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FIN 320 Week 11 Final Exam – Strayer

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Chapters 9, 10, 12 Through 15 And 17 Through 22

Student: ___________________________________________________________________________

Testing many different trading rules until you find one that would have worked in the past is called _______.

data mining

perceived patterning

pattern searching

behavioral analysis

Models of financial markets that emphasize psychological factors affecting investor behavior are called _______.

data mining

fundamental analysis

charting

behavioral finance

The trin statistic is a ______ indicator.

sentiment

flow of funds

market structure

fundamental

The put/call ratio is a ______ indicator.

sentiment

flow of funds

market structure

fundamental

Relative strength is ______ indicator.

a fundamental

an economic

a technical

an international

Short interest is a ______ indicator.

sentiment

flow of funds

market structure

fundamental

Moving averages are ______ indicators.

sentiment

flow of funds

trend

fundamental

Market breadth is a ______ indicator.

sentiment

flow of funds

technical

fundamental

The cumulative tally of the number of advancing stocks minus declining stocks is called the ______________.

market breadth

market volume

trin ratio

relative strength ratio

10.

A high amount of short interest is typically considered as a __________ signal, and contrarians may consider it as a _________ signal.

bearish; bullish

bullish; bearish

bearish; false

bullish; false

11.

Technical analysis focuses on _____________________.

finding opportunities for risk-free investing

finding repeating trends and patterns in prices

changing prospects for earnings growth of particular firms or industries

forecasting technical regulatory changes

12.

Behavioralists point out that even if market prices are ____________, there may be _______________.

distorted; limited arbitrage opportunities

distorted; fundamental efficiency

allocationally efficient; limitless arbitrage opportunities

distorted; allocational efficiency

13.

According to market technicians, it is time to sell stock in a head-and-shoulders formation when ___________.

the price index pierces the left shoulder

the price index pierces the right shoulder

the price index pierces the head

none of these options takes place

14.

When a stock price breaks through the moving average from below, this is considered to be ______.

the starting point for a new moving average

a bearish signal

a bullish signal

none of these options

15.

When the stock price falls below a moving average, a possible conclusion is that _____.

market momentum has become positive

market momentum has become negative

there is no regular pattern for this stock's market momentum

professional analysts' opinions are invalid until the stock price rises again

16.

Following a period of falling prices, the moving average will _____.

be below the current price

be above the current price

be equal to the current price

become more volatile than it had been before prices fell

17.

A moving average of stock prices _________________.

always lies above the most recent price

always lies below the most recent price

is less volatile than the actual prices

is more volatile than the actual prices

18.

When the housing bubble burst in 2007, it set off the worst financial crisis _____.

in 25 years.

in 40 years.

in 50 years.

in 75 years.

19.

A support level is ___________________.

a level beyond which the market is unlikely to rise

a level below which the market is unlikely to fall

an equilibrium price level justified by characteristics such as earnings and cash flows

the peak of a market wave or cycle

20.

According to Kondratieff, the macro economy moves in a series of waves that recur at intervals of approximately _________________.

18 months

4 years

8 years

50 years

21.

According to Elliot's wave theory, stock market behavior can be explained as _________________.

a series of medium-term wave cycles with no short-term trend

a series of long-term wave cycles with no short-term trend

a series of superimposed long-term and short-term wave cycles

sine and cosine functions

22.

Conventional finance theory assumes investors are _______, and behavioral finance assumes investors are _______.

rational; irrational

irrational; rational

greedy; philanthropic

philanthropic; greedy

23.

The only way for behavioral patterns to persist in prices is if ______________.

markets are not weak-form efficient

there are limits to arbitrage activity

there are no significant trading costs

market psychology is inconsistent over time

24.

In the context of a point and figure chart, a horizontal band of Xs and Os is a _____________.

buy signal

sell signal

congestion area

trend reversal

25.

Even though indexing is growing in popularity, only about _____ of equity in the mutual fund industry is held in indexed funds. This may be a sign that investors and managers __________.

5%; are excessively conservative

15%; overestimate their ability

20%; suffer from framing biases

25%; engage in mental accounting

26.

If investors are too slow to update their beliefs about a stock's future performance when new evidence arises, they are exhibiting _______.

representativeness bias

framing error

conservatism

memory bias

27.

If investors overweight recent performance in forecasting the future, they are exhibiting _______.

representativeness bias

framing error

memory bias

overconfidence

28.

Trading activity and average returns in brokerage accounts tend to be _________.

uncorrelated

negatively correlated

positively correlated

positively correlated for women and negatively correlated for men

29.

Your two best friends each tell you about a person they know who successfully started a small business. That's it, you decide; if they can do it, so can you. This is an example of _____________.

mental accounting

framing bias

conservatism

representativeness bias

30.

Which of the following is not a sentiment indicator?

Confidence index

Short interest

Odd-lot trading

Put/call ratio

31.

Which of the following is considered a sentiment indicator?

A 200-day moving average

Short interest

Credit balances in brokerage accounts

Relative strength

32.

An investor holds a very conservative portfolio invested for retirement, but she takes some extra cash she earned from her year-end bonus and buys gold futures. She appears to be engaging in ___________.

overconfidence

representativeness

forecast errors

mental accounting

33.

Which of the following analysts focus more on past price movements of a firm's stock than on the underlying determinants of its future profitability?

Credit analysts

Fundamental analysts

Systems analysts

Technical analysts

34.

A trin ratio of greater than 1 is considered a __________.

bearish signal

bullish signal

bearish signal by some technical analysts and a bullish signal by other technical analysts

trend reversal signal

35.

Contrarian investors consider a high put/call ratio a __________.

bearish signal

bullish signal

trend confirmation signal

signal to enter the options market

36.

The ratio of the average yield on 10 top-rated corporate bonds to the average yield on 10 intermediate-grade bonds is called the __________.

bond price index

confidence index

relative strength index

trin ratio

37.

An investor needs cash to pay some hospital bills. He is willing to use his dividend income to pay the bills, but he will not sell any stock to do so. He is engaging in ___________.

overconfidence

representativeness

forecast errors

mental accounting

38.

Bill and Shelly are friends. Bill invests in a portfolio of hot stocks that almost all his friends are invested in. Shelly invests in a portfolio that is totally different from the portfolios of all her friends. Both Bill's and Shelly's stocks fall 15%. According to regret theory, _________________________________________.

Bill will have more regret over the loss than Shelly

Shelly will have more regret over the loss than Bill

Bill and Shelly will have equal regret over their losses

Bill's and Shelly's risk aversion will increase in the future

39.

The most common measure of __________ is the spread between the number of stocks that advance in price and the number of stocks that decline in price.

market breadth

market volume

odd-lot trading

short interest

40.

Jill is offered a choice between receiving $50 with certainty or possibly receiving the proceeds from a gamble. In the gamble a fair coin is tossed, and if it comes up heads, Jill will receive $100; if the coin comes up tails, she will receive nothing. Jill chooses the $50 instead of the gamble. Jill's behavior indicates __________________.

regret avoidance

overconfidence

that she has a diminishing marginal utility of wealth

prospect theory loss aversion

41.

When the market breaks through the moving average line from below, a technical analyst would probably suggest that it is a good time to ___________.

buy the stock

hold the stock

sell the stock

short the stock

42.

If you believed in the reversal effect, you should __________.

buy bonds this period if you held stocks last period

buy stocks this period that performed poorly last period

buy stocks this period that performed well last period

do nothing if you held the stock last period

43.

According to technical analysts, a shift in market fundamentals will __________.

be reflected in stock prices immediately

lead to a gradual price change that can be recognized as a trend

lead to high volatility in stock market prices

leave prices unchanged

44.

According to market technicians, a trin statistic of less than 1 is considered a __________.

bearish signal

bullish signal

volume decline

signal reversal

45.

It is difficult to test the Kondratieff wave theory because _________.

it applies to only Russian stocks

its main proponent found contrary research results

only two independent data points are generated each century

the stock market is too volatile to generate smooth waves

46.

A _________ is a value above which it is difficult for the market to rise.

book value

resistance level

support level

confidence level

47.

_____________ is a tool that can help identify the direction of a stock's price.

Prospect theory

Framing

A moving average

Conservatism

48.

If the utility you derive from your next dollar of wealth increases by less than a loss of a dollar reduces it, you are exhibiting __________.

loss aversion

regret avoidance

mental accounting

framing bias

49.

In technical analysis, __________ is a value below which the market is relatively unlikely to fall.

book value

resistance level

support level

the Dow line

50.

A possible limit on arbitrage activity that may allow behavioral biases to persist is _______.

technical trends in prices

momentum effects

fundamental risk

trend reversals

51.

If you are not a contrarian, you consider a high put/call ratio to be a __________.

bearish signal

bullish signal

trend confirmation signal

signal to enter the options market

52.

On day 1, the stock price of Ford was $12 and the automotive stock index was 127. On day 2, the stock price of Ford was $15 and the automotive stock index was 139. Consider the ratio of Ford to the automotive stock index at day 1 and day 2. Ford is __________ the automotive industry, and technical analysts who follow relative strength would advise __________ the stock.

outperforming; buying

outperforming; selling

underperforming; buying

underperforming; selling

53.

At the end of July, the average yields on 10 top-rated corporate bonds and 10 intermediate-grade bonds were 7.65% and 8.42%, respectively. At the end of August, the average yields on 10 top-rated corporate bonds and 10 intermediate-grade bonds were 6% and 6.71%, respectively. The confidence index _________ during August, and bond technical analysts are likely to be ________.

increased; bullish

increased; bearish

decreased; bullish

decreased; bearish

54.

On a particular day, there were 890 stocks that advanced on the NYSE and 723 that declined. The volume in advancing issues was 80,846,000, and the volume in declining issues was 70,397,000. The common measure of market breadth is __________.

-10,449,000

-167

167

10,449,000

55.

On a particular day, there were 920 stocks that advanced on the NYSE and 723 that declined. The volume in advancing issues was 80,846,000, and the volume in declining issues was 70,397,000. The trin ratio is __________, and technical analysts are likely to be __________.

.90; bullish

.90; bearish

1.11; bullish

1.11; bearish

56.

An accumulation of cash by mutual funds may be viewed by technical traders as a __________ indicator.

bullish

neutral

bearish

trend reversal

57.

A point and figure chart: I. Gives a sell signal when the stock price penetrates previous lows II. Tracks significant upward or downward movements III. Has no time dimension IV. Indicates congestion areas

I and II only

II and III only

I, III, and IV only

I, II, III, and IV

58.

When technical analysts say a stock has good "relative strength," they mean that in the recent past __________.

it has performed well compared to its closest competitors

it has exceeded its own historical high

trading volume in the stock has exceeded the normal trading volume

it has outperformed the market index

59.

Technical traders view mutual fund investors as _________ market timers.

excellent

frequent

neutral

poor

60.

An important assumption underlying the use of technical analysis techniques is that ___________________.

security prices adjust rapidly to new information

security prices adjust gradually to new information

security dealers will provide enough liquidity to keep price changes relatively small

all investors have immediate and costless access to information

61.

If the put/call ratio increases, market contrarians may interpret this as what kind of signal?

Buy signal

Sell signal

Hold signal

This is not interpreted as a signal

62.

The tendency of investors to hold on to losing investments is called the ________.

overweighting effect

head-in-the-sand effect

disposition effect

prospector effect

63.

Which one of the following best describes fundamental risk?

A stock is overpriced, but your fund does not allow you to engage in short sales.

Your models indicate a stock is mispriced, but you are not sure if this is a real profit opportunity or a model input error.

You buy a stock that you believe is underpriced, and the underpricing persists for a long time, hurting your short-term results.

A stock is trading in two different markets at two different prices.

64.

The trin on day 2 is ___.

.72

1.04

.92

.55

65.

The confidence index on day 1 is _____.

.82

.89

.92

1.09

66.

The breadth on day 3 is _______.

-70

170

67.

The cumulative breadth for the first 2 days is ___.

-240

-50

110

250

68.

Cumulative breadth for the 4 days is ___, which is ___.

-140; bullish

-140; bearish

-300; bullish

-300; bearish

69.

From day 1 to day 4, the trin has ___ and is ___.

increased; bullish

increased; bearish

decreased; bullish

decreased; bearish

70.

From day 1 to day 4, the confidence index has _____. This is _____.

increased; bullish

decreased; bullish

increased; bearish

decreased; bearish

71.

Problems with behavioral finance include: I. The behavioralists tell us nothing about how to exploit any irrationality. II. The implications of behavioral patterns are inconsistent from case to case, sometimes suggesting overreaction, sometimes underreaction. III. As with technical trading rules, behavioralists can always find some pattern in past data that supports a behavioralist trait.

I only

II only

I and III only

I, II, and III

72.

A major problem with technical trading strategies is that ________.

it is very difficult to identify a true trend before the fact

it is very difficult to identify the correct trend after the fact

it is so easy to identify trends that all investors quickly do so

Kondratieff showed that you can't identify trends without 48 to 60 years of data

��73.

The Elliott wave theory gives a buy signal when you can identify a primary bull trend by identifying _________.

when the long-term direction of the market is positive

when the long-term direction of the market is negative

when the long-term direction of the market is stable

good stocks without regard to the long-term direction of the market

74.

In 1997 CSX successfully purchased a significant share of Conrail. Immediately after the first offer was announced and the acquisition eventually consummated, the price of CSX fell below preacquisition levels and took many years to recover. This may be an example of ________________.

loss aversion

mental accounting

overreaction

managerial overconfidence

75.

An investor has her money segregated into checking, savings, and investments. The allocation among the categories is subjective, yet the investor spends freely from the checking account and not the others. This behavior can be explained as _______________.

loss aversion

mental accounting

overreaction

winner's curse

76.

Identify the resistance-level stock price.

$40

$42

$44

$46

77.

Identify the support level stock price.

$40

$42

$44

$46

78.

Investors gravitate toward the latest hot stock even though it has never paid a dividend. Even though net income is projected to fall over the current and next several years, the price of the stock continues to rise. What behavioral concept may explain this price pattern?

Overconfidence

Loss aversion

Mental accounting

Calendar bias

79.

During a period when prices have been rising, the _________ will be _______ the current price.

relative strength index; declining with

relative strength index; declining faster than

moving average; above

moving average; below

80.

An investor purchases shares of an index fund. The investor could take on the same level of risk by taking out a loan and purchasing a higher-risk specialty fund. The Sharpe ratio on this complete portfolio is higher than her existing investment. What behavioral concept prevents the investor from taking out the loan and investing in the index fund?

Framing bias

Excessive volatility

Loss aversion

Mental accounting

81.

The price of a stock fluctuates between $43 and $60. If the time frame referenced encompasses the primary trend, the $43 price may be considered the ___________.

intermediate trend level

minor trend level

resistance level

support level

82.

The moving average generates buy signal(s) _____.

on days 3, 11, and 15

on days 2 and 16

on days 5, 9, and 13

on no days

83.

The moving average generates sell signals _____.

on days 3, 11, and 15

on days 7, 15, and 18

on days 5, 9, and 13

on day 16

84.

The price of a stock fluctuates over a period of 10 days. The movement of the stock price below the 10-day minimum price of $25 triggers a rash of selling. The $25 price might now be considered the _______________.

congestion area

penetration point

resistance level

support level

85.

Trend analysts who follow bonds are most likely to monitor the ____________.

confidence index

odd-lot trading

short interest

trin statistic

��86.

You find that the confidence index is down, the market breadth is up, and the trin ratio is down. In total, how many bullish signs do you have?

87.

You find that the trin ratio is up, the market breadth is down, and the market has closed below its 50-day moving average. In total, how many bearish signs do you have?

Student: ___________________________________________________________________________

The invoice price of a bond is the ______.

stated or flat price in a quote sheet plus accrued interest

stated or flat price in a quote sheet minus accrued interest

bid price

average of the bid and ask price

Sinking funds are commonly viewed as protecting the _______ of the bond.

issuer

underwriter

holder

dealer

A collateral trust bond is _______.

secured by other securities held by the firm

secured by equipment owned by the firm

secured by property owned by the firm

unsecured

A mortgage bond is _______.

secured by other securities held by the firm

secured by equipment owned by the firm

secured by property owned by the firm

unsecured

A debenture is _________.

secured by other securities held by the firm

secured by equipment owned by the firm

secured by property owned by the firm

unsecured

If you are holding a premium bond, you must expect a _______ each year until maturity. If you are holding a discount bond, you must expect a _______ each year until maturity. (In each case assume that the yield to maturity remains stable over time.)

capital gain; capital loss

capital gain; capital gain

capital loss; capital gain

capital loss; capital loss

Floating-rate bonds have a __________ that is adjusted with current market interest rates.

maturity date

coupon payment date

coupon rate

dividend yield

Inflation-indexed Treasury securities are commonly called ____.

PIKs

CARs

TIPS

STRIPS

In regard to bonds, convexity relates to the _______.

shape of the bond price curve with respect to interest rates

shape of the yield curve with respect to maturity

slope of the yield curve with respect to liquidity premiums

size of the bid-ask spread

10.

A Japanese firm issued and sold a pound-denominated bond in the United Kingdom. A U.S. firm issued bonds denominated in dollars but sold the bonds in Japan. Which one of the following statements is correct?

Both bonds are examples of Eurobonds.

The Japanese bond is a Eurobond, and the U.S. bond is termed a foreign bond.

The U.S. bond is a Eurobond, and the Japanese bond is termed a foreign bond.

Neither bond is a Eurobond.

11.

The primary difference between Treasury notes and bonds is ________.

maturity at issue

default risk

coupon rate

tax status

12.

TIPS offer investors inflation protection by ______________ by the inflation rate each year.

increasing only the coupon rate

increasing only the par value

increasing both the par value and the coupon payment

increasing the promised yield to maturity

13.

You would typically find all but which one of the following in a bond contract?

A dividend restriction clause

A sinking fund clause

A requirement to subordinate any new debt issued

A price-earnings ratio

14.

To earn a high rating from the bond rating agencies, a company would want to have: I. A low times-interest-earned ratio II. A low debt-to-equity ratio III. A high quick ratio

I only

II and III only

I and III only

I, II, and III

15.

According to the liquidity preference theory of the term structure of interest rates, an increase in the yield on long-term corporate bonds versus short-term bonds could be due to _______.

declining liquidity premiums

an expectation of an upcoming recession

a decline in future inflation expectations

an increase in expected interest rate volatility

16.

__________ are examples of synthetically created zero-coupon bonds.

COLTS

OPOSSMS

STRIPS

ARMs

17.

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

callable

coupon

puttable

Treasury

18.

TIPS are an example of _______________.

Eurobonds

convertible bonds

indexed bonds

catastrophe bonds

19.

Bonds issued in the currency of the issuer's country but sold in other national markets are called _____________.

Eurobonds

Yankee bonds

Samurai bonds

foreign bonds

20.

You buy a TIPS at issue at par for $1,000. The bond has a 3% coupon. Inflation turns out to be 2%, 3%, and 4% over the next 3 years. The total annual coupon income you will receive in year 3 is _________.

$30

$33

$32.78

$30.90

21.

The bonds of Elbow Grease Dishwashing Company have received a rating of C by Moody's. The C rating indicates that the bonds are _________.

high grade

intermediate grade

investment grade

junk bonds

22.

Bonds rated _____ or better by Standard & Poor's are considered investment grade.

BBB

CCC

23.

Consider the liquidity preference theory of the term structure of interest rates. On average, one would expect investors to require _________.

a higher yield on short-term bonds than on long-term bonds

a higher yield on long-term bonds than on short-term bonds

the same yield on both short-term bonds and long-term bonds

none of these options (The liquidity preference theory cannot be used to make any of the other statements.)

24.

Consider two bonds, A and B. Both bonds presently are selling at their par value of $1,000. Each pays interest of $120 annually. Bond A will mature in 5 years, while bond B will mature in 6 years. If the yields to maturity on the two bonds change from 12% to 14%, _________.

both bonds will increase in value but bond A will increase more than bond B

both bonds will increase in value but bond B will increase more than bond A

both bonds will decrease in value but bond A will decrease more than bond B

both bonds will decrease in value but bond B will decrease more than bond A

25.

You hold a subordinated debenture in a firm. In the event of bankruptcy you will be paid off before which one of the following?

Mortgage bonds

Senior debentures

Preferred stock

Equipment obligation bonds

26.

Bonds with coupon rates that fall when the general level of interest rates rise are called _____________.

asset-backed bonds

convertible bonds

inverse floaters

index bonds

27.

_______ bonds represent a novel way of obtaining insurance from capital markets against specified disasters.

Asset-backed bonds

TIPS

Catastrophe

Pay-in-kind

28.

The issuer of ________ bond may choose to pay interest either in cash or in additional bonds.

an asset-backed

a TIPS

a catastrophe

a pay-in-kind

29.

Everything else equal, the __________ the maturity of a bond and the __________ the coupon, the greater the sensitivity of the bond's price to interest rate changes.

longer; higher

longer; lower

shorter; higher

shorter; lower

30.

Which one of the following statements is correct?

Invoice price = Flat price - Accrued interest

Invoice price = Flat price + Accrued interest

Flat price = Invoice price + Accrued interest

Invoice price = Settlement price - Accrued interest

31.

A __________ bond gives the issuer an option to retire the bond before maturity at a specific price after a specific date.

callable

coupon

puttable

Treasury

32.

Which of the following possible provisions of a bond indenture is designed to ease the burden of principal repayment by spreading it out over several years?

Callable feature

Convertible feature

Subordination clause

Sinking fund

33.

Serial bonds are associated with _________.

staggered maturity dates

collateral

coupon payment dates

conversion features

34.

In an era of particularly low interest rates, which of the following bonds is most likely to be called?

Zero-coupon bonds

Coupon bonds selling at a discount

Coupon bonds selling at a premium

Floating-rate bonds

35.

Consider the expectations theory of the term structure of interest rates. If the yield curve is downward-sloping, this indicates that investors expect short-term interest rates to __________ in the future.

increase

decrease

not change

change in an unpredictable manner

36.

A convertible bond has a par value of $1,000, but its current market price is $975. The current price of the issuing company's stock is $26, and the conversion ratio is 34 shares. The bond's market conversion value is _________.

$1,000

$884

$933

$980

37.

A convertible bond has a par value of $1,000, but its current market price is $950. The current price of the issuing company's stock is $19, and the conversion ratio is 40 shares. The bond's conversion premium is _________.

$50

$190

$200

$240

38.

A coupon bond that pays interest of 4% annually has a par value of $1,000, matures in 5 years, and is selling today at $785. The actual yield to maturity on this bond is _________.

7.2%

8.8%

9.1%

9.6%

39.

A coupon bond that pays interest of $60 annually has a par value of $1,000, matures in 5 years, and is selling today at an $84.52 discount from par value. The yield to maturity on this bond is _________.

7.23%

8.12%

9.45%

40.

A coupon bond that pays interest of $60 annually has a par value of $1,000, matures in 5 years, and is selling today at a $75.25 discount from par value. The current yield on this bond is _________.

6.49%

6.73%

41.

A callable bond pays annual interest of $60, has a par value of $1,000, matures in 20 years but is callable in 10 years at a price of $1,100, and has a value today of $1055.84. The yield to call on this bond is _________.

6.58%

7.2%

42.

A coupon bond that pays interest semiannually has a par value of $1,000, matures in 8 years, and has a yield to maturity of 6%. If the coupon rate is 7%, the intrinsic value of the bond today will be __________.

$1,000

$1,062.81

$1,081.82

$1,100.03

43.

A coupon bond that pays interest annually has a par value of $1,000, matures in 5 years, and has a yield to maturity of 12%. If the coupon rate is 9%, the intrinsic value of the bond today will be _________.

$856.04

$891.86

$926.47

$1,000

44.

A coupon bond that pays semiannual interest is reported in the Wall Street Journal as having an ask price of 117% of its $1,000 par value. If the last interest payment was made 2 months ago and the coupon rate is 6%, the invoice price of the bond will be _________.

$1,140

$1,170

$1,180

$1,200

45.

A Treasury bond due in 1 year has a yield of 6.3%, while a Treasury bond due in 5 years has a yield of 8.8%. A bond due in 5 years issued by High Country Marketing Corp. has a yield of 9.6%, while a bond due in 1 year issued by High Country Marketing Corp. has a yield of 6.8%. The default risk premiums on the 1-year and 5-year bonds issued by High Country Marketing Corp. are, respectively, __________ and _________.

.4%; .3%

.4%; .5%

.5%; .5%

.5%; .8%

46.

A zero-coupon bond has a yield to maturity of 5% and a par value of $1,000. If the bond matures in 16 years, it should sell for a price of __________ today.

$458.11

$641.11

$789.11

$1,100.11

47.

Yields on municipal bonds are typically ___________ yields on corporate bonds of similar risk and time to maturity.

lower than

slightly higher than

identical to

twice as high as

48.

You purchased a 5-year annual-interest coupon bond 1 year ago. Its coupon interest rate was 6%, and its par value was $1,000. At the time you purchased the bond, the yield to maturity was 4%. If you sold the bond after receiving the first interest payment and the bond's yield to maturity had changed to 3%, your annual total rate of return on holding the bond for that year would have been approximately _________.

5.5%

7.6%

8.9%

49.

Analysis of bond returns over a multiyear horizon based on forecasts of the bond's yield to maturity and reinvestment rate of coupons is called ______.

multiyear analysis

horizon analysis

maturity analysis

reinvestment analysis

50.

$1,000 par value zero-coupon bonds (ignore liquidity premiums) The expected 1-year interest rate 1 year from now should be about _________.

7.5 %

9.02%

10.08%

51.

$1,000 par value zero-coupon bonds (ignore liquidity premiums) One year from now bond C should sell for ________ (to the nearest dollar).

$857

$842

$835

$821

52.

$1,000 par value zero-coupon bonds (ignore liquidity premiums) The expected 2-year interest rate 3 years from now should be _________.

9.55%

11.74%

14.89%

13.73%

53.

The __________ of a bond is computed as the ratio of the annual coupon payment to the market price.

nominal yield

current yield

yield to maturity

yield to call

54.

A bond has a par value of $1,000, a time to maturity of 10 years, and a coupon rate of 8% with interest paid annually. If the current market price is $750, what is the capital gain yield of this bond over the next year?

.72%

1.85%

2.58%

3.42%

55.

Consider the following $1,000 par value zero-coupon bonds: The expected 1-year interest rate 2 years from now should be _________.

10%

56.

Which of the following bonds would most likely sell at the lowest yield?

A callable debenture

A puttable mortgage bond

A callable mortgage bond

A puttable debenture

57.

A 1% decline in yield will have the least effect on the price of a bond with a _________.

10-year maturity, selling at 80

10-year maturity, selling at 100

20-year maturity, selling at 80

20-year maturity, selling at 100

58.

Consider the following $1,000 par value zero-coupon bonds: The expected 1-year interest rate 3 years from now should be _________.

10%

59.

Consider the following $1,000 par value zero-coupon bonds: The expected 1-year interest rate 4 years from now should be _________.

16%

18%

20%

22%

60.

You can be sure that a bond will sell at a premium to par when _________.

its coupon rate is greater than its yield to maturity

its coupon rate is less than its yield to maturity

its coupon rate is equal to its yield to maturity

its coupon rate is less than its conversion value

61.

A corporate bond has a 10-year maturity and pays interest semiannually. The quoted coupon rate is 6%, and the bond is priced at par. The bond is callable in 3 years at 110% of par. What is the bond's yield to call?

6.72%

9.17%

4.49%

8.98%

62.

Consider a 7-year bond with a 9% coupon and a yield to maturity of 12%. If interest rates remain constant, 1 year from now the price of this bond will be _________.

higher

lower

the same

indeterminate

63.

Under the pure expectations hypothesis and constant real interest rates for different maturities, an upward-sloping yield curve would indicate __________________.

expected increases in inflation over time

expected decreases in inflation over time

the presence of a liquidity premium

that the equilibrium interest rate in the short-term part of the market is lower than the equilibrium interest rate in the long-term part of the market

64.

The yield to maturity on a bond is: I. Above the coupon rate when the bond sells at a discount and below the coupon rate when the bond sells at a premium II. The discount rate that will set the present value of the payments equal to the bond price III. Equal to the true compound return on investment only if all interest payments received are reinvested at the yield to maturity

I only

II only

I and II only

I, II, and III

65.

Yields on municipal bonds are generally lower than yields on similar corporate bonds because of differences in _________.

marketability

risk

taxation

call protection

66.

Assuming semiannual compounding, a 20-year zero coupon bond with a par value of $1,000 and a required return of 12% would be priced at _________.

$97.22

$104.49

$364.08

$732.14

67.

A discount bond that pays interest semiannually will: I. Have a lower price than an equivalent annual payment bond II. Have a higher EAR than an equivalent annual payment bond III. Sell for less than its conversion value

I and II only

I and III only

II and III only

I, II, and III

68.

A 6% coupon U.S. Treasury note pays interest on May 31 and November 30 and is traded for settlement on August 10. The accrued interest on the $100,000 face amount of this note is _________.

$581.97

$1,163.93

$2,327.87

$3,000

69.

The yield to maturity of a 10-year zero-coupon bond with a par value of $1,000 and a market price of $625 is _____.

4.8%

6.1%

7.7%

10.4%

70.

Consider a newly issued TIPS bond with a 3-year maturity, par value of $1,000, and coupon rate of 5%. Assume annual coupon payments. What is the nominal rate of return on the TIPS bond in the first year?

5.15%

8.15%

71.

Consider a newly issued TIPS bond with a 3-year maturity, par value of $1,000, and coupon rate of 5%. Assume annual coupon payments. What is the real rate of return on the TIPS bond in the first year?

8.15%

7.15%

72.

On May 1, 2007, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds. Suppose market interest rates decline by 100 basis points (i.e., 1%). The effect of this decline would be ______.

The price of the Wildwood bond would decline by more than the price of the Asbury bond.

The price of the Wildwood bond would decline by less than the price of the Asbury bond.

The price of the Wildwood bond would increase by more than the price of the Asbury bond.

The price of the Wildwood bond would increase by less than the price of the Asbury bond.

73.

On May 1, 2007, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds. If interest rates are expected to rise, then Joe Hill should ____.

prefer the Wildwood bond to the Asbury bond

prefer the Asbury bond to the Wildwood bond

be indifferent between the Wildwood bond and the Asbury bond

The answer cannot be determined from the information given.

74.

On May 1, 2007, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds. If the volatility of interest rates is expected to increase, then Joe Hill should __.

prefer the Wildwood bond to the Asbury bond

prefer the Asbury bond to the Wildwood bond

be indifferent between the Wildwood bond and the Asbury bond

The answer cannot be determined from the information given.

75.

One-, two-, and three-year maturity, default-free, zero-coupon bonds have yields to maturity of 7%, 8%, and 9%, respectively. What is the implied 1-year forward rate 1 year from today?

2.07%

8.03%

9.01%

11.12%

76.

If the quote for a Treasury bond is listed in the newspaper as 98:09 bid, 98:13 ask, the actual price at which you can purchase this bond given a $10,000 par value is _____________.

$9,828.12

$9,809.38

$9,840.62

$9,813.42

77.

If the price of a $10,000 par Treasury bond is $10,237.50, the quote would be listed in the newspaper as ________.

102:10

102:11

102:12

102:13

78.

A bond pays a semiannual coupon, and the last coupon was paid 61 days ago. If the annual coupon payment is $75, what is the accrued interest? (Assume 182 days in the 6-month period.)

$13.21

$12.57

$15.44

$16.32

79.

A bond has a flat price of $985, and it pays an annual coupon. The last coupon payment was made 90 days ago. What is the invoice price if the annual coupon is $69?

$999.55

$1,002.01

$1,007.45

$1,012.13

80.

If the quote for a Treasury bond is listed in the newspaper as 99:08 bid, 99:11 ask, the actual price at which you can sell this bond given a $10,000 par value is _____________.

$9,828.12

$9,925

$9,934.37

$9,955.43

81.

A bond has a 5% coupon rate. The coupon is paid semiannually, and the last coupon was paid 35 days ago. If the bond has a par value of $1,000, what is the accrued interest?

$4.81

$14.24

$25

$50

82.

The price on a Treasury bond is 104:21, with a yield to maturity of 3.45%. The price on a comparable maturity corporate bond is 103:11, with a yield to maturity of 4.59%. What is the approximate percentage value of the credit risk of the corporate bond?

1.14%

3.45%

4.59%

8.04%

83.

You buy a bond with a $1,000 par value today for a price of $875. The bond has 6 years to maturity and makes annual coupon payments of $75 per year. You hold the bond to maturity, but you do not reinvest any of your coupons. What was your effective EAR over the holding period?

10.4%

9.57%

7.45%

8.78%

84.

You buy an 8-year $1,000 par value bond today that has a 6% yield and a 6% annual payment coupon. In 1 year promised yields have risen to 7%. Your 1-year holding-period return was ___.

.61%

-5.39%

1.28%

-3.25%

85.

You buy a 10-year $1,000 par value zero-coupon bond priced to yield 6%. You do not sell the bond. If you are in a 28% tax bracket, you will owe taxes on this investment after the first year equal to _______.

$4.27

$9.38

$33.51

86.

You buy a 10-year $1,000 par value 4% annual-payment coupon bond priced to yield 6%. You do not sell the bond at year-end. If you are in a 15% tax bracket, at year-end you will owe taxes on this investment equal to _______.

$9.10

$4.25

$7.68

$5.20

87.

An investor pays $989.40 for a bond. The bond has an annual coupon rate of 4.8%. What is the current yield on this bond?

4.8%

4.85%

9.6%

9.7%

88.

If the coupon rate on a bond is 4.5% and the bond is selling at a premium, which of the following is the most likely yield to maturity on the bond?

4.3%

4.5%

5.2%

5.5%

89.

The price of a bond (with par value of $1,000) at the beginning of a period is $980 and at the end of the period is $975. What is the holding-period return if the annual coupon rate is 4.5%?

4.08%

4.5%

5.1%

5.6%

90.

A bond was purchased at a premium and is now selling at a discount because of a change in market interest rates. If the bond pays a 4% annual coupon, what is the likely impact on the holding-period return if an investor decides to sell now?

Increased

Decreased

Stayed the same

The answer cannot be determined from the information given.

91.

The ___________ is the document that defines the contract between the bond issuer and the bondholder.

indenture

covenant agreement

trustee agreement

collateral statement

Student: ___________________________________________________________________________

A top-down analysis of a firm's prospects starts with an analysis of the ____.

firm's position in its industry

U.S. economy or even the global economy

industry

specific firm under consideration

In 1980 the dollar-yen exchange rate was about $.0045. In 2012 the yen-dollar exchange rate was about 80 yen per dollar. A Japanese producer would have had to increase the dollar price of a good sold in the United States by approximately _____ to maintain the same yen price in 2012.

178%

79.5%

265.4%

36%

An increase in the value of the yen against the U.S. dollar can cause the Japanese automaker Toyota to either _____________ on its U.S. sales.

lose market share or reduce its profit margin

gain market share or reduce its profit margin

lose market share or increase its profit margin

gain market share or increase its profit margin

You estimate that the present value of a firm's cash flow is valued at $15 million. The break up value of the firm if you were to sell the major assets and divisions separately would be $20 million. This is an example of what Peter Lynch would call ___________.

a stalwart

slow growth

a star

an asset play

Between 1999 and 2010, the purchasing power of the U.S. dollar increased relative to the purchasing power of _______.

the United Kingdom

the Euro

Switzerland

Canada

If you believe the economy is about to go into a recession, you might change your asset allocation by selling _______ and buying ______.

growth stocks; long-term bonds

long-term bonds; growth stocks

defensive stocks; growth stocks

defensive stocks; long-term bonds

The yield curve spread between the 10-year T-bond yield and the federal funds rate is a _______ economic indicator.

leading

lagging

coincident

mixed

The Conference Board's Consumer Confidence Index is released ______.

daily

weekly

monthly

quarterly

You can earn abnormal returns on your investments via macro forecasting ______.

if you can forecast the economy at all

if you can forecast the economy as well as the average forecaster

if you can forecast the economy better than the average forecaster

only if you can forecast the economy with perfect accuracy

10.

Which of the following industries would most analysts classify as mature?

Internet service providers

Biotechnology

Wireless communication

Auto manufacturing

11.

Which one of the following stocks represents industries with below-average sensitivity to the state of the economy?

Financials

Technology

Food and beverage

Cyclicals

12.

The most widely used monetary policy tool is _________.

altering the discount rate

altering reserve requirements

open market operations

increasing the budget deficit

13.

Which one of the following is the ratio of actual output from factories to potential output from factories?

Capacity utilizationrate

Participation rate

Durable goods orders rate

Industrial production rate

14.

According to __________ economists, the growth of the U.S. economy in the 1980s can be attributed to lower marginal tax rates, which improved the incentives for people to work.

Keynesian

monetarist

supply-side

demand-side

15.

The market value of all goods and services produced during a given time period is called ______.

GDP

industrial production

capacity utilization

factory orders

16.

A big increase in government spending is an example of a _________.

positive demand shock

positive supply shock

negative demand shock

negative supply shock

17.

GDP refers to _________.

the amount of personal disposable income in the economy

the difference between government spending and government revenues

the total manufacturing output in the economy

the total production of goods and services in the economy

18.

Portfolio manager Peter Lynch would classify Coca-Cola as _________.

an asset play

a slow grower

a stalwart

a turnaround

19.

Attempting to forecast future earnings and dividends is consistent with which of the following approaches to securities analysis?

Technical analysis

Fundamental analysis

Both technical analysis and fundamental analysis

Indexing

20.

The analysis of the determinants of firm value is called _____________.

fundamental analysis

technical analysis

momentum analysis

indexing

21.

Which of the following companies is the best example of a turnaround?

Coca-Cola

Microsoft

ExxonMobil

Kmart

22.

Inflation is caused by ________________.

unions

rapid growth of the money supply

excess supply

low rates of capacity utilization

23.

Everything else equal, if you expect a larger interest rate increase than other market participants, you should _________.

buy long-term bonds

buy short-term bonds

buy common stocks

buy preferred stocks

24.

To obtain an approximate estimate of the real interest rate, one must _________ the __________ the nominal risk-free rate.

add; default premium to

subtract; default premium from

add; expected inflation to

subtract; expected inflation from

25.

Which of the following would not be considered a supply shock?

A change in the price of imported oil

Frost damage to the orange crop

A change in the level of education of the average worker

An increase in the level of government spending

26.

If economic conditions are such that very slow growth is expected in the foreseeable future, one would want to invest in industries with __________ sensitivity to economic conditions.

below-average

average

above-average

Since growth is expected to be slow, sensitivity to economic conditions is not an issue.

27.

Which of the following is not an example of fiscal policy?

Social Security spending

Medicare spending

Fed purchases of Treasury securities

Changes in the tax rate

28.

Supply-side economics tends to focus on _______________.

government spending

price controls

monetary policy

increasing productive capacity

29.

Which one of the following describes the amount by which government spending exceeds government revenues?

Balance of trade

Budget deficit

Gross domestic product

Output gap

30.

Which one of the following is probably the most direct and immediate way to stimulate or slow the economy, although it is not very useful for fine-tuning economic performance?

Fiscal policy

Monetary policy

Supply-side policy

Rising minimum wages

31.

In macroeconomic terms, an increase in the price of imported oil or a decrease in the availability of oil is an example of a _________.

demand shock

supply shock

monetary shock

refinery shock

32.

______________ in interest rates are associated with stock market declines.

Anticipated increases

Unanticipated increases

Anticipated decreases

Unanticipated decreases

33.

The average duration of unemployment is _________.

a leading economic indicator

a coincidental economic indicator

a lagging economic indicator

both a coincidental indicator and a lagging indicator

34.

The ratio of the purchasing power of two economies is termed the _______.

balance of trade

real exchange rate

real interest rate

nominal exchange rate

35.

Everything else equal, an increase in the government budget deficit would: I. Increase the government's demand for funds II. Shift the demand curve for funds to the left III. Increase the interest rate in the economy

II only

I and II only

I and III only

I, II, and III

36.

Which of the following affects a firm's sensitivity of its earnings to the business cycle? I. Financial leverage II. Operating leverage III. Type of product

II only

I and II only

I and III only

I, II, and III

37.

Which of the following describes the rate at which your ability to purchase grows while you hold an interest-earning investment?

The nominal exchange rate

The nominal interest rate

The real exchange rate

The real interest rate

38.

An example of a highly cyclical industry is the _________.

automobile industry

tobacco industry

pharmaceutical industry

utility industry

39.

The stock price index and contracts and orders for nondefense capital goods are _________.

leading economic indicators

coincidental economic indicators

lagging economic indicators

leading and coincidental indicators, respectively

40.

Which one of the following is not a demand shock?

Increase in government spending

Increases in the money supply

Reductions in consumer spending

Improvements in education of U.S. workers

41.

Which one of the following is not a U.S. supply shock?

Unions force an increase in national wage rates.

The oil supply from the Middle East drops 30%.

Extended droughts reduce U.S. food production 25%.

Chinese purchases of U.S. exports increase.

42.

Pharmaceuticals, food, and other necessities would be good performers during the ____ stage of the business cycle.

peak

contraction

trough

expansion

43.

Capital goods industries such as industrial equipment, transportation, and construction would be good investments during the _____ stage of the business cycle.

peak

contraction

trough

expansion

44.

If you are going to earn abnormal returns based on your macroeconomic analysis, it will most likely have to be because __________.

you have more information than others

you are a better analyst than others

you have the same information as others

you are an equally good analyst as others

45.

If the economy is going into a recession, a good industry to invest in would be the __________ industry.

automobile

banking

construction

medical services

46.

Members of the Board of Governors of the Federal Reserve System are appointed by ____________ to serve _____________ terms.

the Senate; 10-year

the House of Representatives; 8-year

the President; 14-year

the Secretary of the Treasury; 6-year

47.

A firm in the early stages of its industry life cycle will likely have _________.

low dividend payout rates

low rates of investment

low rates of return on investment

low R&D spending

48.

Which of the following describes the percentage of the total labor force that has yet to find work?

The capacity utilization rate

The participation rate

The unemployment rate

The natural rate

49.

Which of the following is the rate at which the general level of prices for goods and services is rising?

The exchange rate

The gross domestic product growth rate

The inflation rate

The real interest rate

50.

An analyst starts by examining the broad economic environment and then considers the implications of the economy on the industry in which the firm operates. Finally, the firm's position within the industry is examined. This is called __________ analysis.

bottom-up

outside-inside

top-down

upside-down

51.

Assume that the Federal Reserve increases the money supply. This will cause: I. Interest rates to decrease II. Consumption and investment to decrease III. Inflation to fall

I only

I and II only

II and III only

I, II, and III

52.

The discount rate is the ________.

interest rate banks charge each other for overnight loans of deposits on reserve at the Fed

interest rate the Fed charges commercial banks on short-term loans

interest rate that the U.S. Treasury pays on its bills

interest rate that banks charge their best corporate customers

53.

If the currency of your country is depreciating, this should __________ exports and __________ imports.

stimulate; stimulate

stimulate; discourage

discourage; stimulate

discourage; discourage

54.

If interest rates increase, business investment expenditures are likely to __________ and consumer durable expenditures are likely to _________.

increase; increase

increase; decrease

decrease; increase

decrease; decrease

55.

Increases in the money supply will cause demand for investment and consumption goods to __________ in the short run and may cause prices to __________ in the long run.

increase; increase

increase; decrease

decrease; increase

decrease; decrease

56.

The nominal interest rate is 6%. The inflation rate is 3%. The exact real interest rate must be _________.

2.91%

3.85%

1.45%

2.12%

57.

The nominal interest rate is 10%. The real interest rate is 4%. The inflation rate must be _________.

-6%

5.77%

14.4%

58.

Order the following stages in the industry life cycle from the earliest to latest to occur after the start-up phase: I. Maturity II. Relative decline III. Consolidation

III, I, II

I, III, II

III, II, I

I, II, III

59.

An investment strategy that entails shifting the portfolio into industry sectors that are expected to outperform others based on macroeconomic forecasts is termed ______________.

sector rotation

contraction/expansion analysis

life-cycle analysis

business-cycle shifting

60.

Firm A produces gadgets. The price of gadgets is $2 each. Firm A has total fixed costs of $1,000,000 and variable costs of $1 per gadget. The corporate tax rate is 40%. If the economy is strong, the firm will sell 2,000,000 gadgets. If the economy enters a recession, the firm will sell only half as many gadgets. If the economy enters a recession, the after-tax profit of firm A will be _________.

$90,000

$180,000

$270,000

61.

Firm B produce gadgets. The price of gadgets is $2 each. Firm B has total fixed costs of $300,000 and variable costs of $1.40 per gadget. The corporate tax rate is 30%. If the economy is strong, the firm will sell 2,000,000 gadgets. If the economy enters a recession, the firm will sell only half as many gadgets. If the economy is strong, the after-tax profit of firm B will be _________.

$90,000

$210,000

$300,000

$630,000

62.

The fed funds rate is the __________.

interest rate that banks charge their best corporate customers

interest rate banks charge each other for overnight loans of deposits on reserve at the Fed

interest rate the Fed charges commercial banks on short-term loans

interest rate that the U.S. Treasury pays on its bills

63.

