FIN 320 Week 5 Mid-Term Exam – Strayer

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Chapters 1 Through 8

Chapter 1: ___________________________________________________________________________

1. Financial assets represent _____ of total assets of U.S. households.

A. over 60%

B. over 90%

C. under 10%

D. about 30%

2. Real assets in the economy include all but which one of the following?

A. Land

B. Buildings

C. Consumer durables

D. Common stock

3. Net worth represents _____ of the liabilities and net worth of commercial banks.

A. about 51%

B. about 91%

C. about 11%

D. about 31%

4. According to the Flow of Funds Accounts of the United States, the largest single asset of U.S. households is ___.

A. mutual fund shares

B. real estate

C. pension reserves

D. corporate equity

5. According to the Flow of Funds Accounts of the United States, the largest liability of U.S. households is ________.

A. mortgages

B. consumer credit

C. bank loans

D. gambling debts

6. ____ is not a derivative security.

A. A share of common stock

B. A call option

C. A futures contract

D. None of these options (All of the answers are derivative securities.)

7. According to the Flow of Funds Accounts of the United States, the largest financial asset of U.S. households is ____.

A. mutual fund shares

B. corporate equity

C. pension reserves

D. personal trusts

8. Active trading in markets and competition among securities analysts helps ensure that:

I. Security prices approach informational efficiency

II. Riskier securities are priced to offer higher potential returns

III. Investors are unlikely to be able to consistently find under- or overvalued securities

A. I only

B. I and II only

C. II and III only

D. I, II, and III

9. The material wealth of society is determined by the economy’s _________, which is a function of the economy’s _________.

A. investment bankers; financial assets

B. investment bankers; real assets

C. productive capacity; financial assets

D. productive capacity; real assets

10. Which of the following is not a money market security?

A. U.S. Treasury bill

B. 6-month maturity certificate of deposit

C. Common stock

D. Bankers’ acceptance

11. __________ assets generate net income to the economy, and __________ assets define allocation of income among investors.

A. Financial, financial

B. Financial, real

C. Real, financial

D. Real, real

12. Which of the following are financial assets?

I. Debt securities

II. Equity securities

III. Derivative securities

A. I only

B. I and II only

C. II and III only

D. I, II, and III

13. __________ are examples of financial intermediaries.

A. Commercial banks

B. Insurance companies

C. Investment companies

D. All of these options

14. Asset allocation refers to _________.

A. the allocation of the investment portfolio across broad asset classes

B. the analysis of the value of securities

C. the choice of specific assets within each asset class

D. none of these options

15. Which one of the following best describes the purpose of derivatives markets?

A. Transferring risk from one party to another

B. Investing for a short time period to earn a small rate of return

C. Investing for retirement

D. Earning interest income

16. More than _____________ of currency is traded each day in the market for foreign exchange.

A. $300 million

B. $1 billion

C. $30 billion

D. $1 trillion

17. Security selection refers to the ________.

A. allocation of the investment portfolio across broad asset classes

B. analysis of the value of securities

C. choice of specific securities within each asset class

D. top-down method of investing

18. Which of the following is an example of an agency problem?

A. Managers engage in empire building.

B. Managers protect their jobs by avoiding risky projects.

C. Managers over consume luxuries such as corporate jets.

D. All of these options are examples of agency problems.

19. _____ is a mechanism for mitigating potential agency problems.

A. Tying income of managers to success of the firm

B. Directors defending top management

C. Antitakeover strategies

D. The straight voting method of electing the board of directors

20. __________ is (are) real assets.

A. Bonds

B. Production equipment

C. Stocks

D. Commercial paper

21. __________ portfolio construction starts with selecting attractively priced securities.

A. Bottom-up

B. Top-down

C. Upside-down

D. Side-to-side

22. In a market economy, capital resources are primarily allocated by ____________.

A. governments

B. the SEC

C. financial markets

D. investment bankers

23. __________ represents an ownership share in a corporation.

A. A call option

B. Common stock

C. A fixed-income security

D. Preferred stock

24. The value of a derivative security _________.

A. depends on the value of another related security

B. affects the value of a related security

C. is unrelated to the value of a related security

D. can be integrated only by calculus professors

25. Commodity and derivative markets allow firms to adjust their _________.

A. management styles

B. focus from their main line of business to their investment portfolios

C. ways of doing business so that they’ll always have positive returns

D. exposure to various business risks

26. __________ portfolio management calls for holding diversified portfolios without spending effort or resources attempting to improve investment performance through security analysis.

A. Active

B. Momentum

C. Passive

D. Market-timing

27. Financial markets allow for all but which one of the following?

A. Shift consumption through time from higher-income periods to lower

B. Price securities according to their riskiness

C. Channel funds from lenders of funds to borrowers of funds

D. Allow most participants to routinely earn high returns with low risk

28. Financial intermediaries exist because small investors cannot efficiently _________.

A. diversify their portfolios

B. gather information

C. monitor their portfolios

D. all of these options

29. Methods of encouraging managers to act in shareholders’ best interest include:

I. Threat of takeover

II. Proxy fights for control of the board of directors

III. Tying managers’ compensation to stock price performance

A. I only

B. I and II only

C. II and III only

D. I, II, and III

30. Firms that specialize in helping companies raise capital by selling securities to the public are called _________.

A. pension funds

B. investment banks

C. savings banks

D. REITs

31. In securities markets, there should be a risk-return trade-off with higher-risk assets having _________ expected returns than lower-risk assets.

A. higher

B. lower

C. the same

D. The answer cannot be determined from the information given.

32. When the market is more optimistic about a firm, its share price will ______; as a result, it will need to issue _______ shares to raise funds that are needed.

A. rise; fewer

B. fall; fewer

C. rise; more

D. fall; more

33. Security selection refers to _________.

A. choosing specific securities within each asset class

B. deciding how much to invest in each asset class

C. deciding how much to invest in the market portfolio versus the riskless asset

D. deciding how much to hedge

34. An example of a derivative security is _________.

A. a common share of General Motors

B. a call option on Intel stock

C. a Ford bond

D. a U.S. Treasury bond

35. __________ portfolio construction starts with asset allocation.

A. Bottom-up

B. Top-down

C. Upside-down

D. Side-to-side

36. Which one of the following firms falsely claimed to have a $4.8 billion bank account at Bank of America and vastly understated its debts, eventually resulting in the firm’s bankruptcy?

A. WorldCom

B. Enron

C. Parmalat

D. Global Crossing

37. Debt securities promise:

I. A fixed stream of income

II. A stream of income that is determined according to a specific formula

III. A share in the profits of the issuing entity

A. I only

B. I or II only

C. I and III only

D. II or III only

38. The Sarbanes-Oxley Act tightened corporate governance rules by requiring all but which one of the following?

A. Required that corporations have more independent directors

B. Required that the CFO personally vouch for the corporation’s financial statements

C. Required that firms could no longer employ investment bankers to sell securities to the public

D. Required the creation of a new board to oversee the auditing of public companies

39. The success of common stock investments depends on the success of _________.

A. derivative securities

B. fixed-income securities

C. the firm and its real assets

D. government methods of allocating capital

40. The historical average rate of return on large company stocks since 1926 has been _____.

A. 5%

B. 8%

C. 12%

D. 20%

41. The average rate of return on U.S. Treasury bills since 1926 was _________.

A. less than 1%

B. less than 3%

C. less than 4%

D. less than 7%

42. An example of a real asset is:

I. A college education

II. Customer goodwill

III. A patent

A. I only

B. II only

C. I and III only

D. I, II, and III

43. The 2002 law designed to improve corporate governance is titled the _____.

A. Pension Reform Act

B. ERISA

C. Financial Services Modernization Act

D. Sarbanes-Oxley Act

44. Which of the following is not a financial intermediary?

A. a mutual fund

B. an insurance company

C. a real estate brokerage firm

D. a savings and loan company

45. The combined liabilities of American households represent approximately __________ of combined assets.

A. 11%

B. 19%

C. 25%

D. 33%

46. In 2011 real assets represented approximately __________ of the total asset holdings of American households.

A. 32%

B. 42%

C. 48%

D. 55%

47. In 2011 mortgages represented approximately __________ of total liabilities and net worth of American households.

A. 12%

B. 14%

C. 28%

D. 42%

48. Liabilities equal approximately _____ of total assets for nonfinancial U.S. businesses.

A. 10%

B. 25%

C. 48%

D. 75%

49. Which of the following is not an example of a financial intermediary?

A. Goldman Sachs

B. Allstate Insurance

C. First Interstate Bank

D. IBM

50. Real assets represent about ____ of total assets for commercial banks.

A. 1%

B. 15%

C. 25%

D. 40%

51. Money market securities are characterized by:

I. Maturity less than 1 year

II. Safety of the principal investment

III. Low rates of return

A. I only

B. I and II only

C. I and III only

D. I, II, and III

52. After much investigation, an investor finds that Intel stock is currently underpriced. This is an example of ______.

A. asset allocation

B. security analysis

C. top-down portfolio management

D. passive management

53. After considering current market conditions, an investor decides to place 60% of her funds in equities and the rest in bonds. This is an example of _____.

A. asset allocation

B. security analysis

C. top-down portfolio management

D. passive management

54. Suppose an investor is considering one of two investments that are identical in all respects except for risk. If the investor anticipates a fair return for the risk of the security he invests in, he can expect to _____.

A. earn no more than the Treasury-bill rate on either security.

B. pay less for the security that has higher risk.

C. pay less for the security that has lower risk.

D. earn more if interest rates are lower.

55. The efficient market hypothesis suggests that _______.

A. active portfolio management strategies are the most appropriate investment strategies

B. passive portfolio management strategies are the most appropriate investment strategies

C. either active or passive strategies may be appropriate, depending on the expected direction of the market

D. a bottom-up approach is the most appropriate investment strategy

56. In a perfectly efficient market the best investment strategy is probably _____.

A. an active strategy.

B. a passive strategy.

C. asset allocation.

D. market timing.

57. Market signals will help to allocate capital efficiently only if investors are acting _____.

A. on the basis of their individual hunches.

B. as directed by financial experts.

C. as dominant forces in the economy.

D. on accurate information.

58. Which of the following is (are) true about hedge funds?

I. They are open to institutional investors.

II. They are open to wealthy individuals.

III. They are more likely than mutual funds to pursue simple strategies.

A. I and II only

B. I and III only

C. II and III only

D. I, II, and III

59. Venture capital is _________.

A. frequently used to expand the businesses of well-established companies

B. supplied by venture capital funds and individuals to start-up companies

C. illegal under current U.S. laws

D. most frequently issued with the help of investment bankers

60. Individuals may find it more advantageous to purchase claims from a financial intermediary rather than directly purchasing claims in capital markets because:

I. Intermediaries are better diversified than most individuals

II. Intermediaries can exploit economies of scale in investing that individual investors cannot

III. Intermediated investments usually offer higher rates of return than direct capital market claims

A. I only

B. I and II only

C. II and III only

D. I, II, and III

61. Surf City Software Company develops new surf forecasting software. It sells the software to Microsoft in exchange for 1,000 shares of Microsoft common stock. Surf City Software has exchanged a _____ asset for a _____ asset in this transaction.

A. real; real

B. financial; financial

C. real; financial

D. financial; real

62. Stone Harbor Products takes out a bank loan. It receives $100,000 and signs a promissory note to pay back the loan over 5 years. In this transaction, _____.

A. a new financial asset was created

B. a financial asset was traded for a real asset

C. a financial asset was destroyed

D. a real asset was created

63. Which of the following firms was not engaged in a major accounting scandal between 2000 and 2005?

A. General Electric

B. Parmalat

C. Enron

D. WorldCom

64. Accounting scandals can often be attributed to a particular concept in the study of finance known as the _____.

A. agency problem

B. risk-return trade-off

C. allocation of risk

D. securitization

65. An intermediary that pools and manages funds for many investors is called ______.

A. an investment company

B. a savings and loan

C. an investment banker

D. a commercial bank

66. Financial institutions that specialize in assisting corporations in primary market transactions are called _______.

A. mutual funds

B. investment bankers

C. pension funds

D. globalization specialists

67. When a pass-through mortgage security is issued, what does the issuing agency expect to receive?

A. The amount of the original loan plus a servicing fee

B. The principal and interest that are paid by the homeowner

C. The principal and interest that are paid by the homeowner, minus a servicing fee

D. The interest paid by the homeowner, plus a servicing fee

68. In 2008 the largest corporate bankruptcy in U.S. history involved the investment banking firm of ______.

A. Goldman Sachs

B. Lehman Brothers

C. Morgan Stanley

D. Merrill Lynch

69. The inability of shareholders to influence the decisions of managers, despite overwhelming shareholder support, is a breakdown in what process or mechanism?

A. Auditing

B. Public finance

C. Corporate governance

D. Public reporting

70. Real assets are ______.

A. assets used to produce goods and services

B. always the same as financial assets

C. always equal to liabilities

D. claims on a company’s income

71. A major cause of mortgage market meltdown in 2007 and 2008 was linked to ________.

A. private equity investments

B. securitization

C. negative analyst recommendations

D. online trading

72. In recent years the greatest dollar amount of securitization occurred for which type of loan?

A. Home mortgages

B. Credit card debt

C. Automobile loans

D. Equipment leasing

73. Which of the following is (are) true about nonconforming mortgage loans?

A. They are also known as subprime loans.

B. They have higher default risk than conforming loans.

C. They were able to be offered without due diligence.

D. All of these options are true.

74. The systemic risk that led to the financial crisis of 2008 was increased by _____.

A. collateralized debt obligations

B. subprime mortgages

C. credit default swaps

D. all of the options

75. An investment adviser has decided to purchase gold, real estate, stocks, and bonds in equal amounts. This decision reflects which part of the investment process?

A. Asset allocation

B. Investment analysis

C. Portfolio analysis

D. Security selection

Chapter 2: ___________________________________________________________________________

1. Which of the following is not a money market instrument?

A. Treasury bill

B. Commercial paper

C. Preferred stock

D. Bankers’ acceptance

2. T-bills are issued with initial maturities of:

I. 4 weeks

II. 16 weeks

III. 26 weeks

IV. 32 weeks

A. I and II only

B. I and III only

C. I, II, and III only

D. I, II, III, and IV

3. When computing the bank discount yield, you would use ____ days in the year.

A. 260

B. 360

C. 365

D. 366

4. A dollar-denominated deposit at a London bank is called _____.

A. eurodollars

B. LIBOR

C. fed funds

D. bankers’ acceptance

5. Money market securities are sometimes referred to as cash equivalents because _____.

A. they are safe and marketable

B. they are not liquid

C. they are high-risk

D. they are low-denomination

6. The most marketable money market security is _____.

A. Treasury bills

B. bankers’ acceptances

C. certificates of deposit

D. common stock

7. The minimum tick size, or spread between prices in the Treasury bond market, is

A. 1/8 of a point.

B. 1/16 of a point.

C. 1/32 of a point.

D. 1/64 of a point.

8. An investor in a T-bill earns interest by _________.

A. receiving interest payments every 90 days

B. receiving dividend payments every 30 days

C. converting the T-bill at maturity into a higher-valued T-note

D. buying the bill at a discount from the face value to be received at maturity

9. ______ would not be included in the EAFE index.

A. Australia

B. Canada

C. France

D. Japan

10. _____ is considered to be an emerging market country.

A. France

B. Norway

C. Brazil

D. Canada

11. Which one of the following is a true statement?

A. Dividends on preferred stocks are tax-deductible to individual investors but not to corporate investors.

B. Common dividends cannot be paid if preferred dividends are in arrears on cumulative preferred stock.

C. Preferred stockholders have voting power.

D. Investors can sue managers for nonpayment of preferred dividends.

12. The bid price of a Treasury bill is _________.

A. the price at which the dealer in Treasury bills is willing to sell the bill

B. the price at which the dealer in Treasury bills is willing to buy the bill

C. greater than the ask price of the Treasury bill expressed in dollar terms

D. the price at which the investor can buy the Treasury bill

13. The German stock market is measured by which market index?

A. FTSE

B. Dow Jones 30

C. DAX

D. Nikkei

14. Deposits of commercial banks at the Federal Reserve are called _____.

A. bankers’ acceptances

B. federal funds

C. repurchase agreements

D. time deposits

15. Which of the following is not a true statement regarding municipal bonds?

A. A municipal bond is a debt obligation issued by state or local governments.

B. A municipal bond is a debt obligation issued by the federal government.

C. The interest income from a municipal bond is exempt from federal income taxation.

D. The interest income from a municipal bond is exempt from state and local taxation in the issuing state.

16. Which of the following is not a characteristic of a money market instrument?

A. Liquidity

B. Marketability

C. Low risk

D. Maturity greater than 1 year

17. An individual who goes short in a futures position _____.

A. commits to delivering the underlying commodity at contract maturity

B. commits to purchasing the underlying commodity at contract maturity

C. has the right to deliver the underlying commodity at contract maturity

D. has the right to purchase the underlying commodity at contract maturity

18. Which of the following is not a nickname for an agency associated with the mortgage markets?

A. Fannie Mae

B. Freddie Mac

C. Sallie Mae

D. Ginnie Mae

19. Commercial paper is a short-term security issued by __________ to raise funds.

A. the Federal Reserve

B. the New York Stock Exchange

C. large well-known companies

D. all of these options

20. The maximum maturity on commercial paper is _____.

A. 270 days

B. 180 days

C. 90 days

D. 30 days

21. Which one of the following is a true statement regarding the Dow Jones Industrial Average?

A. It is a value-weighted average of 30 large industrial stocks.

B. It is a price-weighted average of 30 large industrial stocks.

C. It is a price-weighted average of 100 large stocks traded on the New York Stock Exchange.

D. It is a value-weighted average of all stocks traded on the New York Stock Exchange.

22. Treasury bills are financial instruments issued by __________ to raise funds.

A. commercial banks

B. the federal government

C. large corporations

D. state and city governments

23. Which of the following are true statements about T-bills?

I. T-bills typically sell in denominations of $10,000.

II. Income earned on T-bills is exempt from all federal taxes.

III. Income earned on T-bills is exempt from state and local taxes.

A. I only

B. I and II only

C. I and III only

D. I, II, and III

24. A bond that has no collateral is called a _________.

A. callable bond

B. debenture

C. junk bond

D. mortgage

25. A __________ gives its holder the right to sell an asset for a specified exercise price on or before a specified expiration date.

