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CAPM
Which of the following are assumptions of the simple CAPM
model?
I. Individual trades of investors do not affect a stock’s
price
II. All investors plan for one identical holding period
III. All investors analyze securities in the same way and
share the same economic view of the world
IV. All investors have the same level of risk aversion
a. I, II and IV only
b. I, II and III only
c. II, III and IV only
d. I, II, III and IV
b
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Single Index Model
The b of
a stock in the single index model indicates which of the following:
I. The intercept.
II. The stock’s idiosyncratic return.
III. The stock’s return sensitivity to the index.
IV. The slope.
a. I only
b. I and II only
c. III only
d. III and IV only
d
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Portfolio Theory
An investor’s degree of risk aversion will determine his or
her ______.
a. optimal risky portfolio
b. risk-free rate
c. optimal mix of the risk-free asset and risky asset
d. capital allocation line
c
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16
Alphabet Soup
The graph of the relationship between expected return and
beta in the CAPM context is called the
_________.
a. CML
b. CAL
c. SML
d. SCL
c
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CAPM
In a simple CAPM world which of the following statements
is/are correct?
I. All investors will choose to hold the market portfolio,
which includes all risky assets in the world
II. Investors’ complete portfolio will vary depending on
their risk aversion
III. The return per unit of risk will be identical for all
individual assets
IV. The market portfolio will be on the efficient frontier
and it will be the optimal risky portfolio
a. I, II and III only
b. II, III and IV only
c. I, III and IV only
d. I, II, III and IV
d
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CAPM
Consider the CAPM. The risk-free rate is 6% and the
expected return on the market is 18%. What is the
expected return on a stock with a beta of 1.3?
a. 6%
b. 15.6%
c. 18%
d. 21.6%
_ ANSWER: (ri-6) = 1.3(18-6) ---> ri = 21:6, (D)
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SML
According to the capital asset pricing model, a security
with a __________.
a. Negative alpha is considered a good buy
b. Positive alpha is considered overpriced
c. Positive alpha is considered underpriced
d. Zero alpha is considered a good buy
c
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17
EMH
Which of the following beliefs would not preclude charting
as a method of portfolio management?
a. The market is strong form efficient
b. The market is semi-strong form efficient
c. The market is weak form efficient
d. Stock prices follow recurring patterns
d
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EMH
Random price movements indicate
a. Irrational markets
b. That prices cannot equal fundamental values
c. That technical analysis to uncover trends can be quite
useful
d. That markets are functioning efficiently
d
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Risk and Return
When the market risk premium rises, stock prices will
________.
a. Rise
b. Fall
c. Recover
d. Have excess volatility
b
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ProForma
The ______________ method of developing a pro forma income
statement forecasts sales and values
for the cost of goods sold, operating expenses, and
interest expense that are expressed as a ratio of projected
sales.
a. accrual
b. percent-of-sales
c. judgmental
d. cash
b
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Top-down Analysis
A top-down analysis of a firm’s prospects starts with an
analysis of the ______.
a. firm’s position in its industry
b. U.S. economy or even the global economy
c. industry
d. specific firm under consideration
b
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18
Forecasting
You can earn abnormal returns on your investments via macro
forecasting ______.
1. if you can forecast the economy at all
2. if you can forecast the economy as well as the average
forecaster
3. if you can forecast the economy better than the average
forecaster
4. only if you can forecast the economy with perfect
accuracy
c
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Cost of Equity
The Cost of Equity for a firm can be estimated by which of
the following techniques?
a. CAPM assumptions
b. Ad-hoc
c. b _(rm?r f )+r f
d. All of the above
d
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Security Analysts
The greatest value to an analyst from calculating a stock’s
intrinsic value is _______.
a. how easy it is to come up with accurate model inputs
b. the precision of the value estimate
c. how the process forces analysts to understand the
critical variables that have the greatest impact on value
d. how all the different models typically yield identical
value results
c
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Intrinsic Value
A stock has an intrinsic value of $15 and an actual stock
price of $13.50. You know that this stock
________.
a. will generate a positive alpha
b. has an expected return less than its required return
c. has a beta > 1
d. is overpriced
a
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19
Dividend Discount Model
Bill, Jim and Shelly are all looking to buy the same stock
that pays dividends. Bill plans on holding the
stock for one year. Jim plans on holding the stock for
three years. Shelly plans on holding the stock until
she retires in 10 years. Which one of the following
statements is correct?
a. Bill will be willing to pay the most for the stock
because he will get his money back in one year when he
sells.
b. Jim should be willing to pay three times as much for the
stock as Bill because his expected holding period
is three times as long as Bill’s.
c. Shelly should be willing to pay the most for the stock
because she will hold it the longest and hence she
will get the most dividends.
d. All three should be willing to pay the same amount for
the stock regardless of their holding period.
d
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Dividend Discount Model
You are considering acquiring a common share of Sahali
Shopping Center Corporation that you would
like to hold for one 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.
a. $31.25
b. $32.37
c. $38.47
d. $41.32
b
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Futures Positions
A person with a long unhedged position in a commodity
futures contract wants the price of the commodity
to ______.
a. decrease substantially
b. increase substantially
c. remain unchanged
d. increase or decrease substantially
b
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Derivative Costs
Which one of the following contracts requires no cash to
change hands when initiated?
a. Listed put option
b. Short futures contract
c. Forward contract
d. Listed call option
c
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Futures Hedging
A wheat farmer should __________ in order to reduce his
exposure to risk associated with fluctuations
in wheat prices.
a. sell wheat futures
b. buy wheat futures
c. buy a contract for delivery of wheat now, and sell a
contract for delivery of wheat at harvest time
d. sell wheat futures if the basis is currently positive
and buy wheat futures if the basis is currently negative
a
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Futures Trading
The daily settlement of obligations on futures positions is
called _____________.
a. a margin call
b. marking to market
c. a variation margin check
d. initial margin requirement
b
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Option Terminology
A put option on Snapple Beverage has an exercise price of
$30. The current stock price of Snapple
Beverage is $24.25. The put option is __________.
a. At the money
b. In the money
c. Out of the money
d. Knocked out
b
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Each listed stock option contract gives the holder the
right to buy or sell __________ shares of stock.
a. 1
b. 10
c. 100
d. 1,000
c
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21
Option Profits
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.
a. $200 profit
b. $200 loss
c. $300 profit
d. $300 loss
b
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Futures Contracts
A person with a long position in a commodity futures
contract wants the price of the commodity to
______.Â
a. decrease substantially
b. increase substantially
c. remain unchanged
d. increase or decrease substantially
b
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Forwards and Futures
Futures contracts have many advantages over forward
contracts except that _________.
a. futures positions are easier to trade
b. futures contracts are tailored to the specific needs of
the investor
c. futures trading preserves the anonymity of the participants
d. counterparty credit risk is not a concern on futures
b
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Mark to Market
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.
a. pay; pay
b. pay; receive
c. receive; pay
d. receive; receive
b
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