Firm B produce gadgets. The price of gadgets is $2 each. Firm B has total fixed costs of $300,000 and variable costs of $1.40 per gadget. The corporate tax rate is 40%. What is the breakeven number of gadgets B must sell to make a zero after-tax profit?

300,000

400,000

500,000

600,000

64.

The goal of supply-side policies is to _______.

increase government involvement in the economy

create an environment where workers and owners of capital have the maximum incentive and ability to produce and develop goods

maximize tax revenues of the government

focus more on wealth redistribution policies

65.

An industry analysis for manufacturers of a small personal care gadget observed the following characteristics: 1. Industry sales have grown at 15%-20% per year in recent years and are expected to grow at 10%-15% per year over the next 3 years, still well above the economic growth rate. 2. Some U.S. manufacturers are attempting to enter fast-growing non-U.S. markets, which remain largely unexploited. 3. Some manufacturers have created a new niche in the industry by selling directly to customers through mail order. Sales for this industry segment are growing at 40% per year. 4. The current penetration rate in the United States is 60% of households and will be difficult to increase. 5. Manufacturers compete fiercely on the basis of price, and price wars within the industry are common. 6. Some manufacturers are able to develop new, unexploited niche markets in the United States based on company reputation, quality, and service. 7. Several manufacturers have recently merged, and it is expected that consolidation in the industry will increase. 8. New manufacturers continue to enter the market. Characteristics 4 and 5 would indicate that the industry is in the _________ stage.

start-up

consolidation

maturity

relative decline

66.

An industry analysis for manufacturers of a small personal care gadget observed the following characteristics: 1. Industry sales have grown at 15%-20% per year in recent years and are expected to grow at 10%-15% per year over the next 3 years, still well above the economic growth rate. 2. Some U.S. manufacturers are attempting to enter fast-growing non-U.S. markets, which remain largely unexploited. 3. Some manufacturers have created a new niche in the industry by selling directly to customers through mail order. Sales for this industry segment are growing at 40% per year. 4. The current penetration rate in the United States is 60% of households and will be difficult to increase. 5. Manufacturers compete fiercely on the basis of price, and price wars within the industry are common. 6. Some manufacturers are able to develop new, unexploited niche markets in the United States based on company reputation, quality, and service. 7. Several manufacturers have recently merged, and it is expected that consolidation in the industry will increase. 8. New manufacturers continue to enter the market. Characteristics _______ would be typical of an industry that is in the start-up stage.

4 and 7

1 and 4

2 and 5

none of these options

67.

An industry analysis for manufacturers of a small personal care gadget observed the following characteristics: 1. Industry sales have grown at 15%-20% per year in recent years and are expected to grow at 10%-15% per year over the next 3 years, still well above the economic growth rate. 2. Some U.S. manufacturers are attempting to enter fast-growing non-U.S. markets, which remain largely unexploited. 3. Some manufacturers have created a new niche in the industry by selling directly to customers through mail order. Sales for this industry segment are growing at 40% per year. 4. The current penetration rate in the United States is 60% of households and will be difficult to increase. 5. Manufacturers compete fiercely on the basis of price, and price wars within the industry are common. 6. Some manufacturers are able to develop new, unexploited niche markets in the United States based on company reputation, quality, and service. 7. Several manufacturers have recently merged, and it is expected that consolidation in the industry will increase. 8. New manufacturers continue to enter the market. Characteristics ____ would be typical of an industry that is in the consolidation stage.

6 and 7

1 and 4

5 and 6

2 and 8

68.

An industry analysis for manufacturers of a small personal care gadget observed the following characteristics: 1. Industry sales have grown at 15%-20% per year in recent years and are expected to grow at 10%-15% per year over the next 3 years, still well above the economic growth rate. 2. Some U.S. manufacturers are attempting to enter fast-growing non-U.S. markets, which remain largely unexploited. 3. Some manufacturers have created a new niche in the industry by selling directly to customers through mail order. Sales for this industry segment are growing at 40% per year. 4. The current penetration rate in the United States is 60% of households and will be difficult to increase. 5. Manufacturers compete fiercely on the basis of price, and price wars within the industry are common. 6. Some manufacturers are able to develop new, unexploited niche markets in the United States based on company reputation, quality, and service. 7. Several manufacturers have recently merged, and it is expected that consolidation in the industry will increase. 8. New manufacturers continue to enter the market. Which of the characteristics would be typical of an industry that is in the maturity stage?

1, 2, and 3

4 and 5

6, 7, and 8

all of these options

69.

Countercyclical fiscal policy is best described by which of the following statements?

Government surpluses are planned during economic booms, and deficits are planned during economic recessions.

The annual budget should always be balanced.

Deficits should always equal surpluses.

Government deficits are planned during economic booms, and surpluses are planned during economic recessions.

70.

A supply-side economist would likely agree with which of the following statements?

Real output and aggregate employment are primarily determined by aggregate demand.

Real income will rise when government expenditures and tax rates increase.

Real output and aggregate employment are primarily determined by tax rates.

Increasing the money supply will increase real output without causing higher inflation.

71.

Which of the following actions should the central bank take if monetary authorities want to reduce the supply of money to slow the rate of inflation?

Sell government bonds, reducing money supply, increasing interest rates, and slowing aggregate demand.

Buy government bonds, reducing money supply, increasing interest rates, and slowing aggregate demand.

Decrease the discount rate, lowering interest rates and causing both costs and prices to fall.

Increase taxes, reducing costs and causing prices to fall.

72.

The decline in the value of the dollar relative to the yen will have what impact on the purchase of U.S. goods in Japan?

U.S. goods will increase in cost, and Japan will import more.

U.S. goods will increase in cost, and Japan will import less.

U.S. goods will decrease in cost, and Japan will import more.

U.S. goods will increase in cost, and Japan will export less.

73.

Which of the following are examples of cyclical industries? I. Maytag II. Computer chip manufacturers III. Kellogg's Frosted Flakes IV. Pfizer

I and II only

I, II, and III only

II, III, and IV only

I, II, III, and IV

74.

You would expect the beta of cyclical industries to be ______ and the beta of defensive industries to be ______.

greater than 1; less than 1

less than 1; less than 1

less than 1; greater than 1

greater than 1; greater than 1

75.

What economic variable is most closely associated with increasing corporate profits?

Exchange rates

Inflation

Gross domestic product

Budget deficits

76.

The federal government decides to pay for the transition to private social security accounts with a one-time $1 trillion bond issue. What will be the biggest concern to businesses relative to the "crowding out" effect?

Higher interest rates due to the new government borrowing

Inflation resulting from more government purchases

A negative supply shock

Shortage of investment due to new accounts

77.

An expanding economy requires more workers. If the supply of workers becomes inadequate to meet the demand, what is the likely impact on the economy?

An economic slowdown is likely

Employment trends will reverse and unemployment will occur

Government deficits will result from capacity utilization

Inflation may result from upward wage pressures

78.

An expanding economy puts stress on the manufacturing ability of a company. When a firm turns business down during periods of economic expansion, a problem exists in the area of ____________.

asset allocation

capacity utilization

employment management

strategic planning

79.

The expansion of the money supply at a rate that exceeds the increase in goods and services will likely result in ___________.

expanding economy

increased inflation

interest rate declines

lower GDP

80.

The supply of funds in the economy is controlled primarily by ____________.

the Federal Reserve System

Congress

money center banks

the Treasury department

81.

The classification system used to classify firms into industries is now called the _____ code.

SIC

NAICS

ISO 57

ISM

82.

During 2004 China increased its use of global oil by 40%. This followed a 100% increase during the previous 5 years. How do economists refer to this kind of economic event?

Demand shock

Equilibrium event

Expanding commodity event

Supply shock

83.

Whenever OPEC attempts to influence the price of oil by significantly altering production, economists refer to this type of event as a ______________.

demand shock

equilibrium event

expanding commodity event

supply shock

84.

Items that are ____________ and product purchases for which ________ is not important tend to be less cyclical in nature.

necessities; income

luxuries; leverage

discretionary goods; time of purchase

produced with high fixed costs; entertainment

85.

Cash cows are typically found in the _________ stage of the industry life cycle.

start-up

consolidation

maturity

relative decline

86.

At what point in the industry life cycle are inefficiencies in competitors most likely to be removed?

Start-up stage

Consolidation stage

Maturity stage

Relative decline stage

87.

Stalwarts are typically found in the _________ stage of the industry life cycle.

start-up

consolidation

maturity

relative decline

88.

Large-growth companies generally emerge in the __________ stage.

start-up

consolidation

maturity

relative decline

89.

Which of the following are barriers to entry? I. Large economies of scale required to be profitable II. Established brand loyalty III. Patent protection for the firm's product IV. Rapid industry growth

I and II only

I, II, and III only

II, III, and IV only

III and IV only

Student: ___________________________________________________________________________

The accounting measure of a firm's equity value generated by applying accounting principles to asset and liability acquisitions is called ________.

book value

market value

liquidation value

Tobin's q

The price-to-sales ratio is probably most useful for firms in which phase of the industry life cycle?

Start-up phase

Consolidation

Maturity

Relative decline

If a firm increases its plowback ratio, this will probably result in _______ P/E ratio.

a higher

a lower

an unchanged

The answer cannot be determined from the information given.

The value of Internet companies is based primarily on _____.

current profits

Tobin's q

growth opportunities

replacement cost

New-economy companies generally have higher _______ than old-economy companies.

book value per share

P/E multiples

profits

asset values

P/E ratios tend to be _______ when inflation is ______.

higher; higher

lower; lower

higher; lower

They are unrelated.

Which one of the following statements about market and book value is correct?

All firms sell at a market-to-book ratio above 1.

All firms sell at a market-to-book ratio greater than or equal to 1.

All firms sell at a market-to-book ratio below 1.

Most firms have a market-to-book ratio above 1, but not all.

Earnings yields tend to _______ when Treasury yields fall.

fall

rise

remain unchanged

fluctuate wildly

Which one of the following is a common term for the market consensus value of the required return on a stock?

Dividend payout ratio

Intrinsic value

Market capitalization rate

Plowback ratio

10.

Which one of the following is equal to the ratio of common shareholders' equity to common shares outstanding?

Book value per share

Liquidation value per share

Market value per share

Tobin's q

11.

A firm has current assets that could be sold for their book value of $10 million. The book value of its fixed assets is $60 million, but they could be sold for $95 million today. The firm has total debt at a book value of $40 million, but interest rate changes have increased the value of the debt to a current market value of $50 million. This firm's market-to-book ratio is ________.

1.83

1.5

1.35

1.46

12.

If a stock is correctly priced, then you know that ____________.

the dividend payout ratio is optimal

the stock's required return is equal to the growth rate in earnings and dividends

the sum of the stock's expected capital gain and dividend yield is equal to the stock's required rate of return

the present value of growth opportunities is equal to the value of assets in place

13.

A stock has an intrinsic value of $15 and an actual stock price of $13.50. You know that this stock ________.

has a Tobin's q value < 1

will generate a positive alpha

has an expected return less than its required return

has a beta > 1

14.

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

Bill will be willing to pay the most for the stock because he will get his money back in 1 year when he sells.

Jim should be willing to pay three times as much for the stock as Bill will pay because his expected holding period is three times as long as Bill's.

Shelly should be willing to pay the most for the stock because she will hold it the longest and hence will get the most dividends.

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

15.

A firm that has an ROE of 12% is considering cutting its dividend payout. The stockholders of the firm desire a dividend yield of 4% and a capital gain yield of 9%. Given this information, which of the following statements is (are) correct? I. All else equal, the firm's growth rate will accelerate after the payout change. II. All else equal, the firm's stock price will go up after the payout change. III. All else equal, the firm's P/E ratio will increase after the payout change.

I only

I and II only

II and III only

I, II, and III

16.

A firm cuts its dividend payout ratio. As a result, you know that the firm's _______.

return on assets will increase

earnings retention ratio will increase

earnings growth rate will fall

stock price will fall

17.

__________ is the amount of money per common share that could be realized by breaking up the firm, selling its assets, repaying its debt, and distributing the remainder to shareholders.

Book value per share

Liquidation value per share

Market value per share

Tobin's q

18.

An underpriced stock provides an expected return that is ____________ the required return based on the capital asset pricing model (CAPM).

less than

equal to

greater than

greater than or equal to

19.

Stockholders of Dogs R Us Pet Supply expect a 12% rate of return on their stock. Management has consistently been generating an ROE of 15% over the last 5 years but now believes that ROE will be 12% for the next 5 years. Given this, the firm's optimal dividend payout ratio is now ______.

100%

between 0% and 50%

between 50% and 100%

20.

The constant-growth dividend discount model (DDM) can be used only when the ___________.

growth rate is less than or equal to the required return

growth rate is greater than or equal to the required return

growth rate is less than the required return

growth rate is greater than the required return

21.

Suppose that in 2012 the expected dividends of the stocks in a broad market index equaled $240 million when the discount rate was 8% and the expected growth rate of the dividends equaled 6%. Using the constant-growth formula for valuation, if interest rates increase to 9%, the value of the market will change by _____.

-10%

-20%

-25%

-33%

22.

You want to earn a return of 10% on each of two stocks, A and B. Each of the stocks is expected to pay a dividend of $4 in the upcoming year. The expected growth rate of dividends is 6% for stock A and 5% for stock B. Using the constant-growth DDM, the intrinsic value of stock A _________.

will be higher than the intrinsic value of stock B

will be the same as the intrinsic value of stock B

will be less than the intrinsic value of stock B

The answer cannot be determined from the information given.

23.

Each of two stocks, A and B, is expected to pay a dividend of $7 in the upcoming year. The expected growth rate of dividends is 6% for both stocks. You require a return of 10% on stock A and a return of 12% on stock B. Using the constant-growth DDM, the intrinsic value of stock A _________.

will be higher than the intrinsic value of stock B

will be the same as the intrinsic value of stock B

will be less than the intrinsic value of stock B

The answer cannot be determined from the information given.

24.

You want to earn a return of 11% on each of two stocks, A and B. Stock A is expected to pay a dividend of $3 in the upcoming year, while stock B is expected to pay a dividend of $2 in the upcoming year. The expected growth rate of dividends for both stocks is 4%. Using the constant-growth DDM, the intrinsic value of stock A _________.

will be higher than the intrinsic value of stock B

will be the same as the intrinsic value of stock B

will be less than the intrinsic value of stock B

The answer cannot be determined from the information given.

25.

You are considering acquiring a common share of Sahali Shopping Center Corporation that you would like to hold for 1 year. You expect to receive both $1.25 in dividends and $35 from the sale of the share at the end of the year. The maximum price you would pay for a share today is __________ if you wanted to earn a 12% return.

$31.25

$32.37

$38.47

$41.32

26.

The market capitalization rate on the stock of Aberdeen Wholesale Company is 10%. Its expected ROE is 12%, and its expected EPS is $5. If the firm's plowback ratio is 50%, its P/E ratio will be _________.

8.33

12.5

19.23

24.15

27.

The market capitalization rate on the stock of Aberdeen Wholesale Company is 10%. Its expected ROE is 12%, and its expected EPS is $5. If the firm's plowback ratio is 60%, its P/E ratio will be _________.

7.14

14.29

16.67

22.22

28.

Weyerhaeuser Incorporated has a balance sheet that lists $70 million in assets, $45 million in liabilities, and $25 million in common shareholders' equity. It has 1 million common shares outstanding. The replacement cost of its assets is $85 million. Its share price in the market is $49. Its book value per share is _________.

$16.67

$25

$37.50

$40.83

29.

Eagle Brand Arrowheads has expected earnings of $1.25 per share and a market capitalization rate of 12%. Earnings are expected to grow at 5% per year indefinitely. The firm has a 40% plowback ratio. By how much does the firm's ROE exceed the market capitalization rate?

.5%

1.5%

30.

Gagliardi Way Corporation has an expected ROE of 15%. If it pays out 30% of its earnings as dividends, its dividend growth rate will be _____.

4.5%

10.5%

15%

30%

31.

A preferred share of Coquihalla Corporation will pay a dividend of $8 in the upcoming year and every year thereafter; that is, dividends are not expected to grow. You require a return of 7% on this stock. Using the constant-growth DDM to calculate the intrinsic value, a preferred share of Coquihalla Corporation is worth _________.

$13.50

$45.50

$91

$114.29

32.

Brevik Builders has an expected ROE of 25%. Its dividend growth rate will be __________ if it follows a policy of paying 30% of earnings in the form of dividends.

15%

17.5%

45%

33.

A firm is planning on paying its first dividend of $2 three years from today. After that, dividends are expected to grow at 6% per year indefinitely. The stock's required return is 14%. What is the intrinsic value of a share today?

$25

$16.87

$19.24

$20.99

34.

Rose Hill Trading Company is expected to have EPS in the upcoming year of $8. The expected ROE is 18%. An appropriate required return on the stock is 14%. If the firm has a plowback ratio of 70%, its dividend in the upcoming year should be _________.

$1.12

$1.44

$2.40

$5.60

35.

Rose Hill Trading Company is expected to have EPS in the upcoming year of $6. The expected ROE is 18%. An appropriate required return on the stock is 14%. If the firm has a plowback ratio of 70%, its intrinsic value should be _________.

$20.93

$69.77

$128.57

$150

36.

Cache Creek Manufacturing Company is expected to pay a dividend of $3.36 in the upcoming year. Dividends are expected to grow at 8% per year. The risk-free rate of return is 4%, and the expected return on the market portfolio is 14%. Investors use the CAPM to compute the market capitalization rate and use the constant-growth DDM to determine the value of the stock. The stock's current price is $84. Using the constant-growth DDM, the market capitalization rate is _________.

12%

14%

18%

37.

Grott and Perrin, Inc., has expected earnings of $3 per share for next year. The firm's ROE is 20%, and its earnings retention ratio is 70%. If the firm's market capitalization rate is 15%, what is the present value of its growth opportunities?

$20

$70

$90

$115

38.

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

$25

$50

$75

$100

39.

Annie's Donut Shops, Inc., has expected earnings of $3 per share for next year. The firm's ROE is 18%, and its earnings retention ratio is 60%. If the firm's market capitalization rate is 12%, what is the value of the firm excluding any growth opportunities?

$25

$50

$83.33

$208

40.

Flanders, Inc., has expected earnings of $4 per share for next year. The firm's ROE is 8%, and its earnings retention ratio is 40%. If the firm's market capitalization rate is 15%, what is the present value of its growth opportunities?

-$6.33

$20.34

$26.67

41.

Firm A is high-risk, and Firm B is low-risk. Everything else equal, which firm would you expect to have a higher P/E ratio?

Firm A

Firm B

Both would have the same P/E if they were in the same industry.

There is not necessarily any linkage between risk and P/E ratios.

42.

Firms with higher expected growth rates tend to have P/E ratios that are ___________ the P/E ratios of firms with lower expected growth rates.

higher than

equal to

lower than

There is not necessarily any linkage between risk and P/E ratios.

43.

Value stocks are more likely to have a PEG ratio _____.

less than 1

equal to 1

greater than 1

less than zero

44.

Generally speaking, as a firm progresses through the industry life cycle, you would expect the PVGO to ________ as a percentage of share price.

increase

decrease

stay the same

No typical pattern can be expected.

45.

Cache Creek Manufacturing Company is expected to pay a dividend of $4.20 in the upcoming year. Dividends are expected to grow at the rate of 8% per year. The risk-free rate of return is 4%, and the expected return on the market portfolio is 14%. Investors use the CAPM to compute the market capitalization rate on the stock and use the constant-growth DDM to determine the intrinsic value of the stock. The stock is trading in the market today at $84. Using the constant-growth DDM and the CAPM, the beta of the stock is _________.

1.4

46.

Westsyde Tool Company is expected to pay a dividend of $1.50 in the upcoming year. The risk-free rate of return is 6%, and the expected return on the market portfolio is 14%. Analysts expect the price of Westsyde Tool Company shares to be $29 a year from now. The beta of Westsyde Tool Company's stock is 1.2. Using the CAPM, an appropriate required return on Westsyde Tool Company's stock is _________.

10.8%

15.6%

16.8%

47.

Westsyde Tool Company is expected to pay a dividend of $2 in the upcoming year. The risk-free rate of return is 6%, and the expected return on the market portfolio is 12%. Analysts expect the price of Westsyde Tool Company shares to be $29 a year from now. The beta of Westsyde Tool Company's stock is 1.2. Using a one-period valuation model, the intrinsic value of Westsyde Tool Company stock today is _________.

$24.29

$27.39

$31.13

$34.52

48.

Todd Mountain Development Corporation is expected to pay a dividend of $2.50 in the upcoming year. Dividends are expected to grow at the rate of 8% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 12%. The stock of Todd Mountain Development Corporation has a beta of .75. Using the CAPM, the return you should require on the stock is _________.

7.25%

10.25%

14.75%

21%

49.

Todd Mountain Development Corporation is expected to pay a dividend of $3 in the upcoming year. Dividends are expected to grow at the rate of 8% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 17%. The stock of Todd Mountain Development Corporation has a beta of .75. Using the constant-growth DDM, the intrinsic value of the stock is _________.

17.65

37.50

50.

Generally speaking, the higher a firm's ROA, the _________ the dividend payout ratio and the _________ the firm's growth rate of earnings.

higher; lower

higher; higher

lower; lower

lower; higher

51.

Interior Airline is expected to pay a dividend of $3 in the upcoming year. Dividends are expected to grow at the rate of 10% per year. The risk-free rate of return is 4%, and the expected return on the market portfolio is 13%. The stock of Interior Airline has a beta of 4. Using the constant-growth DDM, the intrinsic value of the stock is _________.

$10

$22.73

$27.78

$41.67

52.

Caribou Gold Mining Corporation is expected to pay a dividend of $4 in the upcoming year. Dividends are expected to decline at the rate of 3% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 13%. The stock of Caribou Gold Mining Corporation has a beta of .5. Using the CAPM, the return you should require on the stock is _________.

53.

Caribou Gold Mining Corporation is expected to pay a dividend of $6 in the upcoming year. Dividends are expected to decline at the rate of 3% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 13%. The stock of Caribou Gold Mining Corporation has a beta of .5. Using the constant-growth DDM, the intrinsic value of the stock is _________.

$50

$100

$150

$200

54.

Lifecycle Motorcycle Company is expected to pay a dividend in year 1 of $2, a dividend in year 2 of $3, and a dividend in year 3 of $4. After year 3, dividends are expected to grow at the rate of 7% per year. An appropriate required return for the stock is 12%. Using the multistage DDM, the stock should be worth __________ today.

$63.80

$65.13

$67.95

$85.60

55.

Ace Frisbee Corporation produces a good that is very mature in the firm's product life cycles. Ace Frisbee Corporation is expected to pay a dividend in year 1 of $3, a dividend in year 2 of $2, and a dividend in year 3 of $1. After year 3, dividends are expected to decline at the rate of 2% per year. An appropriate required return for the stock is 8%. Using the multistage DDM, the stock should be worth __________ today.

$13.07

$13.58

$18.25

$18.78

56.

A firm's earnings per share increased from $10 to $12, its dividends increased from $4 to $4.40, and its share price increased from $80 to $100. Given this information, it follows that _________.

the stock experienced a drop in its P/E ratio

the company had a decrease in its dividend payout ratio

both earnings and share price increased by 20%

the required rate of return increased

57.

Assuming all other factors remain unchanged, __________ would increase a firm's price-earnings ratio.

an increase in the dividend payout ratio

a reduction in investor risk aversion

an expected increase in the level of inflation

an increase in the yield on Treasury bills

58.

A company with an expected earnings growth rate which is greater than that of the typical company in the same industry most likely has _________________.

a dividend yield which is greater than that of the typical company

a dividend yield which is less than that of the typical company

less risk than the typical company

less sensitivity to market trends than the typical company

59.

Everything else equal, which variable is negatively related to the intrinsic value of a company?

60.

Sanders, Inc., paid a $4 dividend per share last year and is expected to continue to pay out 60% of its earnings as dividends for the foreseeable future. If the firm is expected to generate a 13% return on equity in the future, and if you require a 15% return on the stock, the value of the stock is _________.

$26.67

$35.19

$42.94

$59.89

61.

A firm has PVGO of 0 and a market capitalization rate of 12%. What is the firm's P/E ratio?

8.33

10.25

18.55

62.

A firm has an earnings retention ratio of 40%. The stock has a market capitalization rate of 15% and an ROE of 18%. What is the stock's P/E ratio?

12.82

7.69

8.33

9.46

63.

A common stock pays an annual dividend per share of $1.80. The risk-free rate is 5%, and the risk premium for this stock is 4%. If the annual dividend is expected to remain at $1.80 per share, what is the value of the stock?

$17.78

$20

$40

None of these options

64.

Transportation stocks currently provide an expected rate of return of 15%. TTT, a large transportation company, will pay a year-end dividend of $3 per share. If the stock is selling at $60 per share, what must be the market's expectation of the constant-growth rate of TTT dividends?

10%

20%

None of these options

65.

A stock is priced at $45 per share. The stock has earnings per share of $3 and a market capitalization rate of 14%. What is the stock's PVGO?

$23.57

$15

$19.78

$21.34

66.

A firm increases its dividend plowback ratio. All else equal, you know that _____________.

earnings growth will increase and the stock's P/E will increase

earnings growth will decrease and the stock's P/E will increase

earnings growth will increase and the stock's P/E will decrease

earnings growth will increase and the stock's P/E may or may not increase

67.

A firm has a stock price of $54.75 per share. The firm's earnings are $75 million, and the firm has 20 million shares outstanding. The firm has an ROE of 15% and a plowback of 65%. What is the firm's PEG ratio?

1.5

1.25

1.1

68.

ART has come out with a new and improved product. As a result, the firm projects an ROE of 25%, and it will maintain a plowback ratio of .20. Its earnings this year will be $3 per share. Investors expect a 12% rate of return on the stock. At what price would you expect ART to sell?

$25

$34.29

$42.86

$45.67

69.

8.33

11.43

14.29

15.25

70.

$8.57

$9.29

$14.29

$16.29

71.

$53.96

$44.95

$41.68

$39.76

72.

The EBIT of a firm is $300, the tax rate is 35%, the depreciation is $20, capital expenditures are $60, and the increase in net working capital is $30. What is the free cash flow to the firm?

$85

$125

$185

$305

73.

A firm reports EBIT of $100 million. The income statement shows depreciation of $20 million. If the tax rate is 35% and total capital expenditures and increases in working capital total $10 million, what is the free cash flow to the firm?

$57

$65

$75

$95

74.

The free cash flow to the firm is $300 million in perpetuity, the cost of equity equals 14%, and the WACC is 10%. If the market value of the debt is $1 billion, what is the value of the equity using the free cash flow valuation approach?

$1 billion

$2 billion

$3 billion

$4 billion

75.

If a firm has a free cash flow equal to $50 million and that cash flow is expected to grow at 3% forever, what is the total firm value given a WACC of 9.5%?

$679.81 million

$715.54 million

$769.23 million

$803.03 million

76.

The free cash flow to the firm is reported as $405 million. The interest expense to the firm is $76 million. If the tax rate is 35% and the net debt of the firm increased by $50 million, what is the free cash flow to the equity holders of the firm?

$405.6 million

$454.2 million

$505.8 million

$553.5 million

77.

The free cash flow to the firm is reported as $275 million. The interest expense to the firm is $60 million. If the tax rate is 35% and the net debt of the firm increased by $33 million, what is the free cash flow to the equity holders of the firm?

$269 million

$296 million

$305 million

$327 million

78.

The free cash flow to the firm is reported as $205 million. The interest expense to the firm is $22 million. If the tax rate is 35% and the net debt of the firm increased by $25 million, what is the approximate market value of the firm if the FCFE grows at 2% and the cost of equity is 11%?

$2,168 billion

$2,445 billion

$2,565 billion

$2,998 billion

79.

The free cash flow to the firm is reported as $198 million. The interest expense to the firm is $15 million. If the tax rate is 35% and the net debt of the firm increased by $20 million, what is the approximate market value of the firm if the FCFE grows at 3% and the cost of equity is 14%?

$1,950 billion

$2,497 billion

$2,585 billion

$3,098 billion

80.

Firm A has a stock price of $35, and 60% of the value of the stock is in the form of PVGO. Firm B also has a stock price of $35, but only 20% of the value of stock B is in the form of PVGO. We know that: I. Stock A will give us a higher return than Stock B. II. An investment in stock A is probably riskier than an investment in stock B. III. Stock A has higher forecast earnings growth than stock B.

I only

I and II only

II and III only

I, II, and III

81.

A firm is expected to produce earnings next year of $3 per share. It plans to reinvest 25% of its earnings at 20%. If the cost of equity is 11%, what should be the value of the stock?

$27.27

$37.50

$66.67

$70

82.

Next year's earnings are estimated to be $5. The company plans to reinvest 20% of its earnings at 15%. If the cost of equity is 9%, what is the present value of growth opportunities?

$9.09

$10.10

$11.11

$12.21

83.

Next year's earnings are estimated to be $6. The company plans to reinvest 33% of its earnings at 12%. If the cost of equity is 8%, what is the present value of growth opportunities?

$24.50

$44.44

$75

84.

When Google's share price reached $475 per share, Google had a P/E ratio of about 68 and an estimated market capitalization rate of 11.5%. Google pays no dividends. Approximately what percentage of Google's stock price was represented by PVGO?

92%

87%

77%

64%

85.

A firm has a stock price of $55 per share and a P/E ratio of 75. If you buy the stock at this P/E and earnings fail to grow at all, how long should you expect it to take to just recover the cost of your investment?

27 years

37 years

55 years

75 years

86.

In what industry are investors likely to use the dividend discount model and arrive at a price close to the observed market price?

Import/export trade

Software

Telecommunications

Utility

87.

Estimates of a stock's intrinsic value calculated with the free cash flow methodology depend most critically on _______.

the terminal value used

whether one uses FCFF or FCFE

the time period used to estimate the cash flows

whether the firm is currently paying dividends

88.

The greatest value to an analyst from calculating a stock's intrinsic value is _______.

how easy it is to come up with accurate model inputs

the precision of the value estimate

how the process forces analysts to understand the critical variables that have the greatest impact on value

how all the different models typically yield identical value results

89.

Which of the following valuation measures is often used to compare firms that have no earnings?

Price-to-book ratio

P/E ratio

Price-to-cash-flow ratio

Price-to-sales ratio

Student: ___________________________________________________________________________

Which of the following assets is most liquid?

Cash equivalents

Receivables

Inventories

Plant and equipment

Cost of goods sold refers to ___________.

direct costs attributable to producing the product sold by the firm

salaries, advertising, and selling expenses

payments to the firm's creditors

payments to federal and local governments

Many observers believe that firms "manage" their income statements to _______.

minimize taxes over time

maximize expenditures

smooth their earnings over time

generate level sales

Depreciation expense is in what broad category of expenditures?

Operating expenses

General and administrative expenses

Debt interest expense

Tax expenditures

Firm A acquires firm B when firm B has a book value of assets of $155 million and a book value of liabilities of $35 million. Firm A actually pays $175 million for firm B. This purchase would result in goodwill for firm A equal to _____.

$175 million

$155 million

$120 million

$55 million

One of the biggest impediments to a global capital market has been _________.

volatile exchange rates

the lack of common accounting standards

lower disclosure standards in the United States than abroad

the lack of transparent reporting standards across the EU

Benjamin Graham thought that the benefits from detailed analysis of a firm's financial statements had _________ over his long professional life.

increased greatly

increased slightly

remained constant

decreased

If the interest rate on debt is higher than the ROA, then a firm's ROE will _________.

decrease

increase

not change

change but in an indeterminable manner

Which of the following is not one of the three key financial statements available to investors in publicly traded firms?

Income statement

Balance sheet

Statement of operating earnings

Statement of cash flows

10.

In 2006 Hewlett-Packard repurchased shares of common stock worth $5,241 million and made dividend payments of $894 million. Other financing activities raised $196 million, and Hewlett-Packard's total cash flow from financing was -$6,077 million. How much did the long-term debt accounts of Hewlett-Packard change?

Increased $138 million

Decreased $138 million

Increased $836 million

Decreased $836 million

11.

What must cash flow from financing have been in 2008 for Interceptors, Inc.?

$28

$30

$33

12.

Based on the cash flow data in the table for Interceptors Inc., which of the following statements is (are) correct? I. This firm appears to be a good investment because of its steady growth in cash. II. This firm has been able to generate growing cash flows only by borrowing or selling equity to offset declining operating cash flows. III. Financing activities have been increasingly important for this firm's operations, at least in the short run.

I only

II and III only

II only

I and II only

13.

Common-size balance sheets are prepared by dividing all quantities by ____________.

total assets

total liabilities

shareholders' equity

fixed assets

14.

Operating ROA is calculated as __________, while ROE is calculated as _________.

EBIT/Total assets; Net profit/Total assets

Net profit/Total assets; EBIT/Total assets

EBIT/Total assets; Net profit/Equity

Net profit/EBIT; Sales/Total assets

15.

A firm increases its financial leverage when its ROA is greater than the cost of debt. Everything else equal, this change will probably increase the firm's: I. Beta II. Earnings variability over the business cycle III. ROE IV. Stock price

I and II only

III and IV only

I, III, and IV only

I, II, and III only

16.

The highest possible value for the interest-burden ratio is ______, and this occurs when the firm _________.

0; uses as much debt as possible

1; uses debt to the point where ROA = interest cost of debt

1; uses no interest-bearing debt

-1; pays down its existing debts

17.

Which one of the following ratios is used to calculate the times-interest-earned ratio?

Net profit/Interest expense

Pretax profit/EBIT

EBIT/Sales

EBIT/Interest expense

18.

The process of decomposing ROE into a series of component ratios is called ______________.

DuPont analysis

technical analysis

comparative analysis

liquidity analysis

19.

Which of the following is not a ratio used in the DuPont analysis?

Interest burden

Profit margin

Asset turnover

Earnings yield ratio

20.

By 2008, over 100 countries had adopted financial reporting standards that are in conformance with ________.

GAAP

IFRS

FASB

GASB

21.

Operating ROA can be found as the product of ______.

Return on sales × ATO

Tax burden × Interest burden

Interest burden × Leverage ratio

ROE × Dividend payout ratio

22.

A firm has an ROE of 20% and a market-to-book ratio of 2.38. Its P/E ratio is _________.

8.4

11.9

17.62

47.6

23.

If a firm has a positive tax rate and a positive operating ROA, and the interest rate on debt is the same as the operating ROA, then operating ROA will be _________.

greater than zero, but it is impossible to determine how operating ROA will compare to ROE

equal to ROE

greater than ROE

less than ROE

24.

You find that a firm that uses debt has a compound leverage factor less than 1. This tells you that ________.

the firm's use of financial leverage is positively contributing to ROE

the firm's use of financial leverage is negatively contributing to ROE

the firm's use of operating leverage is positively contributing to ROE

the firm's use of operating leverage is negatively contributing to ROE

25.

A firm has a P/E ratio of 24 and an ROE of 12%. Its market-to-book-value ratio is _________.

2.88

1.75

.69

26.

A firm has an ROA of 8% and a debt/equity ratio of .5; its ROE is _________.

12%

27.

A firm has a tax burden of .7, a leverage ratio of 1.3, an interest burden of .8, and a return-on-sales ratio of 10%. The firm generates $2.28 in sales per dollar of assets. What is the firm's ROE?

12.4%

14.5%

16.6%

17.8%

28.

Economic value added (EVA) is:

the difference between the return on assets and the opportunity cost of capital times the capital base

ROA × ROE

a measure of the firm's abnormal return

largest for high-growth firms

29.

Which of the following statements is true concerning economic value added?

A growing number of firms tie managers' compensation to EVA.

A profitable firm will always have a positive EVA.

EVA recognizes that the cost of capital is not a real cost.

If a firm has positive present value of growth opportunities, it will have positive EVA.

30.

The financial statements of Flathead Lake Manufacturing Company are shown below: Note: The common shares are trading in the stock market for $15 per share Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's current ratio for 2012 indicates that Flathead's liquidity has ________ since 2011.

risen

fallen

stayed the same

The answer cannot be determined from the information given.

31.

The financial statements of Flathead Lake Manufacturing Company are shown below: Note: The common shares are trading in the stock market for $15 per share Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's inventory turnover ratio is _________. (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)

11.6

10.2

9.5

7.7

32.

2.13

2.44

2.56

2.89

33.

$810,000

$775,000

$755,000

$735,000

34.

The financial statements of Flathead Lake Manufacturing Company are shown below: Note: The common shares are trading in the stock market for $15 per share Refer to the financial statements of Flathead Lake Manufacturing Company. The industry average ACP is 32 days. How is Flathead doing in its collections relative to the industry? (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)

Flathead's receivables are outstanding about 9 fewer days than the industry average.

Flathead's receivables are outstanding about 15 fewer days than the industry average.

Flathead's receivables are outstanding about 12 more days than the industry average.

Flathead's receivables are outstanding about 6 more days than the industry average.

35.

The financial statements of Flathead Lake Manufacturing Company are shown below: Note: The common shares are trading in the stock market for $15 per share Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's total asset turnover for 2012 is _________. (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)

3.56

3.26

3.14

3.02

36.

$.075

$.086

$.092

$.099

37.

The financial statements of Flathead Lake Manufacturing Company are shown below: Note: The common shares are trading in the stock market for $15 per share Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's return on equity ratio for 2012 is _________. (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)

6.5%

26.5%

33.4%

38%

38.

3.39

3.6

13.33

10.67

39.

The financial statements of Flathead Lake Manufacturing Company are shown below: Note: The common shares are trading in the stock market for $15 per share Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's compound leverage ratio is __________. (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)

1.5

2.5

40.

1.3

1.5

1.69

2.83

41.

1.3

1.5

1.69

2.83

42.

1.3

1.5

1.69

2.83

43.

2.8

11.11

44.

The financial statements of Burnaby Mountain Trading Company are shown below. Note: The common shares are trading in the stock market for $27 each. Refer to the financial statements of Burnaby Mountain Trading Company. The firm's fixed-asset turnover ratio for 2012 is _________. (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)

2.8

11.11

45.

The financial statements of Burnaby Mountain Trading Company are shown below. Note: The common shares are trading in the stock market for $27 each. Refer to the financial statements of Burnaby Mountain Trading Company. The firm's asset turnover ratio for 2012 is _________. (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)

1.3

1.5

1.69

2.83

46.

.0409

.0429

.0475

.0753

47.

The financial statements of Burnaby Mountain Trading Company are shown below. Note: The common shares are trading in the stock market for $27 each. Refer to the financial statements of Burnaby Mountain Trading Company. The firm's return-on-equity ratio for 2012 is _________. (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)

.0409

.0429

.0462

.0923

48.

2.8

3.6

11.11

49.

.1708

.1529

.1462

.1636

50.

A firm has a net profit/pretax profit ratio of .6, a leverage ratio of 1.5, a pretax profit/EBIT of .7, an asset turnover ratio of 4, a current ratio of 2, and a return-on-sales ratio of 6%. Its ROE is _________.

7.56%

15.12%

20.16%

30.24%

51.

A firm has an ROA of 19%, a debt/equity ratio of 1.8, and a tax rate of 30%, and the interest rate on its debt is 7%. Its ROE is _________.

15.12%

28.42%

37.24%

40.6%

52.

The level of real income of a firm can be distorted by the reporting of depreciation and interest expense. During periods of low inflation, the level of reported depreciation tends to __________ income, and the level of interest expense reported tends to __________ income.

understate; overstate

understate; understate

overstate; understate

overstate; overstate

53.

If a firm's ratio of stockholders' equity/total assets is lower than the industry average and its ratio of long-term debt/stockholders' equity is also lower than the industry average, this would suggest that the firm _________.

has more current liabilities than the industry average

has more leased assets than the industry average

will be less profitable than the industry average

has more current assets than the industry average

54.

A firm has a lower inventory turnover, a longer ACP, and a lower fixed-asset turnover than the industry averages. You should not be surprised to find that this firm has: I. Lower ATO than the industry average II. Lower ROA than the industry average III. Lower ROE than the industry average

I only

I and II only

II and III only

I, II, and III

55.

A high price-to-book ratio may indicate which one of the following?

The firm expanded its plant and equipment in the past few years.

The firm is doing a poorer job controlling its inventory expense than other related firms.

Investors may believe that this firm has opportunities for earning a rate of return in excess of the market capitalization rate.

All of these options.

56.

A firm has an ROE equal to the industry average, but its price-to-book ratio is below the industry average. You know that the firm's _________.

earnings yield is above the industry average

P/E ratio is above the industry average

dividend payout ratio is too high

interest burden must be below the industry average

57.

Use the following cash flow data of Haven Hardware for the year ended December 31, 2012. What is the net cash provided by operating activities of Haven Hardware?

-$30,000

$220,000

$320,000

$780,000

58.

Use the following cash flow data of Haven Hardware for the year ended December 31, 2012. What is the net cash provided by or used in investing activities of Haven Hardware?

-$12,000

-$62,000

$12,000

$164,000

59.

Use the following cash flow data of Haven Hardware for the year ended December 31, 2012. What is the net cash provided by or used in financing activities of Haven Hardware?

-$10,000

-$120,000

$10,000

$120,000

60.

Use the following cash flow data of Haven Hardware for the year ended December 31, 2012. What is the net increase or decrease in cash for Haven Hardware for 2012?

-$94,000

-$88,000

$88,000

$188,000

61.

Use the following cash flow data of Haven Hardware for the year ended December 31, 2012. What is the cash at the end of 2012 for Haven Hardware?

$6,000

$94,000

$736,000

$188,000

62.

All of the following ratios are related to efficiency except _______.

total asset turnover

fixed-asset turnover

average collection period

cash ratio

63.

Which of the following would result in a cash inflow under the heading "Cash flow from investing" in the statement of cash flows?

Purchase of capital equipment

Payments to suppliers for inventory

Collections on receivables

Sale of production machinery

64.

When assessing the sustainability of a firm's cash flows, analysts will prefer to see cash growth generated from which of the following sources?

Cash flow from investment activities

Cash flow from operating activities

Cash flow from financing

Cash flow from extraordinary events

65.

The ABS company has a capital base of $100 million, an opportunity cost of capital (k) of 15%, a return on assets (ROA) of 9%, and a return on equity (ROE) of 18%. What is the economic value added (EVA) for ABS?

$8 million

-$6 million

$3 million

-$4 million

66.

Another term for EVA is ______.

net income

operating income

residual income

market-based income

67.

Which of the following transactions will result in a decrease in cash flow from operations?

Increase in accounts receivable

Decrease in inventories

Decrease in taxes payable

Decrease in bonds outstanding

68.

Which of the following transactions will result in a decrease in cash flow from investments?

Acquisition of another business

Capital gain from sale of a subsidiary

Decrease in net investments

Sale of equipment

69.

Which of the following will result in an increase in cash to the firm?

Dividends paid

A delay in collecting on accounts receivable

Net new investments

An increase in accounts payable

70.

The table below shows some data for Key Biscuit Company: What must have caused the firm's ROE to drop?

The firm began using more debt as a percentage of financing.

The firm began using less debt as a percentage of financing.

The compound leverage ratio was less than 1.

The operating ROA was declining.

71.

A firm purchases goods on credit worth $150. The same firm pays off $100 in old credit purchases. An investment is made via the purchase of a new facility, and equity is issued in the amount of $300 to pay for the purchase. What is the change in net cash provided by operations?

$50 increase

$100 increase

$150 increase

$250 increase

72.

A firm purchases goods on credit worth $100. The same firm pays off $80 in old credit purchases. An investment is made via the purchase of a new facility, and equity is issued in the amount of $200 to pay for the purchase. What is the change in net cash provided by financing?

$20 increase

$80 increase

$100 increase

$200 increase

73.

A firm purchases goods on credit worth $90. The same firm pays off $100 in old credit purchases. An investment is made via the purchase of a new facility, and equity is issued in the amount of $180 to pay for the purchase. What is the change in net cash provided by investments?

$10 decrease

$90 decrease

$180 decrease

$190 decrease

74.

The net income of the company is $120. Accounts payable increase by $20, depreciation is $15, and equipment is purchased for $40. If the firm issued $110 in new bonds, what is the total change in cash for the firm for all activities?

Increase of $225

Increase of $130

Decrease of $195

Decrease of $110

75.

The term quality of earnings refers to ________.

how well reported earnings conform to GAAP

the realism and sustainability of reported earnings

whether actual earnings matched expected earnings

how well reported earnings fit a trend line of earnings growth

76.

The practice of "selling" large quantities of goods to customers in order to get quarterly sales up while allowing these customers to return the goods next quarter is termed _____________.

channel stuffing

clogging the network

spamming the johns

artificial sales

77.

What ratio will definitely increase when a firm increases its annual sales with no corresponding increase in assets?

Asset turnover

Current ratio

Liquidity ratio

Quick ratio

78.

A firm's leverage ratio is 1.2, interest-burden ratio is .81, and profit margin is .25, and its asset turnover is 1.1. What is the firm's compound leverage factor?

.243

.267

.826

.972

79.

The tax burden of the firm is .4, the interest burden is .65, the return on sales is .05, the asset turnover is .90, and the leverage ratio is 1.35. What is the ROE of the firm?