A. call option

B. futures contract

C. put option

D. interest rate swap

26. A T-bill quote sheet has 90-day T-bill quotes with a 4.92 bid and a 4.86 ask. If the bill has a $10,000 face value, an investor could buy this bill for _____.

A. $10,000

B. $9,878.50

C. $9,877

D. $9,880.16

27. Which one of the following is a true statement regarding corporate bonds?

A. A corporate callable bond gives its holder the right to exchange it for a specified number of the company’s common shares.

B. A corporate debenture is a secured bond.

C. A corporate convertible bond gives its holder the right to exchange it for a specified number of the company’s common shares.

D. Holders of corporate bonds have voting rights in the company.

28. The yield on tax-exempt bonds is ______.

A. usually less than 50% of the yield on taxable bonds

B. normally about 90% of the yield on taxable bonds

C. greater than the yield on taxable bonds

D. less than the yield on taxable bonds

29. __________ is not a money market instrument.

A. A certificate of deposit

B. A Treasury bill

C. A Treasury bond

D. Commercial paper

30. An investor buys a T-bill at a bank discount quote of 4.80 with 150 days to maturity. The investor’s actual annual rate of return on this investment is _____.

A. 4.8%

B. 4.97%

C. 5.47%

D. 5.74%

31. The U.K. stock index is the _________.

A. DAX

B. FTSE

C. GSE

D. TSE

32. A __________ gives its holder the right to buy an asset for a specified exercise price on or before a specified expiration date.

A. call option

B. futures contract

C. put option

D. interest rate swap

33. Which one of the following provides the best example of securitization?

A. Convertible bond

B. Call option

C. Mortgage pass-through security

D. Preferred stock

34. Which of the following indexes are market value-weighted?

I. The NYSE Composite

II. The S&P 500

III. The Wilshire 5000

A. I and II only

B. II and III only

C. I and III only

D. I, II, and III

35. The interest rate charged by large banks in London to lend money among themselves is called _________.

A. the prime rate

B. the discount rate

C. the federal funds rate

D. LIBOR

36. A firm that has large securities holdings and wishes to raise money for a short length of time may be able to find the cheapest financing from which of the following?

A. Reverse repurchase agreement

B. Bankers’ acceptance

C. Commercial paper

D. Repurchase agreement

37. Currently, the Dow Jones Industrial Average is computed by _________.

A. adding the prices of 30 large “blue-chip” stocks and dividing by 30

B. calculating the total market value of the 30 firms in the index and dividing by 30

C. measuring the current total market value of the 30 stocks in the index relative to the total value on the previous day

D. adding the prices of 30 large “blue-chip” stocks and dividing by a divisor adjusted for stock splits and large stock dividends

38. An investor purchases one municipal bond and one corporate bond that pay rates of return of 5% and 6.4%, respectively. If the investor is in the 15% tax bracket, his after-tax rates of return on the municipal and corporate bonds would be, respectively, _____.

A. 5% and 6.4%

B. 5% and 5.44%

C. 4.25% and 6.4%

D. 5.75% and 5.44%

39. If a Treasury note has a bid price of $996.25, the quoted bid price in the Wall Street Journal would be _________.

A. 99:25

B. 99:63

C. 99:20

D. 99:08

40. TIPS are ______.

A. Treasury bonds that pay no interest and are sold at a discount

B. U.K. bonds that protect investors from default risk

C. securities that trade on the Toronto stock index

D. Treasury bonds that protect investors from inflation

41. The price quotations of Treasury bonds in the Wall Street Journal show a bid price of 102:12 and an ask price of 102:14. If you sell a Treasury bond, you expect to receive _________.

A. $1,024.75

B. $1,024.38

C. $1,023.75

D. $1,022.50

42. The Dow Jones Industrial Average is _________.

A. a price-weighted average

B. a value weight and average

C. an equally weighted average

D. an unweighted average

43. Investors will earn higher rates of returns on TIPS than on equivalent default-risk standard bonds if _______________.

A. inflation is lower than anticipated over the investment period

B. inflation is higher than anticipated over the investment period

C. the U.S. dollar increases in value against the euro

D. the spread between commercial paper and Treasury securities remains low

44. Preferred stock is like long-term debt in that ___________.

A. it gives the holder voting power regarding the firm’s management

B. it promises to pay to its holder a fixed stream of income each year

C. the preferred dividend is a tax-deductible expense for the firm

D. in the event of bankruptcy preferred stock has equal status with debt

45. Which of the following does not approximate the performance of a buy-and-hold portfolio strategy?

A. An equally weighted index

B. A price-weighted index

C. A value-weighted index

D. All of these options (Weights are not a factor in this situation.)

46. In calculating the Dow Jones Industrial Average, the adjustment for a stock split occurs _________.

A. automatically

B. by adjusting the divisor

C. by adjusting the numerator

D. by adjusting the market value weights

47. Suppose the market prices of the 30 stocks in the Dow Jones Industrial Average all change by the same dollar amount on a given day. Assuming there are no stock splits, which stock will have the greatest impact on the average?

A. The one with the highest price

B. The one with the lowest price

C. All 30 stocks will have the same impact.

D. The answer cannot be determined from the information given.

48. A bond issued by the state of Alabama is priced to yield 6.25%. If you are in the 28% tax bracket, this bond would provide you with an equivalent taxable yield of _________.

A. 4.5%

B. 7.25%

C. 8.68%

D. none of these options

49. The purchase of a futures contract gives the buyer _________.

A. the right to buy an item at a specified price

B. the right to sell an item at a specified price

C. the obligation to buy an item at a specified price

D. the obligation to sell an item at a specified price

50. Ownership of a put option entitles the owner to the __________ to ___________ a specific stock, on or before a specific date, at a specific price.

A. right; buy

B. right; sell

C. obligation; buy

D. obligation; sell

51. An investor in a 28% tax bracket is trying to decide whether to invest in a municipal bond or a corporate bond. She looks up municipal bond yields (rm) but wishes to calculate the taxable equivalent yield r. The formula she should use is given by ______.

A. r = rm × (1 – 28%)

B. r = rm/(1 – 72%)

C. r = rm × (1 – 72%)

D. r = rm/(1 – 28%)

52. June call and put options on King Books Inc. are available with exercise prices of $30, $35, and $40. Among the different exercise prices, the call option with the _____ exercise price and the put option with the _____ exercise price will have the greatest value.

A. $40; $30

B. $30; $40

C. $35; $35

D. $40; $40

53. Ownership of a call option entitles the owner to the __________ to __________ a specific stock, on or before a specific date, at a specific price.

A. right; buy

B. right; sell

C. obligation; buy

D. obligation; sell

54. The ________ the ratio of municipal bond yields to corporate bond yields, the _________ the cutoff tax bracket at which more individuals will prefer to hold municipal debt.

A. higher; lower

B. lower; lower

C. higher; higher

D. The answer cannot be determined without more information.

55. Which of the following types of bonds are excluded from most bond indexes?

A. Corporate bonds

B. Junk bonds

C. Municipal bonds

D. None of these options

56. The Hang Seng index reflects market performance on which of the following major stock markets?

A. Japan

B. Singapore

C. Taiwan

D. Hong Kong

57. The Standard & Poor’s 500 is __________ weighted index.

A. an equally

B. a price-

C. a value-

D. a share-

58. A firm that fails to pay dividends on its preferred stock is said to be _________.

A. insolvent

B. in arrears

C. insufferable

D. delinquent

59. Large well-known companies often issue their own short-term unsecured debt notes directly to the public, rather than borrowing from banks; their notes are called _________.

A. certificates of deposit

B. repurchase agreements

C. bankers’ acceptances

D. commercial paper

60. Which of the following is most like a short-term collateralized loan?

A. Certificate of deposit

B. Repurchase agreement

C. Bankers’ acceptance

D. Commercial paper

61. Eurodollars are _________.

A. dollar-denominated deposits at any foreign bank or foreign branch of an American bank

B. dollar-denominated bonds issued by firms outside their home market

C. currency issued by Euro Disney and traded in France

D. dollars that wind up in banks as a result of money-laundering activities

62. Which of the following is used to back international sales of goods and services?

A. Certificate of deposit

B. Bankers’ acceptance

C. Eurodollar deposits

D. Commercial paper

63. Treasury notes have initial maturities between ________ years.

A. 2 and 4

B. 5 and 10

C. 10 and 30

D. 1 and 10

64. Which of the following is not a characteristic of common stock ownership?

A. Residual claimant

B. Unlimited liability

C. Voting rights

D. Limited life of the security

65. If you thought prices of stock would be rising over the next few months, you might want to __________________ on the stock.

A. purchase a call option

B. purchase a put option

C. sell a futures contract

D. place a short-sale order

66. A typical bond price quote includes all but which one of the following?

A. Daily high price for the bond

B. Closing bond price

C. Yield to maturity

D. Dividend yield

67. What are business firms most likely to use derivative securities for?

A. Hedging

B. Speculating

C. Doing calculus problems

D. Market making

68. What would you expect to have happened to the spread between yields on commercial paper and Treasury bills immediately after September 11, 2001?

A. No change, as both yields will remain the same

B. Increase, as the spread usually increases in response to a crisis

C. Decrease, as the spread usually decreases in response to a crisis

D. No change, as both yields will move in the same direction

69. A stock quote indicates a stock price of $60 and a dividend yield of 3%. The latest quarterly dividend received by stock investors must have been ______ per share.

A. $0.55

B. $1.80

C. $0.45

D. $1.25

70. Three stocks have share prices of $12, $75, and $30 with total market values of $400 million, $350 million, and $150 million, respectively. If you were to construct a price-weighted index of the three stocks, what would be the index value?

A. 300

B. 39

C. 43

D. 30

71. Which of the following is not considered a money market investment?

A. Bankers’ acceptance

B. Eurodollar

C. Repurchase agreement

D. Treasury note

72. The Federal Reserve Board of Governors directly controls which of the following interest rates?

A. Bankers’ acceptances

B. Brokers’ calls

C. Federal funds

D. LIBOR

73. You decide to purchase an equal number of shares of stocks of firms to create a portfolio. If you wanted to construct an index to track your portfolio performance, your best match for your portfolio would be to construct ______.

A. a value-weighted index

B. an equally weighted index

C. a price-weighted index

D. a bond price index

74. In a ___________ index, changes in the value of the stock with the greatest market value will move the index value the most, everything else equal.

A. value-weighted index

B. equally weighted index

C. price-weighted index

D. bond price index

75. A corporation in a 34% tax bracket invests in the preferred stock of another company and earns a 6% pretax rate of return. An individual investor in a 15% tax bracket invests in the same preferred stock and earns the same pretax return. The after-tax return to the corporation is _______, and the after-tax return to the individual investor is _______.

A. 3.96%; 5.1%

B. 5.39%; 5.1%

C. 6%; 6%

D. 3.96%; 6%

76. All but which one of the following indices is value weighted?

A. NASDAQ Composite

B. S&P 500

C. Wilshire 5000

D. DJIA

77. What is the tax exempt equivalent yield on a 9% bond yield given a marginal tax rate of 28%?

A. 6.48%

B. 7.25%

C. 8.02%

D. 9%

78. A tax free municipal bond provides a yield of 3.2%. What is the equivalent taxable yield on the bond given a 35% tax bracket?

A. 3.2%

B. 3.68%

C. 4.92%

D. 5%

79. An index computed from a simple average of returns is a/an _____.

A. equal weighted index

B. value weighted index

C. price weighted index

D. share weighted index

80. A tax free municipal bond provides a yield of 2.34%. What is the equivalent taxable yield on the bond given a 28% tax bracket?

A. 2.34%

B. 2.68%

C. 3.25%

D. 4.92%

81. The Chompers Index is a price weighted stock index based on the 3 largest fast food chains. The stock prices for the three stocks are $54, $23, and $44. What is the price weighted index value of the Chompers Index?

A. 23.43

B. 35.36

C. 40.33

D. 49.58

82. The Hydro Index is a price weighted stock index based on the 5 largest boat manufacturers in the nation. The stock prices for the five stocks are $10, $20, $80, $50 and $40. The price of the last stock was just split 2 for 1 and the stock price was halved from $40 to $20. What is the new divisor for a price weighted index?

A. 5.00

B. 4.85

C. 4.50

D. 4.75

83. A benchmark index has three stocks priced at $23, $43, and $56. The number of outstanding shares for each is 350,000 shares, 405,000 shares, and 553,000 shares, respectively. If the market value weighted index was 970 yesterday and the prices changed to $23, $41, and $58, what is the new index value?

A. 960

B. 970

C. 975

D. 985

84. A benchmark market value index is comprised of three stocks. Yesterday the three stocks were priced at $12, $20, and $60. The number of outstanding shares for each is 600,000 shares, 500,000 shares, and 200,000 shares, respectively. If the stock prices changed to $16, $18, and $62 today respectively, what is the 1-day rate of return on the index?

A. 5.78%

B. 4.35%

C. 6.16%

D. 7.42%

85. Which of the following mortgage scenarios will benefit the homeowner the most?

A. Adjustable rate mortgage when interest rate increases.

B. Fixed rate mortgage when interest rates falls.

C. Fixed rate mortgage when interest rate rises.

D. None of these options, as the banker’s interest will always be protected.

86. The TED spread refers to

A. the difference between the Treasury bond rate and the Treasury bill rate.

B. the difference between the Treasury note rate and the Treasury bill rate.

C. the difference between the LIBOR rate and the Treasury bill rate.

D. the difference between the LIBOR rate and the Treasury bond rate.

Chapter 3: ___________________________________________________________________________

1. Underwriting is one of the services provided by _____.

A. the SEC

B. investment bankers

C. publicly traded companies

D. FDIC

2. Under firm-commitment underwriting, the ______ assumes the full risk that the shares cannot be sold to the public at the stipulated offering price.

A. red herring

B. issuing company

C. initial stockholder

D. underwriter

3. Explicit costs of an IPO tend to be around ______ of the funds raised.

A. 1%

B. 7%

C. 15%

D. 25%

4. Barnegat Light sold 200,000 shares in an initial public offering. The underwriter’s explicit fees were $90,000. The offering price for the shares was $35, but immediately upon issue, the share price jumped to $43. What is the best estimate of the total cost to Barnegat Light of the equity issue?

A. $90,000

B. $1,290,000

C. $2,390,000

D. $1,690,000

5. A red herring becomes a prospectus when ____.

A. the preliminary registration statement is approved by the SEC

B. the IPO is complete

C. the offering is seasoned

D. the lockup period expires

6. Private placements can be advantageous, compared to public issue, because:

I. Private placements are cheaper to market than public issues.

II. Private placements may still be sold to the general public under SEC Rule 144A.

III. Privately placed securities trade on secondary markets.

A. I only

B. I and III only

C. II and III only

D. I, II, and III

7. A level _____ subscriber to the NASDAQ system may enter bid and ask prices.

A. 1

B. 2

C. 3

D. 4

8. Which one of the following statements about IPOs is not true?

A. IPOs generally underperform in the short run.

B. IPOs often provide very good initial returns to investors.

C. IPOs generally provide superior long-term performance as compared to other stocks.

D. Shares in IPOs are often primarily allocated to institutional investors.

9. The margin requirement on a stock purchase is 25%. You fully use the margin allowed to purchase 100 shares of MSFT at $25. If the price drops to $22, what is your percentage loss?

A. 9%

B. 15%

C. 48%

D. 57%

10. The NYSE acquired the ECN _______, and NASDAQ recently acquired the ECN ________.

A. Archipelago; Instinet

B. Instinet; Archipelago

C. Island; Instinet

D. LSE; Euronext

11. Rank the following types of markets from least integrated and organized to most integrated and organized:

I. Brokered markets

II. Continuous auction markets

III. Dealer markets

IV. Direct search markets

A. IV, II, I, III

B. I, III, IV, II

C. II, III, IV, I

D. IV, I, III, II

12. As a result of flash crashes, the SEC is trying circuit breakers that will halt trading for 5 minutes if large stocks’ prices change by more than _____ in a 5-minute period.

