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Real vs. Financial
__________ assets generate net income to the economy and
__________ assets define allocation of
income among investors.
a. Financial, financial
b. Financial, real
c. Real, financial
d. Real, real
_ ANSWER: C
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Market Transparency
In China, political connections within a company’s
management can significantly influence a company’s
success or failure. Investors have found that they can earn
substantial profits from companies when they successfully
identify companys that have important political
connections. Should prices of Chinese companies
be higher or lower because of this? Why?
a. Higher, investors prefer investments that can earn high
returns
b. Lower, investors will pay less for these companies
because they have higher risk
c. Neither, most investors don’t know about unreported
political connections in China
d. Both, investors that understand political connections
will buy the stock, investors that don’t won’t, moving
the price in both directions at the same time.
_ ANSWER: B
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Agency
_____ is an example of moral hazard.
a. Managers engage in empire building
b. Managers protect their jobs by avoiding risky projects
c. Managers over consume luxuries such as corporate jets
d. All of the answers provide examples of agency problems
_ ANSWER: D
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3
Agency
FEI company’s president has a great investment idea with
positive NPV that will require new financing
worth $10MM in capital. He would prefer to finance this
project with new equity shares. Assume that
you hold FEI stock prior any announcement by the president.
What will happen to your share values if the
president proceeds with the new equity financing?
a. Your shares will increase in value because the new
project will increase the company’s growth potential.
(agency theory)
b. Your shares will not change in value because the new
project is fully funded by new investor money.
(synergies)
c. Your share value would decline, because part your value
is transferred to the new equity buyers. (asymmetric
information)
d. Your shares will not change in value because that would
mean your shares are mispriced. (efficient
markets)
_ ANSWER: C
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Returns
You invest $100 in FEI corporation at the end of June. You
hold this investment until the end of August,
when it is worth $104. What is your rate of return over
this 2 month period?
a. 0.5%
b. 2%
c. 4%
d. 24%
_ ANSWER: 104/100 - 1 = 4% ---> 1.04^6 - 1 = 26:53%
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The Yield Curve
A “Yield Curve” is ___________________.
a. a graph of treasury bill and bond yields at different
maturity dates.
b. a graph of treasury bill and bond coupon payments at
different maturity dates.
c. a plot showing riskless interest rates.
d. a graph showing the interest rates currently set by the
Federal Reserve.
_ ANSWER: A
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Asset Allocation
Asset allocation refers to the _________.
a. allocation of the investment portfolio across broad
asset classes
b. analysis of the value of securities
c. choice of specific assets within each asset class
d. none of the answers define asset allocation
_ ANSWER: A
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4
Agency Debt
Agency debt trades at yields similar to ___________ because
the Agencies are understood to be __________
and their bonds have __________.
a. U.S. Treasury Bonds, too-big-to-fail, an implied
guarantee from the U.S. Government
b. Corporate Bonds, large corporations, similar risk characteristics
to any U.S. company
c. Money market bonds, highly liquid, almost no liquidity
risk premium
d. Bond market yields, market traded, interest rate risks
similar to other bonds
_ ANSWER: A
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Mortgage Rates
___________ mortgages are more risky than __________
mortgages because their repayments are not
insured by __________.
a. Homeowner, asset backed, the FDIC
b. Jumbo, conventional, federal agencies
c. Federal agency, Jumbo, U.S. Government
d. High principal, low principal, the U.S. banking system
_ ANSWER: B
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Interest Rates
Using the Nominal Interest Rate Formula:
I = R+IP+MRP+DRP+LRP
(1)
Which of the following bond combinations could best be used
to measure how the market values maturity
risk?
a. 3 month t-bills and 3 month Commercial Paper
b. 5 year t-notes and 5 year TIPS
c. 3 month t-bills and 30 year t-bonds
d. 1 year t-notes and 1 year CD’s
_ C
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Active vs. Passive
The choice of an active portfolio management strategy
rather than a passive strategy assumes ___________.
1. the ability to continuously adjust the portfolio to
provide superior returns.
2. asset allocation involving only domestic securities
3. stable economic conditions over the short term
4. the ability to minimize trading costs
_ ANSWER: A
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5
Active Portfolio Management
The choice of an active portfolio management strategy
rather than a passive strategy assumes ___________.
