubly cursed in times of high interest rates and low stock prices. D) The yield is less than that of a nonconvertible bond with similar risk and maturity.

A) All of these. These bonds are doubly cursed during times of high interest rates and low stock prices because convertibles typically have lower coupon rates than comparable nonconvertibles. Thus, they experience greater price volatility.

Which of the following would cause the risk premium an investor expects to earn on a stock to increase when using the capital asset pricing model (CAPM)? A) An increase in beta B) A decrease in covariance C) An increase in standard deviation D) An increase in the correlation coefficient

A) An increase in beta All other factors remaining equal, an increase in beta will cause the risk premium to increase. In addition, the resultant expected rate of return will increase.

Larry's 401(k) plan has experienced returns over the past five years of -10%, 15.55%, -5.87%, 12.75%, and 14.85%. What are both the arithmetic and geometric means for this series of returns? A) Arithmetic mean = 5.45%; geometric mean = 4.85% B) Arithmetic mean = 4.85%; geometric mean = 5.34% C) Arithmetic mean = 6.91%; geometric mean = 8.57% D) Arithmetic mean = 11.80%; geometric mean = 26.71%

A) Arithmetic mean = 5.45%; geometric mean = 4.85% The answer is arithmetic mean = 5.45%; geometric mean = 4.85%. Arithmetic mean: [(-0.10 + 0.155 - 0.0587 + 0.1275 + 0.1485) ÷ 5] = 0.0545, or 5.45%. Geometric mean: PV = -1; FV = (1 - 0.10)(1 + 0.155)(1 - 0.0587)(1 + 0.1275)(1 + 0.1485) = 1.2671; N = 5; solve for I/YR = 4.8485, or 4.85%.

Acme Electric Company announces a cash dividend of $0.50 per share on August 5, to be paid on September 20, the payable date. The company also announces that the record date will be August 25. Bob Johnson purchases 100 shares of Acme on August 24. Based on this information, choose the CORRECT statement regarding the dividend payment. A) Bob will not receive the dividend, because he did not purchase the shares before the ex-dividend date. B) Bob will receive the dividend, because he purchased the shares before the record date. C) Bob will not receive the dividend, because he purchased the shares after the announcement date. D) Bob will receive the dividend, because he purchased the shares before the ex-dividend date.

A) Bob will not receive the dividend, because he did not purchase the shares before the ex-dividend date. In order to receive the dividend, Bob must purchase the shares before the ex-dividend date. The ex-dividend date is one business day before the record date. To receive the dividend, Bob must have purchased the shares by August 23.

An investor wants all of her bonds to mature in 10 years. She buys two bonds immediately, two bonds two years from now, and two more bonds four years from now. As a result, the bonds purchased immediately have a maturity of 10 years, the bonds purchased two years later have a maturity of eight years, and the bonds purchased four years later have a maturity of six years. Select the type of bond strategy she is using for her portfolio. A) Bond bullet B) Bond ladder C) Bond barbell D) Bond swap

A) Bond bullet When using the bond bullet strategy, an investor purchases a series of bonds with similar maturities focused on one point in time. This strategy may be an effective method in matching duration to the cash needs of an investor.

Which of these statements regarding a real estate mortgage investment conduit (REMIC) is CORRECT? I. A REMIC is a self-liquidating, flow-through entity that invests exclusively in real estate mortgages or mortgage-backed securities. II. A REMIC terminates when the mortgages that constitute the investment of the REMIC are repaid. A) Both I and II B) II only C) I only D) Neither I nor II

A) Both I and II REMICs are often structured to offer classes of bonds that mature over a period of 3-30 years. Accordingly, investors may invest in bond classes that match their investment time horizon and avoid the uncertainty of bond principal repayment.

The semistrong form of the efficient market hypothesis states that current market prices reflect I. all available information on the history of prices. II. all publicly available information concerning a company. A) Both I and II B) Neither I nor II C) II only D) I only

A) Both I and II The semistrong form states that all publicly available information, including past stock price history, is reflected in current stock prices.

You currently own 100 shares of a stock that has increased in value from $15 to $35 per share. You do not want to sell the stock but want to protect yourself against a large downturn in the market. Which of the following is an effective action on your part? A) Buy a $30 put option on the stock. B) Sell a $30 call option on the stock. C) Sell a $30 put option on the stock. D) Buy a $30 call option on the stock.

A) Buy a $30 put option on the stock. The purchase of a put option on the stock will provide downside protection without limiting the investor's upside.

Which of the following are advantages of investing internationally? I. Some international markets are less efficient than U.S. markets. II. International mutual funds do not have the exchange rate risks of individual foreign stocks. III. Due to lower correlations with U.S. stocks, foreign stocks can lower total portfolio risk. IV. Investors in foreign securities avoid U.S. tax on realized capital gains. A) I and III B) I, III, and IV C) I and II D) II and IV

A) I and III Portfolio standard deviation is highly dependent on the covariance of returns. The covariance of foreign stocks with U.S. stocks is relatively low, serving to lower the standard deviation of the portfolio into which such stocks are placed. Exchange rate risk is a constant threat to a foreign stock or bond investment in any form, including mutual funds. Foreign security income is taxed first in the country of origin and then again in the United States. U.S. taxpayers can take a foreign tax credit on their U.S. return for the taxes paid to other countries.

Which of the following statements correctly distinguishes an investor who practices indexing? I. The investor purchases index mutual funds. II. The investor is practicing an active form of portfolio management. III. The investor is attempting to beat the market (i.e., S&P 500). IV. Indexing and purchasing index funds tends to exhibit low administrative costs and a low turnover of existing assets. A) I and IV B) I, II, and III C) II, III, and IV D) II and III

A) I and IV In actuality, the investor is following a passive portfolio management style. The purpose of indexing is not to beat the market, but merely match its long-term performance.

Mutual fund I has a standard deviation of 4% and an expected return of 10%. Mutual fund J has a standard deviation of 8% and an expected return of 13%. If I and J have a correlation coefficient of -1.0, which of the following statements is CORRECT? A) I and J are perfectly negatively correlated. B) A portfolio combining funds I and J may have an expected return less than 10%. C) J is less risky than I on a risk-adjusted basis. D) There is no combination of I and J such that the portfolio's standard deviation is zero.

A) I and J are perfectly negatively correlated. J's coefficient of variation is 8% ÷ 13% = 0.615. I's coefficient of variation = 4% ÷ 10% = 0.40. I is less risky, on a risk-adjusted basis, than J. Because I and J are perfectly negatively correlated (correlation coefficient of -1.0), there exists a combination of I and J such that the standard deviation is zero. The expected return of a portfolio is the weighted average, which cannot be less than the lowest expected return of the portfolio components.

Companies A and B have exactly the same dollar amount of assets and net income. Company A has a capitalization structure of 70% equity and 30% debt; Company B has a capitalization structure of 40% equity and 60% debt. Which one of these statements is CORRECT? I. Company B has a higher ROE than Company A. II. Company B has a higher ROA than Company A. III. Company A has a higher debt-to-equity ratio than Company B. A) I only B) II only C) III only D) None of these

A) I only All else being equal, a profitable company with a higher debt level will have a higher return on equity. If income is the same for both companies, then the only difference is the percentage of equity. With a lower equity, Company B will have a higher return on equity. Company B has a higher debt-to-equity ratio.

Which of the following are characteristics of the Sharpe ratio? I. The ratio adjusts the return for variability by using standard deviation as the measure of risk. II. The ratio assumes that the portfolio being evaluated is well diversified. III. Both alpha and beta appear in the formula for the ratio. IV. The ratio indicates by how much the realized return differs from the return expected by the capital asset pricing model. A) I only B) III and IV C) II and III D) I and II

A) I only Statements II, III, and IV are true of Jensen's alpha. Statement II is true of the Treynor ratio.

Analyzing financial statements of a company and performing industry analysis would be beneficial under which of the following forms of the efficient market hypothesis (EMH)? I. Weak II. Semistrong III. Strong IV. Semiweak A) I only B) I and II C) I, II, and III D) III and IV

A) I only The weak form of the efficient market hypothesis (EMH) states that market prices incorporate all historical price information. However, fundamental analysis, such as analyzing financial statements, may be beneficial under the weak form of the EMH. Semiweak is not a form of the EMH.

Select the CORRECT statements pertaining to time-weighted and dollar-weighted returns. I. Most returns reported on mutual funds are time-weighted because the portfolio manager does not have any control over the future cash flows to the fund with respect to investor dollars. II. The time-weighted return is determined without regard to any subsequent cash flows of the investor. III. The dollar-weighted return considers subsequent contributions to and withdrawals from an investment. IV. The dollar-weighted approach focuses on the return of the investor over time. A) I, II, III, and IV B) I and IV C) II, III, and IV D) II and III

A) I, II, III, and IV All of these statements are correct pertaining to time-weighted and dollar-weighted returns.

What are the advantages of a private placement to the issuing firm? I. Avoidance of disclosure requirements II. Reduction in the time needed to raise the capital III. Avoidance of some costs associated with publicly selling securities IV. Limited to 25 unaccredited investors, but is available to an unlimited number of accredited investors A) I, II, and III B) I and II C) II and IV D) I, III, and IV

A) I, II, and III A private placement is limited to 35 unaccredited investors but is available to an unlimited number of accredited investors and eliminates the need for full disclosure and SEC registration. In addition, costs associated with the sale of securities to the public are avoided. Because there is no need for SEC registration, the company can quickly raise the needed capital. However, a private placement usually means a higher, not lower, cost of capital to the issuing firm.

Which of these statements correctly explains dollar cost averaging as a portfolio management technique? I. This technique involves investing a specific amount into an investment vehicle, regardless of whether the recent trend in the investment has been up or down. II. If prices decline, the fixed investment amount will purchase a greater quantity of the security. III. For the long-term investor, the presumption is that prices will eventually rise, so a lower average price translates into greater profits. IV. If prices rise, the fixed investment amount will purchase a greater amount of the security. A) I, II, and III B) I, III, and IV C) I and II D) II and III

A) I, II, and III If prices rise, the fixed investment amount will purchase a lower amount of the security. The effect of dollar cost averaging is to increase the number of shares gradually over a long period. Because more shares are acquired when the price of the stock or mutual fund declines, the average cost per share is reduced.

Which of these are characteristics of foreign currency exchange? I. When a strong foreign currency is converted into U.S. dollars, more dollars are received than if the foreign currency had stayed stable or declined. II. An increase in the supply of a currency results in its devaluation. III. A U.S. investor in foreign assets would want the U.S. dollar to strengthen against foreign currencies after the assets are purchased. IV. When the U.S. dollar weakens against a foreign currency, the total return increases to a U.S. investor holding stocks denominated in that currency. A) I, II, and IV B) II, III, and IV C) II and IV D) I and III

A) I, II, and IV When an investor has money invested in a foreign stock, the investor should want the dollar to decline relative to the foreign currency so that a currency gain occurs in addition to the security gain. Currencies are subject to the same supply/demand rules that apply to goods and services and to the money supply. Increasing supply results in decreasing price of the currency.

Which of these statements regarding bond portfolio immunization is CORRECT? I. Immunization allows an investor to ensure that the value of his or her bond portfolio remains the same, regardless of whether interest rates increase or decrease. II. Immunization is accomplished by creating a portfolio whose duration is equal to the investor's investment time horizon. III. Immunization allows investors to earn a current yield that is equal to the yield to maturity. IV. Immunization allows an investor

A) II and IV Immunization attempts to protect the yield of a bond portfolio from changes in interest rates. An immunized portfolio is expected to provide a specific return over the investment time horizon. If interest rates change during the investment period, the capital losses are expected to be offset by the gains on reinvestment income. Immunization is accomplished by creating a portfolio whose duration is equal to the investor's investment time horizon.

Holly and Jeff are a married couple who have recently retired and are no longer earning an income. They would like to change their asset allocation to provide more income in their retirement years. Which of the following investments should be recommended to help the couple in achieving their financial objectives? I. Aggressive growth mutual fund II. AA rated corporate bonds III. Zero-coupon bonds IV. Equity income mutual fund A) II and IV B) I, II, and IV C) II, III, and IV D) I and III

A) II and IV Investments II and IV are the only two that will provide current income for the couple.

Greg buys a call option on LMN Corporation's stock for an option premium of $1.50. Which of these statements is CORRECT? Greg hopes that the price of LMN stock will decline. Greg's maximum loss on the option is $150. A) II only B) I only C) Both I and II D) Neither I nor II

A) II only Statement I is incorrect. An investor who buys a call option hopes the price of the underlying stock will increase. Any time an investor buys an option (either a call or a put) the maximum loss is the amount of premium paid. In this case, Greg paid an option premium of $150 ($1.50 × 100 shares). Each option contract represents 100 shares of the underlying stock.

Which of the following statements regarding the efficient market hypothesis (EMH) is CORRECT? I. The EMH suggests that active management should be used. II. Under the EMH, all publicly known information is incorporated into security A) II only B) I only C) Both I and II D) Neither I nor II

A) II only The EMH suggests that passive, not active, management should be used.

Which of these statements regarding investment risk is CORRECT? I. A firm's decision to buy back some of its own stock in the open market by borrowing funds through a new bond issue is an example of reinvestment rate risk. II. Rising inflation represents purchasing power risk. III. A decline in a firm's share price as a result of a 20% decline in the S&P 500 Index represents market risk. IV. A reduction in the value of an international stock mutual fund because of a depreciation of the Euro is an example of exchange rate risk. A) II, III, and IV B) IV only C) I and II D) I, II, and III

A) II, III, and IV Only statement I is incorrect. A firm's decision to buy back some of its own stock in the open market by borrowing funds through a new bond issue is an example of financial risk.

Identify which of these methods may be used to trade exchange-traded funds (ETFs). I. Investors can buy or redeem shares from the fund family in lots of 1,000. II. Investors can trade ETFs in the secondary market by using a broker. III. ETFs can be purchased on margin. IV. ETFs may be sold short. A) II, III, and IV B) I and II C) I and III D) II only

A) II, III, and IV Some ETFs may be redeemed through the fund family but usually in lots of 50,000 shares or more.

Which of the following are characteristics of exchange-traded funds (ETFs)? I. They may not be sold short. II. They are generally tax-efficient. III. Large investors known as authorized participants buy or sell shares on an "in-kind" basis. IV. They usually trade at or near their net asset value. A) II, III, and IV B) I, II, and III C) II and IV D) I and III

A) II, III, and IV They are tax-efficient, generally low cost, and large investors conduct trades by making in-kind exchanges, whereby they give or receive shares of stock that are in the fund. Generally ETFs trade near net asset value (NAV), if not at NAV.

Consider the yield curves below. Assume yield curve 1 (YC1) changed to yield curve 2 (YC2) over a period of time. Which of the following can be interpreted from these yield curves? I. The Fed has been decreasing the money supply. II. Duration has decreased. III. Interest rates for all time periods have decreased. IV. The yield curve was positive at the time of YC1. A) III and IV B) I and IV C) I, III, and IV D) II and III

A) III and IV Option I is incorrect because the yield curve rises when the Fed tightens the money supply. Option II is incorrect because duration and interest rates are inversely related; when rates fall, duration rises.

Which of the following statements assessing derivative securities is CORRECT? I. A call option is at the money when the exercise price is less than the market price of the stock. II. A put option is at the money when the exercise price is greater than the market price of the stock. III. Buyers of calls are betting that the price of the underlying common stock will rise, making the call option more valuable. IV. Put buyers are betting that the price of the underlying common stock will decline, making the put option more valuable. A) III and IV B) I and II C) I, II, and IV D) II and III

A) III and IV Statements I and II are incorrect because both call and put options are at the money when the exercise price equals the market price of the stock.

A major source of systematic risk when investing in foreign securities is exchange rate risk. To minimize the effect of exchange rate risk, an investor can hedge with currency futures. Which of the following illustrate appropriate times for an investor who owns a foreign security to hedge? I. The foreign security is expected to rise in price and the dollar is expected to fall relative to the foreign currency. II. The foreign security is expected to remain relatively stable in price and the dollar is expected to fall relative to the foreign currency. III. The foreign security is expected to fall in price and the dollar is expected to rise relative to the foreign security. IV. The foreign security is expected to fall in price and the dollar is expected to remain relatively stable relative to the foreign security. A) III only B) II only C) I and IV D) I and III

A) III only A hedge should be initiated if the U.S. dollar is expected to rise; it is not needed if the dollar is expected to fall or remain relatively stable.

Which of the following statements regarding U.S. Treasury bills is CORRECT? I. They are purchased at 50% of face value. II. They are sold at auction in denominations ranging from $50 to $10,000. III. They are not subject to the original issue discount (OID) taxation rules. IV. They are sold with maturities up to two years. A) III only B) II and IV C) I, II, and III D) I and II

A) III only U.S. Treasury bills are purchased at a discount to face value determined at auction. The lowest purchase amount is $100. They are not subject to the OID rules. T-bills have a maturity date of no more than one year.

Which of the following characteristics are associated with the market anomaly known as the neglected-firm effect? I. Low price-to-earnings (P/E) ratio stocks outperform high P/E stocks. II. Stocks of foreign companies outperform known domestic stocks. III. Neglected-firm stocks underperform large capitalization stocks. IV. Stocks not frequently followed by analysts outperform widely followed stocks. A) IV only B) III and IV C) I only D) II and III

A) IV only When such companies can be found, the market for those companies may not be efficient, and investors who can take the time to analyze these companies may be able to take advantage of undervalued situations.

Which of these statements regarding basic option positions is CORRECT? A) If an investor sells a put, the maximum loss is the exercise price less the amount of premium received. B) If an investor buys a call, the maximum loss is unlimited. C) If an investor buys a put, the maximum gain is unlimited. D) If an investor sells a call, the maximum loss is the amount of the premium received.

A) If an investor sells a put, the maximum loss is the exercise price less the amount of premium received. If an investor buys a put, the maximum gain is the exercise price less the premium paid. If an investor sells a naked call, the maximum loss is unlimited. If an investor buys a call, the maximum loss is the premium paid.

Which one of these statements regarding tangible or collectible assets is INCORRECT? A) Investors in politically stable countries, such as the United States, cannot benefit from owning gold. B) Because precious stones lack uniformity, they are difficult to value consistently. C) Collectibles markets are inefficient. D) The principal source of return from an investment in collectible assets comes from capital gains.

A) Investors in politically stable countries, such as the United States, cannot benefit from owning gold. Gold is considered by many to be an investment product held in times of political uncertainty in emerging market economies. If political unrest does occur and gold demand increases, U.S. investors can benefit from the price appreciation likely to occur.

Identify the types of bonds that are subject to the most default risk. A) Junk bonds B) U.S. savings bonds C) AA rated general obligation bonds D) U.S. Treasury bonds

A) Junk bonds Junk bonds, sometimes referred to as high-yield bonds, are subjected to the most default risk. Obligations of the U.S. government are free from default risk. AA rated bonds are not free from default risk, but they are less likely to default than junk bonds.

Options with expiration dates more than two years out are categorized as A) LEAPS. B) REMICs. C) CMOs. D) GICs.

A) LEAPS. Long-term equity anticipation securities (LEAPS) are options with expiration dates extending beyond two years.

What is an order to buy or sell at a specific price? A) Limit order B) Stop order C) Day order D) Market order

A) Limit order A market order is an order to buy or sell at the current price. A day order is an order that is good just for the day and expires at the end of the day (if not executed). A stop order is an order to buy or sell if the price of the stock trades at or through the stop price.

Which of the following combinations of risks is associated with art and other collectibles? A) Liquidity risk and market risk B) Reinvestment rate risk and purchasing power risk C) Market risk and business risk D) Regulation risk and interest rate risk

A) Liquidity risk and market risk The collectibles market is usually characterized by an inefficient market and inherent lack of liquidity.

During his next meeting with his financial advisor, Zachary would like to compare the performance of his international investments against a benchmark. Select the appropriate benchmark to use for this comparison. A) MSCI EAFE Index B) S&P 500 Index C) Dow Jones Industrial Average D) Wilshire 5000 Index

A) MSCI EAFE Index The MSCI EAFE Index is used as a measure of the international securities markets. The other choices are not used to measure international investments, rather, they are used as benchmarks for domestic issues.

Which one of these is NOT a typical key element that separates hedge funds from mutual funds? A) Many hedge funds are broadly diversified B) Leverage is often used in hedge funds C) Derivatives are used extensively by hedge funds D) Illiquid securities are often used in hedge funds

A) Many hedge funds are broadly diversified Hedge funds are private investment vehicles that tend to be more heavily concentrated than mutual funds. They often use leverage, derivatives, employ narrow investment strategies, and invest in nonpublic and illiquid securities.

Rossalyn is researching GFD stock to determine if she should add it to her extensive equity portfolio. This stock has a beta of 1.40 and a standard deviation of 6.85%. Assuming the market rate of return is 10%, and the current 90-day T-bill rate is 2%, what is the market and stock risk premiums for GFD stock? A) Market = 8.00%; stock = 11.20% B) Market = 8.85%; stock = 16.85% C) Market = 3.15%; stock = 8.85% D) Market = 11.20%; stock = 8.00%

A) Market = 8.00%; stock = 11.20% The answer is market = 8.00%; stock = 11.20%. The market risk premium is calculated as follows: rm - rf = (10% - 2%). The stock risk premium is 11.20%, calculated as follows: (rm - rf)βi = (10% - 2%)1.40.

Which one of these alternatives correctly outlines the importance of the portfolio perspective? A) Market participants should analyze the risk-return trade-off of the portfolio, not the risk-return trade-off of the individual investments in a portfolio. B) Market participants should focus on the systematic risk of the components of a portfolio not the unsystematic risk of the components of a portfolio. C) Market participants should analyze the risk-return trade-off of each individual security. D) Market participants should attempt to eliminate the unsystematic risk associated with each security by forming portfolios that will diversify away this risk.

A) Market participants should analyze the risk-return trade-off of the portfolio, not the risk-return trade-off of the individual investments in a portfolio. The key underlying principle of the portfolio perspective is that market participants should analyze the risk-return trade-off of the portfolio as a whole, not the risk-return trade-off of the individual investments in the portfolio.

Yadira owns 20 stocks across several sectors of the economy that are part of the S&P 500 index, typically known as "blue chip" stocks. Her investments are exposed to which of the following risks? A) Market risk B) Financial risk C) Liquidity risk D) Business risk

A) Market risk Market risk is the risk inherent in the overall securities marketplace and is sometimes simply referred to as volatility.

Which one of these is a general characteristic of hedge funds? A) May sell short a variety of securities beyond the standard stocks and bonds. B) High marketability C) Full transparency and disclosure D) Little or no use of leverage

A) May sell short a variety of securities beyond the standard stocks and bonds. Hedge funds charge both a management fee and a carried interest fee. Hedge funds are characterized by a lack of marketability, significant use of leverage, and limited transparency.

Jim, 32, and Caren, 30, have been married for seven years. Both Jim and Caren work and have no children, so they have a large amount of disposable income. They live in the suburbs and are planning to purchase a condominium downtown as a weekend getaway. They would like to invest their money in a safe place for the down payment during the six months they spend searching for the perfect location and amenities. Which of the following investments would you recommend to Jim and Caren to accomplish this goal? A) Money market fund B) Stock index fund C) U.S. government income fund D) Investment-grade bond fund

A) Money market fund Jim and Caren are preparing to make a significant purchase within a relatively short period of time. They will require a highly liquid investment to keep their money safe. Therefore, the money market fund best matches their investment objective.

Which of these investments is advisable during periods of rising interest rates? A) Money market mutual funds B) Long-term bonds C) Public utility stocks D) Bank stocks

A) Money market mutual funds Short-term money market instruments are attractive during periods of rising interest rates. U.S. Treasury bills and negotiable CDs are also advisable. These investments do not experience significant erosion in value in response to increasing interest rates.

Which of these is a disadvantage of a REIT investment? A) No flow-through of tax benefits B) Double taxation of REIT income C) No limited liability for the REIT shareholder D) A lack of knowledgeable professionals as managers

A) No flow-through of tax benefits Tax losses cannot be passed on to REIT investors.

Ophelia is considering the purchase of the Quest Mutual Fund, which has a beta of 1.2, a standard deviation of 15, and a return of 11%. The current risk-free rate is 4%, and the market risk premium is 7%. Should Ophelia purchase the fund? A) No, because the fund has a negative alpha. B) Yes, because of the fund's Treynor ratio. C) Yes, because the fund has an 11% return. D) No, because of the fund's Sharpe ratio.

A) No, because the fund has a negative alpha. This question can be answered with or without a calculation. We have nothing to compare Quest Mutual Fund to, and both Sharpe and Treynor are comparative measures, so neither can be used to evaluate the fund. The answer "Yes, because the fund has an 11% return" just restates the return of the fund without taking risk into account. The calculation would be as follows: a = rp − [ rf (rm − rf) βp] a = 11 − [ 4 + 7 (1.2)] a = 11 − [12.40] a = −1.40 The fund has a negative alpha of 1.40, meaning the fund manager has not obtained the return she should for the amount of risk taken.

FER stock has a current dividend of $0.75 per share that has been growing at a rate of 1.25% per year. If an investor's required rate of return is 15% and the stock is currently selling for $6.34 per share, determine whether the investor should purchase the stock. A) No, the stock is overvalued based on the constant growth dividend discount model. B) No, the stock is not a wise purchase based on the risk-return trade-off. C) Yes, the stock is undervalued using the perpetuity dividend discount model. D) Yes, the stock is undervalued based on the constant growth dividend discount model.

A) No, the stock is overvalued based on the constant growth dividend discount model. Based on the constant growth dividend discount model, the intrinsic value of the stock is $5.52, calculated as follows: [0.75 × (1 + 0.0125)] ÷ (0.15 - 0.0125) = 0.7594 ÷ 0.1375 = 5.5227, or $5.52. Because FER is currently trading at a price of $6.34 per share, it is overvalued, and the investor should not buy the stock.

If a mutual fund's beta and standard deviation are expected to decrease in the future, its average annual return and the market average annual return are expected to remain the same, and the risk-free rate is expected to remain constant, which of the following shows the real effect this would have on the following performance measures? Option | Alpha | Sharpe Ratio A | increase decrease B decrease decrease C decrease increase D increase increase A) Option D B) Option B C) Option A D) Option C

A) Option D A decrease in the risk level decreases the denominator of the Sharpe ratio, while the numerator stays constant, thereby increasing the Sharpe ratio. The decreased risk level, as measured by beta, decreases the expected return for the fund, while the actual portfolio return remains constant, thereby increasing the alpha.

Which of the following statements describes a limitation of Monte Carlo simulation? A) Outcomes of a simulation can only be as accurate as the inputs to the model. B) Variables are assumed to be normally distributed but may not be normally distributed. C) A clearer understanding of short-term and long-term risk can be gained. D) Simulations do not consider possible input values that lie outside of historical experience.

A) Outcomes of a simulation can only be as accurate as the inputs to the model. Monte Carlo simulations can be set up with inputs that have any distribution and any desired range of possible values. However, a limitation of the technique is that its output can only be as accurate as the assumptions an analyst makes about the range and distribution of the inputs.

Lynn and Stuart Wagman are a middle-aged couple who would like to add an equity investment to their portfolio. They require a 12% rate of return and are considering the purchase of one of these common stocks: Stock 1: Dividends currently are $1.50 annually and are expected to increase 8% annually; market price = $35. Stock 2: Dividends currently are $2.25 annually and are expected to increase 7% annually; market price = $50. Using the dividend growth model, determine which stock would be more appropriate for the Wagmans to purchase at this time. A) Stock 1, because the expected return on investment is greater than the Wagmans' required return B) Stock 1, because its dividend growth rate is greater than Stock 2's growth rate C) Stock 2, because the stock is undervalued D) Stock 2, because the return on investment is greater than the Wagmans' required return

A) Stock 1, because the expected return on investment is greater than the Wagmans' required return Compute the intrinsic value and expected return first, then determine which stock should be purchased. The intrinsic value of Stock 1 is $40.50; of Stock 2, $48.15. The expected return on investment of Stock 1 is 12.6%; of Stock 2, 11.8%. Stock 1 has a D0 of $1.50, thus D1 is ($1.50 x 1.08) or $1.62. Current market price is stated as $35 and the stated growth rate is 8%. ($1.62/$35) + .08 = 12.63% expected return for Stock 1. Stock 2 has a D0 of $2.25, thus D1 is ($2.25 x 1.07) or $2.4075. Current market price is stated as $50 and the stated growth is 7%. ($2.4075/$50) + .07 =11.8% expected return for Stock 2.

Stock Beta A 2.16 B 1.54 C 0.96 D 1.28 Risk-free rate of return is 2.75% Market rate of return = 6.75% The investor's required rate of return = 9.5% Based on the information provided, choose the stock that would offer the best investment opportunity. A) Stock A B) Stock C C) Stock B D) Stock D

A) Stock A Calculate the expected rate of return of each stock using the capital asset pricing model (CAPM) and compare the result to the investor's required rate of return. Stock A: E(r) = 2.75 + (6.75 - 2.75)2.16 = 11.39% Stock B: E(r) = 2.75 + (6.75 - 2.75)1.54 = 8.91% Stock C: E(r) = 2.75 + (6.75 - 2.75)0.96 = 6.59% Stock D: E(r) = 2.75 + (6.75 - 2.75)1.28 = 7.87% Based on a required rate of return of 9.5%, Stock A with an expected return of 11.39% is the best available investment opportunity.

