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Chapter 01: Investments: Background and Issues
Key Answers
1. Financial assets represent _____ of total assets of U.S. households.
A. over 60%
B. over 90%
C. under 10%
D. about 30%
Difficulty: Easy
2. Real assets in the economy include all but which one of the following?
A. Land
B. Buildings
C. Consumer durables
D. Common stock
Difficulty: Easy
3. Net worth represents _____ of the liabilities and net worth of commercial banks.
A. about 50%
B. about 90%
C. about 10%
D. about 30%
Difficulty: Medium
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4. According to the Flow of Funds Accounts of the United States, the largest single asset of
U.S. households is ___.
A. mutual fund shares
B. real estate
C. pension reserves
D. corporate equity
Difficulty: Medium
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5. According to the Flow of Funds Accounts of the United States, the largest liability of U.S.
households is ________.
A. mortgages
B. consumer credit
C. bank loans
D. gambling debts
Difficulty: Medium
6. ____ is not a derivative security.
A. A share of common stock
B. A call option
C. A futures contract
D. All of the above are derivative securities.
Difficulty: Easy
7. According to the Flow of Funds Accounts of the United States, the largest financial asset of
U.S. households is ____.
A. mutual fund shares
B. corporate equity
C. pension reserves
D. personal trusts
Difficulty: Medium
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8. Active trading in markets and competition among securities analysts helps ensure that
__________.
I. security prices approach informational efficiency
II. riskier securities are priced to offer higher potential returns
III. investors are unlikely to be able to consistently find under- or overvalued securities
A. I only
B. I and II only
C. II and III only
D. I, II and III
Difficulty: Hard
9. The material wealth of society is determined by the economy's _________, which is a
function of the economy's _________.
A. investment bankers, financial assets
B. investment bankers, real assets
C. productive capacity, financial assets
D. productive capacity, real assets
Difficulty: Medium
10. Which of the following is not a money market security?
A. U.S. Treasury bill
B. Six month maturity certificate of deposit
C. Common stock
D. Banker's acceptance
Difficulty: Medium
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11. __________ assets generate net income to the economy and __________ assets define
allocation of income among investors.
A. Financial, financial
B. Financial, real
C. Real, financial
D. Real, real
Difficulty: Medium
12. Which of the following are financial assets?
I. Debt securities
II. Equity securities
III. Derivative securities
A. I only
B. I and II only
C. II and III only
D. I, II and III
Difficulty: Hard
13. __________ are examples of financial intermediaries.
A. Commercial banks
B. Insurance companies
C. Investment companies
D. All of the above are financial intermediaries
Difficulty: Easy
14. 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
Difficulty: Easy
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15. Which one of the following best describes the purpose of derivatives markets?
A. Transferring risk from one party to another
B. Investing for a short time period to earn a small rate of return
C. Investing for retirement
D. Earning interest income
Difficulty: Medium
16. __________ was the first to introduce mortgage pass-through securities.
A. Chase Manhattan
B. Citicorp
C. FNMA
D. GNMA
Difficulty: Easy
17. Security selection refers to the ________.
A. allocation of the investment portfolio across broad asset classes
B. analysis of the value of securities
C. choice of specific securities within each asset class
D. top down method of investing
Difficulty: Medium
18. _____ is an example of an agency problem.
A. Managers engage in empire building
B. Managers protect their jobs by avoiding risky projects
C. Managers over consume luxuries such as corporate jets
D. All of the answers provide examples of agency problems
Difficulty: Easy
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19. _____ is a mechanism to mitigate potential agency problems.
A. Tying income of managers to success of the firm
B. Directors defending top management
C. Anti takeover strategies
D. Straight voting method of electing the board of directors
Difficulty: Hard
20. __________ are real assets.
A. Bonds
B. Production equipment
C. Stocks
D. Commercial paper
Difficulty: Easy
21. __________ portfolio construction starts with selecting attractively priced securities.
A. Bottom-up
B. Top-down
C. Upside-down
D. Side-to-side
Difficulty: Easy
22. In a capitalist system capital resources are primarily allocated by ____________.
A. governments
B. the SEC
C. financial markets
D. investment bankers
Difficulty: Easy
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23. A __________ represents an ownership share in a corporation.
A. call option
B. common stock
C. fixed-income security
D. preferred stock
Difficulty: Easy
24. The value of a derivative security _________.
A. depends on the value of other related security
B. affects the value of a related security
C. is unrelated to the value of a related security
D. can only be integrated by calculus professors
Difficulty: Easy
25. A bond issue is broken up so that some investors will receive interest payments while
others will receive principal payments. This is an example of _________.
A. bundling
B. credit enhancement
C. securitization
D. unbundling
Difficulty: Easy
26. __________ portfolio management calls for holding diversified portfolios without
spending effort or resources attempting to improve investment performance through security
analysis.
A. Active
B. Momentum
C. Passive
D. Market timing
Difficulty: Easy
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27. Financial markets allow for all but which one of the following?
A. Shift consumption through time from higher income periods to lower
B. Price securities according to their riskiness
C. Channel funds from lenders of funds to borrowers of funds
D. Allow most participants to routinely earn high returns with low risk
Difficulty: Moderate
28. Financial intermediaries exist because small investors cannot efficiently _________.
A. diversify their portfolios
B. gather information
C. monitor their portfolios
D. all of the answers provide reasons why
Difficulty: Easy
29. Methods to encourage managers to act in shareholders' best interest include
I. Threat of takeover
II. Proxy fights for control of the Board of Directors
III. Tying managers' compensation to stock price performance
A. I only
B. I and II only
C. II and III only
D. I, II and III
Difficulty: Easy
30. Firms that specialize in helping companies raise capital by selling securities to the public
are called _________.
A. pension funds
B. investment banks
C. savings banks
D. REITs
Difficulty: Easy
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31. In securities markets, there should be a risk-return trade-off with higher-risk assets having
_________ expected returns than lower-risk assets.
A. higher
B. lower
C. the same
D. Can't tell from the information given
Difficulty: Easy
32. __________ are an indirect way U.S. investors can invest in foreign companies.
A. ADRs
B. IRAs
C. SDRs
D. CPCs
Difficulty: Easy
33. Security selection refers to _________.
A. choosing specific securities within each asset-class
B. deciding how much to invest in each asset-class
C. deciding how much to invest in the market portfolio versus the riskless asset
D. deciding how much to hedge
Difficulty: Easy
34. An example of a derivative security is _________.
A. a common share of General Motors
B. a call option on Intel stock
C. a Ford bond
D. a U.S. Treasury bond
Difficulty: Easy
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35. __________ portfolio construction starts with asset allocation.
A. Bottom-up
B. Top-down
C. Upside-down
D. Side-to-side
Difficulty: Easy
36. Which one of the following firms falsely claimed to have a $4.8 billion bank account at
Bank of America and vastly understated its debts, eventually resulting in the firm's
bankruptcy?
A. WorldCom
B. Enron
C. Parmalat
D. Global Crossing
Difficulty: Medium
37. Debt securities promise _________.
I. a fixed stream of income
II. a stream of income that is determined according to a specific formula
III. a share in the profits of the issuing entity
A. I only
B. I or II only
C. I and III only
D. II or III only
Difficulty: Medium
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38. The Sarbanes-Oxley Act tightened corporate governance rules by requiring all but which
one of the following?
A. Required corporations to have more independent directors
B. Required the CFO to personally vouch for the corporation's financial statements
C. Required that firms could no longer employ investment bankers to sell securities to the
public
D. The creation of a new board to oversee the auditing of public companies
Difficulty: Medium
39. The success of common stock investments depends on the success of _________.
A. derivative securities
B. fixed income securities
C. the firm and its real assets
D. government methods of allocating capital
Difficulty: Easy
40. The historical average rate of return on the large company stocks since 1926 has been
A. 5%
B. 8%
C. 12%
D. 20%
Difficulty: Medium
41. The average rate of return on U.S. Treasury bills since 1926 was _________.
A. 0.5%
B. 2.4%
C. 3.8%
D. 6.0%
Difficulty: Medium
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42. An example of a real asset is _________.
I. a college education
II. customer goodwill
III. a patent
A. I only
B. II only
C. I and III only
D. I, II and III
Difficulty: Medium
43. The 2002 law designed to improve corporate governance is titled the
A. Pension Reform Act
B. ERISA
C. Financial Services Modernization Act
D. Sarbanes-Oxley Act
Difficulty: Easy
44. Which of the following is not a financial intermediary?
A. a mutual fund
B. an insurance company
C. a real estate brokerage firm
D. a savings and loan company
Difficulty: Medium
45. The combined liabilities of American households represent approximately __________
percent of combined assets.
A. 11%
B. 21%
C. 25%
D. 33%
Difficulty: Medium
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46. In 2008 real assets represented approximately __________ percent of the total asset
holdings of American households.
A. 37%
B. 42%
C. 48%
D. 55%
Difficulty: Medium
47. In 2008 mortgages represented approximately __________ percent of total liabilities and
net worth of American households.
A. 12%
B. 15%
C. 28%
D. 42%
Difficulty: Medium
48. Liabilities equal approximately _____ of total assets for nonfinancial U.S. businesses.
A. 10%
B. 25%
C. 44%
D. 75%
Difficulty: Medium
49. Which of the following is not an example of a financial intermediary?
A. Goldman Sachs
B. Allstate Insurance
C. First Interstate Bank
D. IBM
Difficulty: Easy
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50. Real assets represent about ____ of total assets for financial institutions.
A. 1%
B. 15%
C. 25%
D. 40%
Difficulty: Medium
51. Money Market securities are characterized by ________.
I. maturity less than one year
II. safety of the principal investment
III. low rates of return
A. I only
B. I and II only
C. I and III only
D. I, II and III
Difficulty: Easy
52. After much investigation an investor finds that Intel stock is currently under priced. This
is an example of ______.
A. asset allocation
B. security analysis
C. top down portfolio management
D. passive management
Difficulty: Medium
53. After considering current market conditions an investor decides to place 60% of their
funds in equities and the rest in bonds. This is an example of
A. asset allocation
B. security analysis
C. top down portfolio management
D. passive management
Difficulty: Medium
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54. Suppose an investor is considering one of two investments which are identical in all
respects except for risk. If the investor anticipates a fair return for the risk of the security they
invest in they can expect to
A. earn no more than the Treasury bill rate on either security
B. pay less for the security that has higher risk
C. pay less for the security that has lower risk
D. earn more if interest rates are lower
Difficulty: Hard
55. The efficient markets hypothesis suggests that _______.
A. active portfolio management strategies are the most appropriate investment strategies
B. passive portfolio management strategies are the most appropriate investment strategies
C. either active or passive strategies may be appropriate, depending on the expected direction
of the market
D. a bottom up approach is the most appropriate investment strategy
Difficulty: Easy
56. In a perfectly efficient market the best investment strategy is probably a/an
A. active strategy
B. passive strategy
C. asset allocation
D. market timing
Difficulty: Easy
57. An important trend that has changed the contemporary investment market is _________.
A. financial engineering
B. globalization
C. securitization
D. all three of the other answers
Difficulty: Easy
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58. Securitization refers to the creation of new securities by _________.
A. selling individual cash flows of a security or loan
B. repackaging individual cash flows of a security or loan into a new payment pattern
C. taking an illiquid asset and converting it into a marketable security
D. selling financial services overseas as well as in the U.S.
Difficulty: Easy
59. Brady bonds were an example of _________.
A. securitization
B. mortgagization
C. bundling
D. pass through securities
Difficulty: Medium
60. Individuals may find it more advantageous to purchase claims from a financial
intermediary rather than directly purchasing claims in capital markets because
I. intermediaries are better diversified than most individuals
II. intermediaries can exploit economies of scale in investing that individual investors cannot
III. intermediated investments usually offer higher rates of return than direct capital market
claims
A. I only
B. I and II only
C. II and III only
D. I, II and III
Difficulty: Hard
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61. Surf City Software Company develops new surf forecasting software. It sells the software
to Microsoft in exchange for 1000 shares of Microsoft common stock. Surf City Software has
exchanged a _____ asset for a _____ asset in this transaction.
A. real, real
B. financial, financial
C. real, financial
D. financial, real
Difficulty: Medium
62. Stone Harbor Products takes out a bank loan. It receives $100,000 and signs a promissory
note to pay back the loan over 5 years.
A. A new financial asset was created in this transaction.
B. A financial asset was traded for a real asset in this transaction.
C. A financial asset was destroyed in this transaction.
D. A real asset was created in this transaction.
Difficulty: Hard
63. Which of the following firms was not engaged in a major accounting scandal between
2000 and 2005?
A. General Electric
B. Parmalat
C. Enron
D. WorldCom
Difficulty: Easy
64. Accounting scandals can often be attributed to a particular concept in the study of finance
known as the
A. agency problem
B. risk - return trade - off
C. allocation of risk
D. securitization
Difficulty: Easy
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65. An intermediary that pools and manage funds for many investors is called a/an ______.
A. investment company
B. savings and loan
C. investment banker
D. ADR
Difficulty: Easy
66. Financial institutions that specialize in assisting corporations in primary market
transactions are called _______.
A. mutual funds
B. investment bankers
C. pension funds
D. globalization specialists
Difficulty: Easy
67. WEBS allow investors to _______.
A. invest in U.S. mortgage backed securities
B. invest in an individual foreign stock
C. invest in a portfolio of foreign stocks
D. avoid any exposure to foreign exchange risk
Difficulty: Medium
68. In 2008 the largest corporate bankruptcy in the U.S. history involved the investment
banking firm of ______.
A. Goldman Sachs
B. Lehman Brothers
C. Morgan Stanley
D. Merrill Lynch
Difficulty: Medium
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69. The inability of shareholders to influence the decisions of managers, despite
overwhelming shareholder support, is a breakdown in what process or mechanism?
A. Auditing
B. Public finance
C. Corporate governance
D. Public reporting
Difficulty: Medium
70. Real assets are ______.
A. are assets used to produce goods and services
B. always the same as financial assets
C. always equal to liabilities
D. claims on company's income
Difficulty: Easy
71. A major cause of mortgage market meltdown in 2007 and 2008 was linked to ________.
A. globalization
B. securitization
C. negative analyst recommendations
D. online trading
Difficulty: Medium
72. In recent years the greatest dollar amount of securitization occurred for which type loan?
A. Home mortgages
B. Credit card debt
C. Automobile loans
D. Equipment leasing
Difficulty: Medium
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73. The process of securitizing poor quality bank loans made to developing nations resulted in
the creation of __________.
A. Pass-throughs
B. Brady bonds
C. WEBS
D. FHLMC participation certificates
Difficulty: Medium
74. U.S. Treasury bonds pay interest every six months and repay the principal at maturity. The
U.S. Treasury routinely sells individual interest payments on these bonds to investors. This is
an example of ___________.
A. unbundling
B. bundling
C. securitization
D. security selection
Difficulty: Medium
75. An investment advisor has decided to purchase gold, real estate, stocks, and bonds in
equal amounts. This decision reflects which part of the investment process?
A. Asset allocation
B. Investment analysis
C. Portfolio analysis
D. Security selection
Difficulty: Medium
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Chapter 02 Asset Classes and Financial Instruments
Answer Key
Multiple Choice Questions
1. Which of the following is not a money market instrument?
A. Treasury bill
B. Commercial paper
C. Preferred stock
D. Banker's acceptance
Difficulty: Easy
2. Thirteen week T-bill auctions are conducted ____.
A. daily
B. weekly
C. monthly
D. quarterly
Difficulty: Easy
3. When computing the bank discount yield you would use ____ days in the year.
A. 260
B. 360
C. 365
D. 366
Difficulty: Medium
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4. A dollar denominated deposit at a London bank is called _____.
A. eurodollars
B. LIBOR
C. fed funds
D. banker's acceptance
Difficulty: Easy
5. Money market securities are sometimes referred to as "cash equivalent" because _____.
A. they are safe and marketable
B. they are not liquid
C. they are high risk
D. they are low denomination
Difficulty: Easy
6. The most actively traded money market security is
A. Treasury bills
B. Bankers' Acceptances
C. Certificates of Deposit
D. Common stock
Difficulty: Medium
7. ______ voting of common stock gives minority shareholders the most representation on the
board of directors.
A. Majority
B. Cumulative
C. Rights
D. Proxy
Difficulty: Medium
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8. An investor in a T-bill earns interest by _________.
A. receiving interest payments every 90 days
B. receiving dividend payments every 30 days
C. converting the T-bill at maturity into a higher valued T-note
D. buying the bill at a discount from the face value received at maturity
Difficulty: Easy
9. ______ would not be included in the EAFE index.
A. Australia
B. Canada
C. France
D. Japan
Difficulty: Hard
10. _____ is considered to be an emerging market country.
A. France
B. Norway
C. Brazil
D. Canada
Difficulty: Medium
11. Which one of the following is a true statement?
A. Dividends on preferred stocks are tax-deductible to individual investors but not to
corporate investors
B. Common dividends cannot be paid if preferred dividends are in arrears on cumulative
preferred stock
C. Preferred stockholders have voting power
D. Investors can sue managers for nonpayment of preferred dividends
Difficulty: Medium
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12. The bid price of a treasury bill is _________.
A. the price at which the dealer in treasury bills is willing to sell the bill
B. the price at which the dealer in treasury bills is willing to buy the bill
C. greater than the ask price of the treasury bill expressed in dollar terms
D. the price at which the investor can buy the treasury bill
Difficulty: Easy
13. The German stock market is measured by which market index?
A. FTSE
B. Dow Jones 30
C. DAX
D. Nikkei
Difficulty: Easy
14. Deposits of commercial banks at the Federal Reserve are called _____.
A. bankers acceptances
B. federal funds
C. repurchase agreements
D. time deposits
Difficulty: Easy
15. Which of the following is not a true statement regarding municipal bonds?
A. A municipal bond is a debt obligation issued by state or local governments.
B. A municipal bond is a debt obligation issued by the Federal Government.
C. The interest income from a municipal bond is exempt from federal income taxation.
D. The interest income from a municipal bond is exempt from state and local taxation in the
issuing state.
Difficulty: Easy
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16. Which of the following is not a characteristic of a money market instrument?
A. Liquidity
B. Marketability
C. Low risk
D. Maturity greater than one year
Difficulty: Easy
17. An individual who goes short in a futures position
A. commits to delivering the underlying commodity at contract maturity
B. commits to purchasing the underlying commodity at contract maturity
C. has the right to deliver the underlying commodity at contract maturity
D. has the right to purchase the underlying commodity at contract maturity
Difficulty: Easy
18. Which of the following is not a nickname for an agency associated with the mortgage
markets?
A. Fannie Mae
B. Freddie Mac
C. Sallie Mae
D. Ginnie Mae
Difficulty: Easy
19. 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
Difficulty: Easy
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20. The maximum maturity on commercial paper is
A. 270 days
B. 180 days
C. 90 days
D. 30 days
Difficulty: Medium
21. Which one of the following is a true statement regarding the Dow Jones Industrial
Average?
A. It is a value-weighted average of 30 large industrial stocks
B. It is a price-weighted average of 30 large industrial stocks
C. It is a price-weighted average of 100 large stocks traded on the New York Stock Exchange
D. It is a value-weighted average of all stocks traded on the New York Stock Exchange
Difficulty: Easy
22. Treasury bills are financial instruments issued by __________ to raise funds.
A. commercial banks
B. the Federal Government
C. large corporations
D. state and city governments
Difficulty: Easy
23. Which of the following are true statements about T-bills?
I. T-bills typically sell in denominations of $10,000
II. Income earned on T-bills is exempt from all Federal taxes
III. Income earned on T-bills is exempt from state and local taxes
A. I only
B. I and II only
C. I and III only
D. I, II and III
Difficulty: Medium
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24. A bond that has no collateral is called _________.
A. a callable bond
B. a debenture
C. a junk bond
D. a mortgage
Difficulty: Easy
25. A __________ gives its holder the right to sell an asset for a specified exercise price on or
before a specified expiration date.
A. call option
B. futures contract
C. put option
D. interest rate swap
Difficulty: Easy
26. A T-bill quote sheet has 90 day T-bill quotes with a 4.92 bid and a 4.86 ask. If the bill has
a $10,000 face value an investor could buy this bill for
A. $10,000.00
B. $9,878.50
C. $9,877.00
D. $9,880.16
Difficulty: Hard
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27. Which one of the following is a true statement regarding corporate bonds?