A. 10%

B. 20%

C. 30%

D. 40%

13. Which one of the following is not an example of a brokered market?

A. Residential real estate market

B. Market for large block security transactions

C. Primary market for securities

D. NASDAQ

14. More than ______ of all trading is believed to be initiated by computer algorithms.

A. 25%

B. 40%

C. 50%

D. 75%

15. Purchases of new issues of stock take place _________.

A. at the desk of the Fed

B. in the primary market

C. in the secondary market

D. in the money markets

16. Initial margin requirements on stocks are set by _________.

A. the Federal Deposit Insurance Corporation

B. the Federal Reserve

C. the New York Stock Exchange

D. the Securities and Exchange Commission

17. Which one of the following types of markets requires the greatest level of trading activity to be cost-effective?

A. Broker market

B. Dealer market

C. Continuous auction market

D. Direct search market

18. Which one of the following is a false statement regarding NYSE specialists?

A. On a stock exchange most buy or sell orders are executed via an electronic system rather than through specialists.

B. Specialists cannot trade for their own accounts.

C. Specialists maintain limit order books, which contain the outstanding unexecuted limit orders.

D. Specialists stand ready to trade at narrower bid-ask spreads in cases where the spread has become too wide.

19. Restrictions on trading involving insider information apply to:

I. Corporate officers and directors

II. Major stockholders

III. Relatives of corporate directors and officers

A. I only

B. I and II only

C. II and III only

D. I, II, and III

20. An order to buy or sell a security at the current price is a ______________.

A. limit order

B. market order

C. stop-loss order

D. stop-buy order

21. The term inside quotes refers to _____.

A. the difference between the lowest bid price and the highest ask price in the limit order book.

B. the difference between the highest bid price and the lowest ask price in the limit order book.

C. the difference between the lowest bid price and the lowest ask price in the limit order book.

D. the difference between the highest bid price and the highest ask price in the limit order book.

22. The term latency refers to _____.

A. the lag between when an order is placed on the NYSE and when it is executed.

B. the amount of time it takes to accept, process, and deliver a trading order.

C. the time it takes to implement new rules and procedures for stock exchanges and computer trading systems.

D. the lag between when an order is executed and when the investor takes possession of the securities.

23. If an investor places a _________ order, the stock will be sold if its price falls to the stipulated level. If an investor places a __________ order, the stock will be bought if its price rises above the stipulated level.

A. stop-buy; stop-loss

B. market; limit

C. stop-loss; stop-buy

D. limit; market

24. On a given day a stock dealer maintains a bid price of $1,000.50 for a bond and an ask price of $1003.25. The dealer made 10 trades that totaled 500 bonds traded that day. What was the dealer’s gross trading profit for this security?

A. $1,375

B. $500

C. $275

D. $1,450

25. Advantages of ECNs over traditional markets include all but which one of the following?

A. Lower transactions costs

B. Anonymity of the participants

C. Small amount of time needed to execute and order

D. Ability to handle very large orders

26. The __________ was established to protect investors from losses if their brokerage firms fail.

A. CFTC

B. SEC

C. SIPC

D. AIMR

27. When matching orders from the public, a specialist is required to use the _______.

A. lowest outstanding bid price and highest outstanding ask price

B. highest outstanding bid price and highest outstanding ask price

C. lowest outstanding bid price and lowest outstanding ask price

D. highest outstanding bid price and lowest outstanding ask price

28. The process of polling potential investors regarding their interest in a forthcoming initial public offering (IPO) is called ________.

A. interest building

B. book building

C. market analysis

D. customer identification

29. The bulk of most initial public offerings (IPOs) of equity securities goes to ___________.

A. institutional investors

B. individual investors

C. the firm’s current shareholders

D. day traders

30. Initial public offerings (IPOs) are usually ___________ relative to the levels at which their prices stabilize after they begin trading in the secondary market.

A. overpriced

B. correctly priced

C. underpriced

D. mispriced, but without any particular bias

31. According to multiple studies by Ritter, initial public offerings tend to exhibit __________ performance initially and __________ performance over the long term.

A. bad; good

B. bad; bad

C. good; good

D. good; bad

32. Specialists try to maintain a narrow bid-ask spread because:

I. If the spread is too large, they will not participate in as many trades, losing commission income.

II. The exchange requires specialists to maintain price continuity.

III. Specialists are nonprofit entities designed to facilitate market transactions rather than make a profit.

A. I only

B. I and II only

C. II and III only

D. I, II, and III

33. In a __________ underwriting arrangement, the underwriter assumes the full risk that shares may not be sold to the public at the stipulated offering price.

A. best-efforts

B. firm-commitment

C. private placement

D. none of these options

34. The ______________ is the most important dealer market in the United States, and the ______________ is the most important auction market.

A. NYSE; NASDAQ

B. NASDAQ; NYSE

C. CME; OTC

D. AMEX; NYSE

35. The inside quotes on a limit order book can be found ______.

A. at the top of the list

B. at the bottom of the list

C. by taking the averages of the bid and ask prices on the list

D. only by direct contact with the specialist who maintains the book

36. The __________ system enables exchange members to send orders directly to a specialist over computer lines.

A. FAX

B. Direct Plus

C. NASDAQ

D. SUPERDOT

37. The fully automated trade-execution system installed on the NYSE is called _____.

A. FAX

B. Direct +

C. NASDAQ

D. SUPERDOT

38. The NYSE Hybrid Market allows _____.

A. individuals to send orders directly to a specialist

B. individuals to send orders directly to an electronic system

C. brokers to send orders directly to a specialist

D. brokers to send orders either to an electronic system or to a specialist

39. Approximately __________ of trades involving shares issued by firms listed on the New York Stock Exchange actually take place on the New York Stock Exchange.

A. 50%

B. 25%

C. 60%

D. 75%

40. The _________ price is the price at which a dealer is willing to purchase a security.

A. bid

B. ask

C. clearing

D. settlement

41. The _________ price is the price at which a dealer is willing to sell a security.

A. bid

B. ask

C. clearing

D. settlement

42. The difference between the price at which a dealer is willing to buy and the price at which a dealer is willing to sell is called the _________.

A. market spread

B. bid-ask spread

C. bid-ask gap

D. market variation

43. The bid-ask spread exists because of _______________.

A. market inefficiencies

B. discontinuities in the markets

C. the need for dealers to cover expenses and make a profit

D. lack of trading in thin markets

44. The NYSE has lost market share to ECNs in recent years. Part of the NYSE’s response to the growth of ECNs has been to:

I. Purchase Archipelago, a major ECN, and rename it NYSE Arca

II. Enable automatic trade execution through its new Market Center

III. Impose a tighter limit on bid-ask spreads

A. I only

B. II and III only

C. I and II only

D. I, II, and III

45. The cost of buying and selling a stock includes:

I. Broker’s commissions

II. Dealer’s bid-asked spread

III. Price concessions that investors may be forced to make

A. I and II only

B. II and III only

C. I and III only

D. I, II, and III

46. Which of the following is (are) true about dark pools?

I. They allow anonymity in trading.

II. They often involve large blocks of stocks.

III. Trades made through them might not be reported.

A. I and II only

B. II and III only

C. I and III only

D. I, II, and III

47. You purchased XYZ stock at $50 per share. The stock is currently selling at $65. Your gains could be protected by placing a _________.

A. limit buy order

B. limit sell order

C. market order

D. stop-loss order

48. Consider the following limit order book of a specialist. The last trade in the stock occurred at a price of $40. If a market buy order for 100 shares comes in, at what price will it be filled?

A. $39.75

B. $40.25

C. $40.375

D. $40.25 or less

49. You find that the bid and ask prices for a stock are $10.25 and $10.30, respectively. If you purchase or sell the stock, you must pay a flat commission of $25. If you buy 100 shares of the stock and immediately sell them, what is your total implied and actual transaction cost in dollars?

A. $50

B. $25

C. $30

D. $55

50. According to SEC Rule 415 regarding shelf registration, firms can gradually sell securities to the public for __________ following initial registration.

A. 1 year

B. 2 years

C. 3 years

D. 4 years

51. What happened to the effective spread on trades when the SEC allowed the minimum tick size to move from one-eighth of a dollar to one-sixteenth of a dollar in 1997 and from one-sixteenth of a dollar to one cent in 2001?

A. The tick size increased in 1997 but decreased in 2001.

B. The tick size increased in both cases.

C. The tick size decreased in 1997 but increased in 2001.

D. The tick size decreased in both cases.

52. Assume you purchased 500 shares of XYZ common stock on margin at $40 per share from your broker. If the initial margin is 60%, the amount you borrowed from the broker is _________.

A. $20,000

B. $12,000

C. $8,000

D. $15,000

53. You sold short 300 shares of common stock at $30 per share. The initial margin is 50%. You must put up _________.

A. $4,500

B. $6,000

C. $9,000

D. $10,000

54. You short-sell 200 shares of Tuckerton Trading Co., now selling for $50 per share. What is your maximum possible loss?

A. $50

B. $150

C. $10,000

D. Unlimited

55. You short-sell 200 shares of Tuckerton Trading Co., now selling for $50 per share. What is your maximum possible gain, ignoring transactions cost?

A. $50

B. $150

C. $10,000

D. Unlimited

56. You short-sell 200 shares of Rock Creek Fly Fishing Co., now selling for $50 per share. If you want to limit your loss to $2,500, you should place a stop-buy order at ____.

A. $37.50

B. $62.50

C. $56.25

D. $59.75

57. You purchased 200 shares of ABC common stock on margin at $50 per share. Assume the initial margin is 50% and the maintenance margin is 30%. You will get a margin call if the stock drops below ________. (Assume the stock pays no dividends, and ignore interest on the margin loan.)

A. $26.55

B. $35.71

C. $28.95

D. $30.77

58. You purchased 250 shares of common stock on margin for $25 per share. The initial margin is 65%, and the stock pays no dividend. Your rate of return would be __________ if you sell the stock at $32 per share. Ignore interest on margin.

A. 35%

B. 39%

C. 43%

D. 28%

59. You sell short 200 shares of Doggie Treats Inc. that are currently selling at $25 per share. You post the 50% margin required on the short sale. If your broker requires a 30% maintenance margin, at what stock price will you get a margin call? (You earn no interest on the funds in your margin account, and the firm does not pay any dividends.)

A. $28.85

B. $35.71

C. $31.50

D. $32.25

60. Transactions that do not involve the original issue of securities take place in _________.

A. primary markets

B. secondary markets

C. over-the-counter markets

D. institutional markets

61. What was the result of high-frequency traders’ leaving the market during the flash crash of 2010?

A. Market liquidity decreased.

B. Market liquidity increased.

C. Market volatility decreased.

D. Trading frequency increased.

62. __________ often accompany short sales and are used to limit potential losses from the short position.

A. Limit orders

B. Restricted orders

C. Limit loss orders

D. Stop-buy orders

63. The market share held by the NYSE Arca system in February 2011 was approximately ____.

A. 65%

B. 45%

C. 25%

D. 10%

64. Regulation NMS:

I. Supports the goal of integrating financial markets

II. Requires the use of specialists to execute trades

III. Requires that exchanges honor quotes of other exchanges when they can be executed automatically

A. I only

B. I and II only

C. I and III only

D. I, II, and III

65. The commission structure on a stock purchase is $50 plus $.03 per share. If you purchase 600 shares of a stock selling for $65, what is your commission?

A. $35

B. $45

C. $53

D. $68

66. All major stock markets today are effectively _______________.

A. specialist trading systems

B. electronic trading systems

C. continuous auction markets

D. direct search markets

67. In 2008, the NASDAQ stock market merged with _____.

A. Euronext

B. OMX, which operates seven Nordic and Baltic stock exchanges

C. the International Securities Exchange (ISE)

D. BATS

68. You hold 5,000 shares of the 1 million outstanding shares of Wealthy Wranglers common stock. You’ve just learned that the company plans to issue more shares, so that 2 million shares will be outstanding. This is called _____.

A. an advanced equity offering

B. a weathered equity offering

C. a seasoned equity offering

D. a veteran equity offering

69. If an investor uses the full amount of margin available, the equity in a margin account used for a stock purchase can be found as ________.

A. market value of the stock – amount owed on the margin loan

B. market value of the stock + amount owed on the margin loan

C. market value of the stock ÷ margin loan

D. margin loan × market value of the stock

70. The average depth of the limit order book is _____.

A. lower for the large stocks in the S&P 500 Index than for the smaller stocks in the Russell 2000 Index

B. higher for the large stocks in the S&P 500 Index than for the smaller stocks in the Russell 2000 Index

C. about the same for both the large stocks in the S&P 500 Index and the smaller stocks in the Russell 2000 Index

D. unrelated to the sizes of the stocks in the indexes

71. The CFA Institute Standards of Professional Conduct require that members _____.

A. place their clients’ interests before their own

B. disclose conflicts of interest to clients

C. inform their employers that they are obligated to comply with the Standards of Professional Conduct

D. all of these options

72. Trading on inside information is:

I. Prohibited by federal law

II. Prohibited by the CFA Institute Standards of Professional Conduct

III. Monitored by the SEC

A. I and II only

B. II and III only

C. I and III only

D. I, II, and III

73. The ____ requires full disclosure of relevant information relating to the issue of new securities.

A. Insider Trading Act of 1931

B. Securities Act of 1933

C. Securities Exchange Act of 1934

D. Investment Company Act of 1940

74. The SIPC was established by the ____.

A. Insider Trading Act of 1931

B. Securities Act of 1933

C. Securities Exchange Act of 1934

D. none of these options

75. Maintenance requirements for margin accounts are set by ____.

A. brokerage firms

B. the SEC

C. the Federal Reserve System’s Board of Governors

D. the Supreme Court

76. Which of the following are true concerning short sales of exchange-listed stocks?

I. Proceeds from the short sale must be kept on deposit with the broker.

II. Short-sellers must post margin with their broker to cover potential losses on the position.

III. The short-seller earns interest on any cash deposited with the broker that is used to meet the margin requirement.

A. I only

B. I and III only

C. I and II only

D. I, II, and III

77. The largest nongovernmental regulator of securities firms in the United States is ________.

A. the CFA Institute

B. the Public Company Accounting Oversight Board

C. the Financial Industry Regulatory Authority

D. the Board of Directors of NYSE Euronext

78. In ________ markets, participants post bid and ask prices at which they are willing to trade, but orders are not automatically executed by computer. ____________ execute trades for people other than themselves, and in _______________ markets a computer matches orders with an existing limit order book and executes the trades automatically.

A. electronic; Dealers; brokers

B. dealer; Brokers; electronic

C. direct search; Brokers; electronic

D. brokered; Dealers; direct search

79. An investor puts up $5,000 but borrows an equal amount of money from his broker to double the amount invested to $10,000. The broker charges 7% on the loan. The stock was originally purchased at $25 per share, and in 1 year the investor sells the stock for $28. The investor’s rate of return was ____.

A. 17%

B. 12%

C. 14%

D. 19%

80. An investor buys $8,000 worth of a stock priced at $40 per share using 50% initial margin. The broker charges 6% on the margin loan and requires a 30% maintenance margin. In 1 year the investor has interest payable and gets a margin call. At the time of the margin call the stock’s price must have been ____.

A. $20

B. $29.77

C. $30.29

D. $32.45

81. The New York Stock Exchange is a good example of _________.

A. an auction market

B. a brokered market

C. a dealer market

D. a direct search market

82. The primary market where new security issues are offered to the public is a good example of _________.

A. an auction market

B. a brokered market

C. a dealer market

D. a direct search market

83. The over-the-counter securities market is a good example of _________.

A. an auction market

B. a brokered market

C. a dealer market

D. a direct search market

84. An investor buys $16,000 worth of a stock priced at $20 per share using 60% initial margin. The broker charges 8% on the margin loan and requires a 35% maintenance margin. The stock pays a $.50-per-share dividend in 1 year, and then the stock is sold at $23 per share. What was the investor’s rate of return?

A. 17.5%

B. 19.67%

C. 23.83%

D. 25.75%

85. Level 3 NASDAQ subscribers _____.

A. are registered market makers.

B. can post bid and ask prices.

C. have the fastest execution of trades.

D. all of these options.

86. You sell short 300 shares of Microsoft that are currently selling at $30 per share. You post the 50% margin required on the short sale. If you earn no interest on the funds in your margin account, what will be your rate of return after 1 year if Microsoft is selling at $27? (Ignore any dividends.)

A. 10%

B. 20%

C. 6.67%

D. 15%

87. The commission structure on a stock purchase is $20 plus $.02 per share. If you purchase four round lots of a stock selling for $56, what is your commission?

A. $20

B. $22

C. $26

D. $28

Chapter 4: ___________________________________________________________________________

1. Which one of the following invests in a portfolio that is fixed for the life of the fund?

A. Mutual fund

B. Money market fund

C. Managed investment company

D. Unit investment trust

2. ______ are partnerships of investors with portfolios that are larger than most individual investors but are still too small to warrant managing on a separate basis.

A. Commingled funds

B. Closed-end funds

C. REITs

D. Mutual funds

3. A __________ is a private investment pool open only to wealthy or institutional investors that is exempt from SEC regulation and can therefore pursue more speculative policies than mutual funds.

A. commingled pool

B. unit trust

C. hedge fund

D. money market fund

4. Advantages of investment companies to investors include all but which one of the following?

A. Record keeping and administration

B. Low-cost diversification

C. Professional management

D. Guaranteed rates of return

5. Which of the following typically employ significant amounts of leverage?

I. Hedge funds

II. REITs

III. Money market funds

IV. Equity mutual funds

A. I and II only

B. II and III only

C. III and IV only

D. I, II, and III only

6. The NAV of which funds is fixed at $1 per share?

A. Equity funds

B. Money market funds

C. Fixed-income funds

D. Commingled funds

7. The two principal types of REITs are equity trusts, which _______________, and mortgage trusts, which _______________.

A. invest directly in real estate; invest in mortgage and construction loans

B. invest in mortgage and construction loans; invest directly in real estate

C. use extensive leverage; distribute less than 95% of income to shareholders

D. distribute less than 95% of income to shareholders; use extensive leverage

8. A contingent deferred sales charge is commonly called a ____.

A. front-end load

B. back-end load

C. 12b-1 charge

D. top-end sales commission

9. In the United States in 2011, there were approximately _______ mutual funds offered by fewer than _______ fund families.