Consider this information regarding two possible investments: Stocks J and K. Stock J: Expected return: 11.5% Standard deviation: 8% Stock K: Expected return: 8.2% Standard deviation: 6% Identify which of these investments you would prefer and why. A) Stock J because it has the lowest coefficient of variation B) Stock K because it has the highest coefficient of variation C) Stock K because it has the least risk D) Stock J because it has the highest expected return

A) Stock J because it has the lowest coefficient of variation The answer is Stock J because it has the lowest coefficient of variation. The stock with the lower coefficient of variation (CV) provides the least amount of risk for a given level of return. CV = standard deviation of asset ÷ expected return of asset. Stock J: CV = 0.08 ÷ 0.115 = 0.6957 Stock K: CV = 0.06 ÷ 0.082 = 0.7317

Which of the following statements regarding security market indexes is CORRECT? A) The S&P 500 Index automatically adjusts for stock splits and dividends by focusing on market value instead of price. B) The Russell 2000 Index is a well-known index used to benchmark large capitalization companies. C) Market indexes reflect the average price behavior of a group of stocks at a given point in time. D) The Wilshire 100 Index is used as a measure of the financial stock sector.

A) The S&P 500 Index automatically adjusts for stock splits and dividends by focusing on market value instead of price. The Russell 2000 Index is a well-known index used to benchmark small capitalization companies. A market average, not a market index, reflects the average price behavior of a group of stocks at a given point in time. An index measures the current price behavior of a group of stocks in relation to a base value. The Wilshire 5000 index is used as a measure of the U.S. broad market.

Consider the following information for the CPM International Growth Fund: Average annual rate of return = 7.45% Average market rate of return = 8.50% Beta = 1.25 Standard deviation = 4.55% Risk-free rate of return = 3.50% Select the statement that is NOT correct. A) The Treynor ratio for the fund is 0.0400. B) The Sharpe ratio for the fund is 0.8681. C) The fund manager underperformed the market over the given time frame. D) Jensen's alpha for the fund is -2.30%.

A) The Treynor ratio for the fund is 0.0400. The answer is the Treynor ratio for the fund is 0.0400. Based on the information provided, the Treynor ratio for the fund is 0.0316, calculated as follows: Sharpe ratio = (0.0745 - 0.0350) ÷ 0.0455 = 0.8681 Treynor ratio = (0.0745 - 0.0350) ÷ 1.25 = 0.0316 Jensen's alpha = 7.45% - [3.50% + (8.50% - 3.50%) 1.25] = -2.30% When Jensen's alpha is positive, the fund manager outperformed the overall market. In this case, alpha indicates that the fund manager has underperformed.

Which of the following statements regarding investment theory is NOT correct? A) The beta coefficient may be used to help select a portfolio that is consistent with an investor's willingness to assume unsystematic risk. B) A correlation coefficient of 0.14 between the returns of Stock A and Stock B indicates that very little of Stock A's returns can be attributed to the returns of Stock B. C) In a well-diversified portfolio, diversifiable risk is zero. D) Combining two stocks with a negative covariance can significantly reduce the portfolio's standard deviation

A) The beta coefficient may be used to help select a portfolio that is consistent with an investor's willingness to assume unsystematic risk. Beta is a measure of systematic risk, not unsystematic risk. The beta coefficient may be used to help select a portfolio that is consistent with an investor's willingness to assume systematic risk.

Taylor, a personal friend of yours, has been a practicing veterinarian for eight years. She is 35 years old and has a 3-year-old daughter. Taylor has a moderate risk tolerance, wants to save for retirement, and is considering increasing her investment in the following mutual fund. Taylor has asked you for your recommendation. Risk-free return 7.0% Return of market 12.5% Growth and Income Fund NAV (beginning of year) = $53.00 NAV (end of year) = $52.75 Dividend = $3.25 Capital gains distributed = $2.75 Beta = 0.70 Realized return = 10.85% Which of the following is CORRECT regarding the risk and return of the fund? A) The fund has less risk and less return than the market. B) The fund has less risk and greater return than the market. C) The fund has equal risk and greater return than the market. D) The fund has greater risk and less return than the market.

A) The fund has less risk and less return than the market. A beta of 1 represents the risk of the market. A beta of less than 1 represents risk less than the market's risk, and a beta of greater than 1 represents risk greater than that of the market.

Shannon is evaluating the absolute performance of the Shining Star mutual fund. The return of the fund for the past year was 13%, beta is 1.10, and standard deviation is 23. The market return is 9.5%, and the risk-free rate is 4.5%. Which of the following statements is true? A) The fund's alpha is +3, meaning that the fund manager achieved a higher return than required for the risk taken. B) The fund's alpha cannot be determined; however, 13% is a good relative return. C) The fund's Sharpe ratio is 0.37, meaning this fund should be chosen when compared with another fund with a Sharpe ratio of 0.48. D) The fund's Treynor ratio is 7.73, meaning the fund manager achieved a 7.73% higher return than required for the amount of risk taken.

A) The fund's alpha is +3, meaning that the fund manager achieved a higher return than required for the risk taken. The answer is the fund's alpha is +3, meaning that the fund manager achieved a higher return than required for the amount of risk taken. Alpha is an absolute measure that is simply the difference between the return of the portfolio and the required return (CAPM). The formula is rp - [rf + (rm - rf)β. 13 - [4.5 + (9.5 - 4.5)1.1] = 3. Treynor and Sharpe are comparative or relative measures, and you would choose the investment with the highest number. Alpha is an absolute measure, giving you the actual return above the required return.

Mary owns a put option with an exercise price of $20 per share. The option is currently trading for $0.53 and the underlying stock is currently trading for $19.67 per share in the secondary market. Based on this information, select the INCORRECT statement. A) The option is out-of-the-money. B) The option has a time value of $0.20. C) The option has an intrinsic value of $0.33. D) The put option allows Mary to sell the underlying stock for a specified price within a specified period.

A) The option is out-of-the-money. The option is in-the-money because the option has a positive intrinsic value. The option has an intrinsic value of $0.33 ($20.00 - $19.67) and a time value of $0.20 ($0.53 - $0.33).

Which of these best describes the concept of asset allocation? A) The process of apportioning assets available for investment among various investment classes B) Dividends being automatically invested back into the investment from which they were earned C) The process of purchasing securities over time by investing a predetermined amount at regular intervals D) A written document that sets forth a client's investment objectives and limitations on the investment manager

A) The process of apportioning assets available for investment among various investment classes Asset allocation is the main determinant of a portfolio's total return. Historically, these investment classes have consisted of cash and cash equivalents, equities (stock), and debt (bonds). However, recently (and more properly), the potential investment classes have been broadened to also include real estate, international investments, collectibles, and precious metals.

Roger believes that an 11% return for the market next year would be good. The current market risk premium is 7.5% and the Treasury bill rate is 5.75%. The stock Roger has been following has the following characteristics: Standard deviation 18% Dividend yield 2.4% P/E ratio 17 P/E ratio relative to S&P 500 1.4 Beta 1.25 Using the CAPM formula, calculate the required rate of return for the stock and determine if the stock appears to meet Roger's criteria of investing in above-average-risk stocks only if he is rewarded for doing so. A) The required rate of return is 15.13%, and the stock meets Roger's criteria. B) The required rate of return is 12.31%, and the stock does not meet Roger's criteria. C) The required rate of return is 13.25%, and the stock meets Roger's criteria. D) The required rate of return is 11.00%, and the stock does not meet Roger's criteria.

A) The required rate of return is 15.13%, and the stock meets Roger's criteria. Required rate of return is 5.75% + (7.5%)1.25 = 15.13%. The fact that Roger believes 11% would be a good return is not relevant for computation of the required rate of return—only the computed market risk premium is relevant. The market return is computed as 7.5% + 5.75% = 13.25%. Roger will invest in an above-average risk stock (beta = 1.3) if he can be rewarded for taking the extra risk. The reward is the greater-than-market return of 15.13%.

Which of the following correctly illustrates a characteristic of an investment-grade general obligation municipal bond? A) The taxing authority of the issuing government or municipality backs the issue's repayment. B) The bond retains a direct claim on specific property. C) The bond's periodic interest is paid to investors only when sufficient revenue is collected by the municipality. D) The bond's main source of investment risk is financial risk.

A) The taxing authority of the issuing government or municipality backs the issue's repayment. The main source of investment risk for a municipal security is interest rate risk. General obligation bonds do not retain a claim on specific property. The government issuing the bonds uses its taxing authority to pay the interest and repay the principal. Revenue bonds, not general obligation bonds, pay interest when sufficient revenue is collected from the financed project.

You are comparing two stocks based on the statistics below. Which one is the better investment based on the risk/return relationship? | Stock A | Stock B Average Return 3.00% 9.00% Standard Deviation 3.95 11.86 A) The two stocks have equal risk/reward profiles B) Cannot be determined from the information given C) Stock B because it has a higher return D) Stock A because it has a lower standard deviation

A) The two stocks have equal risk/reward profiles The coefficient of variation is used to evaluate risk/return and is 3.95 ÷ 3.00 = 1.32 for stock A and 11.86 ÷ 9.00 = 1.32 for stock B, so both are equal in the amount of return relative to the risk.

Beverly owns two stocks with a correlation coefficient of zero. Which of these is CORRECT? A) These stocks will move independently of each other. B) These stocks are well diversified because they will move in unison. C) These stocks are not well diversified because they move in unison. D) These stocks are well diversified because as one stock appreciates in value, the other decreases in value.

A) These stocks will move independently of each other. A correlation coefficient of zero means that the two stocks will move independently. Because most stocks are positively correlated, a correlation coefficient of zero should provide more diversification benefits than most pairs of stocks.

The Sharpe ratio A) does not assume the portfolio is well diversified. B) assumes the portfolio is well diversified. C) uses the portfolio tracking error. D) uses the portfolio's beta.

A) does not assume the portfolio is well diversified. The Sharpe ratio uses standard deviation in its denominator and, therefore, is a catchall formula that may be used to compare the performance of all portfolios whether they are diversified or not.

Marvin is considering adding XYZ stock to his holdings. The stock has these characteristics: Beta = 1.45 Standard deviation = 15.58% Current dividend = $1.35 Required rate of return = 8% Risk-free rate of return = 2% The current dividend is expected to grow for three years at a rate of 2% and then 3% thereafter. Based on the information provided, calculate the intrinsic value of XYZ stock and determine if Marvin should add XYZ to his portfolio if it is currently trading at $24.50. A) With an intrinsic value of $27.13, the stock is undervalued and should be added to the portfolio. B) With an intrinsic value of $22.90, the stock is overvalued and should not be added to the portfolio. C) With an intrinsic value of $21.60, the stock is overvalued and should not be added to the portfolio. D) With an intrinsic value of $29.60, the stock is undervalued and should be added to the portfolio.

A) With an intrinsic value of $27.13, the stock is undervalued and should be added to the portfolio. The intrinsic value of the stock using the multistage growth dividend discount model is $27.13. Because the intrinsic value is greater than the fair market value, the stock is considered undervalued by the market and should be purchased for the portfolio. Compute the value of each future dividend until the growth rate stabilizes (Years 1-3). D1 = $1.35 × 1.02 = $1.38 D2 = $1.38 × 1.02 = $1.41 D3 = $1.41 × 1.02 = $1.44 Use the constant growth dividend discount model to compute the remaining intrinsic value of the stock at the beginning of the year when the dividend growth rate stabilizes (Year 4). D4 = $1.44 × 1.03 = $1.48 V = $1.48 ÷ (0.08 - 0.03) = $29.60 Use the uneven cash flow method to solve for the net present (intrinsic) value of the stock. CF0 = $0 CF1 = $1.38 CF2 = $1.41 CF3 = $1.44 + $29.60 = $31.04 I/YR = 8% Solve for NPV = 27.1272, or $27.13

CDE Inc. bonds have these characteristics: 10% coupon $1,000 par value Current price of $1,136.92 Eight years to maturity Callable in five years at $1,100 Calculate the bond's yield to maturity (YTM) and yield to call (YTC). A) YTM: 7.68%; YTC: 8.26% B) YTM: 7.65%; YTC: 8.24% C) YTM: 3.84%; YTC: 4.13% D) YTM: 7.97%; YTC: 8.54%

A) YTM: 7.68%; YTC: 8.26% Yield to maturity is calculated using the following TVM inputs on the financial calculator: PMT = $1,000 x 10% = $100 / 2 = $50 FV = $1,000 PV = -$1,136.92 N = 16 (8 x 2 periods per year) Solve for I/YR (YTM) = 7.68, or 7.68% Yield to call is calculated using the following TVM inputs on the financial calculator: PMT = $1,000 x 10% = $100 / 2 = $50 FV = $1,100 PV = -$1,136.92 N =10 (5 x 2 periods per year) Solve for I/YR (YTC) = 8.26, or 8.26%

Marcy may add 100 shares of LKM corporation stock to her investment portfolio. The stock recently paid a dividend of $1.85 per share. The dividend is expected to grow at a constant rate of 2.25% per year. Her required rate of return is 7%. The stock is currently trading for $35.75 per share. Determine whether she should purchase the stock and why. A) Yes, the stock is undervalued based on an intrinsic value of $39.82. B) No, the stock is overvalued based on an intrinsic value of $32.87. C) Yes, the stock is undervalued based on an intrinsic value of $33.46. D) No, the stock is overvalued based on an intrinsic value of $38.95.

A) Yes, the stock is undervalued based on an intrinsic value of $39.82. Using the constant growth dividend discount model, the intrinsic value of the stock is $39.82. V = ($1.85 × 1.0225) ÷ (0.07 - 0.0225) V = 1.8916 ÷ 0.04750 V = 39.8232, or $39.82 Based on this value, the stock is undervalued relative to its price in the secondary market.

An investment, such as an option, whose value is based on that of another security is classified as A) a derivative. B) an equity. C) a collectible. D) a tangible asset.

A) a derivative. An investment whose value is based on that of another security is a derivative. Examples of derivatives include options, futures, and warrants.

All of the following statements concerning the types of orders used to buy and sell securities are correct except A) a market order has the lowest priority and is subject to the fluctuations and timeliness of the market. B) a good-til-canceled (GTC) order is an order to buy or sell a security at a specific or limit price that lasts until the order is completed or canceled. C) a limit order is an order to buy or sell at a specified (or better) price. D) a stop order is an order specifying a certain price at which a market order takes effect.

A) a market order has the lowest priority and is subject to the fluctuations and timeliness of the market. The market order, which is the most popular and has the highest priority, is subject to the fluctuations and timeliness of the market.

All of these statements correctly identifies a separately managed account except A) a separately managed account is a privately offered pool of capital for wealthy, sophisticated investors. B) in a separately managed account, the investor owns 100% of the securities in the account. C) one advantage of a separately managed account is the ability to maintain an individual cost basis in the securities held in the account. D) a separately managed account holds a diversified portfolio of securities managed by a professional money manager.

A) a separately managed account is a privately offered pool of capital for wealthy, sophisticated investors. In a separately managed account, the money manager purchases securities on behalf of the individual investor, not as a pool of capital for numerous investors.

An investor who carefully chooses a bond that has a duration that matches the investor's required holding period is practicing A) an immunization strategy. B) an active management strategy. C) a passive holding strategy. D) an indexing strategy.

A) an immunization strategy. An investor who chooses a bond that has a duration equal to the investor's desired holding period is practicing immunization. Because a bond's reinvestment rate risk and price risk tend to 'offset' each other, immunization can be used to cancel out interest rate risk.

Assets with expected returns that lie above the security market line (SML) A) are undervalued. B) should be sold. C) are overvalued. D) are valued correctly.

A) are undervalued. Assets that lie above the security market line (SML) are undervalued because their expected returns are higher than the required return represented by the SML.

An investor selects an appropriate portfolio by choosing the portfolio A) at the point of tangency between the indifference curve and the efficient frontier. B) with the lowest risk. C) that lies below the efficient frontier. D) with the highest return.

A) at the point of tangency between the indifference curve and the efficient frontier. The investor will choose a portfolio represented by the highest point attainable on the indifference curve.

The basic purposes of the investment policy statement include all of the following except A) determining the specific assets to include. B) determining communication procedures. C) setting objectives. D) establishing investment management procedures

A) determining the specific assets to include. This is not one of the basic purposes of the investment policy statement.

Which of the following correctly describes a disadvantage of cash and cash equivalents? A) investors choosing to redeem their CDs prior to maturity may be subject to a substantial penalty. B) investments in money market mutual funds are insured or guaranteed by the U.S. government. C) the rate of return on passbook savings accounts is relatively high when compared to higher risk alternatives such as government bonds. D) an investor may quickly convert a money market deposit account to cash to meet short-term needs.

A) investors choosing to redeem their CDs prior to maturity may be subject to a substantial penalty. One of the advantages of money market deposit accounts is their liquidity. They may be used by investors as a source of funds to meet emergencies and other short-term obligations. Investments in money market mutual funds are not insured or guaranteed by the U.S. government. The rate of return on passbook savings accounts is relatively low when compared to higher risk alternatives such as government bonds.

All of the following statements concerning market efficiency are correct except A) investors usually react slowly to new and random information pertaining to securities markets. B) an efficient market is one in which the prices of securities quickly and fully reflect all available information. C) the weak form of market efficiency involves market data, whereas the semistrong involve the assimilation of all public information and the strong form involves both public and and private information. D) the efficient market hypothesis states that securities markets are efficient, with the prices of securities reflecting their current economic value.

A) investors usually react slowly to new and random information pertaining to securities markets. Another condition that guarantees an efficient market is investors reacting quickly to new information.

A beta coefficient of 1.3 indicates that a stock A) is more volatile than the market. B) has more unsystematic risk than the market. C) is less volatile than the market. D) has less unsystematic risk than the market.

A) is more volatile than the market. A beta that is higher than 1.0 indicates that the stock's volatility and risk are higher than that of the market.

A distribution with a mean that is less than its median most likely A) is negatively skewed. B) symmetrical. C) has negative excess kurtosis. D) is positively skewed.

A) is negatively skewed. A distribution with a mean that is less than its median is a negatively skewed distribution. A negatively skewed distribution is characterized by many small gains and a few extreme losses. Note that kurtosis is a measure of the peakedness of a return distribution. In a symmetrical distribution, the mean, median, and mode are all equal.

Interest rate changes have the greatest effect on A) long-term bonds. B) staggered maturity bonds. C) short-term bonds. D) medium-term bonds.

A) long-term bonds. The rule-of-thumb approach to measuring the estimated price change of a bond is to multiply the bond's duration by the estimated change in interest rates (for small rate changes—less than 1% or 100 basis points—only). Therefore, longer-term bonds have the greatest duration and the most price volatility.

Lisa is considering investing in timberland. She owns a portfolio of stocks, bonds and money market securities. Relative to her existing portfolio, the primary benefit of the timberland investment is most likely A) low correlation between traditional asset returns and timberland returns. B) timber values are tied to cyclical industries. C) the investment horizon is longer than that of stocks and bonds, balancing the duration of the portfolio. D) timber is a renewable resource so Lisa can profit from the land for many years.

A) low correlation between traditional asset returns and timberland returns. Timberland returns exhibit low correlation with stock and bond returns. This is generally cited as the key advantage to investing in timber. However, it is difficult to measure the returns to illiquid assets such as timber so the low correlation may be more a function of poor measurement of returns and less a function of true uncorrelated or negatively correlated returns. Cyclicality and a long investment horizon are disadvantages of timberland investments. Timber is a renewable resource but that would not be the key advantage in a traditional asset portfolio.

A review of the prospectus of an open-end investment company reveals that its portfolio consists entirely of CDs, Treasury bills, and repurchase agreements. This is probably a(n) A) money market fund. B) index fund. C) balanced fund. D) exchange-traded fund (ETF).

A) money market fund. Money market funds hold money market instruments like negotiable CDs, Treasury bills, banker's acceptances, commercial paper, and repurchase agreements.

An investor using a dollar cost averaging approach to buying a mutual fund will buy A) more shares when the NAV of the fund falls since the last purchase. B) the same number of shares regardless of which direction the NAV takes. C) fewer shares when the NAV of the fund falls since the last purchase. D) more shares when the NAV of the fund rises since the last purchase.

A) more shares when the NAV of the fund falls since the last purchase. The investor will purchase more shares when the NAV falls because the dollar amount invested remains the same.

Unsystematic (unique) risk can be reduced by buying A) stocks in numerous unrelated companies. B) stocks in natural resource companies. C) international stocks. D) stock in less-interest-rate-sensitive companies.

A) stocks in numerous unrelated companies. Owning stock in unrelated companies results in holding stocks that have a low correlation coefficient between them. If a portfolio has numerous diversified issues of stocks, an investor can reduce and virtually eliminate the degree of unsystematic (unique) risk in the portfolio. Buying stocks in international companies can help to reduce systematic risk, because those stocks trade in different markets.

Jana believes that the allocation to emerging market equities in her portfolio has become overvalued, so she trims the holdings in that asset class and reinvests the proceeds in other asset classes that she believes are undervalued. Jana's approach to asset allocation can best be described as A) tactical asset allocation. B) core-satellite asset allocation. C) strategic asset allocation. D) dynamic asset allocation.

A) tactical asset allocation. Tactical asset allocation continuously adjusts the asset allocation and class mix in an attempt to take advantage of changing market conditions and overall investor sentiment.

All of the following affect an investor's risk tolerance except A) tax bracket. B) investment time horizon. C) family situation. D) years of experience with investing in the markets.

A) tax bracket. Tax concerns play an important role in investment planning; however, these constitute an investment constraint, not an investment objective (i.e., risk tolerance).

The difference between a convertible bond and a bond with warrants is that A) when warrants are exercised, the issuer receives equity capital from the warrants in addition to the original debt from the bond with warrants; when convertible bonds are converted, the bond is replaced with stock. B) when warrants are exercised, a portion of the issuer's debt is replaced with equity; when convertible bonds are exercised, a portion of the issuer's debt is replaced with equity. C) a convertible bond has an embedded call option, and a bond with warrants does not. D) a bond with warrants has an embedded put option, and a convertible bond has an embedded call option.

A) when warrants are exercised, the issuer receives equity capital from the warrants in addition to the original debt from the bond with warrants; when convertible bonds are converted, the bond is replaced with stock. The issuer receives new equity upon exercise of the warrants, which is in addition to the initial debt received from the bonds; upon conversion of the convertible bond, the bond is retired and stock is issued in its place.

The yield curve graphically plots A) yield on the y-axis and time on the x-axis. B) yield on the y-axis and price on the x-axis. C) price on the y-axis and time on the x-axis. D) price on the y-axis and yield on the x-axis.

A) yield on the y-axis and time on the x-axis. Yield on the y-axis, plotted against time, on the x-axis, is the yield curve.

CAR stock is currently paying a dividend of $1 per share. Assume the stock's dividend is expected to grow for three years at 5% per year. After three years, the dividend is expected to grow at a constant 2% rate. The investor's required rate of return is 8%. What is the intrinsic value of CAR stock? A. $18.45 B. $19.67 C. $20.83 D. $22.98

A. $18.45 This is found by using the multistage growth dividend discount model, which shows the intrinsic value of CAR stock is $18.45. 1. Compute the value of each future dividend until the growth rate stabilizes (Years 1-3). D1 = $1.00 × 1.05 = $1.05 D2 = $1.05 × 1.05 = $1.10 D3 = $1.10 × 1.05 = $1.16 2. Use the constant growth dividend discount model to compute the remaining intrinsic value of the stock at the beginning of the year when the dividend growth rate stabilizes (Year 4). D4 = $1.16 × 1.02 = $1.18 V = $1.18 ÷ (0.08 - 0.02) = $19.67 3. Use the uneven cash flow method to solve for the net present (intrinsic) value of the stock. CF0 = $0 CF1 = $1.05 CF2 = $1.10 CF3 = $1.16 + $19.67 = $20.83 I/YR = 8% Solve for NPV = $18.45

Your client purchased 100 shares of FAQ stock at $60 per share with a 50% initial margin percentage and a 35% maintenance margin requirement. If the stock drops to $40 per share, how much money does your client need to deposit to meet the required equity amount in the margin account? A. $400 B. $600 C. $615 D. $800

A. $400 Value: $40 × 100 shares = $4,000 Loan amount: $6,000 × 0.50 = ($3,000) Actual equity: $1,000 Required equity: $4,000 × 0.35 = ($1,400) Cash deposit needed: $400

John is traveling to Europe and has $2,000 that he wants to convert to euros. The current exchange rate is 0.68 euros = $1. How many euros will John receive in this exchange? A. 1,360 B. 1,500 C. 2,000 D. 3,360

A. 1,360 Determine the cost in U.S. dollars to purchase one euro. HP 10bII+: 0.68, gold, 1/x = $1.4706 Then, $2,000 ÷ $1.4706 = 1,360 euros, or $2,000 × 0.68 = 1,360 euros.

Brian owns a taxable corporate bond with a coupon rate of 5%. He pays taxes at a marginal rate of 32%. What is the after-tax yield he will receive on this investment? A. 3.40% B. 3.85% C. 4.72% D. 6.60%

A. 3.40% Brian will earn an after-tax yield of 3.40%, or 5% × (1 - 0.32)

A 15-year, 10% annual coupon bond is sold for $1,150. The bond can be called at the end of five years for $1,100. What is the bond's approximate yield to call (YTC)? A. 8.0% B. 8.4% C. 9.2% D. 10.0%

A. 8.0% The calculation is as follows: N = 5; FV = 1,100; PMT = 100; PV = -1,150; then, solve for I/YR = 7.9539, rounded to 8.0%. Interest is compounded on an annual basis according to the problem, so the I/YR does not need to be multiplied by two. The calculator should be in END mode and 1 P/Yr

ADM needs large quantities of soybeans in the future for use in manufacturing products. Which of the following investment strategies should ADM employ to hedge its risk? A. ADM should buy soybean futures to hedge against higher soybean prices. B. ADM should sell soybean futures to hedge against lower soybean prices. C. ADM should sell soybean futures to hedge against higher soybean prices. D. ADM should buy soybean futures to hedge against lower soybean prices.

A. ADM should buy soybean futures to hedge against higher soybean prices. ADM needs, or is short, soybeans. Therefore, the company should buy soybean futures (take an opposite position) to hedge against higher soybean prices. This is referred to as a long hedge.

A portfolio manager considers adding an asset to the portfolio. The manager decides between four equally risky assets: W, X, Y, and Z. The correlations of each asset with the portfolio are as follows: Asset W: 0.90 Asset X: 0.80 Asset Y: 0.40 Asset Z: 0.20 To achieve optimal diversification benefits, which of the assets should be selected by the manager? A. Asset Z B. Asset Y C. Asset W D. Asset X

A. Asset Z Asset Z has the smallest correlation with the portfolio and will therefore provide the largest reduction in portfolio risk.

Why would an institutional investor choose to purchase commercial paper for a portfolio? A. Commercial paper provides higher yields than U.S. Treasury bills. B. Commercial paper offers tax-free interest payments. C. Commercial paper is generally not rated as to quality. D. Commercial paper is usually offered in denominations below $50,000.

A. Commercial paper provides higher yields than U.S. Treasury bills. Compared to U.S. Treasury bills, commercial paper is slightly less liquid and has a higher risk of default; therefore, it has a nominally higher yield. The interest paid on commercial paper is subject to income tax in the year earned. Commercial paper is rated by independent rating services as to quality and is offered in denominations generally in excess of $100,000.

ABC Corporation is a manufacturer of electronic devices used in the manufacturing of airplanes. Five years ago, the corporation floated a $100 million bond issue that would be used to finance improvements at its main manufacturing and distribution center. However, orders for its products have dropped dramatically due to demand being much lower than anticipated. The company believes it may miss paying the coupon payment on the bond issue in the upcoming fiscal year. The owners of the ABC Corporation bonds are facing which of the following types of risk? A. Default risk B. Reinvestment rate risk C. Market risk D. Regulation risk

A. Default risk Default risk is the risk that a business will be unable to service its debt obligations.

Sally, Michael, and Anita use different methods for choosing assets for their investment portfolios. Sally uses technical analysis to determine when to buy and sell the stocks in her portfolio. Michael is committed to a passive investment strategy and a well-diversified portfolio of randomly selected stocks. Anita ignores historical volume and price information, but she reviews the financial statements of the firms in which she is interested. Which of the following statements best describes Sally, Michael, and Anita? I. Anita accepts the strong form of the efficient market hypothesis (EMH). II. Michael accepts the semistrong form of the EMH. III. Sally accepts the weak form of the EMH. IV. Both Anita and Sally accept the semistrong form of the EMH. A. II only B. I and IV C. II and III D. II, III, and IV

A. II only Under the weak form of the EMH, access to fundamental analysis and insider information can achieve superior results. Under the semistrong form of the EMH, only access to insider information can achieve superior results. Under the strong form of the EMH, not even access to insider information can achieve superior results. Anita uses fundamental analysis, which is supported only by the weak form of EMH. Michael does not use fundamental or technical analysis. His strategy is supported by both the semistrong and strong forms of the EMH. Sally uses technical analysis, which is rejected by all forms of the EMH.

Which of the following is a primary purchaser of negotiable CDs? A. Institutional investor B. Individual of modest means C. Hedge fund D. Highly risk-tolerant investor

A. Institutional investor With a minimum denomination of $100,000, an individual of modest means probably could not afford its purchase, and a highly risk-tolerant investor or hedge fund is more interested in growth and a greater return on investment than that afforded by a negotiable CD

George is considering adding ABC stock to his portfolio. ABC has a standard deviation of 4.5% and a beta of 0.85. If the market rate of return is 12% and the 90-day T-bill has a yield of 3%, what are the market risk premium and the stock risk premium for ABC? A. Market risk premium: 9%; stock risk premium: 7.65% B. Market risk premium: 9%; stock risk premium: 13.50% C. Market risk premium: 12%; stock risk premium: 7.65% D. Market risk premium: 12%; stock risk premium: 13.50%

A. Market risk premium: 9%; stock risk premium: 7.65% Market risk premium = rm - rf = 12% − 3% = 9%. Stock risk premium = (rm - rf) βi = 9% × 0.85 = 7.65%.