A. A corporate callable bond gives its holder the right to exchange it for a specified number of
the company's common shares
B. A corporate debenture is a secured bond
C. A corporate convertible bond gives its holder the right to exchange it for a specified
number of the company's common shares
D. Holders of corporate bonds have voting rights in the company
Difficulty: Medium
28. The yield on tax-exempt bonds is ______.
A. usually less than 50% of the yield on taxable bonds
B. normally about 90% of the yield on taxable bonds
C. greater than the yield on taxable bonds
D. less than the yield on taxable bonds
Difficulty: Easy
29. __________ is not a money market instrument.
A. A certificate of deposit
B. A treasury bill
C. A treasury bond
D. Commercial paper
Difficulty: Easy
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30. An investor buys a T-bill at a bank discount quote of 4.80 with 150 days to maturity. The
investor's actual annual rate of return on this investment was _____.
A. 4.80%
B. 4.97%
C. 5.47%
D. 5.74%
Difficulty: Hard
31. The U.K. stock index is the _________.
A. DAX
B. FTSE
C. GSE
D. TSE
Difficulty: Easy
32. A __________ gives its holder the right to buy an asset for a specified exercise price on or
before a specified expiration date.
A. call option
B. futures contract
C. put option
D. interest rate swap
Difficulty: Easy
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33. Which one of the following provides the best example of securitization?
A. convertible bond
B. call option
C. mortgage pass-through security
D. preferred stock
Difficulty: Easy
34. Which of the following indices are market-value weighted?
I. The NYSE Composite
II. The S&P 500
III. The Wilshire 5000
A. I and II only
B. II and III only
C. I and III only
D. I, II and III
Difficulty: Easy
35. The interest rate charged by large banks in London to lend money among themselves is
called _________.
A. the prime rate
B. the discount rate
C. the federal funds rate
D. LIBOR
Difficulty: Easy
36. A firm that has large securities holdings that wishes to raise money for a short length of
time may be able to find the cheapest financing from which of the following?
A. Reverse repurchase agreement
B. Banker's acceptance
C. Commercial paper
D. Repurchase agreement
Difficulty: Hard
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37. Currently the Dow Jones Industrial Average is computed by _________.
A. adding the prices of 30 large "blue-chip" stocks and dividing by 30
B. calculating the total market value of the 30 firms in the index and dividing by 30
C. measuring the current total market value of the 30 stocks in the index relative to the total
value on the previous day
D. adding the prices of 30 large "blue-chip" stocks and dividing by a divisor adjusted for
stock splits and large stock dividends
Difficulty: Hard
38. An investor purchases one municipal and one corporate bond that pay rates of return of
5.00% and 6.40% respectively. If the investor is in the 15% tax bracket, his after tax rates of
return on the municipal and corporate bonds would be respectively
A. 5.00% and 6.40%
B. 5.00% and 5.44%
C. 4.25% and 6.40%
D. 5.75% and 5.44%
After-tax return on municipal bond = .05
After-tax return on corporate bond = .064(1 - .15) = 0.0544 = 5.44%
Difficulty: Medium
39. If a treasury note has a bid price of $996.25, the quoted bid price in the Wall Street
Journal would be _________.
A. 99:25
B. 99:63
C. 99:20
D. 99:08
Difficulty: Medium
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40. TIPS are ______.
A. Treasury bonds that pay a variable rate of interest
B. U.K. bonds that protect investors from default risk
C. securities that trade on the Toronto stock index
D. Treasury bonds that protect investors from inflation
Difficulty: Medium
41. The price quotations of treasury bonds in the Wall Street Journal show a bid price of
102:12 and an ask price of 102:14. If you sold the bond you expect to receive _________.
A. $1,024.75
B. $1,024.38
C. $1,023.75
D. $1,022.50
Difficulty: Medium
42. The Dow Jones Industrial Average is _________.
A. a price weighted average
B. a value weight and average
C. an equally weighted average
D. an unweighted average
Difficulty: Easy
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43. Investors will earn higher rates of returns on TIPS than equivalent default risk standard
bonds if _______________.
A. inflation is lower than anticipated over the investment period
B. inflation is higher than anticipated over the investment period
C. the U.S. dollar increases in value against the euro
D. the spread between commercial paper and Treasury securities remains low
Difficulty: Medium
44. Preferred stock is like long-term debt in that ___________.
A. it gives the holder voting power regarding the firm's management
B. it promises to pay to its holder a fixed stream of income each year
C. the preferred dividend is a tax-deductible expense for the firm
D. in the event of bankruptcy preferred stock has equal status with debt
Difficulty: Medium
45. Which of the following does not approximate the performance of a buy and hold portfolio
strategy?
A. An equally weighted index
B. A price weighted index
C. A value weighted index
D. Weights are not a factor in this situation
Difficulty: Medium
46. In calculating the Dow Jones Industrial Average, the adjustment for a stock split occurs
_________.
A. automatically
B. by adjusting the divisor
C. by adjusting the numerator
D. by adjusting the market value weights
Difficulty: Medium
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47. 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
D. The answer cannot be determined by the information given
Difficulty: Medium
48. A bond issued by the State of Alabama is priced to yield 6.25%. If you are in the 28% tax
bracket this bond would provide you with an equivalent taxable yield of _________.
A. 4.50%
B. 7.25%
C. 8.68%
D. none of the above
Difficulty: Medium Feedback: 8.68% = 6.25%/(1 - 0.28)
49. The purchase of a futures contract gives the buyer _________.
A. the right to buy an item at a specified price
B. the right to sell an item at a specified price
C. the obligation to buy an item at a specified price
D. the obligation to sell an item at a specified price
Difficulty: Easy
50. Ownership of a put option entitles the owner to the __________ to ___________ a
specific stock, on or before a specific date, at a specific price.
A. right, buy
B. right, sell
C. obligation, buy
D. obligation, sell
Difficulty: Easy
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51. An investor in a 28% tax bracket is trying to decide whether to invest in a municipal bond
or a corporate bond. She looks up municipal bond yields (rm) but wishes to calculate the
taxable equivalent yield r. The formula she should use is given by ______.
A. r = rm * (1 - 28%)
B. r = rm/(1 - 72%)
C. r = rm * (1 - 72%)
D. r = rm/(1 - 28%)
Difficulty: Hard
52. June call and put options on King Books Inc are available with exercise prices of $30, $35
and $40. Among the different exercise prices, the call option with the _____ exercise price
and the put option with the _____ exercise price will have the greatest value.
A. $40; $30
B. $30; $40
C. $35; $35
D. $40; $40
Difficulty: Medium
53. Ownership of a call option entitles the owner to the __________ to __________ a specific
stock, on or before a specific date, at a specific price.
A. right, buy
B. right, sell
C. obligation, buy
D. obligation, sell
Difficulty: Easy
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54. The ________ the ratio of municipal bond yields to corporate bond yields the _________
the cutoff tax bracket where more individuals will prefer to hold municipal debt.
A. higher; lower
B. lower; lower
C. lower; higher
D. higher; higher
Difficulty: Hard
55. Which of the following types of bonds are excluded from most bond indices?
A. Corporate bonds
B. Junk bonds
C. Municipal bonds
D. None of the above
Difficulty: Medium
56. The Hang Seng index reflects market performance on which of the following major stock
markets?
A. Japan
B. Singapore
C. Taiwan
D. Hong Kong
Difficulty: Medium
57. The Standard and Poors 500 is a(n) __________ weighted index.
A. equally
B. price
C. value
D. share
Difficulty: Easy
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58. A firm that fails to pay dividends on its preferred stock is said to be _________.
A. insolvent
B. in arrears
C. insufferable
D. delinquent
Difficulty: Medium
59. Large well-known companies often issue their own short term unsecured debt notes
directly to the public, rather than borrowing from banks, their notes are called _________.
A. certificates of deposit
B. repurchase agreements
C. banker's acceptances
D. commercial paper
Difficulty: Easy
60. Which of the following is most like a short-term collateralized loan?
A. Certificate of deposit
B. Repurchase agreement
C. Banker's acceptance
D. Commercial paper
Difficulty: Medium
61. Eurodollars are _________.
A. dollar denominated deposits at any foreign bank or foreign branch of an American bank
B. dollar denominated bonds issued by firms outside their home market
C. currency issued by Euro Disney and traded in France
D. dollars that wind up in banks as a result of money laundering activities
Difficulty: Easy
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62. Which of the following is used to back international sales of goods and services?
A. Certificate of deposit
B. Banker's acceptance
C. Eurodollar deposits
D. Commercial paper
Difficulty: Medium
63. Treasury notes have initial maturities between ________ years.
A. 2 and 4
B. 5 and 10
C. 10 and 30
D. 1 and 10
Difficulty: Easy
64. Which of the following are not characteristic of common stock ownership?
A. Residual claimant
B. Unlimited liability
C. Voting rights
D. Limited life of the security
Difficulty: Easy
65. If you thought prices of stock would be rising over the next few months you may wish to
__________________ on the stock.
A. purchase a call option
B. purchase a put option
C. sell a futures contract
D. place a short sale order
Difficulty: Medium
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66. A typical bond price quote includes all but which one of the following?
A. Daily high price for the bond
B. Closing bond price
C. Yield to maturity
D. Dividend yield
Difficulty: Easy
67. What are business firms most likely to use derivative securities for?
A. Hedging
B. Speculating
C. Doing calculus problems
D. Market making
Difficulty: Medium
68. What would you expect to have happened to the spread between yields on commercial
paper and Treasury bills immediately after September 11, 2001?
A. No change, as both yields will remain the same.
B. Increase, the spread usually increases in response to a crisis.
C. Decrease, the spread usually decreases in response to a crisis.
D. No change, as both yields will move in the same direction.
Difficulty: Hard
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69. A stock quote indicates a stock price of $60 and a dividend yield of 3%. The latest
quarterly dividend received by stock investors must have been ______ per share.
A. $0.55
B. $1.80
C. $0.45
D. $1.25
Difficulty: Medium
70. Three stocks have share prices of $12, $75, and $30 with total market values of $400
million, $350 million and $150 million respectively. If you were to construct a price-weighted
index of the three stocks what would be the index value?
A. 300
B. 39
C. 43
D. 30
Index = (12 + 75 + 30)/3 = 39
Difficulty: Medium
71. Which of the following is not considered a money market investment?
A. Bankers acceptances
B. Eurodollar
C. Repurchase agreement
D. Treasury note
Difficulty: Easy
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72. The Federal Reserve Board of Governors directly controls which of the following interest
rates?
A. Bankers acceptances
B. Brokers call
C. Federal funds
D. LIBOR
Difficulty: Easy
73. You decide to purchase an equal number of shares of stocks of firms to create a portfolio.
If you wished to construct an index to track your portfolio performance your best match for
your portfolio would be to construct a/an ______.
A. value weighted index
B. equal weighted index
C. price weighted index
D. bond price index
Difficulty: Hard
74. In a ___________ index changes in the value of the stock with the greatest market value
will move the index value the most everything else equal.
A. value weighted index
B. equal weighted index
C. price weighted index
D. bond price index
Difficulty: Medium
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75. A corporation in a 34% tax bracket invests in the preferred stock of another company and
earns a 6% pre-tax rate of return. An individual investor in a 15% tax bracket invests in the
same preferred stock and earns the same pre-tax return. The after tax return to the corporation
is _______ and the after tax return to the individual investor is _______.
A. 3.96%; 5.1%
B. 5.39%; 5.1%
C. 6.00%; 6.00%
D. 3.96%; 6.00%
After-tax return to corporate investor after 70% exclusion = 0.06 - (0.06 * 0.30)*0.34 = 5.39%
After-tax return to individual investor = 0.06 * (1 - 0.15) = 5.1%
Difficulty: Hard
76. All but which one of the following indices is value weighted?
A. Nasdaq Composite
B. S&P 500
C. Wilshire 5000
D. DJIA
Difficulty: Easy
77. What is the tax exempt equivalent yield on a 9% bond yield given a marginal tax rate of
28%?
A. 6.48%
B. 7.25%
C. 8.02%
D. 9.00%
Difficulty: Medium
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78. A tax free municipal bond provides a yield of 3.2%. What is the equivalent taxable yield
on the bond given a 35% tax bracket?
A. 3.20%
B. 3.68%
C. 4.92%
D. 5.00%
Difficulty: Medium
79. An index computed from a simple average of returns is a/an _____.
A. equal weighted index
B. value weighted index
C. price weighted index
D. share weighted index
Difficulty: Medium
80. A tax free municipal bond provides a yield of 2.34%. What is the equivalent taxable yield
on the bond given a 28% tax bracket?
A. 2.34%
B. 2.68%
C. 3.25%
D. 4.92%
Difficulty: Medium
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81. The Chompers Index is a price weighted stock index based on the 3 largest fast food
chains. The stock prices for the three stocks are $54, $23, and $44. What is the price weighted
index value of the Chompers Index?
A. 23.43
B. 35.36
C. 40.33
D. 49.58
Difficulty: Medium
82. The Hydro Index is a price weighted stock index based on the 5 largest boat
manufacturers in the nation. The stock prices for the five stocks are $10, $20, $80, $50 and
$40. The price of the last stock was just split 2 for 1 and the stock price was halved from $40
to $20. What is the new divisor for a price weighted index?
A. 5.00
B. 4.85
C. 4.50
D. 4.75
Difficulty: Hard
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83. A benchmark index has three stocks priced at $23, $43, and $56. The number of
outstanding shares for each is 350,000 shares, 405,000 shares, and 553,000 shares,
respectively. If the market value weighted index was 970 yesterday and the prices changed to
$23, $41, and $58, what is the new index value?
A. 960
B. 970
C. 975
D. 985
Difficulty: Hard
84. A benchmark market value index is comprised of three stocks. Yesterday the three stocks
were priced at $12, $20, and $60. The number of outstanding shares for each is 600,000
shares, 500,000 shares, and 200,000 shares, respectively. If the stock prices changed to $16,
$18, and $62 today respectively, what is the one day rate of return on the index?
A. 5.78%
B. 4.35%
C. 6.16%
D. 7.42%
Difficulty: Hard
85. Which of the following mortgage scenarios will benefit the homeowner the most?
A. Adjustable rate mortgage when interest rate increases.
B. Fixed rate mortgage when interest rates falls.
C. Fixed rare mortgage when interest rate rises.
D. None of the above, as banker's interest will always be protected.
Difficulty: Medium
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Chapter 03 Securities Markets
Answer Key
Multiple Choice Questions
1. Underwriting is one of the services provided by _____.
A. the SEC
B. investment bankers
C. publicly traded companies
D. FDIC
Difficulty: Easy
2. Under firm commitment underwriting the ______ assumes the full risk that the shares
cannot be sold to the public at the stipulated offering price.
A. red herring
B. issuing company
C. initial stockholder
D. underwriter
Difficulty: Medium
3. Explicit costs of an IPO tend to be around ______ of the funds raised.
A. 1%
B. 7%
C. 15%
D. 25%
Difficulty: Medium
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4. Barnegat Light sold 200,000 shares in an initial public offering. The underwriter's explicit
fees were $90,000. The offering price for the shares was $35, but immediately upon issue, the
share price jumped to $43. What is the best estimate of the total cost to Barnegat Light of the
equity issue?
A. $90,000
B. $1,290,000
C. $2,390,000
D. $1,690,000
Total Cost = 90,000 + (43 - 35)200,000 = $1,690,000
Difficulty: Hard
5. A red herring becomes a prospectus when ____.
A. the preliminary registration statement is approved by the SEC
B. the IPO is complete
C. the offering is seasoned
D. the lockup period expires
Difficulty: Medium
6. Private placements can be advantageous rather than public issue because ______.
I. private placements are cheaper to market than public issues
II. private placements may still be sold to the general public under SEC Rule 144A
III. privately placed securities trade on secondary markets
A. I only
B. I and III only
C. II and III only
D. I, II and III
Difficulty: Medium
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7. A level _____ subscriber to the NASDAQ system may enter bid and ask prices.
A. 1
B. 2
C. 3
D. 4
Difficulty: Easy
8. Which one of the following statements about IPOs is not true?
A. IPOs generally underperform in the short run.
B. IPOs often provide very good initial returns to investors.
C. IPOs generally provide superior long-term performance as compared to other stocks.
D. Shares in IPOs are often primarily allocated to institutional investors.
Difficulty: Medium
9. The issue process where investors submit bids for a new issue and the shares in an IPO are
allocated to the highest bidders until the entire issue is sold is called a
A. best efforts offer
B. Dutch auction
C. secondary offering
D. firm commitment offer
Difficulty: Medium
10. The NYSE recently acquired the ECN _______ and NASDAQ recently acquired the ECN
________.
A. Archipelago; Instinet
B. Instinet; Archipelago
C. Island; Instinet
D. LSE; Euronext
Difficulty: Medium
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11. Rank the following types of markets from least integrated and organized to most
integrated and organized.
I. Brokered markets
II. Continuous auction markets
III. Dealer markets
IV. Direct search markets
A. IV, II, I, III
B. I, III, IV, II
C. II, III, IV, I
D. IV, I, III, II
Difficulty: Hard
12. A ______ drop in the Dow Jones Industrial Average would stop trading for the day.
A. 10%
B. 20%
C. 30%
D. 40%
Difficulty: Medium
13. Which one of the following is not an example of a brokered market?
A. Residential real estate market
B. Market for large block security transactions
C. Primary market for securities
D. NASDAQ
Difficulty: Medium
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14. Circuit breakers will be imposed if the Dow Jones Industrial Average drops by a
minimum of ______ by 2.30 pm.
A. 10%
B. 20%
C. 30%
D. 40%
Difficulty: Medium
15. Purchases of new issues of stock take place _________.
A. at the desk of the Fed
B. in the primary market
C. in the secondary market
D. in the money markets
Difficulty: Easy
16. Initial margin requirements on stocks are set by _________.
A. the Federal Deposit Insurance Corporation
B. the Federal Reserve
C. the New York Stock Exchange
D. the Securities and Exchange Commission
Difficulty: Easy
17. Which one of the following types of markets requires the greatest level of trading activity
to be cost effective?
A. Broker market
B. Dealer market
C. Continuous auction market
D. Direct search market
Difficulty: Easy
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18. Which one 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
Difficulty: Easy
19. Restrictions on trading involving insider information apply to _________.
I. corporate officers and directors
II. major stockholders
III. relatives of corporate directors and officers
A. I only
B. I and II only
C. II and III only
D. I, II, and III.
Difficulty: Hard
20. An order to buy or sell a security at the current price is a ______________.
A. limit order
B. market order
C. stop loss order
D. stop buy order
Difficulty: Easy
21. When U.S. stock prices were converted from fractions to decimals in 2001 the minimum
bid-ask spread charged by dealers ________.
A. increased
B. decreased
C. remained the same
D. fell at first, but then increased
Difficulty: Medium
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22. The market collapse of 1987 prompted ________________________.
A. Blue Sky laws
B. circuit breakers to halt trading during market crises
C. the Securities Investor Protection Act
D. the National Securities Market Act
Difficulty: Easy
23. If an investor places a _________ order the stock will be sold if its price falls to the
stipulated level. If an investor places a __________ order the stock will be bought if its price
rises above the stipulated level.
A. stop-buy; stop-loss
B. market; limit
C. stop-loss; stop-buy
D. limit; market
Difficulty: Easy
24. On a given day a stock dealer maintains a bid price of $1000.50 for a bond and an ask
price of $1003.25. The dealer made 10 trades which totaled 500 bonds traded that day. What
was the dealer's gross trading profit for this security?
A. $1,375
B. $500
C. $275
D. $1,450
(1003.15 - 1000.50)500 = $1,375
Difficulty: Easy
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25. Advantages of ECNs over traditional markets include all but which one of the following?
A. Lower transactions costs
B. Anonymity of the participants
C. Small amount of time needed to execute and order
D. Ability to handle very large orders
Difficulty: Medium
26. The __________ was established to protect investors from losses if their brokerage firms
fail.
A. CFTC
B. SEC
C. SIPC
D. AIMR
Difficulty: Easy
27. When matching orders from the public a specialist is required to use the _______.
A. lowest outstanding bid price and highest outstanding ask price
B. highest outstanding bid price and highest outstanding ask price
C. lowest outstanding bid price and lowest outstanding ask price
D. highest outstanding bid price and lowest outstanding ask price
Difficulty: Hard
28. The process of polling potential investors regarding their interest in a forthcoming initial
public offering (IPO) is called ________.