1.58%

5.68%

12.2%

13.33%

80.

The tax burden of the firm is .5, the interest burden is .55, the profit margin is .25, the asset turnover is 1.5, and the leverage ratio is 1.65. What is the ROE of the firm?

1.88%

6.68%

12.15%

17.02%

81.

The major difference between IFRS and GAAP is that U.S. standards are ___________ and IFRS standards are _________.

strictly enforced; weakly enforced

rules-based; principles-based

evolutionary; devolutionary

based on government standards; based on corporate practice

82.

The quick ratio is a measure of a firm's __________.

asset turnover

market valuation

liquidity

interest burden

83.

The firm's leverage ratio is 1.2, interest-burden ratio is .81, and profit margin is .24, and its asset turnover is 1.25. What is the firm's ROA?

.25

.335

.372

84.

A firm has a compound leverage factor greater than 1; this indicates that ______.

the firm has no interest payments

the firm uses less debt as a percentage of financing

the firm's interest payments are equal to the firm's pretax profits

the firm's debt has a positive contribution to the firm's ROA

Student: ___________________________________________________________________________

You purchase one IBM July 120 call contract for a premium of $5. You hold the option until the expiration date, when IBM stock sells for $123 per share. You will realize a ______ on the investment.

$200 profit

$200 loss

$300 profit

$300 loss

You purchase one IBM July 125 call contract for a premium of $5. You hold the option until the expiration date, when IBM stock sells for $123 per share. You will realize a ______ on the investment.

$200 profit

$200 loss

$500 profit

$500 loss

You purchase one IBM July 120 put contract for a premium of $3. You hold the option until the expiration date, when IBM stock sells for $123 per share. You will realize a ______ on the investment.

$300 profit

$300 loss

$500 loss

$200 profit

You write one IBM July 120 call contract for a premium of $4. You hold the option until the expiration date, when IBM stock sells for $121 per share. You will realize a ______ on the investment.

$300 profit

$200 loss

$600 loss

$200 profit

______ option can only be exercised on the expiration date.

A Mexican

An Asian

An American

A European

All else the same, an American style option will be ______ valuable than a ______ style option.

more; European-

less; European-

more; Canadian-

less; Canadian-

At contract maturity the value of a call option is ___________, where X equals the option's strike price and ST is the stock price at contract expiration.

Max (0, ST - X)

Min (0, ST - X)

Max (0, X - ST)

Min (0, X - ST)

At contract maturity the value of a put option is ___________, where X equals the option's strike price and ST is the stock price at contract expiration.

Max (0, ST - X)

Min (0, ST - X)

Max (0, X - ST)

Min (0, X - ST)

An American put option gives its holder the right to _________.

buy the underlying asset at the exercise price on or before the expiration date

buy the underlying asset at the exercise price only at the expiration date

sell the underlying asset at the exercise price on or before the expiration date

sell the underlying asset at the exercise price only at the expiration date

10.

An Asian call option gives its holder the right to ____________.

buy the underlying asset at the exercise price on or before the expiration date

buy the underlying asset at a price determined by the average stock price during some specified portion of the option's life

sell the underlying asset at the exercise price on or before the expiration date

sell the underlying asset at a price determined by the average stock price during some specified portion of the option's life

11.

An Asian put option gives its holder the right to ____________.

buy the underlying asset at the exercise price on or before the expiration date

buy the underlying asset at a price determined by the average stock price during some specified portion of the option's life

sell the underlying asset at the exercise price on or before the expiration date

sell the underlying asset at a price determined by the average stock price during some specified portion of the option's life

12.

A time spread may be executed by _____.

selling an option with one exercise price and buying a similar one with a different exercise price

buying two options that have the same expiration dates but different strike prices

selling two options that have the same expiration dates but different strike prices

selling an option with one expiration date and buying a similar option with a different expiration date

13.

Which of the following statements about convertible bonds are true? I. The conversion price does not change over time. II. The associated stocks may not pay dividends as long as the bonds are outstanding. III. Most convertibles are also callable at the discretion of the firm. IV. They may be thought of as straight bonds plus a call option.

I and III only

I and IV only

I, II, and IV only

III and IV only

14.

A quanto provides its holder with the right to ______________.

participate in the payoffs from a portfolio of gambling casino stocks

exchange a fixed amount of a foreign currency for dollars at a specified exchange rate

participate in the investment performance of a foreign security

exchange the payoff from a foreign investment for dollars at a fixed exchange rate

15.

You purchase a call option on a stock. The profit at contract maturity of the option position is ___________, where X equals the option's strike price, ST is the stock price at contract expiration, and C0 is the original purchase price of the option.

Max (-C0, ST - X - C0)

Min (-C0, ST - X - C0)

Max (C0, ST - X + C0)

Max (0, ST - X - C0)

16.

Strips and straps are variations of __________.

straddles

collars

money spreads

time spreads

17.

You write a put option on a stock. The profit at contract maturity of the option position is ___________, where X equals the option's strike price, ST is the stock price at contract expiration, and P0 is the original premium of the put option.

Max (P0, X - ST - P0)

Min (-P0, X - ST - P0)

Min (P0, ST - X + P0)

Max (0, ST - X - P0)

18.

Longer-term American-style options with maturities of up to 3 years are called __________.

warrants

LEAPS

GICs

CATs

19.

The initial maturities of most exchange-traded options are generally __________.

less than 1 year

less than 2 years

between 1 and 2 years

between 1 and 3 years

20.

A futures call option provides its holder with the right to ___________.

purchase a particular stock at some time in the future at a specified price

purchase a futures contract for the delivery of options on a particular stock

purchase a futures contract at a specified price for a specified period of time

deliver a futures contract and receive a specified price at a specific date in the future

21.

Exchange-traded stock options expire on the _______________ of the expiration month.

second Monday

third Wednesday

second Thursday

third Friday

22.

The writer of a put option _______________.

agrees to sell shares at a set price if the option holder desires

agrees to buy shares at a set price if the option holder desires

has the right to buy shares at a set price

has the right to sell shares at a set price

23.

Advantages of exchange-traded options over OTC options include all but which one of the following?

Ease and low cost of trading

Anonymity of participants

Contracts that are tailored to meet the needs of market participants

No concerns about counterparty credit risk

24.

Each listed stock option contract gives the holder the right to buy or sell __________ shares of stock.

100

1,000

25.

Exercise prices for listed stock options usually occur in increments of ____ and bracket the current stock price.

$20

$25

26.

You buy a call option and a put option on General Electric. Both the call option and the put option have the same exercise price and expiration date. This strategy is called a _________.

time spread

long straddle

short straddle

money spread

27.

In 1973, trading of standardized options on a national exchange started on the _________.

AMEX

CBOE

NYSE

CFTC

28.

An American call option gives the buyer the right to _________.

buy the underlying asset at the exercise price on or before the expiration date

buy the underlying asset at the exercise price only at the expiration date

sell the underlying asset at the exercise price on or before the expiration date

sell the underlying asset at the exercise price only at the expiration date

29.

A put option on Dr. Pepper Snapple Group, Inc., has an exercise price of $45. The current stock price is $41. The put option is _________.

at the money

in the money

out of the money

knocked out

30.

You buy a call option on Merritt Corp. with an exercise price of $50 and an expiration date in July, and you write a call option on Merritt Corp. with an exercise price of $55 and an expiration date in July. This is called a ________.

time spread

long straddle

short straddle

money spread

31.

A call option on Brocklehurst Corp. has an exercise price of $30. The current stock price of Brocklehurst Corp. is $32. The call option is _________.

at the money

in the money

out of the money

knocked in

32.

You invest in the stock of Rayleigh Corp. and write a call option on Rayleigh Corp. This strategy is called a _________.

covered call

long straddle

naked call

money spread

33.

You buy a call option on Summit Corp. with an exercise price of $40 and an expiration date in September, and you write a call option on Summit Corp. with an exercise price of $40 and an expiration date in October. This strategy is called a _________.

time spread

long straddle

short straddle

money spread

34.

A European call option gives the buyer the right to _________.

buy the underlying asset at the exercise price on or before the expiration date

buy the underlying asset at the exercise price only at the expiration date

sell the underlying asset at the exercise price on or before the expiration date

sell the underlying asset at the exercise price only at the expiration date

35.

You invest in the stock of Valleyview Corp. and purchase a put option on Valleyview Corp. This strategy is called a _________.

long straddle

naked put

protective put

short stroll

36.

The value of a listed call option on a stock is lower when: I. The exercise price is higher. II. The contract approaches maturity. III. The stock decreases in value. IV. A stock split occurs.

II, III, and IV only

I, III, and IV only

I, II, and III only

I, II, III, and IV

37.

The Option Clearing Corporation is owned by _________.

the exchanges on which stock options are traded

the Federal Deposit Insurance Corporation

the Federal Reserve System

major U.S. banks

38.

The value of a listed put option on a stock is lower when: I. The exercise price is higher. II. The contract approaches maturity. III. The stock decreases in value. IV. A stock split occurs.

II only

II and IV only

I, II, and III only

I, II, III, and IV

39.

The maximum loss a buyer of a stock call option can suffer is the _________.

call premium

stock price

stock price minus the value of the call

strike price minus the stock price

40.

Which one of the statements about margin requirements on option positions is not correct?

The margin required will be higher if the option is in the money.

If the required margin exceeds the posted margin, the option writer will receive a margin call.

A buyer of a put or call option does not have to post margin.

Even if the writer of a call option owns the stock, the writer will have to meet the margin requirement in cash.

41.

A European put option gives its holder the right to _________.

buy the underlying asset at the exercise price on or before the expiration date

buy the underlying asset at the exercise price only at the expiration date

sell the underlying asset at the exercise price on or before the expiration date

sell the underlying asset at the exercise price only at the expiration date

42.

The potential loss for a writer of a naked call option on a stock is _________.

equal to the call premium

larger the lower the stock price

limited

unlimited

43.

A writer of a call option will want the value of the underlying asset to __________, and a buyer of a put option will want the value of the underlying asset to _________.

decrease; decrease

decrease; increase

increase; decrease

increase; increase

44.

Buyers of listed options __________ required to post margins, and writers of naked listed options __________ required to post margins.

are; are not

are; are

are not; are

are not; are not

45.

An option with a payoff that depends on the average price of the underlying asset during at least some portion of the life of the option is called ______ option.

an American

a European

an Asian

an Australian

46.

Which of the following expressions represents the value of a call option to its holder on the expiration date?

ST - X if ST>X, 0 if ST ≤ X

- (ST - X) if ST> X, 0 if ST ≤ X

0 if ST ≥ X,X - ST if ST<X

0 if ST ≥ X, - (X - ST) if ST<X

47.

A "bet" option is also called a ____ option.

barrier

lookback

digital

foreign exchange

48.

Which one of the following is the ticker symbol for the CBOE option contract on the S&P 100 Index?

SPX

DJX

CME

OEX

49.

The May 17, 2012, price quotation for a Boeing call option with a strike price of $50 due to expire in November is $20.80, while the stock price of Boeing is $69.80. The premium on one Boeing November 50 call contract is _________.

$1,980

$4,900

$5,000

$2,080

50.

You purchase one IBM March 120 put contract for a put premium of $10. The maximum profit that you could gain from this strategy is _________.

$120

$1,000

$11,000

$12,000

51.

You buy one Hewlett Packard August 50 call contract and one Hewlett Packard August 50 put contract. The call premium is $1.25, and the put premium is $4.50. Your highest potential loss from this position is _________.

$125

$450

$575

unlimited

52.

You sell one Hewlett Packard August 50 call contract and sell one Hewlett Packard August 50 put contract. The call premium is $1.25 and the put premium is $4.50. Your strategy will pay off only if the stock price is __________ in August.

either lower than $44.25 or higher than $55.75

between $44.25 and $55.75

higher than $55.75

lower than $44.25

53.

Suppose you purchase one Texas Instruments August 75 call contract quoted at $8.50 and write one Texas Instruments August 80 call contract quoted at $6. If, at expiration, the price of a share of Texas Instruments stock is $79, your profit would be _________.

$150

$400

$600

$1,850

54.

__________ is the most risky transaction to undertake in the stock-index option markets if the stock market is expected to fall substantially after the transaction is completed.

Writing an uncovered call option

Writing an uncovered put option

Buying a call option

Buying a put option

55.

Which one of the following is a correct statement?

Exercise of warrants results in more outstanding shares of stock, while exercise of listed call options does not.

A convertible bond consists of a straight bond plus a specified number of detachable warrants.

Call options always have an initial maturity greater than 1 year, while warrants have an initial maturity less than 1 year.

Call options may be convertible into the stock, while warrants are not convertible into the stock.

56.

A put on Sanders stock with a strike price of $35 is priced at $2 per share, while a call with a strike price of $35 is priced at $3.50. The maximum per-share loss to the writer of an uncovered put is __________, and the maximum per-share gain to the writer of an uncovered call is _________.

$33; $3.50

$33; $31.50

$35; $3.50

$35; $35

57.

You are cautiously bullish on the common stock of the Wildwood Corporation over the next several months. The current price of the stock is $50 per share. You want to establish a bullish money spread to help limit the cost of your option position. You find the following option quotes: To establish a bull money spread with calls, you would _______________.

buy the 55 call and sell the 45 call

buy the 45 call and buy the 55 call

buy the 45 call and sell the 55 call

sell the 45 call and sell the 55 call

58.

You are cautiously bullish on the common stock of the Wildwood Corporation over the next several months. The current price of the stock is $50 per share. You want to establish a bullish money spread to help limit the cost of your option position. You find the following option quotes: Ignoring commissions, the cost to establish the bull money spread with calls would be _______.

$1,050

$650

$400

$400 income rather than cost

59.

You are cautiously bullish on the common stock of the Wildwood Corporation over the next several months. The current price of the stock is $50 per share. You want to establish a bullish money spread to help limit the cost of your option position. You find the following option quotes: If in June the stock price is $53, your net profit on the bull money spread (buy the 45 call and sell the 55 call) would be ________.

$300

-$400

$150

$50

60.

sell the 55 put and buy the 45 put

buy the 45 put and buy the 55 put

buy the 55 put and sell the 45 put

sell the 45 put and sell the 55 put

61.

You are cautiously bullish on the common stock of the Wildwood Corporation over the next several months. The current price of the stock is $50 per share. You want to establish a bullish money spread to help limit the cost of your option position. You find the following option quotes: Suppose you establish a bullish money spread with the puts. In June the stock's price turns out to be $52. Ignoring commissions, the net profit on your position is _______________.

$500

$700

$200

$250

62.

The common stock of the Avalon Corporation has been trading in a narrow range around $40 per share for months, and you believe it is going to stay in that range for the next 3 months. The price of a 3-month put option with an exercise price of $40 is $3, and a call with the same expiration date and exercise price sells for $4. What would be a simple options strategy using a put and a call to exploit your conviction about the stock price's future movement?

Sell a call.

Purchase a put.

Sell a straddle.

Buy a straddle.

63.

The common stock of the Avalon Corporation has been trading in a narrow range around $40 per share for months, and you believe it is going to stay in that range for the next 3 months. The price of a 3-month put option with an exercise price of $40 is $3, and a call with the same expiration date and exercise price sells for $4. Selling a straddle would generate total premium income of _____.

$300

$400

$500

$700

64.

The common stock of the Avalon Corporation has been trading in a narrow range around $40 per share for months, and you believe it is going to stay in that range for the next 3 months. The price of a 3-month put option with an exercise price of $40 is $3, and a call with the same expiration date and exercise price sells for $4. Suppose you write a strap and the stock price winds up to be $42 at contract expiration. What was your net profit on the strap?

$200

$300

$700

$400

65.

The common stock of the Avalon Corporation has been trading in a narrow range around $40 per share for months, and you believe it is going to stay in that range for the next 3 months. The price of a 3-month put option with an exercise price of $40 is $3, and a call with the same expiration date and exercise price sells for $4. How can you create a position involving a put, a call, and riskless lending that would have the same payoff structure as the stock at expiration?

Buy the call, sell the put; lend the present value of $40.

Sell the call, buy the put; lend the present value of $40.

Buy the call, sell the put; borrow the present value of $40.

Sell the call, buy the put; borrow the present value of $40.

66.

A stock is trading at $50. You believe there is a 60% chance the price of the stock will increase by 10% over the next 3 months. You believe there is a 30% chance the stock will drop by 5%, and you think there is only a 10% chance of a major drop in price of 20%. At-the-money 3-month puts are available at a cost of $650 per contract. What is the expected dollar profit for a writer of a naked put at the end of 3 months?

$300

$200

$475

67.

A covered call strategy benefits from what environment?

Falling interest rates

Price stability

Price volatility

Unexpected events

68.

You sell one IBM July 90 call contract for a premium of $4 and two puts for a premium of $3 each. You hold the position until the expiration date, when IBM stock sells for $95 per share. You will realize a ______ on this strip.

$300 profit

$100 loss

$500 profit

$200 profit

69.

Which strategy benefits from upside price movement and has some protection should the price of the security fall?

Bull spread

Long put

Short call

Straddle

70.

What combination of puts and calls can simulate a long stock investment?

Long call and short put

Long call and long put

Short call and short put

Short call and long put

71.

An investor purchases a long call at a price of $2.50. The expiration price is $35. If the current stock price is $35.10, what is the break-even point for the investor?

$32.50

$35

$37.50

$37.60

72.

An investor is bearish on a particular stock and decided to buy a put with a strike price of $25. Ignoring commissions, if the option was purchased for a price of $.85, what is the break-even point for the investor?

$24.15

$25

$25.87

$27.86

73.

Which of the following strategies makes a profit if the stock price stays stable?

Long call and short put

Long call and long put

Short call and short put

Short call and long put

74.

Which of the following strategies makes a profit when the stock price declines and loses money when the stock price increases?

Long call and short put

Long call and long put

Short call and short put

Short call and long put

75.

If you combine a long stock position with selling an at-the-money call option, the resulting net payoff profile will resemble the payoff profile of a _______.

long call

short call

short put

long put

76.

What strategy could be considered insurance for an investment in a portfolio of stocks?

Covered call

Protective put

Short put

Straddle

77.

What strategy is designed to ensure a value within the bounds of two different stock prices?

Collar

Covered Call

Protective put

Straddle

78.

You are convinced that a stock's price will move by at least 15% over the next 3 months. You are not sure which way the price will move, but you believe that the results of a patent hearing are definitely going to have a major effect on the stock price. You are somewhat more bullish than bearish however. Which one of the following options strategies best fits this scenario?

Buy a strip.

Buy a strap.

Buy a straddle.

Write a straddle.

79.

When issued, most convertible bonds are issued _____________.

deep in the money

deep out of the money

slightly out of the money

slightly in the money

80.

A convertible bond is deep in the money. This means the bond price will closely track the __________.

straight debt value of the bond

conversion value of the bond

straight debt value of the bond minus the conversion value

straight debt value of the bond plus the conversion value

81.

Warrants differ from listed options in that: I. Exercise of warrants results in dilution of a firm's earnings per share. II. When warrants are exercised, new shares of stock must be created. III. Warrant exercise results in cash flows to the firm, whereas exercise of listed options does not.

I only

I and II only

II and III only

I, II, and III

82.

Suppose you find two bonds identical in all respects except that bond A is convertible to common stock and bond B is not. Bond A is priced at $1,245, and bond B is priced at $1,120. Bond A has a promised yield to maturity of 5.6%, and bond B has a promised yield to maturity of 6.7%. The stock of bond A is trading at $49.80 per share. Which of the following statements is (are) correct? I. The value of the conversion option for bond A is $125. II. The lower promised yield to maturity of bond A indicates that the bond is priced according to its straight debt value rather than its conversion value. III. If bond A can be converted into 25 shares of stock, the investor would break even at the current prices.

II only

I and III only

III only

I, II, and III

83.

You find digital option quotes on jobless claims. You can buy a call option with a strike price of 300,000 jobless claims. This option pays $100 if actual claims exceed the strike price and pays zero otherwise. The option costs $68. A second digital call with a strike price of 305,000 jobless claims is available at a cost of $53. Suppose you buy the option with the 300,000 strike and sell the option with the 305,000 strike and jobless claims actually wind up at 303,000. Your net profit on the position is ______.

-$15

$200

$85

$185

84.

Bill Jones inherited 5,000 shares of stock priced at $45 per share. He does not want to sell the stock this year due to tax reasons, but he is concerned that the stock will drop in value before year-end. Bill wants to use a collar to ensure that he minimizes his risk and doesn't incur too much cost in deferring the gain. January call options with a strike of $50 are quoted at a cost of $2, and January puts with a $40 exercise price are quoted at a cost of $3. If Bill establishes the collar and the stock price winds up at $35 in January, Bill's net position value including the option profit or loss and the stock is _________.

$195,000

$220,000

$175,000

$215,000

85.

You own a stock portfolio worth $50,000. You are worried that stock prices may take a dip before you are ready to sell, so you are considering purchasing either at-the-money or out-of-the-money puts. If you decide to purchase the out-of-the-money puts, your maximum loss is __________ than if you buy at-the-money puts and your maximum gain is __________.

greater; lower

greater; greater

lower; greater

lower; lower

86.

You purchase one IBM July 90 call contract for a premium of $4. The stock has a 2-for-1 split prior to the expiration date. You hold the option until the expiration date, when IBM stock sells for $48 per share. You will realize a ______ on the investment.

$300 profit

$100 loss

$400 loss

$200 profit

87.

You own $75,000 worth of stock, and you are worried the price may fall by year-end in 6 months. You are considering using either puts or calls to hedge this position. Given this, which of the following statements is (are) correct? I. One way to hedge your position would be to buy puts. II. One way to hedge your position would be to write calls. III. If major stock price declines are likely, hedging with puts is probably better than hedging with short calls.

I only

II only

I and III only

I, II, and III

Student: ___________________________________________________________________________

Today's futures markets are dominated by trading in _______ contracts.

metals

agriculture

financial

commodity

A person with a long position in a commodity futures contract wants the price of the commodity to ______.

decrease substantially

increase substantially

remain unchanged

increase or decrease substantially

If an asset price declines, the investor with a _______ is exposed to the largest potential loss.

long call option

long put option

long futures contract

short futures contract

The clearing corporation has a net position equal to ______.

the open interest

the open interest times 2

the open interest divided by 2

zero

The S&P 500 Index futures contract is an example of a(n) ______ delivery contract. The pork bellies contract is an example of a(n) ______ delivery contract.

cash; cash

cash; actual

actual; cash

actual; actual

Which one of the following contracts requires no cash to change hands when initiated?

Listed put option

Short futures contract

Forward contract

Listed call option

Synthetic stock positions are commonly used by ______ because of their ______.

market timers; lower transaction cost

banks; lower risk

wealthy investors; tax treatment

money market funds; limited exposure

_____________ are likely to close their positions before the expiration date, while ____________ are likely to make or take delivery.

Investors; regulators

Hedgers; speculators

Speculators; hedgers

Regulators; investors

Futures contracts have many advantages over forward contracts except that _________.

futures positions are easier to trade

futures contracts are tailored to the specific needs of the investor

futures trading preserves the anonymity of the participants

counterparty credit risk is not a concern on futures

10.

An investor who is hedging a corporate bond portfolio using a T-bond futures contract is said to have _______.

an arbitrage

a cross-hedge

an over hedge

a spread hedge

11.

The open interest on silver futures at a particular time is the number of __________.

all outstanding silver futures contracts

long and short silver futures positions counted separately on a particular trading day

silver futures contracts traded during the day

silver futures contracts traded the previous day

12.

An investor who goes short in a futures contract will _____ any increase in value of the underlying asset and will _____ any decrease in value in the underlying asset.

pay; pay

pay; receive

receive; pay

receive; receive

13.

An investor who goes long in a futures contract will _____ any increase in value of the underlying asset and will _____ any decrease in value in the underlying asset.

pay; pay

pay; receive

receive; pay

receive; receive

14.

The advantage that standardization of futures contracts brings is that _____ is improved because ____________________.

liquidity; all traders must trade a small set of identical contracts

credit risk; all traders understand the risk of the contracts

pricing; convergence is more likely to take place with fewer contracts

trading cost; trading volume is reduced

15.

The fact that the exchange is the counterparty to every futures contract issued is important because it eliminates _________ risk.

market

credit

interest rate

basis

16.

In the futures market the short position's loss is ___________ the long position's gain.

greater than

less than

equal to

sometimes less than and sometimes greater than

17.

A wheat farmer should __________ in order to reduce his exposure to risk associated with fluctuations in wheat prices.

sell wheat futures

buy wheat futures

buy a contract for delivery of wheat now and sell a contract for delivery of wheat at harvest time

sell wheat futures if the basis is currently positive and buy wheat futures if the basis is currently negative

18.

Which of the following provides the profit to a long position at contract maturity?

Original futures price - Spot price at maturity

Spot price at maturity - Original futures price

Zero

Basis

19.

You take a long position in a futures contract of one maturity and a short position in a contract of a different maturity, both on the same commodity. This is called a __________.

cross-hedge

reversing trade

spread position

straddle

20.

Interest rate futures contracts exist for all of the following except __________.

federal funds

Eurodollars

banker's acceptances

repurchase agreements

21.

Initial margin is usually set in the region of ________ of the total value of a futures contract.

5%-15%

10%-20%

15%-25%

20%-30%

22.

Margin must be posted by ________.

buyers of futures contracts only

sellers of futures contracts only

both buyers and sellers of futures contracts

speculators only

23.

The daily settlement of obligations on futures positions is called _____________.

a margin call

marking to market

a variation margin check

the initial margin requirement

24.

Which of the following provides the profit to a short position at contract maturity?

Original futures price - Spot price at maturity

Spot price at maturity - Original futures price

Zero

Basis

25.

Margin requirements for futures contracts can be met by ______________.

cash only

cash or highly marketable securities such as Treasury bills

cash or any marketable securities

cash or warehouse receipts for an equivalent quantity of the underlying commodity

26.

An established value below which a trader's margin may not fall is called the ________.

daily limit

daily margin

maintenance margin

convergence limit

27.

Which one of the following is a true statement?

A margin deposit can be met only by cash.

All futures contracts require the same margin deposit.

The maintenance margin is the amount of money you post with your broker when you buy or sell a futures contract.

The maintenance margin is the value of the margin account below which the holder of a futures contract receives a margin call.

28.

At maturity of a futures contract, the spot price and futures price must be approximately the same because of __________.

marking to market

the convergence property

the open interest

the triple witching hour

29.

A futures contract __________.

is a contract to be signed in the future by the buyer and the seller of a commodity

is an agreement to buy or sell a specified amount of an asset at a predetermined price on the expiration date of the contract

is an agreement to buy or sell a specified amount of an asset at whatever the spot price happens to be on the expiration date of the contract

gives the buyer the right, but not the obligation, to buy an asset some time in the future

30.

Which one of the following exploits differences between actual future prices and their theoretically correct parity values?

Index arbitrage

Marking to market

Reversing trades

Settlement transactions

31.

Which one of the following refers to the daily settlement of obligations on future positions?

Marking to market

The convergence property

The open interest

The triple witching hour

32.

The most actively traded interest rate futures contract is for ___________.

LIBOR

Treasury bills

Eurodollars

Treasury bonds

33.

The CME weather futures contract is an example of ______________.

a cash-settled contract

an agricultural contract

a financial future

a commodity future

34.

Single stock futures, as opposed to stock index futures, are _______________.

not yet being offered by any exchanges

offered overseas but not in the United States

currently trading on One Chicago, a joint venture of several exchanges

scheduled to begin trading in 2015 on several exchanges

35.

You are currently long in a futures contract. You instruct a broker to enter the short side of a futures contract to close your position. This is called __________.

a cross-hedge

a reversing trade

a speculation

marking to market

36.

A company that mines bauxite, an aluminum ore, decides to short aluminum futures. This is an example of __________ to limit its risk.

cross-hedging

long hedging

spreading

speculating

37.

Futures markets are regulated by the __________.

CFA Institute

CFTC

CIA

SEC

38.

A hog farmer decides to sell hog futures. This is an example of __________ to limit risk.

cross-hedging

short hedging

spreading

speculating

39.

On May 21, 2012, you could have purchased a futures contract from Intrade for a price of $5.70 that would pay you $10 if Barack Obama won the 2012 presidential election. This tells you _____.

that the market believed that Obama had a 57% chance of winning

that the market believed that Obama would not win the election

nothing about the market's belief concerning the odds of Obama winning

that the market believed Obama's chances of winning were about 43%

40.

An investor would want to __________ to exploit an expected fall in interest rates.

sell S&P 500 Index futures

sell Treasury-bond futures

buy Treasury-bond futures

buy wheat futures

41.

Forward contracts _________ traded on an organized exchange, and futures contracts __________ traded on an organized exchange.

are; are

are; are not

are not; are

are not; are not

42.

If the S&P 500 Index futures contract is overpriced relative to the spot S&P 500 Index, you should __________.

buy all the stocks in the S&P 500 and write put options on the S&P 500 Index

sell all the stocks in the S&P 500 and buy call options on S&P 500 Index

sell S&P 500 Index futures and buy all the stocks in the S&P 500

sell short all the stocks in the S&P 500 and buy S&P 500 Index futures

43.

A long hedge is a simultaneous __________ position in the spot market and a __________ position in the futures market.

long; long

long; short

short; long

short; short

44.

Investors who take short positions in futures contract agree to ___________ delivery of the commodity on the delivery date, and those who take long positions agree to __________ delivery of the commodity.

make; make

make; take

take; make

take; take

45.

An investor would want to __________ to hedge a long position in Treasury bonds.

buy interest rate futures

buy Treasury bonds in the spot market

sell interest rate futures

sell S&P 500 futures

46.

Futures contracts are said to exhibit the property of convergence because _______________.

the profits from long positions and short positions must ultimately be equal

the profits from long positions and short positions must ultimately net to zero

price discrepancies would open arbitrage opportunities for investors who spot them

the futures price and spot price of any asset must ultimately net to zero

47.

In the context of a futures contract, the basis is defined as ______________.

the futures price minus the spot price

the spot price minus the futures price

the futures price minus the initial margin

the profit on the futures contract

48.

The __________ is among the world's largest derivatives exchanges and operates a fully electronic trading and clearing platform.

CBOE

CBOT

CME

Eurex

49.

Violation of the spot-futures parity relationship results in _______________.

fines and other penalties imposed by the SEC

arbitrage opportunities for investors who spot them

suspension of delivery privileges

suspension of trading

50.

When dividend-paying assets are involved, the spot-futures parity relationship can be stated as _________________.

F1 = S0(1 + rf)

F0 = S0(1 + rf - d)T

F0 = S0(1 + rf + d)T

F0 = S0(1 + rf)T

51.

An investor establishes a long position in a futures contract now (time 0) and holds the position until maturity (time T). The sum of all daily settlements will be __________.

F0 - FT

F0 - S0

FT - F0

FT - S0

52.

A short hedge is a simultaneous __________ position in the spot market and a __________ position in the futures market.

long; long

long; short

short; long

short; short

53.

Approximately __________ of futures contracts result in actual delivery.

less than 1% to 3%

less than 5% to 15%

less than 60% to 80%

54.

A long hedger will __________ from an increase in the basis; a short hedger will __________.

be hurt; be hurt

be hurt; profit

profit; be hurt

profit; profit

55.

At year-end, taxes on a futures position _______________.

must be paid if the position has been closed out

must be paid if the position has not been closed out

must be paid regardless of whether the position has been closed out or not

need not be paid if the position supports a hedge

56.

A speculator will often prefer to buy a futures contract rather than the underlying asset because: I. Gains in futures contracts can be larger due to leverage. II. Transaction costs in futures are typically lower than those in spot markets. III. Futures markets are often more liquid than the markets of the underlying commodities.

I and II only

II and III only

I and III only

I, II, and III

57.

On January 1, you sold one April S&P 500 Index futures contract at a futures price of 1,300. If the April futures price is 1,250 on February 1, your profit would be __________ if you close your position. (The contract multiplier is 250.)

-$12,500

-$15,000

$15,000

$12,500

58.

The current level of the S&P 500 is 1,250. The dividend yield on the S&P 500 is 3%. The risk-free interest rate is 6%. The futures price quote for a contract on the S&P 500 due to expire 6 months from now should be __________.

1,274.33

1,286.95

1,268.61

1,291.29

59.

The spot price for gold is $1,550 per ounce. The dividend yield on the S&P 500 is 2.5%. The risk-free interest rate is 3.5%. The futures price for gold for a 6-month contract on gold should be __________.

$1,504.99

$1,569.08

$1,554.04

$1,557.73

60.

If you expect a stock market downturn, one potential defensive strategy would be to __________.

buy stock-index futures

sell stock-index futures

buy stock-index options

sell foreign exchange futures

61.

At contract maturity the basis should equal ___________.

the risk-free interest rate

-1

62.

You believe that the spread between the September T-bond contract and the June T-bond futures contract is too large and will soon correct. This market exhibits positive cost of carry for all contracts. To take advantage of this, you should ______________.

buy the September contract and sell the June contract

sell the September contract and buy the June contract

sell the September contract and sell the June contract

buy the September contract and buy the June contract

63.

A 1-year gold futures contract is selling for $1,645. Spot gold prices are $1,592 and the 1-year risk-free rate is 3%. The arbitrage profit implied by these prices is _____________.

$3.27

$4.39

$5.24

$6.72

64.

A 1-year gold futures contract is selling for $1,645. Spot gold prices are $1,592 and the 1-year risk-free rate is 3%. Based on the above data, which of the following set of transactions will yield positive riskless arbitrage profits?

Buy gold in the spot with borrowed money, and sell the futures contract.

Buy the futures contract, and sell the gold spot and invest the money earned.

Buy gold spot with borrowed money, and buy the futures contract.

Buy the futures contract, and buy the gold spot using borrowed money.

65.

A hypothetical futures contract on a nondividend-paying stock with a current spot price of $100 has a maturity of 1 year. If the T-bill rate is 5%, what should the futures price be?

$95.24

$100

$105

$107

66.

A hypothetical futures contract on a nondividend-paying stock with a current spot price of $100 has a maturity of 4 years. If the T-bill rate is 7%, what should the futures price be?

$76.29

$93.46

$107

$131.08

67.

On Monday morning you sell one June T-bond futures contract at 97:27, that is, for $97,843.75. The contract's face value is $100,000. The initial margin requirement is $2,700, and the maintenance margin requirement is $2,000 per contract. Use the following price data to answer the following questions. After Monday's close the balance on your margin account will be ________.

$2,700

$2,000

$3,137.50

$2,262.50

68.

On Monday morning you sell one June T-bond futures contract at 97:27, that is, for $97,843.75. The contract's face value is $100,000. The initial margin requirement is $2,700, and the maintenance margin requirement is $2,000 per contract. Use the following price data to answer the following questions. At the close of day on Tuesday your cumulative rate of return on your investment is _____.

16.2%

-5.8%

-.16%

-2.2%

69.

On Monday morning you sell one June T-bond futures contract at 97:27, that is, for $97,843.75. The contract's face value is $100,000. The initial margin requirement is $2,700, and the maintenance margin requirement is $2,000 per contract. Use the following price data to answer the following questions. On which of the given days do you get a margin call?

Monday

Tuesday

Wednesday

None of these options

70.

On Monday morning you sell one June T-bond futures contract at 97:27, that is, for $97,843.75. The contract's face value is $100,000. The initial margin requirement is $2,700, and the maintenance margin requirement is $2,000 per contract. Use the following price data to answer the following questions. The cumulative rate of return on your investment after Wednesday is a ____.

79.9% loss

2.6% loss

33% gain

53.9% loss

71.

The volume of interest rate swaps increased from almost zero in 1980 to over __________ today.

$40 million

$400 million

$400 billion

$400 trillion

72.

If the risk-free rate is greater than the dividend yield, then we know that _______________.

the futures price will be higher as contract maturity increases

F0<S0

FT>ST

arbitrage profits are possible

73.

Sahali Trading Company has issued $100 million worth of long-term bonds at a fixed rate of 9%. Sahali Trading Company then enters into an interest rate swap where it will pay LIBOR and receive a fixed 8% on a notional principal of $100 million. After all these transactions are considered, Sahali's cost of funds is __________.

17%

LIBOR

LIBOR + 1%

LIBOR - 1%

74.

Interest rate swaps involve the exchange of ________________.

actual fixed-rate bonds for actual floating-rate bonds

actual floating-rate bonds for actual fixed-rate bonds

net interest payments and an actual principal swap

net interest payments based on notional principal, but no exchange of principal

75.

From the perspective of determining profit and loss, the long futures position most closely resembles a levered investment in a ____________.

long call

short call

short stock position

long stock position

76.

The _________ contract dominates trading in stock-index futures.

S&P 500

DJIA

Nasdaq 100

Russell 2000

77.

The ________ and the _______ have the lowest correlations with the large-cap indexes.

Nasdaq Composite; Russell 2000

NYSE; DJIA

S&P 500; DJIA

Russell 2000; S&P 500

78.

The use of leverage is practiced in the futures markets due to the existence of _________.

banks

brokers

clearinghouses

margin

79.

You purchase an interest rate futures contract that has an initial margin requirement of 15% and a futures price of $115,098. The contract has a $100,000 underlying par value bond. If the futures price falls to $108,000, you will experience a ______ loss on your money invested.

31%

41%

52%

64%

80.

You own a $15 million bond portfolio with a modified duration of 11 years. Interest rates are expected to increase by 5 basis points, or .05%. What is the price value of a basis point?

$10,400

$14,300

$16,500

$21,300

81.

The price of a corn futures contract is $2.65 per bushel when the contract is issued, and the commodity spot price is $2.55. When the contract expires, the two prices are identical. What principle is represented by this price behavior?

Convergence

Margin

Basis

Volatility

82.

A corporation will be issuing bonds in 6 months, and the treasurer is concerned about unfavorable interest rate moves in the interim. The best way for her to hedge the risk is to _________________.

buy T-bond futures

sell T-bond futures

buy stock-index futures

sell stock-index futures

83.

A farmer sells futures contracts at a price of $2.75 per bushel. The spot price of corn is $2.55 at contract expiration. The farmer harvested 12,500 bushels of corn and sold futures contracts on 10,000 bushels of corn. What are the farmer's proceeds from the sale of corn?

$27,500

$31,875

$33,875

$35,950

84.

A farmer sells futures contracts at a price of $2.75 per bushel. The spot price of corn is $2.55 at contract expiration. The farmer harvested 12,500 bushels of corn and sold futures contracts on 10,000 bushels of corn. Ignoring the transaction costs, how much did the farmer improve his cash flow by hedging sales with the futures contracts?

$2,000

$31,875

$33,875

85.

A bank has made long-term fixed-rate mortgages and has financed them with short-term deposits. To hedge out its interest rate risk, the bank could ________.

sell T-bond futures

buy T-bond futures

buy stock-index futures

sell stock-index futures

86.

A market timer now believes that the economy will soften over the rest of the year as the housing market slump continues, and she also believes that foreign investors will stop buying U.S. fixed-income securities in the large quantities that they have in the past. One way the timer could take advantage of this forecast is to ________________.

buy T-bond futures and sell stock-index futures

sell T-bond futures and buy stock-index futures

buy stock-index futures and buy T-bond futures

sell stock-index futures and sell T-bond futures

87.

The Student Loan Marketing Association (SLMA) has short-term student loans funded by long-term debt. To hedge out this interest rate risk, SLMA could: I. Engage in a swap to pay fixed and receive variable interest payments II. Engage in a swap to pay variable and receive fixed interest payments III. Buy T-bond futures IV. Sell T-bond futures

I and II only

I and IV only

II and III only

II and IV only

Student: ___________________________________________________________________________

A mutual fund with a beta of 1.1 has outperformed the S&P 500 over the last 20 years. We know that this mutual fund manager _____.

must have had superior stock selection ability.

must have had superior asset allocation ability.

must have had superior timing ability.

may or may not have outperformed the S&P 500 on a risk-adjusted basis.

The comparison universe is __________.

the bogey portfolio

a set of mutual funds with similar risk characteristics to your mutual fund

the set of all mutual funds in the United States

the set of all mutual funds in the world

Which one of the following performance measures is the Sharpe ratio?

Average excess return to beta ratio

Average excess return to standard deviation ratio

Alpha to standard deviation of residuals ratio

Average return minus required return

The M2 measure is a variant of ________________.

the Sharpe measure

the Treynor measure

Jensen's alpha

the appraisal ratio

A managed portfolio has a standard deviation equal to 22% and a beta of .9 when the market portfolio's standard deviation is 26%. The adjusted portfolio P* needed to calculate the M2 measure will have ________ invested in the managed portfolio and the rest in T-bills.

84.6%

118%

18%

15.4%

Your return will generally be higher using the __________ if you time your transactions poorly, and your return will generally be higher using the __________ if you time your transactions well.

dollar-weighted return method; dollar-weighted return method

dollar-weighted return method; time-weighted return method

time-weighted return method; dollar-weighted return method

time-weighted return method; time-weighted return method

Consider the Sharpe and Treynor performance measures. When a pension fund is large and well diversified in total and it has many managers, the __________ measure is better for evaluating individual managers while the __________ measure is better for evaluating the manager of a small fund with only one manager responsible for all investments, which may not be fully diversified.

Sharpe; Sharpe

Sharpe; Treynor

Treynor; Sharpe

Treynor; Treynor

Consider the theory of active portfolio management. Stocks A and B have the same beta and the same positive alpha. Stock A has higher nonsystematic risk than stock B. You should want __________ in your active portfolio.

equal proportions of stocks A and B

more of stock A than stock B

more of stock B than stock A

The answer cannot be determined from the information given.

Suppose that over the same time period two portfolios have the same average return and the same standard deviation of return, but portfolio A has a higher beta than portfolio B. According to the Sharpe ratio, the performance of portfolio A __________.

is better than the performance of portfolio B

is the same as the performance of portfolio B

is poorer than the performance of portfolio B

cannot be measured since there is no data on the alpha of the portfolio

10.

Which model is preferred by academics, and is gaining in popularity with practitioners, when evaluating investment performance?

The Treynor-Black model

The single-index model

The Fama-French three-factor model

The Sharpe model

11.

The risk-free rate, average returns, standard deviations, and betas for three funds and the S&P 500 are given below. What is the Treynor measure for portfolio A?

12.38%

2.38%

.91%

3.64%

12.

The risk-free rate, average returns, standard deviations, and betas for three funds and the S&P 500 are given below. What is the M2 measure for portfolio B?

.43%

1.25%

1.77%

1.43%

13.

The risk-free rate, average returns, standard deviations, and betas for three funds and the S&P 500 are given below. If these portfolios are subcomponents that make up part of a well-diversified portfolio, then portfolio ______ is preferred.

S&P 500

14.

The risk-free rate, average returns, standard deviations, and betas for three funds and the S&P 500 are given below. Based on the M2 measure, portfolio C has a superior return of _____ as compared to the S&P 500.

-1.33%

1.43%

15.

Which one of the following is largely based on forecasts of macroeconomic factors?

Security selection

Passive investing

Market efficiency

Market timing

16.

Based on the example used in the book, a perfect market timer would have made _______ by 2008 on a $1 investment made in 1926.

$100

$1,626

$1.5 million

$36.7 billion

17.

The average returns, standard deviations, and betas for three funds are given below along with data for the S&P 500 Index. The risk-free return during the sample period is 6%. You want to evaluate the three mutual funds using the Sharpe ratio for performance evaluation. The fund with the highest Sharpe ratio of performance is __________.

fund A

fund B

fund C

The answer cannot be determined from the information given.

18.

The average returns, standard deviations, and betas for three funds are given below along with data for the S&P 500 Index. The risk-free return during the sample period is 6%. You want to evaluate the three mutual funds using the Treynor measure for performance evaluation. The fund with the highest Treynor measure of performance is __________.

fund A

fund B

fund C

The answer cannot be determined from the information given.

19.

The average returns, standard deviations, and betas for three funds are given below along with data for the S&P 500 Index. The risk-free return during the sample period is 6%. You want to evaluate the three mutual funds using the Jensen measure for performance evaluation. The fund with the highest Jensen measure of performance is __________.

fund A

fund B

fund C

S&P 500

20.

In a particular year, Salmon Arm Mutual Fund earned a return of 16% by making the following investments in asset classes: The return on a bogey portfolio was 12%, based on the following: The total excess return on the managed portfolio was __________.

21.

In a particular year, Salmon Arm Mutual Fund earned a return of 16% by making the following investments in asset classes: The return on a bogey portfolio was 12%, based on the following: The contribution of asset allocation across markets to the total excess return was __________.

1.5%

2.5%

3.5%

22.

In a particular year, Salmon Arm Mutual Fund earned a return of 16% by making the following investments in asset classes: The return on a bogey portfolio was 12%, based on the following: The contribution of security selection within asset classes to the total excess return was __________.

1.5%

2.5%

3.5%

23.

In a particular year, Lost Hope Mutual Fund made the following investments in asset classes: The return on a bogey portfolio was 12%, based on the following: The total extra return on the managed portfolio was __________.

24.

In a particular year, Lost Hope Mutual Fund made the following investments in asset classes: The return on a bogey portfolio was 12%, based on the following: The contribution of asset allocation across markets to the total extra return was __________.