Troy requires a 15% return to meet his financial goals. He is interested in a mutual fund with a beta of 1.3. If the market return has averaged 11% over the past 10 years and the Treasury bill rate is currently 4%, should Troy invest in this fund? A. No, the fund's expected rate of return is less than Troy's required rate of return. B. No, Troy's required rate of return is less than the fund's expected rate of return. C. Yes, the fund's expected rate of return is more than Troy's required rate or return. D. Yes, Troy's required rate of return is more than the fund's expected rate of return.

A. No, the fund's expected rate of return is less than Troy's required rate of return. Expected rate of return for the mutual fund using CAPM is as follows: rf + (rm - rf) βi = 0.04 + (0.11 − 0.04)1.3 = 0.131, or 13.1%. Because the expected rate of return is less than Troy's required rate of return, he should not purchase shares in the fund.

Patrick, age 57, has just retired from his job as a teacher. He is a widower and has three self-sufficient adult children. As part of his compensation plan, he has a cash balance retirement plan. He would like to transfer these assets to his broker and allocate the portfolio according to an income objective with low to moderate risk and a long-term time horizon. Which of the following portfolios should Patrick's financial advisor recommend? A. Portfolio 1—65% bond index fund, 20% S&P 500 Index fund, 10% international stock fund, 5% money market fund B. Portfolio 2—40% high-yield bond fund, 20% municipal bond fund, 20% U.S. government securities fund, 20% small-cap growth fund C. Portfolio 3—80% S&P 500 Index fund, 10% international bond fund, 10% money market fund D. Portfolio 4—25% Bond Index fund, 60% S&P 500 Index fund, 10% international stock fund, 5% money market fund

A. Portfolio 1—65% bond index fund, 20% S&P 500 Index fund, 10% international stock fund, 5% money market fund Because Patrick has recently retired, the portfolio should primarily provide income. In addition, his age necessitates a modest growth component to his portfolio. A portfolio consisting of 65% bonds, 30% stocks, and 5% money market is consistent with an income objective with low to moderate risk and a long-term time hori

Portfolio A has a standard deviation of 5.5%, a beta of 1.15, an actual return of 8%, and an expected return of 10%. Portfolio B has a standard deviation of 7.5%, a beta of 1.50, an actual return of 9%, and an expected return of 12%. Assume a risk-free rate of return of 2.75% and an R2 of 0.40 with respect to the market. Given this information, which of the following statements is CORRECT? A. Portfolio A has a higher Sharpe ratio than Portfolio B, indicating that Portfolio A outperformed Portfolio B. B. Portfolio B has a higher Sharpe ratio than Portfolio A, indicating that Portfolio B outperformed Portfolio A. C. Portfolio A has a higher Jensen's alpha than Portfolio B, indicating that Portfolio A outperformed Portfolio B. D. Portfolio B has a higher Treynor ratio than Portfolio A, indicating that Portfolio B outperformed Portfolio A.

A. Portfolio A has a higher Sharpe ratio than Portfolio B, indicating that Portfolio A outperformed Portfolio B. Because R2 is less than 0.70, the Sharpe ratio must be used to compare the performance of the portfolios. The formula for the Sharpe ratio is as follows: Sp = (rp - rf) ÷ σp Sharpe for Portfolio A = (0.08 - 0.0275) ÷ 0.055 = 0.9545 Sharpe for Portfolio B = (0.09 - 0.0275) ÷ 0.075 = 0.8333 As a result, the Sharpe ratio for Portfolio A is higher than Portfolio B, indicating that Portfolio A outperformed Portfolio B

Mildred is the portfolio manager of a small-cap fund that invests strictly within the United States. Which index would provide the best benchmark for Mildred's fund? A. Russell 2000 Index B. MSCI EAFE Index C. S&P 500 Index D. Wilshire 5000 Index

A. Russell 2000 Index The Russell 2000 is an index of small-capitalization U.S. stocks. The MSCI EAFE is an index of European, Australasian, and Far East stocks. The S&P 500 is an index of large-capitalization U.S. stocks. The Wilshire 5000 is a broad market index.

Which of the following subjects the investor to the greatest possible loss? A. Selling a naked call option B. Selling a covered call C. Buying a put option D. Buying a call option

A. Selling a naked call option The most risky transaction is selling a naked call option. The loss when purchasing any type of option (call or put) is limited to the option premium paid. However, selling a naked call option exposes the investor to an unlimited loss because there is no limit to how much the underlying stock price can increase in the secondary market.

Franklin is considering investing in bonds. He may purchase a corporate bond paying a 7% coupon or a municipal bond paying 5.3%. If Franklin's marginal federal income tax rate is 32% and his state does not collect income taxes, Franklin would prefer A. the municipal, because its taxable equivalent yield is 7.79%. B. the corporate, because its after-tax yield is 10.45%. C. the municipal, because its taxable equivalent yield is 16.06%. D. the corporate, because its after-tax yield is 21.21%.

A. the municipal, because its taxable equivalent yield is 7.79%. One can either compare the taxable equivalent yield (TEY) of the municipal bond with the nominal yield for the corporate bond or compare the after-tax yield of the corporate bond with the nominal yield of the municipal bond. The TEY of the municipal bond = 5.3% ÷ (1 - 0.32) = 7.79%, which is more than the nominal yield of the corporate bond. The after-tax yield of the corporate bond is 7% × (1 - 0.32) = 4.76%.

All of the following are primary factors in the arbitrage pricing theory (APT) except A. the unemployment rate. B. interest rates. C. the inflation rate. D. changes in GDP.

A. the unemployment rate. The four factors in APT are unexpected changes in inflation, GDP, interest rates, and market risk premiums

The Pratts are considering purchasing JKL stock based on a stock tip from their neighbor, Alicia. Alicia has provided them with the following information: - Current dividend: $2.50 - Expected dividend growth rate for years 1 and 2: 8% - Expected dividend growth rate for years 3+: 10% Based on this information, what is the intrinsic value of JKL stock if the Pratts have a required rate of return for this investment of 14%? A) $67.50 B) $66.37 C) $41.67 D) $123.59

B) $66.37 Using the multistage growth dividend discount model, calculate JKL stock's intrinsic value: Step 1: Compute the value of each future dividend until the growth rate stabilizes (Years 1-2). D1 = $2.50 × 1.08 = $2.70 D2 = $2.70 × 1.08 = $2.92 Step 2: Use the constant growth dividend discount model to compute the remaining intrinsic value of the stock at the beginning of the year when the dividend growth rate stabilizes (Year 3). D3 = $2.92 × 1.10 = $3.21 V = $3.21 ÷ (0.14 - 0.10) = $80.25 Step 3: Use the uneven cash flow method to solve for the net present (intrinsic) value of the stock. CF0= $0 CF1= $2.70 CF2 = $2.92 + $80.25 I/YR= 14% Solve for NPV = $66.37

An analyst's report on Derjet Industries has provided the following corporate information: Total assets = $100,000,000 Total equity = $50,000,000 Net income = $12,500,000 Earnings per share = $3.50 P/E ratio = 2.2 Dividend growth rate = 1.65% Assuming an investor has a required rate of return of 15%, calculate the maximum price that should be paid for this stock in the secondary market. A) $14.38 B) $7.70 C) $25.83 D)$35.46

B) $7.70 Calculate the intrinsic value of the stock using EPS and the P/E ratio, which is $7.70 ($3.50 × 2.2).

Norma Smith owns ABC Corporation bonds of AA rated quality that mature in seven years, pay semiannual interest, and have a coupon of 8%. Similar bonds (AA rated, seven years to maturity) yield 9%. The ABC Corporation bonds are convertible into common stock at $26 per share, and the current market price of ABC common stock is $23. What is the conversion value of an ABC Corporation bond? A) $923.08 B) $884.61 C) $851.85 D) $766.47

B) $884.61 Conversion value = conversion ratio × market price of common stock, or ($1,000 ÷ $26) × $23 = $884.61.

Juan has an investment portfolio consisting of 30% MIJ stock with a beta of 1.76, 40% ABC stock with a beta of 0.98, and 30% LFM stock with a beta of 2.09. What is the weighted beta for Juan's portfolio? A) 0.516 B) 1.547 C) 1.610 D) 3.605

B) 1.547 The portfolio's weighted beta is calculated as follows: (0.30 × 1.76) + (0.40 × 0.98) + (0.30 × 2.09) = (0.528 + 0.392 + 0.627) = 1.547 With a beta higher than 1.0, the portfolio is much more volatile than the overall market.

Assume an investor purchased $10,000 of Fund ABC at the beginning of Year 1. Subsequently, he made investments at the beginning of Years 2, 3, and 4 of $1,000, $5,000, and $8,000, respectively. At the beginning of Year 5, the fund was worth $33,000. What was the internal rate of return (IRR) on this fund? A) 20.55% B) 12.79% C) 10.08% D) 14.31%

B) 12.79% This problem involves calculating the IRR/YR for uneven cash flows per the following inputs. Using a financial calculator, include the following cash flows: (10,000) CFj, (1,000) CFj (5,000) CFj (8,000) CFj 33,000 CFj IRR/YR = 12.79%

Based on the following information, which of the following is the expected rate of return for Softco Corporation? Stock's beta 0.80 Forecasted market rate of return 15% Risk-free rate of return 6.5% A) 6.80% B) 13.30% C) 17.20% D) 8.50%

B) 13.30% Using the capital asset pricing model, the expected rate of return is 13.30% [6.5% + (15% - 6.5%)0.80].

Given the following historical return information for ABC stock: Year Annual Rate of Return 1 12% 2 18% 3 -10% 4 -14% 5 23% Which of these is the standard deviation for this series of returns? A) 25.82% B) 16.77% C) 5.18% D) 5.80%

B) 16.77% The standard deviation for this historical series of return for ABC stock is 16.77%. Using the HP 10bII+ the steps are listed below, however for the TI BAII Plus, please see the supplemental calculator document: Keystrokes Display [SHIFT] [C ALL] 0.0000 12 [Ʃ+] 1.0000 18 [Ʃ+] 2.0000 10 [+/-][Ʃ+] 3.0000 14 [+/-][Ʃ+] 4.0000 23 [Ʃ+] 5.0000 [SHIFT] [Sx,Sy] 16.7690, or 16.77%

Kevin owns a $1,000 par value corporate bond with three years remaining until maturity. This bond is currently trading for $1,020.91. The bond has a coupon rate of 4.5% (annual coupon payments) and a current YTM of 3.75%. What is the duration of this bond? A) 1.0067 B) 2.8741 C) 2.0910 D) 3.7500

B) 2.8741 Determine the duration of the bond. Year | Cash Flow(CF) | Present Value(PV) of CF | PV × Year 1 | $45 | $43.37 | $43.37 2 | $45 | $41.81 | $83.62 3 | $1,045 | $935.73 | $2,807.19 $1,020.91 | $2,934.18 Divide the sum in the last column ($2,934.18) by the total PV/market price of the bond ($1,020.91) to derive the duration of 2.8741 years. Using a financial calculator with the following inputs: For year 1, FV = $45, I/YR = 3.75, N = 1, solve for PV. For year 2, change N to 2 without clearing your calculator and solve for PV. For year 3, FV = $1,045, I/YR = 3.75%, N = 3, solve for PV.

Nancy bought 50 shares of ABC stock for $50 per share. She made additional purchases at the end of each of the following years: - Year 1: 10 shares at $52 per share - Year 2: 10 shares at $53 per share - Year 3: 10 shares at $45 per share ABC stock has not paid any dividends during her holding period. At the end of Year 4, the stock is trading for $55 per share. Which of the following is Nancy's return over the past four years on ABC stock (assume she sells the stock for the current trading price)? A) 4.65% B) 2.95% C) 5.00% D) 3.25%

B) 2.95% The answer is 2.95%. The dollar-weighted return is calculated as follows: CF0 (2,500) [50 × $50] CF1 (520) [10 × $52] CF2 (530) [10 × $53] CF3 (450) [10 × $45] CF4 4,400 [80 × $55] Solve for IRR/YR = 2.95%

Lauren invested $15,000 in a growth and income fund four years ago. She received a dividend of $800 the first year and $900 each in the second, third, and fourth years. Today, her investment has a total value of $27,234.56. Calculate the approximate internal rate of return (IRR) on Lauren's investment. (Round to the nearest percent.) A) 13% B) 21% C) 18% D) 12%

B) 21% IRR is the discount rate that equates the present value of all the cash inflows with the present value of the cash outflows. The cash flow inputs for the financial calculator are as follows: - 15,000 CF0, 800 CF1, 900 CF2, 900 CF3, 27,234.56 + 900 = 28,134.56 CF4, Solve for IRR/YR = 20.80 (rounded to 21%). Note the final cash flow consists of both the dividend ($900) and the ending value ($27,234.56).

Financial leverage affects A) risk to stockholders. B) return on equity. C) return on equity, earnings per share, and risk to stockholders. D) earnings per share.

C) return on equity, earnings per share, and risk to stockholders. The answer is return on equity, earnings per share, and risk to stockholders. ROE and earnings per share are magnified with leverage, and the risk to stockholders increases as a firm's leverage increases.

The annual returns of the ABC fund have been +12%. -4%, and +7%. What is the standard deviation of the fund's returns? A) 4.04% B) 8.19% C) 7.79% D) 5.00%

B) 8.19% HP 10bII+ keystrokes: 12, ∑+ 4, +/-, ∑+ 7, ∑+ SHIFT, Sx,Sy (8 key) for standard deviation Calculation is as follows for the TI BA II+: Step 1: press "2nd" then "7". This activates the data screen. Step 2: press "2nd" then "CE/C" to clear all your existing work. Step 3: enter the first return "12" into the first "X01" screen and press enter. Step 4: hit the down arrow button "↓" and scroll past "Y01" and hit "↓" one more time until you get to "X02". Step 5: input the next return value which would be "4,+/-" and hit enter. Follow this process until you input all three values. Step 6: press "2nd" then "8" which is the "STAT" screen. Step 7: press "2nd" then "enter" which is the "SET" screen. Keep hitting the "2nd" and "enter" button until you see "1-V." Step 8: press "↓" to scroll through the calculated statistics. You will hit the "↓" button 3 times before you reach the standard deviation screen which will start with "Sx" and should equal "8.19."

Mary is traveling to Europe and has $1,000 (U.S.) that she wants to convert to euros. The current exchange rate is 0.90 euros = $1 (U.S.). How many euros will she receive in this exchange? A) 1,800 B) 900 C) 1,111 D) 2,000

B) 900 Determine the cost in U.S. dollars to purchase one euro: 1 / 0.90 = $1.1111 Then, $1,000 ÷ $1.1111 = 900 euros or $1,000 × 0.90 = 900 euros

STU Corporation stock has an average rate of return of 24% and a standard deviation of 10%. The risk-free rate of return is 4%. Assuming the historical returns for STU stock are normally distributed, calculate the probability that this stock will have a return in excess of the risk-free rate of return. A) 2.5% B) 97.5% C) 95.0% D) 34.0%

B) 97.5% The answer is 97.5%. The probability of a return above 24% is 50%. The probability of a return between 4% and 24% is 47.5% (95% ÷ 2). Therefore, the probability of a return above 4% is 97.5% (50% + 47.5%).

ABC stock is subject to which of the following risks? A) Business risk B) All of these C) Market risk D) Financial risk

B) All of these Common stock is subject to a variety of risks, including, but not limited to, business risk, financial risk, and market risk.

Select the CORRECT statement regarding security market indexes and averages. A) The S&P 500 Index is used by most professionals as a benchmark for U.S. large-cap equity investments. B) All of these statements are correct. C) The Russell 2000 Index is used to benchmark small capitalization companies. D) The Wilshire 5000 Index is often used as a measure of the overall market within the United States.

B) All of these statements are correct. Averages and indexes are constructed to inform investors about changes in the market. They also serve as benchmarks for the performance of investors' portfolios and the performance of money managers.

When analyzing various investment alternatives, investors would generally choose which of these? A) An investment exhibiting a low positive skewness and a leptokurtic distribution B) An investment exhibiting a high positive skewness and a leptokurtic distribution C) An investment exhibiting a high positive skewness and a platykurtic distribution D) An investment exhibiting a low positive skewness and a platykurtic distribution

B) An investment exhibiting a high positive skewness and a leptokurtic distribution Investments exhibiting high positive skewness have a larger than average number of positive price movements. Also, investments exhibiting a leptokurtic distribution have more observations clustered closely around the mean, resulting in a lower variance. Investors prefer a large number of positive returns with low risk.

Your client has learned of a private placement offering. Which of the following is NOT a characteristic of a private placement? A) Private offerings can be tailored more to the needs of investors and issuers than public offerings. B) An investor with a net worth of $1 million, including the value of their primary residence, can participate in a private placement offering. C) Frequent investors in private placements include insurance companies and pension funds. D) A major advantage of a private placement is that the selling costs associated with a public offering are eliminated.

B) An investor with a net worth of $1 million, including the value of their primary residence, can participate in a private placement offering. The answer is an investor with a net worth of $1 million, including the value of their primary residence, can participate in a private placement offering.

John, your client, received notice that he will be laid off from his job in one month due to his company downsizing as a result of a slowing economy. What would be the best course for your client after his job loss? A) Cash in a growth mutual fund with a large unrealized capital gain. B) Apply for unemployment benefits. C) Take a loan from his 401(k) plan to pay for current expenses. D) Cancel his health insurance.

B) Apply for unemployment benefits. Cancelling his health insurance without reviewing any COBRA options would not be prudent. He will not be able to take a loan from his 401(k) plan after he terminates his employment. Cashing in his mutual fund may not be wise because any unrealized gain would become taxable.

Phil has computed a required return for the Pepsi stock he is considering purchasing. He believes that interest rates and inflation will change over the expected holding period. Therefore, he adjusted the required return for his projected changes in these factors. Which of the following stock market theories did Phil use? A) Dividend growth theory B) Arbitrage pricing theory C) Modern portfolio theory D) Black-Scholes pricing theory

B) Arbitrage pricing theory An investor using the APT starts with a required return for a security, possibly computed using the CAPM. The investor then adjusts the required return for a multitude of factors that may affect that particular security, such as interest rates, industrial production, and inflation.

Brandon owns ABC mutual fund that has produced these returns over the past three years: - Year 1: 4.7% - Year 2: −10.0% - Year 3: 6.5% Based on this information, calculate both the arithmetic mean (AM) and geometric mean (GM) returns for this series. A) Arithmetic mean: −3.93%; geometric mean: −0.1182% B) Arithmetic mean: 0.40%; geometric mean: 0.1182% C) Arithmetic mean: −0.40%; geometric mean: −7.04% D) Arithmetic mean: 7.07%; geometric mean: 7.04%

B) Arithmetic mean: 0.40%; geometric mean: 0.1182% The answer is arithmetic mean: 0.40%; geometric mean: 0.1182%. The arithmetic mean is calculated as follows: (4.7% - 10.0% + 6.5%) ÷ 3. The geometric mean is calculated using the following TVM inputs: PV = -1 FV = (1.047)(0.90)(1.065) PMT = 0 N = 3 Solve for I/YR = 0.1182

The Pratts are concerned that ABC stock may substantially decline in price in the near future. Which of the following option strategies would best protect the Pratts' position in ABC stock? (Assume they own 100 shares currently valued at $130 per share, and all options will expire within 60 days.) A) Sell one put option with an exercise price of $120 for $2.95 per share. B) Buy one put option with an exercise price of $120 for $3.00 per share. C) Sell one call option with an exercise price of $150 for $0.50 per share. D) Buy one call option with an exercise price of $100 for $38.25 per share.

B) Buy one put option with an exercise price of $120 for $3.00 per share. If the Pratts are bearish, they will either sell a call or buy a put. In this particular case, the Pratts should purchase one put option with an exercise price of $120 for $3.00 per share. The total cost of the put option, excluding transaction costs, is $300 ($3 × 100). Each put option contract gives the holder the right to sell 100 shares of the underlying stock at the exercise price within a specified time frame.

Which of the following is a potential pitfall of mutual fund investing? A) Purchasing a fund immediately after a distribution of income and capital gains B) Buying a fund ranked number one if the fund is misclassified C) Buying a fund with a good long-term record with the same manager during the entire period D) Investing in a fund with low annual operating expenses

B) Buying a fund ranked number one if the fund is misclassified A number-one ranking can be obtained if a fund is misclassified with lower-risk funds.

Company A and Company B are in the same industry and have approximately the same dollar amount of assets and operating income. Company A has a return on equity (ROE) of 28% and Company B has an ROE of 12%. Which of the following statements best identifies the major difference causing the disparity in ROE between Company A and Company B? A) Company B has a higher level of depreciation expense than Company A. B) Company A has more debt than Company B. C) Company A has lower selling, general, and administrative (S, G, & A) expenses. D) Company B has an extraordinary loss.

B) Company A has more debt than Company B. Generally, the most significant factor in raising one company's ROE above another company's is the greater use of debt. The company having the greater percentage of debt, assuming the cost of the debt is less than the return earned from the debt proceeds, will have the highest ROE.

Larry is looking to add a real estate investment to his portfolio that is publicly traded on the exchanges, thereby offering him diversification and marketability. He has decided that a real estate investment trust (REIT) is the best choice and asks his financial planner for information about the REITs available for purchase. Based on Larry's request, the financial planner explained the various investment choices. Which of these was incorrectly stated by his financial planner? A) Equity REITs acquire real estate for the purpose of renting the space to other companies, thereby generating income. B) For the shareholders, income received is considered passive income. C) Hybrid REITs are a combination of equity REITs and mortgage REITs. D) Mortgage REITs finance real estate ventures by making loans to develop property or finance construction.

B) For the shareholders, income received is considered passive income. For REIT shareholders, income received is considered investment (not passive) income. Similar to a closed-end investment company, a REIT invests in real estate, short-term construction loans, and mortgages. Some REITs are publicly traded on the exchanges and may sell at a premium or discount to net asset value. As a result, the REIT investor achieves diversification and marketability.

Elayne recently purchased a municipal bond through her stockbroker. The broker told her that the bond is backed by the full faith and credit of the issuer. What type of bond did Elayne buy for her portfolio? A) U.S. Treasury bond B) General obligation bond (GO) C) Revenue bond D) U.S. savings bond

B) General obligation bond (GO) GOs are municipal bonds that are issued to finance capital improvements for the benefit of the entire community. Because taxes back most GOs, municipalities may require a taxpayer vote to approve new issues.

Your clients have invested in a variety of mutual funds, including foreign country funds. You expect the U.S. dollar to strengthen against the Japanese yen over the next year. Which of these actions would be most appropriate? A) Hedge by taking a long position in yen futures. B) Hedge by taking a short position in yen futures. C) Sell the Japanese mutual funds. D) Purchase additional Japanese mutual funds.

B) Hedge by taking a short position in yen futures. Fluctuating currency rates alone are not good reason to sell or purchase country funds. The performance of the funds might exceed the currency loss by a substantial amount.

Which of the following statements regarding hedge funds is CORRECT? A) Hedge funds are typically favored by inexperienced investors to hedge against losses they may experience as they gain investment savvy. B) Hedge funds are usually structured as a partnership. C) Hedge funds are passively managed in an attempt to provide predictable returns for investors. D) Hedge fund managers, like mutual fund managers, are compensated largely based on assets under management.

B) Hedge funds are usually structured as a partnership. The partnership is with the general partner as the investment manager and the investors as limited partners. Hedge funds are actively and aggressively managed, seek superior returns, and are best suited for wealthy, sophisticated investors. Hedge fund managers are largely compensated for performance, not assets under management.

Which of the following may be a negative consequence of a high portfolio turnover rate? A) Consistency of investing style B) Higher tax liabilities for the shareholder C) Lower transaction costs D) Lower annual operating expenses

B) Higher tax liabilities for the shareholder High turnover generally leads to realization of capital gains and higher taxation to shareholders.

Which of the following statements regarding a straddle is CORRECT? I. An investor who writes a short straddle expects that the underlying stock's price will not change or change very little. II. A straddle is an options strategy combining the use of a call option and a put option with different exercise prices and expiration dates. A) Neither I nor II B) I only C) II only D) Both I and II

B) I only A straddle is an options strategy combining the use of a call option and a put option with the same exercise price and expiration date.

Which of the following are characteristics of closed-end funds? I. A closed-end fund stands ready to redeem shares from investors. II. Closed-end funds trade like common stocks. III. Closed-end fund shares can be bought on margin or sold short. IV. Closed-end funds will always trade at net asset value. A) I and III B) II and III C) II, III, and IV D) I and II

B) II and III Similar to common stocks, closed-end funds trade on the exchanges. Also, closed-end funds can be bought on margin and sold short.

Cindy has been an active investor for many years. She currently has a money market mutual fund and several equity mutual funds. She wants to maximize her return on an intermediate-term bond and plans to hold the bond to maturity. Which of these two bonds would be more appropriate for Cindy, and why? - Bond 1: callable at par value; BBB rated; coupon = 6%; matures in six years; selling for $863; duration = 5.16 - Bond 2: callable at par value; A rated; coupon = 10%; matures in four years; selling for $1,103; duration = 3.5 I. Bond 1, because it is selling for a discount and is less likely to be called. II. Bond 1, because it has a higher yield to maturity than Bond 2. III. Bond 2, because its higher coupon gives it a better total return. IV. Bond 2, because it has a higher yield to maturity than Bond 1. A) II only B) I and II C) I only D) III and IV

B) I and II Below are the TVM inputs used on the financial calculator for each bond. YTM for Bond 1: PV = -$863 FV = $1,000 PMT = $1,000 x 6% = $60 / 2 = $30 N = 12 (6 x 2 periods per year) Solve for I/YR = 9% YTM for Bond 2: PV = -$1,103 FV = $1,000 PMT = $1,000 x 10% = $100 / 2 = $50 N = 8 (4 x 2 periods per year) Solve for I/YR =7% In addition, Bond 1 is selling at a discount—unlike Bond 2 selling at a premium—so it is not likely to be called.

Cindy, 38, has been an active investor for many years. She currently has a money market mutual fund and has a number of equity mutual fund shares. She wants to maximize her return on an intermediate-term bond and plans to hold the bond to maturity. Which of these two bonds would be more appropriate for Cindy and why? - Bond 1: callable at par value; BBB rated; coupon = 6%; matures in six years; selling for $863; duration = 5.16 - Bond 2: callable at par value; A rated; coupon = 10%; matures in four years; selling for $1,103; duration = 3.5 I. Bond 1, because it is selling for a discount and is less likely to be called. II. Bond 1, because it has a higher yield to maturity than Bond 2. III. Bond 2, because its higher coupon gives it a better total return. IV. Bond 2, because it has a higher yield to maturity than Bond 1. A) III and IV B) I and II C) I only D) II only

B) I and II YTM for Bond 1 is calculated with the following inputs: - $863 = PV $1,000 = FV $1000 x 6% = $60/2 = $30 = PMT N = 12 (6 x 2 periods per year) Solve for I/YR = 9% YTM Bond 2 is calculated with the following inputs: -$1,103 = PV $1,000 = FV $1000 x 10% = $100/2 = $50 = PMT N = 8 (4 x 2 periods per year) Solve for I/YR = 7% In addition, Bond 1 is selling at a discount—unlike Bond 2 selling at a premium—so it is not likely to be called. NOTE: there are several examples on bond calculations in the blue boxes in Module 2; however, it may be necessary to skip ahead to Module 7 for some additional practice.

Under which of these circumstances will dollar cost averaging result in an average cost per share lower than the average price per share? I. The price of the stock fluctuates over time. II. A fixed number of shares is purchased regularly. III. A fixed dollar amount is invested regularly. IV. A constant dollar plan is maintained. A) II and III B) I and III C) I, III, and IV D) I and II

B) I and III Dollar cost averaging benefits the investor if the same amount is invested on a regular basis over a substantial period, during which the price of the stock fluctuates. A constant dollar plan is one in which the investor maintains a constant dollar value of securities in the investment portfolio.

Which of the following are implications of the weak form of the efficient market hypothesis (EMH)? I. Stock prices fully reflect all historical price behavior. II. Consistently superior performance is common. III. Fundamental analysis may produce superior investment performance. IV. Fundamental and technical analysis can produce superior investment performance. A) I only B) I and III C) I and IV D) II and IV

B) I and III Technical analysis is not considered valuable under any of the forms of the EMH; fundamental analysis is considered valuable under the weak form only.

A $1,000 bond may be converted into common stock at $40 per share. The current market price of the stock is $35 per share. The bond matures in 15 years, has a 7% coupon, and a current market price of $914. The current interest rate paid on comparable debt is 8%. Calculate the conversion value of the bond and determine which of these statements are CORRECT. I. The bond is selling at a premium over its conversion value. II. The bond should be converted because its conversion value is less than its value as a bond. III. The bond should not be converted because its conversion value is less than its value as a bond. IV. The market price of the stock will increase as the market price of the bond increases. A) I, III, and IV B) I and III C) I only D) I and II

B) I and III The bond is currently selling for a premium ($914) over its conversion value [($1,000 ÷ 40) × $35 = $875]. Therefore, the bond should not be converted.

Which of the following are reasons why a client's preferences, understanding, and experience may influence the management of his or her portfolio? I. These factors affect investment strategies that might be used by the planner. II. Consideration of these factors relieves the planner of any fiduciary duty. III. Consideration of these factors eliminates the need for due diligence of securities. IV. Investment choices must be checked for suitability, with these factors kept in mind. A) I and II B) I and IV C) I, II, and III D) II and III

B) I and IV Investment strategies used by a planner should tie closely to the client's goals, risk tolerance, investment preferences, and other intangible factors. Clients with little understanding may not tolerate complicated investment strategies and products. Unsuitability lawsuits are very common in the investment universe. By matching as closely as possible a client's suitability factors with investment products, an advisor may be able to defeat claims of unsuitability.