A. interest building
B. book building
C. market analysis
D. customer identification
Difficulty: Easy
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29. The bulk of most initial public offerings (IPOs) of equity securities go to ___________.
A. institutional investors
B. individual investors
C. the firm's current shareholders
D. day traders
Difficulty: Easy
30. Initial public offerings (IPOs) are usually ___________ relative to the levels at which
their prices stabilize after they begin trading in the secondary market.
A. over priced
B. correctly priced
C. under priced
D. mispriced but without any particular bias
Difficulty: Easy
31. According to Loughran and Ritter, initial public offerings tend to exhibit __________
performance initially, and __________ performance over the long term.
A. bad; good
B. bad; bad
C. good; good
D. good; bad
Difficulty: Medium
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32. Specialists try to maintain a narrow bid-ask spread because _______.
I. If the spread is too large they will not participate in as many trades, losing commission
income
II. The exchange requires specialists to maintain price continuity
III. Specialists are non-profit entities designed to facilitate market transactions rather than
make a profit
A. I only
B. I and II only
C. II and III only
D. I, II and III
Difficulty: Easy
33. In a __________ underwriting arrangement, the underwriter assumes the full risk that
shares may not be sold to the public at the stipulated offering price.
A. best efforts
B. firm commitment
C. private placement
D. none of the above
Difficulty: Easy
34. The ______________ is the most important dealer market in the U.S. and the
______________ is the most important auction market.
A. NYSE; NASDAQ
B. NASDAQ; NYSE
C. CME; OTC
D. AMEX; NYSE
Difficulty: Easy
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35. The inside quotes on a limit order book would be comprised of the ______.
A. highest bid price and the lowest ask price
B. lowest bid price and the lowest ask price
C. lowest bid price and the highest ask price
D. highest bid price and the highest ask price
Difficulty: Medium
36. The __________ system enables exchange members to send orders directly to a specialist
over computer lines.
A. FAX
B. Direct Plus
C. NASDAQ
D. SUPERDOT
Difficulty: Easy
37. The fully automated trade-execution system installed on the NYSE is called
A. FAX
B. Direct Plus
C. NASDAQ
D. SUPERDOT
Difficulty: Easy
38. Nasdaq now offers three listing options. The largest, most actively traded firms are on the
A. Nasdaq Global Market
B. Nasdaq Global Select Market
C. Nasdaq Capital Market
D. Nasdaq Pink Sheet Stocks
Difficulty: Medium
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39. Approximately __________ of trades involving shares issued by firms listed on the New
York Stock Exchange actually take place on the New York Stock Exchange.
A. 50%
B. 75%
C. 80%
D. 95%
Difficulty: Medium
40. The _________ price is the price at which a dealer is willing to purchase a security.
A. bid
B. ask
C. clearing
D. settlement
Difficulty: Easy
41. The _________ price is the price at which a dealer is willing to sell a security.
A. bid
B. ask
C. clearing
D. settlement
Difficulty: Easy
42. The difference between the price at which a dealer is willing to buy, and the price at
which a dealer is willing to sell, is called the _________.
A. market spread
B. bid-ask spread
C. bid-ask gap
D. market variation
Difficulty: Easy
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43. The bid-ask spread exists because of _______________.
A. market inefficiencies
B. discontinuities in the markets
C. the need for dealers to cover expenses and make a profit
D. lack of trading in thin markets
Difficulty: Easy
44. Both the NYSE and Nasdaq have lost market share to ECNs in recent years. Part of
Nasdaq's response to the growth of ECNs has been to _______.
I. Purchase Instinet, a major ECN
II. Enable automatic trade execution through its new Market Center
III. Switch from stock ownership to mutual ownership
A. I only
B. II and III only
C. I and II only
D. I, II and III
Difficulty: Medium
45. The cost of buying and selling a stock include _________.
I. broker's commissions
II. dealer's bid-asked spread
III. price concessions investors may be forced to make
A. I and II only
B. II and III only
C. I and III only
D. I, II and III
Difficulty: Medium
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46. Trades on the __________ are the most likely to trade inside the inside quotes than in
other markets.
A. NYSE
B. NASDAQ market
C. OTC market
D. Pink sheet market
Difficulty: Medium
47. You purchased XYZ stock at $50 per share. The stock is currently selling at $65. Your
gains could be protected by placing a _________.
A. limit-buy order
B. limit-sell order
C. market order
D. stop-loss order
Difficulty: Medium
48. Consider the following limit order book of a specialist. The last trade in the stock occurred
at a price of $40. If a market buy order for 100 shares comes in, at what price will it be filled?
A. $39.75
B. $40.25
C. $40.375
D. $40.25 or less
In this case the specialist would have the option of matching the buy order with the lowest
limit sell order ($40.25) or set an ask price lower than $40.25 ($40 for example) and trade the
order from his own stock.
Difficulty: Medium
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49. You find that the bid and ask prices for a stock are $10.25 and $10.30 respectively. If you
purchase or sell the stock you must pay a flat commission of $25. If you buy 100 shares of the
stock and immediately sell them, what is your total implied and actual transaction cost in
dollars?
A. $50
B. $25
C. $30
D. $55
100(10.30 - 10.25) + 2(.25) = $55
Difficulty: Medium
50. According to SEC Rule 415 regarding shelf registration, firms can gradually sell securities
to the public for __________ following initial registration.
A. 1 year
B. 2 years
C. 3 years
D. 4 years
Difficulty: Medium
51. What percentage of NYSE transactions is executed by specialists?
A. 10%
B. 25%
C. 50%
D. 75%
Difficulty: Medium
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52. Assume you purchased 500 shares of XYZ common stock on margin at $40 per share
from your broker. If the initial margin is 60%, the amount you borrowed from the broker is
_________.
A. $20,000
B. $12,000
C. $8,000
D. $15,000
500($40)(0.40) = $8,000
Difficulty: Medium
53. You sold short 300 shares of common stock at $30 per share. The initial margin is 50%.
You must put up _________.
A. $4,500
B. $6,000
C. $9,000
D. $10,000
Investment = 300(30)(.50) = 4500
Difficulty: Medium
54. You short-sell 200 shares of Tuckerton Trading Co., now selling for $50 per share. What
is your maximum possible loss?
A. $50
B. $150
C. $10,000
D. unlimited
There is no upper limit to the price of a share of stock; therefore no upper limit the price you
will have to pay to replace the 200 shares of Tuckerton.
Difficulty: Easy
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55. You short-sell 200 shares of Tuckerton Trading Co., now selling for $50 per share. What
is your maximum possible gain ignoring transactions cost?
A. $50
B. $150
C. $10,000
D. unlimited
Tuckerton could go bankrupt with a share price of $0. You could keep the entire proceeds
from the short sale.
Difficulty: Medium
56. You short-sell 200 shares of Rock Creek Fly Fishing Co., now selling for $50 per share. If
you wish to limit your loss to $2,500, you should place a stop-buy order at ____.
A. $37.50
B. $62.50
C. $56.25
D. $59.75
50 + (2500/200) = $62.50
Difficulty: Medium
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57. You purchased 200 shares of ABC common stock on margin at $50 per share. Assume the
initial margin is 50% and the maintenance margin is 30%. You will get a margin call if the
stock drops below ________. (Assume the stock pays no dividends and ignore interest on the
margin loan.)
A. $26.55
B. $35.71
C. $28.95
D. $30.77
Difficulty: Hard
58. You purchased 250 shares of common stock on margin for $25 per share. The initial
margin is 65% and the stock pays no dividend. Your rate of return would be __________ if
you sell the stock at $32 per share. Ignore interest on margin.
A. 35%
B. 39%
C. 43%
D. 28%
Difficulty: Hard
59. Specialists on the stock exchanges may do all of the following except _________.
A. They make a market in shares of the firms for which they specialize
B. They keep the limit order book
C. Use their privileged information to make speculative investments on their own account
D. Use their privileged information to make investments on behalf of clients of brokerage
firms with which they do business
Difficulty: Medium
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60. Transactions that do not involve the original issue of securities take place in _________.
A. primary markets
B. secondary markets
C. over-the-counter markets
D. institutional markets
Difficulty: Easy
61. Many exchange-listed securities are also traded in the over-the-counter market. Trading of
this sort is said to take place in the ___________.
A. third market
B. fourth market
C. after-market
D. block market
Difficulty: Easy
62. __________ often accompany short sales, and are used to limit potential losses from the
short position.
A. Limit orders
B. Restricted orders
C. Limit-loss orders
D. Stop-buy orders
Difficulty: Medium
63. The approximate dollar value of trades on the NYSE in 2008 was
A. $75 billion
B. $100 billion
C. $125 billion
D. $150 billion
Difficulty: Medium
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64. Registered traders _________________.
A. trade on their own account only
B. perform trades for brokerage firms
C. perform retail trades for the public
D. trade for the government
Difficulty: Easy
65. Which Congressional action directed the SEC to implement a national competitive
securities market?
A. Securities Act of 1933
B. SEC Act of 1934
C. Securities Act Amendments of 1975
D. Financial Services Modernization Act of 1999
Difficulty: Medium
66. Most European markets, including Euronext, use a/an _____________________.
A. specialist trading system
B. electronic trading system
C. continuous auction market
D. direct search market
Difficulty: Medium
67. Which of the following statements about Saitoris in Japanese stock markets is incorrect?
A. Saitoris maintain the limit order book but may not trade for their own account
B. Saitoris have more responsibilities than NYSE specialists
C. Saitoris act as dealers in the Japanese markets
D. Saitoris are the principle source of liquidity in Japanese markets
Difficulty: Medium
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68. The term "paying for order flow" refers to the practice of ________________.
A. paying more than one broker to execute your order
B. dealers trading with their customers at an outdated price
C. paying a broker a rebate for directing the trade to a particular stock dealer rather than
directing the order to the NYSE
D. allocating shares in an IPO to preferred customers who agree to buy more shares in the
aftermarket
Difficulty: Medium
69. If an investor uses the full amount of margin available, the equity in a margin account
used for a stock purchase can be found as ________.
A. market value of the stock - amount owed on the margin loan
B. market value of the stock + amount owed on the margin loan
C. market value of the stock  margin loan
D. margin loan x market value of the stock
Difficulty: Medium
70. If the Dow Jones Industrial Average falls by 10% by 11 am, trading will ______.
A. continue unchanged
B. will be halted for one hour
C. will be halted for one-half hour
D. will be halted for the rest of the day
Difficulty: Medium
71. The CFA Institute Standards of Professional Conduct require that members _____.
A. place their clients interests before their own
B. disclose conflicts of interest to clients
C. inform their employers that they are obligated to comply with the Standards of Professional
Conduct
D. The AIMR Standard require all three
Difficulty: Medium
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72. Trading on insider information is ____.
I. prohibited by federal law
II. prohibited by the CFA Institute Standards of Professional Conduct
III. legal in Japan
A. I and II only
B. II and III only
C. I and III only
D. I, II and III
Difficulty: Medium
73. The ____ requires full disclosure of relevant information relating to the issue of new
securities.
A. Insider Trading Act of 1931
B. Securities Act of 1933
C. Securities Exchange Act of 1934
D. Investment Company Act of 1940
Difficulty: Easy
74. The SIPC was established by the ____.
A. Insider Trading Act of 1931
B. Securities Act of 1933
C. Securities Exchange Act of 1934
D. none of these acts established the SIPC
Difficulty: Easy
75. Brokerage firms can change margin-loan practices ____.
A. without notice
B. only after 72 hours notice
C. only on new orders
D. only with permission from the SEC
Difficulty: Easy
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76. Which of the following are true concerning short sales of exchange listed stocks?
I. A short sale is permitted only if the last recorded change in the stock's price was positive
II. Proceeds from the short sale must be kept on deposit with the broker
III. Short-sellers must post margin with their broker to cover potential losses on the position
IV. The short-seller earns interest on any cash deposited with the broker that is used to meet
the margin requirement
A. I and II only
B. I, III and IV only
C. II and III only
D. I, II, III and IV
Difficulty: Hard
77. Day to day regulation of the New York Stock Exchange and enforcement of exchange
rules and federal securities laws is conducted by the
A. SEC.
B. CFTC.
C. NYSE Regulation, Inc.
D. U.S. Department of the Treasury.
Difficulty: Hard
78. In ________ markets participants post bid and ask prices at which they are willing to
trade, but orders are not automatically executed by computer. ____________ execute trades
for people other than themselves and in _______________ markets a computer matches
orders with an existing limit order book and executes the trades automatically.
A. electronic; Dealers; brokers
B. dealer; Brokers; electronic
C. direct search; Brokers; electronic
D. brokered; Dealers; direct search
Difficulty: Hard
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79. An investor puts up $5,000 but borrows an equal amount of money from their 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%
Difficulty: Hard
80. An investor buys $8,000 worth of a stock priced at $40 per share using 50% initial
margin. The broker charges 6% on the margin loan and requires a 30% maintenance margin.
In one year the investor gets a margin call. At the time of the margin call the stock's price
must have been ____.
A. $20.00
B. $29.77
C. $30.29
D. $32.45
Difficulty: Hard
81. The New York Stock Exchange is a good example of _________.
A. an auction market
B. a brokered market
C. a dealer market
D. a direct search market
Difficulty: Easy
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82. The primary market where new security issues are offered to the public is a good example
of _________.
A. an auction market
B. a brokered market
C. a dealer market
D. a direct search market
Difficulty: Easy
83. The over-the-counter securities market is a good example of _________.
A. an auction market
B. a brokered market
C. a dealer market
D. a direct search market
Difficulty: Easy
84. An investor buys $16,000 worth of a stock priced at $20 per share using 60% initial
margin. The broker charges 8% on the margin loan and requires a 35% maintenance margin.
The stock pays a $0.50 per share dividend in one year and then the stock is sold at $23 per
share. What was the investor's rate of return?
A. 17.50%
B. 19.67%
C. 23.83%
D. 25.75%
Difficulty: Hard
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85. IBM is listed on the NYSE. If a share of IBM is sold via the NASDAQ exchange in which
market is it thought to have traded?
A. Primary market
B. Secondary market
C. Third market
D. Fourth market
Difficulty: Easy
86. You sell short 300 shares of Microsoft which are currently selling at $30 per share. You
post the 50% margin required on the short sale. If you earn no interest on the funds in your
margin account what will be your rate of return after one year if Microsoft is selling at $27?
(Ignore any dividends)
A. 10.00%
B. 20.00%
C. 6.67%
D. 15%
Difficulty: Hard
87. The commission structure on a stock purchase is $20 plus $0.02 per share. If you purchase
4 round lots of a stock selling for $56, what is your commission?
A. $20
B. $22
C. $26
D. $28
Commission = 20 + (400 x .02) = $28.00
Difficulty: Medium
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88. The commission structure on a stock purchase is $50 plus $0.03 per share. If you purchase
600 shares of a stock selling for $65, what is your commission?
A. $35
B. $45
C. $53
D. $68
Commission = 50 + (600 x .03) = $68.00
Difficulty: Medium
89. You sell short 200 shares of Doggie Treats Inc. which are currently selling at $25 per
share. You post the 50% margin required on the short sale. If your broker requires a 30%
maintenance margin, at what stock price will you get a margin call? (You earn no interest on
the funds in your margin account and the firm does not pay any dividends)
A. $28.85
B. $35.71
C. $31.50
D. $32.25
Difficulty: Hard
90. The margin requirement on a stock purchase is 25%. You fully use the margin allowed to
purchase 100 shares of MSFT at $25. If the price drops to $22, what is your percentage loss?
A. 9%
B. 15%
C. 48%
D. 57%
Difficulty: Medium
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1. Which one of the following invests in a portfolio that is fixed for the life of the fund?
A. mutual fund
B.money market fund
C. managed investment company
D. unit investment trust
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 1 Easy
Learning Objective: 04-02 Contrast open-end mutual funds with closed-end funds, unit investment trusts, hedge funds, and exchange-traded funds.
Topic: Types of Investment Companies
2. ______ are partnerships of investors with portfolios that are larger than most individual investors but are still too small to warrant managing on a separate basis.
A.
B.
C.
D.
Commingled funds
Closed-end funds
REITs
Mutual funds
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 1 Easy
Learning Objective: 04-02 Contrast open-end mutual funds with closed-end funds, unit investment trusts, hedge funds, and exchange-traded funds.
Topic: Types of Investment Companies
3. A __________ is a private investment pool open only to wealthy or institutional investors that is exempt from SEC regulation and can therefore pursue more
speculative policies than mutual funds.
A.
B.
C.
D.
commingled pool
unit trust
hedge fund
money market fund
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 1 Easy
Learning Objective: 04-02 Contrast open-end mutual funds with closed-end funds, unit investment trusts, hedge funds, and exchange-traded funds.
Topic: Types of Investment Companies
4.
Advantages of investment companies to investors include all but which one of the following?
A. record keeping and administration
B. low-cost diversification
C. professional management
D. guaranteed rates of return
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 1 Easy
Learning Objective: 04-01 Cite advantages and disadvantages of investing with an investment company rather than buying securities directly.
Topic: Investment Companies
5. Which of the following typically employ significant amounts of leverage?
I. Hedge funds
II. REITs
III. Money market funds
IV. Equity mutual funds
A.
B.
C.
D.
I and II only
II and III only
III and IV only
I, II, and III only
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 2 Medium
Learning Objective: 04-02 Contrast open-end mutual funds with closed-end funds, unit investment trusts, hedge funds, and exchange-traded funds.
Topic: Types of Investment Companies
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6.
The NAV of which funds is fixed at $1 per share?
A. equity funds
B. money market funds
C. fixed-income funds
D. commingled funds
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 1 Easy
Learning Objective: 04-02 Contrast open-end mutual funds with closed-end funds, unit investment trusts, hedge funds, and exchange-traded funds.
Topic: Types of Investment Companies
7.
A.
B.
C.
D.
The two principal types of REITs are equity trusts, which _______________, and mortgage trusts, which _______________.
invest directly in real estate; invest in mortgage and construction loans
invest in mortgage and construction loans; invest directly in real estate
use extensive leverage; distribute less than 95% of income to shareholders
distribute less than 95% of income to shareholders; use extensive leverage
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 2 Medium
Learning Objective: 04-02 Contrast open-end mutual funds with closed-end funds, unit investment trusts, hedge funds, and exchange-traded funds.
Topic: Types of Investment Companies
8.
A contingent deferred sales load is commonly called a ____.
A. front-end load
B. back-end load
C. 12b-1 charge
D. top-end sales commission
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 1 Easy
Learning Objective: 04-05 Demonstrate the impact of expenses and turnover on mutual fund investment performance.
Topic: Costs of Investing in Mutual Funds
9.
A.
B.
C.
D.
In the United States in 2014, there were approximately _______ mutual funds offered by fewer than _______ fund complexes.
12,000; 600
7,000; 100
8,000; 800
9,000; 300
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 2 Medium
Learning Objective: 04-04 Classify mutual funds according to investment style.
Topic: Mutual Funds
10. Part B of a mutual fund prospectus contains information about:
I. Fund holdings by directors and officers
II. Front-end and back-end loads
III. Securities held by the fund at the end of the fiscal year
A.
B.
C.
D.
I only
I and II only
I and III only
I, II, and III
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 1 Easy
Learning Objective: 04-01 Cite advantages and disadvantages of investing with an investment company rather than buying securities directly.
Topic: Information on Mutual Funds
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11. Mutual funds provide the following for their shareholders.
A. diversification
B. professional management
C. record keeping and administration
D. all of these options
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 1 Easy
Learning Objective: 04-01 Cite advantages and disadvantages of investing with an investment company rather than buying securities directly.
Topic: Investment Companies
12. The average maturity of fund investments in a money market mutual fund is _______.
A.
B.
C.
D.
slightly more than 1 month
slightly more than 1 year
about 9 months
between 2 and 3 years
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 1 Easy
Learning Objective: 04-04 Classify mutual funds according to investment style.
Topic: Mutual Funds
13. Rank the following fund categories from most risky to least risky:
I. Equity growth fund
II. Balanced fund
III. Sector fund
IV. Money market fund
A.
B.
C.
D.
IV, I, III, II
III, II, IV, I
I, II, III, IV
III, I, II, IV
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Understand
Difficulty: 2 Medium
Learning Objective: 04-04 Classify mutual funds according to investment style.
Topic: Mutual Funds
14. Which of the following result in a taxable event for investors?
I. Short-term capital gain distributions from the fund
II. Dividend distributions from the fund
III. Long-term capital gain distributions from the fund
A.
B.
C.
D.