A. 12,000; 600

B. 7,000; 100

C. 8,000; 700

D. 9,000; 300

10. Part B of a mutual fund prospectus contains information about:

I. Fund holdings by directors and officers

II. Front-end and back-end loads

III. Securities held by the fund at the end of the fiscal year

A. I only

B. I and II only

C. I and III only

D. I, II, and III

11. Mutual funds provide the following for their shareholders:

A. Diversification

B. Professional management

C. Record keeping and administration

D. All of these options

12. The average maturity of fund investments in a money market mutual fund is _______.

A. slightly more than 1 month

B. slightly more than 1 year

C. about 9 months

D. between 2 and 3 years

13. Rank the following fund categories from most risky to least risky:

I. Equity growth fund

II. Balanced fund

III. Sector fund

IV. Money market fund

A. IV, I, III, II

B. III, II, IV, I

C. I, II, III, IV

D. III, I, II, IV

14. Which of the following result in a taxable event for investors?

I. Short-term capital gain distributions from the fund

II. Dividend distributions from the fund

III. Long-term capital gain distributions from the fund

A. I only

B. II only

C. I and II only

D. I, II, and III

15. The type of mutual fund that primarily engages in market timing is called _______.

A. a sector fund

B. an index fund

C. an ETF

D. an asset allocation fund

16. As of 2011, approximately _____ of mutual fund assets were invested in equity funds.

A. 5%

B. 54%

C. 30%

D. 12%

17. As of 2011, approximately _____ of mutual fund assets were invested in bond funds.

A. 14%

B. 19%

C. 37%

D. 47%

18. As of 2011, approximately _____ of mutual fund assets were invested in money market funds.

A. 5%

B. 26%

C. 44%

D. 66%

19. Management fees for open-end and closed-end funds typically range between _____ and _____.

A. .2%; 1.5%

B. .5%; 5%

C. 2%; 5%

D. 3%; 8%

20. The primary measurement unit used for assessing the value of one’s stake in an investment company is ___________________.

A. net asset value

B. average asset value

C. gross asset value

D. total asset value

21. Net asset value is defined as ________________________.

A. book value of assets divided by shares outstanding

B. book value of assets minus liabilities divided by shares outstanding

C. market value of assets divided by shares outstanding

D. market value of assets minus liabilities divided by shares outstanding

22. Assume that you have just purchased some shares in an investment company reporting $500 million in assets, $50 million in liabilities, and 50 million shares outstanding. What is the net asset value (NAV) of these shares?

A. $12

B. $9

C. $10

D. $1

23. Assume that you have recently purchased 100 shares in an investment company. Upon examining the balance sheet, you note that the firm is reporting $225 million in assets, $30 million in liabilities, and 10 million shares outstanding. What is the net asset value (NAV) of these shares?

A. $25.50

B. $22.50

C. $19.50

D. $1.95

24. The Vanguard 500 Index Fund tracks the performance of the S&P 500. To do so, the fund buys shares in each S&P 500 company __________.

A. in proportion to the market value weight of the firm’s equity in the S&P 500

B. in proportion to the price weight of the stock in the S&P 500

C. by purchasing an equal number of shares of each stock in the S&P 500

D. by purchasing an equal dollar amount of shares of each stock in the S&P 500

25. Which of the following is not a type of managed investment company?

A. Unit investment trusts

B. Closed-end funds

C. Open-end funds

D. Hedge funds

26. Which of the following funds invest specifically in stocks of fast-growing companies?

A. Balanced funds

B. Growth equity funds

C. REITs

D. Equity income funds

27. A fund that invests in securities worldwide, including the United States, is called ______.

A. an international fund

B. an emerging market fund

C. a global fund

D. a regional fund

28. The greatest percentage of mutual fund assets are invested in ________.

A. bond funds

B. equity funds

C. hybrid funds

D. money market funds

29. Sponsors of unit investment trusts earn a profit by ___________________.

A. deducting management fees from fund assets

B. deducting a percentage of any gains in asset value

C. selling shares in the trust at a premium to the cost of acquiring the underlying assets

D. charging portfolio turnover fees

30. Investors who want to liquidate their holdings in a unit investment trust may ___________________.

A. sell their shares back to the trustee at a discount

B. sell their shares back to the trustee at net asset value

C. sell their shares on the open market

D. sell their shares at a premium to net asset value

31. Investors who want to liquidate their holdings in a closed-end fund may ___________________.

A. sell their shares back to the fund at a discount if they wish

B. sell their shares back to the fund at net asset value

C. sell their shares on the open market

D. sell their shares at a premium to net asset value if they wish

32. __________ fund is defined as one in which the fund charges a sales commission to either buy into or exit from the fund.

A. A load

B. A no-load

C. An index

D. A specialized-sector

33. Which of the following is a false statement regarding open-end mutual funds?

A. They offer investors a guaranteed rate of return.

B. They offer investors a well-diversified portfolio.

C. They redeem shares at their net asset value.

D. They offer low-cost diversification.

34. __________ funds stand ready to redeem or issue shares at their net asset value.

A. Closed-end

B. Index

C. Open-end

D. Hedge

35. Revenue sharing with respect to mutual funds refers to _________.

A. fund companies paying brokers if the broker recommends the fund to investors

B. allowing certain classes of investors to engage in market timing

C. charging loads to new investors in a mutual fund

D. directly marketing funds over the Internet

36. Higher portfolio turnover:

I. Results in greater tax liability for investors

II. Results in greater trading costs for the fund, which investors have to pay for

III. Is a characteristic of asset allocation funds

A. I only

B. II only

C. I and II only

D. I, II, and III

37. Low-load mutual funds have front-end loads of no more than _____.

A. 2%

B. 3%

C. 4%

D. 5%

38. Most real estate investment trusts (REITs) have a debt ratio of around _________.

A. 10%

B. 30%

C. 50%

D. 70%

39. Measured by assets, about _____ of funds are money market funds.

A. 15%

B. 25%

C. 40%

D. 60%

40. Which of the following is not a type of real estate investment trust?

I. Equity trust

II. Debt trust

III. Mortgage trust

IV. Unit trust

A. I and II only

B. II only

C. II and IV only

D. I, II, and III

41. ______________________ are often called mutual funds.

A. Unit investment trusts

B. Open-end investment companies

C. Closed-end investment companies

D. REITs

42. Mutual funds account for roughly ______ of investment company assets.

A. 30%

B. 50%

C. 70%

D. 90%

43. An official description of a particular mutual fund’s planned investment policy can be found in the fund’s _____________.

A. prospectus

B. indenture

C. investment statement

D. 12b-1 forms

44. Mutual funds that hold both equities and fixed-income securities in relatively stable proportions are called ____________________.

A. income funds

B. balanced funds

C. asset allocation funds

D. index funds

45. ______ are mutual funds that vary the proportions of funds invested in particular market sectors according to the fund manager’s forecast of the performance of that market sector.

A. asset allocation funds

B. balanced funds

C. index funds

D. income funds

46. Specialized-sector funds concentrate their investments in _________________.

A. bonds of a particular maturity

B. geographic segments of the real estate market

C. government securities

D. securities issued by firms in a particular industry

47. If a mutual fund has multiple-class shares, which class typically has a front-end load?

A. Class A

B. Class B

C. Class C

D. Class D

48. The commission, or front-end load, paid when you purchase shares in mutual funds may not exceed __________.

A. 3.5%

B. 6%

C. 8.5%

D. 10%

49. You are considering investing in one of several mutual funds. All the funds under consideration have various combinations of front-end and back-end loads and/or 12b-1 fees. The longer you plan on remaining in the fund you choose, the more likely you will prefer a fund with a __________ rather than a __________, everything else equal.

A. 12b-1 fee; front-end load

B. front-end load; 12b-1 fee

C. back-end load; front-end load

D. 12b-1 fee; back-end load

50. Under SEC rules, the managers of certain funds are allowed to deduct charges for advertising, brokerage commissions, and other sales expenses directly from the fund assets rather than billing investors. These fees are known as ____________.

A. direct operating expenses

B. back-end loads

C. 12b-1 charges

D. front-end loads

51. The SEC requires funds to disclose:

I. After-tax returns for the past year

II. After-tax returns for the last 5-year period

III. The tax impact of portfolio turnover

A. I only

B. I and II only

C. I and III only

D. I, II, and III

52. SEC Rule 12b-1 allows managers of certain funds to deduct __________ expenses from fund assets; however, these expenses may not exceed __________ of the fund’s average net assets per year.

A. marketing; 1%

B. marketing; 5%

C. administrative; .5%

D. administrative; 2%

53. Consider a mutual fund with $300 million in assets at the start of the year and 12 million shares outstanding. If the gross return on assets is 18% and the total expense ratio is 2% of the year-end value, what is the rate of return on the fund?

A. 15.64%

B. 16%

C. 17.25%

D. 17.5%

54. Consider a no-load mutual fund with $200 million in assets and 10 million shares at the start of the year and with $250 million in assets and 11 million shares at the end of the year. During the year investors have received income distributions of $2 per share and capital gain distributions of $.25 per share. Assuming that the fund carries no debt, and that the total expense ratio is 1%, what is the rate of return on the fund?

A. 11.19%

B. 23.75%

C. 24.64%

D. The answer cannot be determined from the information given.

55. Consider a no-load mutual fund with $400 million in assets, 50 million in debt, and 15 million shares at the start of the year and with $500 million in assets, 40 million in debt, and 18 million shares at the end of the year. During the year investors have received income distributions of $.50 per share and capital gain distributions of $.30 per share. If the total expense ratio is .75%, what is the rate of return on the fund?

A. 12.09%

B. 12.99%

C. 8.25%

D. The answer cannot be determined from the information given.

56. Mutual fund returns may be granted pass-through status if _________________.

A. virtually all income is distributed to shareholders

B. the fund qualifies for pass-through status according to the U.S. tax code

C. the fund is sufficiently diversified

D. All of these options (All of the answers must be true for pass-through status to be granted.)

57. _____ is an example of an exchange-traded fund.

A. An SPDR or spider

B. A samurai

C. A Vanguard

D. An open-end fund

58. If you place an order to buy or sell a share of a mutual fund during the trading day, the order will be executed at _____.

A. the NAV calculated at the market close at 4 pm New York time

B. the real time NAV

C. the NAV delayed 15 minutes

D. the NAV calculated at the opening of the next day’s trading

59. According to the 2011 Mutual Fund Fact Book, _______ of total assets were in taxable money market funds and _______ were tax-exempt money market funds.

A. 35%; 14%

B. 12.3%; 75%

C. 22%; 3.9%

D. 5%; 47%

60. In his 1970 study, Malkiel found that mutual funds that do well in one period have an approximately ________ chance of doing well in the subsequent-year period.

A. 33%

B. 52%

C. 65%

D. 85%

61. In a recent study, Malkiel found that evidence of persistence in the performance of mutual funds ________________ in the 1980s.

A. grew stronger

B. remained about the same

C. became slightly weaker

D. virtually disappeared

62. The ratio of trading activity of a portfolio to the assets of the portfolio is called the ____________.

A. reinvestment ratio

B. trading rate

C. portfolio turnover

D. tax yield

63. Which of the following ETFs tracks the S&P 500 Index?

A. Qubes

B. Diamonds

C. Vipers

D. Spiders

64. The Stone Harbor Fund is a closed-end investment company with a portfolio currently worth $300 million. It has liabilities of $5 million and 9 million shares outstanding. If the fund sells for $30 a share, what is its premium or discount as a percent of NAV?

A. 9.26% premium

B. 8.47% premium

C. 9.26% discount

D. 8.47% discount

65. The difference between balanced funds and asset allocation funds is that _____.

A. balanced funds invest in bonds while asset allocation funds do not

B. asset allocation funds invest in bonds while balanced funds do not

C. balanced funds have relatively stable proportions of stocks and bonds while the proportions may vary dramatically for asset allocation funds

D. balanced funds make no capital gain distributions and asset allocation funds make both dividend and capital gain distributions

66. The Wildwood Fund sells Class A shares with a front-end load of 5% and Class B shares with a 12b-1 fee of 1% annually. If you plan to sell the fund after 4 years, are Class A or Class B shares the better choice? Assume a 10% annual return net of expenses before the 12b-1 fee is applied.

A. Class A.

B. Class B.

C. There is no difference.

D. The answer cannot be determined from the information given.

67. A mutual fund has total assets outstanding of $69 million. During the year the fund bought and sold assets equal to $17.25 million. This fund’s turnover rate was _____.

A. 25%

B. 28.5%

C. 18.63%

D. 33.4%

68. Which type of investment fund is commonly known to invest in options and futures in large scale?

A. Commingled funds

B. Hedge funds

C. ETFs

D. REITs

69. Advantages of ETFs over mutual funds include all but which one of the following?

A. ETFs trade continuously, so investors can trade throughout the day.

B. ETFs can be sold short or purchased on margin, unlike fund shares.

C. ETF providers do not have to sell holdings to fund redemptions.

D. ETF values can diverge from NAV.

70. Harold has just taken his company public and owns a large quantity of restricted stock. For purposes of diversification, what fund might he help create in order to diversify his holdings?

A. Commingled funds

B. Hedge funds

C. ETF

D. REITs

71. Which of the following funds is most likely to have a debt ratio of 70% or higher?

A. Bond fund

B. Commingled fund

C. Mortgage-backed securities

D. REIT

72. _______ have become the main way for investors to speculate in precious metals.

A. Strategic income funds

B. Balanced funds

C. Specialized-sector funds

D. Exchange-traded funds

73. From 1971 to 2010 the average return on the Wilshire 5000 Index was _________ the return of the average mutual fund.

A. identical to

B. .8% higher than

C. .8% lower than

D. 1.3% higher than

74. An open-end fund has a NAV of $16.50 per share. The fund charges a 6% load. What is the offering price?

A. $14.57

B. $15.95

C. $17.55

D. $16.49

75. The offer price of an open-end fund is $18 and the fund is sold with a front-end load of 5%. What is the fund’s NAV?

A. $18.74

B. $17.10

C. $15.40

D. $16.57

76. A mutual fund has $50 million in assets at the beginning of the year and 1 million shares outstanding throughout the year. Throughout the year assets grow at 12%. The fund imposes a 12b-1 fee on all shares equal to 1%. The fee is imposed on year-end asset values. If there are no distributions, what is the end-of-year NAV for the fund?

A. $50

B. $55.44

C. $56.12

D. $54.55

77. The assets of a mutual fund are $25 million. The liabilities are $4 million. If the fund has 700,000 shares outstanding and pays a $3 dividend, what is the dividend yield?

A. 5%

B. 10%

C. 15%

D. 20%

78. Which of the following funds are usually most tax-efficient?

A. Equity funds

B. Bond Funds

C. ETFs

D. Specialized-sector funds

79. You invest in a mutual fund that charges a 3% front-end load, 1% total annual fees, and a 2% back-end load, which decreases .5% per year. How much will you pay in fees on a $10,000 investment that does not grow if you cash out after 3 years of no gain?

A. $103

B. $219

C. $553

D. $635

80. You invest in a mutual fund that charges a 3% front-end load, 1% total annual fees, and a 0% back-end load on Class A shares. The same fund charges a 0% front-end load, 1% total annual fees, and a 2% back-end load on Class B shares. What are the total fees in year 1 on a Class A investment of $20,000 with no growth in value?

A. $658

B. $794

C. $885

D. $902

81. You invest in a mutual fund that charges a 3% front-end load, 1% total annual fees, and a 0% back-end load on Class A shares. The same fund charges a 0% front-end load, 1% total annual fees, and a 2% back-end load on Class B shares. What are the total fees in year 1 on a Class B investment of $20,000 if you redeem shares with no growth in value?

A. $596

B. $794

C. $885

D. $902

82. You pay $21,600 to the Laramie Fund, which has a NAV of $18 per share at the beginning of the year. The fund deducted a front-end load of 4%. The securities in the fund increased in value by 10% during the year. The fund’s expense ratio is 1.3% and is deducted from year-end asset values. What is your rate of return on the fund if you sell your shares at the end of the year?

A. 4.35%

B. 4.23%

C. 6.45%

D. 5.63%

83. Which one of the following statements about returns reported by mutual funds is not correct?

A. Reported returns are net of management expenses.

B. Reported returns are net of 12b-1 fees.

C. Reported returns are net of brokerage fees paid on the fund’s trading activity.

D. None of these options. (All of the items are included in reported returns.)

84. The top Morningstar mutual fund performance rating is ________.

A. five stars

B. four stars

C. three stars

D. two stars

85. You are considering investing in a no-load mutual fund with an annual expense ratio of .6% and an annual 12b-1 fee of .75%. You could also invest in a bank CD paying 6.5% per year. What minimum annual rate of return must the fund earn to make you better off in the fund than in the CD?

A. 7.1%

B. 7.45%

C. 7.25%

D. 7.85%

Chapter 5: ___________________________________________________________________________

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

A. 4%

B. 3.5%

C. 7%

D. 11%

2. The ______ measure of returns ignores compounding.

A. geometric average

B. arithmetic average

C. IRR

D. dollar-weighted

3. If you want to measure the performance of your investment in a fund, including the timing of your purchases and redemptions, you should calculate the __________.

A. geometric average return

B. arithmetic average return

C. dollar-weighted return

D. index return

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

A. Geometric average return

B. Arithmetic average return

C. Dollar-weighted return

D. Historical average return

5. Rank the following from highest average historical return to lowest average historical return from 1926 to 2010.

I. Small stocks

II. Long-term bonds

III. Large stocks

IV. T-bills

A. I, II, III, IV

B. III, IV, II, I

C. I, III, II, IV

D. III, I, II, IV

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

I. Small stocks

II. Long-term bonds

III. Large stocks

IV. T-bills

A. I, II, III, IV

B. III, IV, II, I

C. I, III, II, IV

D. III, I, II, IV

7. You have calculated the historical dollar-weighted return, annual geometric average return, and annual arithmetic average return. If you desire to forecast performance for next year, the best forecast will be given by the ________.