-1%

25.

In a particular year, Lost Hope Mutual Fund made the following investments in asset classes: The return on a bogey portfolio was 12%, based on the following: The contribution of security selection within asset classes to the total extra return was __________.

-1%

26.

Which one of the following averaging methods is the preferred method of constructing returns series for use in evaluating portfolio performance?

Geometric average

Arithmetic average

Dollar weighted

Internal

27.

The __________ calculates the reward to risk trade-off by dividing the average portfolio excess return by the portfolio beta.

Sharpe ratio

Treynor measure

Jensen measure

appraisal ratio

28.

28. In creating the P* portfolio, one mixes the original portfolio P and T-bills to match the _________ of the market.

alpha

beta

excess return

standard deviation

29.

The M2 measure of portfolio performance was developed by ______________.

Modigliani and Miller

Modigliani and Modigliani

Merton and Miller

Fama and French

30.

Probably the biggest problem with evaluating the portfolio performance of actively managed funds is the assumption that __________________________.

the markets are efficient

portfolio risk is constant over time

diversification pays off

security selection is more valuable than asset allocation

31.

Perfect-timing ability is equivalent to having __________ on the market portfolio.

a call option

a futures contract

a put option

a forward contract

32.

One hundred fund managers enter a contest to see how many times in 13 years they can earn a higher return than their competitors. The probability distribution of the number of successful years out of 13 for the best-performing money managers is Out of this sample, chance alone would indicate that there is a ______ probability that someone would beat the market at least 11 times out of 13 years.

51.3%

65.9%

67.1%

10.83%

33.

The Treynor-Black model is a model that shows how an investment manager can use security analysis and statistics to construct __________.

a market portfolio

a passive portfolio

an active portfolio

an index portfolio

34.

If an investor is a successful market timer, his distribution of monthly portfolio returns will __________.

be skewed to the left

be skewed to the right

exhibit kurtosis

exhibit neither skewness nor kurtosis

35.

Recent analysis indicates that the style of investing is a critical component of fund performance. In fact, on average about _____ of fund performance is attributable to the asset allocation decision.

68%

74%

88%

97%

36.

In the Treynor-Black model, the active portfolio will contain stocks with __________.

alphas equal to zero

negative alphas

positive alphas

some negative and some positive alphas

37.

Portfolio performance is often decomposed into various subcomponents, such as the return due to: I. Broad asset allocation across security classes II. Sector weightings within equity markets III. Security selection with a given sector The one decision that contributes most to the fund performance is _____.

III

All contribute equally to fund performance.

38.

The theory of efficient frontiers has __________.

no adherents among practitioners

a small number of adherents among practitioners

a significant number of adherents among practitioners

complete support by practitioners

39.

In the Treynor-Black model, security analysts __________.

analyze a relatively small number of stocks

analyze all stocks that are publicly traded

are redundant

devote their attention to market timing rather than fundamental analysis

40.

In the Treynor-Black model, security analysts __________.

analyze the entire universe of stocks

assume that markets are inefficient

treat market index as a baseline portfolio from which an active portfolio is constructed

focus on selecting the best-performing bogey

41.

Active portfolio management consists of: I. Market timing II. Security selection III. Sector selection within given markets IV. Indexing

I and II only

II and III only

I, II, and III only

I, II, III, and IV

42.

A market-timing strategy is one in which asset allocation in the stock market __________ when one forecasts that the stock market will outperform Treasury bills.

decreases

increases

remains the same

may increase or decrease

43.

In the Treynor-Black model, the contribution of individual security to the active portfolio should be based primarily on the stock's _________.

alpha

beta

residual variance

information ratio

44.

If all ______ are ______ in the Treynor-Black model, there would be no reason to depart from the passive portfolio.

alphas; zero

alphas; positive

betas; positive

standard deviations; positive

45.

In the Treynor-Black model, the weight of each analyzed security in the portfolio should be proportional to its __________.

alpha/beta

alpha/residual variance

beta/residual variance

none of these options

46.

The critical variable in the determination of the success of the active portfolio is the stock's __________.

alpha/nonsystematic risk ratio

alpha/systematic risk ratio

delta/nonsystematic risk ratio

delta/systematic risk ratio

47.

Consider the theory of active portfolio management. Stocks A and B have the same positive alpha and the same nonsystematic risk. Stock A has a higher beta than stock B. You should want __________ in your active portfolio.

equal proportions of stocks A and B

more of stock A than stock B

more of stock B than stock A

The answer cannot be determined from the information given.

48.

Consider the theory of active portfolio management. Stocks A and B have the same beta and nonsystematic risk. Stock A has a higher positive alpha than stock B. You should want __________ in your active portfolio.

equal proportions of stocks A and B

more of stock A than stock B

more of stock B than stock A

The answer cannot be determined from the information given.

49.

The market-timing form of active portfolio management relies on __________ forecasting, and the security selection form of active portfolio management relies on __________ forecasting.

macroeconomic; macroeconomic

macroeconomic; microeconomic

microeconomic; macroeconomic

microeconomic; microeconomic

50.

Active portfolio managers try to construct a risky portfolio with _______.

a higher Sharpe ratio than a passive strategy

a lower Sharpe ratio than a passive strategy

the same Sharpe ratio as a passive strategy

very few securities

51.

In performance measurement, the bogey portfolio is designed to _________.

measure the returns to a completely passive strategy

measure the returns to a similar active strategy

measure the returns to a given investment style

equal the return on the S&P 500

52.

__________ portfolio managers experience streaks of abnormal returns that are hard to label as lucky outcomes, and _________ anomalies in realized returns have been sufficiently persistent that portfolio managers could use them to beat a passive strategy over prolonged periods.

No; no

No; some

Some; no

Some; some

53.

A passive benchmark portfolio is: I. A portfolio in which the asset allocation across broad asset classes is neutral and not determined by forecasts of performance of the different asset classes II. One in which an indexed portfolio is held within each asset class III. Often called the bogey

I only

I and III only

II and III only

I, II, and III

54.

The correct measure of timing ability is ____________ for a portfolio manager who correctly forecasts 55% of bull markets and 55% of bear markets.

-5%

10%

95%

55.

It is very hard to statistically verify abnormal fund performance because of all of the following except which one?

Inevitably, some fund managers experience streaks of good performance that may just be due to luck.

The noise in realized rates of return is so large as to make it hard to identify abnormal performance in competitive markets.

Portfolio composition is rarely stable long enough to identify abnormal performance.

Even if successful, there is really not much value to be added by active strategies such as market timing.

56.

The term alpha transport refers to _____.

establishing alpha and then using index products to hedge market exposure and reduce exposure to particular sectors.

establishing alpha and then using sector mutual funds to hedge market exposure and reduce exposure to the general market.

establishing alpha and then using sector mutual funds to hedge market exposure and gain exposure to the general market.

establishing alpha and then using index products to hedge market exposure and gain exposure to particular sectors.

57.

Portfolio managers Martin and Krueger each manage $1 million funds. Martin has perfect foresight, and the call option value of his perfect foresight is $150,000. Krueger is an imperfect forecaster and correctly predicts 50% of all bull markets and 70% of all bear markets. The correct measure of timing ability for Krueger is __________.

20%

60%

75%

120%

58.

Portfolio managers Martin and Krueger each manage $1 million funds. Martin has perfect foresight, and the call option value of his perfect foresight is $150,000. Krueger is an imperfect forecaster and correctly predicts 50% of all bull markets and 70% of all bear markets. The value of Krueger's imperfect forecasting ability is __________.

$30,000

$67,500

$108,750

$217,500

59.

Douglass, an imperfect forecaster, correctly predicts 57% of all bull markets and 68% of all bear markets. Simmonds is a perfect forecaster. If Douglass is able to charge a fee of $125,000, the fee that Roy Simmonds should charge is __________. Assume that both forecasters manage similar-size funds.

$31,250

$200,000

$500,000

$625,000

60.

A mutual fund invests in large-capitalization stocks. Its performance should be measured against which one of the following?

Russell 2000 Index

S&P 500 Index

Wilshire 5000 Index

Dow Jones Industrial Average

61.

Assume you purchased a rental property for $100,000 and sold it 1 year later for $115,000 (there was no mortgage on the property). At the time of the sale, you paid $3,000 in commissions and $1,000 in taxes. If you received $10,000 in rental income (all received at the end of the year), what annual rate of return did you earn?

11%

21%

25%

62.

The table presents the actual return of each sector of the manager's portfolio in column (1), the fraction of the portfolio allocated to each sector in column (2), the benchmark or neutral sector allocations in column (3), and the returns of sector indexes in column 4. What was the manager's return in the month?

2.07%

2.21%

2.24%

4.8%

63.

2.07%

2.21%

2.24%

4.8%

64.

Underperformance = .03%

Overperformance = .03%

Overperformance = .14%

Underperformance = 3%

65.

-.15%

.15%

-.3%

.3%

66.

-.18%

.18%

-.15%

.15%

67.

Morningstar's RAR produce results that are similar but not identical to ________.

Jensen's alpha

the Treynor ratio

the Sharpe ratio

68.

The Treynor-Black model assumes that security markets are _________.

completely efficient

nearly efficient

very inefficient

random walks

69.

The information ratio is equal to the stock's ____ divided by its ______.

diversifiable risk; beta

beta; alpha

alpha; beta

alpha; diversifiable risk

70.

Empirical tests to date show ______________.

that many investors have earned large rewards by market timing

little evidence of market-timing ability

clear-cut evidence of substantial market-timing ability

evidence that absolutely no market-timing ability exists

71.

A portfolio generates an annual return of 13%, a beta of .7, and a standard deviation of 17%. The market index return is 14% and has a standard deviation of 21%. What is the M2 measure of the portfolio if the risk-free rate is 5%?

.58%

.68%

.78%

.88%

72.

A portfolio generates an annual return of 17%, a beta of 1.2, and a standard deviation of 19%. The market index return is 12% and has a standard deviation of 16%. What is the M2 measure of the portfolio if the risk-free rate is 4%?

2.15%

2.76%

2.94%

3.14%

73.

A portfolio generates an annual return of 13%, a beta of .7, and a standard deviation of 17%. The market index return is 14% and has a standard deviation of 21%. What is the Treynor measure of the portfolio if the risk-free rate is 5%?

.1143

.1233

.1354

.1477

74.

A portfolio generates an annual return of 16%, a beta of 1.2, and a standard deviation of 19%. The market index return is 12% and has a standard deviation of 16%. What is the Treynor measure of the portfolio if the risk-free rate is 6%?

.0833

.1083

.1114

.1163

75.

A portfolio generates an annual return of 13%, a beta of .7, and a standard deviation of 17%. The market index return is 14% and has a standard deviation of 21%. What is the Sharpe measure of the portfolio if the risk-free rate is 5%?

.3978

.4158

.4563

.4706

76.

A portfolio generates an annual return of 16%, a beta of 1.2, and a standard deviation of 19%. The market index return is 12% and has a standard deviation of 16%. What is the Sharpe ratio of the portfolio if the risk-free rate is 6%?

.4757

.5263

.6842

.7252

77.

A portfolio generates an annual return of 13%, a beta of .7, and a standard deviation of 17%. The market index return is 14% and has a standard deviation of 21%. What is Jensen's alpha of the portfolio if the risk-free rate is 5%?

.017

.034

.067

.078

78.

A portfolio generates an annual return of 16%, a beta of 1.2, and a standard deviation of 19%. The market index return is 12% and has a standard deviation of 16%. What is Jensen's alpha of the portfolio if the risk-free rate is 6%?

.017

.028

.036

.078

79.

The portfolio that contains the benchmark asset allocation against which a manager will be measured is often called _____________.

the bogey portfolio

the Vanguard Index

Jensen's alpha

the Treynor measure

80.

An attribution analysis will not likely contain which of the following components?

Asset allocation

Index returns

Risk-free returns

Security selection

81.

Which of the following investment strategies would have produced the highest returns in the time period since 1926?

T-bills portfolio

S&P 500 Index fund

Perfect market timing

Random stock selection

82.

What phrase might be used as a substitute for the Treynor-Black model developed in 1973?

Solely active management

Enhanced index approach

Passive management

Random selection

83.

What is the term for the process used to assess portfolio manager performance?

Active analysis

Attribution analysis

Passive analysis

Treynor-Black Analysis

84.

A fund has excess performance of 1.5%. In looking at the fund's investment breakdown, you see that the fund overweighted equities relative to the benchmark and that the average return on the fund's equity portfolio was slightly lower than the equity benchmark return. The excess performance for this fund is probably due to _______________.

security selection ability

better sector weightings in the equity portfolio

the asset allocation decision

finding securities with positive alphas

85.

For a market timer, the _____________ will be higher when RM is higher.

portfolio's alpha and beta

portfolio's unsystematic risk

portfolio's beta and slope of the characteristic line

security selection component of the portfolio

86.

The Treynor-Black model combines an actively managed portfolio with an efficiently diversified portfolio in order to: I. Improve the diversification of the overall portfolio II. Improve the overall portfolio's Sharpe ratio III. Reach a higher CAL than would otherwise be possible

I only

I and II only

II and III only

I, II, and III

Student: ___________________________________________________________________________

In 2011, U.S. securities represented ______ of the world market for equities.

less than 25%

more than two-thirds

between 30% and 40%

a consistent 50%

_____ has the highest market capitalization of listed corporations among developed markets.

The United States

Japan

The United Kingdom

Switzerland

Total capitalization of corporate equity in the United States in 2011 was about _______ trillion.

$13.9

$23.4

$30.2

$45.5

If you limit your investment opportunity set to only the largest six countries in the world in terms of equity capitalization as a percentage of total global equity capital, you will include about _______ of the world's equity.

34%

44%

54%

64%

Limiting your investments to the top six countries in the world in terms of market capitalization may make sense for _________ investor but probably does not make sense for ________ investor.

an active; a passive

a passive; an active

a security selection expert; a market timer

a fundamental; a technical

WEBS are ____________________.

investments in country-specific portfolios

traded exactly like mutual funds

identical to ADRs

designed to give investors foreign currency exposure to multiple countries

Which one of the following allows you to purchase the stock of a specific foreign company?

WEBS

MSCI

ADR

EAFE

Generally speaking, countries with ______ capitalization of equities ________.

larger; have higher GDP

smaller; are wealthier

larger; have smaller GDP

larger; are higher-growth countries

The 32 "developed" countries with the largest equity capitalization made up about _____ of the world GDP in 2011.

22%

44%

68%

85%

10.

According to a regression of GDP on market capitalization in 2010, virtually all developed countries had _______ per capita GDP than (as) predicted by the regression.

higher

lower

the same

sometimes lower and sometimes higher

11.

If the direct quote for the exchange rate for the U.S. dollar versus the Canadian dollar is .98, what is the indirect quote?

1.98

1.02

.02

1.05

12.

EAFE stands for _______.

Equity And Foreign Exchange

European, Australian, Far East

European, Asian, Foreign Exchange

European, American, Far East

13.

Which one of the following country risks includes the possibility of expropriation of assets, changes in tax policy, and restrictions on foreign exchange transactions?

Default risk

Foreign exchange risk

Market risk

Political risk

14.

The __________ index is a widely used index of non-U.S. stocks.

CBOE

Dow Jones

EAFE

Lehman Index

15.

Suppose that U.S. equity markets represent about 35% of total global equity markets and that the typical U.S. investor has about 95% of her portfolio invested only in U.S. equities. This is an example of _________.

home-country bias

excessive diversification

active management

passive management

16.

The four largest economies in the world in 2010 were ____________.

United States, India, China, and Japan

United States, China, Canada, and Japan

United States, China, Japan, and Germany

China, United Kingdom, Canada, and United States

17.

The proper formula for interest rate parity is ___________.

[1 + rf(foreign)]/[1 + rf(US)] = F1/E0

[1 + rf(US)]/[1 + rf(foreign)] = E0/F1

[1 + rf(US)]/[1 + rf(foreign)] = F0/E0

[1 + rf(foreign)]/[1 + rf(foreign)] = F0/E1

18.

Research indicates that exchange risk of the major currencies has been _________ so far in this century.

relatively high

relatively low

declining slightly

declining rapidly

19.

It appears from empirical work that exchange rate risk ____________.

has been declining for individual investments in recent years

is mostly diversifiable

is mostly systematic risk

is unimportant for an investment in a single foreign country

20.

Passive investors with well-diversified international portfolios _________.

can safely ignore all political risk in emerging markets

can expect very large diversification gains from their international investing

do not need to be concerned with hedging exposure to foreign currencies

can expect returns to be better than the EAFE on a consistent basis

21.

Which stock market has the largest weight in the EAFE index?

Japan

Germany

United Kingdom

Australia

22.

The correlation coefficient between the U.S. stock market index and stock market indexes of major countries is __________.

between -1 and -.5

between -.50 and 0

between 0 and .5

between .5 and 1

23.

In 2010, the ___ countries with the largest capitalization of equities made up approximately 60% of the world equity portfolio.

24.

Investor portfolios are notoriously overweighted in home-country stocks. This is commonly called ________.

local fat

nativism

home-country bias

misleading representation

25.

Corruption is _________ risk variable.

a firm-specific

a political

a financial

an economic

26.

A U.S. hedge fund owns Swiss franc bonds. The fund manager believes that if Swiss interest rates rise relative to U.S. interest rates, the value of the franc will rise. To limit the risk to the fund's dollar return, the fund manager should __________.

sell the Swiss franc bonds now

sell the Swiss franc forward

probably do nothing because the franc move will offset the lower bond price

enter into an interest rate swap to pay variable and receive fixed

27.

The annual inflation rate is ______ risk variable.

a firm-specific

a political

a financial

an economic

28.

A U.S. insurance firm must pay €75,000 in 6 months. The spot exchange rate is $1.32 per euro, and in 6 months the exchange rate is expected to be $1.35. The 6-month forward rate is currently $1.36 per euro. If the insurer's goal is to limit its risk, should the insurer hedge this transaction? If so how?

The insurer need not hedge because the expected exchange rate move will be favorable.

The insurer should hedge by buying the euro forward even though this will cost more than the expected cost of not hedging.

The insurer should hedge by selling the euro forward because this will cost less than the expected cost of not hedging.

The insurer should hedge by buying the euro forward even though this will cost less than the expected cost of not hedging.

29.

A fund has assets denominated in euros and liabilities in yen due in 6 months. The 6-month forward rate for the euro is $1.36 per euro, and the 6-month forward rate for the yen is 121 yen per dollar. The 6-month forward rate for the euro versus the yen should be ________ per euro.

×88.97

×145.34

×154.67

×164.56

30.

You invest in various broadly diversified international mutual funds as well as your U.S. portfolio. The one risk you probably don't have to worry about affecting your returns is __________.

business-cycle risk

beta risk

inflation risk

currency risk

31.

According to the InternationalCountryRiskGuide in 2011, which of the following countries was the riskiest according to the current composite risk rating?

Japan

United States

China

India

32.

Suppose the 6-month risk-free rate of return in the United States is 5%. The current exchange rate is 1 pound = US$2.05. The 6-month forward rate is 1 pound = US$2. The minimum yield on a 6-month risk-free security in Britain that would induce a U.S. investor to invest in the British security is ________.

5.06%

6.74%

8.48%

10.13%

33.

The quoted interest rate on a 3-month Canadian security is 8%. The current exchange rate is C$1 = US$.68. The 3-month forward rate is C$1 = US$.70. The APR (denominated in US$) that a U.S. investor can earn by investing in the Canadian security is __________.

7.25%

20%

22.43%

34.

Suppose the 1-year risk-free rate of return in the United States is 5% and the 1-year risk-free rate of return in Britain is 8%. The current exchange rate is $1 = ₤.50. A 1-year future exchange rate of __________ would make a U.S. investor indifferent between investing in the U.S. security and investing in the British security.

₤.5150

₤.5142

₤.5123

₤.4859

35.

The risk-free interest rate in the United States is 4%, while the risk-free interest rate in the United Kingdom is 9%. If the British pound is worth $2 in the spot market, a 1-year futures rate on the British pound should be worth __________.

$1.83

$1.91

$2.08

$2.18

36.

The risk-free interest rate in the United States is 8%, while the risk-free interest rate in the United Kingdom is 15%. If the 1-year futures price on the British pound is $2.40, the spot market value of the British pound today should be __________.

$1.93

$2.22

$2.56

$2.76

37.

The present exchange rate is C$1 = US$.77. The 1-year futures rate is C$1 = US$.73. The yield on a 1-year U.S. bill is 4%. A yield of __________ on a 1-year Canadian bill will make investors indifferent between investing in the U.S. bill and the Canadian bill.

9.7%

2.9%

2.8%

38.

The yield on a 1-year bill in the United Kingdom is 6%, and the present exchange rate is 1 pound = US$2. If you expect the exchange rate to be 1 pound = US$1.95 a year from now, the return a U.S. investor can expect to earn by investing in U.K. bills is approximately __________.

-3%

3.35%

8.72%

39.

Assume there is a fixed exchange rate between the Canadian and U.S. dollars. The expected return and standard deviation of return on the U.S. stock market are 13% and 15%, respectively. The expected return and standard deviation of return on the Canadian stock market are 12% and 16%, respectively. The covariance of returns between the U.S. and Canadian stock markets is 1.2%. If you invested 50% of your money in the Canadian stock market and 50% in the U.S. stock market, the expected return on your portfolio would be __________.

12%

12.5%

14%

15.5%

40.

Assume there is a fixed exchange rate between the Canadian and U.S. dollars. The expected return and standard deviation of return on the U.S. stock market are 10% and 15%, respectively. The expected return and standard deviation of return on the Canadian stock market are 12% and 16%, respectively. The covariance of returns between the U.S. and Canadian stock markets is .012. If you invested 50% of your money in the Canadian stock market and 50% in the U.S. stock market, the standard deviation of return on your portfolio would be __________.

10.96%

12.25%

13.42%

15.5%

41.

Inclusion of international equities in a U.S. investor's portfolio has historically produced ___________________.

a substantially reduced portfolio variance

a slightly reduced portfolio variance

a substantially poorer portfolio variance

a slightly poorer portfolio variance

42.

WEBS are _____________.

mutual funds marketed internationally on the Internet

synthetic domestic stock indexes

equity indexes that replicate the price and yield performance of foreign stock portfolios

single stock investments in a foreign security

43.

You are a U.S. investor who purchased British securities for 3,500 pounds 1 year ago when the British pound cost $1.35. No dividends were paid on the British securities in the past year. Your total return based on U.S. dollars was __________ if the value of the securities is now 4,200 pounds and the pound is worth $1.15.

-3.8%

2.2%

5.6%

15%

44.

Real U.S. interest rates move above Japanese interest rates. If you believe that Japanese interest rates won't move and that interest rate parity will hold, then ____________.

the yen-per-dollar exchange rate should rise

the dollar-per-yen exchange rate should rise

the exchange rate should stay the same if parity holds

The answer cannot be determined from the information given.

45.

Suppose a U.S. investor wants to invest in a British firm currently selling for ₤50 per share. The investor has $7,000 to invest, and the current exchange rate is $1.40/₤. How many shares can the investor purchase?

140

100

71.43

None of these options

46.

Suppose a U.S. investor wants to invest in a British firm currently selling for ₤50 per share. The investor has $7,000 to invest, and the current exchange rate is $1.40/₤. After 1 year, the exchange rate is unchanged and the share price is ₤55. What is the dollar-denominated return?

14%

10%

9.3%

7.1%

47.

14%

10%

9.3%

7.1%

48.

Suppose a U.S. investor wants to invest in a British firm currently selling for ₤50 per share. The investor has $7,000 to invest, and the current exchange rate is $1.40/₤. After 1 year, the exchange rate is $1.60/₤ and the share price is ₤55. What is the dollar-denominated return?

25.7%

16%

14.3%

9.3%

49.

Suppose a U.S. investor wants to invest in a British firm currently selling for ₤50 per share. The investor has $7,000 to invest, and the current exchange rate is $1.40/₤. After 1 year, the exchange rate is $1.50/₤ and the share price is ₤45. How much of your dollar-denominated return is due to the currency change?

10%

6.43%

4.34%

2.12%

50.

You find that the exchange rate quote for the yen is 121 yen per dollar. This is an example of ________ quote. You also find that the euro is worth $1.33. This second quote is an example of _______ quote.

a direct; an indirect

an indirect; a direct

a foreign; a U.S.

a U.S.; a foreign

51.

Among emerging countries the largest equity market in 2011 was located in _____________.

China

India

Brazil

Russia

52.

In the PRS country composite risk ratings, a score of ______ represents the least risky and a score of _____ represents the most risky.

0; 100

0; 50

50; 0

100; 0

53.

Which emerging country had the highest percentage growth in market capitalization during the 2000-2011 period?

Brazil

China

Columbia

Turkey

54.

The dollar-per-euro spot rate is 1.2 when an importer of French wines places an order. Six months later, when she takes delivery, the spot rate is 1.3 dollars per euro. If her original invoice was for 30,000 euro, what is her gain or loss due to exchange rate risk?

$3,000 gain

$3,000 loss

$6,000 loss

No gain or loss

55.

An importer of televisions from Japan has a contract to purchase a shipment of televisions for 2 million yen. The spot rate increases from 105 yen per dollar to 108 yen per dollar. What is the importer's gain or loss?

$529 gain

$529 loss

$619 gain

$619 loss

56.

A country has a PRS political risk rating of 75, a financial score of 40, and an economic score of 35. The country's composite rating is _________.

57.

The risk-free rate in the United States is 2.5%, and the risk-free rate in Europe is 3.2%. If the spot rate of dollars per euro is 1.32, what is the likely forward rate in terms of dollars per euro?

1.30

1.31

1.32

1.33

58.

The risk-free rate in the United States is 4%, and the risk-free rate in Japan is 1.2%. If the spot rate of yen to dollars is 105, what is the likely yen-per-dollar forward rate?

101

102

105

108

59.

The yen-per-dollar spot rate is 104. The yen-per-dollar forward rate is 107. If the U.S. risk-free rate is 2.4%, what is the likely yen risk-free rate?

1.24%

2.35%

3.98%

5.35%

60.

In the PRS financial risk ratings, the United States rates poorly because of the U.S. ________. I. Large budget deficit II. Large trade deficit III. Large amount of total debt

I only

I and II only

I and III only

I, II, and III

61.

The major participants who directly purchase securities in the capital markets of other countries are predominantly ____________.

large institutional investors

individual investors

government agencies

central banks

62.

Of the following, which is the most commonly used international index?

DJIA

EAFE

Russell 2000

S&P 500

63.

WEBS differ from mutual funds in that: I. WEBS can be shorted. II. WEBS trade continuously on the AMEX. III. WEBS are passively managed.

II only

II and III only

I and III only

I, II, and III

64.

The variation in the betas of emerging markets suggests that ____________.

emerging markets are more uniform than developed markets

beta does not hold in international markets

international diversification may reduce portfolio risk

riskier emerging markets have uniformly lower betas

65.

One year U.S. interest rates are 5%, and European interest rates are 7%. The spot euro direct exchange rate quote is 1.32, and the 1-year forward rate direct quote is 1.35. If you can borrow either $1 million or €1 million to start with, what would be your dollar profits from interest arbitrage based on these data?

$94,322

$55,345

$44,318

$33,595

66.

One year U.S. interest rates are 7%, and European interest rates are 5%. The spot euro direct exchange rate quote is 1.30 and the 1-year forward rate direct quote is 1.25. If you can borrow either $1 million or €1 million to start with, what would be your dollar profits from interest arbitrage based on these data?

$60,384

$42,973

$68,422

$78,500

67.

All exchange rates are expressed as units of foreign currency that can be purchased with one U.S. dollar. Answer the following about decomposing the manager's performance. What is the difference in return of the manager's portfolio due to currency selection?

-5%

-3%

68.

-.60%

-.75%

.12%

.22%

69.

1.15%

3.25%

5.45%

6.13%

Student: ___________________________________________________________________________

Which of the following are characteristics of a hedge fund? I. Pooling of assets II. Strict regulatory oversight by the SEC III. Investing in equities, debt instruments, and derivative instruments IV. Professional management of assets

I and II only

II and III only

III and IV only

I, III, and IV only

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.

commingled pool

unit trust

hedge fund

money market fund

Hedge funds are typically set up as _______________.

limited liability partnerships

corporations

REITs

mutual funds

A(n) _______________ hedge fund attempts to profit from situations such as mergers, acquisitions, restructuring, bankruptcy, or reorganization.

multistrategy

managed futures

dedicated short bias

event-driven

______ are private partnerships of a small number of wealthy investors, are often subject to lock-up periods, and are allowed to pursue a wide range of investment activities.

Hedge funds

Closed-end funds

REITs

Mutual funds

Which of the following typically employ(s) significant amounts of leverage? I. Hedge funds II. Equity mutual funds III. Money market funds IV. Income mutual funds

I only

I and II only

III and IV only

I, II, and III only

As of 2012, hedge funds had approximately _____ under management.

$.5 trillion

$1.6 trillion

$2 trillion

$3.2 trillion

A restriction under which investors cannot withdraw their funds for as long as several months or years is called __________.

transparency

a lock-up period

a back-end load

convertible arbitrage

Hedge fund managers are compensated by ___________________.

deducting management fees from fund assets and receiving incentive bonuses for beating index benchmarks

deducting a percentage of any gains in asset value

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

charging portfolio turnover fees

10.

Management fees for hedge funds typically range between _____ and _____.

.5%; 1.5%

1%; 2%

2%; 5%

5%; 8%

11.

Hedge funds can invest in various investment options that are not generally available to mutual funds. These include: I. Futures and options II. Merger arbitrage III. Currency contracts IV. Companies undergoing Chapter 11 restructuring and reorganization

I only

I and II only

I, II, and III only

I, II, III, and IV

12.

A typical traditional initial investment in a hedge fund generally is in the range between _____ and _____.

$1,000; $5,000

$5,000; $25,000

$25,000; $250,000

$250,000; $1,000,000

13.

The difference between market-neutral and long-short hedges is that market-neutral hedge funds _________.

establish long and short positions on both sides of the market to eliminate risk and to benefit from security asset mispricing whereas long-short hedges establish positions only on one side of the market

allocate money to several other funds while long-short funds do not

invest in relatively stable proportions of stocks and bonds while the proportions may vary dramatically for long-short funds

invest only in equities and bonds while long-short funds use only derivatives

14.

Convertible arbitrage hedge funds _________.

attempt to profit from mispriced interest-sensitive securities

hold long positions in convertible bonds and offsetting short positions in stocks

establish long and short positions in global capital markets

use derivative products to hedge their short positions in convertible bonds

15.

Assuming positive basis and negligible borrowing cost, which of the following transactions could yield positive arbitrage profits if pursued by a hedge fund?

Buy gold in the spot market, and sell the futures contract.

Buy the futures contract, and sell the gold spot and invest the money earned.

Buy gold spot with borrowed money, and buy the futures contract.

Buy the futures contract, and buy the gold spot using borrowed money.

16.

An example of a neutral pure play is _______.

pairs trading

statistical arbitrage

convergence arbitrage

directional strategy

17.

You believe that the spread between the September S&P 500 future and the S&P 500 Index is too large and will soon correct. To take advantage of this mispricing, a hedge fund should ______________.

buy all the stocks in the S&P 500 and write put options on the S&P 500 Index

sell all the stocks in the S&P 500 and buy call options on the S&P 500 Index

sell S&P 500 Index futures and buy all the stocks in the S&P 500

sell short all the stocks in the S&P 500 and buy S&P 500 Index futures

18.

You believe that the spread between the September S&P 500 future and the S&P 500 Index is too large and will soon correct. This is an example of ______________.

pairs trading

convergence play

statistical arbitrage

a long-short equity hedge

19.

A 1-year oil futures contract is selling for $74.50. Spot oil prices are $68, and the 1-year risk-free rate is 3.25%. The 1-year oil futures price should be equal to __________.

$68

$70.21

$71.25

$74.88

20.

A 1-year oil futures contract is selling for $74.50. Spot oil prices are $68, and the 1-year risk-free rate is 3.25%. The arbitrage profit implied by these prices is _____________.

$6.50

$5.44

$4.29

$3.25

21.

A 1-year oil futures contract is selling for $74.50. Spot oil prices are $68, and the 1-year risk-free rate is 3.25%. Based on the above data, which of the following sets of transactions will yield positive riskless arbitrage profits?

Buy oil in the spot market with borrowed money, and sell the futures contract.

Buy the futures contract, and sell the oil spot and invest the money earned.

Buy the oil spot with borrowed money, and buy the futures contract.

Buy the futures contract, and buy the oil spot using borrowed money.

22.

Assume that you have invested $500,000 to purchase shares in a hedge fund reporting $800 million in assets, $100 million in liabilities, and 70 million shares outstanding. Your initial lockout period is 3 years. How many shares did you purchase?

13,333

25,000

50,000

66,000

23.

$553,600

$625,000

$733,800

$764,000

24.

14.45%

15.18%

16%

17.73%

25.

Which of the following are not managed investment companies?

Hedge funds

Unit investment trusts

Closed-end funds

Open-end funds

26.

You manage a $15 million hedge fund portfolio with beta = 1.2 and alpha = 2% per quarter. Assume the risk-free rate is 2% per quarter and the current value of the S&P 500 Index is 1,200. You want to exploit the positive alpha, but you are afraid that the stock market may fall and you want to hedge your portfolio by selling 3-month S&P 500 future contracts. The S&P contract multiplier is $250. How many S&P 500 contracts do you need to sell to hedge your portfolio?

27.

You manage a $15 million hedge fund portfolio with beta = 1.2 and alpha = 2% per quarter. Assume the risk-free rate is 2% per quarter and the current value of the S&P 500 Index is 1,200. You want to exploit the positive alpha, but you are afraid that the stock market may fall and you want to hedge your portfolio by selling 3-month S&P 500 future contracts. The S&P contract multiplier is $250. When you hedge your stock portfolio with futures contracts, the value of your portfolio beta is __________.

1.2

The answer cannot be determined from the information given.

28.

You manage a $15 million hedge fund portfolio with beta = 1.2 and alpha = 2% per quarter. Assume the risk-free rate is 2% per quarter and the current value of the S&P 500 Index is 1,200. You want to exploit the positive alpha, but you are afraid that the stock market may fall and you want to hedge your portfolio by selling 3-month S&P 500 future contracts. The S&P contract multiplier is $250. What is the expected quarterly return on the hedged portfolio?

29.

You manage a $15 million hedge fund portfolio with beta = 1.2 and alpha = 2% per quarter. Assume the risk-free rate is 2% per quarter and the current value of the S&P 500 Index is 1,200. You want to exploit the positive alpha, but you are afraid that the stock market may fall and you want to hedge your portfolio by selling 3-month S&P 500 future contracts. The S&P contract multiplier is $250. How much is the portfolio expected to be worth 3 months from now?

$15,000,000

$15,450,000

$15,600,000

$16,000,000

30.

You manage a $15 million hedge fund portfolio with beta = 1.2 and alpha = 2% per quarter. Assume the risk-free rate is 2% per quarter and the current value of the S&P 500 Index is 1,200. You want to exploit the positive alpha, but you are afraid that the stock market may fall and you want to hedge your portfolio by selling 3-month S&P 500 future contracts. The S&P contract multiplier is $250. Hedging this portfolio by selling S&P 500 futures contracts is an example of ___________.

statistical arbitrage

pure play

a short equity hedge

fixed-income arbitrage

31.

Hedge funds that change strategies and types of securities invested and also vary the proportions of assets invested in particular market sectors according to the fund manager's outlook are called ____________________.

asset allocation funds

multistrategy funds

event-driven funds

market-neutral funds

32.

When a short-selling hedge fund advertises in a prospectus that it is a 120/20 fund, this means that the fund may sell short up to ______ for every $100 in net assets and increase the long position to __________ of net assets.

$120; $20

$20; $120

$20; $20

$120; $120

33.

The collapse of the Long Term Capital Management hedge fund in 1998 was a case of an extremely unlikely statistical event called ________.

statistical arbitrage

an unhedged play

a tail event

a liquidity trap

34.

Which of the following investment styles could be the best description of the Long Term Capital Management market-neutral strategies?

Convergence arbitrage

Statistical arbitrage

Pairs trading

Convertible arbitrage

35.

Consider a hedge fund with $250 million in assets at the start of the year. If the gross return on assets is 18% and the total expense ratio is 2.5% of the year-end value, what is the rate of return on the fund?

15.05%

15.5%

17.25%

18%

36.

Consider a hedge fund with $200 million at the start of the year. The benchmark S&P 500 Index was up 16.5% during the same period. The gross return on assets is 21%, and the expense ratio is 2%. For each 1% above the benchmark return, the fund managers receive a .1% incentive bonus. What was the management cost for the year?

$4,877,000

$4,900,000

$5,929,000

$6,446,000

37.

16.5%

18.04%

18.55%

21%

38.

Consider a hedge fund with $400 million in assets, $60 million in debt, and 16 million shares at the start of the year and with $500 million in assets, $40 million in debt, and 20 million shares at the end of the year. During the year, investors have received an income dividend of $.75 per share. Assuming that the total expense ratio is 2.75%, what is the rate of return on the fund?

6.45%

8.52%

8.95%

9.46%

39.

Market-neutral hedge funds may experience considerable volatility. The source of volatile returns is the use of _________.

pure play

leverage

directional bests

net short positions

40.

A hedge fund has $150 million in assets at the beginning of the year and 10 million shares outstanding throughout the year. Throughout the year assets grow at 12%. The fund charges a 3% management fee on the assets. The fee is imposed on year-end asset values. What is the end-of-year NAV for the fund?

$15

$15.60

$16.30

$17.55

41.

You pay $216,000 to the Capital Hedge Fund, which has a price of $18 per share at the beginning of the year. The fund deducted a front-end commission of 4%. The securities in the fund increased in value by 15% during the year. The fund's expense ratio is 2% 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?

5.35%

7.23%

8.19%

10%

42.

A hedge fund owns a $15 million bond portfolio with a modified duration of 11 years and needs to hedge risk, but T-bond futures are available only with a modified duration of the deliverable instrument of 10 years. The futures are priced at $105,000. The proper hedge ratio to use is ______.

143

157

196

218

43.

Unlike market-neutral hedge funds, which have betas near ________, directional long funds exhibit highly _______ betas.

zero; positive

positive; negative

positive; zero

negative; positive

44.

Portfolio A has a beta of .2 and an expected return of 14%. Portfolio B has a beta of .5 and an expected return of 16%. The risk-free rate of return is 10%. If you manage a long-short equity fund and want 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

B; A

B; B

45.

According to a model that was estimated using monthly excess returns from January 2005 through November 2011, average returns of equity hedge funds are __________ the S&P 500 Index.

equal to

considerably higher than

slightly lower than

slightly higher than

46.

Research by Aragon (2007) indicates that lock-up restrictions tend to hold ____________ portfolios.

less liquid

more liquid

event-driven

shorter-maturity

47.

Higher returns of equity hedge funds as compared to the S&P 500 Index reflect positive compensation for __________ risk.

market

liquidity

systematic

interest rate

48.

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 9%. If a hedge fund manager wants to take advantage of an arbitrage opportunity, she should take a short position in portfolio __________ and a long position in portfolio __________.

A; A

A; B

B; A

B; B

49.

In a 2011 study, Agarwal, Daniel, and Naik documented that hedge funds tend to report average returns in ____________ that are __________ than their average returns in other months.

September; lower

January; higher

January; lower

December; higher

50.

To attract new clients, hedge funds often include past returns of funds only if they were successful. This is called __________.

long-short bias

survivorship bias

backfill bias

incentive bias

51.

Some argue that abnormally high returns of hedge funds are tainted by __________, which arises when unsuccessful funds cease operations, leaving only successful ones.

reporting bias

survivorship bias

backfill bias

incentive bias

52.

Malkiel and Saha (2005) estimate that the survivorship bias for hedge funds equals 4.4%, which is __________ the survivorship bias for mutual funds.

about the same as

much lower than

much higher than

only slightly lower than

53.

Hedge fund managers receive incentive bonuses when they increase portfolio assets beyond a stipulated benchmark but lose nothing when they fail to perform. This is equivalent to __________.

writing a call option

receiving a free call option

writing a put option

receiving a free put option

54.

A typical hedge fund incentive bonus is usually equal to ________ of investment profits beyond a predetermined benchmark index.

10%

20%

25%

55.

The fastest-growing category of hedge funds is feeder funds. These funds invest in ________.

other hedge funds

convertible securities and preferred stock

equities and bonds

managed futures and options

56.

A high water mark is a limiting factor of hedge fund manager compensation. This means that managers can't charge incentive fees ________.

when a fund stays flat

when a fund falls and does not recover to its previous high value

when a fund falls by 10% or more

none of these options. (Managers can always charge incentive fees.)

57.

If the risk-free interest rate is rf and equals the fund's benchmark, the portfolio's net asset value is S0, and the hedge fund manager incentive fee is 20% of profit beyond that, the incentive fee is equivalent to receiving ______ call(s) with exercise price ________.

.2; S0

1; S0(1 + rf)

1.2; S0

.2; S0(1 + rf)

58.

$100

$105

$110

$115

59.

Assume the risk-free interest rate is 10% and is equal to the fund's benchmark, the portfolio's net asset value is $100, and the fund's standard deviation is 20%. Also assume a time horizon of 1 year. What is the Black-Scholes value of the call option on the management incentive fee?

$6.67

$8.18

$9.74

$10.22

60.

Assume the risk-free interest rate is 10% and is equal to the fund's benchmark, the portfolio's net asset value is $100, and the fund's standard deviation is 20%. Also assume a time horizon of 1 year. Assuming a 2% management fee and a 20% incentive bonus, what is the expected management compensation per share if the fund's net asset value exceeds the stated benchmark?

$4.24

$3.84

$2.20

Student: ___________________________________________________________________________

Which one of the following is an example of "global" consumption smoothing?

Borrowing to buy a car

Borrowing to buy a home

Saving to send children to college

Saving during your working years for retirement

Inflation has an adverse effect on your savings because: I. It erodes the purchasing power of the dollars you have saved. II. It increases the real rate of return on the dollars you save. III. Unless sheltered, it increases the taxes owed on investment income.

I only

II and III only

I and III only

I, II, and III

If you want to tilt your savings toward later years, you might be well advised to purchase which of the following types of readily available insurance?

Career failure insurance

Disability insurance

Unemployment insurance

Moral hazard insurance

Which one of the following represents local consumption smoothing? I. Saving during your working years for retirement II. Borrowing money to buy a car III. Putting off a vacation for a year until you can afford it

I only

II and III only

I and II only

I, II, and III

In a private defined benefit pension plan the ___________ bears the investment risk, and in a private defined contribution plan the ____________ bears the investment risk.

plan sponsor; employee

employee; plan sponsor

U.S. government; plan sponsor

plan sponsor; U.S. government

A decrease of 1% in both your tax exemption and your income tax rate would, on net, _______________.

make you better off

make you worse off

make you neither better off nor worse off

make you either better or worse off depending on your age

Tax shelters __________________.

postpone payment of tax liabilities

decrease investment risk

increase the pretax rate of return earned

benefit the government more than the investor

The tax effect of a traditional retirement plan is to _____ taxes.

evade

postpone

erase

avoid

The U.S. income tax code is generally _____.

regressive

progressive

flat

peaked

10.

Contributions to a _____________ are not tax deductible.

traditional retirement plan

Roth retirement plan

401k plan

403b plan

11.

No taxes are paid on withdrawals made during retirement from a _________.

traditional retirement plan

Roth retirement plan

401k

403b plan

12.

You earn 6% on your corporate bond portfolio this year, and you are in a 25% federal tax bracket and an 8% state tax bracket. Your after-tax return is _____. (Assume that federal taxes are not deductible against state taxes and vice versa).

4.5%

4.14%

4.02%

3.12%

13.

You work for Fun-A-Rama Corporation and receive stock options as an incentive for your performance on the job. You are counting on the stock options to provide the funds you'll need for your retirement. This is called _____________.

adverse selection

a 529 plan

a moral hazard

a Texas hedge

14.

You can tax-shelter only one-half of your retirement savings. You want to invest one-half of your savings in bonds and one-half in stocks. How much of the bonds and how much of the stocks should you allocate to the tax-sheltered investment?

Stock and bond investments should be equally invested in both tax-sheltered and nonsheltered accounts.

You should place all the stocks in tax-sheltered accounts and all the bonds in nonsheltered accounts.

You should place all the bonds in tax-sheltered accounts and all the stocks in nonsheltered accounts.

It makes no difference how you allocate your stock and bond investments among tax sheltered and nonsheltered accounts.

15.

Social Security is ____________.

a pension plan only

an insurance plan only

a combination of a pension and insurance plan

an involuntary intergenerational transfer

16.

The Social Security system _______________.

is financed in a regressive way

is regressive in the way it allocates benefits

is progressive in the way it is financed

is fully funded for the foreseeable future

17.

Total annuity income is positively correlated with: I. Longevity II. Durability of marriage III. Expected length of your base (Social Security) annuity

I only

I and II only

II and III only

I, II, and III

18.