I only
II only
I and II only
I, II, and III
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 1 Easy
Learning Objective: 04-05 Demonstrate the impact of expenses and turnover on mutual fund investment performance.
Topic: Taxation of Mutual Fund Income
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15. The type of mutual fund that primarily engages in market timing is called _______.
A.
B.
C.
D.
a sector fund
an index fund
an ETF
an asset allocation fund
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 2 Medium
Learning Objective: 04-04 Classify mutual funds according to investment style.
Topic: Mutual Funds
16. As of 2014, approximately _____ of mutual fund assets were invested in equity funds.
A.
B.
C.
D.
5%
52%
30%
12%
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 1 Easy
Learning Objective: 04-04 Classify mutual funds according to investment style.
Topic: Mutual Funds
17. As of 2014, approximately _____ of mutual fund assets were invested in bond funds.
A.
B.
C.
D.
22%
32%
37%
47%
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 1 Easy
Learning Objective: 04-04 Classify mutual funds according to investment style.
Topic: Mutual Funds
18. As of 2014, approximately _____ of mutual fund assets were invested in money market funds.
A. 5%
B. 18%
C. 44%
D. 66%
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 1 Easy
Learning Objective: 04-04 Classify mutual funds according to investment style.
Topic: Mutual Funds
19. Management fees for open-end and closed-end funds typically range between _____ and _____.
A. .2%; 1.5%
B. .5%; 5%
C. 2%; 5%
D. 3%; 8%
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 1 Easy
Learning Objective: 04-05 Demonstrate the impact of expenses and turnover on mutual fund investment performance.
Topic: Costs of Investing in Mutual Funds
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20. The primary measurement unit used for assessing the value of one's stake in an investment company is ___________________.
A. net asset value
B. average asset value
C. gross asset value
D. total asset value
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 1 Easy
Learning Objective: 04-01 Cite advantages and disadvantages of investing with an investment company rather than buying securities directly.
Topic: Investment Companies
21. Net asset value is defined as ________________________.
A.
B.
C.
D.
book value of assets divided by shares outstanding
book value of assets minus liabilities divided by shares outstanding
market value of assets divided by shares outstanding
market value of assets minus liabilities divided by shares outstanding
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 1 Easy
Learning Objective: 04-01 Cite advantages and disadvantages of investing with an investment company rather than buying securities directly.
Topic: Investment Companies
22.
Assume that you have just purchased some shares in an investment company reporting $500 million in assets, $50 million in liabilities, and 50 million
shares outstanding. What is the net asset value (NAV) of these shares?
A.
B.
C.
D.
$12
$9
$10
$1
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 2 Medium
Learning Objective: 04-01 Cite advantages and disadvantages of investing with an investment company rather than buying securities directly.
Topic: Investment Companies
23.
Assume that you have recently purchased 100 shares in an investment company. Upon examining the balance sheet, you note that the firm is reporting $225 million
in assets, $30 million in liabilities, and 10 million shares outstanding. What is the net asset value (NAV) of these shares?
A.
B.
C.
D.
$25.50
$22.50
$19.50
$1.95
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 2 Medium
Learning Objective: 04-01 Cite advantages and disadvantages of investing with an investment company rather than buying securities directly.
Topic: Investment Companies
24. The Vanguard 500 Index Fund tracks the performance of the S&P 500. To do so, the fund buys shares in each S&P 500 company __________.
A. in proportion to the market value weight of the firm's equity in the S&P 500
B. in proportion to the price weight of the stock in the S&P 500
C. by purchasing an equal number of shares of each stock in the S&P 500
D. by purchasing an equal dollar amount of shares of each stock in the S&P 500
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 1 Easy
Learning Objective: 04-04 Classify mutual funds according to investment style.
Topic: Mutual Funds
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25. Which of the following is not a type of managed investment company?
A. unit investment trusts
B. closed-end funds
C. open-end funds
D. hedge funds
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 1 Easy
Learning Objective: 04-02 Contrast open-end mutual funds with closed-end funds, unit investment trusts, hedge funds, and exchange-traded funds.
Topic: Types of Investment Companies
26. Which of the following funds invest specifically in stocks of fast-growing companies?
A. balanced funds
B. growth equity funds
C. REITs
D. equity income funds
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 1 Easy
Learning Objective: 04-04 Classify mutual funds according to investment style.
Topic: Mutual Funds
27. A fund that invests in securities worldwide, including the United States, is called ______.
A.
B.
C.
D.
an international fund
an emerging market fund
a global fund
a regional fund
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 1 Easy
Learning Objective: 04-02 Contrast open-end mutual funds with closed-end funds, unit investment trusts, hedge funds, and exchange-traded funds.
Topic: Types of Investment Companies
28. The greatest percentage of mutual fund assets are invested in ________.
A.
B.
C.
D.
bond funds
equity funds
hybrid funds
money market funds
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 1 Easy
Learning Objective: 04-04 Classify mutual funds according to investment style.
Topic: Mutual Funds
29. Sponsors of unit investment trusts earn a profit by ___________________.
A.
B.
C.
D.
deducting management fees from fund assets
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
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 1 Easy
Learning Objective: 04-02 Contrast open-end mutual funds with closed-end funds, unit investment trusts, hedge funds, and exchange-traded funds.
Topic: Types of Investment Companies
30. Investors who want to liquidate their holdings in a unit investment trust may ___________________.
A.
B.
C.
D.
sell their shares back to the trustee at a discount
sell their shares back to the trustee at net asset value
sell their shares on the open market
sell their shares at a premium to net asset value
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 1 Easy
Learning Objective: 04-02 Contrast open-end mutual funds with closed-end funds, unit investment trusts, hedge funds, and exchange-traded funds.
Topic: Types of Investment Companies
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31. Investors who want to liquidate their holdings in a closed-end fund may ___________________.
A.
B.
C.
D.
sell their shares back to the fund at a discount if they wish
sell their shares back to the fund at net asset value
sell their shares on the open market
sell their shares at a premium to net asset value if they wish
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 1 Easy
Learning Objective: 04-02 Contrast open-end mutual funds with closed-end funds, unit investment trusts, hedge funds, and exchange-traded funds.
Topic: Types of Investment Companies
32. __________ fund is defined as one in which the fund charges a sales commission to either buy into or exit from the fund.
A.
B.
C.
D.
A load
A no-load
An index
A specialized-sector
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 1 Easy
Learning Objective: 04-02 Contrast open-end mutual funds with closed-end funds, unit investment trusts, hedge funds, and exchange-traded funds.
Topic: Types of Investment Companies
33. Which of the following is a false statement regarding open-end mutual funds?
A.
B.
C.
D.
They offer investors a guaranteed rate of return.
They offer investors a well-diversified portfolio.
They redeem shares at their net asset value.
They offer low-cost diversification.
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 1 Easy
Learning Objective: 04-02 Contrast open-end mutual funds with closed-end funds, unit investment trusts, hedge funds, and exchange-traded funds.
Topic: Types of Investment Companies
34. __________ funds stand ready to redeem or issue shares at their net asset value.
A.
B.
C.
D.
Closed-end
Index
Open-end
Hedge
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 1 Easy
Learning Objective: 04-02 Contrast open-end mutual funds with closed-end funds, unit investment trusts, hedge funds, and exchange-traded funds.
Topic: Types of Investment Companies
35. Revenue sharing with respect to mutual funds refers to _________.
A.
B.
C.
D.
fund companies paying brokers if the broker recommends the fund to investors
allowing certain classes of investors to engage in market timing
charging loads to new investors in a mutual fund
directly marketing funds over the Internet
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 1 Easy
Learning Objective: 04-04 Classify mutual funds according to investment style.
Topic: Mutual Funds
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36. Higher portfolio turnover:
I. Results in greater tax liability for investors
II. Results in greater trading costs for the fund, which investors have to pay for
III. Is a characteristic of asset allocation funds
A.
B.
C.
D.
I only
II only
I and II only
I, II, and III
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 2 Medium
Learning Objective: 04-05 Demonstrate the impact of expenses and turnover on mutual fund investment performance.
Topic: Mutual Fund Performance
37. Low-load mutual funds have front-end loads of no more than _____.
A.
B.
C.
D.
2%
3%
4%
5%
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 1 Easy
Learning Objective: 04-02 Contrast open-end mutual funds with closed-end funds, unit investment trusts, hedge funds, and exchange-traded funds.
Topic: Types of Investment Companies
38. Most real estate investment trusts (REITs) have a debt ratio of around _________.
A.
B.
C.
D.
10%
30%
50%
70%
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 1 Easy
Learning Objective: 04-02 Contrast open-end mutual funds with closed-end funds, unit investment trusts, hedge funds, and exchange-traded funds.
Topic: Types of Investment Companies
39. Measured by assets, about _____ of funds are money market funds.
A. 15%
B. 25%
C. 40%
D. 60%
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 1 Easy
Learning Objective: 04-04 Classify mutual funds according to investment style.
Topic: Mutual Funds
40. Which of the following is not a type of real estate investment trust?
I. Equity trust
II. Debt trust
III. Mortgage trust
IV. Unit trust
A.
B.
C.
D.
I and II only
II only
II and IV only
I, II, and III
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 1 Easy
Learning Objective: 04-02 Contrast open-end mutual funds with closed-end funds, unit investment trusts, hedge funds, and exchange-traded funds.
Topic: Types of Investment Companies
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41. ______________________ are often called mutual funds.
A.
B.
C.
D.
Unit investment trusts
Open-end investment companies
Closed-end investment companies
REITs
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 1 Easy
Learning Objective: 04-02 Contrast open-end mutual funds with closed-end funds, unit investment trusts, hedge funds, and exchange-traded funds.
Topic: Types of Investment Companies
42. Mutual funds account for roughly ______ of investment company assets.
A.
B.
C.
D.
30%
50%
70%
90%
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 1 Easy
Learning Objective: 04-04 Classify mutual funds according to investment style.
Topic: Mutual Funds
43. An official description of a particular mutual fund's planned investment policy can be found in the fund's _____________.
A. prospectus
B. indenture
C. investment statement
D. 12b-1 forms
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 1 Easy
Learning Objective: 04-04 Classify mutual funds according to investment style.
Topic: Mutual Funds
44. Mutual funds that hold both equities and fixed-income securities in relatively stable proportions are called ____________________.
A.
B.
C.
D.
income funds
balanced funds
asset allocation funds
index funds
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 1 Easy
Learning Objective: 04-02 Contrast open-end mutual funds with closed-end funds, unit investment trusts, hedge funds, and exchange-traded funds.
Topic: Types of Investment Companies
45.
______ are mutual funds that vary the proportions of funds invested in particular market sectors according to the fund manager's forecast of the performance
of that market sector.
A. Asset allocation funds
B. Balanced funds
C. Index funds
D. Income funds
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 1 Easy
Learning Objective: 04-02 Contrast open-end mutual funds with closed-end funds, unit investment trusts, hedge funds, and exchange-traded funds.
Topic: Types of Investment Companies
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46. Specialized-sector funds concentrate their investments in _________________.
A.
B.
C.
D.
bonds of a particular maturity
geographic segments of the real estate market
government securities
securities issued by firms in a particular industry
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 1 Easy
Learning Objective: 04-02 Contrast open-end mutual funds with closed-end funds, unit investment trusts, hedge funds, and exchange-traded funds.
Topic: Types of Investment Companies
47. If a mutual fund has multiple-class shares, which class typically has a front-end load?
A.
B.
C.
D.
Class A
Class B
Class C
Class I
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 2 Medium
Learning Objective: 04-05 Demonstrate the impact of expenses and turnover on mutual fund investment performance.
Topic: Costs of Investing in Mutual Funds
48. The commission, or front-end load, paid when you purchase shares in mutual funds may not exceed __________.
A.
B.
C.
D.
3.5%
6%
8.5%
10%
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 1 Easy
Learning Objective: 04-05 Demonstrate the impact of expenses and turnover on mutual fund investment performance.
Topic: Costs of Investing in Mutual Funds
49.
You are considering investing in one of several mutual funds. All the funds under consideration have various combinations of front-end and back-end loads and/or
12b-1 fees. The longer you plan on remaining in the fund you choose, the more likely you will prefer a fund with a
__________ rather than a __________, everything else equal.
A. 12b-1 fee; front-end load
B. front-end load; 12b-1 fee
C. back-end load; front-end load
D. 12b-1 fee; back-end load
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Understand
Difficulty: 2 Medium
Learning Objective: 04-05 Demonstrate the impact of expenses and turnover on mutual fund investment performance.
Topic: Costs of Investing in Mutual Funds
50.
Under SEC rules, the managers of certain funds are allowed to deduct charges for advertising, brokerage commissions, and other sales expenses
directly from the fund assets rather than billing investors. These fees are known as ____________.
A. direct operating expenses
B. back-end loads
C. 12b-1 charges
D. front-end loads
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 1 Easy
Learning Objective: 04-05 Demonstrate the impact of expenses and turnover on mutual fund investment performance.
Topic: Costs of Investing in Mutual Funds
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51. The SEC requires funds to disclose:
I. After-tax returns for the past year
II. After-tax returns for the last 5-year period
III. The tax impact of portfolio turnover
A.
B.
C.
D.
I only
I and II only
I and III only
I, II, and III
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 2 Medium
Learning Objective: 04-05 Demonstrate the impact of expenses and turnover on mutual fund investment performance.
Topic: Taxation of Mutual Fund Income
52.
SEC Rule 12b-1 allows managers of certain funds to deduct __________ expenses from fund assets; however, these expenses may not exceed
__________ of the fund's average net assets per year.
A.
B.
C.
D.
marketing; 1%
marketing; 5%
administrative; .5%
administrative; 2%
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 1 Easy
Learning Objective: 04-05 Demonstrate the impact of expenses and turnover on mutual fund investment performance.
Topic: Mutual Fund Performance
53.
Consider a mutual fund with $300 million in assets at the start of the year and 12 million shares outstanding. If the gross return on assets is 18% and the total
expense ratio is 2% of the year-end value, what is the rate of return on the fund?
A. 15.64%
B. 16%
C. 17.25%
D. 17.5%
AACSB: Analytical Thinking
Bloom's: Understand
Difficulty: 3 Hard
Learning Objective: 04-05 Demonstrate the impact of expenses and turnover on mutual fund investment performance.
Topic: Mutual Fund Performance
54.
Consider a no-load mutual fund with $200 million in assets and 10 million shares at the start of the year and with $250 million in assets and 11 million shares at the
end of the year. During the year investors have received income distributions of $2 per share and capital gain distributions of $.25 per share. Assuming that the fund carries
no debt, and that the total expense ratio is 1%, what is the rate of return on the fund?
A. 11.19%
B. 23.75%
C. 24.64%
D. The answer cannot be determined from the information given.
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Understand
Difficulty: 2 Medium
Learning Objective: 04-05 Demonstrate the impact of expenses and turnover on mutual fund investment performance.
Topic: Mutual Fund Performance
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55.
Consider a no-load mutual fund with $400 million in assets, 50 million in debt, and 15 million shares at the start of the year and with $500 million in assets, 40 million in
debt, and 18 million shares at the end of the year. During the year investors have received income distributions of $.50 per share and capital gain distributions of $.30 per
share. If the total expense ratio is .75%, what is the rate of return on the fund?
A.
B.
C.
D.
12.09%
12.99%
8.25%
The answer cannot be determined from the information given.
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Understand
Difficulty: 3 Hard
Learning Objective: 04-05 Demonstrate the impact of expenses and turnover on mutual fund investment performance.
Topic: Mutual Fund Performance
56. Mutual fund returns may be granted pass-through status if _________________.
A.
B.
C.
D.
virtually all income is distributed to shareholders
the fund qualifies for pass-through status according to the U.S. tax code
the fund is sufficiently diversified
All of these options (All of the answers must be true for pass-through status to be granted.)
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 1 Easy
Learning Objective: 04-05 Demonstrate the impact of expenses and turnover on mutual fund investment performance.
Topic: Taxation of Mutual Fund Income
57. _____ is an example of an exchange-traded fund.
A.
B.
C.
D.
An SPDR or spider
A samurai
A Vanguard
An open-end fund
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 2 Medium
Learning Objective: 04-02 Contrast open-end mutual funds with closed-end funds, unit investment trusts, hedge funds, and exchange-traded funds.
Topic: Exchange-Traded Funds
58. If you place an order to buy or sell a share of a mutual fund during the trading day, the order will be executed at _____.
A.
B.
C.
D.
the NAV calculated at the market close at 4 pm New York time
the real time NAV
the NAV delayed 15 minutes
the NAV calculated at the opening of the next day's trading
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 2 Medium
Learning Objective: 04-02 Contrast open-end mutual funds with closed-end funds, unit investment trusts, hedge funds, and exchange-traded funds.
Topic: Types of Investment Companies
59.
According to the 2014 Mutual Fund Fact Book, _______ of total assets were in taxable money market funds and _______ were tax-exempt money
market funds.
A.
B.
C.
D.
35%; 14%
12.3%; 75%
16.3%; 1.8%
5%; 47%
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 1 Easy
Learning Objective: 04-02 Contrast open-end mutual funds with closed-end funds, unit investment trusts, hedge funds, and exchange-traded funds.
Topic: Types of Investment Companies
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60.
In his 1970 study, Malkiel found that mutual funds that do well in one period have an approximately ________ chance of doing well in the subsequentyear period.
A.
B.
C.
D.
33%
52%
65%
85%
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 2 Medium
Learning Objective: 04-05 Demonstrate the impact of expenses and turnover on mutual fund investment performance.
Topic: Mutual Fund Performance
61. In a recent study, Malkiel found that evidence of persistence in the performance of mutual funds ________________ in the 1980s.
A.
B.
C.
D.
grew stronger
remained about the same
became slightly weaker
virtually disappeared
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 1 Easy
Learning Objective: 04-05 Demonstrate the impact of expenses and turnover on mutual fund investment performance.
Topic: Mutual Fund Performance
62. The ratio of trading activity of a portfolio to the assets of the portfolio is called the ____________.
A.
B.
C.
D.
reinvestment ratio
trading rate
portfolio turnover
tax yield
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 1 Easy
Learning Objective: 04-05 Demonstrate the impact of expenses and turnover on mutual fund investment performance.
Topic: Mutual Fund Performance
63. Which of the following ETFs tracks the S&P 500 Index?
A.
B.
C.
D.
Qubes
Diamonds
Vipers
Spiders
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 2 Medium
Learning Objective: 04-02 Contrast open-end mutual funds with closed-end funds, unit investment trusts, hedge funds, and exchange-traded funds.
Topic: Exchange-Traded Funds
64.
The Stone Harbor Fund is a closed-end investment company with a portfolio currently worth $300 million. It has liabilities of $5 million and 9 million
shares outstanding. If the fund sells for $30 a share, what is its premium or discount as a percent of NAV?
A.
B.
C.
D.
9.26% premium
8.47% premium
9.26% discount
8.47% discount
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 3 Hard
Learning Objective: 04-02 Contrast open-end mutual funds with closed-end funds, unit investment trusts, hedge funds, and exchange-traded funds.
Topic: Types of Investment Companies
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65. The difference between balanced funds and asset allocation funds is that _____.
A.
B.
C.
D.
balanced funds invest in bonds while asset allocation funds do not
asset allocation funds invest in bonds while balanced funds do not
balanced funds have relatively stable proportions of stocks and bonds while the proportions may vary dramatically for asset allocation funds
balanced funds make no capital gain distributions and asset allocation funds make both dividend and capital gain distributions
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 1 Easy
Learning Objective: 04-02 Contrast open-end mutual funds with closed-end funds, unit investment trusts, hedge funds, and exchange-traded funds.
Topic: Types of Investment Companies
66.
The Wildwood Fund sells Class A shares with a front-end load of 5% and Class B shares with a 12b-1 fee of 1% annually. If you plan to sell the fund after 4
years, are Class A or Class B shares the better choice? Assume a 10% annual return net of expenses before the 12b-1 fee is applied.
A.
B.
C.
D.
Class A.
Class B.
There is no difference.
The answer cannot be determined from the information given.
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 2 Medium
Learning Objective: 04-05 Demonstrate the impact of expenses and turnover on mutual fund investment performance.
Topic: Mutual Fund Performance
67.
A mutual fund has total assets outstanding of $69 million. During the year the fund bought and sold assets equal to $17.25 million. This fund's turnover rate
was _____.
A.
B.
C.
D.
25%
28.5%
18.63%
33.4%
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 1 Easy
Learning Objective: 04-05 Demonstrate the impact of expenses and turnover on mutual fund investment performance.