A. dollar-weighted return

B. geometric average return

C. arithmetic average return

D. index return

8. The complete portfolio refers to the investment in _________.

A. the risk-free asset

B. the risky portfolio

C. the risk-free asset and the risky portfolio combined

D. the risky portfolio and the index

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

A. Dollar-weighted return

B. Geometric average return

C. Arithmetic average return

D. Index return

10. The holding period return on a stock is equal to _________.

A. the capital gain yield over the period plus the inflation rate

B. the capital gain yield over the period plus the dividend yield

C. the current yield plus the dividend yield

D. the dividend yield plus the risk premium

11. Your timing was good last year. You invested more in your portfolio right before prices went up, and you sold right before prices went down. In calculating historical performance measures, which one of the following will be the largest?

A. Dollar-weighted return

B. Geometric average return

C. Arithmetic average return

D. Mean holding-period return

12. Published data on past returns earned by mutual funds are required to be ______.

A. dollar-weighted returns

B. geometric returns

C. excess returns

D. index returns

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

A. 15.67%

B. 8%

C. 11.22%

D. 6.45%

14. The geometric average of -12%, 20%, and 25% is _________.

A. 8.42%

B. 11%

C. 9.7%

D. 18.88%

15. The dollar-weighted return is the _________.

A. difference between cash inflows and cash outflows

B. arithmetic average return

C. geometric average return

D. internal rate of return

16. An investment earns 10% the first year, earns 15% the second year, and loses 12% the third year. The total compound return over the 3 years was ______.

A. 41.68%

B. 11.32%

C. 3.64%

D. 13%

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

A. [1 + (APR/n)]n – 1

B. (APR)(n)

C. (APR/n)

D. (periodic rate)(n)

18. Suppose you pay $9,700 for a $10,000 par Treasury bill maturing in 3 months. What is the holding-period return for this investment?

A. 3.01%

B. 3.09%

C. 12.42%

D. 16.71%

19. Suppose you pay $9,800 for a $10,000 par Treasury bill maturing in 2 months. What is the annual percentage rate of return for this investment?

A. 2.04%

B. 12 %

C. 12.24%

D. 12.89%

20. Suppose you pay $9,400 for a $10,000 par Treasury bill maturing in 6 months. What is the effective annual rate of return for this investment?

A. 6.38%

B. 12.77%

C. 13.17%

D. 14.25%

21. You have an APR of 7.5% with continuous compounding. The EAR is _____.

A. 7.5%

B. 7.65%

C. 7.79 %

D. 8.25%

22. You have an EAR of 9%. The equivalent APR with continuous compounding is _____.

A. 8.47%

B. 8.62%

C. 8.88%

D. 9.42%

23. The market risk premium is defined as __________.

A. the difference between the return on an index fund and the return on Treasury bills

B. the difference between the return on a small-firm mutual fund and the return on the Standard & Poor’s 500 Index

C. the difference between the return on the risky asset with the lowest returns and the return on Treasury bills

D. the difference between the return on the highest-yielding asset and the return on the lowest-yielding asset

24. The excess return is the _________.

A. rate of return that can be earned with certainty

B. rate of return in excess of the Treasury-bill rate

C. rate of return to risk aversion

D. index return

25. The rate of return on _____ is known at the beginning of the holding period, while the rate of return on ____ is not known until the end of the holding period.

A. risky assets; Treasury bills

B. Treasury bills; risky assets

C. excess returns; risky assets

D. index assets; bonds

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

A. the slope of the capital allocation line

B. the second derivative of the capital allocation line

C. the point at which the second derivative of the investor’s indifference curve reaches zero

D. the portfolio’s excess return

27. Your investment has a 20% chance of earning a 30% rate of return, a 50% chance of earning a 10% rate of return, and a 30% chance of losing 6%. What is your expected return on this investment?

A. 12.8%

B. 11%

C. 8.9%

D. 9.2%

28. Your investment has a 40% chance of earning a 15% rate of return, a 50% chance of earning a 10% rate of return, and a 10% chance of losing 3%. What is the standard deviation of this investment?

A. 5.14%

B. 7.59%

C. 9.29%

D. 8.43%

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

A. 5.31%

B. 5.56%

C. 9.34%

D. 11.80%

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

A. 5.12%

B. 5.56%

C. 9.34%

D. 11.43%

31. During the 1926-2010 period the Sharpe ratio was greatest for which of the following asset classes?

A. Small U.S. stocks

B. Large U.S. stocks

C. Long-term U.S. Treasury bonds

D. Bond world portfolio return in U.S. dollars

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

A. Small U.S. stocks

B. Large U.S. stocks

C. Long-term U.S. Treasury bonds

D. Equity world portfolio in U.S. dollars

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

A. Small U.S. stocks

B. Large U.S. stocks

C. Long-term U.S. Treasury bonds

D. Equity world portfolio in U.S. dollars

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

A. is normally risk neutral

B. requires a risk premium to take on the risk

C. knows he or she will not lose money

D. knows the outcomes at the beginning of the holding period

35. Historical returns have generally been __________ for stocks of small firms as (than) for stocks of large firms.

A. the same

B. lower

C. higher

D. none of these options (There is no evidence of a systematic relationship between returns on small-firm stocks and returns on large-firm stocks.)

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

A. small firms are better run than large firms

B. government subsidies available to small firms produce effects that are discernible in stock market statistics

C. small firms are riskier than large firms

D. small firms are not being accurately represented in the data

37. In calculating the variance of a portfolio’s returns, squaring the deviations from the mean results in:

I. Preventing the sum of the deviations from always equaling zero

II. Exaggerating the effects of large positive and negative deviations

III. A number for which the unit is percentage of returns

A. I only

B. I and II only

C. I and III only

D. I, II, and III

38. If you are promised a nominal return of 12% on a 1-year investment, and you expect the rate of inflation to be 3%, what real rate do you expect to earn?

A. 5.48%

B. 8.74%

C. 9%

D. 12%

39. If you require a real growth in the purchasing power of your investment of 8%, and you expect the rate of inflation over the next year to be 3%, what is the lowest nominal return that you would be satisfied with?

A. 3%

B. 8%

C. 11%

D. 11.24%

40. One method of forecasting the risk premium is to use the _______.

A. coefficient of variation of analysts’ earnings forecasts

B. variations in the risk-free rate over time

C. average historical excess returns for the asset under consideration

D. average abnormal return on the index portfolio

41. Treasury bills are paying a 4% rate of return. A risk-averse investor with a risk aversion of A = 3 should invest entirely in a risky portfolio with a standard deviation of 24% only if the risky portfolio’s expected return is at least ______.

A. 8.67%

B. 9.84%

C. 21.28%

D. 14.68%

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

A. capital allocation line

B. indifference curve

C. investor’s utility line

D. security market line

43. Most studies indicate that investors’ risk aversion is in the range _____.

A. 1-3

B. 1.5-4

C. 3-5.2

D. 4-6

44. Two assets have the following expected returns and standard deviations when the risk-free rate is 5%:

An investor with a risk aversion of A = 3 would find that _________________ on a risk-return basis.

A. only asset A is acceptable

B. only asset B is acceptable

C. neither asset A nor asset B is acceptable

D. both asset A and asset B are acceptable

45. Historically, the best asset for the long-term investor wanting to fend off the threats of inflation and taxes while making his money grow has been ____.

A. Stocks

B. Bonds

C. Money market funds

D. Treasury bills

46. The formula is used to calculate the _____________.

A. Sharpe ratio

B. Treynor measure

C. Coefficient of variation

D. Real rate of return

47. A portfolio with a 25% standard deviation generated a return of 15% last year when T-bills were paying 4.5%. This portfolio had a Sharpe ratio of ____.

A. .22

B. .60

C. .42

D. .25

48. Consider a Treasury bill with a rate of return of 5% and the following risky securities:

Security A: E(r) = .15; variance = .0400

Security B: E(r) = .10; variance = .0225

Security C: E(r) = .12; variance = .1000

Security D: E(r) = .13; variance = .0625

The investor must develop a complete portfolio by combining the risk-free asset with one of the securities mentioned above. The security the investor should choose as part of her complete portfolio to achieve the best CAL would be _________.

A. security A

B. security B

C. security C

D. security D

49. You purchased a share of stock for $29. One year later you received $2.25 as dividend and sold the share for $28. Your holding-period return was _________.

A. -3.57%

B. -3.45%

C. 4.31%

D. 8.03%

50. Security A has a higher standard deviation of returns than security B. We would expect that:

I. Security A would have a higher risk premium than security B.

II. The likely range of returns for security A in any given year would be higher than the likely range of returns for security B.

III. The Sharpe ratio of A will be higher than the Sharpe ratio of B.

A. I only

B. I and II only

C. II and III only

D. I, II, and III

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

A. $.25

B. $1

C. $2

D. $4

52. An investor invests 70% of her wealth in a risky asset with an expected rate of return of 15% and a variance of 5%, and she puts 30% in a Treasury bill that pays 5%. Her portfolio’s expected rate of return and standard deviation are __________ and __________ respectively.

A. 10%; 6.7%

B. 12%; 22.4%

C. 12%; 15.7%

D. 10%; 35%

53. The holding-period return on a stock was 32%. Its beginning price was $25, and its cash dividend was $1.50. Its ending price must have been _________.

A. $28.50

B. $33.20

C. $31.50

D. $29.75

54. Consider the following two investment alternatives: First, a risky portfolio that pays a 15% rate of return with a probability of 40% or a 5% rate of return with a probability of 60%. Second, a Treasury bill that pays 6%. The risk premium on the risky investment is _________.

A. 1%

B. 3%

C. 6%

D. 9%

55. Consider the following two investment alternatives: First, a risky portfolio that pays a 20% rate of return with a probability of 60% or a 5% rate of return with a probability of 40%. Second, a Treasury bill that pays 6%. If you invest $50,000 in the risky portfolio, your expected profit would be _________.

A. $3,000

B. $7,000

C. $7,500

D. $10,000

56. You invest $10,000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 15% and a standard deviation of 21% and a Treasury bill with a rate of return of 5%. How much money should be invested in the risky asset to form a portfolio with an expected return of 11%?

A. $6,000

B. $4,000

C. $7,000

D. $3,000

57. You invest $1,000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 16% and a standard deviation of 20% and a Treasury bill with a rate of return of 6%. __________ of your complete portfolio should be invested in the risky portfolio if you want your complete portfolio to have a standard deviation of 9%.

A. 100%

B. 90%

C. 45%

D. 10%

58. You invest $1,000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 16% and a standard deviation of 20% and a Treasury bill with a rate of return of 6%. A portfolio that has an expected value in 1 year of $1,100 could be formed if you _________.

A. place 40% of your money in the risky portfolio and the rest in the risk-free asset

B. place 55% of your money in the risky portfolio and the rest in the risk-free asset

C. place 60% of your money in the risky portfolio and the rest in the risk-free asset

D. place 75% of your money in the risky portfolio and the rest in the risk-free asset

59. You invest $1,000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 16% and a standard deviation of 20% and a Treasury bill with a rate of return of 6%. The slope of the capital allocation line formed with the risky asset and the risk-free asset is approximately _________.

A. 1.040

B. .80

C. .50

D. .25

60. You have $500,000 available to invest. The risk-free rate, as well as your borrowing rate, is 8%. The return on the risky portfolio is 16%. If you wish to earn a 22% return, you should _________.

A. invest $125,000 in the risk-free asset

B. invest $375,000 in the risk-free asset

C. borrow $125,000

D. borrow $375,000

61. The return on the risky portfolio is 15%. The risk-free rate, as well as the investor’s borrowing rate, is 10%. The standard deviation of return on the risky portfolio is 20%. If the standard deviation on the complete portfolio is 25%, the expected return on the complete portfolio is _________.

A. 6%

B. 8.75 %

C. 10%

D. 16.25%

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

A. 19%

B. 25%

C. 36%

D. 50%

63. You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40% respectively. X has an expected rate of return of 14%, and Y has an expected rate of return of 10%. To form a complete portfolio with an expected rate of return of 8%, you should invest approximately __________ in the risky portfolio. This will mean you will also invest approximately __________ and __________ of your complete portfolio in security X and Y, respectively.

A. 0%; 60%; 40%

B. 25%; 45%; 30%

C. 40%; 24%; 16%

D. 50%; 30%; 20%

64. You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40%, respectively. X has an expected rate of return of 14%, and Y has an expected rate of return of 10%. If you decide to hold 25% of your complete portfolio in the risky portfolio and 75% in the Treasury bills, then the dollar values of your positions in X and Y, respectively, would be __________ and _________.

A. $300; $450

B. $150; $100

C. $100; $150

D. $450; $300

65. You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40%, respectively. X has an expected rate of return of 14%, and Y has an expected rate of return of 10%. The dollar values of your positions in X, Y, and Treasury bills would be _________, __________, and __________, respectively, if you decide to hold a complete portfolio that has an expected return of 8%.

A. $162; $595; $243

B. $243; $162; $595

C. $595; $162; $243

D. $595; $243; $162

66. You have the following rates of return for a risky portfolio for several recent years:

If you invested $1,000 at the beginning of 2008, your investment at the end of 2011 would be worth ___________.

A. $2,176.60

B. $1,785.56

C. $1,645.53

D. $1,247.87

67. You have the following rates of return for a risky portfolio for several recent years:

The annualized (geometric) average return on this investment is _____.

A. 16.15%

B. 16.87%

C. 21.32%

D. 15.60%

68. A security with normally distributed returns has an annual expected return of 18% and standard deviation of 23%. The probability of getting a return between -28% and 64% in any one year is _____.

A. 68.26%

B. 95.44%

C. 99.74%

D. 100%

69. The Manhawkin Fund has an expected return of 16% and a standard deviation of 20%. The risk-free rate is 4%. What is the reward-to-volatility ratio for the Manhawkin Fund?

A. .8

B. .6

C. 9

D. 1

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

A. lower; higher

B. lower; lower

C. higher; lower

D. higher; higher

71. The price of a stock is $55 at the beginning of the year and $50 at the end of the year. If the stock paid a $3 dividend and inflation was 3%, what is the real holding-period return for the year?

A. -3.64%

B. -6.36%

C. -6.44%

D. -11.74%

72. The price of a stock is $38 at the beginning of the year and $41 at the end of the year. If the stock paid a $2.50 dividend, what is the holding-period return for the year?

A. 6.58%

B. 8.86%

C. 14.47%

D. 18.66%

73. You invest all of your money in 1-year T-bills. Which of the following statements is (are) correct?

I. Your nominal return on the T-bills is riskless.

II. Your real return on the T-bills is riskless.

III. Your nominal Sharpe ratio is zero.

A. I only

B. I and III only

C. II only

D. I, II, and III

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

A. Money market fund

B. U.S. T-bill

C. Short-term corporate bonds

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

75. What is the geometric average return of the following quarterly returns: 3%, 5%, 4%, and 7%?

A. 3.72%

B. 4.23%

C. 4.74%

D. 4.90%

76. What is the geometric average return over 1 year if the quarterly returns are 8%, 9%, 5%, and 12%?

A. 8%

B. 8.33 %

C. 8.47%

D. 8.5 %

77. If the nominal rate of return on investment is 6% and inflation is 2% over a holding period, what is the real rate of return on this investment?

A. 3.92%

B. 4%

C. 4.12%

D. 6%

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

A. Long-term Treasury bonds

B. Corporate bonds

C. Common stocks

D. Preferred stocks

79. The buyer of a new home is quoted a mortgage rate of .5% per month. What is the APR on the loan?

A. .50%

B. 5%

C. 6%

D. 6.5%

80. A loan for a new car costs the borrower .8% per month. What is the EAR?

A. .80%

B. 6.87%

C. 9.6%

D. 10.03%

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

A. SML

B. CAPM

C. CML

D. total return line

82. Which of the following arguments supporting passive investment strategies is (are) correct?

I. Active trading strategies may not guarantee higher returns but guarantee higher costs.

II. Passive investors can free-ride on the activity of knowledge investors whose trades force prices to reflect currently available information.

III. Passive investors are guaranteed to earn higher rates of return than active investors over sufficiently long time horizons.

A. I only

B. I and II only

C. II and III only

D. I, II, and III

83. You have the following rates of return for a risky portfolio for several recent years. Assume that the stock pays no dividends.

What is the geometric average return for the period?

A. 2.87%

B. .74%

C. 2.6%

D. 2.21%

84. You have the following rates of return for a risky portfolio for several recent years. Assume that the stock pays no dividends.

What is the dollar-weighted return over the entire time period?

A. 2.87%

B. .74%

C. 2.6%

D. 2.21%

Chapter 6: ___________________________________________________________________________

1. Risk that can be eliminated through diversification is called ______ risk.

A. unique

B. firm-specific

C. diversifiable

D. all of these options

2. The _______ decision should take precedence over the _____ decision.

A. asset allocation; stock selection

B. bond selection; mutual fund selection

C. stock selection; asset allocation

D. stock selection; mutual fund selection

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

A. they had to pay huge fines for obstruction of justice

B. their 401k accounts were held outside the company

C. their 401k accounts were not well diversified

D. none of these options

4. Based on the outcomes in the following table, choose which of the statements below is (are) correct?

I. The covariance of security A and security B is zero.

II. The correlation coefficient between securities A and C is negative.

III. The correlation coefficient between securities B and C is positive.

A. I only

B. I and II only

C. II and III only

D. I, II, and III

5. Asset A has an expected return of 15% and a reward-to-variability ratio of .4. Asset B has an expected return of 20% and a reward-to-variability ratio of .3. A risk-averse investor would prefer a portfolio using the risk-free asset and ______.