The principal functions of an investment banker are to I. distribute securities to the public. II. provide a secondary market. III. provide financing for an individual. IV. advise the issuer about alternatives in raising capital. A) III and IV B) I and IV C) I and II D) II and III

B) I and IV The principal functions of the underwriter are to advise the issuer about the financial alternatives and to sell securities to the public.

Identify the CORRECT statements regarding warrants. I. Warrants give the owner the right to purchase a specified number of shares for a specified period at a specified price. II. Warrants are typically written with a maturity date of nine months. III. Warrants must include standardized terms required by the Options Clearing Corporation. IV. Warrants are issued by a corporation rather than written by an individual. A) I and II B) I and IV C) III and IV D) I, II, III, and IV

B) I and IV Warrants typically have a maturity date of several years, not months, and are customized to fit the needs of the issuing corporation.

Your Fund Client Fund Three year total return 13.5% 14.75% Average P/E ratio 20% 24% Standard deviation 19% 23% Beta 1.03 1.24 Which fund would you recommend based on each fund's relationship between risk and return? I. Your fund, because its coefficient of variation is 1.41, compared to the client's coefficient of variation of 1.56 II. Client fund, because its higher beta dictates that its return should also be higher, which in fact occurred III. Client fund, because standard deviations and betas change over time and the statistics are close enough so that the fund with the better return should be chosen A) II and III B) I only C) II only D) I and III

B) I only The standard deviation is divided by the total return to obtain the coefficient of variation. A beta is higher does not mean that any higher return is acceptable. The client's fund has higher risk as measured by both standard deviation and beta, but taking this higher risk does not provide sufficient return based on the coefficient of variation calculation.

Which of the following statements concerning the purpose of an investment policy statement is CORRECT? I. An investment policy statement is a written document that establishes client objectives and sets limitations on the investment manager. II. The investment policy statement can be used as the basis to measure the manager's performance against the stated objectives and constraints. III. Possible investment strategies that should be pursued by an investment adviser on behalf of the client begin with the formulation of a complete and thorough investment policy statement. IV. An allocation among asset classes and their respective weights is a part of any investment policy statement. A) II and IV B) I, II, III, and IV C) I and III D) I, III, and IV

B) I, II, III, and IV All of these statements are correct. In addition, the investment policy statement can be provided to the portfolio manager to use in establishing and managing the characteristics of the client's portfolio.

Limited partnerships are distinguished by which of the following? I. The general partner controls the business activities of the partnership. II. The limited partners participate in the business venture with limited liability. III. The general partner determines when distributions are made to the limited partners. IV. The limited partners may have difficulty selling their interests. A) II and IV B) I, II, III, and IV C) I, II, and III D) I and III

B) I, II, III, and IV Limited partnerships are characterized by a partnership entity that consists of a general partner and limited partners.

Which of the following statements concerning dollar cost averaging as a portfolio management technique are CORRECT? I. This technique involves investing a specific amount into an investment vehicle, regardless of whether the recent trend in the investment has been up or down. II. If prices decline, the fixed investment amount will purchase a greater quantity of the security. III. For the long-term investor, the presumption is that prices will eventually rise, so a lower average price translates into greater profits. IV. If prices rise, the fixed investment amount will purchase a greater amount of the security. A) II and III B) I, II, and III C) I and II D) I, III, and IV

B) I, II, and III If prices rise, the fixed investment amount will purchase a lower amount of the security.

Identify which of these statements regarding zero-coupon bonds is NOT correct. I. Zero-coupon bonds are purchased at par and defer interest payments until maturity. II. Because there are no coupon payments for zero-coupon bonds, no current income is recognized. III. A zero-coupon bond is issued at a discount and pays semiannual interest payments. IV. Corporations may favor zero-coupon bonds because they have an extended period to use the money that has been raised by the offering. A) II and III

B) I, II, and III Zero-coupon bonds are issued at a discount and pay only the par value at maturity; 'interest' is not paid during the term of the bond but 'interest/growth' are paid at the end. Even though no periodic interest payments are made, the bondholder must recognize the accrued interest each year for income tax purposes.

The Dow Jones Utility Average has recently dropped 30% from its high, and you decide to recommend a utility sector fund to your clients. If they invest in the fund, your clients will be exposed to which of these risks? I. Interest rate risk II. Business risk III. Default risk IV. Financial risk A) II, III, and IV B) I, II, and IV C) II and IV D) I, II, III, and IV

B) I, II, and IV Sector funds are subject to the unsystematic (diversifiable) risks of business risk and financial risk; utility sector funds are also subject to the nondiversifiable interest rate risk because of their high debt to total capital percentage. Stocks are not subject to default risk.

Dave and Pam Larson, ages 65 and 63, respectively, recently retired. They successfully saved for their retirement throughout their careers using a low-risk approach. They would like to restructure their investments to have current income now to travel in their leisure time. Which of the following investment alternatives would be appropriate for the Larsons' goal? I. Equity income mutual fund shares II. Aggressive growth mutual fund shares III. Newly issued U.S. government bonds IV. GNMA fund shares A) II, III, and IV B) I, III, and IV C) I, II, and III D) I, II, and IV

B) I, III, and IV Aggressive growth mutual funds have a primary objective of capital appreciation and pay out little to no dividends. This investment would not provide the Larsons with their desired current income. The remaining investment alternatives all fit within the Larsons' risk tolerance.

Which of these statements regarding the capital asset pricing model (CAPM) are CORRECT? I. Standard deviation is used as the measure of risk on the security market line. II. The capital asset pricing model formula defines the security market line. III. Superior performance opportunity exists if a fund's position is above the security market line. IV. Both portfolio risk and return increase when investors substitute risky securities for risk-free assets. A) II, III, and IV B) II and III C) I and IV D) I, II, and IV

B) II and III Beta is used as the measure of risk on the security market line. If risky securities are added to the portfolio, both risk and return will increase. The capital market line slopes upward indicating that as more risk is undertaken, more return should be achieved.

Identify which of the following statements regarding money market deposit accounts (MMDAs) are NOT correct. I. They are FDIC insured. II. They offer unlimited check writing privileges. III. They are primarily offered by open-end investment companies. IV. They require a minimum balance. A) I and IV B) II and III C) III and IV D) I and II

B) II and III MMDAs provide limited check writing privileges and are offered by banks and savings and loans. MMDAs require a minimum balance. Unlike money market mutual funds, MMDAs are FDIC insured.

Which of the following statements about the efficient market hypothesis (EMH) and associated anomalies are CORRECT? I. An investor purchasing a high price-to-earnings (P/E) ratio is exploiting the P/E effect anomaly. II. An investor studying annual reports and analysts' reports in his stock selection process believes that markets are weak-form efficient. III. An investor who buys the securities of firms that are not followed by many analysts is trying to benefit from the neglected-firm effect. IV. An investor who befriends the chauffeur of a firm's CEO to solicit information about the firm's plans before making investment decisions believes the markets are strong-form efficient. A) I and II B) II and III C) III and IV D) I and III

B) II and III The P/E effect suggests that portfolios consisting of stocks with low price-to-earnings ratios have higher average returns than do portfolios consisting of stocks with high P/E ratios. Strong-form market efficiency suggests that all public and private information is included in market prices. A person who solicits private information believes that it is possible to profit by making trading decisions based on private information and does not believe that the markets are efficient in the strong form. Weak-form efficiency suggests that all historical price and volume information is included in stock prices but that gains may be made by analyzing other publicly available information. An investor studying annual reports and analysts' reports to make stock selections indicates that the person is conducting fundamental analysis, because the investor believes that the markets are weak-form efficient.

Assume that the economic forecast for the coming year is expected to be one of increasing inflation and interest rates. The GDP is expected to be strong. Which of the following types of investments would be advisable for the coming year and why? I. Liquid investments, such as money market funds and short-term securities, to allow the investor flexibility to reinvest as rates increase II. Long-term debt, such as 20-year government bonds, to lock in current interest rates III. Stock in public utilities and durable goods firms, becausethey benefit from a rising interest rate environment IV. Tangible assets, such as gold, to keep pace with the rate of inflation A) I, III, and IV B) II and IV C) I, II, and III D) I and IV

B) II and IV Long-term bonds decrease in value in a rising interest rate environment. Stock in public utilities and durable goods firms does not benefit from a rising interest rate environment.

An investment portfolio has the following three stocks: Stock | Investment | Beta Stock 1 $8,000 0.6 Stock 2 $22,000 1.3 Stock 3 $12,000 0.9 Which of the following are CORRECT statements about this portfolio? I. The weighted beta for the portfolio is 0.93. II. The weighted beta for the portfolio is 1.05. III. The portfolio is less risky than the market. IV. The portfolio is riskier than the market. A) II and III B) II and IV C) I and III D) I and IV

B) II and IV The portfolio weighted beta is computed as follows: [(8 ÷ 42) × 0.6] + [(22 ÷ 42) × 1.3] + [(12 ÷ 42) × 0.9] = 0.114 + 0.681 + 0.257 = 1.052, or 1.05. Because the portfolio beta is more than 1.0, the portfolio is considered riskier than the market, which has a portfolio beta of exactly 1.0.

Which of the following are factors used in industry analysis for investment purposes? I. Financial leverage II. Government rules and regulations III. Labor conditions IV. Technological advances A) I and II B) II, III, and IV C) III and IV D) I, II, and IV

B) II, III, and IV Option I is not a factor used for industry analysis, but rather for company analysis.

Which of these statements regarding unit investment trusts (UITs) are CORRECT? I. A bond UIT has a yield to maturity. II. UIT sponsors must make a secondary market in the UITs they create. III. UITs have management fees lower than mutual funds. IV. A bond UIT does not replace bonds that are called. A) I and IV B) III and IV C) II and III D) I and II

B) III and IV A bond UIT has an estimated return but cannot offer a yield to maturity because various bonds in the UIT have different maturities and some of the bond issues might be called before maturity. UIT sponsors are not required to make a secondary market in the UITs they create. UITs are not managed so their management fees are typically lower than those of mutual funds. If a bond issue is in a UIT and subsequently called, that issue is not replaced.

Robert owns 400 shares of Intel stock that he purchased several years ago for $60 per share. Intel's current market price is $48 per share. On December 17, Robert decides to buy an additional 200 shares of Intel stock. On December 23, he decides to sell 200 shares that he purchased several years ago so that he can claim a loss on his current year's tax return. Which of the following statements is true? I. The loss will be disallowed, but Robert will have to reduce his tax basis in the shares he purchased on December 17 by the amount of the loss. II. The loss will be disallowed; the transactions are illegal and tax penalties will be imposed. III. The loss will be disallowed; the amount of the disallowed loss will be added to the cost basis of the shares purchased on December 17. IV. The transaction is called a wash sale; wash sale rules apply when shares are sold for a loss and repurchased within 30 days before or aft

B) III and IV The transaction is not illegal and no tax penalties are imposed on the transaction itself. The basis of the stock is adjusted for the disallowed loss.

Which of these statements regarding option pricing models is CORRECT? I. The binomial option pricing model assumes that the price of the option will change constantly because the market price of the underlying security also changes constantly. II. The Black-Scholes option valuation model is designed to determine the price of an American call option. III. The Black-Scholes option valuation model assumes that the price of the option will change in discrete increments on the basis of movements (up or down) in the price of the underlying stock. IV. The binomial model assumes the call option being valued has an exercise price of $100. A) I, II, and III B) IV only C) I and IV D) II, III, and IV

B) IV only The Black-Scholes option valuation model assumes that the price of the option will change constantly because the market price of the underlying security also changes constantly and is designed to determine the price of a European call option. The binomial option pricing model assumes that the price of the option will change in discrete increments on the basis of movements (up or down) in the price of the underlying stock.

Which of these statements describing real estate limited partnerships (RELPs) is CORRECT? A) Interests in RELPs are generally traded in the secondary market. B) Income attributed to limited partners is considered passive income for income tax purposes. C) An individual may be the sole owner of a RELP. D) Limited partners have limited management responsibilities.

B) Income attributed to limited partners is considered passive income for income tax purposes. Real estate limited partnerships (RELPs) are composed of at least two partners. Limited partners do not have any management responsibilities, and income attributed to them is treated as passive income by the IRS. RELPs are not publicly traded.

Which of the following statements concerning preferred stock is correct? A) If the issuer of a cumulative preferred stock fails to pay the dividend in any year, the unpaid dividend(s) will not have to be paid in the future. B) Preferred stock dividends are not legally binding but must be voted on each period by the corporation's board of directors. C) Preferred stockholders are paid before bondholders in terms of priority of payment of income and in case of corporate liquidation. D) Preferred stock resembles bonds, in that dividend income continues forever unless the stock issue is called or otherwise retired.

B) Preferred stock dividends are not legally binding but must be voted on each period by the corporation's board of directors. Preferred stockholders are paid after bondholders in terms of priority of payment of income and in case of corporate liquidation. If the issuer of a cumulative preferred stock fails to pay the dividend in any year, the unpaid dividend(s) will have to be paid in the future before common stock dividends can be paid.

Mutual fund QUE has a correlation coefficient with the market of 0.82, a beta of 1.05, and a standard deviation of 4%. The risk-free rate of return is 3.5%, and the return on the market is 12%. Mutual fund POI has a Sharpe ratio of 2.05, a Treynor ratio of 0.11, and an alpha of 0.70%. Decide which of the following a rational investor would select if the market's standard deviation is 2% and QUE realized a 13% return. A) POI over QUE because QUE's alpha is 0.58%. B) QUE over POI because QUE's Sharpe ratio is 2.38. C) POI over QUE because QUE's Treynor ratio is 0.09. D) QUE over POI because QUE's coefficient of variation is 0.31.

B) QUE over POI because QUE's Sharpe ratio is 2.38. QUE's alpha = 13% - [3.5% + (12% - 3.5%) 1.05] = 0.58% QUE's Treynor ratio = (0.13 - 0.035) ÷ 1.05 = 0.09 QUE's Sharpe ratio = (0.13 - 0.035) ÷ 0.04 = 2.38 QUE's coefficient of variation = 4% ÷ 13% = 0.31 Because QUE's R2 equals 67% (0.82 × 0.82), alpha and Treynor are not appropriate performance measures for comparison purposes. Because we do not know POI's coefficient of variation, we must use the Sharpe ratio to select the better risk-adjusted return.

Select the arrangement that is commonly used by dealers in government securities to satisfy short-term liquidity needs. A) Banker's acceptance B) Repurchase agreement C) Commercial paper D) Negotiable CDs

B) Repurchase agreement Dealers in government securities use repurchase agreements, or repos, to satisfy short-term liquidity needs.

Your client owns a small-cap fund and wants to compare its performance to an appropriate benchmark. You would advise him to choose which benchmark? A) S&P 500 B) Russell 2000 C) MSCI EAFE D) Russell 3000

B) Russell 2000 The Russell 2000 is a small-cap index.

Mary owns a portfolio consisting of two stocks, FUR and STC. FUR stock has a beta of 0.90, a standard deviation of 5%, and an actual return of 10%. STC stock has a beta of 1.10, a standard deviation of 7%, and an actual return of 12%. Assume a risk-free rate of return of 3%. Using the Treynor ratio, evaluate which stock had the better risk-adjusted performance. A) Cannot be determined with the information provided B) STC stock C) Both stocks exhibit the same performance D) FUR stock

B) STC stock The answer is STC stock. The formula for the Treynor ratio is: Tp = (rp − rf ) ÷ βp Treynor for FUR stock = (0.10 − 0.03) ÷ 0.90 = 0.0777 Treynor for STC stock = (0.12 − 0.03) ÷ 1.10 = 0.0818 As a result, the Treynor ratio for STC stock is higher than FUR stock, indicating that STC has outperformed FUR on a risk-adjusted basis.

Which of these terms is considered early-stage business funding for the purpose of research and development of an idea? A) Bridge financing B) Seed financing C) First-stage financing D) Start-up financing

B) Seed financing Seed financing (or seed capital) is for new companies without any products and it provides them cash for product development and market research. Bridge financing is for firms that expect to go public within approximately one year. First-stage financing is for initial manufacturing and sales. Start-up financing is for product development and marketing for firms who have not sold products or services commercially.

Sam holds a considerable amount of both Series EE and Series HH savings bonds. He is nearing retirement and likes the fact that his Series HH bonds pay interest semiannually and would like to exchange most of his Series EE bonds for Series HH bonds to increase his cash flow. Choose which of these statements regarding such an exchange is CORRECT. A) Sam may exchange the bonds but will be subject to a three-month interest penalty. B) Series EE bonds may no longer be exchanged for Series HH bonds.

B) Series EE bonds may no longer be exchanged for Series HH bonds. Until September 2004 (when Series HH bonds were no longer issued by the Treasury), the exchange of EE bonds for HH bonds was a popular way of continuing the income tax deferral on the accrued interest portion of the EE bonds. Such changes are no longer possible.

Brian and Kellie purchased savings bonds for their children's future college education expenses. What series of bonds did they choose if the savings bonds are inflation-indexed and may be used to pay for higher education costs on a tax-favored basis? A) Series EE B) Series I C) Series E D) Series HH

B) Series I Series I savings bonds are an inflation-indexed debt security issued by the U.S. government. The accrued interest on Series I bonds may be completely excluded from income tax if the bond proceeds are used to pay for qualified higher education costs.

Adam is trying to evaluate the performance of his portfolio on a risk-adjusted basis. He has a nondiversified portfolio of large-cap stocks. He knows there are different measures of risk-adjusted performance and is not sure which one to use. Which of the following is the most appropriate measure to use? A) Jensen, because it compares a portfolio's return to that of a market index. B) Sharpe, because when a portfolio represents the entire investment fund, standard deviation is a better measure of risk. C) Sharpe, because it is used to compute alpha by comparing the Sharpe ratio for a portfolio with the Sharpe ratio for the S&P 500. D) Treynor, because when a portfolio represents one subportfolio of a large diversified portfolio, beta is a better measure of risk.

B) Sharpe, because when a portfolio represents the entire investment fund, standard deviation is a better measure of risk. The Sharpe ratio must be computed for a benchmark, which is then compared to the performance of a portfolio. The Treynor ratio is used when the performance of a subportfolio is measured. Alpha is computed using the Jensen performance measure.

Linda and Ralph Stewart have never invested in the stock market, but they would like to begin an investment program to cover college expenses for their two young children. The Stewarts' required rate of return is 11%. They are considering the purchase of one of these two stocks: Stock 1: Dividends are currently $1.85 annually and are expected to increase 9% annually; market price = $59 Stock 2: Dividends are currently $1.58 annually and are expected to increase 6% annually; market price = $37 Which stock would be most appropriate for the Stewarts to purchase at this time, and why? A) Stock 2, because the stock is undervalued B) Stock 1, because the return on investment is greater than the Stewarts' required rate of return C) Stock 1, because the stock is overvalued D) Stock 2, because the return on investment is greater than the Stewarts' required rate of return

B) Stock 1, because the return on investment is greater than the Stewarts' required rate of return The intrinsic value of Stock 1 = $100.83 [($1.85 × 1.09) ÷ (0.11 - 0.09)]. Because $100.83 is more than $59, the stock is undervalued and would return more than their required return. The intrinsic value of Stock 2 = $33.50 [($1.58 × 1.06) ÷ (0.11 - 0.06)]. Because $33.50 is less than $37, the stock is overvalued and would return less than their required return.

Grant calls his broker and tells her to sell his XYZ stock if it falls to $20, but he does not want less than $19.75 for his shares. Select the type of order that his broker should place to sell the stock. A) Good-til-canceled order B) Stop limit order C) Limit order D) Market order

B) Stop limit order The stop limit order turns into a limit order when triggered (both the stop order price and the limit order price are specified). However, this type of order will not guarantee execution if the stock leapfrogs past the $19.75 mark.

A client has a portfolio of blue-chip stocks that were purchased many years ago by her spouse. The spouse is now deceased and the client is considering her needs for income and feels the dividend yield on the stocks is not sufficient. You have decided she should be in 60% fixed-income. Which of the following sets of factors related to the recommended changes in the portfolio is the most important for the portfolio advisor to review? A) Client goals, cash flows, and legal constraints B) Tax issues, risk tolerance level, and client goals C) Risk tolerance level, liquidity, and social investing D) Tax issues, liquidity, and legal constraints

B) Tax issues, risk tolerance level, and client goals Investments purchased years ago will probably have a low tax basis, which could affect decisions to sell them, or they may have become worthless, in which case they can be used as a tax deduction. Likewise, the risk level of the investment is probably unknown and may not be compatible with the client's risk tolerance level and goals.

Which of the following statements regarding fundamental and technical analysis is CORRECT? A) Fundamental analysis may result in better returns than the overall market under both the weak and semistrong forms of the efficient market hypothesis. B) Technical analysis is not considered valid under the efficient market hypothesis, because this type of analysis is attempting to predict future prices based on past price movement. C) Investors looking for excellent companies to invest in may use bottom-up analysis, which is a form of technical analysis. D) In top-down analysis, an investor would start by researching various industries, and then choose stocks within that industry

B) Technical analysis is not considered valid under the efficient market hypothesis, because this type of analysis is attempting to predict future prices based on past price movement. This is correct, as any form of EMH does not coexist with technical analysis.

According to the arbitrage pricing theory (APT), the return on a stock represents which of the following? A) The APT equals the market return if the expected rate of inflation is realized. B) The APT depends on the stock's responsiveness to unexpected changes. C) The APT is reduced through the construction of diversified portfolios. D) The APT is not related to the expected return on the stock.

B) The APT depends on the stock's responsiveness to unexpected changes. The APT is related to the expected return on the stock. The APT is not reduced by the construction of diversified portfolios. The APT does not take into consideration the market return if the expected rate of inflation is realized.

Which of these statements regarding the bond ladder strategy is CORRECT? A) A laddered portfolio will provide lower yields than a portfolio consisting entirely of short-term bonds. B) The bond ladder strategy is used to immunize a portfolio against interest rate risk. C) The bond ladder strategy involves the purchase of a mixture of very long-term and very short-term bonds. D) The bond ladder strategy is generally more aggressive than the barbell strategy.

B) The bond ladder strategy is used to immunize a portfolio against interest rate risk. It is an investment strategy in which equal amounts of money are invested in a series of bonds with staggered maturities. The barbell strategy involves the purchase of a mixture of very long-term and very short-term bonds. The laddered portfolio will provide higher yields than a portfolio consisting entirely of short-term bonds. The barbell strategy is generally more aggressive than the ladder strategy because the barbell strategy only utilizes short-term and long-term bonds.

You are about to invest in foreign mutual funds and have decided to invest in country funds as opposed to a single diversified international mutual fund. Your single biggest concern is the fact that the U.S. dollar has been rising dramatically against the currency of this country. Which of the following points is most important? A) The correlation between the foreign market and the U.S. market should be as low as possible. B) The foreign currency should be fully hedged. C) If the U.S. mutual funds hold only large-cap stocks, the foreign funds should include only small-cap stocks. D) The correlation between the foreign market and the U.S. market should be as high as possible

B) The foreign currency should be fully hedged. To achieve the greatest diversification benefits of investing in foreign securities, or any securities for that matter, the correlation coefficients between the two markets should be as low as possible—generally close to zero or negative, but hedging the foreign currency will eliminate exchange rate risk and allow the investor to focus only on the fundamentals of investing in that country's stock market. Diversifying with different investment styles and market caps is important, but not as critical to addressing his primary concern of the rising dollar.

What is the internal rate of return (IRR) on an investment that was purchased for $10,000, generated income at the end of Year 1 of $600, required an additional expenditure at the end of Year 2 of $300, and was sold at the end of Year 3 for $13,000? A) 12.11% B) 6.28% C) 10.24% D) 9.50%

C) 10.24% The following cash flows are used on the financial calculator: CF0 = (10,000) CF1 = 600 CF2 = (300) CF3 = 13,000 Solve for IRR/YR = 10.2432, or 10.24%.

All of the following statements correctly assess the determination of cost basis when a taxpayer sells publicly traded securities such as stocks or bonds except A) when a taxpayer sells or redeems shares in a mutual fund, the taxpayer is permitted to use the average cost of all the mutual fund shares owned in determining the basis of the shares sold or redeemed. B) if the taxpayer cannot specifically identify the shares sold, basis will be calculated using the average cost of all shares or units owned. C) if the taxpayer can adequately identify the actual shares or units being sold, then the basis of those specific shares or units can be used in calculating the realized gain or loss. D) if the taxpayer cannot specifically identify the shares sold, basis will be calculated using a first-in, first-out (FIFO) method of identification.

B) if the taxpayer cannot specifically identify the shares sold, basis will be calculated using the average cost of all shares or units owned. The average cost method is only allowed for the sale of mutual fund shares. Without specific identification, the FIFO method is used.

All else remaining equal, if the dividend payout ratio decreases, the value of a company's common stock would A) increase because the company's risk premium will decrease. B) increase because the company's dividend growth rate will increase. C) decrease because the company's return on equity (ROE) will decrease. D) decrease because the company's dividend growth rate will decrease.

B) increase because the company's dividend growth rate will increase. A decrease in the dividend payout ratio means that the earnings retention ratio (rr in the following formula) will increase. An increase in rr will cause an increase in g. When the higher g is inserted in the dividend discount model formula, the denominator decreases, thereby causing the value of the stock to increase. g = ROE × rr

A convertible bond's market value will NOT fall below its A) downside value. B) investment value. C) conversion value. D) call value.

B) investment value. If the conversion premium is worthless, the bond still has value as a straight bond—its market value.

All of these statements describing real estate mortgage investment conduits (REMICs) are correct except A) REMICs commonly issue bonds backed by a pool of mortgages. B) investors receive a variable cash flow from the underlying real estate mortgages. C) REMICs are self-liquidating flow-through entities. D) Tranche A of a collateralized mortgage obligation (CMO) has the least amount of interest rate risk of all CMO tranches.

B) investors receive a variable cash flow from the underlying real estate mortgages. Investors who own REMICs receive a specified cash flow from the underlying pool of mortgages. REMICs are self-liquidating pass-through entities that invest exclusively in mortgages and mortgage-backed securities. REMICs frequently issue bonds in the form of collateralized mortgage obligations, which divide payment streams into tranches. Investors in Tranche A receive principal payments first, which reduces their interest rate risk, when compared to other tranche investors.

All of these statements correctly explain warrants except A) a warrant typically has a maturity date of several years. B) issuing a bond with an attached warrant may permit the corporation to increase the coupon rate to entice investors to make the investment. C) a warrant differs from a traditional option security in terms of maturity. D) a warrant is a long-term call option issued as a sweetener with a new bond issue.

B) issuing a bond with an attached warrant may permit the corporation to increase the coupon rate to entice investors to make the investment. Warrants give the bond purchaser a sweetener, which makes the issue more attractive. Issuing a bond with a warrant will typically allow the corporation to lower the coupon rate necessary to entice the investor to make the investment.

A convertible bond's market value will NOT fall below A) its conversion value. B) its investment value. C) none of the these. D) a floor guaranteed by the issuer.

B) its investment value. A convertible bond's market value will not fall below its investment value.

A distribution that is more peaked than normal is A) skewed. B) leptokurtic. C) platykurtic. D) convex.

B) leptokurtic. A distribution that is more peaked than normal is leptokurtic. A distribution that is flatter than normal is platykurtic.

Reasons for investing in real estate include all of these except A) potential tax shelter. B) liquidity. C) potential long-term appreciation. D) relatively constant cash flow.

B) liquidity. Real estate is an illiquid investment. Real estate offers the ability to shelter an investment's cash flow. Income real estate provides a relatively dependable source of cash flow. Real estate offers investors an excellent source of long-term capital appreciation.

Tangible assets might be suitable as an investment in the portfolio of an investor looking for A) stability of periodic cash flows. B) long-term capital gains. C) deflationary hedges. D) short-term investments.

B) long-term capital gains. Tangible assets tend to have high markups and take a relatively long time to recover the costs. They tend to do well during periods of inflation.

The use of financial leverage affects all of these except A) earnings per share. B) monetary policy. C) risk to stockholders. D) return on equity.

B) monetary policy. Return on equity and earnings per share are magnified with leverage, and the risk to stockholders increases as a firm's leverage increases. A country's monetary policy is not affected by a company's use of financial leverage.

If ABC Fund pays regular dividends, offers a high degree of safety of principal, and appeals especially to investors in the higher tax brackets, ABC is a(n) A) corporate bond fund. B) municipal bond fund. C) aggressive growth fund. D) money market fund.

B) municipal bond fund. Municipal bonds are considered second only to U.S. government securities in terms of safety. Furthermore, whenever you see a question about an investor in a high tax bracket, always look for the answer choice with municipal bonds; the tax-free income is the key. LO 3.3.1

The reason for using a barbell bond strategy is to A) decrease default risk. B) offset price and reinvestment rate risk. C) maximize the potential capital gain in a bond portfolio. D) increase interest rate risk.

B) offset price and reinvestment rate risk. If rates rise, short-term bonds can be reinvested at higher rates. If rates drop, long-term bonds are used to lock in rates.

Which of the following is an example of technical analysis? A) Interest rate trends B) Debt as a percentage of total capital C) Growth rate of the industry of which a company is a part D) 39-week moving average of a company's stock prices

D) 39-week moving average of a company's stock prices The 39-week moving average is one technical indicator.

All of the following statements correctly explain the core and satellite approach to investing except A) one goal of this strategy is to reduce portfolio risk through diversification. B) the core portion of the portfolio uses an active investment philosophy to achieve above-market returns. C) core investments may include U.S. stocks, U.S. fixed-income, and developed international equities. D) the core and satellite investment strategy has the client invest in both broad market indexes (core) and higher-risk alternatives (satellite).

B) the core portion of the portfolio uses an active investment philosophy to achieve above-market returns. The answer is the core portion of the portfolio uses an active investment philosophy to achieve above-market returns. The core portion of the portfolio uses a passive investment philosophy to achieve market-based returns, while the satellite portion of the portfolio uses active investment management in an attempt to achieve above-market level returns.