Topic: Mutual Fund Performance
68. Which type of investment fund is commonly known to invest in options and futures in large scale?
A. commingled funds
B. hedge funds
C. ETFs
D. REITs
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 1 Easy
Learning Objective: 04-02 Contrast open-end mutual funds with closed-end funds, unit investment trusts, hedge funds, and exchange-traded funds.
Topic: Types of Investment Companies
69. Advantages of ETFs over mutual funds include all but which one of the following?
A.
B.
C.
D.
ETFs trade continuously, so investors can trade throughout the day.
ETFs can be sold short or purchased on margin, unlike fund shares.
ETF providers do not have to sell holdings to fund redemptions.
ETF values can diverge from NAV.
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 2 Medium
Learning Objective: 04-02 Contrast open-end mutual funds with closed-end funds, unit investment trusts, hedge funds, and exchange-traded funds.
Topic: Types of Investment Companies
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70.
Harold has just taken his company public and owns a large quantity of restricted stock. For purposes of diversification, what fund might he help create in
order to diversify his holdings?
A. commingled funds
B. hedge funds
C. ETF
D. REITs
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 2 Medium
Learning Objective: 04-02 Contrast open-end mutual funds with closed-end funds, unit investment trusts, hedge funds, and exchange-traded funds.
Topic: Types of Investment Companies
71. Which of the following funds is most likely to have a debt ratio of 70% or higher?
A. bond fund
B. commingled fund
C. mortgage-backed securities
D. REIT
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 1 Easy
Learning Objective: 04-02 Contrast open-end mutual funds with closed-end funds, unit investment trusts, hedge funds, and exchange-traded funds.
Topic: Types of Investment Companies
72. _______ have become the main way for investors to speculate in precious metals.
A.
B.
C.
D.
Strategic income funds
Balanced funds
Specialized-sector funds
Exchange-traded funds
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 1 Easy
Learning Objective: 04-02 Contrast open-end mutual funds with closed-end funds, unit investment trusts, hedge funds, and exchange-traded funds.
Topic: Types of Investment Companies
73. From 1971 to 2013 the average return on the Wilshire 5000 Index was _________ the return of the average mutual fund.
A. identical to
B. .9% higher than
C. .9% lower than
D. 1.3% higher than
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 2 Medium
Learning Objective: 04-05 Demonstrate the impact of expenses and turnover on mutual fund investment performance.
Topic: Mutual Fund Performance
74. An open-end fund has a NAV of $16.50 per share. The fund charges a 6% load. What is the offering price?
A.
B.
C.
D.
$14.57
$15.95
$17.55
$16.49
AACSB: Analytical Thinking
Bloom's: Remember
Difficulty: 2 Medium
Learning Objective: 04-03 Define net asset value and measure the rate of return on a mutual fund.
Topic: Net Asset Value and Rate of Return
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75. The offer price of an open-end fund is $18 and the fund is sold with a front-end load of 5%. What is the fund's NAV?
A.
B.
C.
D.
$18.74
$17.10
$15.40
$16.57
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 2 Medium
Learning Objective: 04-03 Define net asset value and measure the rate of return on a mutual fund.
Topic: Net Asset Value and Rate of Return
76.
A mutual fund has $50 million in assets at the beginning of the year and 1 million shares outstanding throughout the year. Throughout the year assets grow
at 12%. The fund imposes a 12b-1 fee on all shares equal to 1%. The fee is imposed on year-end asset values. If there are no distributions, what is the end-ofyear NAV for the fund?
A.
B.
C.
D.
$50
$55.44
$56.12
$54.55
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Understand
Difficulty: 2 Medium
Learning Objective: 04-03 Define net asset value and measure the rate of return on a mutual fund.
Topic: Net Asset Value and Rate of Return
77.
The assets of a mutual fund are $25 million. The liabilities are $4 million. If the fund has 700,000 shares outstanding and pays a $3 dividend, what is the
dividend yield?
A.
B.
C.
D.
5%
10%
15%
20%
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 2 Medium
Learning Objective: 04-03 Define net asset value and measure the rate of return on a mutual fund.
Topic: Net Asset Value and Rate of Return
78. Which of the following funds are usually most tax-efficient?
A. equity funds
B. bond Funds
C. ETFs
D. specialized-sector funds
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 2 Medium
Learning Objective: 04-05 Demonstrate the impact of expenses and turnover on mutual fund investment performance.
Topic: Taxation of Mutual Fund Income
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79.
You invest in a mutual fund that charges a 3% front-end load, 1% total annual fees, and a 2% back-end load, which decreases .5% per year. How much
will you pay in fees on a $10,000 investment that does not grow if you cash out after 3 years of no gain?
A.
B.
C.
D.
$103
$219
$553
$635
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Understand
Difficulty: 3 Hard
Learning Objective: 04-05 Demonstrate the impact of expenses and turnover on mutual fund investment performance.
Topic: Costs of Investing in Mutual Funds
80.
You invest in a mutual fund that charges a 3% front-end load, 1% total annual fees, and a 0% back-end load on Class A shares. The same fund charges a
0% front-end load, 1% total annual fees, and a 2% back-end load on Class B shares. What are the total fees in year 1 on a Class A investment of $20,000 with no
growth in value?
A.
B.
C.
D.
$658
$794
$885
$902
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Understand
Difficulty: 2 Medium
Learning Objective: 04-05 Demonstrate the impact of expenses and turnover on mutual fund investment performance.
Topic: Costs of Investing in Mutual Funds
81.
You invest in a mutual fund that charges a 3% front-end load, 1% total annual fees, and a 0% back-end load on Class A shares. The same fund charges a
0% front-end load, 1% total annual fees, and a 2% back-end load on Class B shares. What are the total fees in year 1 on a Class B investment of $20,000 if you
redeem shares with no growth in value?
A.
B.
C.
D.
$596
$794
$885
$902
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Understand
Difficulty: 2 Medium
Learning Objective: 04-05 Demonstrate the impact of expenses and turnover on mutual fund investment performance.
Topic: Costs of Investing in Mutual Funds
82.
You pay $21,600 to the Laramie Fund, which has a NAV of $18 per share at the beginning of the year. The fund deducted a front-end load of 4%. The
securities in the fund increased in value by 10% during the year. The fund's expense ratio is 1.3% and is deducted from year-end asset values. What is your rate of
return on the fund if you sell your shares at the end of the year?
A.
B.
C.
D.
4.35%
4.23%
6.45%
5.63%
AACSB: Analytical Thinking
Bloom's: Understand
Difficulty: 3 Hard
Learning Objective: 04-05 Demonstrate the impact of expenses and turnover on mutual fund investment performance.
Topic: Costs of Investing in Mutual Funds
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83. Which one of the following statements about returns reported by mutual funds is not correct?
A. Reported returns are net of management expenses.
B. Reported returns are net of 12b-1 fees.
C. Reported returns are net of brokerage fees paid on the fund's trading activity.
D. None of these options. (All of the items are included in reported returns.)
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 2 Medium
Learning Objective: 04-05 Demonstrate the impact of expenses and turnover on mutual fund investment performance.
Topic: Costs of Investing in Mutual Funds
84. The top Morningstar mutual fund performance rating is ________.
A.
B.
C.
D.
five stars
four stars
three stars
two stars
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 1 Easy
Learning Objective: 04-05 Demonstrate the impact of expenses and turnover on mutual fund investment performance.
Topic: Mutual Fund Performance
85.
You are considering investing in a no-load mutual fund with an annual expense ratio of .6% and an annual 12b-1 fee of .75%. You could also invest in a bank
CD paying 6.5% per year. What minimum annual rate of return must the fund earn to make you better off in the fund than in the CD?
A.
B.
C.
D.
7.1%
7.45%
7.25%
7.85%
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Understand
Difficulty: 2 Medium
Learning Objective: 04-05 Demonstrate the impact of expenses and turnover on mutual fund investment performance.
Topic: Costs of Investing in Mutual Funds
86.
The five-star Morningstar rating implies
A. superior returns compared to risk.
B. superior risk compared to return.
C. lowest turnover compared to peers.
D. lowest fees compared to peers.
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Understand
Difficulty: 2 Medium
Learning Objective: 04-05 Demonstrate the impact of expenses and turnover on mutual fund investment performance.
Topic: Information on Mutual Funds
87. Which type of fund is often priced at a significant discount to net asset value?
A. open-end fund
B. closed-end fund
C. hedge fund
D. ETF
AACSB: Analytical Thinking
Bloom's: Remember
Difficulty: 1 Easy
Learning Objective: 04-05 Demonstrate the impact of expenses and turnover on mutual fund investment performance.
Topic: Types of Investment Companies
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88. Which type of fund generally has the lowest average expense ratio?
A. actively managed bond funds
B. hedge funds
C. indexed funds
D. actively managed international funds
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 1 Easy
Learning Objective: 04-05 Demonstrate the impact of expenses and turnover on mutual fund investment performance.
Topic: Costs of Investing in Mutual Funds
89. Approximately what percentage of assets held in equity funds in 2014 was in index funds?
A.
B.
C.
D.
20%
33%
50%
60%
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 1 Easy
Learning Objective: 04-05 Demonstrate the impact of expenses and turnover on mutual fund investment performance.
Topic: Mutual Funds
90. Disadvantages of ETFs include all of the following except
A. investors incur a bid-ask spread when purchasing.
B. investors must pay a broker fee when purchasing.
C. prices are only quoted once each day.
D. prices can depart from NAV at times.
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom's: Remember
Difficulty: 1 Easy
Learning Objective: 04-05 Demonstrate the impact of expenses and turnover on mutual fund investment performance.
Topic: Exchange Traded Funds
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Chapter 05 Risk and Return: Past and Prologue
Answer Key
Multiple Choice Questions
1. You put up $50 at the beginning of the year for an investment. The value of the investment
grows 4% and you earn a dividend of $3.50. Your HPR was ____.
A. 4.00%
B. 3.50%
C. 7.00%
D. 11.00%
Difficulty: Medium
2. The ______ measure of returns ignores compounding.
A. geometric average
B. arithmetic average
C. IRR
D. dollar weighted
Difficulty: Easy
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3. If you want to measure the performance of your investment in a fund, including the timing
of your purchases and redemptions you should calculate the __________.
A. geometric average return
B. arithmetic average return
C. dollar weighted return
D. index return
Difficulty: Medium
4. Which one of the following measure time weighted returns?
I. Geometric average return
II. Arithmetic average return
III. Dollar weighted return
A. I only
B. II only
C. I and II only
D. I and III only
Difficulty: Medium
5. Rank the following from highest average historical return to lowest average historical
return from 1926-2008.
I. Small stocks
II. Long term bonds
III. Large stocks
IV. T-bills
A. I, II, III, IV
B. III, IV, II, I
C. I, III, II, IV
D. III, I, II, IV
Difficulty: Medium
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6. Rank the following from highest average historical standard deviation to lowest average
historical standard deviation from 1926-2008.
I. Small stocks
II. Long term bonds
III. Large stocks
IV. T-bills
A. I, II, III, IV
B. III, IV, II, I
C. I, III, II, IV
D. III, I, II, IV
Difficulty: Medium
7. You have calculated the historical dollar weighted return, annual geometric average return
and annual arithmetic average return. If you desire to forecast performance for next year, the
best forecast will be given by the ________.
A. dollar weighted return
B. geometric average return
C. arithmetic average return
D. index return
Difficulty: Medium
8. The complete portfolio refers to the investment in _________.
A. the risk-free asset
B. the risky portfolio
C. the risk-free asset and the risky portfolio combined
D. the risky portfolio and the index
Difficulty: Easy
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9. You have calculated the historical dollar weighted return, annual geometric average return
and annual arithmetic average return. You always reinvest your dividends and interest earned
on the portfolio. Which method provides the best measure of the actual average historical
performance of the investments you have chosen?
A. Dollar weighted return
B. Geometric average return
C. Arithmetic average return
D. Index return
Difficulty: Medium
10. The holding period return on a stock is equal to _________.
A. the capital gain yield over the period plus the inflation rate
B. the capital gain yield over the period plus the dividend yield
C. the current yield plus the dividend yield
D. the dividend yield plus the risk premium
Difficulty: Easy
11. Your timing was good last year. You invested more in your portfolio right before prices
went up and you sold right before prices went down. In calculating historical performance
measures which one of the following will be the largest?
A. Dollar weighted return
B. Geometric average return
C. Arithmetic average return
D. Mean holding period return
Difficulty: Medium
12. Published data on past returns earned by mutual funds are required to be ______.
A. dollar weighted returns
B. geometric returns
C. excess returns
D. index returns
Difficulty: Medium
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13. The arithmetic average of -11%, 15% and 20% is ________.
A. 15.67%
B. 8.00%
C. 11.22%
D. 6.45%
Difficulty: Easy
14. The geometric average of -12%, 20% and 25% is _________.
A. 8.42%
B. 11.00%
C. 9.70%
D. 18.88%
Difficulty: Medium
15. The dollar weighted return is the _________.
A. difference between cash inflows and cash outflows
B. arithmetic average return
C. geometric average return
D. internal rate of return
Difficulty: Easy
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16. An investment earns 10% the first year, 15% the second year and loses 12% the third year.
Your total compound return over the three years was ______.
A. 41.68%
B. 11.32%
C. 3.64%
D. 13.00%
(1.10)(1.15)(1 - .12) = 11.32%
Difficulty: Medium
17. Annual percentage rates can be converted to effective annual rates by means of the
following formula:
A. (1 + (APR/n))n - 1
B. (APR)(n)
C. (APR/n)
D. (periodic rate)(n)
Difficulty: Easy
18. Suppose you pay $9,700 for a $10,000 par Treasury bill maturing in three months. What is
the holding period return for this investment?
A. 3.01%
B. 3.09%
C. 12.42%
D. 16.71%
Difficulty: Easy
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19. Suppose you pay $9,800 for a $10,000 par Treasury bill maturing in two months. What is
the annual percentage rate of return for this investment?
A. 2.04%
B. 12.00 %
C. 12.24%
D. 12.89%
Difficulty: Medium
20. Suppose you pay $9,400 for a $10,000 par Treasury bill maturing in six months. What is
the effective annual rate of return for this investment?
A. 6.38%
B. 12.77%
C. 13.17%
D. 14.25%
Difficulty: Medium
21. You have an APR of 7.5% with continuous compounding. The EAR is _____.
A. 7.50%
B. 7.65%
C. 7.79 %
D. 8.25%
Difficulty: Medium
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22. You have an EAR of 9%. The equivalent APR with continuous compounding is _____.
A. 8.47%
B. 8.62%
C. 8.88%
D. 9.42%
LN[1 + .09] = 8.62%
Difficulty: Medium
23. The market risk premium is defined as __________.
A. the difference between the return on an index fund and the return on Treasury bills
B. the difference between the return on a small firm mutual fund and the return on the
Standard and Poor's 500 index
C. the difference between the return on the risky asset with the lowest returns and the return
on Treasury bills
D. the difference between the return on the highest yielding asset and the lowest yielding asset
Difficulty: Easy
24. The excess return is the _________.
A. rate of return that can be earned with certainty
B. rate of return in excess of the Treasury bill rate
C. rate of return to risk aversion
D. index return
Difficulty: Easy
25. The rate of return on _____ is known at the beginning of the holding period while the rate
of return on ____ is not known until the end of the holding period.
A. risky assets, Treasury bills
B. Treasury bills, risky assets
C. excess returns, risky assets
D. index assets, bonds
Difficulty: Medium
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26. The reward/variability ratio is given by _________.
A. the slope of the capital allocation line
B. the second derivative of the capital allocation line
C. the point at which the second derivative of the investor's indifference curve reaches zero
D. portfolio excess return
Difficulty: Easy
27. Your investment has a 20% chance of earning a 30% rate of return, a 50% chance of
earning a 10% rate of return and a 30% chance of losing 6%. What is your expected return on
this investment?
A. 12.8%
B. 11.0%
C. 8.9%
D. 9.2%
(0.2)(30%) + (0.5)(10%) + (0.3)(-6%) = 9.2%
Difficulty: Medium
28. Your investment has a 40% chance of earning a 15% rate of return, a 50% chance of
earning a 10% rate of return and a 10% chance of losing 3%. What is the standard deviation
of this investment?
A. 5.14%
B. 7.59%
C. 9.29%
D. 8.43%
Difficulty: Hard
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29. During the 1926 to 2008 period the geometric mean return on small firm stocks was
______.
A. 5.31%
B. 5.56%
C. 9.34%
D. 11.43%
Difficulty: Medium
30. During the 1926 to 2008 period the geometric mean return on Treasury bills was
_________.
A. 5.31%
B. 5.56%
C. 9.34%
D. 11.43%
Difficulty: Medium
31. During the 1926 to 2008 period the Sharpe ratio was greatest for which of the following
asset classes?
A. Small U.S. stocks
B. Large U.S. stocks
C. Long-Term U.S. Treasury Bonds
D. Bond World portfolio return in U.S. dollars
Difficulty: Medium
32. During the 1985 to 2008 period the Sharpe ratio was greatest for which of the following
asset classes?
A. Small U.S. stocks
B. Large U.S. stocks
C. Long-Term U.S. Treasury Bonds
D. Equity world portfolio in U.S. dollars
Difficulty: Hard
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33. During the 1926 to 2008 period which one of the following asset classes provided the
lowest real return?
A. Small U.S. stocks
B. Large U.S. stocks
C. Long-Term U.S. Treasury Bonds
D. Equity world portfolio in U.S. dollars
Difficulty: Medium
34. Both investors and gamblers take on risk. The difference between an investor and a
gambler is that an investor _______.
A. is normally risk neutral
B. requires a risk premium to take on the risk
C. knows he or she will not lose money
D. knows the outcomes at the beginning of the holding period
Difficulty: Easy
35. Historical returns have generally been __________ for stocks of small firms as/than for
stocks of large firms.
A. the same
B. lower
C. higher
D. There is no evidence of a systematic relationship between returns on small firm stocks and
returns on small firm stocks
Difficulty: Easy
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36. Historically small firm stocks have earned higher returns than large firm stocks. When
viewed in the context of an efficient market, this suggests that ___________.
A. small firms are better run than large firms
B. government subsidies available to small firms produce effects that are discernible in stock
market statistics
C. small firms are riskier than large firms
D. small firms are not being accurately represented in the data
Difficulty: Medium
37. When calculating the variance of a portfolio's returns squaring the deviations from the
mean results in ________.
I. preventing the sum of the deviations from always equaling zero
II. exaggerating the effects of large positive and negative deviations
III. a number in units of percentage of returns
A. I only
B. I and II only
C. I and III only
D. I, II and III
Difficulty: Medium
38. If you are promised a nominal return of 12% on a one year investment, and you expect the
rate of inflation to be 3%, what real rate do you expect to earn?
A. 5.48%
B. 8.74%
C. 9.00%
D. 12.00%
Difficulty: Medium
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39. If you require a real growth in the purchasing power of your investment of 8%, and you
expect the rate of inflation over the next year to be 3%, what is the lowest nominal return that
you would be satisfied with?
A. 3.00%
B. 8.00%
C. 11.00%
D. 11.24%
Difficulty: Medium
40. One method to forecast the risk premium is to use the _______.
A. coefficient of variation of analysts' earnings forecasts
B. variations in the risk free rate over time
C. average historical excess returns for the asset under consideration
D. average abnormal return on the index portfolio
Difficulty: Medium
41. Treasury bills are paying a 4% rate of return. A risk averse investor with a risk aversion of
A = 3 should invest in a risky portfolio with a standard deviation of 24% only if the risky
portfolio's expected return is at least ______.
A. 8.67%
B. 9.84%
C. 12.64%
D. 14.68%
Difficulty: Hard
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42. In the mean-standard deviation graph, the line that connects the risk-free rate and the
optimal risky portfolio, P, is called _________.
A. the capital allocation line
B. the indifference curve
C. the investor's utility line
D. the security market line
Difficulty: Medium
43. Most studies indicate that investors' risk aversion is in the range _____.
A. 1-3
B. 2-4
C. 3-5
D. 4-6
Difficulty: Medium
44. Two assets have the following expected returns and standard deviations when the risk-free
rate is 5%:
An investor with a risk aversion of A = 3 would find that _________________ on a risk
return basis.
A. only Asset A is acceptable
B. only Asset B is acceptable
C. neither Asset A nor Asset B is acceptable
D. both Asset A and Asset B are acceptable
Difficulty: Hard
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45. Historically the best asset for the long term investor wanting to fend off the threats of
inflation and taxes while making his money grow has been ____.