The solvency of Social Security is threatened by ______________.

increasing population longevity

above-replacement growth of the U.S. population

alternative tax shelters

the growth of competing defined contribution plans

19.

A person in poor health trying to buy supplemental health insurance is an example of ________.

moral hazard

adverse selection

a Texas hedge

actuarial error

20.

A person in excellent health with a long life expectancy chooses a lifetime annuity. This is an example of _________.

moral hazard

adverse selection

a Texas hedge

actuarial error

21.

It would be costly to provide wage insurance because of the ___________ problem.

moral hazard

adverse selection

Texas hedge

actuarial error

22.

You earned 8% on your corporate bond portfolio this year, and you are in a 15% federal tax bracket. If over your holding period inflation was 3%, your real after-tax rate of return was _____.

6.8%

3.69%

4.91%

4.25%

23.

As you get older, you decide to reduce the risk level of your retirement portfolio because your portfolio is nearing your minimum acceptable level. As the portfolio does better, you reallocate funds into higher-risk categories. You are practicing a form of ____________.

manipulating tax shelters

involuntary intergenerational transfers

excessive savings

dynamic hedging

24.

Tilting your retirement savings plan toward your later years should only be done by investors _____________.

who are sufficiently risk averse

who are more tolerant of risk

who are unsure if their income growth will keep up with inflation

who want to retire early

25.

Employers commonly match at least some portion of employee contributions to: I. 401k plans II.403b plans III. Self-directed retirement plans

I only

I and II only

II only

I, II, and III

26.

A saver who expects to have a higher tax rate after retirement would prefer a ______.

Roth retirement plan

traditional retirement plan

401k plan

403b plan

27.

A retirement plan that offers a tax shelter will defer ______________ taxes on contributions and investment earnings.

income

sales

property

estate

28.

A study by Spivack and Kotlikoff (1981) showed that a marriage contract increases the dollar value of lifetime savings by as much as _____.

10%

25%

50%

29.

Taxes are applied to the _______________________.

real value of sheltered investment income

nominal value of unsheltered investment income

nominal value of sheltered investment income

real value of unsheltered investment income

30.

One feasible way to hedge labor income is to ____________________.

diversify your investment portfolio away from the industry in which you work

save for retirement only from investment income

change careers every 7 years

invest heavily in the stock options provided by your firm

31.

Which one of the following is not likely to be subject to adverse selection?

Health insurance providers

Lifetime annuity providers

Life insurance providers

Social Security

32.

Average Indexed Monthly Earnings are used to compute ___________.

the consumer price index

your Social Security retirement benefits

your maximum 401k contribution

your maximum retirement plan contribution

33.

The Social Security Primary Insurance Amount formula favors ______.

older workers

high-income workers

younger workers

low-income workers

34.

Contributions to a traditional retirement plan are __________, and contributions to a Roth retirement plan are ____________.

not tax deductible; not tax deducible

tax deductible; tax deductible

tax deductible; not tax deductible

not tax deductible; tax deductible

35.

How many years of Social Security contributions count for determination of benefits?

All yearly contributions count.

36.

Under current rules most workers will have ________ of their salary deducted to pay for Social Security retirement benefits and _______ toward Medicare.

1.45%; 6.2%

6.2%; 1.45%

7.65%; 1.45%%

15.3%; 4.9%

37.

In 2012, the income cap on Social Security taxes was set at _____ with an exemption of _____.

$200,000; $10,000

$153,600; $7,600

$110,100; $0

$96,000; $10,000

38.

If your marginal tax rate is 15%, your capital gains tax rate on a stock you have held for 10 years would be ___.

15%

20%

27.5%

39.

A tax shelter that allows for tax-exempt saving for higher education is called a _____.

Roth savings plan

403b

401k

529 plan

40.

Withdrawals from a traditional retirement plan prior to age ___ are taxable and must pay a ___ tax penalty.

59½; 10%

62; 5%

65; 7½ %

63½; 5%

41.

In planning for retirement, an investor decides she will save $2,000 every year for 25 years. At a 7% return on her investment, how much money will she have at the end of 25 years?

$119,015

$125,316

$126,498

$128,420

42.

In planning for retirement, an investor decides she will save $11,000 every year for 40 years. At an 11% return on her investment, how much money will she have at the end of 40 years (to the nearest hundred thousand dollars)?

$1,400,000

$2,800,000

$4,900,000

$6,400,000

43.

An investor plans to retire at age 60 with total savings of $1,000,000. If she is currently 35 years old, has no savings, and expects to earn 8% per year on her investments, how much money must she set aside every year?

$15,546

$13,679

$11,892

$10,324

44.

An insurance company plans to sell annuities to investors. Based on actuarial calculations, an investor has a 15-year life span, and he wants a $30,000-per-year annuity, payable at the end of each year. If the insurance company uses a 4% assumed investment rate, how much should the annuity cost?

$296,928

$312,236

$333,552

$353.982

45.

A safe driver who drives faster as a result of purchasing collision car insurance would be an example of the ___________ problem.

moral hazard

adverse selection

Texas hedge

actuarial error

46.

A worker plans to retire in 20 years. He needs $20,000 per year in retirement income in today's dollars. If inflation is forecast at 3.5% per year, what annual income should he plan to receive in the first year of retirement in order to maintain the purchasing power on $20,000?

$30,353

$34,159

$37,398

$39,796

47.

An insurance company plans to sell annuities to investors. Based on actuarial calculations, an investor has a 20-year life span, and she wants a $50,000-per-year annuity, payable at the end of each year. If the insurance company uses a 3% assumed investment rate, how much should the annuity cost?

$696,928

$743,874

$833,552

$953.982

48.

A worker plans to retire in 30 years. He hopes to receive $65,000 per year in retirement income. If inflation is forecast at 2.5% per year, what annual income should he plan to receive in the first year of retirement in order to maintain the purchasing power on $65,000?

$65,000

$76,159

$98,398

$136,342

49.

An investor must decide between putting $2,000 into a regular retirement plan or putting $1,440 into a Roth retirement plan. If the investor's tax rate is 28% now and in retirement, and she expects to earn 12% per year over the next 20 years, which will produce more cash in the end?

The investment in the regular retirement plan.

The investment in the Roth retirement plan.

Both investments will have the same future value after taxes.

The answer cannot be determined from the information given.

50.

A regular retirement plan requires that taxes be paid at the time the money is removed from the plan. What is the after-tax value of a $5,000 deposit into a retirement plan today that generates an 8% return for 20 years if the investor is taxed at the 28% level?

$16,779

$20,135

$21,685

$23,305

51.

What is the value of a $2,500 deposit into a retirement plan if the investment earns 12% per year for 15 years?

$12,174

$13,684

$14,652

$15,523

52.

The employees of a firm complain that they cannot afford to contribute $8,000 per year to a 401k because of the loss of $8,000 of take-home pay. In fact, how much will the take-home pay be reduced if all taxes combined total 33%?

$5,360

$6,340

$7,637

$8,000

53.

An employee uses her firm's 401k plan. If she decides to contribute $11,000 per year and pays an effective tax rate for all items of 28%, what is the reduction in her take-home pay each year?

$3,080

$4,210

$7,920

$11,000

54.

An investor has an effective tax rate on all items of 30%, and he decides to put $8,000 into a 401k. The future value of the investment that results from the deferral of taxes over 30 years at an 8% return equals _____________.

$2,400

$8,000

$10,400

$24,150

55.

Withdrawals after retirement from a traditional retirement plan are __________, and withdrawals after retirement from a Roth retirement plan are ____________.

taxable; not taxable

not taxable; taxable

tax deductible; not tax deductible

not tax deductible; tax deductible

56.

If you start saving for retirement only in your later years and your income growth from that point is rapid, then ________________________.

a traditional retirement plan is probably a better choice than a Roth retirement plan

a Roth retirement plan is probably a better choice than a traditional retirement plan

a SEP is probably a better choice than Medicare

a 401k is probably a better choice than a 403b

57.

Which one of the following statements about 401k plans is not correct?

The employer will typically match some portion of an employee's contributions to a 401k.

A 401k plan is a defined contribution plan.

Allowable contributions to 401k plans are limited.

Withdrawals from 401k plans are not taxed upon retirement.

58.

Suppose you have maxed out your allowable contributions to your tax-sheltered retirement plans and you still want to shelter income. The best choice of investment for you to minimize the tax bill is to invest in _________.

a bond portfolio

stocks with high dividend yields

a blended stock and bond portfolio containing zero-coupon bonds

stocks with low or zero dividend yields

59.

A bond portfolio and a stock portfolio both provided an unrealized pretax return of 8% to a taxable investor. If the stocks paid no dividends, we know that the ________.

after-tax return of the stock portfolio was higher than the after-tax return of the bond portfolio

after-tax return of the bond portfolio was higher than the after-tax return of the stock portfolio

after-tax income of the stock portfolio was equal to the after-tax income of the bond portfolio

after-tax income of the stock portfolio could have been higher or lower than the after-tax income of the bond portfolio, depending on the marginal tax rate of the investor

60.

Statistics show that life expectancy at age 66 for males is about _____ additional years and for females is about _____ additional years.

15; 20

16; 19

18; 22

19; 24

61.

Currently, the maximum combined taxable income of a retired household that avoids having to pay any taxes on a portion of their Social Security benefit is ______.

$15,000

$32,000

$45,000

$75,000

62.

An investor can earn a 6% nominal rate of return, but inflation is expected to be 3%. If the individual invests $2,000 per year for 20 years, the real future value of this investment is ________. (All investments occur at year-end).

$73,571

$66,334

$53,251

$48,732

63.

An individual wants to have $95,000 per year to live on when she retires in 30 years. The individual is planning on living for 20 years after retirement. If the investor can earn 6% during her retirement years and 10% during her working years, how much should she be saving during her working life? (Hint: Treat all calculations as annuities.)

$9,872

$8,234

$7,908

$6,624

64.

If you plan for a bequest for your children, your grandchildren, their children, and so on, your planning horizon becomes _____.

equal to the life span of your children

100 years, or your lifetime, whichever ends first

infinite

double what it would have been without the bequest

65.

You want to minimize your current tax bill by maximizing your contributions to your _____________.

taxable bond portfolio

Roth retirement plan

401k or 403b plan

taxable savings account

66.

Sharon decides to put $5,000 into her retirement plan at the age of 25. She will continue to invest the same amount for a total of 6 years and then stop contributing. Assume 10% annual return. How much money will Sharon have in her retirement plan after 6 years?

$30,000

$35,575

$38,578

$41,451

67.

$554,856

$623,245

$740,480

$1,311,805

68.

A nonprofit organization offers a 5% salary contribution to John's 403b plan regardless of his own contributions, plus a matching 5% when John contributes 5% of his salary. John makes $56,000 a year. What is the amount of the total contribution to his 403b if John contributes 5% of his own money?

$5,600

$8,400

$11,200

$12,500

69.

A nonprofit organization offers a 5% salary contribution to John's 403b plan regardless of his own contributions, plus a matching 5% when John contributes 5% of his salary. John makes $56,000 a year. What is John's effective salary reduction if he is in the 25% tax bracket?

$2,100

$2,800

$5,600

$8,400

70.

$2,100 cost

$2,800 cost

$700 benefit

$3.500 benefit

71.

The fact that the U.S. government provides deposit insurance to banks creates a form of ___________, which is at least partially offset by requiring banks to hold more capital if they are riskier.

moral hazard

adverse selection

risk aversion

interest rate risk

72.

An investor in the 34% tax bracket would be indifferent between a corporate bond with a before-tax yield of 8% and a municipal bond with a yield of _________.

3.91%

6.15%

5.28%

10.72%

73.

An investor who is in the 35% federal tax bracket and the 5% state bracket buys a 6.5% yield corporate bond. What is his after-tax yield? (Assume that federal taxes are not deductible against state taxes and vice versa).

3.9%

4.75%

6.5%

9.9%

Student: ___________________________________________________________________________

To _____ means to mitigate a financial risk.

invest

speculate

hedge

renege

In a defined benefit pension plan, the _____ bears all of the fund's investment performance risk.

employer

employee

fund manager

government

In a defined contribution pension plan, the _____ bears all of the fund's investment performance risk.

employer

employee

fund manager

government

My pension plan will pay me a yearly retirement amount equal to 2% of my highest annual salary for each year of service. I must have ___________.

a defined benefit plan

a defined contribution plan

an endowment fund

a variable annuity

A ______ insurance policy provides death benefits, with no buildup of cash value.

whole-life

universal life

variable life

term life

If the maturity of a bank's assets is much longer than the maturity of its liabilities and it wants to limit its interest rate risk, the bank may _________.

prefer to invest in long-term bonds in its asset portfolio

prefer to invest in equities in its asset portfolio

prefer to invest in variable-rate assets

decide to increase its fixed-rate mortgage holdings

You are thinking of investing in one of two assets. Asset A has higher systematic risk than asset B. You can be sure that asset A's _______ return will be higher than asset B's, but you can't be sure if asset A's _______ return will be higher than asset B's.

realized; expected

real; nominal

expected; realized

nominal; expected

A mutual fund may not hold more than ______ of the shares of any publicly traded company.

10%

25%

50%

Which one of the following would be considered a "cash equivalent" investment?

Treasury bills

Common stock

Corporate bonds

Real estate

10.

For a bank, the difference between the interest rate charged to borrowers and the interest rate paid on liabilities is called the __________.

insurance premium

interest rate spread

risk premium

term premium

11.

Price volatility is greatest on which one of the following investments?

Commercial paper

20-year zero-coupon bonds

Treasury notes

Treasury bills

12.

A portfolio manager indexes part of a portfolio and actively manages the rest of the portfolio. This is called a _________ strategy.

passive-aggressive

passive core

passively active

balanced fund

13.

The major asset most people have during their early working years is their ________.

home

stock portfolio

earning power derived from their skills

bond portfolio

14.

At the early stage of an individual's working career, his or her retirement portfolio should probably consist mostly of _______.

annuities

stocks

bonds

commodities

15.

If an investor wants to invest 100% of her portfolio in safe assets but does not want to manage her portfolio, she should invest in __________.

a money market fund

a growth stock fund

several different money market instruments

several different stocks

16.

Just 2 months after you put money into an investment, its price falls 25%. Assuming that none of the investment fundamentals have changed, which of the following actions would evidence the greatest risk tolerance?

You sell to avoid further worry and buy something else.

You do nothing and wait for the investment to come back.

You buy more, thinking that if it was a good investment before, now it's not only good but cheap too.

You sue your financial adviser.

17.

To become a CFA, you must do all of the following except which one?

Pass three exams designed to ensure that you have sufficient knowledge of investments.

Obtain 3 years of work experience in money management.

Become a member of a local Society of the Financial Analysts Federation.

Divest all your own stock holdings to eliminate any potential conflicts of interest with client recommendations.

18.

Which of the following is not one of the main areas covered in the examinations that must be taken in order to achieve the designation of Chartered Financial Analyst?

Investment management ethics

Securities analysis

Securities marketing techniques

Portfolio management

19.

As the typical investor ages, the composition of his wealth usually switches from primarily _______ to primarily _______.

human capital; financial capital

financial capital; human capital

intellectual capital; physical capital

investable capital; noninvestable capital

20.

The two most important factors in describing an individual's or organization's investment objectives are ________________.

income level and age

income level and risk tolerance

age and risk tolerance

return requirement and risk tolerance

21.

The term hedge refers to an investment that is used ________________.

primarily for tax-loss selling purposes

to mitigate specific financial risks

to conceal one's true investment strategy from other market participants

primarily to defer capital losses

22.

The price of your investment increases 20% one month after you buy it. You do not believe that the stock's prospects have changed. Which one of the following actions would indicate the lowest amount of risk aversion?

You hang on to the stock, anticipating that it will go higher.

You buy more stock, anticipating that it will go higher.

You sell all of your stock holdings immediately.

You sell half of your stock holdings and invest the proceeds in other areas of your portfolio.

23.

An individual is on the game show Squeal or No Squeal, and she has a choice between receiving a certain gain of $100,000 and receiving a 50% chance of winning $200,000 or zero. If she takes the gamble instead of the certain $100,000, she is acting ____________________.

like a person who is risk-neutral

like a person who is risk averse

like a person who is a risk lover

irrationally

24.

Which of the following typically strives to earn a return on their investments that exceeds the actuarially determined rate of return?

Banks

Thrifts

Mutual funds

Pension funds

25.

If an individual confers legal title to property to another person or institution to manage the property on their behalf, the individual has created ___________.

a personal trust

a charitable trust

an endowment fund

a mutual fund

26.

Personal trusts are typically allowed to engage in which of the following investment activities? I. Buying and selling futures contracts. II. Short-selling securities. III. Purchasing and writing options. IV. Buying stock on margin.

I only

II and III only

II and IV only

None of the given activities are allowed.

27.

If a defined benefit pension fund's actual rate of return is _____ than the actuarial assumed rate, then the ___________.

greater; employees will benefit

greater; firm's shareholders will benefit

lower; employees will benefit

lower; firm's shareholders will benefit

28.

An employee has an average wage of $60,000 and has worked for the firm for 25 years. The defined benefit pension plan pays retirees 2.5% of the average wage times the years of service. The employee can expect to receive _______ per year upon retirement.

$18,000

$37,500

$45,325

$55,250

29.

Life insurance companies try to hedge the risks inherent in whole-life insurance policies by investing in __________.

long-term bonds

money market mutual funds

savings accounts

short-term commercial paper

30.

A pension fund will owe $10 million to retirees in 6 years. An actuary assumes an 8% rate of return on the funds invested in the pension plan. If the pension plan receives annual contributions from the company sponsor, how much must the company pay each year to fully fund the pension liability?

$1,212,587

$1,363,154

$1,533,333

$1,666,667

31.

The risk that a downturn in the market may substantially reduce your investment principal is called _______.

purchasing power risk

interest rate risk

market risk

liquidity risk

32.

The possibility that you are too conservative and your money doesn't grow fast enough to keep pace with inflation is called ________.

purchasing power risk

liquidity risk

timing risk

market risk

33.

A pension fund will owe $15 million to retirees in 20 years. An actuary assumes a 6% rate of return on the funds invested in the pension plan, but the fund actually earns 8%. The pension plan receives annual contributions from the company sponsor. If the 8% rate of return is expected to continue, by how much can the company reduce its pension payments per year?

$65,437

$79,985

$89,462

$95,320

34.

Many defined benefit pension plans have a target rate of return on investment that is equal to the ____________.

firm's return on equity

plan's assumed actuarial rate of return

economic inflation rate because wages often increase with inflation

estimated stock market return

35.

_______ is a life insurance policy that provides a death benefit and a fixed-rate tax-deferred savings plan.

Term life

Whole life

Variable life

Universal life

36.

Empirical evidence confirms that investors become __________ as they approach retirement.

greedier

less interested in investments

more risk averse

more risk tolerant

37.

_______ is a life insurance policy that will provide a death benefit only and has no savings plan.

Term life

Whole life

Variable life

Universal life

38.

Of the following, the investment time horizon is typically the shortest for __________.

banks

endowment funds

life insurance companies

pension funds

39.

A passive asset allocation strategy involves _________.

investing in the stock of companies that are price takers

maintaining approximately the same proportions of a portfolio in each asset class over time

varying the proportions of a portfolio in each asset class in response to changing market conditions

selecting individual securities in different sectors that are believed to be undervalued

40.

An active asset allocation strategy involves _________.

investing in the stock of companies that are price takers

maintaining approximately the same proportions of a portfolio in each asset class over time

varying the proportions of a portfolio in each asset class in response to changing market conditions

selecting individual securities in different sectors that are believed to be undervalued

41.

Endowment funds are held by __________.

financial intermediaries

individuals

profit-oriented firms

nonprofit institutions

42.

Which one of the following is a life insurance policy that will provide a fixed death benefit and allows the policyholder to choose where to invest the policy's cash value?

Term life

Whole life

Variable life

Industrial life

43.

Under a "passive core" portfolio management strategy, a manager would ___________.

index the entire portfolio

index part of the portfolio and actively manage the rest

delegate the management of core segments of the portfolio to other managers

actively manage the entire portfolio

44.

Of the following, the most flexible type of life insurance policy from the policyholder's perspective is probably a ___________ policy.

term life

whole life

variable life

universal life

45.

The amount of risk an individual should take depends on his or her: I. Return requirements II. Risk tolerance III. Time horizon

I only

I and II only

II and III only

I, II, and III

46.

Earnings on variable life and universal life insurance policies are ___________.

never taxed

taxed only at the capital gains tax rate

not taxed until the money is withdrawn

not taxed at the federal level but are taxed at the state level

47.

When a company sets up a defined contribution pension plan, the __________ bears all the risk and the __________ receives all the return from the plan's assets.

employee; employee

employee; employer

employer; employee

employer; employer

48.

Suppose that the pretax holding-period returns on two stocks are the same. Stock A has a high dividend payout policy and stock B has a low dividend payout policy. If you are a high-tax rate individual and do not intend to sell the stocks during the holding period, __________.

stock A will have a higher after-tax holding-period return than stock B

the after-tax holding period returns on stocks A and B will be the same

stock B will have a higher after-tax holding-period return than stock A

The answer cannot be determined from the information given.

49.

The objectives of personal trusts normally are __________ in scope than those of individual investors, and personal trust managers typically are __________ than individual investors.

broader; more risk averse

broader; less risk averse

more limited; more risk averse

more limited; less risk averse

50.

The prudent investor rule requires __________.

executives of companies to avoid investing in options of companies they work for

executives of companies to disclose their transactions in stocks of companies they work for

professional investors who manage money for others to avoid all risky investments

professional investors who manage money for others to constrain their investments to those that would be approved by a prudent investor

51.

The prudent investor rule is an example of a regulation designed to ensure appropriate _____________ by money managers.

fiduciary responsibility

fiscal responsibility

monetary responsibility

marketing procedures

52.

An investor has a long time horizon and desires to earn the market rate of return. However, the investor will need to withdraw funds each year from her investment portfolio. The biggest constraint a planner would face with this client is a ___________ constraint.

tax

risk-tolerance

liquidity

social

53.

When used in the context of investment decision making, the term liquidity refers to _____________.

the ease and speed with which an asset can be sold at any value possible

the ease and speed with which an asset can be sold without having to discount the value

an aspect of monetary policy

the proportion of short-term to long-term investments held in an investor's portfolio

54.

The term investment horizon refers to __________.

the proportion of short-term to long-term investments held in an investor's portfolio

the planned liquidation date of an investment

the average maturity date of investments held in a portfolio

the maturity date of the longest investment in the portfolio

55.

The choice of an active portfolio management strategy rather than a passive strategy assumes ___________.

the ability to continuously adjust the portfolio to provide superior returns

asset allocation involving only domestic securities

stable economic conditions over the short term

the ability to minimize trading costs

56.

Conservative investors are likely to want to invest in __________ mutual funds, while risk-tolerant investors are likely to want to invest in __________.

income; high growth

income; moderate growth

moderate-growth; high growth

high-growth; moderate growth

57.

The first step any investor should take before beginning to invest is to __________.

establish investment objectives

develop a list of investment managers with superior records to interview

establish asset allocation guidelines

decide between active management and passive management

58.

Which of the following is the least likely to be included in the portfolio management process?

Monitoring market conditions and relative values

Monitoring investor circumstances

Identifying investor constraints and preferences

Organizing the investment management process itself

59.

A clearly understood investment policy statement is not critical for which one of the following? I. Mutual funds II. Individuals III. Defined benefit pension funds

II only

III only

I only

None of these options (A policy statement is necessary for all three.)

60.

An investor refuses to invest in any firm that produces alcohol or tobacco. This is an example of a ___________ constraint.

return requirement

risk-tolerance

liquidity

social

61.

Under the provisions of a typical defined benefit pension plan, the employer is responsible for _____________.

investing in conservative fixed-income assets

paying benefits to retired employees

counseling employees in the selection of asset classes

paying employees the market rate of return on employee contributions

62.

A life insurance firm wants to minimize its interest rate risk, and it is planning on paying out $250,000 in 5 years. Which one of the following investments best matches its goal?

High-yield utility stocks

5-year zero-coupon bonds

10-year coupon bonds

Money market investments rolled over as needed

63.

An institutional investor will have to pay off a maturing bond issue in 3 years. The institution has 10,000 bonds outstanding, each with a $1,000 par value. The institutional money manager is reevaluating the fund's total portfolio of $100 million at this time. She is bullish on stocks and wants to put the most she can into the stock market, but she cannot risk being unable to pay off the bonds. Three-year zero-coupon bonds are available paying 6% interest. What percentage of the total $100 million portfolio can she put in stocks and still ensure meeting the bond payments?

87.4%

88.5%

90%

91.6%

64.

An investor with high risk aversion will likely prefer which of the following risk and return combinations?

Expected return = 12%, historical standard deviation = 17%

Expected return = 14%, historical standard deviation = 19%

Expected return = 16%, historical standard deviation = 21%

Expected return = 18%, historical standard deviation = 23%

65.

An investor with low risk aversion will likely prefer which of the following risk and return combinations?

Expected return = 11%, historical standard deviation = 12%

Expected return = 12%, historical standard deviation = 14%

Expected return = 14%, historical standard deviation = 18%

Expected return = 17%, historical standard deviation = 21%

66.

Medfield College's $10 million endowment fund is not allowed to spend any contributed capital or any capital gains. The fund may spend only investment earnings. The fund is expected to need between $500,000 and $1,000,000 to pay for new lab equipment for the science building. Which of the following is (are) true? I. The fund should have a target rate of return of at least 10%. II. The limitations on spending require that the fund limit its considerations to growth stocks. III. The requirement to spend money out of the fund this year provides a liquidity constraint that may reduce the fund's rate of return.

I only

II only

I and III only

I, II, and III

67.

An investor is looking at different retirement investment choices, and he is willing to accept one with upside potential even if that means sacrificing certainty. Which of the following will he most likely select?

Fixed annuity

Defined benefit plan

Defined contribution plan

Bonds invested in a retirement plan

68.

Both a wife and her husband work in the airline industry. They are in their 40s, and they have a high tax bracket and are concerned about their after-tax rate of return. A meeting with their financial planner reveals that they are primarily focused on long-term capital gains and will need at least a 9% to 11% average rate of return to meet their retirement goals. They desire a diversified portfolio, and liquidity is not currently a major concern. Which of the following asset allocations seems to best fit their situation?

10% money market; 40% long-term bonds; 10% commodities; 40% high-dividend-paying stocks

0% money market; 60% long-term bonds; 40% stocks

10% money market; 30% long-term bonds; 10% commodities; 50% high-dividend-paying stocks

5% money market; 30% long-term bonds; 5% commodities; 60% stocks, most with low dividends and high growth prospects

69.

A family will retire in a few years. They have a high tax bracket and are concerned about their after-tax rate of return. A meeting with their financial planner reveals that they are primarily focused on safety of principal and will need a 6% to 8% average rate of return on their portfolio. They desire a diversified portfolio, and liquidity is likely to be a concern due to health reasons. Which of the following asset allocations seems to best fit this family's situation?

10% money market; 50% intermediate-term bonds; 40% blue chip stocks, many with high dividend yields

0% money market; 60% intermediate-term bonds; 40% stocks

10% money market; 30% intermediate-term bonds; 60% high-dividend-paying stocks

5% money market; 35% intermediate-term bonds; 60% stocks, most with low dividends

70.

Your sister, an avid outdoors person, works in the airline industry, and she has come to you (the financial guru) for investment advice. She is looking into purchasing stocks she knows something about. She is considering purchasing stock in Boeing, Lockheed Martin, United Technologies (maker of aircraft engines), and Cabela's Sporting Goods. Based only on the information given, which stock should you recommend for her?

Boeing

Lockheed Martin

United Technologies

Cabela's

71.

In 1937 the Eli Lilly family donated millions of dollars in stock to fund a not-for-profit charitable organization. Such organizations are typically called _________________.

annuities

endowments

mutual funds

personal trusts

72.

Which one of the following institutions typically has the longest investment horizon?

Mutual funds

Pension funds

Property and casualty insurers

Banks

73.

For which one of the following institutions is liquidity usually the most important?

Mutual funds

Pension funds

Life insurers

Banks

74.

One of the major functions of the investment committee is to ________________.

determine security selection of each portfolio operated by the investment company

translate the objectives and constraints of the investment company into an asset universe

determine the percentages of each security in the total investment company portfolio

calculate and report the overall rate of return to investment company constituents

75.

For an investor concerned with maximizing liquidity, which of the following investments should be avoided?

Real estate

Bonds

Domestic stocks

International stocks

76.

The asset universe is the _____________________.

set of investments in which an investment company can legally invest

existing set of assets the investment company currently owns in one or more of its portfolios

list of assets approved by the investment committee that may be placed into the investment company's portfolio

market portfolio of all available risky assets

77.

Go Global Investment Management has an asset allocation strategy of 60% U.S. investments and 40% global investments. Within the United States, Go Global has allocated 70% of its portfolio to equities and 30% to bonds. Go Global now holds 3% of its U.S. equity portfolio in the stock of Wally World. Internationally, Go Global has allocated 55% to equities and 45% to bonds. About what percentage of Go Global's total portfolio is invested in Wally World?

1.26%

1.5%

1.77%

78.

Major functions of the investment committee include all but which one of the following?

Engage in security selection for each portfolio managed

Broadly determine the overall asset allocation of the investment company

Determine the asset-class weights for each portfolio

Determine the asset universe

79.

A portfolio consists of three index funds: an equity index, a bond index, and an international index. The portfolio manager changes the weights periodically according to forecasts for each sector. This is an example of __________.

a passively managed core with an actively managed component

a totally passively managed fund

passive asset allocation with active security selection

active asset allocation with passive security selection

80.

A portfolio consists of three index funds: an equity index accounting for 40% of the total portfolio, a bond index accounting for 30% of the total portfolio, and an international index accounting for 30% of the total portfolio. After each quarter the portfolio manager buys and sells some of each sector to preserve the original weights for each sector. This is an example of ____________.

a passively managed core with an actively managed component

a totally passively managed fund

passive asset allocation with active security selection

active asset allocation with passive security selection

81.

One way that life insurance firms can hedge the risk created by offering whole-life insurance policies is by ________________.

holding long-term bonds

holding equities

holding short-term bonds

exercising its right to terminate the policy

#FIN 320 Week 11 Final Exam – Strayer

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FIN 320 Week 11 Final Exam – Strayer

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Chapters 9, 10, 12 Through 15 And 17 Through 22

Student: ___________________________________________________________________________

Testing many different trading rules until you find one that would have worked in the past is called _______.

data mining

perceived patterning

pattern searching

behavioral analysis

Models of financial markets that emphasize psychological factors affecting investor behavior are called _______.

data mining

fundamental analysis

charting

behavioral finance

The trin statistic is a ______ indicator.

sentiment

flow of funds

market structure

fundamental

The put/call ratio is a ______ indicator.

sentiment

flow of funds

market structure

fundamental

Relative strength is ______ indicator.

a fundamental

an economic

a technical

an international

Short interest is a ______ indicator.

sentiment

flow of funds

market structure

fundamental

Moving averages are ______ indicators.

sentiment

flow of funds

trend

fundamental

Market breadth is a ______ indicator.

sentiment

flow of funds

technical

fundamental

The cumulative tally of the number of advancing stocks minus declining stocks is called the ______________.

market breadth

market volume

trin ratio

relative strength ratio

10.

A high amount of short interest is typically considered as a __________ signal, and contrarians may consider it as a _________ signal.

bearish; bullish

bullish; bearish

bearish; false

bullish; false

11.

Technical analysis focuses on _____________________.

finding opportunities for risk-free investing

finding repeating trends and patterns in prices

changing prospects for earnings growth of particular firms or industries

forecasting technical regulatory changes

12.

Behavioralists point out that even if market prices are ____________, there may be _______________.

distorted; limited arbitrage opportunities

distorted; fundamental efficiency

allocationally efficient; limitless arbitrage opportunities

distorted; allocational efficiency

13.

According to market technicians, it is time to sell stock in a head-and-shoulders formation when ___________.

the price index pierces the left shoulder

the price index pierces the right shoulder

the price index pierces the head

none of these options takes place

14.

When a stock price breaks through the moving average from below, this is considered to be ______.

the starting point for a new moving average

a bearish signal

a bullish signal

none of these options

15.

When the stock price falls below a moving average, a possible conclusion is that _____.

market momentum has become positive

market momentum has become negative

there is no regular pattern for this stock's market momentum

professional analysts' opinions are invalid until the stock price rises again

16.

Following a period of falling prices, the moving average will _____.

be below the current price

be above the current price

be equal to the current price

become more volatile than it had been before prices fell

17.

A moving average of stock prices _________________.

always lies above the most recent price

always lies below the most recent price

is less volatile than the actual prices

is more volatile than the actual prices

18.

When the housing bubble burst in 2007, it set off the worst financial crisis _____.

in 25 years.

in 40 years.

in 50 years.

in 75 years.

19.

A support level is ___________________.

a level beyond which the market is unlikely to rise

a level below which the market is unlikely to fall

an equilibrium price level justified by characteristics such as earnings and cash flows

the peak of a market wave or cycle

20.

According to Kondratieff, the macro economy moves in a series of waves that recur at intervals of approximately _________________.

18 months

4 years

8 years

50 years

21.

According to Elliot's wave theory, stock market behavior can be explained as _________________.

a series of medium-term wave cycles with no short-term trend

a series of long-term wave cycles with no short-term trend

a series of superimposed long-term and short-term wave cycles

sine and cosine functions

22.

Conventional finance theory assumes investors are _______, and behavioral finance assumes investors are _______.

rational; irrational

irrational; rational

greedy; philanthropic

philanthropic; greedy

23.

The only way for behavioral patterns to persist in prices is if ______________.

markets are not weak-form efficient

there are limits to arbitrage activity

there are no significant trading costs

market psychology is inconsistent over time

24.

In the context of a point and figure chart, a horizontal band of Xs and Os is a _____________.

buy signal

sell signal

congestion area

trend reversal

25.

Even though indexing is growing in popularity, only about _____ of equity in the mutual fund industry is held in indexed funds. This may be a sign that investors and managers __________.

5%; are excessively conservative

15%; overestimate their ability

20%; suffer from framing biases

25%; engage in mental accounting

26.

If investors are too slow to update their beliefs about a stock's future performance when new evidence arises, they are exhibiting _______.

representativeness bias

framing error

conservatism

memory bias

27.

If investors overweight recent performance in forecasting the future, they are exhibiting _______.

representativeness bias

framing error

memory bias

overconfidence

28.

Trading activity and average returns in brokerage accounts tend to be _________.

uncorrelated

negatively correlated

positively correlated

positively correlated for women and negatively correlated for men

29.

Your two best friends each tell you about a person they know who successfully started a small business. That's it, you decide; if they can do it, so can you. This is an example of _____________.

mental accounting

framing bias

conservatism

representativeness bias

30.

Which of the following is not a sentiment indicator?

Confidence index

Short interest

Odd-lot trading

Put/call ratio

31.

Which of the following is considered a sentiment indicator?

A 200-day moving average

Short interest

Credit balances in brokerage accounts

Relative strength

32.

overconfidence

representativeness

forecast errors

mental accounting

33.

Which of the following analysts focus more on past price movements of a firm's stock than on the underlying determinants of its future profitability?

Credit analysts

Fundamental analysts

Systems analysts

Technical analysts

34.

A trin ratio of greater than 1 is considered a __________.

bearish signal

bullish signal

bearish signal by some technical analysts and a bullish signal by other technical analysts

trend reversal signal

35.

Contrarian investors consider a high put/call ratio a __________.

bearish signal

bullish signal

trend confirmation signal

signal to enter the options market

36.

The ratio of the average yield on 10 top-rated corporate bonds to the average yield on 10 intermediate-grade bonds is called the __________.

bond price index

confidence index

relative strength index

trin ratio

37.

An investor needs cash to pay some hospital bills. He is willing to use his dividend income to pay the bills, but he will not sell any stock to do so. He is engaging in ___________.

overconfidence

representativeness

forecast errors

mental accounting

38.

Bill will have more regret over the loss than Shelly

Shelly will have more regret over the loss than Bill

Bill and Shelly will have equal regret over their losses

Bill's and Shelly's risk aversion will increase in the future

39.

The most common measure of __________ is the spread between the number of stocks that advance in price and the number of stocks that decline in price.

market breadth

market volume

odd-lot trading

short interest

40.

regret avoidance

overconfidence

that she has a diminishing marginal utility of wealth

prospect theory loss aversion

41.

When the market breaks through the moving average line from below, a technical analyst would probably suggest that it is a good time to ___________.

buy the stock

hold the stock

sell the stock

short the stock

42.

If you believed in the reversal effect, you should __________.

buy bonds this period if you held stocks last period

buy stocks this period that performed poorly last period

buy stocks this period that performed well last period

do nothing if you held the stock last period

43.

According to technical analysts, a shift in market fundamentals will __________.

be reflected in stock prices immediately

lead to a gradual price change that can be recognized as a trend

lead to high volatility in stock market prices

leave prices unchanged

44.

According to market technicians, a trin statistic of less than 1 is considered a __________.

bearish signal

bullish signal

volume decline

signal reversal

45.

It is difficult to test the Kondratieff wave theory because _________.

it applies to only Russian stocks

its main proponent found contrary research results

only two independent data points are generated each century

the stock market is too volatile to generate smooth waves

46.

A _________ is a value above which it is difficult for the market to rise.

book value

resistance level

support level

confidence level

47.

_____________ is a tool that can help identify the direction of a stock's price.

Prospect theory

Framing

A moving average

Conservatism

48.

If the utility you derive from your next dollar of wealth increases by less than a loss of a dollar reduces it, you are exhibiting __________.

loss aversion

regret avoidance

mental accounting

framing bias

49.

In technical analysis, __________ is a value below which the market is relatively unlikely to fall.

book value

resistance level

support level

the Dow line

50.

A possible limit on arbitrage activity that may allow behavioral biases to persist is _______.

technical trends in prices

momentum effects

fundamental risk

trend reversals

51.

If you are not a contrarian, you consider a high put/call ratio to be a __________.

bearish signal

bullish signal

trend confirmation signal

signal to enter the options market

52.

outperforming; buying

outperforming; selling

underperforming; buying

underperforming; selling

53.

increased; bullish

increased; bearish

decreased; bullish

decreased; bearish

54.

-10,449,000

-167

167

10,449,000

55.

.90; bullish

.90; bearish

1.11; bullish

1.11; bearish

56.

An accumulation of cash by mutual funds may be viewed by technical traders as a __________ indicator.

bullish

neutral

bearish

trend reversal

57.

I and II only

II and III only

I, III, and IV only

I, II, III, and IV

58.

When technical analysts say a stock has good "relative strength," they mean that in the recent past __________.

it has performed well compared to its closest competitors

it has exceeded its own historical high

trading volume in the stock has exceeded the normal trading volume

it has outperformed the market index

59.

Technical traders view mutual fund investors as _________ market timers.

excellent

frequent

neutral

poor

60.

An important assumption underlying the use of technical analysis techniques is that ___________________.

security prices adjust rapidly to new information

security prices adjust gradually to new information

security dealers will provide enough liquidity to keep price changes relatively small

all investors have immediate and costless access to information

61.

If the put/call ratio increases, market contrarians may interpret this as what kind of signal?

Buy signal

Sell signal

Hold signal

This is not interpreted as a signal

62.

The tendency of investors to hold on to losing investments is called the ________.

overweighting effect

head-in-the-sand effect

disposition effect

prospector effect

63.

Which one of the following best describes fundamental risk?

A stock is overpriced, but your fund does not allow you to engage in short sales.

Your models indicate a stock is mispriced, but you are not sure if this is a real profit opportunity or a model input error.

You buy a stock that you believe is underpriced, and the underpricing persists for a long time, hurting your short-term results.

A stock is trading in two different markets at two different prices.

64.

The trin on day 2 is ___.

.72

1.04

.92

.55

65.

The confidence index on day 1 is _____.

.82

.89

.92

1.09

66.

The breadth on day 3 is _______.

-70

170

67.

The cumulative breadth for the first 2 days is ___.

-240

-50

110

250

68.

Cumulative breadth for the 4 days is ___, which is ___.

-140; bullish

-140; bearish

-300; bullish

-300; bearish

69.

From day 1 to day 4, the trin has ___ and is ___.

increased; bullish

increased; bearish

decreased; bullish

decreased; bearish

70.

From day 1 to day 4, the confidence index has _____. This is _____.

increased; bullish

decreased; bullish

increased; bearish

decreased; bearish

71.

I only

II only

I and III only

I, II, and III

72.

A major problem with technical trading strategies is that ________.

it is very difficult to identify a true trend before the fact

it is very difficult to identify the correct trend after the fact

it is so easy to identify trends that all investors quickly do so

Kondratieff showed that you can't identify trends without 48 to 60 years of data

73.

The Elliott wave theory gives a buy signal when you can identify a primary bull trend by identifying _________.

when the long-term direction of the market is positive

when the long-term direction of the market is negative

when the long-term direction of the market is stable

good stocks without regard to the long-term direction of the market

74.

loss aversion

mental accounting

overreaction

managerial overconfidence

75.

loss aversion

mental accounting

overreaction

winner's curse

76.

Identify the resistance-level stock price.

$40

$42

$44

$46

77.

Identify the support level stock price.

$40

$42

$44

$46

78.

Overconfidence

Loss aversion

Mental accounting

Calendar bias

79.

During a period when prices have been rising, the _________ will be _______ the current price.

relative strength index; declining with

relative strength index; declining faster than

moving average; above

moving average; below

80.

Framing bias

Excessive volatility

Loss aversion

Mental accounting

81.

The price of a stock fluctuates between $43 and $60. If the time frame referenced encompasses the primary trend, the $43 price may be considered the ___________.

intermediate trend level

minor trend level

resistance level

support level

82.

The moving average generates buy signal(s) _____.

on days 3, 11, and 15

on days 2 and 16

on days 5, 9, and 13

on no days

83.

The moving average generates sell signals _____.

on days 3, 11, and 15

on days 7, 15, and 18

on days 5, 9, and 13

on day 16

84.

congestion area

penetration point

resistance level

support level

85.

Trend analysts who follow bonds are most likely to monitor the ____________.

confidence index

odd-lot trading

short interest

trin statistic

86.

You find that the confidence index is down, the market breadth is up, and the trin ratio is down. In total, how many bullish signs do you have?

87.

You find that the trin ratio is up, the market breadth is down, and the market has closed below its 50-day moving average. In total, how many bearish signs do you have?

Student: ___________________________________________________________________________

The invoice price of a bond is the ______.

stated or flat price in a quote sheet plus accrued interest

stated or flat price in a quote sheet minus accrued interest

bid price

average of the bid and ask price

Sinking funds are commonly viewed as protecting the _______ of the bond.

issuer

underwriter

holder

dealer

A collateral trust bond is _______.

secured by other securities held by the firm

secured by equipment owned by the firm

secured by property owned by the firm

unsecured

A mortgage bond is _______.

secured by other securities held by the firm

secured by equipment owned by the firm

secured by property owned by the firm

unsecured

A debenture is _________.

secured by other securities held by the firm

secured by equipment owned by the firm

secured by property owned by the firm

unsecured

capital gain; capital loss

capital gain; capital gain

capital loss; capital gain

capital loss; capital loss

Floating-rate bonds have a __________ that is adjusted with current market interest rates.

maturity date

coupon payment date

coupon rate

dividend yield

Inflation-indexed Treasury securities are commonly called ____.

PIKs

CARs

TIPS

STRIPS

In regard to bonds, convexity relates to the _______.

shape of the bond price curve with respect to interest rates

shape of the yield curve with respect to maturity

slope of the yield curve with respect to liquidity premiums

size of the bid-ask spread

10.

Both bonds are examples of Eurobonds.

The Japanese bond is a Eurobond, and the U.S. bond is termed a foreign bond.

The U.S. bond is a Eurobond, and the Japanese bond is termed a foreign bond.

Neither bond is a Eurobond.

11.

The primary difference between Treasury notes and bonds is ________.

maturity at issue

default risk

coupon rate

tax status

12.

TIPS offer investors inflation protection by ______________ by the inflation rate each year.

increasing only the coupon rate

increasing only the par value

increasing both the par value and the coupon payment

increasing the promised yield to maturity

13.

You would typically find all but which one of the following in a bond contract?

A dividend restriction clause

A sinking fund clause

A requirement to subordinate any new debt issued

A price-earnings ratio

14.

To earn a high rating from the bond rating agencies, a company would want to have: I. A low times-interest-earned ratio II. A low debt-to-equity ratio III. A high quick ratio

I only

II and III only

I and III only

I, II, and III

15.

According to the liquidity preference theory of the term structure of interest rates, an increase in the yield on long-term corporate bonds versus short-term bonds could be due to _______.

declining liquidity premiums

an expectation of an upcoming recession

a decline in future inflation expectations

an increase in expected interest rate volatility

16.

__________ are examples of synthetically created zero-coupon bonds.

COLTS

OPOSSMS

STRIPS

ARMs

17.

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

callable

coupon

puttable

Treasury

18.

TIPS are an example of _______________.

Eurobonds

convertible bonds

indexed bonds

catastrophe bonds

19.

Bonds issued in the currency of the issuer's country but sold in other national markets are called _____________.