All of the following statements concerning security valuation and analysis are CORRECT except A) for successful security analysis, it is necessary to understand the characteristics of and the factors that affect various securities. B) the intrinsic value of a security is the future value of expected future cash flows inflated at an appropriate risk-free rate, without taking the risk of the investment into consideration. C) for successful security analysis, a valuation model is applied to securities to estimate their price, or value. D) value is a function of the expected future returns on a security and the associated risk.

B) the intrinsic value of a security is the future value of expected future cash flows inflated at an appropriate risk-free rate, without taking the risk of the investment into consideration. The intrinsic value of a security is the present value of expected future cash flows discounted at an appropriate discount rate, taking the risk of the investment into consideration.

Capitalization-weighted indexes are A) constructed by giving each investment equal weighting. B) the preferred type of index to use in modern portfolio theory applications. C) characterized by higher-priced stocks having more influence on the overall movement of the index than lower-priced stocks. D) uncommon and not suitable for performance measurement.

B) the preferred type of index to use in modern portfolio theory applications. Capitalization weighted indexes are the most prevalent type of index and are best suited for modern portfolio theory applications. In a price-weighted index, higher-priced stocks within this index have more influence on the overall movement of this index than lower-priced stocks.

To be on a corporation's books as holder-of-record (and thus have a right to the next dividend payment), the investor must purchase stock A) between the ex-dividend date and the record date. B) two business days before the record date. C) three days before the payment date. D) before the declaration date.

B) two business days before the record date. Under the T+2 rules in effect, ex-dividend date is one day business prior to the record date. A trade made on the ex-dividend date will clear in two business days, one day after the record date. The investor will not be on the corporation's record book as a shareholder unless the purchase is made at least two days before the record date.

Equity investments made for the launch, early development, or expansion of a business are known as A) mezzanine financing. B) venture capital. C) leveraged buyouts. D) distressed debt investing.

B) venture capital. Equity financing associated with the early development of a business is called venture capital. Mezzanine financing is provided for expansion and new products. Leveraged buyout financing is provided to allow management to buy all or part of a business; often used when a public company divests a division that it feels is no longer part of its long-term plans. Distressed debt is distressed debt investing in the debt of companies that are in trouble or failing.

KRF Corporation offers $100 preferred stock that will always pay a $1.50 potential dividend to any investor. If an investor has a required rate of return of 12%, how much should the investor pay for KRF preferred stock? A. $1.68 B. $12.50 C. $15.00 D. $100.00

B. $12.50 Using the perpetuity model, an investor should pay no more than $12.50 for the preferred stock of KRF Corporation. The $12.50 is derived by dividing the $1.50 first-year dividend (or any year) by the investor's required rate of return of 12%.

Patricia owns 100 shares of Blue stock, which has a current market price of $150. She also owns 300 shares of Red stock, which has a current market price of $5. If Blue Corporation undergoes a 2-for-1 stock split and Red Corporation undergoes a 1-for-3 reverse split, which row would correctly identify Patricia's holdings? A. 100, $7,500, 300, $3,000 B. 200, $15,000, 100, $1,500 C. 200, $15,000, 900, $1,500 D. 50, $7,500, 900, $4,500

B. 200, $15,000, 100, $1,500 Stock splits and reverse splits do not change the total value of shares. Thus, Patricia will own 100 × $150 = $15,000 of Blue stock and 300 × $5 = $1,500 of Red stock. In a 2-for-1 stock split, the number of shares doubles, so Patricia will own 200 shares of Blue stock. In a 1-for-3 reverse split, the number of shares is divided by 3, so Patricia will own 100 shares of Red stock.

Which of the following statements describing the difference between a RELP and a REIT is CORRECT? A. A RELP is actively traded on a stock exchange. B. A REIT is a portfolio investment and generates investment income. C. A RELP is not subject to the passive income taxation rules. D. A REIT is managed by a general partner.

B. A REIT is a portfolio investment and generates investment income. In contrast, distributions from a RELP are subject to the passive income taxation rules. A RELP is managed by a general partner, whereas a REIT is managed by a board of directors. Some REITs are actively traded on the exchanges.

Alphabet stock is selling for $67 per share. Alphabet's earnings per share last year were $8.90. Comparable firms in the same industry have P/E ratios of 8.0. Which of the following statements is CORRECT? A. Alphabet stock is undervalued because its P/E ratio is greater than 8.0. B. Alphabet stock is undervalued because its intrinsic value is $71.20. C. Alphabet stock is overvalued because its P/E ratio is less than 8.0. D. Alphabet stock is overvalued because its intrinsic value is $71.20.

B. Alphabet stock is undervalued because its intrinsic value is $71.20. Alphabet's P/E ratio is $67 ÷ $8.90 = 7.53. Because its P/E is lower than that of comparable firms, Alphabet is considered undervalued. Alphabet's intrinsic value is $8.90 × 8.0 = $71.20.

clients are both moderate risk takers. Madeline concludes that based on all of the information gathered both of them should be able to cope with the volatility in the equity and bond markets Which of the following would be the most appropriate asset allocation for each of their individual portfolios within their respective IRAs? A Portfolio 1 50% smallcap growth fund 30% international stock fund 20% S&P 500 Index fund B Portfolio 2 10% US government securities fund 10% utilities fund 30% balanced fund 25% smalcap growth fund 25% highyield bond fund C Portfolio 3 10% smallcap growth fund 30% corporate bond fund 10% international growth fund 50% S&P 500 Index fund D Portfolio 4 25% Wilshire 5000 Index fund 25% highyield bond fund 25% asset allocation fund 25% international stock fund

C Portfolio 3 10% smallcap growth fund 30% corporate bond fund 10% international growth fund 50% S&P 500 Index fund The answer is Portfolio 3—10% small-cap growth fund, 30% corporate bond fund, 10% international growth fund, 50% S&P 500 Index fund. Portfolio 3, composed of 70% equities and 30% bonds, would be an appropriate allocation for a young couple with a moderate risk profile.

Calculate the intrinsic value of a call option that trades at $4, with an exercise price of $35, and has a current underlying stock price of $33. A) $200 B) $600 C) $0 D) -$200

C) $0 The intrinsic value of the call option equals $0, because $33 is less than $35. The call premium is $400 ($4 × 100 shares); therefore, the market feels the stock price will appreciate before the call expires.

Galen has come to his financial planner with questions about dividends he received on some of his stock this year. He has received $1,000 in qualified dividends paid in cash. He also has received stock dividends of $4,000, but without a cash dividend option. How much will Galen have to report as dividend income for the current year? A) $0 B) $4,000 C) $1,000 D) $5,000

C) $1,000 Only the dividends paid in cash to Galen that are reported as income. The stock dividends did not have a cash-dividend option and are not taxable.

Ronald owns a Hydro Industries 7% convertible bond. The bond is convertible into 30 shares of Hydro Industries, which is currently trading at $43 per share. The investment value of the bond is $980, and the current market price of the bond is $1,433. What is the conversion value of Larry's bond? A) $1,358 B) $1,433 C) $1,290 D) $1,404

C) $1,290 Conversion value = conversion ratio × market price of common stock, or 30 × $43 = $1,290.

Your client is considering the purchase of an apartment complex with the following anticipated financial characteristics: Mortgage = 8% for 30 years, amortized monthly, with financing available for 70% of value Cost recovery period = 27.5 years (residential rental) Potential gross income (PGI) (year 1) = $1,500,000 Vacancy rate = 8% of PGI Operating expenses = 30% of PGI Capitalization rate = 9% Based on this information, what is the maximum price you would advise your client to pay? A) $16,666,667 B) $11,666,667 C) $10,333,333 D) $9,400,000

C) $10,333,333 The calculation is as follows: Potential gross income (PGI) of $1,500,000 less vacancy losses of $120,000 equals effective gross income of $1,380,000. Subtract operating expenses of $450,000, resulting in net operating income (NOI) of $930,000. Value = $930,000 ÷ 0.09 = $10,333,333

A client is considering the purchase of a $25 par preferred stock to add income to his portfolio. The stock has an 8% stated annual dividend rate and will never change. The investor's discount rate is 12%. What is the most the investor should pay for this stock? A) $3.20 B) If the required return exceeds the coupon rate, another valuation method must be used. C) $16.67 D) The value cannot be determined without an appropriate growth rate.

C) $16.67 The zero growth or dividend in perpetuity formula would apply: 8% of $25 par is $2.00, so $2.00 ÷ 0.12 = $16.67

John Hawkins began purchasing VNB stock two years ago. He has followed a dollar cost averaging approach by investing $1,500 every six months for the last two years. The following data depicts John's purchases: Date | Price of Stock | Number of Shares Purchased 9/30/X7 | $25.00 | 60 9/31/X8 | $22.06 | 68 9/30/X8 | $20.83 | 72 3/31/X9 | $26.79 | 56 What is John's average cost per share of VNB? A) $22.56 B) $19.53 C) $23.44 D) $24.39

C) $23.44 John purchased 256 shares (60 + 68 + 72 + 56) and invested $6,000 over this period. Divide the total dollars invested by the number of shares purchased to obtain the correct answer.

John made these investments over a four month period into ABC Growth and Income fund. What is the average cost per share? Month | Amount Invested | Price Per Share | No. of Shares January | $600 | $20 | 30 February | $600 | $24 | 25 March | $600 | $30 | 20 April | $600 | $40 | 15 Total | $2,400 | $114 | 90 A) $28.50 B) $32.50 C) $26.67 D) $35.67

C) $26.67 The average cost per share equals $2,400 (the total investment) ÷ 90 (the total number of shares purchased), or $26.67 per share, whereas the average price per share is $28.50 ($114 ÷ 4).

Assume that ABC stock pays a dividend in the current year of $1.56 per share. The company's dividend is expected to grow by 1.5% per year. Calculate the stock's price if an investor has a required rate of return of 7%. A) $14.29 B) $20.54 C) $28.79 D) $28.36

C) $28.79 The formula for the constant growth dividend discount model: V = D1 ÷ (r - g) Therefore, the intrinsic value of ABC stock equals $28.79 [(1.56 × 1.015) ÷ (0.07 - 0.015)].

CCC stock paid a dividend this year of $3, and this dividend is expected to grow at a rate of 10% for the next two years and at a rate of 5% thereafter. Assuming Jackie expects to sell the stock in three years, and her required rate of return is 12%, what is the price she should be willing to pay for CCC stock? A) $37.57 B) $71.43 C) $49.25 D) $43.41

C) $49.25 Use the multistage growth dividend discount model to calculate the stock's intrinsic value. Step 1: Compute the value of each future dividend until the growth rate stabilizes (Years 1-2). D1 = $3.00 × 1.10 = $3.30 D2 = $3.30 × 1.10 = $3.63 Step 2: Use the constant growth dividend discount model to compute the remaining intrinsic value of the stock at the beginning of the year when the dividend growth rate stabilizes (Year 3). D3 = $3.63 × 1.05 = $3.81 V = $3.81 ÷ (0.12 - 0.05) = $54.45 Step 3: Use the uneven cash flow method to solve for the net present (intrinsic) value of the stock. CF0 = $0 CF1 = $3.30 CF2 = $3.63 + $54.45 = $58.08 I/YR = 12% Solve for NPV = $49.25 The intrinsic value of the stock is $49.25.

Amanda buys 75 shares of BR Enterprise stock for $67 per share on margin. The initial margin is 55% and the maintenance margin is 40%. Calculate the market price at which Amanda will receive a margin call. A) $33.00 B) $21.54 C) $50.25 D) $56.95

C) $50.25 [(1 - initial margin percentage) / (1 - maintenance margin)] x purchase price of the stock. [(1 - 0.55) / (1 - 0.40)] x $67 [(0.45) / (0.6)] x $67 (0.75) x $67 = $50.25

Patrice Patterson began investing last year in the Apex Fund. She is investing $500 every quarter and wants to know what her average cost per share (basis) has been. These are the prices of the Apex fund at the end of each quarter when she made her purchases: $35.50, $38.90, $65.70, $72.50, and $89.00. What is her average cost per share? A) $41.44 B) $60.32 C) $53.12 D) $63.88

C) $53.12 $Amount | Share Price | # of Shares Purchased $500 | $35.50 | 14.0845 $500 | $38.90 | 12.8535 $500 | $65.70 | 7.6104 $500 | $72.50 | 6.8966 $500 | $89.00 | 5.6180 TOTAL 47.063 shares $2,500 ÷ 47.063 shares = $53.12

LFM Corporation has an estimated free cash flow to equity (FCFE) of $2.50 per share in the current year. Moreover, its FCFE is expected to grow at a constant rate of 2% per year. Assuming an institutional investor has a required rate of return of 6.5%, calculate the intrinsic value of LFM stock. A) $40.76 B) $133.13 C) $56.67 D) $55.56

C) $56.67 The formula for the discounted free cash-flow model: V = FCFE1 ÷ (r - g) = ($2.50 × 1.02) ÷ (0.065 - 0.02) = 2.55 ÷ 0.045 = 56.6667, or $56.67

An investor buys 100 shares of stock at $75 per share, with a 60% initial margin requirement and 40% maintenance margin requirement. Assuming the stock quickly falls to $40 per share, calculate the additional capital that the investor must provide to cover a margin call. A) $800 B) $200 C) $600 D) $400

C) $600 The maintenance margin requires an equity of $4,000 × 0.40, or $1,600. The investor's equity in the account ($1,000) is the market value ($4,000) minus the loan amount ($3,000). A margin call for $600 ($1,600 - $1,000) will be ordered.

Norma owns ABC Corporation bonds of AA rated quality that mature in seven years, pay semiannual interest, and have a coupon of 8%. Similar bonds (AA rated, seven years to maturity) yield 9%. The ABC Corporation bonds are convertible into common stock at $26 per share, and the current market price of ABC common stock is $23. What is the conversion value of an ABC Corporation bond? A) $923.08 B) $766.47 C) $884.61 D) $851.85

C) $884.61 The conversion value = conversion ratio × market price of common stock. Therefore, the conversion value equals ($1,000 ÷ $26) × $23 = $884.61.

LJM Corporation has a bond issue with a coupon rate of 8% and seven years remaining until maturity. Assuming a par value of $1,000 and semiannual coupon payments, calculate the intrinsic value of the bond if current market conditions justify a 10% required rate of return. A) $1,033.32 B) $941.58 C) $901.01 D) $920.81

C) $901.01 The intrinsic value of LJM's bond is $901.01, calculated using the following inputs on a semiannual basis: N = 14 (7 x 2 periods per year) 10 / 2 = 5% I/YR 8% × $1,000 ÷ 2 = $40 = PMT $1,000 = FV Solve for PV = -901.01, or $901.01.

George has a five-year bond with a coupon rate of 3.65% (paid semiannually). Assuming the comparable yield for this quality bond is 4.85%, calculate the intrinsic value of his bond. A) $1,054.39 B) $1,179.84 C) $947.28 D) $1,000.00

C) $947.28 The intrinsic value of George's bond equals $947.28, indicating the bond would be trading at a discount to par. The value is calculated using the following inputs: FV = 1$,000 N = 10 (5 x 2 periods per year) I/YR = 4.85% PMT = (3.65% × 1,000 ÷ 2) = $18.25 Solve for PV = -947.2835, or $947.28

Stock XYZ has an average return of 18% with a standard deviation of 21. Within what range could an investor expect a return to fall 68% of the time? A) 0% to 21% B) 3% to 39% C) -3% to 39% D) -3% to 18%

C) -3% to 39% By definition, an investment's return will be within one standard deviation of the mean return 68% of the time. The mean return of 18% plus or minus one standard deviation is 18% - 21% (-3%) and 18% + 21% (39%).

An investor is researching a mutual fund. Last year this fund had a total return of 12% when the stock market had a 10% return. This fund has a beta of 1.2 and a standard deviation of 14%. The risk-free rate of return is 5%. What is the Sharpe ratio for this fund? A) 0.11 B) 0.05 C) 0.50 D) 0.62

C) 0.50 The Sharpe ratio is (the investment return - the risk-free return) divided by the investment's standard deviation. Therefore, (0.12 - 0.05) ÷ 14 = 0.07÷0.14 = 0.50.

Mark owns a corporate bond with a coupon rate of 6.78%. Assume the annual inflation rate is 2.5% and he is in the 35% federal marginal income tax bracket. Calculate his after-tax, inflation-adjusted rate of return on this bond. A) 2.04% B) 1.50% C) 1.86% D) 4.17%

C) 1.86% First, calculate Mark's after-tax rate of return on the corporate bond [0.0678 × (1 - 0.35)] = 0.04407, or 4.41%. Next, calculate the after-tax, inflation-adjusted rate of return {[(1 + 0.0441) ÷ (1 + 0.025)] - 1} × 100 = 1.8634, or 1.86%.

The yield to maturity on a zero-coupon bond ($1,000 par value) currently selling at $677 and maturing in four years is approximately A) 15.00%. B) 37.48%. C) 10.00%. D) 4.00%.

C) 10.00%. Solve for yield to maturity using the following TVM inputs in the financial calculator: PV = −$677 FV = $1,000 PMT = 0 N = 8 (4 x 2 periods per year) Solve for I/YR = 10% (rounded) (4.99%x2?)

Which of the following statements regarding modern portfolio theory is correct? A) A portfolio that lies below the efficient frontier is unattainable. B) A portfolio that lies below the efficient frontier is superior to the one that has the same risk but lies on the efficient frontier. C) A portfolio that lies at the point where the indifference curve is tangent to the efficient frontier is the optimal portfolio. D) A portfolio that lies below the security market line (SML) is undervalued.

C) A portfolio that lies at the point where the indifference curve is tangent to the efficient frontier is the optimal portfolio. Statements III and IV are not correct. A portfolio that lies below the SML is overvalued because its expected return is lower than the required return plotted on the SML. A portfolio that lies below the efficient frontier is inferior to one that lies on the efficient frontier. Each portfolio on the efficient frontier offers the highest possible return for a particular level of risk.

Carol sells her AA rated 5% YTM bond for $940 and buys a BB-rated 6% bond for $900. Both bonds mature in four years. This transaction illustrates which of these swaps? A) A substitution swap B) An intermarket swap C) A pure yield pickup swap D) A rate anticipation swap

C) A pure yield pickup swap In a pure yield pickup swap, a lower YTM bond is substituted for a higher YTM bond.

The portfolio manager of XYZ Insurance Co. is considering the use of Treasury bond futures to hedge the portfolio of the company. XYZ has a Treasury bond portfolio worth over $500 million. Into what type of hedge position should XYZ enter, and why? A) A short hedge: The company should sell Treasury bond futures contracts because it is hedging against lower interest rates. B) A long hedge: The company should buy Treasury bond futures contracts because it is hedging against lower interest rates. C) A short hedge: The company should sell Treasury bond futures contracts because it is hedging against higher interest rates. D) A long hedge: The company should buy Treasury bond futures contracts because it is hedging against higher interest rates.

C) A short hedge: The company should sell Treasury bond futures contracts because it is hedging against higher interest rates. If interest rates rise, there is a loss on the cash side (i.e., bond prices drop); however, there is a gain on the futures side because the short position can be covered at a lower price. When you own something and want to hedge, you must short; when you are short something and want to hedge, you must buy.

The use of P/E ratios to select stocks suggests which of these? A) Low P/E ratio stocks are overvalued. B) A stock should be purchased if it is selling near its historic high P/E. C) A stock should be purchased if it is selling near its historic low P/E. D) High P/E stocks should be purchased.

C) A stock should be purchased if it is selling near its historic low P/E. While purchasing stocks near their historically high P/E ratio could continue to represent value, a much better time would be to purchase stocks that are at their historic low ratios.

Henry is constructing an asset allocation portfolio for his financial planning client, Gretchen, based on information obtained from completing a risk-profile questionnaire. Which of the following are considerations for Henry to keep in mind when developing portfolio alternatives for Gretchen? A) Construct portfolios that match Gretchen's risk tolerance. B) Choose the appropriate benchmark(s) for investment performance comparison. C) All of these are considerations. D) Develop portfolios that take her tax situation into consideration.

C) All of these are considerations. A financial planner should be aware of all of these considerations when constructing and monitoring an investment portfolio for a client.

Choose the CORRECT statement regarding yield curves. A) An inverted yield curve occurs when the Federal Reserve has tightened credit in an inflationary economy. B) A flat yield curve occurs when the economy is peaking and, therefore, no near-term change in future interest rates is expected. C) All of these statements are correct. D) A normal yield curve occurs during periods of economic expansion and generally predicts that market interest rates will rise in the future.

C) All of these statements are correct. The yield curve is a graph of interest rate yields for bonds of the same quality, ranging in maturity from 31 days to 30 years. An inverted yield curve predicts interest rates will fall and sometimes can signal an upcoming recession.

The performance of two growth and income mutual funds is displayed below: ABC Fund | XYZ Fund Average annual rate of return 8.65% 6.78% Standard deviation of returns 5.86% 9.98% Beta 0.75 1.00 Assuming a risk-free rate of return of 5%, which of these statements is CORRECT? A) XYZ Fund has a higher level of systematic risk than ABC Fund. B) Based on the Treynor ratio, ABC Fund has a better risk-adjusted performance than XYZ Fund. C) All of these statements are correct. D) The Sharpe ratio for XYZ Fund is 0.1784 and 0.6229 for ABC Fund.

C) All of these statements are correct. When compared with another investment, the higher the Treynor ratio, the better the risk-adjusted performance of the asset. Therefore, ABC Fund with a Treynor ratio of 0.0487 has a better risk-adjusted performance than XYZ Fund. XYZ Fund has a beta greater than ABC Fund, indicating a higher level of systematic risk. Calculations: Treynor ratio for ABC Fund is 0.0487 [(0.0865 - 0.05) ÷ 0.75] Treynor ratio for XYZ Fund is 0.0178 [(0.0678 - 0.05) ÷ 1.00] Sharpe ratio for ABC Fund is 0.6229 [(0.0865 - 0.05) ÷ 0.0586] Sharpe ratio for XYZ Fund is 0.1784 [(0.0678 - 0.05) ÷ 0.0998]

Identify which of these is NOT a characteristic of a normal yield curve. A) A normal yield curve occurs during periods of economic expansion. B) The curve has a tendency to slope upward and outward. C) As the maturity date of bonds lengthens, the corresponding bond yield decreases. D) A normal yield curve indicates that long-term market interest rates are higher than short-term rates.

C) As the maturity date of bonds lengthens, the corresponding bond yield decreases. When the maturity date of the bonds lengthen, the corresponding yields will increase.

Which of the following is a type of growth mutual fund? A) U.S. government fund B) Money market fund C) Asset allocation fund D) GNMA fund

C) Asset allocation fund The other options are all considered income funds.

Which of these statements concerning the principles of real estate investing is CORRECT? I. Investors in undeveloped land are seeking returns primarily from capital appreciation. II. Effective real estate investing almost always involves a careful but extensive use of leverage. III. Investors in real estate are usually seeking tax benefits for mortgage interest, property taxes, and depreciation. IV. Generally, investors in developed land experience significant taxable income in the early years of ownership. A) I, III, and IV B) IV only C) I, II, and III D) II and III

C) I, II, and III Only Statement IV is incorrect. Investors in real estate experience little taxable income in the early years due to depreciation.

The market's standard deviation is 15 Stock A Stock B Correlation coefficient with market 0.20 0.80 Standard deviation 20 10 Which of the following statements are true and why I The beta of Stock A is lower than the beta of Stock B due to the impact of the correlation coefficients II The beta of Stock A is higher than the beta of Stock B because the standard deviation of Stock A is twice the standard deviation of Stock B III The ratio of Stock As correlation coefficient to Stock Bs correlation coefficient indicates that Stock Bs beta is four times Stock As beta IV The correlation coefficient of Stock A suggests that the price movements of the market are likely to have little relationship with the price movements of Stock A 2 4 1 3 I 4 I 3 4

C) I & IV (1 & 4) According to the formula for beta, Stock A's beta is (20 ÷ 15) × 0.20 = 0.27 and Stock B's beta is (10 ÷ 15) × 0.80 = 0.53. Statement II is incorrect because it does not take into account the relative correlation coefficients. Statement III is incorrect because it does not take into account the relative standard deviations.

Portfolio immunization is designed to protect bondholders from which of the following risks? I. Interest rate risk II. Reinvestment rate risk III. Default risk A) I, II, and III B) II and III C) I and II D) I and III

C) I and II Portfolio immunization protects bondholders from fluctuations in interest rates and from reinvestment rate risk but does not protect against default risk.

Which of these statements concerning portfolio diversification is CORRECT? I. By increasing the number of securities in a portfolio, the total risk would be expected to fall at a decreasing rate. II. Total risk is reduced as diversification is increased. III. The benefits of diversification are not realized until at least 30 individual securities are included in the portfolio. IV. Diversification reduces the portfolio's expected return because diversification reduces a portfolio's total risk. A) III and IV B) I, II, and III C) I and II D) IV only

C) I and II Studies have shown that an investor only needs about 15-20 assets to fully diversify a portfolio. The main attraction of diversification is the reduction of risk without an accompanying loss of return.

In order to do an effective job of investment counseling, which of the following should be analyzed and reviewed? I. Financial goals II. Client tax situation III. Client financial statements IV. Client preferences, investment understanding, and experience A) I, II, and III B) I only C) I, II, III, and IV D) I and III

C) I, II, III, and IV All of these are parts of a comprehensive client analysis. In addition, the planner should discuss the risk tolerance and risk exposure of the client and the liquidity needs and the investment time horizon of the client.

Choose the CORRECT statements regarding option contracts. I. The buyer of a call option has the potential for unlimited gain. II. The seller of a put option is bullish. III. The writer of a naked call is exposed to an unlimited loss. IV. If the writer of a call option owns the underlying stock, the option is considered covered. A) I and II B) III and IV C) I, II, III, and IV D) II and III

C) I, II, III, and IV All of these statements are correct regarding option contracts.

Most fixed-income securities are subject to which of the following risks? I. Purchasing power risk II. Liquidity risk III. Default risk IV. Reinvestment rate risk A) I and II B) I, III, and IV C) I, II, III, and IV D) II, III, and IV

C) I, II, III, and IV Fixed-income securities are subject to a number of risks including purchasing power, liquidity, default, and reinvestment rate risk.

In order to do an effective job of investment counseling, the investment adviser should examine and review the client's I. financial goals. II. risk tolerance and risk exposure. III. tax situation. IV. liquidity and marketability needs. A) I and II B) III and IV C) I, II, III, and IV D) I, II, and IV

C) I, II, III, and IV In order to do an effective job of investment counseling, the adviser should examine and review the client's financial goals, risk tolerance and risk exposure, tax situation, liquidity and marketability needs, and financial statements.

XYZ Company issued a series of bonds 20 years ago. The bonds originally sold at par, have a 6.25% coupon rate (paid semiannually), and mature in 30 years. Five years after issue, the prevailing market interest rate for similar type bonds was 5.15%. Based on this information, identify which of these statements are CORRECT. I. The bond's yield to maturity at issue was 6.25%. II. The bond's price five years after issue was $1,153.68. III. The current yield of the bond five years after issue was 5.42%. IV. The bond was selling at a discount in the secondary market five years after issue. A) I and II B) III and IV C) I, II, and III D) II, III, and IV

C) I, II, and III Because the bond was selling for a price exceeding the par value, the bond was trading at a premium. A bond selling for par at issue will have a yield to maturity equal to the annual coupon rate. Statement II (use the following TVM inputs on a financial calculator): FV =$1,000 PMT = $1,000 x 6.25% = $62.50 ÷ 2 = $31.25 N = 50 (25 x 2 periods per year) I/YR = 5.15% Solve for PV = 1,153.68, or $1,153.68 Statement III: Current yield = $62.50 ÷ $1,153.68 (found in Statement II) Current yield = 0.0542, or 5.42%

You are about to recommend international mutual funds to your clients. Which of the following are characteristics of investing internationally? I. International markets are less efficient than U.S. markets. II. International mutual funds have the exchange rate risks of individual foreign stocks. III. Due to lower correlations with U.S. stocks, foreign stocks can lower total portfolio risk. IV. Investors in foreign securities avoid U.S. tax on realized capital gains. A) I and II B) II, III, and IV C) I, II, and III D) I and III

C) I, II, and III Foreign markets have fewer analysts following stocks than do U.S. markets, and the information available from many foreign companies is minimal, making these markets less efficient than U.S. markets. The covariance of foreign stocks, especially small-cap and emerging market stocks, with U.S. stocks is relatively low, serving to lower the standard deviation of the portfolio in which such stocks are placed. Exchange rate risk is a systematic risk with foreign investments. Foreign income is taxed first in the country of origin and then again in the United States; U.S. taxpayers can take a foreign tax credit for taxes paid to other countries.

Indifference curves, which represent the risk-reward trade-off that the investor is willing to make, will I. cross the efficient frontier in two locations. II. lie tangent to the efficient frontier. III. will not intersect the efficient frontier. A) II and III B) I and II C) I, II, and III D) I only

C) I, II, and III The portfolio that lies at the point of tangency of an indifference curve and the efficient frontier is the optimal portfolio for the investor.

Max bought 100 shares of PET Corporation stock 10 years ago. He paid $10 per share for the stock. The stock currently has a fair market value of $50 per share. Choose the CORRECT statement regarding Max's stock. A) If Max sells the stock now, he must pay taxes on only half the amount he receives from the sale. B) If Max does not sell the stock now, he must pay taxes on the difference between the amount he paid for the stock and the current market price, which will increase his basis in the stock. C) If Max does not sell the stock this year, he will not have to pay taxes on the difference between the amount he paid for the stock and the current market price this year. D) If Max sells the stock now, he must pay taxes on the full $5,000 he receives from the sale.