A. stocks
B. bonds
C. money market funds
D. Treasury bills
Difficulty: Easy
46. The formula
is used to calculate the _____________.
A. Sharpe measure
B. Treynor measure
C. Coefficient of variation
D. Real rate of return
Difficulty: Easy
47. A portfolio with a 25% standard deviation generated a return of 15% last year when Tbills were paying 4.5%. This portfolio had a Sharpe measure of ____.
A. 0.22
B. 0.60
C. 0.42
D. 0.25
Difficulty: Medium
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48. Consider a treasury bill with a rate of return of 5% and the following risky securities:
Security A: E(r) = .15; variance = .0400
Security B: E(r) = .10; variance = .0225
Security C: E(r) = .12; variance = .1000
Security D: E(r) = .13; variance = .0625
The investor must develop a complete portfolio by combining the risk-free asset with one of
the securities mentioned above. The security the investor should choose as part of his
complete portfolio to achieve the best CAL would be _________.
A. security A
B. security B
C. security C
D. security D
A has the steepest slope; found as:
Difficulty: Medium
49. You purchased a share of stock for $29. One year later you received $2.25 as dividend and
sold the share for $28. Your holding-period return was _________.
A. -3.57%
B. - 3.45%
C. 4.31%
D. 8.03%
Difficulty: Medium
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50. Security A has a higher standard deviation of returns than Security B. We would expect
that ______.
I. Security A would have a higher risk premium than Security B
II. the likely range of returns for Security A in any given year would be higher than the likely
range of returns for Security B
III. the Sharpe measure of A will be higher than the Sharpe measure of B.
A. I only
B. I and II only
C. II and III only
D. I, II and III
Difficulty: Medium
51. The holding period return on a stock was 25%. Its ending price was $18 and its beginning
price was $16. Its cash dividend must have been _________.
A. $0.25
B. $1.00
C. $2.00
D. $4.00
Difficulty: Medium
52. An investor invests 70% of her wealth in a risky asset with an expected rate of return of
15% and a variance of 5% and she puts 30% in a Treasury bill that pays 5%. Her portfolio's
expected rate of return and standard deviation are __________ and __________ respectively.
A. 10.0%, 6.7%
B. 12.0%, 22.4%
C. 12.0%, 15.7%
D. 10.0%, 35.0%
Difficulty: Medium
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53. The holding period return on a stock was 32%. Its beginning price was $25 and its cash
dividend was $1.50. Its ending price must have been _________.
A. $28.50
B. $33.20
C. $31.50
D. $29.75
Difficulty: Medium
54. Consider the following two investment alternatives. First, a risky portfolio that pays 15%
rate of return with a probability of 40% or 5% with a probability of 60%. Second, a treasury
bill that pays 6%. The risk premium on the risky investment is _________.
A. 1%
B. 3%
C. 6%
D. 9%
Difficulty: Medium
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55. Consider the following two investment alternatives. First, a risky portfolio that pays 20%
rate of return with a probability of 60% or 5% with a probability of 40%. Second, a treasury
bill that pays 6%. If you invest $50,000 in the risky portfolio, your expected profit would be
_________.
A. $3,000
B. $7,000
C. $7,500
D. $10,000
Difficulty: Medium
56. You invest $10,000 in a complete portfolio. The complete portfolio is composed of a risky
asset with an expected rate of return of 15% and a standard deviation of 21% and a treasury
bill with a rate of return of 5%. How much money should be invested in the risky asset to
form a portfolio with an expected return of 11%?
A. $6,000
B. $4,000
C. $7,000
D. $3,000
15x + 5(1 - x) = 11; x = 60%; 0.60(10,000) = $6,000
Difficulty: Hard
You invest $1,000 in a complete portfolio. The complete portfolio is composed of a risky
asset with an expected rate of return of 16% and a standard deviation of 20% and a treasury
bill with a rate of return of 6%.
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57. __________ of your complete portfolio should be invested in the risky portfolio if you
want your complete portfolio to have a standard deviation of 9%.
A. 100%
B. 90%
C. 45%
D. 10%
Difficulty: Easy
58. A portfolio that has an expected value in one year of $1,100 could be formed if you
_________.
A. Place 40% of your money in the risky portfolio and the rest in the risk free asset
B. Place 55% of your money in the risky portfolio and the rest in the risk free asset
C. Place 60% of your money in the risky portfolio and the rest in the risk free asset
D. Place 75% of your money in the risky portfolio and the rest in the risk free asset
$1100 = x(1000)(1.16) + (1 - x)1000(1.06)
Difficulty: Hard
59. The slope of the capital allocation line formed with the risky asset and the risk-free asset
is _________.
A. 1.40
B. 0.80
C. 0.50
D. 0.40
Difficulty: Medium
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60. You have $500,000 available to invest. The risk-free rate as well as your borrowing rate is
8%. The return on the risky portfolio is 16%. If you wish to earn a 22% return, you should
_________.
A. invest $125,000 in the risk-free asset
B. invest $375,000 in the risk-free asset
C. borrow $125,000
D. borrow $375,000
Difficulty: Hard
61. The return on the risky portfolio is 15%. The risk-free rate as well as the investor's
borrowing rate is 10%. The standard deviation of return on the risky portfolio is 20%. If the
standard deviation on the complete portfolio is 25%, the expected return on the complete
portfolio is _________.
A. 6.00%
B. 8.75 %
C. 10.00%
D. 16.25%
Difficulty: Hard
You are considering investing $1,000 in a complete portfolio. The complete portfolio is
composed of treasury bills that pay 5% and a risky portfolio, P, constructed with 2 risky
securities X and Y. The optimal weights of X and Y in P are 60% and 40% respectively. X
has an expected rate of return of 14% and Y has an expected rate of return of 10%.
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62. To form a complete portfolio with an expected rate of return of 11%, you should invest
__________ of your complete portfolio in treasury bills.
A. 19%
B. 25%
C. 36%
D. 50%
Difficulty: Hard
63. To form a complete portfolio with an expected rate of return of 8%, you should invest
approximately __________ in the risky portfolio. This will mean you will also invest
approximately __________ and __________ of your complete portfolio in security X and Y
respectively.
A. 0%, 60%, 40%
B. 25%, 45%, 30%
C. 40%, 24%, 16%
D. 50%, 30%, 20%
Difficulty: Hard
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64. If you decide to hold 25% of your complete portfolio in the risky portfolio and 75% in the
treasury bills then the dollar values of your positions in X and Y respectively would be
__________ and _________.
A. $300, $450
B. $150, $100
C. $100, $150
D. $450, $300
Difficulty: Medium
65. The dollar values of your positions in X, Y, and treasury bills would be _________,
__________ and __________ respectively if you decide to hold a complete portfolio that has
an expected return of 8%.
A. $162, $595, $243
B. $243, $162, $595
C. $595, $162, $243
D. $595, $243, $162
Difficulty: Hard
You have the following rates of return for a risky portfolio for several recent years:
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66. If you invested $1,000 at the beginning of 2005 your investment at the end of 2008 would
be worth ___________.
A. $2,176.60
B. $1,785.56
C. $1,645.53
D. $1,247.87
$1(1.3523)(1.1867)(1 + -.0987)(1.2345) = $1.7856
Difficulty: Medium
67. The annualized average return on this investment is
A. 16.15%
B. 16.87%
C. 21.32%
D. 15.60%
Difficulty: Hard
68. A security with normally distributed returns has an annual expected return of 18% and
standard deviation of 23%. The probability of getting a return between -28% and 64% in any
one year is
A. 68.26%
B. 95.44%
C. 99.74%
D. 100.00%
Difficulty: Medium
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69. The Manhawkin Fund has an expected return of 16% and a standard deviation of 20%.
The risk free rate is 4%. What is the reward-to-volatility ratio for the Manhawkin Fund?
A. 0.8
B. 0.6
C. 9.0
D. 1.0
Difficulty: Medium
70. From 1926 to 2008 the world stock portfolio offered _____ return and _____ volatility
than the portfolio of large U.S. stocks.
A. lower; higher
B. lower; lower
C. higher; lower
D. higher; higher
Difficulty: Medium
71. The price of a stock is $55 at the beginning of the year and $50 at the end of the year. If
the stock paid a $3 dividend and inflation was 3%, what is the real holding period return for
the year?
A. -3.64%
B. -6.36%
C. -6.44%
D. -11.74%
Nominal return on stock:
Real return
Difficulty: Hard
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72. The price of a stock is $38 at the beginning of the year and $41 at the end of the year. If
the stock paid a $2.50 dividend what is the holding period return for the year?
A. 6.58%
B. 8.86%
C. 14.47%
D. 18.66%
HPR = (41 - 38 + 2.50)/38 = 0.1447
Difficulty: Easy
73. You invest all of your money in one year T-bills. Which of the following statements is/are
correct?
I. Your nominal return on the T-bills is riskless.
II. Your real return on the T-bills is riskless.
III. Your nominal Sharpe measure is zero.
A. I only
B. I and III only
C. II only
D. I, II and III
Difficulty: Medium
74. Which one of the following would be considered a risk-free asset in real terms as opposed
to nominal?
A. Money market fund
B. U.S. T-bill
C. Short term corporate bonds
D. U.S. T-bill whose return was indexed to inflation
Difficulty: Medium
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75. What is the geometric average return of the following quarterly returns: 3%, 5%, 4%, and
7%, respectively?
A. 3.72%
B. 4.23%
C. 4.74%
D. 4.90%
Return = (1.03 x 1.04 x 1.05 x 1.07).25 - 1 = .0474
Difficulty: Medium
76. What is the geometric average return over one year if the quarterly returns are 8%, 9%,
5%, and 12%, respectively?
A. 8.00%
B. 8.33 %
C. 8.47%
D. 8.50 %
Return = (1.05 x 1.08 x 1.09 x 1.12).25 - 1 = .0847
Difficulty: Medium
77. If nominal rate of return on investment is 6% and inflation is 2% over a holding period,
what is the real rate of return on this investment?
A. 3.92%
B. 4.00%
C. 4.12%
D. 6.00%
Difficulty: Medium
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78. According to historical data, over the long run which of the following assets has the best
chance to provide the best after inflation, after tax rate of return?
A. Long term Treasury bonds
B. Corporate bonds
C. Common stocks
D. Preferred stocks
Difficulty: Easy
79. The buyer of a new home is quoted a mortgage rate of 0.5% per month. What is the APR
on the loan?
A. 0.50%
B. 5.0%
C. 6.0%
D. 6.5%
APR = .5% x 12 = 6.0%
Difficulty: Medium
80. A loan for a new car costs the borrower 0.8% per month. What is the EAR?
A. 0.80%
B. 6.87%
C. 9.60%
D. 10.03%
Difficulty: Hard
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81. The CAL provided by combinations of one month T-bills and a broad index of common
stocks is called the ______.
A. SML
B. CAPM
C. CML
D. Total Return Line
Difficulty: Easy
82. Which of the following are correct arguments supporting passive investment strategies?
I. Active trading strategies may not guarantee higher returns but guarantee higher costs
II. Passive investors can free ride on the activity of knowledge investors whose trades force
prices to reflect currently available information
III. Passive investors are guaranteed to earn higher rates of return than active investors over
sufficiently long time horizons
A. I only
B. I and II only
C. II and III only
D. I, II and III
Difficulty: Medium
You have the following rates of return for a risky portfolio for several recent years. Assume
that the stock pays no dividends
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83. What is the geometric average return for the period?
A. 2.87%
B. 0.74%
C. 2.60%
D. 2.21%
[(1.10)(1 + -.0727)(1.0588)]⅓ - 1 = 2.60%
Difficulty: Hard
84. What is the dollar weighted return over the entire time period?
A. 2.87%
B. 0.74%
C. 2.60%
D. 2.21%
0 = -50(100) +
IRR = 0.744%
Difficulty: Hard
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Chapter 06 Efficient Diversification
Answer Key
Multiple Choice Questions
1. Risk that can be eliminated through diversification is called ______ risk.
A. unique
B. firm-specific
C. diversifiable
D. all of the above
Difficulty: Easy
2. The _______ decision should take precedence over the _____ decision.
A. asset allocation, stock selection
B. bond selection, mutual fund selection
C. stock selection, asset allocation
D. stock selection, mutual fund selection
Difficulty: Medium
3. Many current and retired Enron Corp. employees had their 401k retirement accounts wiped
out when Enron collapsed because ___.
A. they had to pay huge fines for obstruction of justice
B. their 401k accounts were held outside the company
C. their 401k accounts were not well diversified
D. none of the above
Difficulty: Easy
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4. Based on the outcomes in the table below choose which of the statements is/are correct:
I. The covariance of Security A and Security B is zero
II. The correlation coefficient between Security A and C is negative
III. The correlation coefficient between Security B and C is positive
A. I only
B. I and II only
C. II and III only
D. I, II and III
Difficulty: Hard
5. Asset A has an expected return of 15% and a reward-to-variability ratio of .4. Asset B has
an expected return of 20% and a reward-to-variability ratio of .3. A risk-averse investor would
prefer a portfolio using the risk-free asset and ______.
A. asset A
B. asset B
C. no risky asset
D. can't tell from the data given
Difficulty: Medium
6. Adding additional risky assets to the investment opportunity set will generally move the
efficient frontier _____ and to the ______.
A. up, right
B. up, left
C. down, right
D. down, left
Difficulty: Medium
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7. An investor's degree of risk aversion will determine his or her ______.
A. optimal risky portfolio
B. risk-free rate
C. optimal mix of the risk-free asset and risky asset
D. capital allocation line
Difficulty: Medium
8. The ________ is equal to the square root of the systematic variance divided by the total
variance.
A. covariance
B. correlation coefficient
C. standard deviation
D. reward-to-variability ratio
Difficulty: Medium
9. Which of the following statistics cannot be negative?
A. Covariance
B. Variance
C. E[r]
D. Correlation coefficient
Difficulty: Easy
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10. Asset A has an expected return of 20% and a standard deviation of 25%. The risk free rate
is 10%. What is the reward-to-variability ratio?
A. .40
B. .50
C. .75
D. .80
Difficulty: Medium
11. The correlation coefficient between two assets equals to _________.
A. their covariance divided by the product of their variances
B. the product of their variances divided by their covariance
C. the sum of their expected returns divided by their covariance
D. their covariance divided by the product of their standard deviations
Difficulty: Medium
12. Diversification is most effective when security returns are _________.
A. high
B. negatively correlated
C. positively correlated
D. uncorrelated
Difficulty: Easy
13. The expected rate of return of a portfolio of risky securities is _________.
A. the sum of the securities' covariances
B. the sum of the securities' variances
C. the weighted sum of the securities' expected returns
D. the weighted sum of the securities' variances
Difficulty: Easy
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14. Beta is a measure of security responsiveness to _________.
A. firm specific risk
B. diversifiable risk
C. market risk
D. unique risk
Difficulty: Easy
15. The risk that can be diversified away is __________.
A. beta
B. firm specific risk
C. market risk
D. systematic risk
Difficulty: Easy
16. To eliminate the bias in calculating the variance and covariance of returns from historical
data the average squared deviation must be multiplied by _________.
A. n/(n - 1)
B. n * (n - 1)
C. (n - 1)/n
D. (n - 1) * n
Difficulty: Medium
17. Consider an investment opportunity set formed with two securities that are perfectly
negatively correlated. The global minimum variance portfolio has a standard deviation that is
always _________.
A. equal to the sum of the securities standard deviations
B. equal to -1
C. equal to 0
D. greater than 0
Difficulty: Medium
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18. Market risk is also called __________ and _________.
A. systematic risk, diversifiable risk
B. systematic risk, nondiversifiable risk
C. unique risk, nondiversifiable risk
D. unique risk, diversifiable risk
Difficulty: Easy
19. Firm specific risk is also called __________ and __________.
A. systematic risk, diversifiable risk
B. systematic risk, non-diversifiable risk
C. unique risk, non-diversifiable risk
D. unique risk, diversifiable risk
Difficulty: Easy
20. Which one of the following stock return statistics fluctuates the most over time?
A. Covariance of returns
B. Variance of returns
C. Average return
D. Correlation coefficient
Difficulty: Medium
21. Harry Markowitz is best known for his Nobel prize winning work on _____________.
A. strategies for active securities trading
B. techniques used to identify efficient portfolios of risky assets
C. techniques used to measure the systematic risk of securities
D. techniques used in valuing securities options
Difficulty: Easy
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22. Suppose that a stock portfolio and a bond portfolio have a zero correlation. This means
that ______.
A. the returns on the stock and bond portfolio tend to move inversely
B. the returns on the stock and bond portfolio tend to vary independently of each other
C. the returns on the stock and bond portfolio tend to move together
D. the covariance of the stock and bond portfolio will be positive
Difficulty: Easy
23. You put half of your money in a stock portfolio that has an expected return of 14% and a
standard deviation of 24%. You put the rest of you 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 0.55. The standard deviation of the resulting portfolio will be ________________.
A. more than 18% but less than 24%
B. equal to 18%
C. more than 12% but less than 18%
D. equal to 12%
2p = 0.02592 = (.52)(.242) + (.52)(.122) + 2(.5)(.5)(.24)(.12)0.55;  = 16.1%
Difficulty: Hard
24. On a standard expected return vs. standard deviation graph investors will prefer portfolios
that lie to the _____________ of the current investment opportunity set.
A. left and above
B. left and below
C. right and above
D. right and below
Difficulty: Easy
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25. The term "complete portfolio" refers to a portfolio consisting of _________________.
A. the risk-free asset combined with at least one risky asset
B. the market portfolio combined with the minimum variance portfolio
C. securities from domestic markets combined with securities from foreign markets
D. common stocks combined with bonds
Difficulty: Easy
26. Rational risk-averse investors will always prefer portfolios _____________.
A. located on the efficient frontier to those located on the capital market line
B. located on the capital market line to those located on the efficient frontier
C. at or near the minimum variance point on the efficient frontier
D. that are risk-free to all other asset choices
Difficulty: Easy
27. The optimal risky portfolio can be identified by finding ____________.
I. the minimum variance point on the efficient frontier
II. the maximum return point on the efficient frontier the minimum variance point on the
efficient frontier
III. the tangency point of the capital market line and the efficient frontier
IV. the line with the steepest slope that connects the risk free rate to the efficient frontier
A. I and II only
B. II and III only
C. III and IV only
D. I and IV only
Difficulty: Medium
28. Reward-to-variability ratios are ________ on the ________ capital market line.
A. lower; steeper
B. higher; flatter
C. higher; steeper
D. the same; flatter
Difficulty: Medium
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29. A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of
return of 24% while stock B has a standard deviation of return of 18%. Stock A comprises
60% of the portfolio while stock B comprises 40% of the portfolio. If the variance of return
on the portfolio is .0380, the correlation coefficient between the returns on A and B is
_________.
A. 0.583
B. 0.225
C. 0.327
D. 0.128
0.0380 = (.62)(.242) + (.42)(.182) + 2(.6)(.4)(.24)(.18) ;  = 0.583
Difficulty: Hard
30. The standard deviation of return on investment A is .10 while the standard deviation of
return on investment B is .05. If the covariance of returns on A and B is .0030, the correlation
coefficient between the returns on A and B is _________.
A. .12
B. .36
C. .60
D. .77
Correlation =
Difficulty: Medium
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31. A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of
return of 35% while stock B has a standard deviation of return of 15%. The correlation
coefficient between the returns on A and B is 0.45. Stock A comprises 40% of the portfolio
while stock B comprises 60% of the portfolio. The standard deviation of the return on this
portfolio is _________.
A. 23.00%
B. 19.76%
C. 18.45%
D. 17.67%
2p = (.402)(.352) + (.602)(.15)2 + (2)(.4)(.6)(.35)(.15)(.45)
2p = .039046
p = 19.76%
Difficulty: Medium
32. The standard deviation of return on investment A is .10 while the standard deviation of
return on investment B is .04. If the correlation coefficient between the returns on A and B is .50, the covariance of returns on A and B is _________.
A. -.0447
B. -.0020
C. .0020
D. .0447
Difficulty: Medium
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33. Consider two perfectly negatively correlated risky securities, A and B. Security A has an
expected rate of return of 16% and a standard deviation of return of 20%. B has an expected
rate of return of 10% and a standard deviation of return of 30%. The weight of security B in
the minimum variance portfolio is _________.