Eurobonds

Yankee bonds

Samurai bonds

foreign bonds

20.

$30

$33

$32.78

$30.90

21.

The bonds of Elbow Grease Dishwashing Company have received a rating of C by Moody's. The C rating indicates that the bonds are _________.

high grade

intermediate grade

investment grade

junk bonds

22.

Bonds rated _____ or better by Standard & Poor's are considered investment grade.

BBB

CCC

23.

Consider the liquidity preference theory of the term structure of interest rates. On average, one would expect investors to require _________.

a higher yield on short-term bonds than on long-term bonds

a higher yield on long-term bonds than on short-term bonds

the same yield on both short-term bonds and long-term bonds

none of these options (The liquidity preference theory cannot be used to make any of the other statements.)

24.

both bonds will increase in value but bond A will increase more than bond B

both bonds will increase in value but bond B will increase more than bond A

both bonds will decrease in value but bond A will decrease more than bond B

both bonds will decrease in value but bond B will decrease more than bond A

25.

You hold a subordinated debenture in a firm. In the event of bankruptcy you will be paid off before which one of the following?

Mortgage bonds

Senior debentures

Preferred stock

Equipment obligation bonds

26.

Bonds with coupon rates that fall when the general level of interest rates rise are called _____________.

asset-backed bonds

convertible bonds

inverse floaters

index bonds

27.

_______ bonds represent a novel way of obtaining insurance from capital markets against specified disasters.

Asset-backed bonds

TIPS

Catastrophe

Pay-in-kind

28.

The issuer of ________ bond may choose to pay interest either in cash or in additional bonds.

an asset-backed

a TIPS

a catastrophe

a pay-in-kind

29.

Everything else equal, the __________ the maturity of a bond and the __________ the coupon, the greater the sensitivity of the bond's price to interest rate changes.

longer; higher

longer; lower

shorter; higher

shorter; lower

30.

Which one of the following statements is correct?

Invoice price = Flat price - Accrued interest

Invoice price = Flat price + Accrued interest

Flat price = Invoice price + Accrued interest

Invoice price = Settlement price - Accrued interest

31.

A __________ bond gives the issuer an option to retire the bond before maturity at a specific price after a specific date.

callable

coupon

puttable

Treasury

32.

Which of the following possible provisions of a bond indenture is designed to ease the burden of principal repayment by spreading it out over several years?

Callable feature

Convertible feature

Subordination clause

Sinking fund

33.

Serial bonds are associated with _________.

staggered maturity dates

collateral

coupon payment dates

conversion features

34.

In an era of particularly low interest rates, which of the following bonds is most likely to be called?

Zero-coupon bonds

Coupon bonds selling at a discount

Coupon bonds selling at a premium

Floating-rate bonds

35.

increase

decrease

not change

change in an unpredictable manner

36.

$1,000

$884

$933

$980

37.

$50

$190

$200

$240

38.

A coupon bond that pays interest of 4% annually has a par value of $1,000, matures in 5 years, and is selling today at $785. The actual yield to maturity on this bond is _________.

7.2%

8.8%

9.1%

9.6%

39.

7.23%

8.12%

9.45%

40.

A coupon bond that pays interest of $60 annually has a par value of $1,000, matures in 5 years, and is selling today at a $75.25 discount from par value. The current yield on this bond is _________.

6.49%

6.73%

41.

6.58%

7.2%

42.

$1,000

$1,062.81

$1,081.82

$1,100.03

43.

$856.04

$891.86

$926.47

$1,000

44.

$1,140

$1,170

$1,180

$1,200

45.

.4%; .3%

.4%; .5%

.5%; .5%

.5%; .8%

46.

A zero-coupon bond has a yield to maturity of 5% and a par value of $1,000. If the bond matures in 16 years, it should sell for a price of __________ today.

$458.11

$641.11

$789.11

$1,100.11

47.

Yields on municipal bonds are typically ___________ yields on corporate bonds of similar risk and time to maturity.

lower than

slightly higher than

identical to

twice as high as

48.

5.5%

7.6%

8.9%

49.

Analysis of bond returns over a multiyear horizon based on forecasts of the bond's yield to maturity and reinvestment rate of coupons is called ______.

multiyear analysis

horizon analysis

maturity analysis

reinvestment analysis

50.

$1,000 par value zero-coupon bonds (ignore liquidity premiums) The expected 1-year interest rate 1 year from now should be about _________.

7.5 %

9.02%

10.08%

51.

$1,000 par value zero-coupon bonds (ignore liquidity premiums) One year from now bond C should sell for ________ (to the nearest dollar).

$857

$842

$835

$821

52.

$1,000 par value zero-coupon bonds (ignore liquidity premiums) The expected 2-year interest rate 3 years from now should be _________.

9.55%

11.74%

14.89%

13.73%

53.

The __________ of a bond is computed as the ratio of the annual coupon payment to the market price.

nominal yield

current yield

yield to maturity

yield to call

54.

.72%

1.85%

2.58%

3.42%

55.

Consider the following $1,000 par value zero-coupon bonds: The expected 1-year interest rate 2 years from now should be _________.

10%

56.

Which of the following bonds would most likely sell at the lowest yield?

A callable debenture

A puttable mortgage bond

A callable mortgage bond

A puttable debenture

57.

A 1% decline in yield will have the least effect on the price of a bond with a _________.

10-year maturity, selling at 80

10-year maturity, selling at 100

20-year maturity, selling at 80

20-year maturity, selling at 100

58.

Consider the following $1,000 par value zero-coupon bonds: The expected 1-year interest rate 3 years from now should be _________.

10%

59.

Consider the following $1,000 par value zero-coupon bonds: The expected 1-year interest rate 4 years from now should be _________.

16%

18%

20%

22%

60.

You can be sure that a bond will sell at a premium to par when _________.

its coupon rate is greater than its yield to maturity

its coupon rate is less than its yield to maturity

its coupon rate is equal to its yield to maturity

its coupon rate is less than its conversion value

61.

6.72%

9.17%

4.49%

8.98%

62.

Consider a 7-year bond with a 9% coupon and a yield to maturity of 12%. If interest rates remain constant, 1 year from now the price of this bond will be _________.

higher

lower

the same

indeterminate

63.

Under the pure expectations hypothesis and constant real interest rates for different maturities, an upward-sloping yield curve would indicate __________________.

expected increases in inflation over time

expected decreases in inflation over time

the presence of a liquidity premium

that the equilibrium interest rate in the short-term part of the market is lower than the equilibrium interest rate in the long-term part of the market

64.

I only

II only

I and II only

I, II, and III

65.

Yields on municipal bonds are generally lower than yields on similar corporate bonds because of differences in _________.

marketability

risk

taxation

call protection

66.

Assuming semiannual compounding, a 20-year zero coupon bond with a par value of $1,000 and a required return of 12% would be priced at _________.

$97.22

$104.49

$364.08

$732.14

67.

I and II only

I and III only

II and III only

I, II, and III

68.

A 6% coupon U.S. Treasury note pays interest on May 31 and November 30 and is traded for settlement on August 10. The accrued interest on the $100,000 face amount of this note is _________.

$581.97

$1,163.93

$2,327.87

$3,000

69.

The yield to maturity of a 10-year zero-coupon bond with a par value of $1,000 and a market price of $625 is _____.

4.8%

6.1%

7.7%

10.4%

70.

5.15%

8.15%

71.

8.15%

7.15%

72.

The price of the Wildwood bond would decline by more than the price of the Asbury bond.

The price of the Wildwood bond would decline by less than the price of the Asbury bond.

The price of the Wildwood bond would increase by more than the price of the Asbury bond.

The price of the Wildwood bond would increase by less than the price of the Asbury bond.

73.

On May 1, 2007, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds. If interest rates are expected to rise, then Joe Hill should ____.

prefer the Wildwood bond to the Asbury bond

prefer the Asbury bond to the Wildwood bond

be indifferent between the Wildwood bond and the Asbury bond

The answer cannot be determined from the information given.

74.

On May 1, 2007, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds. If the volatility of interest rates is expected to increase, then Joe Hill should __.

prefer the Wildwood bond to the Asbury bond

prefer the Asbury bond to the Wildwood bond

be indifferent between the Wildwood bond and the Asbury bond

The answer cannot be determined from the information given.

75.

One-, two-, and three-year maturity, default-free, zero-coupon bonds have yields to maturity of 7%, 8%, and 9%, respectively. What is the implied 1-year forward rate 1 year from today?

2.07%

8.03%

9.01%

11.12%

76.

If the quote for a Treasury bond is listed in the newspaper as 98:09 bid, 98:13 ask, the actual price at which you can purchase this bond given a $10,000 par value is _____________.

$9,828.12

$9,809.38

$9,840.62

$9,813.42

77.

If the price of a $10,000 par Treasury bond is $10,237.50, the quote would be listed in the newspaper as ________.

102:10

102:11

102:12

102:13

78.

A bond pays a semiannual coupon, and the last coupon was paid 61 days ago. If the annual coupon payment is $75, what is the accrued interest? (Assume 182 days in the 6-month period.)

$13.21

$12.57

$15.44

$16.32

79.

A bond has a flat price of $985, and it pays an annual coupon. The last coupon payment was made 90 days ago. What is the invoice price if the annual coupon is $69?

$999.55

$1,002.01

$1,007.45

$1,012.13

80.

If the quote for a Treasury bond is listed in the newspaper as 99:08 bid, 99:11 ask, the actual price at which you can sell this bond given a $10,000 par value is _____________.

$9,828.12

$9,925

$9,934.37

$9,955.43

81.

A bond has a 5% coupon rate. The coupon is paid semiannually, and the last coupon was paid 35 days ago. If the bond has a par value of $1,000, what is the accrued interest?

$4.81

$14.24

$25

$50

82.

1.14%

3.45%

4.59%

8.04%

83.

10.4%

9.57%

7.45%

8.78%

84.

You buy an 8-year $1,000 par value bond today that has a 6% yield and a 6% annual payment coupon. In 1 year promised yields have risen to 7%. Your 1-year holding-period return was ___.

.61%

-5.39%

1.28%

-3.25%

85.

$4.27

$9.38

$33.51

86.

$9.10

$4.25

$7.68

$5.20

87.

An investor pays $989.40 for a bond. The bond has an annual coupon rate of 4.8%. What is the current yield on this bond?

4.8%

4.85%

9.6%

9.7%

88.

If the coupon rate on a bond is 4.5% and the bond is selling at a premium, which of the following is the most likely yield to maturity on the bond?

4.3%

4.5%

5.2%

5.5%

89.

The price of a bond (with par value of $1,000) at the beginning of a period is $980 and at the end of the period is $975. What is the holding-period return if the annual coupon rate is 4.5%?

4.08%

4.5%

5.1%

5.6%

90.

Increased

Decreased

Stayed the same

The answer cannot be determined from the information given.

91.

The ___________ is the document that defines the contract between the bond issuer and the bondholder.

indenture

covenant agreement

trustee agreement

collateral statement

Student: ___________________________________________________________________________

A top-down analysis of a firm's prospects starts with an analysis of the ____.

firm's position in its industry

U.S. economy or even the global economy

industry

specific firm under consideration

178%

79.5%

265.4%

36%

An increase in the value of the yen against the U.S. dollar can cause the Japanese automaker Toyota to either _____________ on its U.S. sales.

lose market share or reduce its profit margin

gain market share or reduce its profit margin

lose market share or increase its profit margin

gain market share or increase its profit margin

a stalwart

slow growth

a star

an asset play

Between 1999 and 2010, the purchasing power of the U.S. dollar increased relative to the purchasing power of _______.

the United Kingdom

the Euro

Switzerland

Canada

If you believe the economy is about to go into a recession, you might change your asset allocation by selling _______ and buying ______.

growth stocks; long-term bonds

long-term bonds; growth stocks

defensive stocks; growth stocks

defensive stocks; long-term bonds

The yield curve spread between the 10-year T-bond yield and the federal funds rate is a _______ economic indicator.

leading

lagging

coincident

mixed

The Conference Board's Consumer Confidence Index is released ______.

daily

weekly

monthly

quarterly

You can earn abnormal returns on your investments via macro forecasting ______.

if you can forecast the economy at all

if you can forecast the economy as well as the average forecaster

if you can forecast the economy better than the average forecaster

only if you can forecast the economy with perfect accuracy

10.

Which of the following industries would most analysts classify as mature?

Internet service providers

Biotechnology

Wireless communication

Auto manufacturing

11.

Which one of the following stocks represents industries with below-average sensitivity to the state of the economy?

Financials

Technology

Food and beverage

Cyclicals

12.

The most widely used monetary policy tool is _________.

altering the discount rate

altering reserve requirements

open market operations

increasing the budget deficit

13.

Which one of the following is the ratio of actual output from factories to potential output from factories?

Capacity utilizationrate

Participation rate

Durable goods orders rate

Industrial production rate

14.

According to __________ economists, the growth of the U.S. economy in the 1980s can be attributed to lower marginal tax rates, which improved the incentives for people to work.

Keynesian

monetarist

supply-side

demand-side

15.

The market value of all goods and services produced during a given time period is called ______.

GDP

industrial production

capacity utilization

factory orders

16.

A big increase in government spending is an example of a _________.

positive demand shock

positive supply shock

negative demand shock

negative supply shock

17.

GDP refers to _________.

the amount of personal disposable income in the economy

the difference between government spending and government revenues

the total manufacturing output in the economy

the total production of goods and services in the economy

18.

Portfolio manager Peter Lynch would classify Coca-Cola as _________.

an asset play

a slow grower

a stalwart

a turnaround

19.

Attempting to forecast future earnings and dividends is consistent with which of the following approaches to securities analysis?

Technical analysis

Fundamental analysis

Both technical analysis and fundamental analysis

Indexing

20.

The analysis of the determinants of firm value is called _____________.

fundamental analysis

technical analysis

momentum analysis

indexing

21.

Which of the following companies is the best example of a turnaround?

Coca-Cola

Microsoft

ExxonMobil

Kmart

22.

Inflation is caused by ________________.

unions

rapid growth of the money supply

excess supply

low rates of capacity utilization

23.

Everything else equal, if you expect a larger interest rate increase than other market participants, you should _________.

buy long-term bonds

buy short-term bonds

buy common stocks

buy preferred stocks

24.

To obtain an approximate estimate of the real interest rate, one must _________ the __________ the nominal risk-free rate.

add; default premium to

subtract; default premium from

add; expected inflation to

subtract; expected inflation from

25.

Which of the following would not be considered a supply shock?

A change in the price of imported oil

Frost damage to the orange crop

A change in the level of education of the average worker

An increase in the level of government spending

26.

If economic conditions are such that very slow growth is expected in the foreseeable future, one would want to invest in industries with __________ sensitivity to economic conditions.

below-average

average

above-average

Since growth is expected to be slow, sensitivity to economic conditions is not an issue.

27.

Which of the following is not an example of fiscal policy?

Social Security spending

Medicare spending

Fed purchases of Treasury securities

Changes in the tax rate

28.

Supply-side economics tends to focus on _______________.

government spending

price controls

monetary policy

increasing productive capacity

29.

Which one of the following describes the amount by which government spending exceeds government revenues?

Balance of trade

Budget deficit

Gross domestic product

Output gap

30.

Which one of the following is probably the most direct and immediate way to stimulate or slow the economy, although it is not very useful for fine-tuning economic performance?

Fiscal policy

Monetary policy

Supply-side policy

Rising minimum wages

31.

In macroeconomic terms, an increase in the price of imported oil or a decrease in the availability of oil is an example of a _________.

demand shock

supply shock

monetary shock

refinery shock

32.

______________ in interest rates are associated with stock market declines.

Anticipated increases

Unanticipated increases

Anticipated decreases

Unanticipated decreases

33.

The average duration of unemployment is _________.

a leading economic indicator

a coincidental economic indicator

a lagging economic indicator

both a coincidental indicator and a lagging indicator

34.

The ratio of the purchasing power of two economies is termed the _______.

balance of trade

real exchange rate

real interest rate

nominal exchange rate

35.

II only

I and II only

I and III only

I, II, and III

36.

Which of the following affects a firm's sensitivity of its earnings to the business cycle? I. Financial leverage II. Operating leverage III. Type of product

II only

I and II only

I and III only

I, II, and III

37.

Which of the following describes the rate at which your ability to purchase grows while you hold an interest-earning investment?

The nominal exchange rate

The nominal interest rate

The real exchange rate

The real interest rate

38.

An example of a highly cyclical industry is the _________.

automobile industry

tobacco industry

pharmaceutical industry

utility industry

39.

The stock price index and contracts and orders for nondefense capital goods are _________.

leading economic indicators

coincidental economic indicators

lagging economic indicators

leading and coincidental indicators, respectively

40.

Which one of the following is not a demand shock?

Increase in government spending

Increases in the money supply

Reductions in consumer spending

Improvements in education of U.S. workers

41.

Which one of the following is not a U.S. supply shock?

Unions force an increase in national wage rates.

The oil supply from the Middle East drops 30%.

Extended droughts reduce U.S. food production 25%.

Chinese purchases of U.S. exports increase.

42.

Pharmaceuticals, food, and other necessities would be good performers during the ____ stage of the business cycle.

peak

contraction

trough

expansion

43.

Capital goods industries such as industrial equipment, transportation, and construction would be good investments during the _____ stage of the business cycle.

peak

contraction

trough

expansion

44.

If you are going to earn abnormal returns based on your macroeconomic analysis, it will most likely have to be because __________.

you have more information than others

you are a better analyst than others

you have the same information as others

you are an equally good analyst as others

45.

If the economy is going into a recession, a good industry to invest in would be the __________ industry.

automobile

banking

construction

medical services

46.

Members of the Board of Governors of the Federal Reserve System are appointed by ____________ to serve _____________ terms.

the Senate; 10-year

the House of Representatives; 8-year

the President; 14-year

the Secretary of the Treasury; 6-year

47.

A firm in the early stages of its industry life cycle will likely have _________.

low dividend payout rates

low rates of investment

low rates of return on investment

low R&D spending

48.

Which of the following describes the percentage of the total labor force that has yet to find work?

The capacity utilization rate

The participation rate

The unemployment rate

The natural rate

49.

Which of the following is the rate at which the general level of prices for goods and services is rising?

The exchange rate

The gross domestic product growth rate

The inflation rate

The real interest rate

50.

bottom-up

outside-inside

top-down

upside-down

51.

Assume that the Federal Reserve increases the money supply. This will cause: I. Interest rates to decrease II. Consumption and investment to decrease III. Inflation to fall

I only

I and II only

II and III only

I, II, and III

52.

The discount rate is the ________.

interest rate banks charge each other for overnight loans of deposits on reserve at the Fed

interest rate the Fed charges commercial banks on short-term loans

interest rate that the U.S. Treasury pays on its bills

interest rate that banks charge their best corporate customers

53.

If the currency of your country is depreciating, this should __________ exports and __________ imports.

stimulate; stimulate

stimulate; discourage

discourage; stimulate

discourage; discourage

54.

If interest rates increase, business investment expenditures are likely to __________ and consumer durable expenditures are likely to _________.

increase; increase

increase; decrease

decrease; increase

decrease; decrease

55.

Increases in the money supply will cause demand for investment and consumption goods to __________ in the short run and may cause prices to __________ in the long run.

increase; increase

increase; decrease

decrease; increase

decrease; decrease

56.

The nominal interest rate is 6%. The inflation rate is 3%. The exact real interest rate must be _________.

2.91%

3.85%

1.45%

2.12%

57.

The nominal interest rate is 10%. The real interest rate is 4%. The inflation rate must be _________.

-6%

5.77%

14.4%

58.

Order the following stages in the industry life cycle from the earliest to latest to occur after the start-up phase: I. Maturity II. Relative decline III. Consolidation

III, I, II

I, III, II

III, II, I

I, II, III

59.

An investment strategy that entails shifting the portfolio into industry sectors that are expected to outperform others based on macroeconomic forecasts is termed ______________.

sector rotation

contraction/expansion analysis

life-cycle analysis

business-cycle shifting

60.

$90,000

$180,000

$270,000

61.

$90,000

$210,000

$300,000

$630,000

62.

The fed funds rate is the __________.

interest rate that banks charge their best corporate customers

interest rate banks charge each other for overnight loans of deposits on reserve at the Fed

interest rate the Fed charges commercial banks on short-term loans

interest rate that the U.S. Treasury pays on its bills

63.

300,000

400,000

500,000

600,000

64.

The goal of supply-side policies is to _______.

increase government involvement in the economy

create an environment where workers and owners of capital have the maximum incentive and ability to produce and develop goods

maximize tax revenues of the government

focus more on wealth redistribution policies

65.

start-up

consolidation

maturity

relative decline

66.

An industry analysis for manufacturers of a small personal care gadget observed the following characteristics: 1. Industry sales have grown at 15%-20% per year in recent years and are expected to grow at 10%-15% per year over the next 3 years, still well above the economic growth rate. 2. Some U.S. manufacturers are attempting to enter fast-growing non-U.S. markets, which remain largely unexploited. 3. Some manufacturers have created a new niche in the industry by selling directly to customers through mail order. Sales for this industry segment are growing at 40% per year. 4. The current penetration rate in the United States is 60% of households and will be difficult to increase. 5. Manufacturers compete fiercely on the basis of price, and price wars within the industry are common. 6. Some manufacturers are able to develop new, unexploited niche markets in the United States based on company reputation, quality, and service. 7. Several manufacturers have recently merged, and it is expected that consolidation in the industry will increase. 8. New manufacturers continue to enter the market. Characteristics _______ would be typical of an industry that is in the start-up stage.

4 and 7

1 and 4

2 and 5

none of these options

67.

An industry analysis for manufacturers of a small personal care gadget observed the following characteristics: 1. Industry sales have grown at 15%-20% per year in recent years and are expected to grow at 10%-15% per year over the next 3 years, still well above the economic growth rate. 2. Some U.S. manufacturers are attempting to enter fast-growing non-U.S. markets, which remain largely unexploited. 3. Some manufacturers have created a new niche in the industry by selling directly to customers through mail order. Sales for this industry segment are growing at 40% per year. 4. The current penetration rate in the United States is 60% of households and will be difficult to increase. 5. Manufacturers compete fiercely on the basis of price, and price wars within the industry are common. 6. Some manufacturers are able to develop new, unexploited niche markets in the United States based on company reputation, quality, and service. 7. Several manufacturers have recently merged, and it is expected that consolidation in the industry will increase. 8. New manufacturers continue to enter the market. Characteristics ____ would be typical of an industry that is in the consolidation stage.

6 and 7

1 and 4

5 and 6

2 and 8

68.

An industry analysis for manufacturers of a small personal care gadget observed the following characteristics: 1. Industry sales have grown at 15%-20% per year in recent years and are expected to grow at 10%-15% per year over the next 3 years, still well above the economic growth rate. 2. Some U.S. manufacturers are attempting to enter fast-growing non-U.S. markets, which remain largely unexploited. 3. Some manufacturers have created a new niche in the industry by selling directly to customers through mail order. Sales for this industry segment are growing at 40% per year. 4. The current penetration rate in the United States is 60% of households and will be difficult to increase. 5. Manufacturers compete fiercely on the basis of price, and price wars within the industry are common. 6. Some manufacturers are able to develop new, unexploited niche markets in the United States based on company reputation, quality, and service. 7. Several manufacturers have recently merged, and it is expected that consolidation in the industry will increase. 8. New manufacturers continue to enter the market. Which of the characteristics would be typical of an industry that is in the maturity stage?

1, 2, and 3

4 and 5

6, 7, and 8

all of these options

69.

Countercyclical fiscal policy is best described by which of the following statements?

Government surpluses are planned during economic booms, and deficits are planned during economic recessions.

The annual budget should always be balanced.

Deficits should always equal surpluses.

Government deficits are planned during economic booms, and surpluses are planned during economic recessions.

70.

A supply-side economist would likely agree with which of the following statements?

Real output and aggregate employment are primarily determined by aggregate demand.

Real income will rise when government expenditures and tax rates increase.

Real output and aggregate employment are primarily determined by tax rates.

Increasing the money supply will increase real output without causing higher inflation.

71.

Which of the following actions should the central bank take if monetary authorities want to reduce the supply of money to slow the rate of inflation?

Sell government bonds, reducing money supply, increasing interest rates, and slowing aggregate demand.

Buy government bonds, reducing money supply, increasing interest rates, and slowing aggregate demand.

Decrease the discount rate, lowering interest rates and causing both costs and prices to fall.

Increase taxes, reducing costs and causing prices to fall.

72.

The decline in the value of the dollar relative to the yen will have what impact on the purchase of U.S. goods in Japan?

U.S. goods will increase in cost, and Japan will import more.

U.S. goods will increase in cost, and Japan will import less.

U.S. goods will decrease in cost, and Japan will import more.

U.S. goods will increase in cost, and Japan will export less.

73.

Which of the following are examples of cyclical industries? I. Maytag II. Computer chip manufacturers III. Kellogg's Frosted Flakes IV. Pfizer

I and II only

I, II, and III only

II, III, and IV only

I, II, III, and IV

74.

You would expect the beta of cyclical industries to be ______ and the beta of defensive industries to be ______.

greater than 1; less than 1

less than 1; less than 1

less than 1; greater than 1

greater than 1; greater than 1

75.

What economic variable is most closely associated with increasing corporate profits?

Exchange rates

Inflation

Gross domestic product

Budget deficits

76.

Higher interest rates due to the new government borrowing

Inflation resulting from more government purchases

A negative supply shock

Shortage of investment due to new accounts

77.

An expanding economy requires more workers. If the supply of workers becomes inadequate to meet the demand, what is the likely impact on the economy?

An economic slowdown is likely

Employment trends will reverse and unemployment will occur

Government deficits will result from capacity utilization

Inflation may result from upward wage pressures

78.

An expanding economy puts stress on the manufacturing ability of a company. When a firm turns business down during periods of economic expansion, a problem exists in the area of ____________.

asset allocation

capacity utilization

employment management

strategic planning

79.

The expansion of the money supply at a rate that exceeds the increase in goods and services will likely result in ___________.

expanding economy

increased inflation

interest rate declines

lower GDP

80.

The supply of funds in the economy is controlled primarily by ____________.

the Federal Reserve System

Congress

money center banks

the Treasury department

81.

The classification system used to classify firms into industries is now called the _____ code.

SIC

NAICS

ISO 57

ISM

82.

During 2004 China increased its use of global oil by 40%. This followed a 100% increase during the previous 5 years. How do economists refer to this kind of economic event?

Demand shock

Equilibrium event

Expanding commodity event

Supply shock

83.

Whenever OPEC attempts to influence the price of oil by significantly altering production, economists refer to this type of event as a ______________.

demand shock

equilibrium event

expanding commodity event

supply shock

84.

Items that are ____________ and product purchases for which ________ is not important tend to be less cyclical in nature.

necessities; income

luxuries; leverage

discretionary goods; time of purchase

produced with high fixed costs; entertainment

85.

Cash cows are typically found in the _________ stage of the industry life cycle.

start-up

consolidation

maturity

relative decline

86.

At what point in the industry life cycle are inefficiencies in competitors most likely to be removed?

Start-up stage

Consolidation stage

Maturity stage

Relative decline stage

87.

Stalwarts are typically found in the _________ stage of the industry life cycle.

start-up

consolidation

maturity

relative decline

88.

Large-growth companies generally emerge in the __________ stage.

start-up

consolidation

maturity

relative decline

89.

I and II only

I, II, and III only

II, III, and IV only

III and IV only

Student: ___________________________________________________________________________

The accounting measure of a firm's equity value generated by applying accounting principles to asset and liability acquisitions is called ________.

book value

market value

liquidation value

Tobin's q

The price-to-sales ratio is probably most useful for firms in which phase of the industry life cycle?

Start-up phase

Consolidation

Maturity

Relative decline

If a firm increases its plowback ratio, this will probably result in _______ P/E ratio.

a higher

a lower

an unchanged

The answer cannot be determined from the information given.

The value of Internet companies is based primarily on _____.

current profits

Tobin's q

growth opportunities

replacement cost

New-economy companies generally have higher _______ than old-economy companies.

book value per share

P/E multiples

profits

asset values

P/E ratios tend to be _______ when inflation is ______.

higher; higher

lower; lower

higher; lower

They are unrelated.

Which one of the following statements about market and book value is correct?

All firms sell at a market-to-book ratio above 1.

All firms sell at a market-to-book ratio greater than or equal to 1.

All firms sell at a market-to-book ratio below 1.

Most firms have a market-to-book ratio above 1, but not all.

Earnings yields tend to _______ when Treasury yields fall.

fall

rise

remain unchanged

fluctuate wildly

Which one of the following is a common term for the market consensus value of the required return on a stock?

Dividend payout ratio

Intrinsic value

Market capitalization rate

Plowback ratio

10.

Which one of the following is equal to the ratio of common shareholders' equity to common shares outstanding?

Book value per share

Liquidation value per share

Market value per share

Tobin's q

11.

1.83

1.5

1.35

1.46

12.

If a stock is correctly priced, then you know that ____________.

the dividend payout ratio is optimal

the stock's required return is equal to the growth rate in earnings and dividends

the sum of the stock's expected capital gain and dividend yield is equal to the stock's required rate of return

the present value of growth opportunities is equal to the value of assets in place

13.

A stock has an intrinsic value of $15 and an actual stock price of $13.50. You know that this stock ________.

has a Tobin's q value < 1

will generate a positive alpha

has an expected return less than its required return

has a beta > 1

14.

Bill will be willing to pay the most for the stock because he will get his money back in 1 year when he sells.

Jim should be willing to pay three times as much for the stock as Bill will pay because his expected holding period is three times as long as Bill's.

Shelly should be willing to pay the most for the stock because she will hold it the longest and hence will get the most dividends.

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

15.

I only

I and II only

II and III only

I, II, and III

16.

A firm cuts its dividend payout ratio. As a result, you know that the firm's _______.

return on assets will increase

earnings retention ratio will increase

earnings growth rate will fall

stock price will fall

17.

__________ is the amount of money per common share that could be realized by breaking up the firm, selling its assets, repaying its debt, and distributing the remainder to shareholders.

Book value per share

Liquidation value per share

Market value per share

Tobin's q

18.

An underpriced stock provides an expected return that is ____________ the required return based on the capital asset pricing model (CAPM).

less than

equal to

greater than

greater than or equal to

19.

100%

between 0% and 50%

between 50% and 100%

20.

The constant-growth dividend discount model (DDM) can be used only when the ___________.

growth rate is less than or equal to the required return

growth rate is greater than or equal to the required return

growth rate is less than the required return

growth rate is greater than the required return

21.

-10%

-20%

-25%

-33%

22.

will be higher than the intrinsic value of stock B

will be the same as the intrinsic value of stock B

will be less than the intrinsic value of stock B

The answer cannot be determined from the information given.

23.

will be higher than the intrinsic value of stock B

will be the same as the intrinsic value of stock B

will be less than the intrinsic value of stock B

The answer cannot be determined from the information given.

24.

will be higher than the intrinsic value of stock B

will be the same as the intrinsic value of stock B

will be less than the intrinsic value of stock B

The answer cannot be determined from the information given.

25.

$31.25

$32.37

$38.47

$41.32

26.

8.33

12.5

19.23

24.15

27.

7.14

14.29

16.67

22.22

28.

$16.67

$25

$37.50

$40.83

29.

.5%

1.5%

30.

Gagliardi Way Corporation has an expected ROE of 15%. If it pays out 30% of its earnings as dividends, its dividend growth rate will be _____.

4.5%

10.5%

15%

30%

31.

$13.50

$45.50

$91

$114.29

32.

Brevik Builders has an expected ROE of 25%. Its dividend growth rate will be __________ if it follows a policy of paying 30% of earnings in the form of dividends.

15%

17.5%

45%

33.

$25

$16.87

$19.24

$20.99

34.

$1.12

$1.44

$2.40

$5.60

35.

$20.93

$69.77

$128.57

$150

36.

12%

14%

18%

37.

$20

$70

$90

$115

38.

$25

$50

$75

$100

39.

$25

$50

$83.33

$208

40.

-$6.33

$20.34

$26.67

41.

Firm A is high-risk, and Firm B is low-risk. Everything else equal, which firm would you expect to have a higher P/E ratio?

Firm A

Firm B

Both would have the same P/E if they were in the same industry.

There is not necessarily any linkage between risk and P/E ratios.

42.

Firms with higher expected growth rates tend to have P/E ratios that are ___________ the P/E ratios of firms with lower expected growth rates.

higher than

equal to

lower than

There is not necessarily any linkage between risk and P/E ratios.

43.

Value stocks are more likely to have a PEG ratio _____.

less than 1

equal to 1

greater than 1

less than zero

44.

Generally speaking, as a firm progresses through the industry life cycle, you would expect the PVGO to ________ as a percentage of share price.

increase

decrease

stay the same

No typical pattern can be expected.

45.

1.4

46.

10.8%

15.6%

16.8%

47.

$24.29

$27.39

$31.13

$34.52

48.

7.25%

10.25%

14.75%

21%

49.

17.65

37.50

50.

Generally speaking, the higher a firm's ROA, the _________ the dividend payout ratio and the _________ the firm's growth rate of earnings.

higher; lower

higher; higher

lower; lower

lower; higher

51.

$10

$22.73

$27.78

$41.67

52.

53.

$50

$100

$150

$200

54.

$63.80

$65.13

$67.95

$85.60

55.

$13.07

$13.58

$18.25

$18.78

56.

A firm's earnings per share increased from $10 to $12, its dividends increased from $4 to $4.40, and its share price increased from $80 to $100. Given this information, it follows that _________.

the stock experienced a drop in its P/E ratio

the company had a decrease in its dividend payout ratio

both earnings and share price increased by 20%

the required rate of return increased

57.

Assuming all other factors remain unchanged, __________ would increase a firm's price-earnings ratio.

an increase in the dividend payout ratio

a reduction in investor risk aversion

an expected increase in the level of inflation

an increase in the yield on Treasury bills

58.

A company with an expected earnings growth rate which is greater than that of the typical company in the same industry most likely has _________________.

a dividend yield which is greater than that of the typical company

a dividend yield which is less than that of the typical company

less risk than the typical company

less sensitivity to market trends than the typical company

59.

Everything else equal, which variable is negatively related to the intrinsic value of a company?

60.

$26.67

$35.19

$42.94

$59.89

61.

A firm has PVGO of 0 and a market capitalization rate of 12%. What is the firm's P/E ratio?

8.33

10.25

18.55

62.

A firm has an earnings retention ratio of 40%. The stock has a market capitalization rate of 15% and an ROE of 18%. What is the stock's P/E ratio?

12.82

7.69

8.33

9.46

63.

$17.78

$20

$40

None of these options

64.

10%

20%

None of these options

65.

A stock is priced at $45 per share. The stock has earnings per share of $3 and a market capitalization rate of 14%. What is the stock's PVGO?

$23.57

$15

$19.78

$21.34

66.

A firm increases its dividend plowback ratio. All else equal, you know that _____________.

earnings growth will increase and the stock's P/E will increase

earnings growth will decrease and the stock's P/E will increase

earnings growth will increase and the stock's P/E will decrease

earnings growth will increase and the stock's P/E may or may not increase

67.

1.5

1.25

1.1

68.

$25

$34.29

$42.86

$45.67

69.

8.33

11.43

14.29

15.25

70.

$8.57

$9.29

$14.29

$16.29

71.

$53.96

$44.95

$41.68

$39.76

72.

The EBIT of a firm is $300, the tax rate is 35%, the depreciation is $20, capital expenditures are $60, and the increase in net working capital is $30. What is the free cash flow to the firm?

$85

$125

$185

$305

73.

$57

$65

$75

$95

74.

$1 billion

$2 billion

$3 billion

$4 billion

75.

If a firm has a free cash flow equal to $50 million and that cash flow is expected to grow at 3% forever, what is the total firm value given a WACC of 9.5%?

$679.81 million

$715.54 million

$769.23 million

$803.03 million

76.

$405.6 million

$454.2 million

$505.8 million

$553.5 million

77.

$269 million

$296 million

$305 million

$327 million

78.

$2,168 billion

$2,445 billion

$2,565 billion

$2,998 billion

79.

$1,950 billion

$2,497 billion

$2,585 billion

$3,098 billion

80.

I only

I and II only

II and III only

I, II, and III

81.

A firm is expected to produce earnings next year of $3 per share. It plans to reinvest 25% of its earnings at 20%. If the cost of equity is 11%, what should be the value of the stock?

$27.27

$37.50

$66.67

$70

82.

Next year's earnings are estimated to be $5. The company plans to reinvest 20% of its earnings at 15%. If the cost of equity is 9%, what is the present value of growth opportunities?

$9.09

$10.10

$11.11

$12.21

83.

Next year's earnings are estimated to be $6. The company plans to reinvest 33% of its earnings at 12%. If the cost of equity is 8%, what is the present value of growth opportunities?

$24.50

$44.44

$75

84.

92%

87%

77%

64%

85.

27 years

37 years

55 years

75 years

86.

In what industry are investors likely to use the dividend discount model and arrive at a price close to the observed market price?

Import/export trade

Software

Telecommunications

Utility

87.

Estimates of a stock's intrinsic value calculated with the free cash flow methodology depend most critically on _______.

the terminal value used

whether one uses FCFF or FCFE

the time period used to estimate the cash flows

whether the firm is currently paying dividends

88.

The greatest value to an analyst from calculating a stock's intrinsic value is _______.

how easy it is to come up with accurate model inputs

the precision of the value estimate

how the process forces analysts to understand the critical variables that have the greatest impact on value

how all the different models typically yield identical value results

89.

Which of the following valuation measures is often used to compare firms that have no earnings?

Price-to-book ratio

P/E ratio

Price-to-cash-flow ratio

Price-to-sales ratio

Student: ___________________________________________________________________________

Which of the following assets is most liquid?

Cash equivalents

Receivables

Inventories

Plant and equipment

Cost of goods sold refers to ___________.

direct costs attributable to producing the product sold by the firm

salaries, advertising, and selling expenses

payments to the firm's creditors

payments to federal and local governments

Many observers believe that firms "manage" their income statements to _______.

minimize taxes over time

maximize expenditures

smooth their earnings over time

generate level sales

Depreciation expense is in what broad category of expenditures?

Operating expenses

General and administrative expenses

Debt interest expense

Tax expenditures

$175 million

$155 million

$120 million

$55 million

One of the biggest impediments to a global capital market has been _________.

volatile exchange rates

the lack of common accounting standards

lower disclosure standards in the United States than abroad

the lack of transparent reporting standards across the EU

Benjamin Graham thought that the benefits from detailed analysis of a firm's financial statements had _________ over his long professional life.

increased greatly

increased slightly

remained constant

decreased

If the interest rate on debt is higher than the ROA, then a firm's ROE will _________.

decrease

increase

not change

change but in an indeterminable manner

Which of the following is not one of the three key financial statements available to investors in publicly traded firms?

Income statement

Balance sheet

Statement of operating earnings

Statement of cash flows

10.

Increased $138 million

Decreased $138 million

Increased $836 million

Decreased $836 million

11.

What must cash flow from financing have been in 2008 for Interceptors, Inc.?

$28

$30

$33

12.

I only

II and III only

II only

I and II only

13.

Common-size balance sheets are prepared by dividing all quantities by ____________.

total assets

total liabilities

shareholders' equity

fixed assets

14.

Operating ROA is calculated as __________, while ROE is calculated as _________.

EBIT/Total assets; Net profit/Total assets

Net profit/Total assets; EBIT/Total assets

EBIT/Total assets; Net profit/Equity

Net profit/EBIT; Sales/Total assets

15.

I and II only

III and IV only

I, III, and IV only

I, II, and III only

16.

The highest possible value for the interest-burden ratio is ______, and this occurs when the firm _________.

0; uses as much debt as possible

1; uses debt to the point where ROA = interest cost of debt

1; uses no interest-bearing debt

-1; pays down its existing debts

17.

Which one of the following ratios is used to calculate the times-interest-earned ratio?

Net profit/Interest expense

Pretax profit/EBIT

EBIT/Sales

EBIT/Interest expense

18.

The process of decomposing ROE into a series of component ratios is called ______________.

DuPont analysis

technical analysis

comparative analysis

liquidity analysis

19.

Which of the following is not a ratio used in the DuPont analysis?

Interest burden

Profit margin

Asset turnover

Earnings yield ratio

20.

By 2008, over 100 countries had adopted financial reporting standards that are in conformance with ________.

GAAP

IFRS

FASB

GASB

21.

Operating ROA can be found as the product of ______.

Return on sales × ATO

Tax burden × Interest burden

Interest burden × Leverage ratio

ROE × Dividend payout ratio

22.

A firm has an ROE of 20% and a market-to-book ratio of 2.38. Its P/E ratio is _________.

8.4

11.9

17.62

47.6

23.

If a firm has a positive tax rate and a positive operating ROA, and the interest rate on debt is the same as the operating ROA, then operating ROA will be _________.

greater than zero, but it is impossible to determine how operating ROA will compare to ROE

equal to ROE

greater than ROE

less than ROE

24.

You find that a firm that uses debt has a compound leverage factor less than 1. This tells you that ________.

the firm's use of financial leverage is positively contributing to ROE

the firm's use of financial leverage is negatively contributing to ROE

the firm's use of operating leverage is positively contributing to ROE

the firm's use of operating leverage is negatively contributing to ROE

25.

A firm has a P/E ratio of 24 and an ROE of 12%. Its market-to-book-value ratio is _________.

2.88

1.75

.69

26.

A firm has an ROA of 8% and a debt/equity ratio of .5; its ROE is _________.

12%

27.

A firm has a tax burden of .7, a leverage ratio of 1.3, an interest burden of .8, and a return-on-sales ratio of 10%. The firm generates $2.28 in sales per dollar of assets. What is the firm's ROE?

12.4%

14.5%

16.6%

17.8%

28.

Economic value added (EVA) is:

the difference between the return on assets and the opportunity cost of capital times the capital base

ROA × ROE

a measure of the firm's abnormal return

largest for high-growth firms

29.

Which of the following statements is true concerning economic value added?

A growing number of firms tie managers' compensation to EVA.

A profitable firm will always have a positive EVA.

EVA recognizes that the cost of capital is not a real cost.

If a firm has positive present value of growth opportunities, it will have positive EVA.

30.

The financial statements of Flathead Lake Manufacturing Company are shown below: Note: The common shares are trading in the stock market for $15 per share Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's current ratio for 2012 indicates that Flathead's liquidity has ________ since 2011.

risen

fallen

stayed the same

The answer cannot be determined from the information given.

31.

The financial statements of Flathead Lake Manufacturing Company are shown below: Note: The common shares are trading in the stock market for $15 per share Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's inventory turnover ratio is _________. (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)

11.6

10.2

9.5

7.7

32.

2.13

2.44

2.56

2.89

33.

$810,000

$775,000

$755,000

$735,000

34.

The financial statements of Flathead Lake Manufacturing Company are shown below: Note: The common shares are trading in the stock market for $15 per share Refer to the financial statements of Flathead Lake Manufacturing Company. The industry average ACP is 32 days. How is Flathead doing in its collections relative to the industry? (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)

Flathead's receivables are outstanding about 9 fewer days than the industry average.

Flathead's receivables are outstanding about 15 fewer days than the industry average.

Flathead's receivables are outstanding about 12 more days than the industry average.

Flathead's receivables are outstanding about 6 more days than the industry average.

35.

The financial statements of Flathead Lake Manufacturing Company are shown below: Note: The common shares are trading in the stock market for $15 per share Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's total asset turnover for 2012 is _________. (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)

3.56

3.26

3.14

3.02

36.

$.075

$.086

$.092

$.099

37.

The financial statements of Flathead Lake Manufacturing Company are shown below: Note: The common shares are trading in the stock market for $15 per share Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's return on equity ratio for 2012 is _________. (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)

6.5%

26.5%

33.4%

38%

38.

3.39

3.6

13.33

10.67

39.

The financial statements of Flathead Lake Manufacturing Company are shown below: Note: The common shares are trading in the stock market for $15 per share Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's compound leverage ratio is __________. (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)

1.5

2.5

40.

1.3

1.5

1.69

2.83

41.

1.3

1.5

1.69

2.83

42.

1.3

1.5

1.69

2.83

43.

2.8

11.11

44.

2.8

11.11

45.

The financial statements of Burnaby Mountain Trading Company are shown below. Note: The common shares are trading in the stock market for $27 each. Refer to the financial statements of Burnaby Mountain Trading Company. The firm's asset turnover ratio for 2012 is _________. (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)

1.3

1.5

1.69

2.83

46.

.0409

.0429

.0475

.0753

47.

The financial statements of Burnaby Mountain Trading Company are shown below. Note: The common shares are trading in the stock market for $27 each. Refer to the financial statements of Burnaby Mountain Trading Company. The firm's return-on-equity ratio for 2012 is _________. (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)

.0409

.0429

.0462

.0923

48.

2.8

3.6

11.11

49.

.1708

.1529

.1462

.1636

50.

7.56%

15.12%

20.16%

30.24%

51.

A firm has an ROA of 19%, a debt/equity ratio of 1.8, and a tax rate of 30%, and the interest rate on its debt is 7%. Its ROE is _________.