C) If Max does not sell the stock this year, he will not have to pay taxes on the difference between the amount he paid for the stock and the current market price this year. If Max sells the stock today, he realizes the gain in the value of the stock and must pay taxes on the gain. The gain would equal the price at which Max sells the stock minus the original purchase price, or $40 per share. If the gain is not realized, Max has no tax liability for the increase in the value of the stock. Capital gains are only taxable when they are realized at the time of the sale.

Baylor stock is currently selling for $63 per share. A put option for this security with an exercise price of $65 per share can be purchased for $4 per share. The option expires in three months. Which of these statements best describes this option? A) By-the-money B) At-the-money C) In-the-money D) Out-of-the-money

C) In-the-money A put option is in-the-money when the exercise price is greater than the market price of the underlying security. A put option is out-of-the-money when the market price is greater than the exercise price.

Identify the CORRECT statement concerning international investing. A) The rates of return on foreign securities have always been less than those available from U.S. markets. B) Foreign markets are usually mature and offer no growth advantages. C) Information is not as readily available on foreign investments. D) The addition of foreign securities to a portfolio may result in increased portfolio risk due to the different movements of foreign markets and U.S. markets.

C) Information is not as readily available on foreign investments. Foreign markets offer economies of scale and growth opportunities. Investors may earn higher returns in foreign markets, particularly if they are less efficient than U.S. markets. Including foreign securities in an investment portfolio may lower risk through greater diversification.

Portfolio immunization is designed to mitigate which type of risk? A) Default risk B) Exchange rate risk C) Interest rate risk D) Investment manager risk

C) Interest rate risk A bond portfolio is immunized when the duration of the portfolio is equal to the time horizon of the investor, thereby mitigating both interest rate risk and reinvestment rate risk.

Which of the following risks relating to fixed-income investments have an offsetting effect on one another? A) Interest rate risk and call risk B) Interest rate risk and default risk C) Interest rate risk and reinvestment rate risk D) Interest rate risk and purchasing power risk

C) Interest rate risk and reinvestment rate risk Interest rate risk and reinvestment rate risk have offsetting effects, and the offsetting of these two risks in a bond portfolio takes place through immunization (the matching of the durations of bonds to the durations of liabilities).

Which of these statements regarding index options is NOT correct? A) Investors can profit from a decline in the stock market by purchasing a put index option. B) When exercised, index options result only in cash settlement. C) Investors often buy call index options to hedge against the risk of a decline in the value of their long positions in stocks. D) Index options allow investors to earn a return associated with the movements in the market.

C) Investors often buy call index options to hedge against the risk of a decline in the value of their long positions in stocks. Investors purchase put index options to hedge their long positions in stocks. A decline in stock prices causes the value of their long portfolios to decline. This loss is offset by the gain in the value of the option.

An investor who would like to know how a portfolio manager performed relative to how the manager was expected to perform on a risk-adjusted basis would use which one of the following indicators? A) Sharpe ratio B) Beta C) Jensen's alpha D) Treynor ratio

C) Jensen's alpha The indicator that measures performance in relation to what was expected on a risk-adjusted basis is Jensen's alpha. A positive number (alpha) indicates that the manager performed better than expected on a risk-adjusted basis.

Which of these represents the best reason to include real estate as part of an investment portfolio? A) High liquidity B) Low potential for capital appreciation C) Low correlation between real estate and equity investments D) Low management costs

C) Low correlation between real estate and equity investments Real estate's low correlation with equities provides investors with an additional way to diversify a portfolio. Real estate ownership may present an opportunity for capital appreciation. Investment in real estate generally requires substantial management costs and is not liquid.

Which of these is a reason why tangible assets are an excellent addition to an investment portfolio? A) High liquidity of the investments B) Low cost of buying tangible assets C) Low correlations with financial assets D) Tax benefits

C) Low correlations with financial assets Tangible assets have low correlations with financial assets.

In a positively skewed distribution, what is the order (from lowest value to highest) for the distribution's mode, mean, and median values? A) Mean, median, mode B) Median, mode, mean C) Mode, median, mean D) Mode, mean, median

C) Mode, median, mean In a positively skewed distribution, the mode is less than the median, which is less than the mean.

What is the best choice for clients to use to finance an unanticipated financial crisis? A) Credit cards B) Retirement plan loan C) Money market mutual fund D) Home equity

C) Money market mutual fund Clients should establish an emergency fund, generally funded with highly liquid and marketable investments such as money market mutual funds, to finance any unanticipated financial emergencies.

The daily limit of a commodity futures contract is the maximum A) amount by which the maintenance margin can change per day. B) number of contracts allowed to be traded that day. C) price increase or decrease relative to the settlement price the previous day. D) percentage by which the futures price can increase from the previous day.

C) price increase or decrease relative to the settlement price the previous day. This is the definition of the daily limit.

Al, age 37, wants to add to his common stock portfolio. He wants long-term capital appreciation and requires a 14% rate of return on stock investments. He is considering the purchase of one of these two stocks: Stock 1:Dividends are currently $1.20 annually and are expected to increase 10% annually; market price = $38Stock 2:Dividends are currently $1.00 annually and are expected to increase 11% annually; market price = $30 Which stock would be most appropriate for Al to purchase at this time, and why? A) Stock 1, because the return on investment is greater than Al's required rate of return B) Stock 2, because the stock is overvalued C) Stock 2, because the return on investment is greater than Al's required rate of return D) Stock 1, because the stock is undervalued

C) Stock 2, because the return on investment is greater than Al's required rate of return The intrinsic value of Stock 1 = $33 [($1.20 x 1.10) ÷ (0.14 - 0.10)]. Because $33 is less than $38, the stock is overvalued and would return less than his required return. The intrinsic value of Stock 2 = $36.67 [($1.00 x 1.11) ÷ (0.14 - 0.11)]. Because $36.67 is more than $30, the stock is undervalued and would return more than his required return.

Stock A has an expected mean return of 15% and a standard deviation of 22%; Stock B has an expected mean return of 11% and a standard deviation of 13%; and Stock C has an expected mean return of 18% and a standard deviation of 24%. You want to recommend one of these stocks to a client who is most interested in owning stocks that are more likely to deliver the expected mean return. Which stock should you recommend to meet this client's requirement? A) Stock A B) Stock C C) Stock B D) None of these

C) Stock B The coefficient of variation is a measure of the degree of variation of returns compared with the expected mean return. The security with the lowest coefficient of variation is the one most likely to deliver periodic returns closest to its expected return. The coefficients of variation of the three securities are 1.47 for Stock A, 1.18 for Stock B, and 1.33 for Stock C. Stock B should be recommended.

While managing his portfolio, James's investment adviser attempts to take advantage of perceived market inefficiencies. His investment adviser is not concerned with James's long-term goals; rather, the interest lies in continuously changing the investment mix to take advantage of overall investor sentiment. Based on this information, choose the type of portfolio management style that the investment adviser is using to manage James's money. A) Strategic asset allocation B) Buy and hold C) Tactical asset allocation D) Portfolio ratio analysis

C) Tactical asset allocation Tactical asset allocation continuously adjusts the asset allocation in an attempt to take advantage of changing market conditions.

Which of the following statements regarding fundamental and technical analysis is CORRECT? A) In top-down analysis, an investor would start by researching various industries, then choosing stocks within that industry. B) Fundamental analysis may result in better returns than the overall market under both the weak and semistrong forms of the efficient market hypothesis. C) Technical analysis is not considered valid under the efficient market hypothesis because this type of analysis is attempting to predict future prices based on past price movement. D) Investors looking for excellent companies to invest in may use bottom-up analysis, which is a form of technical analysis.

C) Technical analysis is not considered valid under the efficient market hypothesis because this type of analysis is attempting to predict future prices based on past price movement. The answer is technical analysis is not considered valid under the efficient market hypothesis because this type of analysis is attempting to predict future prices based on past price movement.

Currently it costs $1.47 in U.S. dollars to purchase one Eurodollar. If a U.S. investor purchases euros, what would be the result for this investor if the exchange rate were to be 0.70 euros per U.S. dollar when the euros were converted back into U.S. dollars? A) The U.S. investor would have lost money, because the U.S. dollar has been devalued. B) The U.S. investor would have made money, because the U.S. dollar has been revalued. C) The U.S. investor would have lost money, because the U.S. dollar has been revalued. D) The U.S. investor would have made money, because the U.S. dollar has been devalued

C) The U.S. investor would have lost money, because the U.S. dollar has been revalued. The key here is to compare apples to apples and state the currency rate from the same perspective. You are given how many U.S. dollars are needed to purchase a euro ($1.47), so calculate how many euros you would receive for one U.S. dollar: 1/ $1.47 = 0.6803 euros per U.S. dollar You are told the rate has changed to 0.70 euros per U.S. dollar, and before it was 0.68 euros per U.S. dollar. This means the investor needs to spend more euros for one U.S. dollar—so the euro is worth less (devaluation), and the U.S. dollar is worth more (revaluation). In order to make money on a currency transaction, the home currency (the U.S. dollar in this case) needs to go down (devaluation), and the foreign currency needs to go up (revaluation). The opposite has happened in this case, so the U.S. investor has lost money because the U.S. dollar has gone up in value (revalued).

Which of the following best describes the term marketability? A) The ability to sell an investment quickly at a specific price. B) The ability to sell an investment with a significant loss in principal. C) The ability to sell an investment quickly in a readily identifiable market. D) The ability to sell an investment quickly without transaction costs.

C) The ability to sell an investment quickly in a readily identifiable market. Liquidity is the ability to sell or redeem an investment quickly and at a known price, without a significant loss of principal.

Which of the following describes downside risk with respect to convertible bonds? A) The difference between the conversion value of the bond and its investment value. B) The difference between the current market value of the bond and its conversion value. C) The difference between the current market value of the bond and its investment value. D) The difference between the straight value of the bond and its conversion value.

C) The difference between the current market value of the bond and its investment value. Downside risk with respect to convertible bonds is the difference between the current market value of the bond and its investment value.

All of these positions are used to create a zero-cost collar except A) purchasing a put option on the stock. B) writing a call option on the stock. C) purchasing a call option on the stock. D) a long position in the stock.

C) purchasing a call option on the stock. To create a zero-cost collar, the investor will not purchase a call option on the stock. Rather, the investor will use the premium received from writing the call option to subsequently purchase the put option on the underlying stock, thereby creating a cashless collar and protection from downside risk.

The expected returns and standard deviations of each fund are approximately equal. The correlations between the funds are as shown in the following table. Correlation of Returns Largecap Fund Midcap Fund Smallcap Fund Largecap fund 1 Midcap fund .67 1 Smallcap fund .41 .23 1 Which two funds should you recommend, assuming that your goal is to recommend the two funds that will provide the lowest total portfolio risk and that the portfolio will be equally weighted in the two funds you select? A) The smallcap fund and the largecap fund B) None, since no fund is negatively correlated with another fund C) The midcap fund and the smallcap fund D) The largecap fund and the midcap fund

C) The midcap fund and the smallcap fund A negative correlation is not necessary; low positive correlations are adequate to lower the standard deviation of a portfolio. The fund combination that should be selected, given the objective and the fact that all other factors are equal, is the combination with the lowest correlation—the mid-cap fund and the small-cap fund.

Which of these statements regarding Treasury Inflation-Protected Securities (TIPS) is CORRECT? A) The TIPS coupon rate is adjusted every 12 months based on changes in the Consumer Price Index (CPI). B) TIPS are issued at 50% of the par value with the par value being adjusted every six months for inflation. C) The principal value is adjusted for inflation every six months based on the Consumer Price Index (CPI), and one-half of the stated coupon rate is paid semiannually on the inflation-adjusted principal value. D) A semiannual inflation rate is combined with the stated coupon rate to determine the TIPS interest rate for the next six months.

C) The principal value is adjusted for inflation every six months based on the Consumer Price Index (CPI), and one-half of the stated coupon rate is paid semiannually on the inflation-adjusted principal value. TIPS coupon rate stays the same for the life of the security, but the interest payment changes based on the inflation-adjusted principal or par value.

What is the holding period requirement for a stock investor for the dividend to qualify for the preferential tax rates? A) The taxpayer must make an election to reinvest any cash dividends. B) The stock must be held for more than 30 days during the 61-day period beginning 10 days before the ex-dividend date. C) The stock must be held for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date. D) The stock must have paid dividends for two consecutive quarters.

C) The stock must be held for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date. The answer is the stock must be held for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date.

A Japanese bank has decided to use some of its U.S. dollar reserves, resulting from the U.S. merchandise trade deficit with Japan, to invest in U.S. Treasury bonds. The U.S. Treasury securities pay approximately 6% interest, compared to 2% interest paid on Japanese bonds. For the Japanese bank to retain at least this differential in interest income, which of these situations in the foreign exchange market would have to occur? A) The yen would have to appreciate relative to the dollar and interest rates in the United States would have to fall. B) The yen would have to appreciate relative to the dollar during the holding period of the bond. C) The yen would have to depreciate or remain steady relative to the dollar during the holding period of the bond. D) The yen would have to depreciate relative to the dollar and interest rates in the United States would have to rise

C) The yen would have to depreciate or remain steady relative to the dollar during the holding period of the bond. When an investor in Country A invests in a security in Country B, the investor benefits if Country A's currency depreciates relative to Country B (or Country B's currency appreciates relative to Country A). Because rising interest rates cause bond prices to decline, the best possible scenario would be for the yen to depreciate and for U.S. interest rates to fall. This would give both a capital gain and a currency gain.

Robin purchased a 20-year bond with a duration of 11 years for $1,323.18. Which of these statements is CORRECT? A) The coupon rate is higher than the yield to maturity, and the YTM is higher than the current yield. B) The current yield is higher than both the coupon rate and the yield to maturity. C) The yield to maturity (YTM) is less than both the current yield and the coupon rate. D) The coupon rate is lower than the YTM, and the current yield should be higher than the coupon rate.

C) The yield to maturity (YTM) is less than both the current yield and the coupon rate. CR = coupon rate CY = current yield YTM = yield to maturity Premium bonds: CR > CY > YTM Par bonds: CR = CY = YTM Discount bonds: CR < CY < YTM Because the bond was purchased at a premium, the yield to maturity is less than both the current yield and the coupon rate.

What is one disadvantage of investing in convertible bonds? A) The dividend yield on the underlying stock is usually greater than the interest income on the bonds. B) There is substantial business and market risk. C) The yield to maturity tends to be lower than that of similar nonconvertible bonds. D) The likelihood of a call increases as the price of the underlying stock decreases.

C) The yield to maturity tends to be lower than that of similar nonconvertible bonds. A disadvantage of investing in a convertible bond is that its yield to maturity tends to be lower than a similar nonconvertible bond due to the conversion feature.

Trey is considering the purchase of American depositary receipts (ADRs). He is looking to further diversify his portfolio. Which of these is NOT a feature of this type of investment vehicle? A) ADRs are both liquid and marketable. B) Information regarding the foreign company is easily attainable. C) They are not subject to exchange rate, or currency, risk. D) ADRs are denominated and pay dividends in U.S. dollars.

C) They are not subject to exchange rate, or currency, risk. The answer is they are not subject to exchange rate, or currency, risk. Even though ADRs are denominated in U.S. dollars, they are subject to exchange rate, or currency, risk.

To measure the performance of an investment manager, which of the following methods of computing returns should be used? A) Arithmetic average B) Dollar-weighted return C) Time-weighted return D) Holding period return

C) Time-weighted return The time-weighted return should be used to measure the performance of an investment manager.

Which of the following is NOT considered when calculating a mutual fund operating expense? A) Management fees B) 12b-1 fees C) Transaction costs related to the portfolio securities D) Shareholder recordkeeping

C) Transaction costs related to the portfolio securities A fund's operating expenses include management fees, 12b-1 fees, and administrative fees. Funds do incur transaction costs and those costs do impact performance but transaction costs are not captured in the expense calculation.

A(n) ______________________ average allows small companies to have as much influence as large companies in the average; a(n)_________________ average gives greater influence to large companies than to small companies in the average; and a(n) ______________________ average gives greater influence to high-priced stocks than to low-priced stocks in the average. A) price-weighted; equally weighted; capitalization-weighted B) price-weighted; capitalization-weighted; equally weighted C) equally weighted; capitalization-weighted; price-weighted D) capitalization-weighted; price-weighted; equally weighted

C) equally weighted; capitalization-weighted; price-weighted For a price-weighted index, higher priced stocks have more influence on the overall movement of this index than lower priced stocks. For a market capitalization weighted index, such as the S&P 500, a stock with a market capitalization value of $25 million will have 10 times the impact of a stock with a market capitalization value of a $2.5 million company.

According to Markowitz, an investor's optimal portfolio is determined when the investor's A) indifference curve crosses the efficient frontier. B) lowest indifference curve is tangent to the efficient frontier. C) highest indifference curve is tangent to the efficient frontier. D) indifference curve meets the efficient frontier.

C) highest indifference curve is tangent to the efficient frontier. The optimal portfolio for an investor is determined as the point when the investor's highest indifference curve is tangent to the efficient frontier.

If a bond is immunized against interest rate risk, a dollar decline in the bond's price, resulting from rising interest rates, will be approximately offset by a dollar increase in the A) bond's call price. B) price of comparable bonds in the market. C) income from coupons reinvested over the investment horizon. D) bond issuer's common stock.

C) income from coupons reinvested over the investment horizon. By investing in bonds that have a duration equal to the investor's investment time horizon, any bond price/value changes caused by interest rate fluctuations will be approximately offset by changes in the interest earned on the reinvested coupons.

All of the following correctly identify advantages of U.S. Treasury bills except A) investors can tailor purchases to meet short-term goals and obligations. B) investors are provided a high degree of safety. C) interest income is not subject to federal income tax. D) they are not subject to default risk.

C) interest income is not subject to federal income tax. Interest income from U.S. Treasury bills is taxed at ordinary federal income tax rates but is not subject to state income tax.

All of the following statements correctly evaluate market efficiency except A) the weak form of market efficiency involves market data, whereas the semistrong involve the assimilation of all public information and the strong form involves both public and private information. B) the efficient market hypothesis states that securities markets are efficient, with the prices of securities reflecting their current economic value. C) investors usually react slowly to new and random information pertaining to security's markets. D) an efficient market is one in which the prices of securities quickly and fully reflect all available information.

C) investors usually react slowly to new and random information pertaining to security's markets. Another condition that guarantees an efficient market is investors reacting quickly to new information.

All of the following illustrate a characteristic of a Monte Carlo simulation except A) the simulation provides insight into the range of outcomes. B) a clearer understanding of short-term and long-term risk can be gained. C) large changes in the projected rate of return will make small differences in the outcome. D) the user gets a best-case scenario and a worst-case scenario.

C) large changes in the projected rate of return will make small differences in the outcome. The answer is large changes in the projected rate of return will make small differences in the outcome. Small changes in the projected rate of return will make large differences in the outcome.

The use of borrowed money to attain an individual's investment objectives is described as A) laddering. B) indexing. C) leveraging. D) hedging.

C) leveraging The advantage of leveraging is that the investor can control property that has greater value than the amount of cash invested.

All of the following are risks associated with hedge funds except A) leverage. B) lack of transparency. C) long selling. D) higher risk investments.

C) long selling. Short selling is a risk associated with hedge funds because losses can be incurred in unlimited amounts.

The reason for using a ladder bond strategy is to A) turn a paper loss into an actual loss. B) magnify gains. C) lower interest rate risk. D) spread cash flows evenly over a given time horizon to eliminate default risk.

C) lower interest rate risk. For example, with a ladder bond strategy, instead of investing all money in a seven-year bond, an investor may divide the dollars among bonds with one, three, five, seven, and nine-year maturities. With this approach, instead of making a single bet on interest rates, the investor has both longer and shorter maturities, so that regardless of which way interest rates move the investor will not experience either great losses or great gains.

An investor would consider converting a convertible bond into common stock if the bond's A) yield to maturity is less than its conversion premium. B) duration exceeds 10 years. C) market price is less than the conversion value. D) yield to call is the same as a comparable municipal bond.

C) market price is less than the conversion value. An investor would consider converting a convertible bond into common stock if the bond's conversion value exceeds its market price.

Which of the following correctly explains a disadvantage of investing in money market instruments? A) money market instruments are not subject to purchasing power (inflation) risk. B) certificates of deposit (CDs) generally pay a higher rate of interest than long-term corporate bonds and are FDIC insured. C) money market mutual funds pay a low rate of interest. D) certificates of deposit are not subject to penalties for withdrawals made prior to maturity.

C) money market mutual funds pay a low rate of interest. An investor in CDs is willing to accept a lower return to maintain a high degree of safety. Certificates of deposit are subject to penalties for withdrawals made prior to maturity. However, by accepting a low rate of return, the investor is subject to purchasing power (inflation) risk. Money market instruments are subject to purchasing power (inflation) risk.

Long-term bond funds have A) no reinvestment rate risk. B) minimal purchasing power risk. C) more interest rate risk than short-term bonds. D) no interest rate risk.

C) more interest rate risk than short-term bonds. Long-term bonds have greater purchasing power risk than short-term bonds.

Which of the following statements correctly explains separately managed accounts and their relation to mutual funds? A) they are similar to mutual funds, in that a money manager develops a model index specializing in a particular aspect of the market. B) in a mutual fund, the investor owns the underlying securities directly, while in a separately managed account, the investor owns shares of the fund. C) separately managed accounts are individual investment accounts offered by financial consultants who provide advisory services and are managed by independent money managers using an asset-based fee structure. D) the key difference between mutual funds and separate accounts is that in a separate account, the money manager is purchasing the securities in the portfolio on behalf of the fund, not on behalf of the investor.

C) separately managed accounts are individual investment accounts offered by financial consultants who provide advisory services and are managed by independent money managers using an asset-based fee structure. The answer is separately managed accounts are individual investment accounts offered by financial consultants who provide advisory services and are managed by independent money managers using an asset-based fee structure.

A wheat farmer would hedge by _____________ wheat futures; a bread manufacturer would hedge by ________________ wheat futures; a speculator would _________ a wheat futures contract if he believes the price of wheat may rise; and a speculator would __________ a wheat futures contract if he believes the price of wheat may fall. A) buying; shorting; buy; short B) buying; shorting; short; buy C) shorting; buying; buy; short D) shorting; buying; short; buy

C) shorting; buying; buy; short A wheat farmer would hedge by shorting wheat futures; a bread manufacturer would hedge by buying wheat futures; a speculator would buy a wheat futures contract if he believes the price of wheat may rise; and a speculator would short a wheat futures contract if he believes the price of wheat may fall.

The security market line (SML) A) indicates the market portfolio as the only optimal portfolio. B) plots diversifiable risk on the horizontal (X) axis. C) shows a security's expected return as a function of its systematic risk. D) presents the relationship between a security's return and the return of the market portfolio.

C) shows a security's expected return as a function of its systematic risk. The security market line (SML) shows the relationship between the rate of return and systematic risk (beta). Thus, the SML depicts a security's expected return as a function of its systematic risk. The intersection between the efficient frontier and a line from the risk-free rate depicts all the optimal portfolios composed of a combination of the market portfolio and the risk-free asset. The market portfolio is the only optimal portfolio comprised solely of risky securities.

In a financial market A) investors will take an active investment strategy if they are strong believers in the efficient market hypothesis (EMH). B) investors who do not believe in the efficient market hypothesis (EMH) will stop seeking undervalued securities. C) that is efficient, the prices of securities will not differ from their justified economic values for any length of time. D) that is efficient, new information will be slowly reflected in securities prices.

C) that is efficient, the prices of securities will not differ from their justified economic values for any length of time. An efficient market is a market that quickly reflects all new information. Accordingly, security prices will not depart from their justified economic value for any extended period. Investors who are strong subscribers to the EMH will be passive investors. On the other hand, investors who do not believe in the EMH will become active investors and will seek to identify undervalued securities.

An investor holding a Treasury bill as of the date of maturity includes A) the face value as a capital gain. B) the discounted sales price as ordinary income. C) the amount of the discount as ordinary income. D) the amount of the discount as a capital gain.

C) the amount of the discount as ordinary income. An investor holding a Treasury bill as of the date of maturity includes the amount of the discount as ordinary income. An investor who sells the bill before maturity includes as ordinary income only a portion of the acquisition discount based on the total time he held the bill. The remaining portion is capital gain income.

An investor holding a Treasury bill as of the date of maturity includes A) the face value as a capital gain. B) the amount of the discount as a capital gain. C) the amount of the discount as ordinary income. D) the discounted sales price as ordinary income.

C) the amount of the discount as ordinary income. An investor who sells the bill before maturity includes as ordinary income only a portion of the acquisition discount based on the total time he held the bill. The remaining portion is capital gain income.

Wendy traveled to France and converted U.S. dollars into euros when the exchange rate was USD 1.42 for each euro. When Wendy returned from France, she had some euros left over and converted them back into U.S. dollars. At that time, one dollar was worth .77 euros. Wendy wants to know if she made or lost money on the euros she exchanged back into U.S. dollars. You inform her that A) the dollar has weakened, and she lost money. B) the dollar has strengthened, and she made money. C) the dollar has strengthened, and she lost money. D) the dollar has weakened, and she made money

C) the dollar has strengthened, and she lost money. The answer is the dollar has strengthened, and she lost money. When she returned, she would have preferred the euro to strengthen against the dollar; that way, she could have received more dollars.

The segment of the security trading marketplace that allows for institutional investors to trade with other institutional investors outside of normal trading hours is known as A) the primary market. B) the secondary market. C) the fourth market. D) the third market.

C) the fourth market. The segment of the security trading marketplace that allows for institutional investors to trade with other institutional investors outside of normal trading hours is known as the fourth market.

Which of the following correctly identifies the role of a limited partner in a limited partnership? A) the limited partner controls the business activities of the partnership. B) the limited partners have unlimited liability. C) the limited partners may not participate in the management of the partnership. D) the limited partner determines when distributions are made to the limited partners.

C) the limited partners may not participate in the management of the partnership. The general partner controls the business activities of the partnership. The general partner determines when distributions are made to the limited partners.

Roger is interested in purchasing a commercial real property investment currently offered for $2 million. He will finance the investment by taking out a $1.5 million loan, on which the debt service will be $9,000 per month. The real property will be depreciated using the straight-line depreciation method at $6,000 per month. Roger has determined that the gross rental receipts from the property will be $25,000 per month and that the vacancy and collection losses will be estimated at 5% of potential gross income (PGI). Operating expenses will be $12,000 per month. What is the monthly NOI of Roger's potential investment? A. $2,750 B. $8,750 C. $11,750 D. $13,000

C. $11,750 The monthly NOI of Roger's potential commercial real property investment is $11,750, computed as follows: Gross rental receipts: $25,000 − vacancy and collection losses (5% of PGI, or $1,250) = effective gross income: $23,750 − operating expenses (*$12,000) = NOI of $11,750 *Operating expenses do not include debt service or depreciation expense.

An investor sells (writes) a call option with an exercise price of $45 on KRF stock for $2.50. The option expires when the stock is trading at $44.50. What is the investor's gain or loss? A. $50 gain B. $50 loss C. $250 gain D. $250 loss

C. $250 gain This option was allowed to expire because it was out of the money. When the option expires, the investor's gain is the amount of premium received, or $250 ($2.50 × 100 shares). Recall each option contract represents 100 shares of underlying stock.

Abigail uses her margin account to purchase 300 shares of Monroe stock at $85 per share. The initial margin is 50% and the maintenance margin is 35%. Abigail's margin account charges 6% annual interest. Monroe stock pays the following dividends at the end of the first two years: $2.50 (Year 1) and $3.60 (Year 2). At the end of Year 2, Abigail sells all of her stock for $100 per share. What is Abigail's holding period return? A. 18.83% B. 24.85% C. 37.65% D. 49.67%

C. 37.65% For HPR, we sum the cash flows and divide by the initial investment. Profit on sale: $100 - $85 = $15 Dividends: $2.50 + $3.60 = $6.10 Margin account interest: 6% × 50% × $85 × 2 (years) = $5.10 HPR = ($15 + $6.10 - $5.10) ÷ (50% × $85) = 37.65% or ($30,000 - $25,500 + $750 + $1,080 - $1,530) ÷ $12,750 $4,800 ÷ $12,750 = 37.65%

Portfolio A has a standard deviation of 55%, and the market has a standard deviation of 40%. Assume that the correlation coefficient between Portfolio A and the market is 0.50. What percentage of the total risk of Portfolio A is unsystematic risk? A. 25% B. 50% C. 75% D. 100%

C. 75% The coefficient of determination (R2) of Portfolio A is 25% (0.25). This is derived by squaring the correlation coefficient (R) of 0.50 (0.50 × 0.50 = 0.25). Therefore, 25% is the percentage of returns of Portfolio A that may be explained by the market (or systematic risk). The remainder of the percentage of returns (movement) of Portfolio A is explained by factors independent of the market (or unsystematic risk). To determine this, subtract the systematic risk from 1.0 (1.0 - 0.25 = 0.75, or 75%).

Jerry purchased a 30-year junk bond for $977.36 with a stated coupon rate of 8.5%. What is the YTM for this bond if he receives semiannual coupon payments and expects to hold the bond to maturity? A. 4.36% B. 5.68% C. 8.71% D. 8.93%

C. 8.71% This is calculated as follows: Set the calculator in END Mode and 2 P/Yr. PV = -977.36; FV = 1,000; PMT = 8.5% × 1,000 ÷ 2 = 42.50; 30, DOWNSHIFT, N = 60. Solve for I/YR = 8.71%

Janine's investment portfolio is 50% growth stocks, 10% foreign stocks, and 40% blue-chip stocks. Janine is interested in further diversification. Which mutual fund would best meet her goal? A. Emerging market fund B. Global equity fund C. Bond fund D. Aggressive growth fund

C. Bond fund Janine's portfolio contains foreign equities and growth stocks. She does not own fixed-income securities.

Which of the following statements is NOT correct concerning the use of the correlation coefficient in reducing portfolio risk? A. Combining securities with perfect positive correlation provides no portfolio risk reduction. B. Combining two securities with zero correlation (statistical independence) reduces portfolio risk, but cannot be eliminated. C. Combining two securities with perfect negative correlation provides no portfolio risk reduction. D. Because securities typically have some positive correlation with each other, risk can be reduced, but seldom eliminated.