A. 10%
B. 20%
C. 40%
D. 60%
Difficulty: Hard
An investor can design a risky portfolio based on two stocks, A and B. Stock A has an
expected return of 18% and a standard deviation of return of 20%. Stock B has an expected
return of 14% and a standard deviation of return of 5%. The correlation coefficient between
the returns of A and B is 0.50. The risk-free rate of return is 10%.
34. The proportion of the optimal risky portfolio that should be invested in stock A is
_________.
A. 0%
B. 40%
C. 60%
D. 100%
Difficulty: Hard
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35. The expected return on the optimal risky portfolio is _________.
A. 14.0%
B. 15.6%
C. 16.4%
D. 18.0%
Difficulty: Hard
36. The standard deviation of return on the optimal risky portfolio is _________.
A. 0%
B. 5%
C. 7%
D. 20%
Difficulty: Hard
An investor can design a risky portfolio based on two stocks, A and B. Stock A has an
expected return of 21% and a standard deviation of return of 39%. Stock B has an expected
return of 14% and a standard deviation of return of 20%. The correlation coefficient between
the returns of A and B is 0.4. The risk-free rate of return is 5%.
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37. The proportion of the optimal risky portfolio that should be invested in stock B is
approximately _________.
A. 29%
B. 44%
C. 56%
D. 71%
WB = 71%
Difficulty: Hard
38. The expected return on the optimal risky portfolio is _________.
A. 14%
B. 16%
C. 18%
D. 19%
E[rp] = (.29)(.21) + (.71)(.14) = 16%
Difficulty: Hard
39. The standard deviation of the returns on the optimal risky portfolio is _________.
A. 25.5%
B. 22.3%
C. 21.4%
D. 20.7%
2rp = (.292)(.392) + (.712)(.202) + 2(.29)(.71)(.39)(.20).4
2rp = .045804
rp = 21.4%
Difficulty: Hard
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40. An investor can design a risky portfolio based on two stocks, A and B. The standard
deviation of return on stock A is 24% while the standard deviation on stock B is 14%. The
correlation coefficient between the return on A and B is 0.35. The expected return on stock A
is 25% while on stock B it is 11%. The proportion of the minimum variance portfolio that
would be invested in stock B is approximately _________.
A. 45%
B. 67%
C. 85%
D. 92%
WB =
; COVAB = ABAB = (.35)(.24)(.14) = .01176
WB =
Difficulty: Hard
41. An investor can design a risky portfolio based on two stocks, A and B. The standard
deviation of return on stock A is 20% while the standard deviation on stock B is 15%. The
expected return on stock A is 20% while on stock B it is 10%. The correlation coefficient
between the return on A and B is 0%. The expected return on the minimum variance portfolio
is approximately _________.
A. 10.00%
B. 13.60%
C. 15.00%
D. 19.41%
Difficulty: Hard
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42. An investor can design a risky portfolio based on two stocks, A and B. The standard
deviation of return on stock A is 20% while the standard deviation on stock B is 15%. The
correlation coefficient between the return on A and B is 0%. The standard deviation of return
on the minimum variance portfolio is _________.
A. 0%
B. 6%
C. 12%
D. 17%
Difficulty: Hard
43. A measure of the riskiness of an asset held in isolation is ____________.
A. beta
B. standard deviation
C. covariance
D. semi-variance
Difficulty: Easy
44. Semitool Corp has an expected excess return of 6% for next year. However for every
unexpected 1% change in the market, Semitool's return responds by a factor of 1.2. Suppose it
turns out the economy and the stock market do better than expected by 1.5% and Semitool's
products experience more rapid growth than anticipated, pushing up the stock price by
another 1%. Based on this information what was Semitool's actual excess return?
A. 7.00%
B. 8.50%
C. 8.80%
D. 9.25%
6% + (1.5%)(1.2) + 1% = 8.8%
Difficulty: Medium
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45. The part of a stock's return that is systematic is a function of which of the following
variables?
I. Volatility in excess returns of the stock market
II. The sensitivity of the stock's returns to changes in the stock market
III. The variance in the stock's returns that is unrelated to the overall stock market
A. I only
B. I and II only
C. II and III only
D. I, II and III
Difficulty: Easy
46. Stock A has a beta of 1.2 and Stock B has a beta of 1. The returns of Stock A are ______
sensitive to changes in the market as the returns of Stock B.
A. 20% more
B. slightly more
C. 20% less
D. slightly less
Difficulty: Easy
47. Which risk can be diversified away as additional securities are added to a portfolio?
I. Total risk
II. Systematic risk
III. Firm specific risk
A. I only
B. I and II only
C. I, II, and III
D. I and III
Difficulty: Easy
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48. According to Tobin's separation property, portfolio choice can be separated into two
independent tasks consisting of __________ and __________.
A. identifying all investor imposed constraints; identifying the set of securities that conform
to the investor's constraints and offer the best risk-return tradeoffs
B. identifying the investor's degree of risk aversion; choosing securities from industry groups
that are consistent with the investor's risk profile
C. identifying the optimal risky portfolio; constructing a complete portfolio from T-bills and
the optimal risky portfolio based on the investor's degree of risk aversion
D. choosing which risky assets an investor prefers according to their risk aversion level;
minimizing the CAL by lending at the risk-free rate
Difficulty: Medium
49. You are constructing a scatter plot of excess returns for Stock A versus the market index.
If the correlation coefficient between Stock A and the index is -1 you will find that the points
of the scatter diagram ______________________ and the line of best fit has a
______________.
A. all fall on the line of best fit; positive slope
B. all fall on the line of best fit; negative slope
C. are widely scattered around the line; positive slope
D. are widely scattered around the line; negative slope
Difficulty: Medium
50. The term excess-return refers to ______________.
A. returns earned illegally by means of insider trading
B. the difference between the rate of return earned and the risk-free rate
C. the difference between the rate of return earned on a particular security and the rate of
return earned on other securities of equivalent risk
D. the portion of the return on a security which represents tax liability and therefore cannot be
reinvested
Difficulty: Easy
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51. You are recalculating the risk of ACE stock in relation to the market index and you find
the ratio of the systematic variance to the total variance has risen. You must also find that the
____________.
A. covariance between ACE and the market has fallen
B. correlation coefficient between ACE and the market has fallen
C. correlation coefficient between ACE and the market has risen
D. unsystematic risk of ACE has risen
Difficulty: Medium
52. A stock has a correlation with the market of 0.45. The standard deviation of the market is
21% and the standard deviation of the stock is 35%. What is the stock's beta?
A. 1.00
B. 0.75
C. 0.60
D. 0.55
=
Difficulty: Medium
53. The values of beta coefficients of securities are __________.
A. always positive
B. always negative
C. always between positive 1 and negative 1
D. usually positive, but are not restricted in any particular way
Difficulty: Easy
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54. A security's beta coefficient will be negative if ____________.
A. its returns are negatively correlated with market index returns
B. its returns are positively correlated with market index returns
C. its stock price has historically been very stable
D. market demand for the firm's shares is very low
Difficulty: Easy
55. The market value weighted average beta of firms included in the market index will always
be _____________.
A. 0
B. between 0 and 1
C. 1
D. There is no particular rule concerning the average beta of firms included in the market
index
Difficulty: Easy
56. Diversification can reduce or eliminate __________ risk.
A. all
B. systematic
C. non-systematic
D. only an insignificant
Difficulty: Easy
57. 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
Difficulty: Easy
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58. Some diversification benefits can be achieved by combining securities in a portfolio as
long as the correlation between the securities is _____________.
A. 1
B. less than 1
C. between 0 and 1
D. less than or equal to 0
Difficulty: Easy
59. If an investor does not diversify their portfolio and instead puts all of their money in one
stock, the appropriate measure of security risk for that investor is the ________.
A. stock's standard deviation
B. variance of the market
C. stock's beta
D. covariance with the market index
Difficulty: Medium
60. Which of the following provides the best example of a systematic risk event?
A. A strike by union workers hurts a firm's quarterly earnings.
B. Mad Cow disease in Montana hurts local ranchers and buyers of beef.
C. The Federal Reserve increases interest rates 50 basis points.
D. A senior executive at a firm embezzles $10 million and escapes to South America.
Difficulty: Easy
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61. Which of the following statements is true regarding time diversification?
I. The standard deviation of the average annual rate of return over several
years will be smaller than the one-year standard deviation.
II. For a longer time horizon, uncertainty compounds over a greater number
of years.
III. Time diversification does not reduce risk.
A. I only
B. II only
C. II and III only
D. I, II and III
E. None of the statements are correct
Difficulty: Medium
62. You find that the annual standard deviation of a stock's returns is equal to 25%. For a 3
year holding period the standard deviation of your total return would equal _______.
A. 75%
B. 25%
C. 43%
D. 55%
Difficulty: Easy
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63. The beta of this stock is ____.
A. 0.12
B. 0.35
C. 1.32
D. 4.05
Beta equals slope coefficient = 1.32
Difficulty: Easy
64. This stock has greater systematic risk than a stock with a beta of ___.
A. 0.50
B. 1.50
C. 2.00
D. 3.00
0.50 < 1.32
Difficulty: Easy
65. The characteristic line for this stock is Rstock = ___ + ___ Rmarket.
A. 0.35, 0.12
B. 4.05, 1.32
C. 15.44, 0.97
D. 0.26, 1.36
Intercept equals 4.05 and slope equals 1.32.
Difficulty: Medium
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66. ____ percent of the variance is explained by this regression.
A. 12
B. 35
C. 4.05
D. 80
R2 = 12 means 12% of the variance is explained by the regression.
Difficulty: Medium
67. The stock is ______ riskier than the typical stock.
A. 32%
B. 15.44%
C. 12%
D. 38%
Beta of 1.32 means that this stock is 32% riskier than the market.
Difficulty: Medium
68. Decreasing the number of stocks in a portfolio from 50 to 10 would likely
_________________________.
A. increase the systematic risk of the portfolio
B. increase the unsystematic risk of the portfolio
C. increase the return of the portfolio
D. decrease the variation in returns the investor faces in any one year
Difficulty: Medium
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69. If you want to know the portfolio standard deviation for a three stock portfolio you will
have to
A. calculate two covariances and one trivariance
B. calculate only two covariances
C. calculate three covariances
D. average the variances of the individual stocks
Difficulty: Medium
70. Which of the following correlations coefficients will produce the least diversification
benefit?
A. -0.6
B. -0.3
C. 0.0
D. 0.8
Difficulty: Easy
71. Which of the following correlation coefficients will produce the most diversification
benefits?
A. -0.6
B. -0.9
C. 0.0
D. 0.4
Difficulty: Easy
72. What is the most likely correlation coefficient between a stock index mutual fund and the
S&P 500?
A. -1.0
B. 0.0
C. 1.0
D. 0.5
Difficulty: Easy
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73. Investing in two assets with a correlation coefficient of -0.5 will reduce what kind of risk?
A. Market risk
B. Non-diversifiable risk
C. Systematic risk
D. Unique risk
Difficulty: Easy
74. Investing in two assets with a correlation coefficient of 1.0 will reduce which kind of
risk?
A. Market risk
B. Unique risk
C. Unsystematic risk
D. With a correlation of 1.0, no risk will be reduced
Difficulty: Easy
75. A portfolio of stocks fluctuates when the treasury yields change. Since this risk can not be
eliminated through diversification, it is called __________.
A. firm specific risk
B. systematic risk
C. unique risk
D. none of the above
Difficulty: Easy
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76. As you lengthen the time horizon of your investment period and decide to invest for
multiple years you will find that ________.
I. the average risk per year may be smaller over longer investment horizons
II. the overall risk of your investment will compound over time
III. your overall risk on the investment will fall
A. I only
B. I and II only
C. III only
D. I, II and III
Difficulty: Medium
77. You are considering adding a new security to your portfolio. In order to decide whether
you should add the security you need to know the security's _______.
I. expected return
II. standard deviation
III. correlation with your portfolio
A. I only
B. I and II only
C. I and III only
D. I, II and III
Difficulty: Medium
78. Which of the following is a correct expression concerning the formula for the standard
deviation of returns of a two asset portfolio where the correlation coefficient is positive?
A. 2rp < (W1212 + W2222)
B. 2rp = (W1212 + W2222)
C. 2rp = (W1212 - W2222)
D. 2rp > (W1212 + W2222)
Difficulty: Medium
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79. What is the standard deviation of a portfolio of two stocks given the following data? Stock
A has a standard deviation of 18%. Stock B has a standard deviation of 14%. The portfolio
contains 40% of stock A and the correlation coefficient between the two stocks is -.23.
A. 9.7%
B. 12.2%
C. 14.0%
D. 15.6%
Difficulty: Medium
80. What is the standard deviation of a portfolio of two stocks given the following data? Stock
A has a standard deviation of 30%. Stock B has a standard deviation of 18%. The portfolio
contains 60% of stock A and the correlation coefficient between the two stocks is -1.0.
A. 0.0%
B. 10.8%
C. 18.0%
D. 24.0%
Difficulty: Medium
81. The expected return of portfolio is 8.9% and the risk free rate is 3.5%. If the portfolio
standard deviation is 12.0%, what is the reward to variability ratio of the portfolio?
A. 0.0
B. 0.45
C. 0.74
D. 1.35
Reward to variability ratio = (.089 - .035)/.12 = 0.45
Difficulty: Medium
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82. A project has a 60% chance of doubling your investment in one year and a 40% chance of
losing half your money. What is the standard deviation of this investment?
A. 25%
B. 50%
C. 62%
D. 73%
E[rp] = (.60)(1) + (.40)(-.5) = .40
2rp = (.60)(1 - .40)2 + (.40)(-.5 - .40)2 = .54
rp = .73
Difficulty: Medium
83. A project has a 50% chance of doubling your investment in one year and a 50% chance of
losing half your money. What is the expected return on this investment project?
A. 0%
B. 25%
C. 50%
D. 75%
E[rp] = (.5)(100) + (.5)(-50) = 25%
Difficulty: Easy
The figures below show plots of monthly excess returns for two stocks plotted against excess
returns for a market index.
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84. Which stock is likely to further reduce risk for an investor currently holding his portfolio
in a well diversified portfolio of common stock?
A. Stock A
B. Stock B
C. There is no difference between A or B
D. You cannot tell from the information given.
Difficulty: Medium
85. Which stock is riskier to a non-diversified investor who puts all his money in only one of
these stocks?
A. Stock A is riskier
B. Stock B is riskier
C. Both stocks are equally risky
D. You cannot tell from the information given.
Difficulty: Medium
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Chapter 07 Capital Asset Pricing and Arbitrage Pricing
Theory
Answer Key
Multiple Choice Questions
1. An adjusted beta will be ______ than the unadjusted beta.
A. lower
B. higher
C. closer to 1
D. closer to 0
Difficulty: Medium
2. Fama and French claim that after controlling for firm size and the ratio of firm's book value
to market value, beta is ______________.
I. highly significant in predicting future stock returns
II. relatively useless in predicting future stock returns
III. a good predictor of firm's specific risk
A. I only
B. II only
C. I and III only
D. I, II and III
Difficulty: Medium
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3. Which of the following are assumptions of the simple CAPM model?
I. Individual trades of investors do not affect a stock's price
II. All investors plan for one identical holding period
III. All investors analyze securities in the same way and share the same economic view of the
world
IV. All investors have the same level of risk aversion
A. I, II and IV only
B. I, II and III only
C. II, III and IV only
D. I, II, III and IV
Difficulty: Medium
4. When all investors analyze securities in the same way and share the same economic view of
the world we say they have ____________________.
A. heterogeneous expectations
B. equal risk aversion
C. asymmetric information
D. homogeneous expectations
Difficulty: Easy
5. In a simple CAPM world which of the following statements is/are correct?
I. All investors will choose to hold the market portfolio, which includes all risky assets in the
world
II. Investors' complete portfolio will vary depending on their risk aversion
III. The return per unit of risk will be identical for all individual assets
IV. The market portfolio will be on the efficient frontier and it will be the optimal risky
portfolio
A. I, II and III only
B. II, III and IV only
C. I, III and IV only
D. I, II, III and IV
Difficulty: Hard
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6. Consider the CAPM. The risk-free rate is 6% and the expected return on the market is 18%.
What is the expected return on a stock with a beta of 1.3?
A. 6%
B. 15.6%
C. 18%
D. 21.6%
E[rs] = 6% + [18% - 6%](1.3) = 21.6%
Difficulty: Medium
7. Consider the CAPM. The risk-free rate is 5% and the expected return on the market is 15%.
What is the beta on a stock with an expected return of 17%?
A. .5
B. .7
C. 1
D. 1.2
17% = 5% + [15% - 5%]s; s = 1.2
Difficulty: Medium
8. Consider the CAPM. The expected return on the market is 18%. The expected return on a
stock with a beta of 1.2 is 20%. What is the risk-free rate?
A. 2%
B. 6%
C. 8%
D. 12%
20% = rF + (18 - rF)(1.2); rF = 8%
Difficulty: Medium
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9. The arbitrage pricing theory was developed by _________.
A. Henry Markowitz
B. Stephen Ross
C. William Sharpe
D. Eugene Fama
Difficulty: Easy
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10. In the context of the capital asset pricing model, the systematic measure of risk is captured
by _________.
A. unique risk
B. beta
C. standard deviation of returns
D. variance of returns
Difficulty: Easy
11. Empirical results estimated from historical data indicate that betas _________.
A. are always close to zero
B. are constant over time
C. of all securities are always between zero and one
D. seem to regress toward one over time
Difficulty: Easy
12. If enough investors decide to purchase stocks they are likely to drive up stock prices
thereby causing _____________ and ___________.
A. expected returns to fall; risk premiums to fall
B. expected returns to rise; risk premiums to fall
C. expected returns to rise; risk premiums to rise
D. expected returns to fall; risk premiums to rise
Difficulty: Medium
13. The market portfolio has a beta of _________.
A. -1.0
B. 0
C. 0.5
D. 1.0
Difficulty: Easy
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14. In a well diversified portfolio, __________ risk is negligible.
A. nondiversifiable
B. market
C. systematic
D. unsystematic
Difficulty: Easy
15. The capital asset pricing model was developed by _________.
A. Kenneth French
B. Stephen Ross
C. William Sharpe
D. Eugene Fama
Difficulty: Easy
16. If all investors become more risk averse the SML will _______________ and stock prices
will _______________.
A. shift upward; rise
B. shift downward; fall
C. have the same intercept with a steeper slope; fall
D. have the same intercept with a flatter slope; rise
Difficulty: Medium
17. According to the capital asset pricing model, a security with a _________.
A. negative alpha is considered a good buy
B. positive alpha is considered overpriced
C. positive alpha is considered underpriced
D. zero alpha is considered a good buy
Difficulty: Easy
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18. Arbitrage is based on the idea that _________.
A. assets with identical risks must have the same expected rate of return
B. securities with similar risk should sell at different prices
C. the expected returns from equally risky assets are different
D. markets are perfectly efficient
Difficulty: Easy
19. Investors require a risk premium as compensation for bearing ______________.
A. unsystematic risk
B. alpha risk
C. residual risk
D. systematic risk
Difficulty: Easy
20. According to the capital asset pricing model, a fairly priced security will plot _________.
A. above the security market line
B. along the security market line
C. below the security market line
D. at no relation to the security market line
Difficulty: Easy
21. According to the capital asset pricing model, fairly priced securities have _________.
A. negative betas
B. positive alphas
C. positive betas
D. zero alphas
Difficulty: Medium
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22. You have a $50,000 portfolio consisting of Intel, GE and Con Edison. You put $20,000 in
Intel, $12,000 in GE and the rest in Con Edison. Intel, GE and Con Edison have betas of 1.3,
1.0 and 0.8 respectively. What is your portfolio beta?
A. 1.048
B. 1.033
C. 1.000
D. 1.037
Difficulty: Medium
23. The graph of the relationship between expected return and beta in the CAPM context is
called the _________.
A. CML
B. CAL
C. SML
D. SCL
Difficulty: Easy
24. Research has revealed that regardless of what the current estimate of a firm's beta is, it
will tend to move closer to ______ over time.
A. 1
B. 0
C. -1
D. 0.5
Difficulty: Easy
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25. The beta of a security is equal to _________.