15.12%

28.42%

37.24%

40.6%

52.

understate; overstate

understate; understate

overstate; understate

overstate; overstate

53.

has more current liabilities than the industry average

has more leased assets than the industry average

will be less profitable than the industry average

has more current assets than the industry average

54.

I only

I and II only

II and III only

I, II, and III

55.

A high price-to-book ratio may indicate which one of the following?

The firm expanded its plant and equipment in the past few years.

The firm is doing a poorer job controlling its inventory expense than other related firms.

Investors may believe that this firm has opportunities for earning a rate of return in excess of the market capitalization rate.

All of these options.

56.

A firm has an ROE equal to the industry average, but its price-to-book ratio is below the industry average. You know that the firm's _________.

earnings yield is above the industry average

P/E ratio is above the industry average

dividend payout ratio is too high

interest burden must be below the industry average

57.

Use the following cash flow data of Haven Hardware for the year ended December 31, 2012. What is the net cash provided by operating activities of Haven Hardware?

-$30,000

$220,000

$320,000

$780,000

58.

Use the following cash flow data of Haven Hardware for the year ended December 31, 2012. What is the net cash provided by or used in investing activities of Haven Hardware?

-$12,000

-$62,000

$12,000

$164,000

59.

Use the following cash flow data of Haven Hardware for the year ended December 31, 2012. What is the net cash provided by or used in financing activities of Haven Hardware?

-$10,000

-$120,000

$10,000

$120,000

60.

Use the following cash flow data of Haven Hardware for the year ended December 31, 2012. What is the net increase or decrease in cash for Haven Hardware for 2012?

-$94,000

-$88,000

$88,000

$188,000

61.

Use the following cash flow data of Haven Hardware for the year ended December 31, 2012. What is the cash at the end of 2012 for Haven Hardware?

$6,000

$94,000

$736,000

$188,000

62.

All of the following ratios are related to efficiency except _______.

total asset turnover

fixed-asset turnover

average collection period

cash ratio

63.

Which of the following would result in a cash inflow under the heading "Cash flow from investing" in the statement of cash flows?

Purchase of capital equipment

Payments to suppliers for inventory

Collections on receivables

Sale of production machinery

64.

When assessing the sustainability of a firm's cash flows, analysts will prefer to see cash growth generated from which of the following sources?

Cash flow from investment activities

Cash flow from operating activities

Cash flow from financing

Cash flow from extraordinary events

65.

$8 million

-$6 million

$3 million

-$4 million

66.

Another term for EVA is ______.

net income

operating income

residual income

market-based income

67.

Which of the following transactions will result in a decrease in cash flow from operations?

Increase in accounts receivable

Decrease in inventories

Decrease in taxes payable

Decrease in bonds outstanding

68.

Which of the following transactions will result in a decrease in cash flow from investments?

Acquisition of another business

Capital gain from sale of a subsidiary

Decrease in net investments

Sale of equipment

69.

Which of the following will result in an increase in cash to the firm?

Dividends paid

A delay in collecting on accounts receivable

Net new investments

An increase in accounts payable

70.

The table below shows some data for Key Biscuit Company: What must have caused the firm's ROE to drop?

The firm began using more debt as a percentage of financing.

The firm began using less debt as a percentage of financing.

The compound leverage ratio was less than 1.

The operating ROA was declining.

71.

$50 increase

$100 increase

$150 increase

$250 increase

72.

$20 increase

$80 increase

$100 increase

$200 increase

73.

$10 decrease

$90 decrease

$180 decrease

$190 decrease

74.

Increase of $225

Increase of $130

Decrease of $195

Decrease of $110

75.

The term quality of earnings refers to ________.

how well reported earnings conform to GAAP

the realism and sustainability of reported earnings

whether actual earnings matched expected earnings

how well reported earnings fit a trend line of earnings growth

76.

The practice of "selling" large quantities of goods to customers in order to get quarterly sales up while allowing these customers to return the goods next quarter is termed _____________.

channel stuffing

clogging the network

spamming the johns

artificial sales

77.

What ratio will definitely increase when a firm increases its annual sales with no corresponding increase in assets?

Asset turnover

Current ratio

Liquidity ratio

Quick ratio

78.

A firm's leverage ratio is 1.2, interest-burden ratio is .81, and profit margin is .25, and its asset turnover is 1.1. What is the firm's compound leverage factor?

.243

.267

.826

.972

79.

The tax burden of the firm is .4, the interest burden is .65, the return on sales is .05, the asset turnover is .90, and the leverage ratio is 1.35. What is the ROE of the firm?

1.58%

5.68%

12.2%

13.33%

80.

The tax burden of the firm is .5, the interest burden is .55, the profit margin is .25, the asset turnover is 1.5, and the leverage ratio is 1.65. What is the ROE of the firm?

1.88%

6.68%

12.15%

17.02%

81.

The major difference between IFRS and GAAP is that U.S. standards are ___________ and IFRS standards are _________.

strictly enforced; weakly enforced

rules-based; principles-based

evolutionary; devolutionary

based on government standards; based on corporate practice

82.

The quick ratio is a measure of a firm's __________.

asset turnover

market valuation

liquidity

interest burden

83.

The firm's leverage ratio is 1.2, interest-burden ratio is .81, and profit margin is .24, and its asset turnover is 1.25. What is the firm's ROA?

.25

.335

.372

84.

A firm has a compound leverage factor greater than 1; this indicates that ______.

the firm has no interest payments

the firm uses less debt as a percentage of financing

the firm's interest payments are equal to the firm's pretax profits

the firm's debt has a positive contribution to the firm's ROA

Student: ___________________________________________________________________________

You purchase one IBM July 120 call contract for a premium of $5. You hold the option until the expiration date, when IBM stock sells for $123 per share. You will realize a ______ on the investment.

$200 profit

$200 loss

$300 profit

$300 loss

You purchase one IBM July 125 call contract for a premium of $5. You hold the option until the expiration date, when IBM stock sells for $123 per share. You will realize a ______ on the investment.

$200 profit

$200 loss

$500 profit

$500 loss

You purchase one IBM July 120 put contract for a premium of $3. You hold the option until the expiration date, when IBM stock sells for $123 per share. You will realize a ______ on the investment.

$300 profit

$300 loss

$500 loss

$200 profit

You write one IBM July 120 call contract for a premium of $4. You hold the option until the expiration date, when IBM stock sells for $121 per share. You will realize a ______ on the investment.

$300 profit

$200 loss

$600 loss

$200 profit

______ option can only be exercised on the expiration date.

A Mexican

An Asian

An American

A European

All else the same, an American style option will be ______ valuable than a ______ style option.

more; European-

less; European-

more; Canadian-

less; Canadian-

At contract maturity the value of a call option is ___________, where X equals the option's strike price and ST is the stock price at contract expiration.

Max (0, ST - X)

Min (0, ST - X)

Max (0, X - ST)

Min (0, X - ST)

At contract maturity the value of a put option is ___________, where X equals the option's strike price and ST is the stock price at contract expiration.

Max (0, ST - X)

Min (0, ST - X)

Max (0, X - ST)

Min (0, X - ST)

An American put option gives its holder the right to _________.

buy the underlying asset at the exercise price on or before the expiration date

buy the underlying asset at the exercise price only at the expiration date

sell the underlying asset at the exercise price on or before the expiration date

sell the underlying asset at the exercise price only at the expiration date

10.

An Asian call option gives its holder the right to ____________.

buy the underlying asset at the exercise price on or before the expiration date

buy the underlying asset at a price determined by the average stock price during some specified portion of the option's life

sell the underlying asset at the exercise price on or before the expiration date

sell the underlying asset at a price determined by the average stock price during some specified portion of the option's life

11.

An Asian put option gives its holder the right to ____________.

buy the underlying asset at the exercise price on or before the expiration date

buy the underlying asset at a price determined by the average stock price during some specified portion of the option's life

sell the underlying asset at the exercise price on or before the expiration date

sell the underlying asset at a price determined by the average stock price during some specified portion of the option's life

12.

A time spread may be executed by _____.

selling an option with one exercise price and buying a similar one with a different exercise price

buying two options that have the same expiration dates but different strike prices

selling two options that have the same expiration dates but different strike prices

selling an option with one expiration date and buying a similar option with a different expiration date

13.

I and III only

I and IV only

I, II, and IV only

III and IV only

14.

A quanto provides its holder with the right to ______________.

participate in the payoffs from a portfolio of gambling casino stocks

exchange a fixed amount of a foreign currency for dollars at a specified exchange rate

participate in the investment performance of a foreign security

exchange the payoff from a foreign investment for dollars at a fixed exchange rate

15.

Max (-C0, ST - X - C0)

Min (-C0, ST - X - C0)

Max (C0, ST - X + C0)

Max (0, ST - X - C0)

16.

Strips and straps are variations of __________.

straddles

collars

money spreads

time spreads

17.

Max (P0, X - ST - P0)

Min (-P0, X - ST - P0)

Min (P0, ST - X + P0)

Max (0, ST - X - P0)

18.

Longer-term American-style options with maturities of up to 3 years are called __________.

warrants

LEAPS

GICs

CATs

19.

The initial maturities of most exchange-traded options are generally __________.

less than 1 year

less than 2 years

between 1 and 2 years

between 1 and 3 years

20.

A futures call option provides its holder with the right to ___________.

purchase a particular stock at some time in the future at a specified price

purchase a futures contract for the delivery of options on a particular stock

purchase a futures contract at a specified price for a specified period of time

deliver a futures contract and receive a specified price at a specific date in the future

21.

Exchange-traded stock options expire on the _______________ of the expiration month.

second Monday

third Wednesday

second Thursday

third Friday

22.

The writer of a put option _______________.

agrees to sell shares at a set price if the option holder desires

agrees to buy shares at a set price if the option holder desires

has the right to buy shares at a set price

has the right to sell shares at a set price

23.

Advantages of exchange-traded options over OTC options include all but which one of the following?

Ease and low cost of trading

Anonymity of participants

Contracts that are tailored to meet the needs of market participants

No concerns about counterparty credit risk

24.

Each listed stock option contract gives the holder the right to buy or sell __________ shares of stock.

100

1,000

25.

Exercise prices for listed stock options usually occur in increments of ____ and bracket the current stock price.

$20

$25

26.

You buy a call option and a put option on General Electric. Both the call option and the put option have the same exercise price and expiration date. This strategy is called a _________.

time spread

long straddle

short straddle

money spread

27.

In 1973, trading of standardized options on a national exchange started on the _________.

AMEX

CBOE

NYSE

CFTC

28.

An American call option gives the buyer the right to _________.

buy the underlying asset at the exercise price on or before the expiration date

buy the underlying asset at the exercise price only at the expiration date

sell the underlying asset at the exercise price on or before the expiration date

sell the underlying asset at the exercise price only at the expiration date

29.

A put option on Dr. Pepper Snapple Group, Inc., has an exercise price of $45. The current stock price is $41. The put option is _________.

at the money

in the money

out of the money

knocked out

30.

time spread

long straddle

short straddle

money spread

31.

A call option on Brocklehurst Corp. has an exercise price of $30. The current stock price of Brocklehurst Corp. is $32. The call option is _________.

at the money

in the money

out of the money

knocked in

32.

You invest in the stock of Rayleigh Corp. and write a call option on Rayleigh Corp. This strategy is called a _________.

covered call

long straddle

naked call

money spread

33.

time spread

long straddle

short straddle

money spread

34.

A European call option gives the buyer the right to _________.

buy the underlying asset at the exercise price on or before the expiration date

buy the underlying asset at the exercise price only at the expiration date

sell the underlying asset at the exercise price on or before the expiration date

sell the underlying asset at the exercise price only at the expiration date

35.

You invest in the stock of Valleyview Corp. and purchase a put option on Valleyview Corp. This strategy is called a _________.

long straddle

naked put

protective put

short stroll

36.

The value of a listed call option on a stock is lower when: I. The exercise price is higher. II. The contract approaches maturity. III. The stock decreases in value. IV. A stock split occurs.

II, III, and IV only

I, III, and IV only

I, II, and III only

I, II, III, and IV

37.

The Option Clearing Corporation is owned by _________.

the exchanges on which stock options are traded

the Federal Deposit Insurance Corporation

the Federal Reserve System

major U.S. banks

38.

The value of a listed put option on a stock is lower when: I. The exercise price is higher. II. The contract approaches maturity. III. The stock decreases in value. IV. A stock split occurs.

II only

II and IV only

I, II, and III only

I, II, III, and IV

39.

The maximum loss a buyer of a stock call option can suffer is the _________.

call premium

stock price

stock price minus the value of the call

strike price minus the stock price

40.

Which one of the statements about margin requirements on option positions is not correct?

The margin required will be higher if the option is in the money.

If the required margin exceeds the posted margin, the option writer will receive a margin call.

A buyer of a put or call option does not have to post margin.

Even if the writer of a call option owns the stock, the writer will have to meet the margin requirement in cash.

41.

A European put option gives its holder the right to _________.

buy the underlying asset at the exercise price on or before the expiration date

buy the underlying asset at the exercise price only at the expiration date

sell the underlying asset at the exercise price on or before the expiration date

sell the underlying asset at the exercise price only at the expiration date

42.

The potential loss for a writer of a naked call option on a stock is _________.

equal to the call premium

larger the lower the stock price

limited

unlimited

43.

A writer of a call option will want the value of the underlying asset to __________, and a buyer of a put option will want the value of the underlying asset to _________.

decrease; decrease

decrease; increase

increase; decrease

increase; increase

44.

Buyers of listed options __________ required to post margins, and writers of naked listed options __________ required to post margins.

are; are not

are; are

are not; are

are not; are not

45.

An option with a payoff that depends on the average price of the underlying asset during at least some portion of the life of the option is called ______ option.

an American

a European

an Asian

an Australian

46.

Which of the following expressions represents the value of a call option to its holder on the expiration date?

ST - X if ST>X, 0 if ST ≤ X

- (ST - X) if ST> X, 0 if ST ≤ X

0 if ST ≥ X,X - ST if ST<X

0 if ST ≥ X, - (X - ST) if ST<X

47.

A "bet" option is also called a ____ option.

barrier

lookback

digital

foreign exchange

48.

Which one of the following is the ticker symbol for the CBOE option contract on the S&P 100 Index?

SPX

DJX

CME

OEX

49.

$1,980

$4,900

$5,000

$2,080

50.

You purchase one IBM March 120 put contract for a put premium of $10. The maximum profit that you could gain from this strategy is _________.

$120

$1,000

$11,000

$12,000

51.

$125

$450

$575

unlimited

52.

either lower than $44.25 or higher than $55.75

between $44.25 and $55.75

higher than $55.75

lower than $44.25

53.

$150

$400

$600

$1,850

54.

__________ is the most risky transaction to undertake in the stock-index option markets if the stock market is expected to fall substantially after the transaction is completed.

Writing an uncovered call option

Writing an uncovered put option

Buying a call option

Buying a put option

55.

Which one of the following is a correct statement?

Exercise of warrants results in more outstanding shares of stock, while exercise of listed call options does not.

A convertible bond consists of a straight bond plus a specified number of detachable warrants.

Call options always have an initial maturity greater than 1 year, while warrants have an initial maturity less than 1 year.

Call options may be convertible into the stock, while warrants are not convertible into the stock.

56.

$33; $3.50

$33; $31.50

$35; $3.50

$35; $35

57.

buy the 55 call and sell the 45 call

buy the 45 call and buy the 55 call

buy the 45 call and sell the 55 call

sell the 45 call and sell the 55 call

58.

You are cautiously bullish on the common stock of the Wildwood Corporation over the next several months. The current price of the stock is $50 per share. You want to establish a bullish money spread to help limit the cost of your option position. You find the following option quotes: Ignoring commissions, the cost to establish the bull money spread with calls would be _______.

$1,050

$650

$400

$400 income rather than cost

59.

You are cautiously bullish on the common stock of the Wildwood Corporation over the next several months. The current price of the stock is $50 per share. You want to establish a bullish money spread to help limit the cost of your option position. You find the following option quotes: If in June the stock price is $53, your net profit on the bull money spread (buy the 45 call and sell the 55 call) would be ________.

$300

-$400

$150

$50

60.

sell the 55 put and buy the 45 put

buy the 45 put and buy the 55 put

buy the 55 put and sell the 45 put

sell the 45 put and sell the 55 put

61.

You are cautiously bullish on the common stock of the Wildwood Corporation over the next several months. The current price of the stock is $50 per share. You want to establish a bullish money spread to help limit the cost of your option position. You find the following option quotes: Suppose you establish a bullish money spread with the puts. In June the stock's price turns out to be $52. Ignoring commissions, the net profit on your position is _______________.

$500

$700

$200

$250

62.

Sell a call.

Purchase a put.

Sell a straddle.

Buy a straddle.

63.

The common stock of the Avalon Corporation has been trading in a narrow range around $40 per share for months, and you believe it is going to stay in that range for the next 3 months. The price of a 3-month put option with an exercise price of $40 is $3, and a call with the same expiration date and exercise price sells for $4. Selling a straddle would generate total premium income of _____.

$300

$400

$500

$700

64.

The common stock of the Avalon Corporation has been trading in a narrow range around $40 per share for months, and you believe it is going to stay in that range for the next 3 months. The price of a 3-month put option with an exercise price of $40 is $3, and a call with the same expiration date and exercise price sells for $4. Suppose you write a strap and the stock price winds up to be $42 at contract expiration. What was your net profit on the strap?

$200

$300

$700

$400

65.

The common stock of the Avalon Corporation has been trading in a narrow range around $40 per share for months, and you believe it is going to stay in that range for the next 3 months. The price of a 3-month put option with an exercise price of $40 is $3, and a call with the same expiration date and exercise price sells for $4. How can you create a position involving a put, a call, and riskless lending that would have the same payoff structure as the stock at expiration?

Buy the call, sell the put; lend the present value of $40.

Sell the call, buy the put; lend the present value of $40.

Buy the call, sell the put; borrow the present value of $40.

Sell the call, buy the put; borrow the present value of $40.

66.

$300

$200

$475

67.

A covered call strategy benefits from what environment?

Falling interest rates

Price stability

Price volatility

Unexpected events

68.

$300 profit

$100 loss

$500 profit

$200 profit

69.

Which strategy benefits from upside price movement and has some protection should the price of the security fall?

Bull spread

Long put

Short call

Straddle

70.

What combination of puts and calls can simulate a long stock investment?

Long call and short put

Long call and long put

Short call and short put

Short call and long put

71.

An investor purchases a long call at a price of $2.50. The expiration price is $35. If the current stock price is $35.10, what is the break-even point for the investor?

$32.50

$35

$37.50

$37.60

72.

$24.15

$25

$25.87

$27.86

73.

Which of the following strategies makes a profit if the stock price stays stable?

Long call and short put

Long call and long put

Short call and short put

Short call and long put

74.

Which of the following strategies makes a profit when the stock price declines and loses money when the stock price increases?

Long call and short put

Long call and long put

Short call and short put

Short call and long put

75.

If you combine a long stock position with selling an at-the-money call option, the resulting net payoff profile will resemble the payoff profile of a _______.

long call

short call

short put

long put

76.

What strategy could be considered insurance for an investment in a portfolio of stocks?

Covered call

Protective put

Short put

Straddle

77.

What strategy is designed to ensure a value within the bounds of two different stock prices?

Collar

Covered Call

Protective put

Straddle

78.

Buy a strip.

Buy a strap.

Buy a straddle.

Write a straddle.

79.

When issued, most convertible bonds are issued _____________.

deep in the money

deep out of the money

slightly out of the money

slightly in the money

80.

A convertible bond is deep in the money. This means the bond price will closely track the __________.

straight debt value of the bond

conversion value of the bond

straight debt value of the bond minus the conversion value

straight debt value of the bond plus the conversion value

81.

I only

I and II only

II and III only

I, II, and III

82.

II only

I and III only

III only

I, II, and III

83.

-$15

$200

$85

$185

84.

$195,000

$220,000

$175,000

$215,000

85.

greater; lower

greater; greater

lower; greater

lower; lower

86.

$300 profit

$100 loss

$400 loss

$200 profit

87.

I only

II only

I and III only

I, II, and III

Student: ___________________________________________________________________________

Today's futures markets are dominated by trading in _______ contracts.

metals

agriculture

financial

commodity

A person with a long position in a commodity futures contract wants the price of the commodity to ______.

decrease substantially

increase substantially

remain unchanged

increase or decrease substantially

If an asset price declines, the investor with a _______ is exposed to the largest potential loss.

long call option

long put option

long futures contract

short futures contract

The clearing corporation has a net position equal to ______.

the open interest

the open interest times 2

the open interest divided by 2

zero

The S&P 500 Index futures contract is an example of a(n) ______ delivery contract. The pork bellies contract is an example of a(n) ______ delivery contract.

cash; cash

cash; actual

actual; cash

actual; actual

Which one of the following contracts requires no cash to change hands when initiated?

Listed put option

Short futures contract

Forward contract

Listed call option

Synthetic stock positions are commonly used by ______ because of their ______.

market timers; lower transaction cost

banks; lower risk

wealthy investors; tax treatment

money market funds; limited exposure

_____________ are likely to close their positions before the expiration date, while ____________ are likely to make or take delivery.

Investors; regulators

Hedgers; speculators

Speculators; hedgers

Regulators; investors

Futures contracts have many advantages over forward contracts except that _________.

futures positions are easier to trade

futures contracts are tailored to the specific needs of the investor

futures trading preserves the anonymity of the participants

counterparty credit risk is not a concern on futures

10.

An investor who is hedging a corporate bond portfolio using a T-bond futures contract is said to have _______.

an arbitrage

a cross-hedge

an over hedge

a spread hedge

11.

The open interest on silver futures at a particular time is the number of __________.

all outstanding silver futures contracts

long and short silver futures positions counted separately on a particular trading day

silver futures contracts traded during the day

silver futures contracts traded the previous day

12.

An investor who goes short in a futures contract will _____ any increase in value of the underlying asset and will _____ any decrease in value in the underlying asset.

pay; pay

pay; receive

receive; pay

receive; receive

13.

An investor who goes long in a futures contract will _____ any increase in value of the underlying asset and will _____ any decrease in value in the underlying asset.

pay; pay

pay; receive

receive; pay

receive; receive

14.

The advantage that standardization of futures contracts brings is that _____ is improved because ____________________.

liquidity; all traders must trade a small set of identical contracts

credit risk; all traders understand the risk of the contracts

pricing; convergence is more likely to take place with fewer contracts

trading cost; trading volume is reduced

15.

The fact that the exchange is the counterparty to every futures contract issued is important because it eliminates _________ risk.

market

credit

interest rate

basis

16.

In the futures market the short position's loss is ___________ the long position's gain.

greater than

less than

equal to

sometimes less than and sometimes greater than

17.

A wheat farmer should __________ in order to reduce his exposure to risk associated with fluctuations in wheat prices.

sell wheat futures

buy wheat futures

buy a contract for delivery of wheat now and sell a contract for delivery of wheat at harvest time

sell wheat futures if the basis is currently positive and buy wheat futures if the basis is currently negative

18.

Which of the following provides the profit to a long position at contract maturity?

Original futures price - Spot price at maturity

Spot price at maturity - Original futures price

Zero

Basis

19.

You take a long position in a futures contract of one maturity and a short position in a contract of a different maturity, both on the same commodity. This is called a __________.

cross-hedge

reversing trade

spread position

straddle

20.

Interest rate futures contracts exist for all of the following except __________.

federal funds

Eurodollars

banker's acceptances

repurchase agreements

21.

Initial margin is usually set in the region of ________ of the total value of a futures contract.

5%-15%

10%-20%

15%-25%

20%-30%

22.

Margin must be posted by ________.

buyers of futures contracts only

sellers of futures contracts only

both buyers and sellers of futures contracts

speculators only

23.

The daily settlement of obligations on futures positions is called _____________.

a margin call

marking to market

a variation margin check

the initial margin requirement

24.

Which of the following provides the profit to a short position at contract maturity?

Original futures price - Spot price at maturity

Spot price at maturity - Original futures price

Zero

Basis

25.

Margin requirements for futures contracts can be met by ______________.

cash only

cash or highly marketable securities such as Treasury bills

cash or any marketable securities

cash or warehouse receipts for an equivalent quantity of the underlying commodity

26.

An established value below which a trader's margin may not fall is called the ________.

daily limit

daily margin

maintenance margin

convergence limit

27.

Which one of the following is a true statement?

A margin deposit can be met only by cash.

All futures contracts require the same margin deposit.

The maintenance margin is the amount of money you post with your broker when you buy or sell a futures contract.

The maintenance margin is the value of the margin account below which the holder of a futures contract receives a margin call.

28.

At maturity of a futures contract, the spot price and futures price must be approximately the same because of __________.

marking to market

the convergence property

the open interest

the triple witching hour

29.

A futures contract __________.

is a contract to be signed in the future by the buyer and the seller of a commodity

is an agreement to buy or sell a specified amount of an asset at a predetermined price on the expiration date of the contract

is an agreement to buy or sell a specified amount of an asset at whatever the spot price happens to be on the expiration date of the contract

gives the buyer the right, but not the obligation, to buy an asset some time in the future

30.

Which one of the following exploits differences between actual future prices and their theoretically correct parity values?

Index arbitrage

Marking to market

Reversing trades

Settlement transactions

31.

Which one of the following refers to the daily settlement of obligations on future positions?

Marking to market

The convergence property

The open interest

The triple witching hour

32.

The most actively traded interest rate futures contract is for ___________.

LIBOR

Treasury bills

Eurodollars

Treasury bonds

33.

The CME weather futures contract is an example of ______________.

a cash-settled contract

an agricultural contract

a financial future

a commodity future

34.

Single stock futures, as opposed to stock index futures, are _______________.

not yet being offered by any exchanges

offered overseas but not in the United States

currently trading on One Chicago, a joint venture of several exchanges

scheduled to begin trading in 2015 on several exchanges

35.

You are currently long in a futures contract. You instruct a broker to enter the short side of a futures contract to close your position. This is called __________.

a cross-hedge

a reversing trade

a speculation

marking to market

36.

A company that mines bauxite, an aluminum ore, decides to short aluminum futures. This is an example of __________ to limit its risk.

cross-hedging

long hedging

spreading

speculating

37.

Futures markets are regulated by the __________.

CFA Institute

CFTC

CIA

SEC

38.

A hog farmer decides to sell hog futures. This is an example of __________ to limit risk.

cross-hedging

short hedging

spreading

speculating

39.

On May 21, 2012, you could have purchased a futures contract from Intrade for a price of $5.70 that would pay you $10 if Barack Obama won the 2012 presidential election. This tells you _____.

that the market believed that Obama had a 57% chance of winning

that the market believed that Obama would not win the election

nothing about the market's belief concerning the odds of Obama winning

that the market believed Obama's chances of winning were about 43%

40.

An investor would want to __________ to exploit an expected fall in interest rates.

sell S&P 500 Index futures

sell Treasury-bond futures

buy Treasury-bond futures

buy wheat futures

41.

Forward contracts _________ traded on an organized exchange, and futures contracts __________ traded on an organized exchange.

are; are

are; are not

are not; are

are not; are not

42.

If the S&P 500 Index futures contract is overpriced relative to the spot S&P 500 Index, you should __________.

buy all the stocks in the S&P 500 and write put options on the S&P 500 Index

sell all the stocks in the S&P 500 and buy call options on S&P 500 Index

sell S&P 500 Index futures and buy all the stocks in the S&P 500

sell short all the stocks in the S&P 500 and buy S&P 500 Index futures

43.

A long hedge is a simultaneous __________ position in the spot market and a __________ position in the futures market.

long; long

long; short

short; long

short; short

44.

make; make

make; take

take; make

take; take

45.

An investor would want to __________ to hedge a long position in Treasury bonds.

buy interest rate futures

buy Treasury bonds in the spot market

sell interest rate futures

sell S&P 500 futures

46.

Futures contracts are said to exhibit the property of convergence because _______________.

the profits from long positions and short positions must ultimately be equal

the profits from long positions and short positions must ultimately net to zero

price discrepancies would open arbitrage opportunities for investors who spot them

the futures price and spot price of any asset must ultimately net to zero

47.

In the context of a futures contract, the basis is defined as ______________.

the futures price minus the spot price

the spot price minus the futures price

the futures price minus the initial margin

the profit on the futures contract

48.

The __________ is among the world's largest derivatives exchanges and operates a fully electronic trading and clearing platform.

CBOE

CBOT

CME

Eurex

49.

Violation of the spot-futures parity relationship results in _______________.

fines and other penalties imposed by the SEC

arbitrage opportunities for investors who spot them

suspension of delivery privileges

suspension of trading

50.

When dividend-paying assets are involved, the spot-futures parity relationship can be stated as _________________.

F1 = S0(1 + rf)

F0 = S0(1 + rf - d)T

F0 = S0(1 + rf + d)T

F0 = S0(1 + rf)T

51.

An investor establishes a long position in a futures contract now (time 0) and holds the position until maturity (time T). The sum of all daily settlements will be __________.

F0 - FT

F0 - S0

FT - F0

FT - S0

52.

A short hedge is a simultaneous __________ position in the spot market and a __________ position in the futures market.

long; long

long; short

short; long

short; short

53.

Approximately __________ of futures contracts result in actual delivery.

less than 1% to 3%

less than 5% to 15%

less than 60% to 80%

54.

A long hedger will __________ from an increase in the basis; a short hedger will __________.

be hurt; be hurt

be hurt; profit

profit; be hurt

profit; profit

55.

At year-end, taxes on a futures position _______________.

must be paid if the position has been closed out

must be paid if the position has not been closed out

must be paid regardless of whether the position has been closed out or not

need not be paid if the position supports a hedge

56.

I and II only

II and III only

I and III only

I, II, and III

57.

-$12,500

-$15,000

$15,000

$12,500

58.

1,274.33

1,286.95

1,268.61

1,291.29

59.

$1,504.99

$1,569.08

$1,554.04

$1,557.73

60.

If you expect a stock market downturn, one potential defensive strategy would be to __________.

buy stock-index futures

sell stock-index futures

buy stock-index options

sell foreign exchange futures

61.

At contract maturity the basis should equal ___________.

the risk-free interest rate

-1

62.

buy the September contract and sell the June contract

sell the September contract and buy the June contract

sell the September contract and sell the June contract

buy the September contract and buy the June contract

63.

A 1-year gold futures contract is selling for $1,645. Spot gold prices are $1,592 and the 1-year risk-free rate is 3%. The arbitrage profit implied by these prices is _____________.

$3.27

$4.39

$5.24

$6.72

64.

Buy gold in the spot with borrowed money, and sell the futures contract.

Buy the futures contract, and sell the gold spot and invest the money earned.

Buy gold spot with borrowed money, and buy the futures contract.

Buy the futures contract, and buy the gold spot using borrowed money.

65.

A hypothetical futures contract on a nondividend-paying stock with a current spot price of $100 has a maturity of 1 year. If the T-bill rate is 5%, what should the futures price be?

$95.24

$100

$105

$107

66.

A hypothetical futures contract on a nondividend-paying stock with a current spot price of $100 has a maturity of 4 years. If the T-bill rate is 7%, what should the futures price be?

$76.29

$93.46

$107

$131.08

67.

$2,700

$2,000

$3,137.50

$2,262.50

68.

On Monday morning you sell one June T-bond futures contract at 97:27, that is, for $97,843.75. The contract's face value is $100,000. The initial margin requirement is $2,700, and the maintenance margin requirement is $2,000 per contract. Use the following price data to answer the following questions. At the close of day on Tuesday your cumulative rate of return on your investment is _____.

16.2%

-5.8%

-.16%

-2.2%

69.

On Monday morning you sell one June T-bond futures contract at 97:27, that is, for $97,843.75. The contract's face value is $100,000. The initial margin requirement is $2,700, and the maintenance margin requirement is $2,000 per contract. Use the following price data to answer the following questions. On which of the given days do you get a margin call?

Monday

Tuesday

Wednesday

None of these options

70.

On Monday morning you sell one June T-bond futures contract at 97:27, that is, for $97,843.75. The contract's face value is $100,000. The initial margin requirement is $2,700, and the maintenance margin requirement is $2,000 per contract. Use the following price data to answer the following questions. The cumulative rate of return on your investment after Wednesday is a ____.

79.9% loss

2.6% loss

33% gain

53.9% loss

71.

The volume of interest rate swaps increased from almost zero in 1980 to over __________ today.

$40 million

$400 million

$400 billion

$400 trillion

72.

If the risk-free rate is greater than the dividend yield, then we know that _______________.

the futures price will be higher as contract maturity increases

F0<S0

FT>ST

arbitrage profits are possible

73.

17%

LIBOR

LIBOR + 1%

LIBOR - 1%

74.

Interest rate swaps involve the exchange of ________________.

actual fixed-rate bonds for actual floating-rate bonds

actual floating-rate bonds for actual fixed-rate bonds

net interest payments and an actual principal swap

net interest payments based on notional principal, but no exchange of principal

75.

From the perspective of determining profit and loss, the long futures position most closely resembles a levered investment in a ____________.

long call

short call

short stock position

long stock position

76.

The _________ contract dominates trading in stock-index futures.

S&P 500

DJIA

Nasdaq 100

Russell 2000

77.

The ________ and the _______ have the lowest correlations with the large-cap indexes.

Nasdaq Composite; Russell 2000

NYSE; DJIA

S&P 500; DJIA

Russell 2000; S&P 500

78.

The use of leverage is practiced in the futures markets due to the existence of _________.

banks

brokers

clearinghouses

margin

79.

31%

41%

52%

64%

80.

You own a $15 million bond portfolio with a modified duration of 11 years. Interest rates are expected to increase by 5 basis points, or .05%. What is the price value of a basis point?

$10,400

$14,300

$16,500

$21,300

81.

Convergence

Margin

Basis

Volatility

82.

A corporation will be issuing bonds in 6 months, and the treasurer is concerned about unfavorable interest rate moves in the interim. The best way for her to hedge the risk is to _________________.

buy T-bond futures

sell T-bond futures

buy stock-index futures

sell stock-index futures

83.

$27,500

$31,875

$33,875

$35,950

84.

A farmer sells futures contracts at a price of $2.75 per bushel. The spot price of corn is $2.55 at contract expiration. The farmer harvested 12,500 bushels of corn and sold futures contracts on 10,000 bushels of corn. Ignoring the transaction costs, how much did the farmer improve his cash flow by hedging sales with the futures contracts?

$2,000

$31,875

$33,875

85.

A bank has made long-term fixed-rate mortgages and has financed them with short-term deposits. To hedge out its interest rate risk, the bank could ________.

sell T-bond futures

buy T-bond futures

buy stock-index futures

sell stock-index futures

86.

buy T-bond futures and sell stock-index futures

sell T-bond futures and buy stock-index futures

buy stock-index futures and buy T-bond futures

sell stock-index futures and sell T-bond futures

87.

I and II only

I and IV only

II and III only

II and IV only

Student: ___________________________________________________________________________

A mutual fund with a beta of 1.1 has outperformed the S&P 500 over the last 20 years. We know that this mutual fund manager _____.

must have had superior stock selection ability.

must have had superior asset allocation ability.

must have had superior timing ability.

may or may not have outperformed the S&P 500 on a risk-adjusted basis.

The comparison universe is __________.

the bogey portfolio

a set of mutual funds with similar risk characteristics to your mutual fund

the set of all mutual funds in the United States

the set of all mutual funds in the world

Which one of the following performance measures is the Sharpe ratio?

Average excess return to beta ratio

Average excess return to standard deviation ratio

Alpha to standard deviation of residuals ratio

Average return minus required return

The M2 measure is a variant of ________________.

the Sharpe measure

the Treynor measure

Jensen's alpha

the appraisal ratio

84.6%

118%

18%

15.4%

Your return will generally be higher using the __________ if you time your transactions poorly, and your return will generally be higher using the __________ if you time your transactions well.

dollar-weighted return method; dollar-weighted return method

dollar-weighted return method; time-weighted return method

time-weighted return method; dollar-weighted return method

time-weighted return method; time-weighted return method

Sharpe; Sharpe

Sharpe; Treynor

Treynor; Sharpe

Treynor; Treynor

equal proportions of stocks A and B

more of stock A than stock B

more of stock B than stock A

The answer cannot be determined from the information given.

is better than the performance of portfolio B

is the same as the performance of portfolio B

is poorer than the performance of portfolio B

cannot be measured since there is no data on the alpha of the portfolio

10.

Which model is preferred by academics, and is gaining in popularity with practitioners, when evaluating investment performance?

The Treynor-Black model

The single-index model

The Fama-French three-factor model

The Sharpe model

11.

The risk-free rate, average returns, standard deviations, and betas for three funds and the S&P 500 are given below. What is the Treynor measure for portfolio A?

12.38%

2.38%

.91%

3.64%

12.

The risk-free rate, average returns, standard deviations, and betas for three funds and the S&P 500 are given below. What is the M2 measure for portfolio B?

.43%

1.25%

1.77%

1.43%

13.

S&P 500

14.

-1.33%

1.43%

15.

Which one of the following is largely based on forecasts of macroeconomic factors?

Security selection

Passive investing

Market efficiency

Market timing

16.

Based on the example used in the book, a perfect market timer would have made _______ by 2008 on a $1 investment made in 1926.

$100

$1,626

$1.5 million

$36.7 billion

17.

fund A

fund B

fund C

The answer cannot be determined from the information given.

18.

The average returns, standard deviations, and betas for three funds are given below along with data for the S&P 500 Index. The risk-free return during the sample period is 6%. You want to evaluate the three mutual funds using the Treynor measure for performance evaluation. The fund with the highest Treynor measure of performance is __________.

fund A

fund B

fund C

The answer cannot be determined from the information given.

19.

The average returns, standard deviations, and betas for three funds are given below along with data for the S&P 500 Index. The risk-free return during the sample period is 6%. You want to evaluate the three mutual funds using the Jensen measure for performance evaluation. The fund with the highest Jensen measure of performance is __________.

fund A

fund B

fund C

S&P 500

20.

21.

In a particular year, Salmon Arm Mutual Fund earned a return of 16% by making the following investments in asset classes: The return on a bogey portfolio was 12%, based on the following: The contribution of asset allocation across markets to the total excess return was __________.

1.5%

2.5%

3.5%

22.

In a particular year, Salmon Arm Mutual Fund earned a return of 16% by making the following investments in asset classes: The return on a bogey portfolio was 12%, based on the following: The contribution of security selection within asset classes to the total excess return was __________.

1.5%

2.5%

3.5%

23.

24.

-1%

25.

-1%

26.

Which one of the following averaging methods is the preferred method of constructing returns series for use in evaluating portfolio performance?

Geometric average

Arithmetic average

Dollar weighted

Internal

27.

The __________ calculates the reward to risk trade-off by dividing the average portfolio excess return by the portfolio beta.

Sharpe ratio

Treynor measure

Jensen measure

appraisal ratio

28.

28. In creating the P* portfolio, one mixes the original portfolio P and T-bills to match the _________ of the market.

alpha

beta

excess return

standard deviation

29.

The M2 measure of portfolio performance was developed by ______________.

Modigliani and Miller

Modigliani and Modigliani

Merton and Miller

Fama and French

30.

Probably the biggest problem with evaluating the portfolio performance of actively managed funds is the assumption that __________________________.

the markets are efficient

portfolio risk is constant over time

diversification pays off

security selection is more valuable than asset allocation

31.

Perfect-timing ability is equivalent to having __________ on the market portfolio.

a call option

a futures contract

a put option

a forward contract

32.

51.3%

65.9%

67.1%

10.83%

33.

The Treynor-Black model is a model that shows how an investment manager can use security analysis and statistics to construct __________.

a market portfolio

a passive portfolio

an active portfolio

an index portfolio

34.

If an investor is a successful market timer, his distribution of monthly portfolio returns will __________.

be skewed to the left

be skewed to the right

exhibit kurtosis

exhibit neither skewness nor kurtosis

35.

68%

74%

88%

97%

36.

In the Treynor-Black model, the active portfolio will contain stocks with __________.

alphas equal to zero

negative alphas

positive alphas

some negative and some positive alphas

37.

III

All contribute equally to fund performance.

38.

The theory of efficient frontiers has __________.

no adherents among practitioners

a small number of adherents among practitioners

a significant number of adherents among practitioners

complete support by practitioners

39.

In the Treynor-Black model, security analysts __________.

analyze a relatively small number of stocks

analyze all stocks that are publicly traded

are redundant

devote their attention to market timing rather than fundamental analysis

40.

In the Treynor-Black model, security analysts __________.

analyze the entire universe of stocks

assume that markets are inefficient

treat market index as a baseline portfolio from which an active portfolio is constructed

focus on selecting the best-performing bogey

41.

Active portfolio management consists of: I. Market timing II. Security selection III. Sector selection within given markets IV. Indexing

I and II only

II and III only

I, II, and III only

I, II, III, and IV

42.

A market-timing strategy is one in which asset allocation in the stock market __________ when one forecasts that the stock market will outperform Treasury bills.

decreases

increases

remains the same

may increase or decrease

43.

In the Treynor-Black model, the contribution of individual security to the active portfolio should be based primarily on the stock's _________.

alpha

beta

residual variance

information ratio

44.

If all ______ are ______ in the Treynor-Black model, there would be no reason to depart from the passive portfolio.

alphas; zero

alphas; positive

betas; positive

standard deviations; positive

45.

In the Treynor-Black model, the weight of each analyzed security in the portfolio should be proportional to its __________.

alpha/beta

alpha/residual variance

beta/residual variance

none of these options

46.

The critical variable in the determination of the success of the active portfolio is the stock's __________.

alpha/nonsystematic risk ratio

alpha/systematic risk ratio

delta/nonsystematic risk ratio

delta/systematic risk ratio

47.

equal proportions of stocks A and B

more of stock A than stock B

more of stock B than stock A

The answer cannot be determined from the information given.

48.

equal proportions of stocks A and B

more of stock A than stock B

more of stock B than stock A

The answer cannot be determined from the information given.

49.

The market-timing form of active portfolio management relies on __________ forecasting, and the security selection form of active portfolio management relies on __________ forecasting.

macroeconomic; macroeconomic

macroeconomic; microeconomic

microeconomic; macroeconomic

microeconomic; microeconomic

50.

Active portfolio managers try to construct a risky portfolio with _______.

a higher Sharpe ratio than a passive strategy

a lower Sharpe ratio than a passive strategy

the same Sharpe ratio as a passive strategy

very few securities

51.

In performance measurement, the bogey portfolio is designed to _________.

measure the returns to a completely passive strategy

measure the returns to a similar active strategy

measure the returns to a given investment style

equal the return on the S&P 500

52.

No; no

No; some

Some; no

Some; some

53.

I only

I and III only

II and III only

I, II, and III

54.

The correct measure of timing ability is ____________ for a portfolio manager who correctly forecasts 55% of bull markets and 55% of bear markets.

-5%

10%

95%

55.

It is very hard to statistically verify abnormal fund performance because of all of the following except which one?

Inevitably, some fund managers experience streaks of good performance that may just be due to luck.

The noise in realized rates of return is so large as to make it hard to identify abnormal performance in competitive markets.

Portfolio composition is rarely stable long enough to identify abnormal performance.

Even if successful, there is really not much value to be added by active strategies such as market timing.

56.

The term alpha transport refers to _____.

establishing alpha and then using index products to hedge market exposure and reduce exposure to particular sectors.

establishing alpha and then using sector mutual funds to hedge market exposure and reduce exposure to the general market.

establishing alpha and then using sector mutual funds to hedge market exposure and gain exposure to the general market.

establishing alpha and then using index products to hedge market exposure and gain exposure to particular sectors.

57.

20%

60%

75%

120%

58.

Portfolio managers Martin and Krueger each manage $1 million funds. Martin has perfect foresight, and the call option value of his perfect foresight is $150,000. Krueger is an imperfect forecaster and correctly predicts 50% of all bull markets and 70% of all bear markets. The value of Krueger's imperfect forecasting ability is __________.

$30,000

$67,500

$108,750

$217,500

59.

$31,250

$200,000

$500,000

$625,000

60.

A mutual fund invests in large-capitalization stocks. Its performance should be measured against which one of the following?

Russell 2000 Index

S&P 500 Index

Wilshire 5000 Index

Dow Jones Industrial Average

61.

11%

21%

25%

62.

2.07%

2.21%

2.24%

4.8%

63.

2.07%

2.21%

2.24%

4.8%

64.

Underperformance = .03%

Overperformance = .03%

Overperformance = .14%

Underperformance = 3%

65.

-.15%

.15%

-.3%

.3%

66.

-.18%

.18%

-.15%

.15%

67.

Morningstar's RAR produce results that are similar but not identical to ________.

Jensen's alpha

the Treynor ratio

the Sharpe ratio

68.

The Treynor-Black model assumes that security markets are _________.

completely efficient

nearly efficient

very inefficient

random walks

69.

The information ratio is equal to the stock's ____ divided by its ______.

diversifiable risk; beta

beta; alpha

alpha; beta

alpha; diversifiable risk

70.