A. asset A

B. asset B

C. no risky asset

D. The answer cannot be determined from the data given.

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

A. up; right

B. up; left

C. down; right

D. down; left

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

A. optimal risky portfolio

B. risk-free rate

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

D. capital allocation line

8. The ________ is equal to the square root of the systematic variance divided by the total variance.

A. covariance

B. correlation coefficient

C. standard deviation

D. reward-to-variability ratio

9. Which of the following statistics cannot be negative?

A. Covariance

B. Variance

C. E(r)

D. Correlation coefficient

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

A. .40

B. .50

C. .75

D. .80

11. The correlation coefficient between two assets equals _________.

A. their covariance divided by the product of their variances

B. the product of their variances divided by their covariance

C. the sum of their expected returns divided by their covariance

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

12. Diversification is most effective when security returns are _________.

A. high

B. negatively correlated

C. positively correlated

D. uncorrelated

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

A. the sum of the securities’ covariances

B. the sum of the securities’ variances

C. the weighted sum of the securities’ expected returns

D. the weighted sum of the securities’ variances

14. Beta is a measure of security responsiveness to _________.

A. firm-specific risk

B. diversifiable risk

C. market risk

D. unique risk

15. The risk that can be diversified away is __________.

A. beta

B. firm-specific risk

C. market risk

D. systematic risk

16. Approximately how many securities does it take to diversify almost all of the unique risk from a portfolio?

A. 2

B. 6

C. 8

D. 20

17. Consider an investment opportunity set formed with two securities that are perfectly negatively correlated. The global minimum-variance portfolio has a standard deviation that is always _________.

A. equal to the sum of the securities’ standard deviations

B. equal to -1

C. equal to 0

D. greater than 0

18. Market risk is also called __________ and _________.

A. systematic risk; diversifiable risk

B. systematic risk; nondiversifiable risk

C. unique risk; nondiversifiable risk

D. unique risk; diversifiable risk

19. Firm-specific risk is also called __________ and __________.

A. systematic risk; diversifiable risk

B. systematic risk; nondiversifiable risk

C. unique risk; nondiversifiable risk

D. unique risk; diversifiable risk

20. Which one of the following stock return statistics fluctuates the most over time?

A. Covariance of returns

B. Variance of returns

C. Average return

D. Correlation coefficient

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

A. strategies for active securities trading

B. techniques used to identify efficient portfolios of risky assets

C. techniques used to measure the systematic risk of securities

D. techniques used in valuing securities options

22. Suppose that a stock portfolio and a bond portfolio have a zero correlation. This means that ______.

A. the returns on the stock and bond portfolios tend to move inversely

B. the returns on the stock and bond portfolios tend to vary independently of each other

C. the returns on the stock and bond portfolios tend to move together

D. the covariance of the stock and bond portfolios will be positive

23. You put half of your money in a stock portfolio that has an expected return of 14% and a standard deviation of 24%. You put the rest of your money in a risky bond portfolio that has an expected return of 6% and a standard deviation of 12%. The stock and bond portfolios have a correlation of .55. The standard deviation of the resulting portfolio will be ________________.

A. more than 18% but less than 24%

B. equal to 18%

C. more than 12% but less than 18%

D. equal to 12%

24. On a standard expected return versus standard deviation graph, investors will prefer portfolios that lie to the _____________ of the current investment opportunity set.

A. left and above

B. left and below

C. right and above

D. right and below

25. The term complete portfolio refers to a portfolio consisting of _________________.

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

B. the market portfolio combined with the minimum-variance portfolio

C. securities from domestic markets combined with securities from foreign markets

D. common stocks combined with bonds

26. Rational risk-averse investors will always prefer portfolios _____________.

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

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

C. at or near the minimum-variance point on the efficient frontier

D. that are risk-free to all other asset choices

27. The optimal risky portfolio can be identified by finding:

I. The minimum-variance point on the efficient frontier

II. The maximum-return point on the efficient frontier and the minimum-variance point on the efficient frontier

III. The tangency point of the capital market line and the efficient frontier

IV. The line with the steepest slope that connects the risk-free rate to the efficient frontier

A. I and II only

B. II and III only

C. III and IV only

D. I and IV only

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

A. lowest; steepest

B. highest; flattest

C. highest; steepest

D. lowest; flattest

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

A. .583

B. .225

C. .327

D. .128

30. The standard deviation of return on investment A is .10, while the standard deviation of return on investment B is .05. If the covariance of returns on A and B is .0030, the correlation coefficient between the returns on A and B is _________.

A. .12

B. .36

C. .60

D. .77

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

A. 23%

B. 19.76%

C. 18.45%

D. 17.67%

32. The standard deviation of return on investment A is .10, while the standard deviation of return on investment B is .04. If the correlation coefficient between the returns on A and B is -.50, the covariance of returns on A and B is _________.

A. -.0447

B. -.0020

C. .0020

D. .0447

33. Consider two perfectly negatively correlated risky securities, A and B. Security A has an expected rate of return of 16% and a standard deviation of return of 20%. B has an expected rate of return of 10% and a standard deviation of return of 30%. The weight of security B in the minimum-variance portfolio is _________.

A. 10%

B. 20%

C. 40%

D. 60%

34. An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 18% and a standard deviation of return of 20%. Stock B has an expected return of 14% and a standard deviation of return of 5%. The correlation coefficient between the returns of A and B is .50. The risk-free rate of return is 10%. The proportion of the optimal risky portfolio that should be invested in stock A is _________.

A. 0%

B. 40%

C. 60%

D. 100%

35. An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 18% and a standard deviation of return of 20%. Stock B has an expected return of 14% and a standard deviation of return of 5%. The correlation coefficient between the returns of A and B is .50. The risk-free rate of return is 10%. The expected return on the optimal risky portfolio is _________.

A. 14%

B. 15.6%

C. 16.4%

D. 18%

36. An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 18% and a standard deviation of return of 20%. Stock B has an expected return of 14% and a standard deviation of return of 5%. The correlation coefficient between the returns of A and B is .50. The risk-free rate of return is 10%. The standard deviation of return on the optimal risky portfolio is _________.

A. 0%

B. 5%

C. 7%

D. 20%

37. An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 21% and a standard deviation of return of 39%. Stock B has an expected return of 14% and a standard deviation of return of 20%. The correlation coefficient between the returns of A and B is .4. The risk-free rate of return is 5%. The proportion of the optimal risky portfolio that should be invested in stock B is approximately _________.

A. 29%

B. 44%

C. 56%

D. 71%

38. An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 21% and a standard deviation of return of 39%. Stock B has an expected return of 14% and a standard deviation of return of 20%. The correlation coefficient between the returns of A and B is .4. The risk-free rate of return is 5%. The expected return on the optimal risky portfolio is approximately _________. (Hint: Find weights first.)

A. 14%

B. 16%

C. 18%

D. 19%

39. An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 21% and a standard deviation of return of 39%. Stock B has an expected return of 14% and a standard deviation of return of 20%. The correlation coefficient between the returns of A and B is .4. The risk-free rate of return is 5%. The standard deviation of the returns on the optimal risky portfolio is _________.

A. 25.5%

B. 22.3%

C. 21.4%

D. 20.7%

40. An investor can design a risky portfolio based on two stocks, A and B. The standard deviation of return on stock A is 24%, while the standard deviation on stock B is 14%. The correlation coefficient between the returns on A and B is .35. The expected return on stock A is 25%, while on stock B it is 11%. The proportion of the minimum-variance portfolio that would be invested in stock B is approximately _________.

A. 45%

B. 67%

C. 85%

D. 92%

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

A. 10%

B. 13.6%

C. 15%

D. 19.41%

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

A. 0%

B. 6%

C. 12%

D. 17%

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

A. beta

B. standard deviation

C. covariance

D. alpha

44. Semitool Corp. has an expected excess return of 6% for next year. However, for every unexpected 1% change in the market, Semitool’s return responds by a factor of 1.2. Suppose it turns out that the economy and the stock market do better than expected by 1.5% and Semitool’s products experience more rapid growth than anticipated, pushing up the stock price by another 1%. Based on this information, what was Semitool’s actual excess return?

A. 7%

B. 8.5%

C. 8.8%

D. 9.25%

45. The part of a stock’s return that is systematic is a function of which of the following variables?

I. Volatility in excess returns of the stock market

II. The sensitivity of the stock’s returns to changes in the stock market

III. The variance in the stock’s returns that is unrelated to the overall stock market

A. I only

B. I and II only

C. II and III only

D. I, II, and III

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

A. 20% more

B. slightly more

C. 20% less

D. slightly less

47. Which risk can be partially or fully diversified away as additional securities are added to a portfolio?

I. Total risk

II. Systematic risk

III. Firm-specific risk

A. I only

B. I and II only

C. I, II, and III

D. I and III

48. According to Tobin’s separation property, portfolio choice can be separated into two independent tasks consisting of __________ and __________.

A. identifying all investor imposed constraints; identifying the set of securities that conform to the investor’s constraints and offer the best risk-return trade-offs

B. identifying the investor’s degree of risk aversion; choosing securities from industry groups that are consistent with the investor’s risk profile

C. identifying the optimal risky portfolio; constructing a complete portfolio from T-bills and the optimal risky portfolio based on the investor’s degree of risk aversion

D. choosing which risky assets an investor prefers according to the investor’s risk-aversion level; minimizing the CAL by lending at the risk-free rate

49. You are constructing a scatter plot of excess returns for stock A versus the market index. If the correlation coefficient between stock A and the index is -1, you will find that the points of the scatter diagram ___________ and the line of best fit has a ______________.

A. all fall on the line of best fit; positive slope

B. all fall on the line of best fit; negative slope

C. are widely scattered around the line; positive slope

D. are widely scattered around the line; negative slope

50. The term excess return refers to ______________.

A. returns earned illegally by means of insider trading

B. the difference between the rate of return earned and the risk-free rate

C. the difference between the rate of return earned on a particular security and the rate of return earned on other securities of equivalent risk

D. the portion of the return on a security that represents tax liability and therefore cannot be reinvested

51. You are recalculating the risk of ACE stock in relation to the market index, and you find that the ratio of the systematic variance to the total variance has risen. You must also find that the ____________.

A. covariance between ACE and the market has fallen

B. correlation coefficient between ACE and the market has fallen

C. correlation coefficient between ACE and the market has risen

D. unsystematic risk of ACE has risen

52. A stock has a correlation with the market of .45. The standard deviation of the market is 21%, and the standard deviation of the stock is 35%. What is the stock’s beta?

A. 1

B. .75

C. .60

D. .55

53. The values of beta coefficients of securities are __________.

A. always positive

B. always negative

C. always between positive 1 and negative 1

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

54. A security’s beta coefficient will be negative if ____________.

A. its returns are negatively correlated with market-index returns

B. its returns are positively correlated with market-index returns

C. its stock price has historically been very stable

D. market demand for the firm’s shares is very low

55. The market value weighted-average beta of firms included in the market index will always be _____________.

A. 0

B. between 0 and 1

C. 1

D. none of these options (There is no particular rule concerning the average beta of firms included in the market index.)

56. Diversification can reduce or eliminate __________ risk.

A. all

B. systematic

C. nonsystematic

D. only an insignificant

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

A. 1

B. .5

C. 0

D. -1

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

A. 1

B. less than 1

C. between 0 and 1

D. less than or equal to 0

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

A. stock’s standard deviation

B. variance of the market

C. stock’s beta

D. covariance with the market index

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

A. A strike by union workers hurts a firm’s quarterly earnings.

B. Mad Cow disease in Montana hurts local ranchers and buyers of beef.

C. The Federal Reserve increases interest rates 50 basis points.

D. A senior executive at a firm embezzles $10 million and escapes to South America.

61. Which of the following statements is (are) true regarding time diversification?

I. The standard deviation of the average annual rate of return over several years will be smaller than the 1-year standard deviation.

II. For a longer time horizon, uncertainty compounds over a greater number of years.

III. Time diversification does not reduce risk.

A. I only

B. II only

C. II and III only

D. I, II, and III

62. You find that the annual Sharpe ratio for stock A returns is equal to 1.8. For a 3-year holding period, the Sharpe ratio would equal _______.

A. 1.8

B. 2.48

C. 3.12

D. 5.49

63.

The beta of this stock is ____.

A. .12

B. .35

C. 1.32

D. 4.05

64.

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

A. .50

B. 1.5

C. 2

D. 3

65.

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

A. .35; .12

B. 4.05; 1.32

C. 15.44; .97

D. .26; 1.36

66.

_______________ percent of the variance is explained by this regression.

A. 12

B. 35

C. 4.05

D. 80

67.

The stock is ______ riskier than the typical stock.

A. 32%

B. 15.44%

C. 12%

D. 38%

68. Decreasing the number of stocks in a portfolio from 50 to 10 would likely ________________.

A. increase the systematic risk of the portfolio

B. increase the unsystematic risk of the portfolio

C. increase the return of the portfolio

D. decrease the variation in returns the investor faces in any one year

69. If you want to know the portfolio standard deviation for a three-stock portfolio, you will have to ______.

A. calculate two covariances and one trivariance

B. calculate only two covariances

C. calculate three covariances

D. average the variances of the individual stocks

70. Which of the following correlation coefficients will produce the least diversification benefit?

A. -.6

B. -.3

C. 0

D. .8

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

A. -.6

B. -.9

C. 0

D. .4

72. What is the most likely correlation coefficient between a stock-index mutual fund and the S&P 500?

A. -1

B. 0

C. 1

D. .5

73. Investing in two assets with a correlation coefficient of -.5 will reduce what kind of risk?

A. Market risk

B. Nondiversifiable risk

C. Systematic risk

D. Unique risk

74. Investing in two assets with a correlation coefficient of 1 will reduce which kind of risk?

A. Market risk

B. Unique risk

C. Unsystematic risk

D. None of these options (With a correlation of 1, no risk will be reduced.)

75. A portfolio of stocks fluctuates when the Treasury yields change. Since this risk cannot be eliminated through diversification, it is called __________.

A. firm-specific risk

B. systematic risk

C. unique risk

D. none of the options

76. As you lengthen the time horizon of your investment period and decide to invest for multiple years, you will find that:

I. The average risk per year may be smaller over longer investment horizons.

II. The overall risk of your investment will compound over time.

III. Your overall risk on the investment will fall.

A. I only

B. I and II only

C. III only

D. I, II, and III

77. You are considering adding a new security to your portfolio. To decide whether you should add the security, you need to know the security’s:

I. Expected return

II. Standard deviation

III. Correlation with your portfolio

A. I only

B. I and II only

C. I and III only

D. I, II, and III

78. Which of the following is a correct expression concerning the formula for the standard deviation of returns of a two-asset portfolio where the correlation coefficient is positive?

A. σ2rp < (W12σ12 + W22σ22) B. σ2rp = (W12σ12 + W22σ22) C. σ2rp = (W12σ12 – W22σ22) D. σ2rp > (W12σ12 + W22σ22)

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

A. 9.7%

B. 12.2%

C. 14%

D. 15.6%

80. What is the standard deviation of a portfolio of two stocks given the following data: Stock A has a standard deviation of 30%. Stock B has a standard deviation of 18%. The portfolio contains 60% of stock A, and the correlation coefficient between the two stocks is -1.

A. 0%

B. 10.8%

C. 18%

D. 24%

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

A. 0

B. .45

C. .74

D. 1.35

82. A project has a 60% chance of doubling your investment in 1 year and a 40% chance of losing half your money. What is the standard deviation of this investment?

A. 25%

B. 50%

C. 62%

D. 73%

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

A. 0%

B. 25%

C. 50%

D. 75%

84. The figures below show plots of monthly excess returns for two stocks plotted against excess returns for a market index.

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

A. Stock A

B. Stock B

C. There is no difference between A or B.

D. The answer cannot be determined from the information given.

85. The figures below show plots of monthly excess returns for two stocks plotted against excess returns for a market index.

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

A. Stock A is riskier.

B. Stock B is riskier.

C. Both stocks are equally risky.

D. The answer cannot be determined from the information given.

Chapter 7: ___________________________________________________________________________

1. An adjusted beta will be ______ than the unadjusted beta.

A. lower

B. higher

C. closer to 1

D. closer to 0

2. Fama and French claim that after controlling for firm size and the ratio of the firm’s book value to market value, beta is:

I. Highly significant in predicting future stock returns

II. Relatively useless in predicting future stock returns

III. A good predictor of the firm’s specific risk

A. I only

B. II only

C. I and III only

D. I, II, and III

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

I. Individual trades of investors do not affect a stock’s price.

II. All investors plan for one identical holding period.

III. All investors analyze securities in the same way and share the same economic view of the world.

IV. All investors have the same level of risk aversion.

A. I, II, and IV only

B. I, II, and III only

C. II, III, and IV only

D. I, II, III, and IV

4. When all investors analyze securities in the same way and share the same economic view of the world, we say they have ____________________.

A. heterogeneous expectations

B. equal risk aversion

C. asymmetric information

D. homogeneous expectations

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

I. All investors will choose to hold the market portfolio, which includes all risky assets in the world.

II. Investors’ complete portfolio will vary depending on their risk aversion.

III. The return per unit of risk will be identical for all individual assets.

IV. The market portfolio will be on the efficient frontier, and it will be the optimal risky portfolio.

A. I, II, and III only

B. II, III, and IV only

C. I, III, and IV only

D. I, II, III, and IV

6. Consider the CAPM. The risk-free rate is 6%, and the expected return on the market is 18%. What is the expected return on a stock with a beta of 1.3?