C. Combining two securities with perfect negative correlation provides no portfolio risk reduction. The answer is combining two securities with perfect negative correlation provides no portfolio risk reduction. This could eliminate risk altogether and is the principle behind hedging strategies.

A couple in a high tax bracket wants to invest in a mutual fund to provide current income without large principal fluctuations. They have a moderate risk tolerance, and they are considering the following funds: Fund A: High-yield single-state municipal bond fund (long term) Fund B: Long-term municipal bond fund Fund C: Intermediate-term municipal bond fund Fund D: Aggressive growth fund Which of these funds would be the best choice for this couple? A. Fund A B. Fund B C. Fund C D. Fund D

C. Fund C All three of the municipal bond funds will provide current, tax-free income, but large principal fluctuations are more likely in Fund A and Fund B because they invest in long-term bonds, which have higher durations than intermediate-term bonds. An aggressive growth fund is not appropriate in this situation because the couple desires current income

Which of the following statements regarding venture capital are CORRECT? I. Venture capitalists have a high risk tolerance. II. They offer investors the potential for high rates of return. III. Investors are willing to lose their entire principal. IV. Venture capital investments exhibit a high level of liquidity. A. I and II B. III and IV C. I, II, and III D. I, II, III, and IV

C. I, II, and III The answer is I, II, and III. Only statement IV is incorrect. Venture capital investments exhibit a lack of liquidity

According to the liquidity preference theory, which of the following statements is least accurate? A. All else equal, investors prefer short-term securities over long-term securities. B. Long-term rates should be higher than short-term rates because of the added risks. C. Investors perceive little risk differential between short-term and long-term securities. D. Borrowers will pay a premium for long-term funds to avoid having to roll over short-term debt.

C. Investors perceive little risk differential between short-term and long-term securities. Rational investors feel that long-term bonds have more risk exposure than short-term securities (i.e., long-term securities are less liquid and subject to more price volatility). The other statements are correct.

XYZ stock has a current dividend of $1.75 that has been growing at a constant rate of 8% per year. If the stock is currently selling for $100 and your required rate of return is 10%, would you buy the stock at today's price? A. Yes, because the stock is undervalued on the basis of the constant growth dividend discount model. B. Yes, because the stock is a good buy on the basis of its risk-return relationship. C. No, because the stock is overvalued on the basis of the constant growth dividend discount model. D. No, because the stock is not a good investment on the basis of its risk-return relationship.

C. No, because the stock is overvalued on the basis of the constant growth dividend discount model. On the basis of the constant growth dividend discount model, the intrinsic value of XYZ stock is $94.50, calculated as follows: D0(1 + g) ÷ (r - g) = $1.75(1.08) ÷ (0.10 - 0.08) = $94.50. Because XYZ stock is currently selling for $100 per share, it is overvalued in the market and the investor should not buy the stock.

Baylor stock is currently selling for $63 per share. A call option for this stock with an exercise price of $65 per share may be purchased for a premium of $4. The option expires in three months. Which of the following terms best describes this option? A. In the money B. At the money C. Out of the money D. By the money

C. Out of the money The option is currently out of the money because the exercise price of the option ($65 per share) is currently greater than the current market price of the stock ($63 per share). Therefore, the option will not be exercised unless the market price increases to more than $65 per share within the three-month period.

Shelley is contemplating buying 100 shares of ABC Corporation's preferred stock for $42 per share. She knows the dividend is a fixed amount, paid quarterly, and determined by taking a percentage of which of the following? A. Market value B. Book value C. Par value D. Intrinsic value

C. Par value Shareholders of preferred stock receive dividends each year equal to a stated percentage of the par value of the stock (e.g., a 3% dividend on a $100 par value of preferred stock).

Karl and Wendy, ages 35 and 34, have provided their financial planner with the following information: Salary (Wendy) $100,000 Salary (Karl)$55,000 Investment portfolio $150,000 Personal debt $5,000 Personal residence $250,000 Mortgage$188,000 Checking account $12,000 1. 100% of the assets are invested in common stocks. They have communicated that they are aggressive risk takers and wish to reposition $8,000 from their checking account to their investments. They prefer a risky investment to add

C. Pharmaceutical stock The best choice for the couple is the pharmaceutical stock. This type of stock is generally riskier and may provide a higher rate of return than the other choices. Grocery stock is considered a defensive stock. Utility stock is an example of an income stock. An international airline stock is a cyclical stock.

For which of the following investors would zero-coupon bonds be most appropriate? A. Nancy, age 67, recently retired, conservative risk tolerance, has a need for immediate income B. Jim, age 26, aggressive risk tolerance, modest income, has a need for an emergency fund C. Ralph and Gina, ages 42 and 40, have a 13-year-old daughter, need $25,000 for college funding in 5 years D. Marvin and Juanita, ages 56 and 50, moderate to aggressive risk takers, both employed, high net worth, wish to retire in 13 years

C. Ralph and Gina, ages 42 and 40, have a 13-year-old daughter, need $25,000 for college funding in 5 years Ralph and Gina would be the best choice to invest in zero-coupon bonds. Their need is clearly defined in terms of amount and time frame. Zero-coupon bonds could be purchased to provide the necessary funds at the desired time.

Which of the following statements, with respect to the features of U.S. savings bonds, is CORRECT? A. Series EE and Series I bonds are sold at a discount and accrue interest annually. B. Series EE and Series HH bonds may be used as payment for qualified higher education costs free of income tax. C. Series I bonds feature a combination of fixed and inflation-adjusted interest rates. D. Series HH bonds may be obtained only by using cash and not with a tax-free exchange of Series EE bonds.

C. Series I bonds feature a combination of fixed and inflation-adjusted interest rates. The Series I bond interest rate is a combination of a fixed rate of return and a semiannual, inflation-adjusted interest rate. Like a Series EE bond, a Series I bond may also be used for the payment of higher education costs free of income tax so long as the taxpayer's adjusted gross income is not above the phaseout limit. However, Series HH bonds may not be used for this purpose.

In a rising stock market, which of the following methods of establishing basis in mutual fund shares is the most favorable to the taxpayer-owner? A. Average cost method B. FIFO C. Specific identification D. Amortized cost method

C. Specific identification In a stock market where prices are rising, specific identification of mutual fund shares sold will generally prove most favorable to the taxpayer. (FIFO is least favorable.) However, most taxpayers do not keep good financial records; therefore, the average cost method of determining basis in mutual fund shares is the most common.

Which of the following is NOT a characteristic of Eurodollars? A. They are used to settle international transactions. B. The average deposit is in the millions. C. They have a maturity of greater than one year. D. Interest income is taxable as ordinary income when earned

C. They have a maturity of greater than one year Eurodollars have a maturity of less than six months.

Coretta, age 63, is an executive with ABC Corporation (a publicly traded company). She wants to retire within two years. Over the years, she has accumulated a large position in her company's stock. She is concerned that her portfolio may not be diversified enough to withstand a substantial decline in ABC's stock price. She would like to retain control over the proceeds and create a diversified portfolio. She has come to you for advice on how to handle this situation. Based on this information, which is the best choice for Coretta? A. Gift the stock to a family member. B. Sell the stock to a family member. C. Use an exchange fund. D. Sell the stock and transfer the proceeds to a charitable remainder trust.

C. Use an exchange fund. The best course of action for Coretta is to use an exchange fund. This fund permits investors with concentrated portfolios to contribute the stock to the fund. In exchange, the investor receives a proportional interest in the fund. All of the other choices will require Coretta to give up control of the proceeds.

With respect to the term structure of interest rates, the market segmentation theory holds that A. an increase in demand for long-term borrowings could lead to an inverted yield curve. B. expectations about the future of short-term interest rates are the major determinants of the shape of the yield curve. C. the yield curve reflects the maturity demands of financial institutions and investors. D. the shape of the yield curve is independent of the relationship between long-and short-term interest rates.

C. the yield curve reflects the maturity demands of financial institutions and investors. The market segmentation theory holds that certain types of financial institutions and investors prefer to confine (most of) their investment activity to certain maturity ranges of the fixed-income market and that supply and demand forces within each segment ultimately determine the shape of the yield curve.

MLM Corporation exhibits an expected growth in earnings of 11% for the next year. If an investor's required rate of return is 14%, what is the firm's price-to-free-cash-flow (P/FCF) ratio? A) 10.36 B) 38.00 C) 7.93 D) 37.00

D) 37.00 The firm's P/FCF ratio is 37.00, calculated as follows: (1 + 0.11) ÷ (0.14 - 0.11) = 37.00. After calculating this ratio, an investor would compare the result with the stock's peers to determine if a purchase is warranted.

Element Corp had these annual returns over the past four years: +12%, +6%, -8%, and +20%. What is the standard deviation for Element Corp. over the past four years? A) 15% B) 12.4% C) 7.5% D) 11.8%

D) 11.8% HP 10bII+ Keystrokes: 12, ∑+ 6, ∑+ 8, +/-, ∑+ 20, ∑+ SHIFT, Sx,Sy (8 key) for standard deviation = 11.8% TI BA II+ Keystrokes: Step 1: press "2nd" then "7". This activates the data screen. Step 2: press "2nd" then "CE/C" to clear all your existing work. Step 3: enter the first return "12" into the first "X01" screen and press enter. Step 4: hit the down arrow button "↓" and scroll past "Y01" and hit "↓" one more time until you get to "X02." Step 5: input the next return value which would be "6" and hit enter. Follow this process until you input all four values. Step 6: press "2nd" then "8" which is the "STAT" screen. Step 7: press "2nd" then "enter" which is the "SET" screen. Keep hitting the "2nd" and "enter" button until you see "1-V." Step 8: press "↓" to scroll through the calculated statistics. You will hit the "↓" button three times before you reach the standard deviation screen which will start with "Sx" and should equal "11.8."

Assuming Mary earned a 3% return from dividend reinvestment, a 2% return from capital gain reinvestment, and a 9% return from share price appreciation on her mutual fund, calculate her total return. A) 3% B) 12% C) 5% D) 14%

D) 14% Total return on a stock or mutual fund may be thought of as the sum of the capital appreciation/depreciation on the underlying principal of the investment and any income or earnings generated from that investment. Therefore, Mary's total return equals 14% (3% + 2% + 9%).

Frank purchased 100 shares of ABC common stock five years ago at a cost of $5,000. The stock paid these dividends: Year | Amount 1 | $200.00 2 | $200.00 3 | $250.00 4 | $275.00 5 | $300.00 At the time the fifth-year dividend was paid, Frank sold the stock for $8,500. What is the dollar-weighted return on ABC stock? A) 18.15% B) 15.51% C) 12.67% D) 15.11%

D) 15.11% This problem involves calculating the IRR/YR for uneven cash flows per the following inputs. Using the HP 10bII+: - 5000, CF0 200, CF1 200, CF2 250, CF3 275, CF4 8800 ($300 + $8,500), CF5 Solve for IRR/YR = 15.1076 = 15.11%

Calculate the expected rate of return for Stock A based on the following information: Risk-free rate of return: 3.85% Factor | Sensitivity | Risk Premium Inflation 1.2 4.00% Industrial Production 0.9 5.75% PopulationGrowth 0.5 2.60% A) 7.97% B) 11.28% C) 12.35% D) 15.13%

D) 15.13% The expected rate of return for Stock A based on the arbitrage pricing model (APT) is calculated as follows: ri = 0.0385 + (1.2 × 0.04) + (0.9 × 0.0575) + (0.5 × 0.0260) = 0.0385 + 0.048 + 0.0518 + 0.013 = 0.1513, or 15.13%.

VUL stock has a current market price of $25.65 and sales per share of $1.67. Calculate the price-to-sales ratio for this stock. A) 17.20 B) 34.87 C) 22.77 D) 15.36

D) 15.36 The formula for the price-to-sales (P/S) ratio: P/S = market price per share ÷ sales per share P/S = $25.65 ÷ $1.67 = 15.3592, or 15.36 This ratio would then be compared to its industry peers to determine whether the stock appears to be overvalued or undervalued.

Allison purchases 200 shares of ADM stock for $23 per share and makes subsequent purchases at the end of the following years: Year 1: 50 shares at $26/share Year 2:75 shares at $29/share Year 3: 25 shares at $36/share At the end of Year 4, ADM is trading for $41 per share. There have been no dividends paid during the holding period. Calculate the annualized dollar-weighted return on Allison's investment for this four-year period. A) 14.55% B) 15.05% C) 15.55% D) 16.05%

D) 16.05% To use the uneven cash flow method to solve for the internal rate of return: CF0 (4,600) (200 × 23) CF1 (1,300) (50 × 26) CF2 (2,175) (75 × 29) CF3 (900) (25 × 36) CF4 14,350 (350 × 41) Solve for IRR/YR = 16.0531, or 16.05%

Jonathan purchased 500 shares of CPM stock for $12 per share. At the end of the first year, he made another purchase of 500 shares at a stock price of $12 per share. At the end of the third year, he sold all of the stock for $17 per share. In addition, the stock paid a dividend of 0.35 per share at the end of each year. Calculate the dollar-weighted return to Jonathan over the three-year period. A) 13.50% B) 11.63% C) 15.60% D) 17.46%

D) 17.46% Jonathan earned a dollar-weighted rate of return of 17.46% on CPM stock over the three-year period, calculated as follows: CF0 = −12 × 500 = −6,000 CF1 = (−12 × 500) + (0.35 × 500) = −5,825 CF2 = (0.35 × 1,000) = 350 CF3 = (0.35 × 1,000) + (17 × 1,000) = 17,350 Solve for the internal rate of return (IRR/YR) = 17.4626, or 17.46%

DMM stock has a P/E ratio of 12 and is expected to have an expected growth rate of earnings of 6%. Based on this information, calculate the PEG ratio of DMM stock. A) 5 B) 4 C) 7.2 D) 2

D) 2 The PEG ratio is calculated by dividing a company's P/E ratio by the firm's expected growth rate of earnings: PEG = P/E ÷ g. Therefore, the PEG of DMM stock is 2 (12 ÷ 6). DMM's ratio would then be compared to its peers to determine whether the stock is a good buy.

Cosmo has a margin account with a balance of $50,000 with a national broker-dealer. The initial margin requirement on this account is 50%. Cosmo is interested in purchasing shares of Aardvark Inc., which is currently selling at $40 per share. Given the above information, calculate the number of shares of Aardvark that Cosmo can purchase using margin. A) 625 B) 1,250 C) 2,000 D) 2,500

D) 2,500 Cosmo can purchase 2,500 shares calculated as follows: $50,000 ÷ 50% initial margin = $100,000 of buying power. $100,000 ÷ $40/share = 2,500 shares.

Carolyn owns a corporate bond with a coupon rate of 3.60%. Currently, the inflation rate is 1.50%. Calculate the real rate of return on this bond. A) 3.60% B) 5.10% C) 2.10% D) 2.07%

D) 2.07% The real rate of return on this bond is calculated as follows: [((1 + 0.036) ÷ (1 + 0.015)) - 1] × 100 = 0.0207 × 100 = 2.07%

What is the highest long-term capital gains rate on collectibles? A) 15% B) 20% C) 25% D) 28%

D) 28% The long-term capital gains tax rate on collectibles (tangible assets other than real estate) is capped at 28%.

During the past year, the stock market had a return of 8%, while the risk-free rate of return was 3%. Fund B had a realized return of 12%, a standard deviation of 15, and a beta of 1.20. Jensen's alpha for the fund is A) 0.40%. B) 1.60%. C) -0.60%. D) 3.00%.

D) 3.00%. Alpha = 12% - [3% + (8% - 3%)1.20] = 12% - 9% = 3%

Your client purchased the Zenith Fund three years ago at $13.16. Here are the year-end prices of the fund up until today: 20X7 = $14.21 20X8 = $15.86 20X9 = $14.78 What is the geometric return of Zenith Fund for this three-year period? A) 5.26% B) 4.61% C) 5.88% D) 3.95%

D) 3.95% The $13.16 has grown to $14.78 over a three-year period, so ($13.16) is the PV: $14.78 FV, 3 N, and solve for I/YR, which equals 3.95%.

Choose the statement that best describes a real estate investment trust (REIT). A) A REIT is an agreement between two parties to make or take delivery of a specified amount of a financial asset at a future time, place, and unit price. B) A REIT is a self-liquidating, flow-through entity that invests exclusively in real estate mortgages or mortgage-backed securities. C) Similar to open-end investment companies, REITs are redeemed directly by the issuer at a price determined by the investment company minus a sales commission. D) A REIT is a closed-end investment company investing in real estate, short-term construction loans, or mortgages.

D) A REIT is a closed-end investment company investing in real estate, short-term construction loans, or mortgages. Similar to closed-end investment companies, some REITs are publicly traded on the exchanges and can sell at premiums or discounts to net asset value. Also, REIT investors achieve diversification and marketability that is generally lacking with real estate limited partnerships (RELPs).

Dividend reinvestment plans offer which of these advantages? A) A means for the company to retain more earnings B) An increase in the stock's par value C) A means for the company to repurchase some of its shares D) A convenient means to accumulate shares

D) A convenient means to accumulate shares The advantage to an investor is the saving of commissions by using a dividend reinvestment plan (DRIP). The advantage is to an investor, not to the company. The use of a DRIP has no effect on the stock's par value. A dividend reinvestment program has no effect on the company's ability to retain more earnings.

Which of the following correctly describes a lifecycle fund? A) A fund that invests in other funds, usually offering three portfolios with different levels of risk, such as conservative, moderate, and growth B) A fund that utilizes sector rotation to adjust the asset allocation based on where the economy is in its "life cycle" C) A fund that bases and adjusts its asset allocation based on the current phase of life of the investor D) A fund that bases and adjusts its asset allocation on a specific target date at which the investor will retire

D) A fund that bases and adjusts its asset allocation on a specific target date at which the investor will retire This is also known as a target-date fund.

Which of the following statements regarding futures contracts is correct? A) Futures contracts do not trade on an exchange. B) Hedging involves purchasing a futures contract in the same position of that which is currently held. C) To complete a futures contract, delivery of the asset or commodity must be made. D) A futures contract is an agreement between two parties to make or take delivery of a specified amount of a commodity or financial asset at a future time, place, and unit price.

D) A futures contract is an agreement between two parties to make or take delivery of a specified amount of a commodity or financial asset at a future time, place, and unit price. To complete a futures contract, delivery of the commodity or asset may be made. But more often, the buyer (or holder) simply purchases an offsetting contract and cancels the original position. Hedging involves purchasing a futures contract in the opposite position of that which is currently held. Futures contracts are traded on an exchange such as the Chicago Mercantile Exchange.

Which of these best describes the concept of convexity? A) Helps explain the changes in stock prices not accounted for by the constant growth dividend discount model B) A precise measure of the change in the price of a bond, given a respective change in GDP C) The average time it takes a bondholder to receive the interest and principal payments from a bond in present value dollars D) A measure of the curvature of the relationship between a bond's YTM and its market price (value)

D) A measure of the curvature of the relationship between a bond's YTM and its market price (value) Specifically, convexity helps explain the change in bond prices not accounted for simply by the bond's duration; in other words, convexity gives us a more precise measure of the change in the price of a bond, given a respective change in market interest rates.

Which of these is a risk associated with corporate bonds? A) Reinvestment rate risk B) Default risk C) Interest rate risk D) All of these

D) All of these All bonds are subject to systematic risks. However, government bonds are not subject to default risk.

Which of the following should be agreed upon between the client and the investment professional when making recommendations based on an investment policy statement? A) Permitted and excluded investments B) Return requirement C) Risk tolerance D) All of these

D) All of these The client and the investment professional should agree on return requirement, risk tolerance, and permissible investments. Other factors to incorporate are liquidity needs, asset allocation, time horizons, tax considerations, and laws and regulations.

Which of these statements describing the primary market is correct? A) One goal of underwriting is to evaluate a firm's financial needs. B) The purpose of the primary market is to facilitate the initial sale of securities to the public. C) A syndicate is a group of investment banks that collectively underwrite an issue. D) All of these.

D) All of these. In the primary market, underwriters assist with the sale of the issue, evaluate the firm's financial needs, and determine the best investment vehicle to achieve the capital goal.

Select the CORRECT statement regarding foreign investments. A) Investing directly in a foreign company's shares is a convenient way for the individual investor to diversify a portfolio. B) Eurobonds are commonly used by U.S. companies to finance imports and exports. C) Global mutual funds invest exclusively in foreign securities. D) American depositary receipts (ADRs) pay dividends in U.S. currency.

D) American depositary receipts (ADRs) pay dividends in U.S. currency. Global mutual funds invest in both U.S. and foreign securities. Direct investment in foreign companies is inconvenient. Banker's acceptances are used to finance imports and exports.

Jane considers herself to be a conservative investor. To generate additional income, she wants to add an investment-grade bond to her portfolio. She lives in a state that does not have an income tax and she is in the 35% federal income tax bracket. Select the best choice for her portfolio. A) Bond C, D rated corporate debenture with a 6% coupon rate B) Bond B, A rated corporate debenture with a 4.75% coupon rate C) Bond D, AAA rated Treasury bond with a 1.5% coupon rate D) Bond A, AA rated municipal bond with a 3.5% coupon rate

D) Bond A, AA rated municipal bond with a 3.5% coupon rate The answer is Bond A, AA rated municipal bond with a 3.5% coupon rate. Even though Bond C has the highest after-tax rate of return, this bond would not be appropriate for Jane based on her desire for an investment-grade bond. Therefore, Bond A would be the best choice. Calculations: Bond A: 3.5% Bond B: 4.75% × (1 - 0.35) = 3.0875% Bond C: 6% × (1 - 0.35) = 3.90% Bond D: 1.5% × (1 - 0.35) = 0.9750%

After suffering an unexpected job loss and losing a $125,000 annual salary, your client, Joe, comes to you to review his asset allocation. In addition to possibly having a prolonged unemployment period, Joe, age 62, would like to retire within eight years. He is concerned about the allocation of the Section 401(k) plan at his prior employer which is 100% invested in an S&P 500 Index fund. The balance of the account is $2,500,000. Based on this information, what should you do next? A) Tell Joe to focus on finding a job and not be concerned with his asset allocation. B) Recommend Joe apply for early Social Security benefits to provide him with income during his job search. C) Have Joe complete any necessary paperwork to transfer his 401(k) plan assets to an IRA. D) Discuss Joe's risk tolerance and make appropriate changes to his plan's asset allocation.

D) Discuss Joe's risk tolerance and make appropriate changes to his plan's asset allocation. With retirement looming on the horizon, Joe should consider reducing the risk exposure in his retirement plan. Moving the 401(k) to an IRA could be a consideration, but this should not be an immediate planning recommendation. Recommending he take early Social Security benefits may not be prudent due to tax issues and locking in a lower monthly benefit for life.

Which of these statements best describes the concept of bond duration? A) Duration is used as an estimate of the change in the price of a bond given a negative one percentage point change in mortgage rates. B) Duration assumes the price of a bond will stay constant because the market price of the underlying stock stays constant. C) Duration measures the extent to which two variables move together, either positively (together) or negatively (opposite). D) Duration is the average weighted time it takes the bondholder to receive the interest and principal payments from a bond in present value dollars.

D) Duration is the average weighted time it takes the bondholder to receive the interest and principal payments from a bond in present value dollars. Covariance measures the extent to which two variables move together, either positively (together) or negatively (opposite). Duration is a measure of the sensitivity of a bond's price to changes in interest rates.

Which of these is a feature of zero-coupon bonds? A) Have a duration less than their term to maturity B) Have low interest rate risk C) Offer minimum price volatility D) Eliminate reinvestment rate risk

D) Eliminate reinvestment rate risk They are redeemed for their face value at maturity. These bonds have maximum price volatility and respond sharply to interest rate changes. Zero-coupon bonds have durations equal to their term to maturity.

Which of the following risks is specific to international investing? A) Business risk B) Event risk C) Reinvestment rate risk D) Exchange rate risk

D) Exchange rate risk Exchange rate risk pertains to foreign investments and is the risk for a U.S. investor that the exchange rates between a foreign currency and the U.S. dollar change adversely; that is, when the U.S. investor converts the foreign currency into U.S. dollars, she will get fewer dollars than previously.

Which of the following statements about the importance of risk and return in the investment objective is least accurate? A) The return and risk objectives have to be consistent with reasonable capital market expectations, as well as the client constraints. B) The return objective may be stated in dollar amounts even if the risk objective is stated in percentages. C) The investor's risk tolerance is likely to determine what level of return will be feasible. D) Expressing investment goals in terms of risk is more appropriate than expressing goals in terms of return.

D) Expressing investment goals in terms of risk is more appropriate than expressing goals in terms of return. The answer is expressing investment goals in terms of risk is more appropriate than expressing goals in terms of return. Expressing investment goals in terms of risk is not more appropriate than expressing goals in terms of return. The investment objectives should be stated in terms of both risk and return. Risk tolerance will likely help determine what level of expected return is feasible.

In general, rising interest rates result in which of the following combinations? A) Rising bond prices and falling stock prices B) Rising stock and bond prices C) Falling bond prices and rising stock prices D) Falling stock and bond prices

D) Falling stock and bond prices In general, rising interest rates result in falling stock and bond prices.

Which of these types of risk is associated with the degree to which a company utilizes debt to finance its operations? A) Credit risk B) Default risk C) Business risk D) Financial risk

D) Financial risk Financial risk is associated with the degree to which a company utilizes debt to finance its operations.

Which of the following are NOT used in technical analysis? A) Supply and demand of stocks B) Graphs C) Moving averages D) Financial statement ratios

D) Financial statement ratios Financial statement ratios are part of fundamental analysis.

You have narrowed your choice down to these three mutual funds which have these annual returns. Which fund should you choose based on risk and return? Fund X | Fund Y | Fund Z Year 1 +15% +7% +12% Year 2 +9% +13% +2% Year 3 +5% +8% +11% A) Fund Z B) Fund X C) Any of these funds because the risk and return are equal D) Fund Y

D) Fund Y This is a problem that can be solved using the coefficient of variation. With the annual returns, calculate the standard deviation and mean return for each of the three funds: Fund X | Fund Y | Fund Z Standard deviation 5.0332 3.2146 5.5076 Mean return 9.6667 9.3333 8.3333 Coefficient of variation 0.5207 0.3444 0.6609 The lowest CV is the correct answer. Sample keystrokes for Fund X (repeat for the other funds) on the HP10BII+: 15 ∑+ 9 ∑+ 5 ∑+ SHIFT, Sx,Sy (8 key) = 5.0332 For the mean return: SHIFT, x,y (7 key) = 9.6667 Calculation as follows for the TI BA II+: Step 1: press "2nd" then "7". This activates the data screen. Step 2: press "2nd" then "CE/C" to clear all your existing work. Step 3: enter the first return "15" into the first "X01" screen and press enter. Step 4: hit the down arrow button "↓" and scroll past "Y01" and hit "↓" one more time until you get to "X02". Step 5: input the next return value which would be "9" and hit enter. Follow this process until you input all 3 values. Step 6: press "2nd" then "8" which is the "STAT" screen. Step 7: press "2nd" then "enter" which is the "SET" screen. Keep hitting the "2nd" and "enter" button until you see "1-V." Step 8: press "↓" to scroll through the calculated statistics. You will hit the "↓" button three times before you reach the standard deviation screen which will start with "Sx" and should equal "5.0332." Step 9: press the up arrow to see the stat above "Sx" which is "x" and should equal "9.67" as the mean. CV = standard deviation ÷ mean CV = 5.0332 ÷ 9.6667 = 0.5207

Which of the following statements describing tangible assets and natural resources is CORRECT? A) The share value of a mutual fund that invests primarily in companies that develop natural resources is positively correlated with the value of the bond market. B) Oil and gas investments are typically offered to the public as general partnerships. C) Collectibles offer the investor personal enjoyment and a highly liquid investment. D) Gold prices and stock prices have traditionally had an inverse relationship.

D) Gold prices and stock prices have traditionally had an inverse relationship. Because gold prices move inversely with stock prices, gold has been used as a hedge against falling stock values. Collectibles offer the investor personal enjoyment at the expense of an efficient and liquid market. Oil and gas partnership interests are typically offered as limited partnerships. Both the bond market and the stock market are negatively correlated with the value of natural resources.

Harry invests in a money market mutual fund to provide funds for investment opportunities and emergencies. However, he is concerned about the potential disadvantages of placing too much money into this type of fund. Which of these is NOT an advantage of money market mutual funds? A) Ease of redemption B) Diversification C) Safety of principal D) High rates of return

D) High rates of return Money market mutual funds invest in highly liquid short-term instruments. They have significantly lower risk and lower returns when compared to investing in stocks.

Which of these statements correctly describes differences between preferred stock and long-term bonds? I. Interest paid by firms is a tax-deductible expense; dividends paid on preferred stock are not tax deductible. II. Bonds usually have a finite maturity; preferred stock is usually perpetual. III. Bonds pay a fixed amount of interest; preferred stock pays a fluctuating dividend based on earnings. IV. Interest on bonds and preferred stock dividends are legal obligations of a firm that must be p

D) I and II Bonds pay a fixed periodic interest that is tax deductible by the firm; preferred stock dividends are fixed, but they are not tax deductible. Only the interest on bonds is a legal obligation that must be paid; dividends on preferred stock can be deferred (if there is a cumulative feature) or skipped

Identify which of these statements regarding revenue bonds is NOT correct. I. They are secured by a specific pledge or property. II. They are a type of full faith and credit bond. III. Their interest is tax-exempt at the federal level. IV. They are analyzed by the project's ability to generate earnings. A) III and IV B) I and III C) II and IV D) I and II

D) I and II Revenue bonds are not secured by property and are not a type of general obligation bond. They are only secured by user fees.