Empirical tests to date show ______________.

that many investors have earned large rewards by market timing

little evidence of market-timing ability

clear-cut evidence of substantial market-timing ability

evidence that absolutely no market-timing ability exists

71.

.58%

.68%

.78%

.88%

72.

2.15%

2.76%

2.94%

3.14%

73.

.1143

.1233

.1354

.1477

74.

.0833

.1083

.1114

.1163

75.

.3978

.4158

.4563

.4706

76.

.4757

.5263

.6842

.7252

77.

.017

.034

.067

.078

78.

.017

.028

.036

.078

79.

The portfolio that contains the benchmark asset allocation against which a manager will be measured is often called _____________.

the bogey portfolio

the Vanguard Index

Jensen's alpha

the Treynor measure

80.

An attribution analysis will not likely contain which of the following components?

Asset allocation

Index returns

Risk-free returns

Security selection

81.

Which of the following investment strategies would have produced the highest returns in the time period since 1926?

T-bills portfolio

S&P 500 Index fund

Perfect market timing

Random stock selection

82.

What phrase might be used as a substitute for the Treynor-Black model developed in 1973?

Solely active management

Enhanced index approach

Passive management

Random selection

83.

What is the term for the process used to assess portfolio manager performance?

Active analysis

Attribution analysis

Passive analysis

Treynor-Black Analysis

84.

security selection ability

better sector weightings in the equity portfolio

the asset allocation decision

finding securities with positive alphas

85.

For a market timer, the _____________ will be higher when RM is higher.

portfolio's alpha and beta

portfolio's unsystematic risk

portfolio's beta and slope of the characteristic line

security selection component of the portfolio

86.

I only

I and II only

II and III only

I, II, and III

Student: ___________________________________________________________________________

In 2011, U.S. securities represented ______ of the world market for equities.

less than 25%

more than two-thirds

between 30% and 40%

a consistent 50%

_____ has the highest market capitalization of listed corporations among developed markets.

The United States

Japan

The United Kingdom

Switzerland

Total capitalization of corporate equity in the United States in 2011 was about _______ trillion.

$13.9

$23.4

$30.2

$45.5

34%

44%

54%

64%

Limiting your investments to the top six countries in the world in terms of market capitalization may make sense for _________ investor but probably does not make sense for ________ investor.

an active; a passive

a passive; an active

a security selection expert; a market timer

a fundamental; a technical

WEBS are ____________________.

investments in country-specific portfolios

traded exactly like mutual funds

identical to ADRs

designed to give investors foreign currency exposure to multiple countries

Which one of the following allows you to purchase the stock of a specific foreign company?

WEBS

MSCI

ADR

EAFE

Generally speaking, countries with ______ capitalization of equities ________.

larger; have higher GDP

smaller; are wealthier

larger; have smaller GDP

larger; are higher-growth countries

The 32 "developed" countries with the largest equity capitalization made up about _____ of the world GDP in 2011.

22%

44%

68%

85%

10.

According to a regression of GDP on market capitalization in 2010, virtually all developed countries had _______ per capita GDP than (as) predicted by the regression.

higher

lower

the same

sometimes lower and sometimes higher

11.

If the direct quote for the exchange rate for the U.S. dollar versus the Canadian dollar is .98, what is the indirect quote?

1.98

1.02

.02

1.05

12.

EAFE stands for _______.

Equity And Foreign Exchange

European, Australian, Far East

European, Asian, Foreign Exchange

European, American, Far East

13.

Which one of the following country risks includes the possibility of expropriation of assets, changes in tax policy, and restrictions on foreign exchange transactions?

Default risk

Foreign exchange risk

Market risk

Political risk

14.

The __________ index is a widely used index of non-U.S. stocks.

CBOE

Dow Jones

EAFE

Lehman Index

15.

home-country bias

excessive diversification

active management

passive management

16.

The four largest economies in the world in 2010 were ____________.

United States, India, China, and Japan

United States, China, Canada, and Japan

United States, China, Japan, and Germany

China, United Kingdom, Canada, and United States

17.

The proper formula for interest rate parity is ___________.

[1 + rf(foreign)]/[1 + rf(US)] = F1/E0

[1 + rf(US)]/[1 + rf(foreign)] = E0/F1

[1 + rf(US)]/[1 + rf(foreign)] = F0/E0

[1 + rf(foreign)]/[1 + rf(foreign)] = F0/E1

18.

Research indicates that exchange risk of the major currencies has been _________ so far in this century.

relatively high

relatively low

declining slightly

declining rapidly

19.

It appears from empirical work that exchange rate risk ____________.

has been declining for individual investments in recent years

is mostly diversifiable

is mostly systematic risk

is unimportant for an investment in a single foreign country

20.

Passive investors with well-diversified international portfolios _________.

can safely ignore all political risk in emerging markets

can expect very large diversification gains from their international investing

do not need to be concerned with hedging exposure to foreign currencies

can expect returns to be better than the EAFE on a consistent basis

21.

Which stock market has the largest weight in the EAFE index?

Japan

Germany

United Kingdom

Australia

22.

The correlation coefficient between the U.S. stock market index and stock market indexes of major countries is __________.

between -1 and -.5

between -.50 and 0

between 0 and .5

between .5 and 1

23.

In 2010, the ___ countries with the largest capitalization of equities made up approximately 60% of the world equity portfolio.

24.

Investor portfolios are notoriously overweighted in home-country stocks. This is commonly called ________.

local fat

nativism

home-country bias

misleading representation

25.

Corruption is _________ risk variable.

a firm-specific

a political

a financial

an economic

26.

sell the Swiss franc bonds now

sell the Swiss franc forward

probably do nothing because the franc move will offset the lower bond price

enter into an interest rate swap to pay variable and receive fixed

27.

The annual inflation rate is ______ risk variable.

a firm-specific

a political

a financial

an economic

28.

The insurer need not hedge because the expected exchange rate move will be favorable.

The insurer should hedge by buying the euro forward even though this will cost more than the expected cost of not hedging.

The insurer should hedge by selling the euro forward because this will cost less than the expected cost of not hedging.

The insurer should hedge by buying the euro forward even though this will cost less than the expected cost of not hedging.

29.

×88.97

×145.34

×154.67

×164.56

30.

You invest in various broadly diversified international mutual funds as well as your U.S. portfolio. The one risk you probably don't have to worry about affecting your returns is __________.

business-cycle risk

beta risk

inflation risk

currency risk

31.

According to the InternationalCountryRiskGuide in 2011, which of the following countries was the riskiest according to the current composite risk rating?

Japan

United States

China

India

32.

5.06%

6.74%

8.48%

10.13%

33.

7.25%

20%

22.43%

34.

₤.5150

₤.5142

₤.5123

₤.4859

35.

$1.83

$1.91

$2.08

$2.18

36.

$1.93

$2.22

$2.56

$2.76

37.

9.7%

2.9%

2.8%

38.

-3%

3.35%

8.72%

39.

12%

12.5%

14%

15.5%

40.

10.96%

12.25%

13.42%

15.5%

41.

Inclusion of international equities in a U.S. investor's portfolio has historically produced ___________________.

a substantially reduced portfolio variance

a slightly reduced portfolio variance

a substantially poorer portfolio variance

a slightly poorer portfolio variance

42.

WEBS are _____________.

mutual funds marketed internationally on the Internet

synthetic domestic stock indexes

equity indexes that replicate the price and yield performance of foreign stock portfolios

single stock investments in a foreign security

43.

-3.8%

2.2%

5.6%

15%

44.

Real U.S. interest rates move above Japanese interest rates. If you believe that Japanese interest rates won't move and that interest rate parity will hold, then ____________.

the yen-per-dollar exchange rate should rise

the dollar-per-yen exchange rate should rise

the exchange rate should stay the same if parity holds

The answer cannot be determined from the information given.

45.

140

100

71.43

None of these options

46.

14%

10%

9.3%

7.1%

47.

14%

10%

9.3%

7.1%

48.

Suppose a U.S. investor wants to invest in a British firm currently selling for ₤50 per share. The investor has $7,000 to invest, and the current exchange rate is $1.40/₤. After 1 year, the exchange rate is $1.60/₤ and the share price is ₤55. What is the dollar-denominated return?

25.7%

16%

14.3%

9.3%

49.

Suppose a U.S. investor wants to invest in a British firm currently selling for ₤50 per share. The investor has $7,000 to invest, and the current exchange rate is $1.40/₤. After 1 year, the exchange rate is $1.50/₤ and the share price is ₤45. How much of your dollar-denominated return is due to the currency change?

10%

6.43%

4.34%

2.12%

50.

a direct; an indirect

an indirect; a direct

a foreign; a U.S.

a U.S.; a foreign

51.

Among emerging countries the largest equity market in 2011 was located in _____________.

China

India

Brazil

Russia

52.

In the PRS country composite risk ratings, a score of ______ represents the least risky and a score of _____ represents the most risky.

0; 100

0; 50

50; 0

100; 0

53.

Which emerging country had the highest percentage growth in market capitalization during the 2000-2011 period?

Brazil

China

Columbia

Turkey

54.

$3,000 gain

$3,000 loss

$6,000 loss

No gain or loss

55.

$529 gain

$529 loss

$619 gain

$619 loss

56.

A country has a PRS political risk rating of 75, a financial score of 40, and an economic score of 35. The country's composite rating is _________.

57.

The risk-free rate in the United States is 2.5%, and the risk-free rate in Europe is 3.2%. If the spot rate of dollars per euro is 1.32, what is the likely forward rate in terms of dollars per euro?

1.30

1.31

1.32

1.33

58.

The risk-free rate in the United States is 4%, and the risk-free rate in Japan is 1.2%. If the spot rate of yen to dollars is 105, what is the likely yen-per-dollar forward rate?

101

102

105

108

59.

The yen-per-dollar spot rate is 104. The yen-per-dollar forward rate is 107. If the U.S. risk-free rate is 2.4%, what is the likely yen risk-free rate?

1.24%

2.35%

3.98%

5.35%

60.

In the PRS financial risk ratings, the United States rates poorly because of the U.S. ________. I. Large budget deficit II. Large trade deficit III. Large amount of total debt

I only

I and II only

I and III only

I, II, and III

61.

The major participants who directly purchase securities in the capital markets of other countries are predominantly ____________.

large institutional investors

individual investors

government agencies

central banks

62.

Of the following, which is the most commonly used international index?

DJIA

EAFE

Russell 2000

S&P 500

63.

WEBS differ from mutual funds in that: I. WEBS can be shorted. II. WEBS trade continuously on the AMEX. III. WEBS are passively managed.

II only

II and III only

I and III only

I, II, and III

64.

The variation in the betas of emerging markets suggests that ____________.

emerging markets are more uniform than developed markets

beta does not hold in international markets

international diversification may reduce portfolio risk

riskier emerging markets have uniformly lower betas

65.

$94,322

$55,345

$44,318

$33,595

66.

$60,384

$42,973

$68,422

$78,500

67.

-5%

-3%

68.

-.60%

-.75%

.12%

.22%

69.

1.15%

3.25%

5.45%

6.13%

Student: ___________________________________________________________________________

I and II only

II and III only

III and IV only

I, III, and IV only

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.

commingled pool

unit trust

hedge fund

money market fund

Hedge funds are typically set up as _______________.

limited liability partnerships

corporations

REITs

mutual funds

A(n) _______________ hedge fund attempts to profit from situations such as mergers, acquisitions, restructuring, bankruptcy, or reorganization.

multistrategy

managed futures

dedicated short bias

event-driven

______ are private partnerships of a small number of wealthy investors, are often subject to lock-up periods, and are allowed to pursue a wide range of investment activities.

Hedge funds

Closed-end funds

REITs

Mutual funds

Which of the following typically employ(s) significant amounts of leverage? I. Hedge funds II. Equity mutual funds III. Money market funds IV. Income mutual funds

I only

I and II only

III and IV only

I, II, and III only

As of 2012, hedge funds had approximately _____ under management.

$.5 trillion

$1.6 trillion

$2 trillion

$3.2 trillion

A restriction under which investors cannot withdraw their funds for as long as several months or years is called __________.

transparency

a lock-up period

a back-end load

convertible arbitrage

Hedge fund managers are compensated by ___________________.

deducting management fees from fund assets and receiving incentive bonuses for beating index benchmarks

deducting a percentage of any gains in asset value

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

charging portfolio turnover fees

10.

Management fees for hedge funds typically range between _____ and _____.

.5%; 1.5%

1%; 2%

2%; 5%

5%; 8%

11.

I only

I and II only

I, II, and III only

I, II, III, and IV

12.

A typical traditional initial investment in a hedge fund generally is in the range between _____ and _____.

$1,000; $5,000

$5,000; $25,000

$25,000; $250,000

$250,000; $1,000,000

13.

The difference between market-neutral and long-short hedges is that market-neutral hedge funds _________.

allocate money to several other funds while long-short funds do not

invest in relatively stable proportions of stocks and bonds while the proportions may vary dramatically for long-short funds

invest only in equities and bonds while long-short funds use only derivatives

14.

Convertible arbitrage hedge funds _________.

attempt to profit from mispriced interest-sensitive securities

hold long positions in convertible bonds and offsetting short positions in stocks

establish long and short positions in global capital markets

use derivative products to hedge their short positions in convertible bonds

15.

Assuming positive basis and negligible borrowing cost, which of the following transactions could yield positive arbitrage profits if pursued by a hedge fund?

Buy gold in the spot market, and sell the futures contract.

Buy the futures contract, and sell the gold spot and invest the money earned.

Buy gold spot with borrowed money, and buy the futures contract.

Buy the futures contract, and buy the gold spot using borrowed money.

16.

An example of a neutral pure play is _______.

pairs trading

statistical arbitrage

convergence arbitrage

directional strategy

17.

You believe that the spread between the September S&P 500 future and the S&P 500 Index is too large and will soon correct. To take advantage of this mispricing, a hedge fund should ______________.

buy all the stocks in the S&P 500 and write put options on the S&P 500 Index

sell all the stocks in the S&P 500 and buy call options on the S&P 500 Index

sell S&P 500 Index futures and buy all the stocks in the S&P 500

sell short all the stocks in the S&P 500 and buy S&P 500 Index futures

18.

You believe that the spread between the September S&P 500 future and the S&P 500 Index is too large and will soon correct. This is an example of ______________.

pairs trading

convergence play

statistical arbitrage

a long-short equity hedge

19.

A 1-year oil futures contract is selling for $74.50. Spot oil prices are $68, and the 1-year risk-free rate is 3.25%. The 1-year oil futures price should be equal to __________.

$68

$70.21

$71.25

$74.88

20.

A 1-year oil futures contract is selling for $74.50. Spot oil prices are $68, and the 1-year risk-free rate is 3.25%. The arbitrage profit implied by these prices is _____________.

$6.50

$5.44

$4.29

$3.25

21.

Buy oil in the spot market with borrowed money, and sell the futures contract.

Buy the futures contract, and sell the oil spot and invest the money earned.

Buy the oil spot with borrowed money, and buy the futures contract.

Buy the futures contract, and buy the oil spot using borrowed money.

22.

13,333

25,000

50,000

66,000

23.

$553,600

$625,000

$733,800

$764,000

24.

14.45%

15.18%

16%

17.73%

25.

Which of the following are not managed investment companies?

Hedge funds

Unit investment trusts

Closed-end funds

Open-end funds

26.

27.

You manage a $15 million hedge fund portfolio with beta = 1.2 and alpha = 2% per quarter. Assume the risk-free rate is 2% per quarter and the current value of the S&P 500 Index is 1,200. You want to exploit the positive alpha, but you are afraid that the stock market may fall and you want to hedge your portfolio by selling 3-month S&P 500 future contracts. The S&P contract multiplier is $250. When you hedge your stock portfolio with futures contracts, the value of your portfolio beta is __________.

1.2

The answer cannot be determined from the information given.

28.

You manage a $15 million hedge fund portfolio with beta = 1.2 and alpha = 2% per quarter. Assume the risk-free rate is 2% per quarter and the current value of the S&P 500 Index is 1,200. You want to exploit the positive alpha, but you are afraid that the stock market may fall and you want to hedge your portfolio by selling 3-month S&P 500 future contracts. The S&P contract multiplier is $250. What is the expected quarterly return on the hedged portfolio?

29.

You manage a $15 million hedge fund portfolio with beta = 1.2 and alpha = 2% per quarter. Assume the risk-free rate is 2% per quarter and the current value of the S&P 500 Index is 1,200. You want to exploit the positive alpha, but you are afraid that the stock market may fall and you want to hedge your portfolio by selling 3-month S&P 500 future contracts. The S&P contract multiplier is $250. How much is the portfolio expected to be worth 3 months from now?

$15,000,000

$15,450,000

$15,600,000

$16,000,000

30.

You manage a $15 million hedge fund portfolio with beta = 1.2 and alpha = 2% per quarter. Assume the risk-free rate is 2% per quarter and the current value of the S&P 500 Index is 1,200. You want to exploit the positive alpha, but you are afraid that the stock market may fall and you want to hedge your portfolio by selling 3-month S&P 500 future contracts. The S&P contract multiplier is $250. Hedging this portfolio by selling S&P 500 futures contracts is an example of ___________.

statistical arbitrage

pure play

a short equity hedge

fixed-income arbitrage

31.

asset allocation funds

multistrategy funds

event-driven funds

market-neutral funds

32.

$120; $20

$20; $120

$20; $20

$120; $120

33.

The collapse of the Long Term Capital Management hedge fund in 1998 was a case of an extremely unlikely statistical event called ________.

statistical arbitrage

an unhedged play

a tail event

a liquidity trap

34.

Which of the following investment styles could be the best description of the Long Term Capital Management market-neutral strategies?

Convergence arbitrage

Statistical arbitrage

Pairs trading

Convertible arbitrage

35.

15.05%

15.5%

17.25%

18%

36.

$4,877,000

$4,900,000

$5,929,000

$6,446,000

37.

16.5%

18.04%

18.55%

21%

38.

6.45%

8.52%

8.95%

9.46%

39.

Market-neutral hedge funds may experience considerable volatility. The source of volatile returns is the use of _________.

pure play

leverage

directional bests

net short positions

40.

$15

$15.60

$16.30

$17.55

41.

5.35%

7.23%

8.19%

10%

42.

143

157

196

218

43.

Unlike market-neutral hedge funds, which have betas near ________, directional long funds exhibit highly _______ betas.

zero; positive

positive; negative

positive; zero

negative; positive

44.

A; A

A; B

B; A

B; B

45.

According to a model that was estimated using monthly excess returns from January 2005 through November 2011, average returns of equity hedge funds are __________ the S&P 500 Index.

equal to

considerably higher than

slightly lower than

slightly higher than

46.

Research by Aragon (2007) indicates that lock-up restrictions tend to hold ____________ portfolios.

less liquid

more liquid

event-driven

shorter-maturity

47.

Higher returns of equity hedge funds as compared to the S&P 500 Index reflect positive compensation for __________ risk.

market

liquidity

systematic

interest rate

48.

A; A

A; B

B; A

B; B

49.

In a 2011 study, Agarwal, Daniel, and Naik documented that hedge funds tend to report average returns in ____________ that are __________ than their average returns in other months.

September; lower

January; higher

January; lower

December; higher

50.

To attract new clients, hedge funds often include past returns of funds only if they were successful. This is called __________.

long-short bias

survivorship bias

backfill bias

incentive bias

51.

Some argue that abnormally high returns of hedge funds are tainted by __________, which arises when unsuccessful funds cease operations, leaving only successful ones.

reporting bias

survivorship bias

backfill bias

incentive bias

52.

Malkiel and Saha (2005) estimate that the survivorship bias for hedge funds equals 4.4%, which is __________ the survivorship bias for mutual funds.

about the same as

much lower than

much higher than

only slightly lower than

53.

Hedge fund managers receive incentive bonuses when they increase portfolio assets beyond a stipulated benchmark but lose nothing when they fail to perform. This is equivalent to __________.

writing a call option

receiving a free call option

writing a put option

receiving a free put option

54.

A typical hedge fund incentive bonus is usually equal to ________ of investment profits beyond a predetermined benchmark index.

10%

20%

25%

55.

The fastest-growing category of hedge funds is feeder funds. These funds invest in ________.

other hedge funds

convertible securities and preferred stock

equities and bonds

managed futures and options

56.

A high water mark is a limiting factor of hedge fund manager compensation. This means that managers can't charge incentive fees ________.

when a fund stays flat

when a fund falls and does not recover to its previous high value

when a fund falls by 10% or more

none of these options. (Managers can always charge incentive fees.)

57.

.2; S0

1; S0(1 + rf)

1.2; S0

.2; S0(1 + rf)

58.

$100

$105

$110

$115

59.

$6.67

$8.18

$9.74

$10.22

60.

Assume the risk-free interest rate is 10% and is equal to the fund's benchmark, the portfolio's net asset value is $100, and the fund's standard deviation is 20%. Also assume a time horizon of 1 year. Assuming a 2% management fee and a 20% incentive bonus, what is the expected management compensation per share if the fund's net asset value exceeds the stated benchmark?

$4.24

$3.84

$2.20

Student: ___________________________________________________________________________

Which one of the following is an example of "global" consumption smoothing?

Borrowing to buy a car

Borrowing to buy a home

Saving to send children to college

Saving during your working years for retirement

I only

II and III only

I and III only

I, II, and III

If you want to tilt your savings toward later years, you might be well advised to purchase which of the following types of readily available insurance?

Career failure insurance

Disability insurance

Unemployment insurance

Moral hazard insurance

I only

II and III only

I and II only

I, II, and III

In a private defined benefit pension plan the ___________ bears the investment risk, and in a private defined contribution plan the ____________ bears the investment risk.

plan sponsor; employee

employee; plan sponsor

U.S. government; plan sponsor

plan sponsor; U.S. government

A decrease of 1% in both your tax exemption and your income tax rate would, on net, _______________.

make you better off

make you worse off

make you neither better off nor worse off

make you either better or worse off depending on your age

Tax shelters __________________.

postpone payment of tax liabilities

decrease investment risk

increase the pretax rate of return earned

benefit the government more than the investor

The tax effect of a traditional retirement plan is to _____ taxes.

evade

postpone

erase

avoid

The U.S. income tax code is generally _____.

regressive

progressive

flat

peaked

10.

Contributions to a _____________ are not tax deductible.

traditional retirement plan

Roth retirement plan

401k plan

403b plan

11.

No taxes are paid on withdrawals made during retirement from a _________.

traditional retirement plan

Roth retirement plan

401k

403b plan

12.

4.5%

4.14%

4.02%

3.12%

13.

adverse selection

a 529 plan

a moral hazard

a Texas hedge

14.

Stock and bond investments should be equally invested in both tax-sheltered and nonsheltered accounts.

You should place all the stocks in tax-sheltered accounts and all the bonds in nonsheltered accounts.

You should place all the bonds in tax-sheltered accounts and all the stocks in nonsheltered accounts.

It makes no difference how you allocate your stock and bond investments among tax sheltered and nonsheltered accounts.

15.

Social Security is ____________.

a pension plan only

an insurance plan only

a combination of a pension and insurance plan

an involuntary intergenerational transfer

16.

The Social Security system _______________.

is financed in a regressive way

is regressive in the way it allocates benefits

is progressive in the way it is financed

is fully funded for the foreseeable future

17.

Total annuity income is positively correlated with: I. Longevity II. Durability of marriage III. Expected length of your base (Social Security) annuity

I only

I and II only

II and III only

I, II, and III

18.

The solvency of Social Security is threatened by ______________.

increasing population longevity

above-replacement growth of the U.S. population

alternative tax shelters

the growth of competing defined contribution plans

19.

A person in poor health trying to buy supplemental health insurance is an example of ________.

moral hazard

adverse selection

a Texas hedge

actuarial error

20.

A person in excellent health with a long life expectancy chooses a lifetime annuity. This is an example of _________.

moral hazard

adverse selection

a Texas hedge

actuarial error

21.

It would be costly to provide wage insurance because of the ___________ problem.

moral hazard

adverse selection

Texas hedge

actuarial error

22.

You earned 8% on your corporate bond portfolio this year, and you are in a 15% federal tax bracket. If over your holding period inflation was 3%, your real after-tax rate of return was _____.

6.8%

3.69%

4.91%

4.25%

23.

manipulating tax shelters

involuntary intergenerational transfers

excessive savings

dynamic hedging

24.

Tilting your retirement savings plan toward your later years should only be done by investors _____________.

who are sufficiently risk averse

who are more tolerant of risk

who are unsure if their income growth will keep up with inflation

who want to retire early

25.

Employers commonly match at least some portion of employee contributions to: I. 401k plans II.403b plans III. Self-directed retirement plans

I only

I and II only

II only

I, II, and III

26.

A saver who expects to have a higher tax rate after retirement would prefer a ______.

Roth retirement plan

traditional retirement plan

401k plan

403b plan

27.

A retirement plan that offers a tax shelter will defer ______________ taxes on contributions and investment earnings.

income

sales

property

estate

28.

A study by Spivack and Kotlikoff (1981) showed that a marriage contract increases the dollar value of lifetime savings by as much as _____.

10%

25%

50%

29.

Taxes are applied to the _______________________.

real value of sheltered investment income

nominal value of unsheltered investment income

nominal value of sheltered investment income

real value of unsheltered investment income

30.

One feasible way to hedge labor income is to ____________________.

diversify your investment portfolio away from the industry in which you work

save for retirement only from investment income

change careers every 7 years

invest heavily in the stock options provided by your firm

31.

Which one of the following is not likely to be subject to adverse selection?

Health insurance providers

Lifetime annuity providers

Life insurance providers

Social Security

32.

Average Indexed Monthly Earnings are used to compute ___________.

the consumer price index

your Social Security retirement benefits

your maximum 401k contribution

your maximum retirement plan contribution

33.

The Social Security Primary Insurance Amount formula favors ______.

older workers

high-income workers

younger workers

low-income workers

34.

Contributions to a traditional retirement plan are __________, and contributions to a Roth retirement plan are ____________.

not tax deductible; not tax deducible

tax deductible; tax deductible

tax deductible; not tax deductible

not tax deductible; tax deductible

35.

How many years of Social Security contributions count for determination of benefits?

All yearly contributions count.

36.

Under current rules most workers will have ________ of their salary deducted to pay for Social Security retirement benefits and _______ toward Medicare.

1.45%; 6.2%

6.2%; 1.45%

7.65%; 1.45%%

15.3%; 4.9%

37.

In 2012, the income cap on Social Security taxes was set at _____ with an exemption of _____.

$200,000; $10,000

$153,600; $7,600

$110,100; $0

$96,000; $10,000

38.

If your marginal tax rate is 15%, your capital gains tax rate on a stock you have held for 10 years would be ___.

15%

20%

27.5%

39.

A tax shelter that allows for tax-exempt saving for higher education is called a _____.

Roth savings plan

403b

401k

529 plan

40.

Withdrawals from a traditional retirement plan prior to age ___ are taxable and must pay a ___ tax penalty.

59½; 10%

62; 5%

65; 7½ %

63½; 5%

41.

In planning for retirement, an investor decides she will save $2,000 every year for 25 years. At a 7% return on her investment, how much money will she have at the end of 25 years?

$119,015

$125,316

$126,498

$128,420

42.

$1,400,000

$2,800,000

$4,900,000

$6,400,000

43.

$15,546

$13,679

$11,892

$10,324

44.

$296,928

$312,236

$333,552

$353.982

45.

A safe driver who drives faster as a result of purchasing collision car insurance would be an example of the ___________ problem.

moral hazard

adverse selection

Texas hedge

actuarial error

46.

$30,353

$34,159

$37,398

$39,796

47.

$696,928

$743,874

$833,552

$953.982

48.

$65,000

$76,159

$98,398

$136,342

49.

The investment in the regular retirement plan.

The investment in the Roth retirement plan.

Both investments will have the same future value after taxes.

The answer cannot be determined from the information given.

50.

$16,779

$20,135

$21,685

$23,305

51.

What is the value of a $2,500 deposit into a retirement plan if the investment earns 12% per year for 15 years?

$12,174

$13,684

$14,652

$15,523

52.

$5,360

$6,340

$7,637

$8,000

53.

An employee uses her firm's 401k plan. If she decides to contribute $11,000 per year and pays an effective tax rate for all items of 28%, what is the reduction in her take-home pay each year?

$3,080

$4,210

$7,920

$11,000

54.

$2,400

$8,000

$10,400

$24,150

55.

Withdrawals after retirement from a traditional retirement plan are __________, and withdrawals after retirement from a Roth retirement plan are ____________.

taxable; not taxable

not taxable; taxable

tax deductible; not tax deductible

not tax deductible; tax deductible

56.

If you start saving for retirement only in your later years and your income growth from that point is rapid, then ________________________.

a traditional retirement plan is probably a better choice than a Roth retirement plan

a Roth retirement plan is probably a better choice than a traditional retirement plan

a SEP is probably a better choice than Medicare

a 401k is probably a better choice than a 403b

57.

Which one of the following statements about 401k plans is not correct?

The employer will typically match some portion of an employee's contributions to a 401k.

A 401k plan is a defined contribution plan.

Allowable contributions to 401k plans are limited.

Withdrawals from 401k plans are not taxed upon retirement.

58.

a bond portfolio

stocks with high dividend yields

a blended stock and bond portfolio containing zero-coupon bonds

stocks with low or zero dividend yields

59.

A bond portfolio and a stock portfolio both provided an unrealized pretax return of 8% to a taxable investor. If the stocks paid no dividends, we know that the ________.

after-tax return of the stock portfolio was higher than the after-tax return of the bond portfolio

after-tax return of the bond portfolio was higher than the after-tax return of the stock portfolio

after-tax income of the stock portfolio was equal to the after-tax income of the bond portfolio

after-tax income of the stock portfolio could have been higher or lower than the after-tax income of the bond portfolio, depending on the marginal tax rate of the investor

60.

Statistics show that life expectancy at age 66 for males is about _____ additional years and for females is about _____ additional years.

15; 20

16; 19

18; 22

19; 24

61.

Currently, the maximum combined taxable income of a retired household that avoids having to pay any taxes on a portion of their Social Security benefit is ______.

$15,000

$32,000

$45,000

$75,000

62.

$73,571

$66,334

$53,251

$48,732

63.

$9,872

$8,234

$7,908

$6,624

64.

If you plan for a bequest for your children, your grandchildren, their children, and so on, your planning horizon becomes _____.

equal to the life span of your children

100 years, or your lifetime, whichever ends first

infinite

double what it would have been without the bequest

65.

You want to minimize your current tax bill by maximizing your contributions to your _____________.

taxable bond portfolio

Roth retirement plan

401k or 403b plan

taxable savings account

66.

$30,000

$35,575

$38,578

$41,451

67.

$554,856

$623,245

$740,480

$1,311,805

68.

$5,600

$8,400

$11,200

$12,500

69.

A nonprofit organization offers a 5% salary contribution to John's 403b plan regardless of his own contributions, plus a matching 5% when John contributes 5% of his salary. John makes $56,000 a year. What is John's effective salary reduction if he is in the 25% tax bracket?

$2,100

$2,800

$5,600

$8,400

70.

$2,100 cost

$2,800 cost

$700 benefit

$3.500 benefit

71.

The fact that the U.S. government provides deposit insurance to banks creates a form of ___________, which is at least partially offset by requiring banks to hold more capital if they are riskier.

moral hazard

adverse selection

risk aversion

interest rate risk

72.

An investor in the 34% tax bracket would be indifferent between a corporate bond with a before-tax yield of 8% and a municipal bond with a yield of _________.

3.91%

6.15%

5.28%

10.72%

73.

3.9%

4.75%

6.5%

9.9%

Student: ___________________________________________________________________________

To _____ means to mitigate a financial risk.

invest

speculate

hedge

renege

In a defined benefit pension plan, the _____ bears all of the fund's investment performance risk.

employer

employee

fund manager

government

In a defined contribution pension plan, the _____ bears all of the fund's investment performance risk.

employer

employee

fund manager

government

My pension plan will pay me a yearly retirement amount equal to 2% of my highest annual salary for each year of service. I must have ___________.

a defined benefit plan

a defined contribution plan

an endowment fund

a variable annuity

A ______ insurance policy provides death benefits, with no buildup of cash value.

whole-life

universal life

variable life

term life

If the maturity of a bank's assets is much longer than the maturity of its liabilities and it wants to limit its interest rate risk, the bank may _________.

prefer to invest in long-term bonds in its asset portfolio

prefer to invest in equities in its asset portfolio

prefer to invest in variable-rate assets

decide to increase its fixed-rate mortgage holdings

realized; expected

real; nominal

expected; realized

nominal; expected

A mutual fund may not hold more than ______ of the shares of any publicly traded company.

10%

25%

50%

Which one of the following would be considered a "cash equivalent" investment?

Treasury bills

Common stock

Corporate bonds

Real estate

10.

For a bank, the difference between the interest rate charged to borrowers and the interest rate paid on liabilities is called the __________.

insurance premium

interest rate spread

risk premium

term premium

11.

Price volatility is greatest on which one of the following investments?

Commercial paper

20-year zero-coupon bonds

Treasury notes

Treasury bills

12.

A portfolio manager indexes part of a portfolio and actively manages the rest of the portfolio. This is called a _________ strategy.

passive-aggressive

passive core

passively active

balanced fund

13.

The major asset most people have during their early working years is their ________.

home

stock portfolio

earning power derived from their skills

bond portfolio

14.

At the early stage of an individual's working career, his or her retirement portfolio should probably consist mostly of _______.

annuities

stocks

bonds

commodities

15.

If an investor wants to invest 100% of her portfolio in safe assets but does not want to manage her portfolio, she should invest in __________.

a money market fund

a growth stock fund

several different money market instruments

several different stocks

16.

You sell to avoid further worry and buy something else.

You do nothing and wait for the investment to come back.

You buy more, thinking that if it was a good investment before, now it's not only good but cheap too.

You sue your financial adviser.

17.

To become a CFA, you must do all of the following except which one?

Pass three exams designed to ensure that you have sufficient knowledge of investments.

Obtain 3 years of work experience in money management.

Become a member of a local Society of the Financial Analysts Federation.

Divest all your own stock holdings to eliminate any potential conflicts of interest with client recommendations.

18.

Which of the following is not one of the main areas covered in the examinations that must be taken in order to achieve the designation of Chartered Financial Analyst?

Investment management ethics

Securities analysis

Securities marketing techniques

Portfolio management

19.

As the typical investor ages, the composition of his wealth usually switches from primarily _______ to primarily _______.

human capital; financial capital

financial capital; human capital

intellectual capital; physical capital

investable capital; noninvestable capital

20.

The two most important factors in describing an individual's or organization's investment objectives are ________________.

income level and age

income level and risk tolerance

age and risk tolerance

return requirement and risk tolerance

21.

The term hedge refers to an investment that is used ________________.

primarily for tax-loss selling purposes

to mitigate specific financial risks

to conceal one's true investment strategy from other market participants

primarily to defer capital losses

22.

You hang on to the stock, anticipating that it will go higher.

You buy more stock, anticipating that it will go higher.

You sell all of your stock holdings immediately.

You sell half of your stock holdings and invest the proceeds in other areas of your portfolio.

23.

like a person who is risk-neutral

like a person who is risk averse

like a person who is a risk lover

irrationally

24.

Which of the following typically strives to earn a return on their investments that exceeds the actuarially determined rate of return?

Banks

Thrifts

Mutual funds

Pension funds

25.

If an individual confers legal title to property to another person or institution to manage the property on their behalf, the individual has created ___________.

a personal trust

a charitable trust

an endowment fund

a mutual fund

26.

I only

II and III only

II and IV only

None of the given activities are allowed.

27.

If a defined benefit pension fund's actual rate of return is _____ than the actuarial assumed rate, then the ___________.

greater; employees will benefit

greater; firm's shareholders will benefit

lower; employees will benefit

lower; firm's shareholders will benefit

28.

$18,000

$37,500

$45,325

$55,250

29.

Life insurance companies try to hedge the risks inherent in whole-life insurance policies by investing in __________.

long-term bonds

money market mutual funds

savings accounts

short-term commercial paper

30.

$1,212,587

$1,363,154

$1,533,333

$1,666,667

31.

The risk that a downturn in the market may substantially reduce your investment principal is called _______.

purchasing power risk

interest rate risk

market risk

liquidity risk

32.

The possibility that you are too conservative and your money doesn't grow fast enough to keep pace with inflation is called ________.

purchasing power risk

liquidity risk

timing risk

market risk

33.

$65,437

$79,985

$89,462

$95,320

34.

Many defined benefit pension plans have a target rate of return on investment that is equal to the ____________.

firm's return on equity

plan's assumed actuarial rate of return

economic inflation rate because wages often increase with inflation

estimated stock market return

35.

_______ is a life insurance policy that provides a death benefit and a fixed-rate tax-deferred savings plan.

Term life

Whole life

Variable life

Universal life

36.

Empirical evidence confirms that investors become __________ as they approach retirement.

greedier

less interested in investments

more risk averse

more risk tolerant

37.

_______ is a life insurance policy that will provide a death benefit only and has no savings plan.

Term life

Whole life

Variable life

Universal life

38.

Of the following, the investment time horizon is typically the shortest for __________.

banks

endowment funds

life insurance companies

pension funds

39.

A passive asset allocation strategy involves _________.

investing in the stock of companies that are price takers

maintaining approximately the same proportions of a portfolio in each asset class over time

varying the proportions of a portfolio in each asset class in response to changing market conditions

selecting individual securities in different sectors that are believed to be undervalued

40.

An active asset allocation strategy involves _________.

investing in the stock of companies that are price takers

maintaining approximately the same proportions of a portfolio in each asset class over time

varying the proportions of a portfolio in each asset class in response to changing market conditions

selecting individual securities in different sectors that are believed to be undervalued

41.

Endowment funds are held by __________.

financial intermediaries

individuals

profit-oriented firms

nonprofit institutions

42.

Which one of the following is a life insurance policy that will provide a fixed death benefit and allows the policyholder to choose where to invest the policy's cash value?

Term life

Whole life

Variable life

Industrial life

43.

Under a "passive core" portfolio management strategy, a manager would ___________.

index the entire portfolio

index part of the portfolio and actively manage the rest

delegate the management of core segments of the portfolio to other managers

actively manage the entire portfolio

44.

Of the following, the most flexible type of life insurance policy from the policyholder's perspective is probably a ___________ policy.

term life

whole life

variable life

universal life

45.

The amount of risk an individual should take depends on his or her: I. Return requirements II. Risk tolerance III. Time horizon

I only

I and II only

II and III only

I, II, and III

46.

Earnings on variable life and universal life insurance policies are ___________.

never taxed

taxed only at the capital gains tax rate

not taxed until the money is withdrawn

not taxed at the federal level but are taxed at the state level

47.

When a company sets up a defined contribution pension plan, the __________ bears all the risk and the __________ receives all the return from the plan's assets.

employee; employee

employee; employer

employer; employee

employer; employer

48.

stock A will have a higher after-tax holding-period return than stock B

the after-tax holding period returns on stocks A and B will be the same

stock B will have a higher after-tax holding-period return than stock A

The answer cannot be determined from the information given.

49.

The objectives of personal trusts normally are __________ in scope than those of individual investors, and personal trust managers typically are __________ than individual investors.

broader; more risk averse

broader; less risk averse

more limited; more risk averse

more limited; less risk averse

50.

The prudent investor rule requires __________.

executives of companies to avoid investing in options of companies they work for

executives of companies to disclose their transactions in stocks of companies they work for

professional investors who manage money for others to avoid all risky investments

professional investors who manage money for others to constrain their investments to those that would be approved by a prudent investor

51.

The prudent investor rule is an example of a regulation designed to ensure appropriate _____________ by money managers.

fiduciary responsibility

fiscal responsibility

monetary responsibility

marketing procedures

52.

tax

risk-tolerance

liquidity

social

53.

When used in the context of investment decision making, the term liquidity refers to _____________.

the ease and speed with which an asset can be sold at any value possible

the ease and speed with which an asset can be sold without having to discount the value

an aspect of monetary policy

the proportion of short-term to long-term investments held in an investor's portfolio

54.

The term investment horizon refers to __________.

the proportion of short-term to long-term investments held in an investor's portfolio

the planned liquidation date of an investment

the average maturity date of investments held in a portfolio

the maturity date of the longest investment in the portfolio

55.

The choice of an active portfolio management strategy rather than a passive strategy assumes ___________.

the ability to continuously adjust the portfolio to provide superior returns

asset allocation involving only domestic securities

stable economic conditions over the short term

the ability to minimize trading costs

56.

Conservative investors are likely to want to invest in __________ mutual funds, while risk-tolerant investors are likely to want to invest in __________.

income; high growth

income; moderate growth

moderate-growth; high growth

high-growth; moderate growth

57.

The first step any investor should take before beginning to invest is to __________.

establish investment objectives

develop a list of investment managers with superior records to interview

establish asset allocation guidelines

decide between active management and passive management

58.

Which of the following is the least likely to be included in the portfolio management process?

Monitoring market conditions and relative values

Monitoring investor circumstances

Identifying investor constraints and preferences

Organizing the investment management process itself

59.

A clearly understood investment policy statement is not critical for which one of the following? I. Mutual funds II. Individuals III. Defined benefit pension funds

II only

III only

I only

None of these options (A policy statement is necessary for all three.)

60.

An investor refuses to invest in any firm that produces alcohol or tobacco. This is an example of a ___________ constraint.

return requirement

risk-tolerance

liquidity

social

61.

Under the provisions of a typical defined benefit pension plan, the employer is responsible for _____________.

investing in conservative fixed-income assets

paying benefits to retired employees

counseling employees in the selection of asset classes

paying employees the market rate of return on employee contributions

62.

A life insurance firm wants to minimize its interest rate risk, and it is planning on paying out $250,000 in 5 years. Which one of the following investments best matches its goal?

High-yield utility stocks

5-year zero-coupon bonds

10-year coupon bonds

Money market investments rolled over as needed

63.

87.4%

88.5%

90%

91.6%

64.

An investor with high risk aversion will likely prefer which of the following risk and return combinations?

Expected return = 12%, historical standard deviation = 17%

Expected return = 14%, historical standard deviation = 19%

Expected return = 16%, historical standard deviation = 21%

Expected return = 18%, historical standard deviation = 23%

65.

An investor with low risk aversion will likely prefer which of the following risk and return combinations?

Expected return = 11%, historical standard deviation = 12%

Expected return = 12%, historical standard deviation = 14%

Expected return = 14%, historical standard deviation = 18%

Expected return = 17%, historical standard deviation = 21%

66.

I only

II only

I and III only

I, II, and III

67.

Fixed annuity

Defined benefit plan

Defined contribution plan

Bonds invested in a retirement plan

68.

10% money market; 40% long-term bonds; 10% commodities; 40% high-dividend-paying stocks

0% money market; 60% long-term bonds; 40% stocks

10% money market; 30% long-term bonds; 10% commodities; 50% high-dividend-paying stocks

5% money market; 30% long-term bonds; 5% commodities; 60% stocks, most with low dividends and high growth prospects

69.

10% money market; 50% intermediate-term bonds; 40% blue chip stocks, many with high dividend yields

0% money market; 60% intermediate-term bonds; 40% stocks

10% money market; 30% intermediate-term bonds; 60% high-dividend-paying stocks

5% money market; 35% intermediate-term bonds; 60% stocks, most with low dividends

70.

Boeing

Lockheed Martin

United Technologies

Cabela's

71.

In 1937 the Eli Lilly family donated millions of dollars in stock to fund a not-for-profit charitable organization. Such organizations are typically called _________________.

annuities

endowments

mutual funds

personal trusts

72.

Which one of the following institutions typically has the longest investment horizon?

Mutual funds

Pension funds

Property and casualty insurers

Banks

73.

For which one of the following institutions is liquidity usually the most important?

Mutual funds

Pension funds

Life insurers

Banks

74.

One of the major functions of the investment committee is to ________________.

determine security selection of each portfolio operated by the investment company

translate the objectives and constraints of the investment company into an asset universe

determine the percentages of each security in the total investment company portfolio

calculate and report the overall rate of return to investment company constituents

75.

For an investor concerned with maximizing liquidity, which of the following investments should be avoided?

Real estate

Bonds

Domestic stocks

International stocks

76.

The asset universe is the _____________________.

set of investments in which an investment company can legally invest

existing set of assets the investment company currently owns in one or more of its portfolios

list of assets approved by the investment committee that may be placed into the investment company's portfolio

market portfolio of all available risky assets

77.

1.26%

1.5%

1.77%

78.

Major functions of the investment committee include all but which one of the following?

Engage in security selection for each portfolio managed

Broadly determine the overall asset allocation of the investment company

Determine the asset-class weights for each portfolio

Determine the asset universe

79.

a passively managed core with an actively managed component

a totally passively managed fund

passive asset allocation with active security selection

active asset allocation with passive security selection

80.

a passively managed core with an actively managed component

a totally passively managed fund

passive asset allocation with active security selection

active asset allocation with passive security selection

81.

One way that life insurance firms can hedge the risk created by offering whole-life insurance policies is by ________________.

holding long-term bonds

holding equities

holding short-term bonds

exercising its right to terminate the policy

#FIN 320 Week 11 Final Exam – Strayer

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