1. An ability to consistently outguess other investors
2. An asset allocation choice involving only domestic
securities
3. Stable economic conditions over the short term
4. The ability to minimize trading costs
_ ANSWER: A
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Securitization
Which one of the following provides the best example of
securitization?
1. Convertible bond
2. Call option
3. Mortgage pass-through security
4. Preferred stock
_ ANSWER: C
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Money Markets
A dollar denominated deposit at a London bank is called:
a. Eurodollars
b. LIBOR
c. Fed funds
d. Banker’s acceptance
_ ANSWER: A
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Mortgage Markets
Which of the following is not a nickname for an agency
associated with the mortgage markets?
a. Fannie Mae
b. Freddie Mac
c. Sallie Mae
d. Ginnie Mae
_ ANSWER: C
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Money Markets
Commercial paper is a short-term security issued by
________ to raise funds.
a. The Federal Reserve
b. Commercial banks
c. Large well-known companies
d. The New York Stock Exchange
_ ANSWER: C
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6
The Yield Curve
The “Yield Curve” is _____________________.
a. a plot that shows yields of treasury bills, notes, and
bonds at different maturities
b. a plot that shows interest rates of treasury bills,
notes, and bonds at different yields
c. a plot that compares the yield of risky bonds to the
yield of riskless bonds
d. a plot that shows the possible returns bond investors
can earn by investing in treasury bills, notes, and
bonds.
_ ANSWER: A
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Municipal Bonds
Which of the following is not a true statement regarding
municipal bonds?
a. A municipal bond is a debt obligation issued by state or
local governments.
b. A municipal bond is a debt obligation issued by the
Federal Government.
c. The interest income from a municipal bond is exempt from
federal income taxation.
d. The interest income from a municipal bond is exempt from
state and local taxation in the issuing state.
_ ANSWER: B
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Tax-Equivalent Yield
The yield on tax-exempt bonds is ______.
a. usually less than 50% of the yield on taxable bonds
b. normally about 90% of the yield on taxable bonds
c. greater than the yield on taxable bonds
d. less than the yield on taxable bonds
_ ANSWER: D
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Indexes: The Dow
Which one of the following is a true statement regarding
the Dow Jones Industrial Average?
a. It is a value-weighted average of 30 large industrial
stocks
b. It is a price-weighted average of 30 large industrial
stocks
c. It is a price-weighted average of 100 large stocks
traded on the New York Stock Exchange
d. It is a value-weighted average of all stocks traded on
the New York Stock Exchange
_ ANSWER: B
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IndexWeights
If the market prices of the 30 stocks in the Dow Jones
Industrial Average all change by the same dollar
amount on a given day, assuming there are no stock splits
which stock will have the greatest impact on the
average?
a. The one with the highest price
b. The one with the lowest price
c. All 30 stocks will have the same impact
_ ANSWER: C
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7
Bid-Ask Spreads
Shares of Canon corporation stock trade on the Japaneese
stock market (converted to US$) and the US
market for the following bid-ask spreads:
Exchange Bid Ask
Tokyo 33 35
US 34 36
In which market and at what price would you sell stock if
you held it?
a. Tokyo at $35
b. US at $36
c. Tokyo at $33
d. US at $34
_ ANSWER: US for $34
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Bid-Ask Spreads
Shares of Canon corporation stock trade on the Japaneese
stock market (converted to US$) and the US
market for the following bid-ask spreads:
Exchange Bid Ask
Tokyo 33 35
US 34 36
Is there an arbitrage opportunity between these markets?
a. No, your best trade can sell in US for $34 and buy in
Tokyo for $35
b. Yes, your best trade would buy in US for $34 and sell in
Tokyo for $35
c. Yes, your best trade can sell in US for $36 and buy in
Tokyo for $33
d. No, your best trade would buy in US for $36 and sell in
Tokyo for $33
_ ANSWER: A
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8
IPO’s
Which one of the following statements about IPOs is not
true?
