FIN 311 Midterm

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FIN 311 Midterm
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  1. 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
  2. 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
  3. 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
  4. 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
  5. 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%
  6. 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
  7. 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
  8. 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
  9. 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
  10. 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
  11. 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
  12. 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
  13. 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
  14. 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
  15. 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
  16. 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
  17. 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
  18. 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
  19. 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
  20. 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
  21. 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
  22. 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
  23. 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
  24. 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
  25. 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
  26. 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
  27. 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
  28. 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
  29. 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
  30. 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
  31. 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
  32. 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
  33. 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
  34. 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
  35. 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)
  36. 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)
  37. 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%
  38. 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
  39. 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
  40. 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
  41. 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
  42. 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
  43. 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
  44. 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
  45. 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
  46. 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
  47. 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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