A. 6%

B. 15.6%

C. 18%

D. 21.6%

7. Consider the CAPM. The risk-free rate is 5%, and the expected return on the market is 15%. What is the beta on a stock with an expected return of 17%?

A. .5

B. .7

C. 1

D. 1.2

8. Consider the CAPM. The expected return on the market is 18%. The expected return on a stock with a beta of 1.2 is 20%. What is the risk-free rate?

A. 2%

B. 6%

C. 8%

D. 12%

9. The arbitrage pricing theory was developed by _________.

A. Henry Markowitz

B. Stephen Ross

C. William Sharpe

D. Eugene Fama

10. In the context of the capital asset pricing model, the systematic measure of risk is captured by _________.

A. unique risk

B. beta

C. the standard deviation of returns

D. the variance of returns

11. Empirical results estimated from historical data indicate that betas _________.

A. are always close to zero

B. are constant over time

C. of all securities are always between zero and 1

D. seem to regress toward 1 over time

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

A. expected returns to fall; risk premiums to fall

B. expected returns to rise; risk premiums to fall

C. expected returns to rise; risk premiums to rise

D. expected returns to fall; risk premiums to rise

13. The market portfolio has a beta of _________.

A. -1

B. 0

C. .5

D. 1

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

A. nondiversifiable

B. market

C. systematic

D. unsystematic

15. The capital asset pricing model was developed by _________.

A. Kenneth French

B. Stephen Ross

C. William Sharpe

D. Eugene Fama

16. If all investors become more risk averse, the SML will _______________ and stock prices will _______________.

A. shift upward; rise

B. shift downward; fall

C. have the same intercept with a steeper slope; fall

D. have the same intercept with a flatter slope; rise

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

A. negative alpha is considered a good buy

B. positive alpha is considered overpriced

C. positive alpha is considered underpriced

D. zero alpha is considered a good buy

18. Arbitrage is based on the idea that _________.

A. assets with identical risks must have the same expected rate of return

B. securities with similar risk should sell at different prices

C. the expected returns from equally risky assets are different

D. markets are perfectly efficient

19. Investors require a risk premium as compensation for bearing ______________.

A. unsystematic risk

B. alpha risk

C. residual risk

D. systematic risk

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

A. above the security market line

B. along the security market line

C. below the security market line

D. at no relation to the security market line

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

A. negative betas

B. positive alphas

C. positive betas

D. zero alphas

22. You have a $50,000 portfolio consisting of Intel, GE, and Con Edison. You put $20,000 in Intel, $12,000 in GE, and the rest in Con Edison. Intel, GE, and Con Edison have betas of 1.3, 1, and .8, respectively. What is your portfolio beta?

A. 1.048

B. 1.033

C. 1

D. 1.037

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

A. CML

B. CAL

C. SML

D. SCL

24. Research has revealed that regardless of what the current estimate of a firm’s beta is, beta will tend to move closer to ______ over time.

A. 1

B. 0

C. -1

D. .5

25. The beta of a security is equal to _________.

A. the covariance between the security and market returns divided by the variance of the market’s returns

B. the covariance between the security and market returns divided by the standard deviation of the market’s returns

C. the variance of the security’s returns divided by the covariance between the security and market returns

D. the variance of the security’s returns divided by the variance of the market’s returns

26. According to the capital asset pricing model, in equilibrium _________.

A. all securities’ returns must lie below the capital market line

B. all securities’ returns must lie on the security market line

C. the slope of the security market line must be less than the market risk premium

D. any security with a beta of 1 must have an excess return of zero

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

A. All securities in the market portfolio are held in proportion to their market values.

B. It includes all risky assets in the world, including human capital.

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

D. It lies on the efficient frontier.

28. In a world where the CAPM holds, which one of the following is not a true statement regarding the capital market line?

A. The capital market line always has a positive slope.

B. The capital market line is also called the security market line.

C. The capital market line is the best-attainable capital allocation line.

D. The capital market line is the line from the risk-free rate through the market portfolio.

29. Consider the single factor APT. Portfolio A has a beta of 1.3 and an expected return of 21%. Portfolio B has a beta of .7 and an expected return of 17%. The risk-free rate of return is 8%. If you wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio __________ and a long position in portfolio _________.

A. A; A

B. A; B

C. B; A

D. B; B

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

A. A; A

B. A; B

C. B; A

D. B; B

31. Consider the multifactor APT with two factors. Portfolio A has a beta of .5 on factor 1 and a beta of 1.25 on factor 2. The risk premiums on the factor 1 and 2 portfolios are 1% and 7%, respectively. The risk-free rate of return is 7%. The expected return on portfolio A is __________ if no arbitrage opportunities exist.

A. 13.5%

B. 15%

C. 16.25%

D. 23%

32. Consider the one-factor APT. The variance of the return on the factor portfolio is .08. The beta of a well-diversified portfolio on the factor is 1.2. The variance of the return on the well-diversified portfolio is approximately _________.

A. .1152

B. .1270

C. .1521

D. .1342

33. Security X has an expected rate of return of 13% and a beta of 1.15. The risk-free rate is 5%, and the market expected rate of return is 15%. According to the capital asset pricing model, security X is _________.

A. fairly priced

B. overpriced

C. underpriced

D. none of these answers

34. The possibility of arbitrage arises when ____________.

A. there is no consensus among investors regarding the future direction of the market, and thus trades are made arbitrarily

B. mispricing among securities creates opportunities for riskless profits

C. two identically risky securities carry the same expected returns

D. investors do not diversify

35. Building a zero-investment portfolio will always involve _____________.

A. an unknown mixture of short and long positions

B. only short positions

C. only long positions

D. equal investments in a short and a long position

36. An important characteristic of market equilibrium is _______________.

A. the presence of many opportunities for creating zero-investment portfolios

B. all investors exhibit the same degree of risk aversion

C. the absence of arbitrage opportunities

D. the lack of liquidity in the market

37. Consider the capital asset pricing model. The market degree of risk aversion, A, is 3. The variance of return on the market portfolio is .0225. If the risk-free rate of return is 4%, the expected return on the market portfolio is _________.

A. 6.75%

B. 9%

C. 10.75%

D. 12%

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

A. 1.14

B. 1.2

C. 1.26

D. 1.5

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

A. measures the stock’s contribution to the standard deviation of the market portfolio

B. measures the stock’s unsystematic risk

C. changes with the variance of the residuals

D. measures the stock’s contribution to the standard deviation of the stock

40. Security A has an expected rate of return of 12% and a beta of 1.1. The market expected rate of return is 8%, and the risk-free rate is 5%. The alpha of the stock is _________.

A. -1.7%

B. 3.7%

C. 5.5%

D. 8.7%

41. The variance of the return on the market portfolio is .04 and the expected return on the market portfolio is 20%. If the risk-free rate of return is 10%, the market degree of risk aversion, A, is _________.

A. .5

B. 2.5

C. 3.5

D. 5

42. The risk-free rate is 4%. The expected market rate of return is 11%. If you expect stock X with a beta of .8 to offer a rate of return of 12%, then you should _________.

A. buy stock X because it is overpriced

B. buy stock X because it is underpriced

C. sell short stock X because it is overpriced

D. sell short stock X because it is underpriced

43. Consider the one-factor APT. The standard deviation of return on a well-diversified portfolio is 20%. The standard deviation on the factor portfolio is 12%. The beta of the well-diversified portfolio is approximately _________.

A. .60

B. 1

C. 1.67

D. 3.20

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

A. 12%

B. 17%

C. 18%

D. 23%

45. Consider two stocks, A and B. Stock A has an expected return of 10% and a beta of 1.2. Stock B has an expected return of 14% and a beta of 1.8. The expected market rate of return is 9% and the risk-free rate is 5%. Security __________ would be considered the better buy because _________.

A. A; it offers an expected excess return of .2%

B. A; it offers an expected excess return of 2.2%

C. B; it offers an expected excess return of 1.8%

D. B; it offers an expected return of 2.4%

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

A. directly related to the risk aversion of the particular investor

B. inversely related to the risk aversion of the particular investor

C. directly related to the beta of the stock

D. inversely related to the alpha of the stock

47. In his famous critique of the CAPM, Roll argued that the CAPM ______________.

A. is not testable because the true market portfolio can never be observed

B. is of limited use because systematic risk can never be entirely eliminated

C. should be replaced by the APT

D. should be replaced by the Fama-French three-factor model

48. Which of the following variables do Fama and French claim do a better job explaining stock returns than beta?

I. Book-to-market ratio

II. Unexpected change in industrial production

III. Firm size

A. I only

B. I and II only

C. I and III only

D. I, II, and III

49. In a study conducted by Jagannathan and Wang, it was found that the performance of beta in explaining security returns could be considerably enhanced by:

I. Including the unsystematic risk of a stock

II. Including human capital in the market portfolio

III. Allowing for changes in beta over time

A. I and II only

B. II and III only

C. I and III only

D. I, II, and III

50. The SML is valid for _______________, and the CML is valid for ______________.

A. only individual assets; well-diversified portfolios only

B. only well-diversified portfolios; only individual assets

C. both well-diversified portfolios and individual assets; both well-diversified portfolios and individual assets

D. both well-diversified portfolios and individual assets; well-diversified portfolios only

51. Liquidity is a risk factor that __________.

A. has yet to be accurately measured and incorporated into portfolio management

B. is unaffected by trading mechanisms on various stock exchanges

C. has no effect on the market value of an asset

D. affects bond prices but not stock prices

52. Beta is a measure of ______________.

A. total risk

B. relative systematic risk

C. relative nonsystematic risk

D. relative business risk

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

A. the degree of diversification

B. the systematic risk of the portfolio

C. the firm-specific risk of the portfolio

D. economic factors

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

A. the market rate of return

B. zero

C. the risk-free rate

D. The answer cannot be determined from the information given.

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

A. Expected inflation

B. Systematic risk

C. Time value of money

D. Residual risk

56. The most significant conceptual difference between the arbitrage pricing theory (APT) and the capital asset pricing model (CAPM) is that the CAPM _____________.

A. places less emphasis on market risk

B. recognizes multiple unsystematic risk factors

C. recognizes only one systematic risk factor

D. recognizes multiple systematic risk factors

57. Arbitrage is __________________________.

A. an example of the law of one price

B. the creation of riskless profits made possible by relative mispricing among securities

C. a common opportunity in modern markets

D. an example of a risky trading strategy based on market forecasting

58. A stock’s alpha measures the stock’s ____________________.

A. expected return

B. abnormal return

C. excess return

D. residual return

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

A. residual standard deviation

B. R-square

C. degrees of freedom

D. sum of squares of the regression

60. Standard deviation of portfolio returns is a measure of ___________.

A. total risk

B. relative systematic risk

C. relative nonsystematic risk

D. relative business risk

61. One of the main problems with the arbitrage pricing theory is __________.

A. its use of several factors instead of a single market index to explain the risk-return relationship

B. the introduction of nonsystematic risk as a key factor in the risk-return relationship

C. that the APT requires an even larger number of unrealistic assumptions than does the CAPM

D. the model fails to identify the key macroeconomic variables in the risk-return relationship

62. You run a regression of a stock’s returns versus a market index and find the following:

Based on the data, you know that the stock _____.

A. earned a positive alpha that is statistically significantly different from zero

B. has a beta precisely equal to .890

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

D. has no systematic risk

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

A. SDA Corp. stock is underpriced

B. SDA Corp. stock is fairly priced

C. SDA Corp. stock’s alpha is -.75%

D. SDA Corp. stock alpha is .75%

64. Assume that both X and Y are well-diversified portfolios and the risk-free rate is 8%. Portfolio X has an expected return of 14% and a beta of 1. Portfolio Y has an expected return of 9.5% and a beta of .25. In this situation, you would conclude that portfolios X and Y _________.

A. are in equilibrium

B. offer an arbitrage opportunity

C. are both underpriced

D. are both fairly priced

65.

What is the expected return on the market?

A. 0%

B. 5%

C. 10%

D. 15%

66.

What is the beta for a portfolio with an expected return of 12.5%?

A. 0

B. 1

C. 1.5

D. 2

67.

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

A. 5%

B. 7.5%

C. 12.5%

D. 15%

68.

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

A. 0%

B. 13%

C. 15%

D. 17%

69. If the simple CAPM is valid and all portfolios are priced correctly, which of the situations below is possible? Consider each situation independently, and assume the risk-free rate is 5%.

A. Option A

B. Option B

C. Option C

D. Option D

70. Two investment advisers are comparing performance. Adviser A averaged a 20% return with a portfolio beta of 1.5, and adviser B averaged a 15% return with a portfolio beta of 1.2. If the T-bill rate was 5% and the market return during the period was 13%, which adviser was the better stock picker?

A. Advisor A was better because he generated a larger alpha.

B. Advisor B was better because she generated a larger alpha.

C. Advisor A was better because he generated a higher return.

D. Advisor B was better because she achieved a good return with a lower beta.

71. The expected return on the market is the risk-free rate plus the _____________.

A. diversified returns

B. equilibrium risk premium

C. historical market return

D. unsystematic return

72. You consider buying a share of stock at a price of $25. The stock is expected to pay a dividend of $1.50 next year, and your advisory service tells you that you can expect to sell the stock in 1 year for $28. The stock’s beta is 1.1, rf is 6%, and E[rm] = 16%. What is the stock’s abnormal return?

A. 1%

B. 2%

C. -1%

D. -2%

73. If the beta of the market index is 1 and the standard deviation of the market index increases from 12% to 18%, what is the new beta of the market index?

A. .8

B. 1

C. 1.2

D. 1.5

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

A. 4%

B. 4.8%

C. 6.6%

D. 8%

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

A. 5%

B. 9%

C. 13%

D. 14%

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

A. 3.8%

B. 13.1%

C. 15.6%

D. 19.1%

77. Research has identified two systematic factors that affect U.S. stock returns. The factors are growth in industrial production and changes in long-term interest rates. Industrial production growth is expected to be 3%, and long-term interest rates are expected to increase by 1%. You are analyzing a stock that has a beta of 1.2 on the industrial production factor and .5 on the interest rate factor. It currently has an expected return of 12%. However, if industrial production actually grows 5% and interest rates drop 2%, what is your best guess of the stock’s return?

A. 15.9%

B. 12.9%

C. 13.2%

D. 12%

78. A stock has a beta of 1.3. The systematic risk of this stock is ____________ the stock market as a whole.

A. higher than

B. lower than

C. equal to

D. indeterminable compared to

79. There are two independent economic factors, M1 and M2. The risk-free rate is 5%, and all stocks have independent firm-specific components with a standard deviation of 25%. Portfolios A and B are well diversified. Given the data below, which equation provides the correct pricing model?

A. E(rP) = 5 + 1.12βP1 + 11.86βP2

B. E(rP) = 5 + 4.96βP1 + 13.26βP2

C. E(rP) = 5 + 3.23βP1 + 8.46βP2

D. E(rP) = 5 + 8.71βP1 + 9.68βP2

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

A. .0%

B. 1%

C. 2%

D. 3%

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

A. 10%

B. 11.5%

C. 13.6%

D. 14%

82. The two-factor model on a stock provides a risk premium for exposure to market risk of 9%, a risk premium for exposure to interest rate risk of (-1.3%), and a risk-free rate of 3.5%. The beta for exposure to market risk is 1, and the beta for exposure to interest rate risk is also 1. What is the expected return on the stock?

A. 8.7%

B. 11.2%

C. 13.8%

D. 15.2%

83. The risk premium for exposure to exchange rates is 5%, and the firm has a beta relative to exchange rates of .4. The risk premium for exposure to the consumer price index is -6%, and the firm has a beta relative to the CPI of .8. If the risk-free rate is 3%, what is the expected return on this stock?

A. .2%

B. 1.5%

C. 3.6%

D. 4%

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

A. 11.6%

B. 13%

C. 15.3%

D. 19.5%

85. The measure of risk used in the capital asset pricing model is ___________.

A. specific risk

B. the standard deviation of returns

C. reinvestment risk

D. beta

Chapter 8: ___________________________________________________________________________

1. Which of the following beliefs would not preclude charting as a method of portfolio management?

A. The market is strong-form efficient.

B. The market is semistrong-form efficient.

C. The market is weak-form efficient.

D. Stock prices follow recurring patterns.

2. In a 1953 study of stock prices, Maurice Kendall found that ________.

A. there were no predictable patterns in stock prices

B. stock prices exhibited strong serial autocorrelation

C. day-to-day stock prices followed consistent trends

D. fundamental analysis could be used to generate abnormal returns

3. The weak form of the EMH states that ________ must be reflected in the current stock price.

A. all past information, including security price and volume data

B. all publicly available information

C. all information, including inside information

D. all costless information

4. The semistrong form of the EMH states that ________ must be reflected in the current stock price.

A. all security price and volume data

B. all publicly available information

C. all information, including inside information

D. all costless information

5. The strong form of the EMH states that ________ must be reflected in the current stock price.

A. all security price and volume data

B. all publicly available information

C. all information, including inside information

D. all costless information

6. Random price movements indicate ________.

A. irrational markets

B. that prices cannot equal fundamental values

C. that technical analysis to uncover trends can be quite useful

D. that markets are functioning efficiently

7. When the market risk premium rises, stock prices will ________.

A. rise

B. fall

C. recover

D. have excess volatility

8. The small-firm-in-January effect is strongest ________.

A. early in the month

B. in the middle of the month

C. late in the month

D. in even-numbered years

9. Evidence suggests that there may be _______ momentum and ________ reversal patterns in stock price behavior.

A. short-run; short-run

B. long-run; long-run

C. long-run; short-run

D. short-run; long run

10. Proponents of the EMH typically advocate __________.

A. a conservative investment strategy

B. a liberal investment strategy

C. a passive investment strategy

D. an aggressive investment strategy

11. Stock prices that are stable over time _______.

A. indicate that prices are useful indicators of true economic value

B. indicate that the market is not incorporating new information into current stock prices

C. ensure that an economy allocates its resources efficiently

D. indicates that returns follow a random-walk process

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

A. worst; best

B. worst; worst

C. best; worst

D. best; best

13. Which of the following is not a method employed by followers of technical analysis?

A. Charting

B. Relative strength analysis

C. Earnings forecasting

D. Trading around support and resistance levels

14. Which of the following is not a method employed by fundamental analysts?

A. Analyzing the Fed’s next interest rate move

B. Relative strength analysis

C. Earnings forecasting

D. Estimating the economic growth rate

15. The primary objective of fundamental analysis is to identify __________.

A. well-run firms

B. poorly run firms

C. mispriced stocks

D. high P/E stocks

16. If you believe in the __________ form of the EMH, you believe that stock prices reflect all publicly available information but not information that is available only to insiders.