a. IPO underpricing represents an opportunity cost to
issuing firms
b. IPOs often provide very good initial returns to
investors
c. Although U.S. IPOs are typically underpriced, most
foreign issues are not
d. Shares in IPOs are often primarily allocated to
institutional investors
_ ANSWER: C
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Margin Requirements
Initial margin requirements on stocks are set by
_____________.
a. The Federal Deposit Insurance Corporation
b. The Federal Reserve
c. The New York Stock Exchange
d. The Securities and Exchange Commission
_ ANSWER: B
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Specialists
Which of the following is a false statement regarding NYSE
specialists?
a. On a stock exchange all buy or sell orders are executed
at a specialist’s post on the exchange
b. Specialists can not trade for their own accounts
c. Specialists earn income from commissions and spreads in
stock prices
d. Specialists stand ready to trade at quoted bid and ask
prices
_ ANSWER: B
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Margin Positions
You purchased 100 shares of ABC common stock on margin at
$40 per share. Assume the initial margin
is 50% and the maintenance margin is 35%. You will get a
margin call if the stock price drops below
________. (Assume the stock pays no dividends and ignore
interest on the margin loan.)
a. $26.55
b. $34.43
c. $28.95
d. $30.77
_ ANSWER: (100P-2000)/100P = 0.35 ---> P = $30:77, D
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9
Returns on Margin Positions
An investor puts up $5,000 but borrows an equal amount of
money from her broker to double the amount
invested to $10,000. The broker charges 7% on the loan. The
stock was originally purchased at $25 per
share and in one year the investor sells the stock for $28.
The investor’s rate of return was _____.
a. 17%
b. 12%
c. 14%
d. 19%
_ ANSWER: A
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Investment Companies
Advantages of investment companies to investors include all
but which one of the following?
a. Record keeping and administration
b. Low cost diversification
c. Professional management
d. Guaranteed rates of return
_ ANSWER: D
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Net Asset Value
Net Asset Value is defined as ______________.
a. Book value of assets divided by shares outstanding
b. Book value of assets minus liabilities divided by shares
outstanding
c. Market value of assets divided by shares outstanding
d. Market value of assets minus liabilities divided by
shares outstanding
_ ANSWER: D
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Closed-End Funds
Investors who wish to liquidate their holdings in a
closed-end fund may ___________.
a. sell their shares back to the fund at a discount if they
wish
b. sell their shares back to the fund at net asset value
c. sell their shares on the open market
d. sell their shares at a premium to net asset value if
they wish
_ ANSWER: C
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10
Mutual Fund Scandals
Investors might steal mutual fund shareholder wealth due to
problems inherent to NAV pricing. Each of
the following might result in mispricing EXCEPT:
a. Large investor flows into the fund
b. Illiquid stocks
c. Accidentally late (after-hours) buy orders
d. International Markets
_ ANSWER: A
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Hedge Funds: Scandal
Long-Term Capital Management failed due to
a. Fraud
b. No Regulatory Oversight
c. The Asian Financial Crisis violated the assumptions of
their pairs trading technique
d. The Federal Reserve’s bailout
_ ANSWER: C
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Hedge Funds
The JOBS Act of 2012 was signed into law to make it easier
for companies to raise capital in the market.
This act also permits hedge funds to ___________, which was
previously prohibited by the Securities Act
of 1933.
a. accept investments from retail investors
b. make highly leveraged investments to increase returns
c. not disclose their investments and investment strategies
to regulators
d. advertise to potential investors
_ ANSWER: D
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Return Calculations
You invest $100 in a stock at the end of the day on the
last market day of the year in 2010. On the last
market day in December 2011, your investment is worth $125,
and you buy $100 more to make your total
investment value equal $225. On the last day of 2012, your
investment will be worth $210. What is your
annualized rate of return? Please ignore compounding (use
arithmetic means).
a. 5.00%
b. 9.15%
c. 18.33%
d. 24.2%
_ ANSWER: period 1: 125/100 - 1 = 25%,
period 2: 210/225 - 1 = -6.7%,
Annualized: (25+(-6.7))/2 = 9.15% (B)
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11
Return Calculations
You invest $100 in a stock at the end of the day on the
last market day of the year in 2010. On the last
market day in December 2011, your investment is worth $105,
and you buy $100 more to make your total
investment value equal $205. On the last market day in
December 2012, your investment is worth $203.