Which of the following are positive characteristics of a dividend reinvestment program? I. Such a program has the benefit of dollar cost averaging. II. Dividend income is not taxed when reinvested. III. Dividend shares are purchased at no commission cost. IV. Dividend shares have no tax basis. A) II and IV B) I and II C) I, II, and III D) I and III

D) I and III Because the dividends are reinvested directly into additional company shares without having to make a purchase through a stockbroker, these purchases are made with no commission cost.

Which of the following are characteristics of collectibles investments that distinguish them from financial investments? I. The market is relatively inefficient. II. The capital gain is taxed at a maximum rate of 20%. III. There are large spreads between bid and ask prices. IV. There is little liquidity risk. A) I, II, and III B) II, III, and IV C) I, II, III, and IV D) I and III

D) I and III Collectibles are taxed at a maximum capital gain rate of 28%, compared to the 20% maximum rate on financial assets. Liquidity is a major risk in collectibles, since there is no active market for the assets.

The strong form of the efficient market hypothesis suggests which of the following? I. Inside information will not lead to superior investment results. II. Inside information will lead to superior investment results. III. Studying financial statements will not lead to superior investment results. IV. Studying financial statements will lead to superior investment results. A) I and IV B) II and III C) II and IV D) I and III

D) I and III The strong form says that all information, both public and private, is already reflected in the stock price, so nothing will produce superior results.

Which of the following statements are true regarding risk and return for tangible investments? I. Unsystematic risk tends to be high with most forms of tangible assets. II. High cash flows from collectibles create annual taxable events. III. The illiquid nature of the investments makes them suitable for income-seeking investors. IV. The capital gains rate on collectibles is greater than that of other investments. A) II and III B) I only C) I and II D) I and IV

D) I and IV Generally, collectibles do not provide an investor with predictable cash flows. Therefore, they would not be suitable for an income-seeking investor.

Why would financial planners recommend their clients purchase natural resources for their investment portfolios? I. Diversification II. Low degree of risk III. Positive correlation with other financial assets IV. Pass through of certain tax benefits including depletion A) II and III B) II, III, and IV C) I, II, III, and IV D) I and IV

D) I and IV Statements II and III are incorrect. Investments in natural resources offer investors a high degree of risk and a negative correlation with other financial assets.

Identify which of these statements regarding unit investment trusts (UITs) is CORRECT. |. Units are sold at net asset value plus a commission for the broker executing the transaction. II. Like stocks, UITs are traded on the major exchanges. III. During the term of the trust, unit holders are taxed in the same manner as owners of variable annuities. IV. Upon maturity, the securities are generally liquidated and the proceeds distributed to the investor or trust beneficiaries. A) I, III, and IV B) I and II C) III and IV D) I and IV

D) I and IV UITs are sold in the secondary market, but not on the major exchanges. During the term of the trust, unit holders are taxed in the same manner as shareholders of mutual funds with capital gains earned by the trust passed through and taxed to the unit holders. Dividends are taxed as ordinary income in the year earned.

Which of these statements about closed-end funds is CORRECT? A) Closed-end shares are purchased from and sold by the fund company. B) Closed-end funds continuously offer new shares to the public. C) Closed-end funds have 12b-1 fees. D) Investors in closed-end shares can profit from changes in the discount to NAV.

D) Investors in closed-end shares can profit from changes in the discount to NAV. When the discount shrinks, an investor can profit even if the NAV of the underlying portfolio does not change.

TLP stock sells for $40 a share and pays an annual dividend of $2.75, which is expected to increase 5% annually. An investor has a required rate of return of 13%. Which of the following conclusions about TLP stock can be drawn? I. It is undervalued. II. It has an intrinsic value of $36.09. III. It is overvalued. IV. It has an expected rate of return of 12.2%. A) I and II B) III and IV C) I, II, and IV D) II, III, and IV

D) II, III, and IV The constant growth dividend discount model may be used as follows: V = D1 ÷ (r - g) = (2.75 × 1.05) ÷ (0.13 - 0.05) = 2.8875 ÷ 0.08 = 36.09, or $36.09 With an intrinsic value that is less than the current market price, the stock would be considered overvalued and not worthy of a purchase. With option IV, the expected return is lower than the required return. In order to calculate the expected return, we can solve for it using the following steps: $40 = 2.8875 ÷ (x - 0.05) $40 (x - 0.05) = 2.8875 $40x - 2 = 2.8875 $40x = 4.8875 x = 4.8874 ÷ $40 = 0.1222, or 12.2%

Select the CORRECT statements regarding stock splits. I. Following a stock split, an investor owns an increased percentage of the company. II. Because of the increased number of shares an investor owns following a stock split, the stock split is a taxable event to the investor. III. A stock split results in a downward adjustment in a shareholder's per share basis. IV. A reverse stock split reduces the total shares outstanding and increases the price per share. A) II and IV B) I, II, III, and IV C) I and III D) III and IV

D) III and IV A stock split is not a taxable event to the investor. Following a stock split, the investor owns the same percentage of the company as before, but each share now represents a correspondingly smaller percentage.

Your client is invested in a well-diversified portfolio of mutual funds. Recently he read about closed-end funds, and he wonders if he should consider adding them to his portfolio. As his advisor, you would explain to him which of the following regarding closed-end funds? I. Closed-end managers periodically close the fund to new investors, whereas open-end managers continuously offer shares to new investors. II. Closed-end shares are purchased at NAV plus a commission, whereas some open-end shares can be purchased with no commission. III. Closed-end shares generally trade at a discount or premium to NAV, whereas open-end shares trade at NAV plus commission, if applicable. IV. The number of available shares in a closed-end fund is fixed, whereas the number of available shares in an open-end fund varies. A) I and II B) II and III C) I and III D) III and IV

D) III and IV Closed-end funds are closed to new investors after all shares are initially sold; thereafter, they can only be purchased on the open market from another investor. Closed-end shares trade at their market price plus commission, not at NAV plus commission.

Which of the following statements regarding the variables in the Black/Scholes European call option pricing model is CORRECT? I. An increase in the price of the underlying stock decreases the value of the European call option. II. An increase in the variability of the price of the underlying stock decreases the value of the European call option. III. An increase in the risk-free rate increases the value of the European call option. IV. An increase in the time to expiration decreases the value of the European call option. A) II and III B) I, II, and IV C) III and IV D) III only

D) III only An increase in the time to expiry also increases the value of the European call option.

Which of the following statements regarding common stock is CORRECT? A) Growth stocks are so named because they pay dividends that grow at a constant rate. B) An investor who owns common stock in street name is issued a certificate of ownership by the corporation. C) During recessions, cyclical stocks typically perform better than defensive stocks. D) If Jacob sells his XYZ stock to Darlene the day before the record date, Jacob will receive the dividend for that period.

D) If Jacob sells his XYZ stock to Darlene the day before the record date, Jacob will receive the dividend for that period. The person who is the owner of the stock on the second business day before the record date is issued the dividend for that period. Jacob sold the stock to Darlene after the ex-dividend date; therefore, he is still the owner of record because the trade will not settle for two business days following the sale. Darlene purchased the stock after the ex-dividend date. Stock owned in street name is held by the brokerage firm; the corporation does not issue a certificate to the investor. Growth stocks typically do not pay dividends. The value of the stock is expected to grow—or appreciate—with the reinvestment of earnings. Defensive stocks typically perform better than cyclical stocks in a recessionary economy.

Which of these statements correctly illustrates basic option positions? A) If an investor buys a put, the maximum gain is unlimited. B) If an investor writes a call, the maximum loss is the amount of premium paid. C) If an investor buys a call, the maximum loss is unlimited. D) If an investor writes a put, the maximum loss is the exercise price less the amount of premium received.

D) If an investor writes a put, the maximum loss is the exercise price less the amount of premium received. If an investor buys a put, the maximum gain is the exercise price less the amount of premium paid. If an investor writes a call, the maximum loss is unlimited. If an investor buys a call, the maximum loss is the premium paid.

An individual who is a proponent of the efficient market hypothesis (EMH) will likely invest in which of the following? A) Growth mutual funds B) Balanced mutual funds C) Sector mutual funds D) Index funds

D) Index funds An individual who believes in the EMH will likely invest in index funds. Inherent in this strategy is a belief that an investor cannot outperform the market with active portfolio management techniques. The remaining choices all incorporate an active portfolio management philosophy.

Identify the entity that issues guaranteed investment contracts (GICs). A) Credit unions B) Open-end investment companies C) Commercial banks D) Insurance companies

D) Insurance companies GICs are issued by insurance companies. They are called guaranteed investment contracts because their rate of return is guaranteed by the insurance company for a fixed period.

Choose the stock value that is defined as the discounted present value based on future cash flows as determined by some form of a dividend discount model. A) Market value B) Par value C) Book value D) Intrinsic value

D) Intrinsic value A stock's intrinsic value is its discounted present value based on future cash flows as determined by some form of a dividend discount model.

Choose the characteristic that does not apply to Eurodollars. A) Dollar-denominated deposits B) Maturities of less than six months C) Interest earned is taxed as ordinary income in the year received D) Issued by the U.S. Treasury

D) Issued by the U.S. Treasury The answer is issued by the U.S. Treasury. Eurodollars are issued by banks outside of the United States, not the U.S. Treasury.

SmallCap Value SmallCap Growth Current yield 1.1% .6% Five-year total return 14.2% 16.7% Beta .89 1.14 Sharpe ratio 1.12 .93 Standard deviation 8.2 12.6 Alpha +2.7 +.4 Which mutual fund is more appropriate & why A Smallcap growth fund, bc its total return is higher B Smallcap growth fund, bc growth stocks fit her goal of maximum capital appreciation C Smallcap value fund, bc its coefficient of variation is higher D Smallcap value fund, bc its risk-adjusted performance statistics are superior

D) Smallcap value fund, bc its risk-adjusted performance statistics are superior Perhaps a fund other than one with a lower-than-market beta fund should have been considered since she is an aggressive investor. However, no such alternative is shown. Total return alone is insufficient reason to select one fund over another. Risk-adjusted return is the appropriate measure. The value fund has a higher alpha, a higher Sharpe ratio, and a higher risk-adjusted performance when the total return is divided by beta. The current yield is relatively low for both funds.

Jerry Warner would like to increase his portfolio of common stock. He requires a 13% rate of return on common stock investments. He is considering purchasing one of these stocks: Stock 1: Dividends are currently $3.00 annually and are expected to increase 7% annually; market price = $45 Stock 2: Dividends are currently $2.25 annually and are expected to increase 8% annually; market price = $50 Which stock is most appropriate to purchase in this situation, and why? A) Stock 2, because the return on investment is greater than Jerry's required rate of return B) Stock 2, because it is undervalued C) Stock 1, because it is overvalued D) Stock 1, because the return on investment is greater than Jerry's required rate of return

D) Stock 1, because the return on investment is greater than Jerry's required rate of return The intrinsic value of Stock 1 = $53.50 [($3 × 1.07) ÷ (0.13 - 0.07)]. Because $53.50 is more than $45, the stock is undervalued and would return more than his required return. The intrinsic value of Stock 2 = $33.50 [($2.25 × 1.08) ÷ (0.13 - 0.08)]. Because $48.60 is less than $50, the stock is overvalued and would return less than his required return.

Based on the information provided, identify the stock that should be acquired if the investor's objective is to minimize the relative total risk per unit of expected return. Stock A Standard deviation = 12.49% Beta = 1.07 Expected return = 4.65% Stock B Standard deviation = 23.51% Beta = 1.98 Expected return = 10.40% Stock C Standard deviation = 14.43% Beta = 1.40 Expected return = 8.75% Stock D Standard deviation = 17.98% Beta = 1.56 Expected return = 9.63% A) Stock A B) Stock B C) Stock D D) Stock C

D) Stock C Coefficient of variation (CV) is a relative measure of total risk (as measured by standard deviation) per unit of expected return. Use the coefficient of variation to solve for the best investment alternative: Stock A: 12.49 ÷ 4.65 = 2.6860 Stock B: 23.51 ÷ 10.40 = 2.2606 Stock C: 14.43 ÷ 8.75 = 1.6491 Stock D: 17.98 ÷ 9.63 = 1.8671 The stock with the lowest CV has the least amount of total risk per unit of expected return.

An investor who reallocates her portfolio frequently to take advantage of perceived opportunities in other market sectors is using which one of the following types of asset allocation? A) Strategic B) Passive C) Dynamic D) Tactical

D) Tactical Reallocating a portfolio frequently to take advantage of perceived under- or overvaluations in a particular market is tactical asset allocation, which is akin to market timing. Strategic asset allocation involves determining the best risk/return portfolio for an investor and then rebalancing to that optimum mix when percentages change due to market movements. The dynamic strategy is used by institutions, and involves increasing risky assets as the portfolio value rises, and decreasing risky assets as the portfolio value declines.

Which of the following is the primary difference between the underlying assumptions of technical analysis and those of fundamental analysis? A) Technical analysts argue that the market only weighs irrational factors, and therefore, the psychology of investors will produce a herd effect. B) Technical analysts maintain that stock prices adjust quickly to the dissemination of public information. C) Technical analysts hold that the price of a security is established by the expected investor return and a combination of risk factors. D) Technical analysts believe the trend in security prices is determined solely by the interaction of economic supply and demand.

D) Technical analysts believe the trend in security prices is determined solely by the interaction of economic supply and demand. Stock prices move in trends, and therefore, market price adjustments occur gradually over time (e.g., company financial statements play a much less important role).

The Allegro Mutual Fund has an alpha of +1.50, a Sharpe ratio of 0.44, and an R2 with the Russell 2000 of 0.45. The Moderato Mutual Fund has an alpha of +0.40, a Sharpe ratio of 0.48, and an R2 with the Russell 2000 of 0.52. Which fund should be chosen and why? A) The Moderato Fund because it has a lower alpha. B) The Allegro Fund because it has a lower Sharpe ratio. C) The Allegro Fund because it has a higher alpha. D) The Moderato Fund because it has a higher Sharpe ratio.

D) The Moderato Fund because it has a higher Sharpe ratio. This can be determined by R2, which gives the level of systematic risk. The R2 for both funds is low (0.45 and 0.52), meaning beta, and formulas using beta, should not be used. You want an R2 of 0.70 or higher in order to use beta. This then leaves you with Sharpe, and the Moderato Fund has the highest Sharpe ratio of the two.

Bond ABC is selling at par, offers an 8% coupon, and matures in 20 years. The bond has a call feature that allows the issuer to call the bond after 10 years at a price of $1,050. Which of these statements explains the relationship between the bond's yield to call (YTC) and yield to maturity (YTM)? A) The YTC for Bond ABC is 8.33%, which is less than Bond ABC's YTM. B) The YTC for Bond ABC is 8.00%, which is equal to Bond ABC's YTM. C) The YTC for Bond ABC is 8.00%, which is more than Bond ABC's YTM. D) The YTC for Bond ABC is 8.33%, which is more than Bond ABC's YTM.

D) The YTC for Bond ABC is 8.33%, which is more than Bond ABC's YTM. The answer is the YTC for Bond ABC is 8.33%, which is more than Bond ABC's YTM. Because Bond ABC is selling at par, the YTM is equal to the coupon rate of 8%. Use the following TVM inputs in the financial calculator: PV = -$1,000 FV = $1,050 N = 20 (10 x 2 periods per year) PMT = 8% × $1,000 = $80 ÷ 2 = $40 Solve for I/YR = 8.33%

All of these are disadvantages of investing in foreign securities except A) lack of complete information about foreign companies. B) fluctuations in the value of currencies. C) changes in foreign government or government policies. D) strong correlation with U.S. securities.

D) strong correlation with U.S. securities. Foreign securities are not highly correlated with U.S. securities and thus offer opportunities to further reduce the portfolio volatility. Changes in the value of a foreign currency can increase or reduce the return from a securities portfolio.

An active bond management strategy, where one bond is swapped for another bond with similar characteristics but a higher yield to maturity, is considered A) a pure yield pickup swap. B) an intermarket spread swap. C) a rate anticipation swap. D) a substitution swap.

D) a substitution swap. A substitution swap is an active investment strategy whereby one bond is swapped for another bond with almost identical characteristics other than yield to maturity. The substitution swap capitalizes on bond market inefficiency. An intermarket spread swap involves the exchange of one type of bond (e.g., government bond) with another type of bond (e.g., corporate bond). This occurs when investors believe one type of bond is currently mispriced in relation to the other. The goal of this type of swap is to capitalize on a yield to maturity (YTM) disparity across bond markets. A pure yield pickup swap involves selling short-term bonds and purchasing long-term bonds. A rate anticipation swap is one in which bonds are swapped as a result of expected changes in interest rates.

When a taxpayer sells or exchanges stock or securities for a loss and, within 30 days before or after the date of the sale or exchange, acquires similar securities, this transaction is classified as A) a repurchase agreement. B) an equity swap. C) a substitution swap. D) a wash sale.

D) a wash sale. This rule will postpone the capital loss if a substantially identical security is purchased within 30 days before or after the sale. If this event occurs, the basis of the new stock or securities will include the unrecovered portion of the basis of the formerly held stock or securities.

All of these correctly express risks associated with an investment in undeveloped land except A) the investor may not be able to obtain permits to build on the land. B) access to the land may be restricted. C) the land may be adversely rezoned. D) an investment in undeveloped land always guarantees a short-term profit.

D) an investment in undeveloped land always guarantees a short-term profit. An investment in undeveloped land is made with the expectation that the land will eventually provide a significant, future capital return over the long run.

To be on a corporation's books as holder-of-record (and thus have a right to the next dividend payment), the investor must purchase stock A) on the declaration date. B) on or after the ex-dividend date. C) before the payment date. D) before the ex-dividend date.

D) before the ex-dividend date. Ex-dividend means "without dividend." Therefore, all purchases made on or after the ex-dividend date are not entitled to the next dividend to be paid. The ex-dividend date is one trading day before the record date.

If an American investor holds foreign securities and is concerned about exchange rate risk, that investor may hedge by A) diversifying the portfolio into many foreign securities. B) buying American securities in Europe. C) selling a futures contract for delivery of dollars. D) buying a futures contract for delivery of dollars.

D) buying a futures contract for delivery of dollars. If an investor holds securities denominated in euros, for example, he is concerned about the dollar appreciating versus the euro when he converts his holdings back to dollars. He can hedge against the dollar appreciating (which would be negative when holding foreign securities) by buying a futures contract for delivery of dollars.

In the Markowitz framework, an investor should most appropriately evaluate a potential investment based on its A) required return. B) expected return. C) intrinsic value compared to market value. D) effect on portfolio risk and return.

D) effect on portfolio risk and return. Modern portfolio theory concludes that an investor should evaluate potential investments from a portfolio perspective and consider how the investment will affect the risk and return characteristics of an investor's entire portfolio.

One advantage of convertible bonds is that they A) are usually offered only by firms with high bond credit ratings. B) have higher coupon rates than straight coupon bonds. C) offer the ability to buy the underlying stock at a discount. D) have a higher coupon rate than the underlying stock's dividend.

D) have a higher coupon rate than the underlying stock's dividend. This enables the investor to get a higher periodic cash flow while waiting for the stock to appreciate.

All of the following statements correctly illustrate bond relationships except A) long-term bonds are more affected by interest rate changes than short-term bonds. B) everything else being equal, the larger the coupon, the shorter the duration. C) bonds with longer durations are more affected by interest rate changes than bonds with shorter durations. D) higher-rated bonds have more price volatility than lower rated bonds.

D) higher-rated bonds have more price volatility than lower rated bonds. Higher-rated bonds are less risky and are less volatile than lower rated bonds.

The interest rate theory that states investors are compensated for the increased price risk of holding long-term maturities is known as A) preferred habitat theory. B) market segmentation theory. C) unbiased expectations theory. D) liquidity preference theory.

D) liquidity preference theory. The liquidity preference theory holds that long-term bonds should provide higher returns than shorter-term obligations because investors are willing to sacrifice some yield to invest in short-term bonds in order to avoid the higher price volatility of longer-term issues.

All of these are examples of investment strategies for mutual funds, except A) short selling. B) lack of diversification. C) leverage through borrowing. D) manager bias.

D) manager bias. This is not a strategy discussed in the module text. All others are examples in addition to manager flexibility, investment style, and lending securities.

The main purpose of a laddered bond portfolio is to A) have a higher yield to maturity. B) increase the duration of a bond portfolio. C) achieve the highest possible capital gains when interest rates decline. D) minimize the effect of changes in interest rates.

D) minimize the effect of changes in interest rates. The purpose of a laddered strategy is to minimize the effect of swings in interest rates. Rather than trying to forecast interest rates, an investor spreads out the bond investment over a period of time.

All of the following are considered risks inherent with equity investments except A) interest rate risk. B) financial risk. C) market risk. D) reinvestment rate risk.

D) reinvestment rate risk. Interest rate risk, market risk, business risk, and financial risk are all risks that impact equity investments. Reinvestment rate risk is a primary consideration for fixed-income investments.

You are about to choose a new mutual fund to add to client portfolios. As you review the Morningstar reports for the funds you are considering, you have focused on each fund's alpha as reported by Morningstar. Alpha tells you A) each fund's performance relative to the S&P 500. B) a fund's percentage return above the risk-free rate of return. C) by what percentage a fund's capital appreciation exceeded the capital appreciation of the average fund in its asset class. D) the difference between a fund's realized return and its risk-adjusted expected return.

D) the difference between a fund's realized return and its risk-adjusted expected return. Alpha does not compare directly to the S&P 500, but rather to the fund's expected return, which is risk-adjusted for the fund's beta. The total return, not just the capital appreciation component, is used in the Jensen formula. The risk-adjusted required return is the risk-free rate plus the risk premium multiplied by the fund's beta.

An investor who makes the assumptions that security prices reflect all available information, that organized exchanges can execute trades rapidly, that security prices change rapidly in response to new information, and that security prices follow random patterns is a believer in A) the capital asset pricing model. B) the arbitrage pricing theory. C) the constant growth hypothesis. D) the efficient market hypothesis.

D) the efficient market hypothesis. In its purest form, the efficient market hypothesis suggests that investors are unable to outperform the market on a consistent basis. The fundamental assumption of the theory is that current stock prices reflect all available information for a company and that prices rapidly (or immediately) adjust to reflect any new information.

All of the following correctly identify features of limited partnerships except A) the limited partners have limited liability. B) the general partner controls the business activities of the partnership. C) the general partner determines when distributions are made to the limited partners. D) the limited partners may participate in the management of the partnership.

D) the limited partners may participate in the management of the partnership. The answer is the limited partners may participate in the management of the partnership. Disadvantages of limited partnerships include the following: (1) they are generally riskier than bonds or exchange-traded equities; (2) they are generally illiquid; (3) limited partners cannot participate in the management; and (4) the sale of partnership interest may be restricted. In addition, the general partner has unlimited liability.

Open interest is A) the rate of interest charged on the difference between the market value of a commodity contract and the amount of margin on deposit in a customer's account. B) the number of unexecuted buy and sell orders for a particular commodity pending at the end of trading each day on a commodity exchange. C) a technical indicator, used only with financial futures, that indicates the dollar amount of bonds expected to be delivered at contract expiration. D) the number of futures contracts outstanding for a commodity on any given trading day.

D) the number of futures contracts outstanding for a commodity on any given trading day. The answer is the number of futures contracts outstanding for a commodity on any given trading day. Open interest is reported daily in the financial press. Traders like to be in the most active months of a contract for liquidity purposes.

If a security has an average return of 14.2% and a standard deviation of 8.4%, then A) the security's returns can be expected to always be positive. B) the security's returns can be expected to be between 8.4% and 14.2% approximately 95% of the time. C) the security's annual volatility can be expected to be within a range approximately 8.4% above and 8.4% below the current fair market value. D) the security's returns can be expected to be between 5.8% and 22.6% approximately 68% of the time.

D) the security's returns can be expected to be between 5.8% and 22.6% approximately 68% of the time. This security can be expected to have a return that does not range beyond one standard deviation on either side of its average return approximately 68% of the time.

The group of investment bankers that actually purchases the stocks to be resold to the investing public is called A) the standby group. B) the underwriting manager. C) the selling group. D) the syndicate.

D) the syndicate. Syndicate members purchase the securities issue being offered and are responsible for reselling to the public. The underwriting manager is the manager of that syndicate. Selling groups consist of brokerage firms that help distribute securities in an offering but that are not members of the syndicate.

To evaluate the performance of a portfolio manager, you should calculate the portfolio's A) dollar-weighted return. B) portfolio return. C) holding period return. D) time-weighted return.

D) time-weighted return. Because portfolio managers have no control over the deposits and withdrawals made by clients, the time-weighted return is a more appropriate measure of performance.

The yield curve theory that states current long-term interest rates contain an implicit prediction of future short-term interest rates is known as A) liquidity preference theory. B) preferred habitat theory. C) market segmentation theory. D) unbiased expectations theory.

D) unbiased expectations theory. The unbiased expectations theory states that long-term rates consist of many short-term rates and that long-term rates will be the average (or geometric mean) of short-term rates.

The interest rate theory that long-term rates consist of many short-term rates and that long-term rates will be the average of short-term rates is known as A) market segmentation theory. B) preferred habitat theory. C) rate preference theory. D) unbiased expectations theory.

D) unbiased expectations theory. The unbiased expectations theory states that long-term rates consist of many short-term rates and that long-term rates will be the average of short-term rates.

When a company issues an option to buy its stock at a specified price within a specified time period, it is known as a A) rights offering. B) short put option. C) long call option. D) warrant.

D) warrant. A warrant can only be created by corporations and is an option to buy its stock at a specified price within a specified time period.

Yvette is saving for her son's college education. Her son is expected to start college in eight years. Which bond portfolio would likely be immunized with respect to this goal? A. Weighted average time to maturity of bonds is 8 years with coupon of 6% B. Weighted average time to maturity of bonds is 10 years with coupon of 0% C. Weighted average time to maturity of bonds is 7 years with coupon of 3% D. Weighted average time to maturity of bonds is 10 years with coupon of 5%

D. Weighted average time to maturity of bonds is 10 years with coupon of 5% To immunize the portfolio, the duration of the portfolio should closely, but not necessary exactly, match the investor's time horizon. The goal of immunization is to line up the time horizon and duration as closely as possible, understanding of course that duration is not the same thing as time. For example, an 8% coupon with a maturity of 8 years will have a duration less than 8 years. In this case, the 10-year bonds with a coupon rate of 5% will have a duration that is closest to the investor's time horizon of 8 years. Coupon-paying bonds have durations that are less than their time to maturity. Zero-coupon bonds have durations equal to their time to maturity

Which of the following statements regarding the taxation of corporate bonds is NOT correct? A. The amount attributable to a market discount is generally not includable in income until disposition of the bond. B. At disposition, the market discount is treated as interest income. C. Upon sale, only gain in excess of the accrued market discount is treated as capital gain income. D. When a market premium bond is purchased, the tax law does not permit the taxpayer to elect to amortize the premium over the remaining life of the bond.

D. When a market premium bond is purchased, the tax law does not permit the taxpayer to elect to amortize the premium over the remaining life of the bond. The tax law does permit an investor to make an election to amortize the premium over the remaining life of the bond

Portfolio A has a standard deviation of 55%, and the market has a standard deviation of 40%. The correlation coefficient between Portfolio A and the market is 0.50. Calculate the percentage of total risk that is unsystematic. A) 75% B) 25% C) 50% D) 100%

The coefficient of determination explains the percentage of change in the dependent variable that can be explained by changes in the independent variable. Therefore, 25% (0.50 × 0.50) of returns are explained by changes in the market. To determine the percentage of returns that are explained by unsystematic risk, subtract the systematic risk from 1. Therefore, the return explained by unsystematic risk is (1 − 0.25) = 0.75, or 75%.

A 35-unit apartment complex has 20 one-bedroom and 15 two-bedroom apartments renting for $450 and $600 per month, respectively. Laundry income: $2,000 per year Vacancy and collection losses: 9% of potential gross income (PGI) Operating expenses: $55,000 No major repairs are expected over the next five years. Cost of the project is $1.7 million. Land is valued at $300,000 and improvements at $1.4 million. Improvements will be depreciated using the straight-line method over 27.5 years. Assume the property is purchased on January 1 of the year so that a full year's depreciation is allowed in year 1. A mortgage of $1.2 million is available at 9% for 30 years (annual payments), fully amortized. The investor's marginal tax bracket is 24%. Calculate the net operating income (NOI) for the apartment complex for the next year. A) $92,471 B) ($15,529) C) $143,380 D) $141,560

The key to this problem is to recognize that interest expense and depreciation are not included in expenses when calculating NOI. The calculation is as follows: Gross rental income of $216,000 plus other income of $2,000 equals potential gross income (PGI) of $218,000. Subtract vacancy and collection losses (9%) of $19,620 to arrive at effective gross income of $198,380. Subtract operating expenses of $55,000, resulting in net operating income (NOI) of $143,380.

Kristy has a fixed-income portfolio that consists of three individual bonds. | FMV | Duration Bond A | $5,000 | 5.0 Bond B | $3,000 | 8.0 Bond C | $2,000 | 12.0 What is the duration of Kristy's portfolio? A) 6.9 B) 7.0 C) 7.3 D) 8.3

The weighted duration of Kristy's portfolio is 7.3, calculated as follows: | FMV | Duration | Product Bond A | $5,000 | 5.0 | $25,000 Bond B | $3,000 | 8.0 | $24,000 Bond C | $2,000 | 12.0 | $24,000 Total | $10,000 | | $73,000 portfolio duration = $73,000 ÷ $10,000 = 7.3