A. semistrong

B. strong

C. weak

D. perfect

17. If you believe in the __________ form of the EMH, you believe that stock prices reflect all relevant information, including information that is available only to insiders.

A. semistrong

B. strong

C. weak

D. perfect

18. Most of the stock price response to a corporate earnings or dividend announcement occurs within ________________.

A. about 30 seconds

B. about 10 minutes

C. 6 months

D. 2 years

19. __________ is the return on a stock beyond what would be predicted from market movements alone.

A. A normal return

B. A subliminal return

C. An abnormal return

D. None of these options

20. You believe that stock prices reflect all information that can be derived by examining market trading data such as the history of past stock prices, trading volume, or short interest, but you do not believe stock prices reflect all publicly available and inside information. You are a proponent of the ____________ form of the EMH.

A. semistrong

B. strong

C. weak

D. perfect

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

A. $12,000,000

B. $6,000,000

C. $3,000,000

D. $0

22. A mutual fund that attempts to hold quantities of shares in proportion to their representation in the market is called a __________ fund.

A. stock

B. index

C. hedge

D. money market

23. Choosing stocks by searching for predictable patterns in stock prices is called ________.

A. fundamental analysis

B. technical analysis

C. index management

D. random-walk investing

24. Which of the following is not an issue that is central to the debate regarding market efficiency?

A. The magnitude issue

B. The tax-loss selling issue

C. The lucky event issue

D. The selection bias issue

25. Most people would readily agree that the stock market is not _________.

A. weak-form efficient

B. semistrong-form efficient

C. strong-form efficient

D. efficient at all

26. Small firms have tended to earn abnormal returns primarily in __________.

A. the month of January

B. the month July

C. the trough of the business cycle

D. the peak of the business cycle

27. Fama and French have suggested that many market anomalies can be explained as manifestations of ____________.

A. regulatory effects

B. high trading costs

C. information asymmetry

D. varying risk premiums

28. Proponents of the EMH think technical analysts __________.

A. should focus on relative strength

B. should focus on resistance levels

C. should focus on support levels

D. are wasting their time

29. Evidence supporting semistrong-form market efficiency suggests that investors should _________________________.

A. rely on technical analysis to select securities

B. rely on fundamental analysis to select securities

C. use a passive trading strategy such as purchasing an index fund or an ETF

D. select securities by throwing darts at the financial pages of the newspaper

30. “Buy a stock if its price moves up by 2% more than the Dow Average” is an example of a _________________.

A. trading rule

B. market anomaly

C. fundamental approach

D. passive trading strategy

31. Jaffe found that stock prices __________ after insiders intensively bought shares and __________ after insiders intensively sold shares.

A. decreased; decreased

B. decreased; increased

C. increased; decreased

D. increased; increased

32. In a 1988 study, Fama and French found that the return on the aggregate stock market was __________ when the dividend yield was higher.

A. higher

B. lower

C. unaffected

D. more skewed

33. In their 2010 study, Fama and French used a four-factor model to analyze excess returns on equity mutual funds. They found that the funds ______.

A. had negative alphas before fees were considered.

B. had positive alphas after fees were considered.

C. had negative alphas after fees were considered.

D. had negative alphas before fees were considered and had negative alphas after fees were considered.

34. Joe bought a stock at $57 per share. The price promptly fell to $55. Joe held on to the stock until it again reached $57, and then he sold it once he had eliminated his loss. If other investors do the same to establish a trading pattern, this would contradict _______.

A. the strong-form EMH

B. the weak-form EMH

C. technical analysis

D. the semistrong-form EMH

35. According to 1968 research by Ball and Brown, securities markets fully adjust to earnings announcements _______.

A. instantly

B. in 1 day

C. in 1 week

D. gradually over time

36. When stock returns exhibit positive serial correlation, this means that __________ returns tend to follow ___________ returns.

A. positive; positive

B. positive; negative

C. negative; positive

D. positive; zero

37. Basu found that firms with high P/E ratios __________.

A. earned higher average returns than firms with low P/E ratios

B. earned the same average returns as firms with low P/E ratios

C. earned lower average returns than firms with low P/E ratios

D. had higher dividend yields than firms with low P/E ratios

38. Fundamental analysis is likely to yield best results for _______.

A. NYSE stocks

B. neglected stocks

C. stocks that are frequently in the news

D. fast-growing companies

39. You are looking to invest in one of three stocks. All other things being equal, Stock A has high expected earnings growth, stock B has only modest expected earnings growth, and stock C is expected to generate poor earnings growth. According to LaPorta’s 1996 study, which stock is likely to generate the greatest alpha for you?

A. Stock A

B. Stock B

C. Stock C

D. The answer cannot be determined from the information given.

40. You believe that you can earn 2% more on your portfolio if you engage in full-time stock research. However, the additional trading costs and tax liability from active management will cost you about .5%. You have an $800,000 stock portfolio. What is the most you can afford to spend on your research?

A. $4,000

B. $8,000

C. $12,000

D. $16,000

41. Even if the markets are efficient, professional portfolio management is still important because it provides investors with:

I. Low-cost diversification

II. A portfolio with a specified risk level

III. Better risk-adjusted returns than an index

A. I only

B. I and II only

C. II and III only

D. I, II, and III

42. Banz found that, on average, the risk-adjusted returns of small firms __________.

A. were higher than the risk-adjusted returns of large firms

B. were the same as the risk-adjusted returns of large firms

C. were lower than the risk-adjusted returns of large firms

D. were negative

43. If the U.S. capital markets are not informationally efficient, ______.

A. the markets cannot be allocationally efficient

B. systematic risk does not matter

C. no type of analysis can be used to generate abnormal returns

D. returns must follow a random walk

44. “Active investment management may at times generate additional returns of about .1%. However, the standard deviation of the typical well-diversified portfolio is about 20%, so it is very difficult to statistically identify any increase in performance.” Even if true, this statement is an example of the _________ problem in deciding how efficient the markets are.

A. magnitude

B. selection bias

C. lucky event

D. allocation

45. DeBondt and Thaler (1985) found that the poorest-performing stocks in one time period experienced __________ performance in the following period and that the best-performing stocks in one time period experienced __________ performance in the following time period.

A. good; good

B. good; poor

C. poor; good

D. poor; poor

46. J. M. Keyes put all his money in one stock, and the stock doubled in value in a matter of months. He did this three times in a row with three different stocks. J. M. got his picture on the front page of the Wall Street Journal. However, the paper never mentioned the thousands of investors who made similar bets on other stocks and lost most of their money. This is an example of the ________ problem in deciding how efficient the markets are.

A. magnitude

B. selection bias

C. lucky event

D. small firm

47. Most tests of semistrong efficiency are _________.

A. designed to test whether inside information can be used to generate abnormal returns

B. based on technical trading rules

C. unable to generate any evidence of market anomalies

D. joint tests of market efficiency and the risk-adjustment measure

48. The _________ effect may explain much of the small-firm anomaly.

I. January

II. neglected

III. liquidity

A. I only

B. II only

C. II and III only

D. I, II, and III

49. The effect of liquidity on stock returns might be related to:

I. The small-firm effect

II The book-to-market effect

III The neglected-firm effect

IV. The P/E effect

A. I and II only

B. I and III only

C. II and IV only

D. I, II, and III only

50. The broadest information set is included in the _____.

A. weak-form efficiency argument

B. semistrong-form efficiency argument

C. strong-form efficiency argument

D. technical analysis trading method

51. The Fama and French evidence that high book-to-market firms outperform low book-to-market firms even after adjusting for beta means that _________.

A. high book-to-market firms are underpriced or the book-to-market ratio is a proxy for a unique risk factor

B. low book-to-market firms are underpriced or the book-to-market ratio is a proxy for a systematic risk factor

C. either high book-to-market firms are underpriced or the book-to-market ratio is a proxy for a systematic risk factor

D. high book-to-market firms have more post-earnings drift

52. According to results by Seyhun, __________.

A. investors cannot usually earn abnormal returns by following inside trades after knowledge of the trades are made public

B. investors can usually earn abnormal returns by following inside trades after knowledge of the trades are made public

C. investors cannot earn abnormal returns by following inside trades before knowledge of the trades are made public

D. investors cannot earn abnormal returns by trading before insiders

53. If the daily returns on the stock market are normally distributed with a mean of .05% and a standard deviation of 1%, the probability that the stock market would have a return of -23% or worse on one particular day (as it did on Black Monday) is approximately __________.

A. .0%

B. .1%

C. 1%

D. 10%

54. According to the semistrong form of the efficient markets hypothesis, ____________.

A. stock prices do not rapidly adjust to new information

B. future changes in stock prices cannot be predicted from any information that is publicly available

C. corporate insiders should have no better investment performance than other investors even if allowed to trade freely

D. arbitrage between futures and cash markets should not produce extraordinary profits

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

A. stock price changes that are random but predictable

B. stock prices that respond slowly to both old and new information

C. stock price changes that are random and unpredictable

D. stock prices changes that follow the pattern of past price changes

56. Among the important characteristics of market efficiency is (are) that:

I. There are no arbitrage opportunities.

II. Security prices react quickly to new information.

III. Active trading strategies will not consistently outperform passive strategies.

A. I only

B. II only

C. I and III only

D. I, II, and III

57. Stock market analysts have tended to be ___________ in their recommendations to investors.

A. slightly overly optimistic

B. overwhelmingly optimistic

C. slightly overly pessimistic

D. overwhelmingly pessimistic

58. Assume that a company announces unexpectedly high earnings in a particular quarter. In an efficient market one might expect _____________.

A. an abnormal price change immediately after the announcement

B. an abnormal price increase before the announcement

C. an abnormal price decrease after the announcement

D. no abnormal price change before or after the announcement

59. Market anomaly refers to _______.

A. an exogenous shock to the market that is sharp but not persistent

B. a price or volume event that is inconsistent with historical price or volume trends

C. a trading or pricing structure that interferes with efficient buying and selling of securities

D. price behavior that differs from the behavior predicted by the efficient market hypothesis

60. Which of the following contradicts the proposition that the stock market is weakly efficient?

A. Over 25% of mutual funds outperform the market on average.

B. Insiders earn abnormal trading profits.

C. Every January, the stock market earns above-normal returns.

D. Applications of technical trading rules fail to earn abnormal returns.

61. Which of the following would violate the efficient market hypothesis?

A. Intel has consistently generated large profits for years.

B. Prices for stocks before stock splits show, on average, consistently positive abnormal returns.

C. Investors earn abnormal returns months after a firm announces surprise earnings.

D. High-earnings growth stocks fail to generate higher returns for investors than do low earnings growth stocks.

62. Which of the following stock price observations would appear to contradict the weak form of the efficient market hypothesis?

A. The average rate of return is significantly greater than zero.

B. The correlation between the market return one week and the return the following week is zero.

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

D. You could have consistently made superior returns by forecasting future earnings performance with your new Crystal Ball forecast methodology.

63. The semistrong form of the efficient market hypothesis implies that ____________ generate abnormal returns and ____________ generate abnormal returns.

A. technical analysis cannot; fundamental analysis can

B. technical analysis can; fundamental analysis can

C. technical analysis can; fundamental analysis cannot

D. technical analysis cannot; fundamental analysis cannot

64. An implication of the efficient market hypothesis is that __________.

A. high-beta stocks are consistently overpriced

B. low-beta stocks are consistently overpriced

C. nonzero alphas will quickly disappear

D. growth stocks are better buys than value stocks

65. One type of passive portfolio management is ________.

A. investing in a well-diversified portfolio without attempting to search out mispriced securities

B. investing in a well-diversified portfolio while only seeking out passively mispriced securities

C. investing an equal dollar amount in index stocks

D. investing in an equal amount of shares in each of the index stocks

66. The four-factor model used to construct performance benchmarks for mutual funds uses the three Fama and French factors and one additional factor related to _________.

A. the tenure of the fund manager

B. momentum

C. fees

D. the age of the fund manager

67. Value stocks may provide investors with better returns than growth stocks if:

I. Value stocks are out of favor with investors.

II. Prices of growth stocks include premiums for overly optimistic growth levels.

III. Value stocks are likely to generate positive-earnings surprises.

A. I only

B. II only

C. I and III only

D. I, II, and III

68. Value stocks usually exhibit ______ price-to-book ratios and ______ price-to-earnings ratios.

A. low; low

B. low; high

C. high; low

D. high; high

69. Growth stocks usually exhibit ______ price-to-book ratios and ______ price-to-earnings ratios.

A. low; low

B. low; high

C. high; low

D. high; high

70. A day trade with an average stock holding period of under 8 minutes might be most closely associated with which trading philosophy?

A. EMH

B. Fundamental analysis

C. Strong-form market efficiency

D. Technical analysis

71. A technical analyst is most likely to be affiliated with which investment philosophy?

A. Active management

B. Buy and hold

C. Passive investment

D. Index funds

72. Someone who invests in the Vanguard Index 500 mutual fund could most accurately be described as using which approach?

A. Active management

B. Arbitrage

C. Fundamental analysis

D. Passive investment

73. Evidence by Blake, Elton, and Gruber indicates that, on average, actively managed bond funds ______.

A. outperform passive fixed-income indexes

B. underperform passive fixed-income indexes by a wide margin

C. perform as well as passive fixed-income indexes

D. underperform passive fixed-income indexes by an amount equal to fund expenses

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

A. Weak-form efficiency

B. Semistrong-form efficiency

C. Strong-form efficiency

D. Technical analysis

75. In an efficient market and for an investor who believes in a passive approach to investing, what is the primary duty of a portfolio manager?

A. Accounting for results

B. Diversification

C. Identifying undervalued stocks

D. No need for a portfolio manager

76. Which of the following is not a topic related to the debate over market efficiency?

A. IPO results

B. Lucky event issue

C. Magnitude issue

D. Selection bias

77. Which Fidelity Magellan portfolio manager is often referenced as an exception to the general conclusion of efficient markets?

A. Jeff Vinik

B. Peter Lynch

C. Robert Stansky

D. William Hayes

78. The tendency of poorly performing stocks and well-performing stocks in one period to continue their performance into the next period is called the ________________.

A. fad effect

B. martingale effect

C. momentum effect

D. reversal effect

79. Which of the following is not a concept related to explaining abnormal excess stock returns?

A. January effect

B. Neglected-firm effect

C. P/E effect

D. Preferred stock effect

80. The lack of adequate trading volume in stock that may ultimately lead to its ability to produce excess returns is referred to as the ____________________.

A. January effect

B. liquidity effect

C. neglected-firm effect

D. P/E effect

81. Fundamental analysis determines that the price of a firm’s stock is too low, given its intrinsic value. The information used in the analysis is available to all market participants, yet the price does not seem to react. The stock does not trade on a major exchange. What concept might explain the ability to produce excess returns on this stock?

A. January effect

B. Neglected-firm effect

C. P/E effect

D. Reversal effect

82. When testing mutual fund performance over time, one must be careful of ___________, which means that a certain percentage of poorer-performing funds fail over time, making the performance of remaining funds seem more consistent over time.

A. survivorship bias

B. lucky event bias

C. magnitude bias

D. mean reversion bias

83. Most evidence indicates that U.S. stock markets are _______________________.

A. reasonably weak-form and semistrong-form efficient

B. strong-form efficient

C. reasonably weak-form but not semistrong- or strong-form efficient

D. neither weak-, semistrong-, nor strong-form efficient

84. Which of the following statements is (are) correct?

A. If a market is weak-form efficient, it is also semistrong- and strong-form efficient.

B. If a market is semistrong-form efficient, it is also strong-form efficient.

C. If a market is strong-form efficient, it is also semistrong- but not weak-form efficient.

D. If a market is strong-form efficient, it is also semistrong- and weak-form efficient.

85. According to Markowitz and other proponents of modern portfolio theory, which of the following activities would not be expected to produce any benefits?

A. Diversifying

B. Investing in Treasury bills

C. Investing in stocks of utility companies

D. Engaging in active portfolio management to enhance returns

86. According to results by Seyhun, the main reason that investors cannot earn excess returns by following inside trades after they become public is that ______________.

A. the information isn’t available for at least 2 weeks

B. transaction costs offset abnormal returns

C. the SEC late-disclosure rule doesn’t apply to insiders

D. insiders don’t have to disclose their trades