What is your annualized rate of return? Please include
compounding in your calculation (use geometric
means).
a. 1.97%
b. 3.96%
c. 8.11%
d. 16.88%
_ ANSWER: period 1: 105/100 - 1=5%,
period 2: 203/205 - 1= -0.98%,
Annualized:sqrt[(1+0:05)(1-0.98)] - 1 = 1.97% (A)
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Annualized Rate of Return
You invest $100 at time 0 and hold that investment for 1
year and gain $10 on your investment’s market
value. You then invest an additional $900 at time 1 and
lose $100 of your investment’s time 1 market value
in the second year. What is your geometric average
annualized rate of return?
a. -8.24%
b. -0.89%
c. -0.45%
d. 0.05%
_ ANSWER: Period 1: 110/100 - 1=10%,
Period 2: 910/1010 - 1= -9.9%,
annualized return: sqt[(1.1)(0.90099)] - 1 = -0.45%
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Complete Portfolio
The term “complete portfolio” refers to a portfolio
consisting of __________.
a. The risk-free asset combined with at least one risky
asset
b. The market portfolio combined with the minimum variance
portfolio
c. Securities from domestic markets combined with
securities from foreign markets
d. Common stocks combined with bonds.
_ ANSWER: A
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Complete Portfolio Expected Return and Risk
An investor invests 70% of her wealth in a risky asset with
an expected rate of return of 15% and a
variance of 5% and she puts 30% in a Treasury bill that
pays 5%. Her portfolio’s expected rate of return and
standard deviation are __________ and __________
respectively.
a. 10.0%, 6.7%
b. 12.0%, 22.4%
c. 12.0%, 15.7%
d. 10.0%, 35.0%
_ ANSWER: C
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13
Risk and Return
For a given level of expected return, portfolio managers
generally want to create a portfolio that has
________________risk. For a given level of risk, portfolio
manager generally want to create a portfolio that
has _________________expected return.
a. lowest, highest
b. lowest, lowest
c. highest, highest
d. highest, lowest
_ ANSWER: A
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Types of Risk
Which one of the following is a risk that impacts most
securities?
a. unsystematic
b. diversifiable
c. systematic
d. firm-specific
_ ANSWER: C
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Types of Risk
Which one of the following can be considered as a
systematic risk?
I. Government Shutdown
II. Wallgreens Strike
III. Transportation and airport strike in France
IV. Steve Jobs’ Health Problems.
a. (I) and (II)
b. (I) and (III)
c. (III) and (IV)
d. (I) and (IV)
_ ANSWER: B
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The 2-Risky Asset Portfolio
You put half of your money in a stock portfolio that has an
expected return of 14% and a standard
deviation of 24%. You put the rest of your money in a risky
bond portfolio that has an expected return of
6% and a standard deviation of 12%. The stock and bond
portfolio have a correlation of 0.55. The standard
deviation of the resulting portfolio will be __________.
a. More than 18% but less than 24%
b. Equal to 18%
c. Less than 18%
d. Zero
_ ANSWER: C
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14
Portfolio Theory
Adding additional risky assets to the investment
opportunity set will generally move the efficient frontier
________ and to the _______.
a. Up, right
b. Up, left
c. Down, right
d. Down, left
b
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Two Risky Assets
In order to construct a riskless portfolio using two risky
stocks, one would need to find two stocks with
a correlation coefficient of ________.
a. 1.0
b. 0.5
c. 0
d. -1.0
_ ANSWER: D
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Portfolio Returns
You have invested your retirement portfolio with the
following allocation:
_ borrowed $20 at the risk free rate of 3%
_ $80 in common stock with E(Rs) = 15%
_ $40 in bonds with E(Rb) = 6%
What is your portfolios 1 year expected rate of return?
a. 9.7%
b. 10.7%
c. 12%
d. 13.8%
_ ANSWER: D
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N-Stock Portfolios
Decreasing the number of stocks in a portfolio from 50 to
10 would likely ______________.
1. increase the systematic risk of the portfolio
2. increase the unsystematic risk of the portfolio
3. increase the return of the portfolio
4. decrease the variation in returns the investor faces in
any one year
_ ANSWER: B
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