A. the covariance between the security and market returns divided by the variance of the
market's returns
B. the covariance between the security and market returns divided by the standard deviation
of the market's returns
C. the variance of the security's returns divided by the covariance between the security and
market returns
D. the variance of the security's returns divided by the variance of the market's returns
Difficulty: Medium
26. According to the capital asset pricing model, _________.
A. all securities' returns must lie on the capital market line
B. all securities' returns must lie on the security market line
C. the slope of the security market line must be less than the market risk premium
D. any security with a beta of 1 must have an excess return of zero
Difficulty: Medium
27. According to the CAPM which of the following is not a true statement regarding the
market portfolio.
A. All securities in the market portfolio are held in proportion to their market values
B. It includes all risky assets in the world, including human capital
C. It is always the minimum variance portfolio on the efficient frontier
D. It lies on the efficient frontier
Difficulty: Medium
28. In a world where the CAPM holds which one of the following is not a true statement
regarding the capital market line?
A. The capital market line always has a positive slope
B. The capital market line is also called the security market line
C. The capital market line is the best attainable capital allocation line
D. The capital market line is the line from the risk-free rate through the market portfolio
Difficulty: Medium
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29. Consider the single factor APT. Portfolio A has a beta of 1.3 and an expected return of
21%. Portfolio B has a beta of 0.7 and an expected return of 17%. The risk-free rate of return
is 8%. If you wanted to take advantage of an arbitrage opportunity, you should take a short
position in portfolio __________ and a long position in portfolio _________.
A. A, A
B. A, B
C. B, A
D. B, B
Difficulty: Medium
30. Consider the single factor APT. Portfolio A has a beta of 0.2 and an expected return of
13%. Portfolio B has a beta of 0.4 and an expected return of 15%. The risk-free rate of return
is 10%. If you wanted to take advantage of an arbitrage opportunity, you should take a short
position in portfolio __________ and a long position in portfolio _________.
A. A, A
B. A, B
C. B, A
D. B, B
Difficulty: Medium
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31. Consider the multi-factor APT with two factors. Portfolio A has a beta of 0.5 on factor 1
and a beta of 1.25 on factor 2. The risk premiums on the factors 1 and 2 portfolios are 1% and
7% respectively. The risk-free rate of return is 7%. The expected return on portfolio A is
__________ if no arbitrage opportunities exist.
A. 13.5%
B. 15.0%
C. 16.25%
D. 23.0%
Difficulty: Medium
32. Consider the one-factor APT. The variance of the return on the factor portfolio is .08. The
beta of a well-diversified portfolio on the factor is 1.2. The variance of the return on the welldiversified portfolio is approximately _________.
A. .1152
B. .1270
C. .1521
D. .1342
Difficulty: Medium
33. Security X has an expected rate of return of 13% and a beta of 1.15. The risk-free rate is
5% and the market expected rate of return is 15%. According to the capital asset pricing
model, security X is _________.
A. fairly priced
B. overpriced
C. underpriced
D. None of the above
Difficulty: Medium
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34. The possibility of arbitrage arises when ____________.
A. there is no consensus among investors regarding the future direction of the market, and
thus trades are made arbitrarily
B. mis-pricing among securities creates opportunities for riskless profits
C. two identically risky securities carry the same expected returns
D. investors do not diversify
Difficulty: Easy
35. Building a zero-investment portfolio will always involve _____________.
A. an unknown mixture of short and long positions
B. only short positions
C. only long positions
D. equal investments in a short and a long position
Difficulty: Easy
36. An important characteristic of market equilibrium is _______________.
A. the presence of many opportunities for creating zero-investment portfolios
B. all investors exhibit the same degree of risk aversion
C. the absence of arbitrage opportunities
D. the a lack of liquidity in the market
Difficulty: Easy
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37. Consider the capital asset pricing model. The market degree of risk aversion, A, is 3. The
variance of return on the market portfolio is .0225. If the risk-free rate of return is 4%, the
expected return on the market portfolio is _________.
A. 6.75%
B. 9.0%
C. 10.75%
D. 12.0%
Difficulty: Medium
38. You invest $600 in security A with a beta of 1.5 and $400 in security B with a beta of .90.
The beta of this portfolio is _________.
A. 1.14
B. 1.20
C. 1.26
D. 1.50
Difficulty: Medium
39. In a single factor market model the beta of a stock ________.
A. measures the stock's contribution to the standard deviation of the market portfolio
B. measures the stock's unsystematic risk
C. changes with the variance of the residuals
D. measures the stock's contribution to the standard deviation of the stock
Difficulty: Medium
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40. Security A has an expected rate of return of 12% and a beta of 1.10. The market expected
rate of return is 8% and the risk-free rate is 5%. The alpha of the stock is _________.
A. -1.7%
B. 3.7%
C. 5.5%
D. 8.7%
Difficulty: Medium
41. The variance of the return on the market portfolio is .0400 and the expected return on the
market portfolio is 20%. If the risk-free rate of return is 10%, the market degree of risk
aversion, A, is _________.
A. 0.5
B. 2.5
C. 3.5
D. 5.0
A = (.20 - .10)/.04 = 2.5
Difficulty: Medium
42. The risk-free rate is 4%. The expected market rate of return is 11%. If you expect stock X
with a beta of .8 to offer a rate of return of 12 percent, then you should _________.
A. buy stock X because it is overpriced
B. buy stock X because it is underpriced
C. sell short stock X because it is overpriced
D. sell short stock X because it is underpriced
Difficulty: Medium
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43. Consider the one-factor APT. The standard deviation of return on a well-diversified
portfolio is 20%. The standard deviation on the factor portfolio is 12%. The beta of the welldiversified portfolio is approximately _________.
A. 0.60
B. 1.00
C. 1.67
D. 3.20
Difficulty: Medium
44. The risk-free rate and the expected market rate of return are 6% and 16% respectively.
According to the capital asset pricing model, the expected rate of return on security X with a
beta of 1.2 is equal to _________.
A. 12%
B. 17%
C. 18%
D. 23%
Difficulty: Medium
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45. Consider the following two stocks, A and B. Stock A has an expected return of 10% and a
beta of 1.20. Stock B has an expected return of 14% and a beta of 1.80. The expected market
rate of return is 9% and the risk-free rate is 5%. Security __________ would be considered a
good buy because _________.
A. A, it offers an expected excess return of 0.2%
B. A, it offers an expected excess return of 2.2%
C. B, it offers an expected excess return of 1.8%
D. B, it offers an expected return of 2.4%
Difficulty: Hard
46. According to the CAPM, the risk premium an investor expects to receive on any stock or
portfolio is _______________.
A. directly related to the risk aversion of the particular investor
B. inversely related to the risk aversion of the particular investor
C. directly related to the beta of the stock
D. inversely related to the alpha of the stock
Difficulty: Easy
47. In his famous critique of the CAPM, Roll argued that the CAPM ______________.
A. is not testable because the true market portfolio can never be observed
B. is of limited use because systematic risk can never be entirely eliminated
C. should be replaced by the APT
D. should be replaced by the Fama French 3 factor model
Difficulty: Medium
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48. Which of the following variables do Fama and French claim do a better job explaining
stock returns than beta?
I. Book to market ratio
II. Unexpected change in industrial production
III. Firm size
A. I only
B. I and II only
C. I and III only
D. I, II and III
Difficulty: Medium
49. In a study conducted by Jagannathan and Wang, it was found that the performance of beta
in explaining security returns could be considerably enhanced by _____________.
I. including the unsystematic risk of a stock
II. including human capital in the market portfolio
III. allowing for changes in beta over time
A. I and II only
B. II and III only
C. I and III only
D. I, II and III
Difficulty: Medium
50. The SML is valid for _______________ and the CML is valid for ______________.
A. only individual assets; well diversified portfolios only
B. only well diversified portfolios; only individual assets
C. both well diversified portfolios and individual assets; both well diversified portfolios and
individual assets
D. both well diversified portfolios and individual assets; well diversified portfolios only
Difficulty: Medium
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51. Liquidity is a risk factor that __________.
A. has yet to be accurately measured and incorporated into portfolio management
B. is unaffected by trading mechanisms on various stock exchanges
C. has no effect on the market value of an asset
D. affects bond prices but not stock prices
Difficulty: Medium
52. Beta is a measure of ______________.
A. total risk
B. relative systematic risk
C. relative non-systematic risk
D. relative business risk
Difficulty: Easy
53. According to capital asset pricing theory, the key determinant of portfolio returns is
_________.
A. the degree of diversification
B. the systematic risk of the portfolio
C. the firm specific risk of the portfolio
D. economic factors
Difficulty: Easy
54. The expected return of the risky asset portfolio with minimum variance is _________.
A. the market rate of return
B. zero
C. the risk-free rate
D. There is not enough information to answer this question
Difficulty: Medium
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55. According to the CAPM, investors are compensated for all but which of the following?
A. Expected inflation
B. Systematic risk
C. Time value of money
D. Residual risk
Difficulty: Medium
56. The most significant conceptual difference between the arbitrage pricing theory (APT)
and the capital asset pricing model (CAPM) is that the CAPM _____________.
A. places less emphasis on market risk
B. recognizes multiple unsystematic risk factors
C. recognizes only one systematic risk factor
D. recognizes multiple systematic risk factors
Difficulty: Medium
57. Arbitrage is __________________________.
A. is an example of the law of one price
B. the creation of riskless profits made possible by relative mispricing among securities
C. is a common opportunity in modern markets
D. an example of a risky trading strategy based on market forecasting
Difficulty: Easy
58. A stock's alpha measures the stock's ____________________.
A. expected return
B. abnormal return
C. excess return
D. residual return
Difficulty: Hard
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59. The measure of unsystematic risk can be found from an index model as _________.
A. residual standard deviation
B. R-square
C. degrees of freedom
D. sum of squares of the regression
Difficulty: Medium
60. Standard deviation of portfolio returns is a measure of ___________.
A. total risk
B. relative systematic risk
C. relative non-systematic risk
D. relative business risk
Difficulty: Easy
61. One of the main problems with the arbitrage pricing theory is __________.
A. its use of several factors instead of a single market index to explain the risk-return
relationship
B. the introduction of non-systematic risk as a key factor in the risk-return relationship
C. that the APT requires an even larger number of unrealistic assumptions than the CAPM
D. the model fails to identify the key macroeconomic variables in the risk-return relationship
Difficulty: Medium
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62. You run a regression of a stock's returns versus a market index and find the following:
Based on the data you know that the stock
A. earned a positive alpha that is statistically significantly different from zero
B. has a beta precisely equal to 0.890
C. has a beta that could be anything between 0.6541 and 1.465 inclusive
D. has no systematic risk
Difficulty: Hard
63. The expected return on the market portfolio is 15%. The risk-free rate is 8%. The expected
return on SDA Corp. common stock is 16%. The beta of SDA Corp. common stock is 1.25.
Within the context of the capital asset pricing model, _________.
A. SDA Corp. stock is underpriced
B. SDA Corp. stock is fairly priced
C. SDA Corp. stock's alpha is -0.75%
D. SDA Corp. stock alpha is 0.75%
Difficulty: Medium
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64. Assume that both X and Y are well-diversified portfolios and the risk-free rate is 8%.
Portfolio X has an expected return of 14% and a beta of 1.00. Portfolio Y has an expected
return of 9.5% and a beta of 0.25. In this situation, you would conclude that portfolios X and
Y _________.
A. are in equilibrium
B. offer an arbitrage opportunity
C. are both underpriced
D. are both fairly priced
Thus, there are no arbitrage opportunities, and X and Y are in equilibrium.
Difficulty: Medium
65. What is the expected return on the market?
A. 0%
B. 5%
C. 10%
D. 15%
Difficulty: Easy
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66. What is the beta for a portfolio with an expected return of 12.5%?
A. 0
B. 1
C. 1.5
D. 2
Since 10% return corresponds to beta = 1, and 15% corresponds to beta = 2, 12.5% return will
equal to beta (1 + 2)/2 = 1.5
Difficulty: Medium
67. What is the expected return for a portfolio with a beta of 0.5?
A. 5%
B. 7.5%
C. 12.5%
D. 15%
Difficulty: Medium
68. What is the alpha of a portfolio with a beta of 2 and actual return of 15%?
A. 0%
B. 13%
C. 15%
D. 17%
alpha = actual return - expected return = 15% - 15% = 0%
A portfolio with a return of 15% and a beta of 2 lies on the SML and therefore has an alpha of
zero.
Difficulty: Medium
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69. If the simple CAPM is valid and all portfolios are priced correctly, which of the situations
below are possible? Consider each situation independently and assume the risk free rate is
5%.
A. Opiton A
B. Opiton B
C. Opiton C
D. Opiton D
A) Not possible, two portfolios with different betas can not have the same expected return.
B) Not possible, under CAPM market portfolio must yield highest CAL.
C) Not possible, portfolio A and the market have different excess returns per unit of risk.
D) Possible
Difficulty: Hard
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70. Two investment advisors are comparing performance. Advisor A averaged a 20% return
with a portfolio beta of 1.5 and Advisor B averaged a 15% return with a portfolio beta of 1.2.
If the T-bill rate was 5% and the market return during the period was 13%, which advisor was
the better stock picker?
A. Advisor A was better because he generated a larger alpha
B. Advisor B was better because he generated a larger alpha
C. Advisor A was better because he generated a higher return
D. Advisor B was better because he achieved a good return with a lower beta
Required return A = 5% + (13% - 5%)(1.5) = 17%
Required return B = 5% + (13% - 5%)(1.2) = 14.6%
A = Actual return A - required return A = 20% - 17% = 3%
B = Actual return B - required return B = 15% - 14.6% = 0.4%
Difficulty: Hard
71. The expected return on the market is the risk free rate plus the _____________.
A. diversified returns
B. equilibrium risk premium
C. historical market return
D. unsystematic return
Difficulty: Easy
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72. You consider buying a share of stock at a price of $25. The stock is expected to pay a
dividend of $1.50 next year and your advisory service tells you that you can expect to sell the
stock in one year for $28. The stock's beta is 1.1, rf is 6% and E[rm] = 16%. What is the
stock's abnormal return?
A. 1%
B. 2%
C. -1%
D. -2%
Required return = 6% + (16% - 6%)(1.1) = 17%
Abnormal return = 18% - 17% = 1%
Difficulty: Hard
73. If the beta of the market index is 1.0 and the standard deviation of the market index
increases from 12% to 18%, what is the new beta of the market index?
A. 0.8
B. 1.0
C. 1.2
D. 1.5
Market beta always equals to 1 regardless of market volatility.
Difficulty: Easy
74. According to the CAPM, what is the market risk premium given an expected return on a
security of 13.6%, a stock beta of 1.2, and a risk free interest rate of 4.0%?
A. 4.0%
B. 4.8%
C. 6.6%
D. 8.0%
13.6 = 4.0 + 1.2 x (MRP), MRP = 8.0%
Difficulty: Medium
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75. According to the CAPM, what is the expected market return given an expected return on a
security of 15.8%, a stock beta of 1.2, and a risk free interest rate of 5.0%?
A. 5.0%
B. 9.0%
C. 13.0%
D. 14.0%
15.8 = 5.0 + 1.2 x (MRP), MRP = 9.0%, Expected market return = 5.0 + 9.0 = 14.0%
Difficulty: Medium
76. What is the expected return on a stock with a beta of 0.8, given a risk free rate of 3.5%
and an expected market return of 15.5%?
A. 3.8%
B. 13.1%
C. 15.6%
D. 19.1%
Expected return = 3.5 + (0.8)(15.5 - 3.5) = 13.1%
Difficulty: Medium
77. Research has identified two systematic factors that affect U.S. stock returns. The factors
are growth in industrial production and changes in long term interest rates. Industrial
production growth is expected to be 3% and long term interest rates are expected to increase
by 1%. You are analyzing a stock is that has a beta of 1.2 on the industrial production factor
and 0.5 on the interest rate factor. It currently has an expected return of 12%. However, if
industrial production actually grows 5% and interest rates drop 2% what is your best guess of
the stock's return?
A. 15.9%
B. 12.9%
C. 13.2%
D. 12.0%
E[rnew] = 12% + (5% - 3%)(1.2) + (-2% - 1%)(0.5) = 12.9%
Difficulty: Hard
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78. A stock has a beta of 1.3. The unsystematic risk of this stock is ____________ the stock
market as a whole.
A. higher than
B. lower than
C. equal to
D. indeterminable compared to
Difficulty: Medium
79. There are two independent economic factors M1 and M2. The risk-free rate is 5% and all
stocks have independent firm-specific components with a standard deviation of 25%.
Portfolios A and B are well diversified. Given the data below which equation provides the
correct pricing model?
A. E(rP) = 5 + 1.12P1 + 11.86P2
B. E(rP) = 5 + 4.96P1 + 13.26P2
C. E(rP) = 5 + 3.23P1 + 8.46P2
D. E(rP) = 5 + 8.71P1 + 9.68P2
35 = 5 + 1.5 1 + 1.75 2; Solve for 1
1 = 20 - 1.16672
20 = 5 + 1 + 0.652; Sub in 1
20 = 5 + 20 - 1.1667 2 + 0.65 2
2 = 9.68% 1 = 8.71%
Difficulty: Hard
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80. Using the index model, the alpha of a stock is 3.0%, the beta if 1.1 and the market return
is 10%. What is the residual given an actual return of 15%?
A. 0.0%
B. 1.0%
C. 2.0%
D. 3.0%
Residual = 15 - (3 + 1.1 x 10) = 1%
Difficulty: Medium
81. The risk premium for exposure to aluminum commodity prices is 4% and the firm has a
beta relative to aluminum commodity prices of 0.6. The risk premium for exposure to GDP
changes is 6% and the firm has a beta relative to GDP of 1.2. If the risk free rate is 4.0%, what
is the expected return on this stock?
A. 10.0%
B. 11.5%
C. 13.6%
D. 14.0%
Return = .04 + 0.6(0.04) + 1.2(.06) = .136
Difficulty: Medium
82. The two factor model on a stock provides a risk premium for exposure to market risk of
9%, a risk premium for exposure to interest rate of (-1.3%), and a risk free rate of 3.5%. What
is the expected return on the stock?
A. 8.7%
B. 11.2%
C. 13.8%
D. 15.2%
Return = 3.5 + 9 - 1.3 = 11.2%
Difficulty: Medium
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83. The risk premium for exposure to exchange rates is 5% and the firm has a beta relative to
exchanges rates of 0.4. The risk premium for exposure to the consumer price index is -6% and
the firm has a beta relative to the CPI of 0.8. If the risk free rate is 3.0%, what is the expected
return on this stock?
A. 0.2%
B. 1.5%
C. 3.6%
D. 4.0%
Return = .03 + 0.4(0.05) + 0.8(-.06) = .002
Difficulty: Medium
84. The two factor model on a stock provides a risk premium for exposure to market risk of
12%, a risk premium for exposure to silver commodity prices of 3.5% and a risk free rate of
4.0%. What is the expected return on the stock?
A. 11.6%
B. 13.0%
C. 15.3%
D. 19.5%
Return = 3.5 + 4 + 12 = 19.5%
Difficulty: Medium
85. The measure of risk used in the Capital Asset Pricing Model is ___________.
A. specific risk
B. the standard deviation of returns
C. reinvestment risk
D. beta
Difficulty: Easy
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1.
A.
B.
C.
D.
Which of the following beliefs would not preclude charting as a method of portfolio management?
The market is strong-form efficient.
The market is semistrong-form efficient.
The market is weak-form efficient.
Stock prices follow recurring patterns.
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 08-01 Demonstrate why security price changes should be essentially unpredictable in an efficient market.
Topic: Random Walks and the Efficient Market Hypothesis
2.
A.
B.
C.
D.
In a 1953 study of stock prices, Maurice Kendall found that ________.
there were no predictable patterns in stock prices
stock prices exhibited strong serial autocorrelation
day-to-day stock prices followed consistent trends
fundamental analysis could be used to generate abnormal returns
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-01 Demonstrate why security price changes should be essentially unpredictable in an efficient market.
Topic: Random Walks and the Efficient Market Hypothesis
3.
A.
B.
C.
D.
The weak form of the EMH states that ________ must be reflected in the current stock price.
all past information, including security price and volume data
all publicly available information
all information, including inside information
all costless information
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-01 Demonstrate why security price changes should be essentially unpredictable in an efficient market.
Topic: Random Walks and the Efficient Market Hypothesis
4.
A.
B.
C.
D.
The semistrong form of the EMH states that ________ must be reflected in the current stock price.
all security price and volume data
all publicly available information
all information, including inside information
all costless information
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-01 Demonstrate why security price changes should be essentially unpredictable in an efficient market.
Topic: Random Walks and the Efficient Market Hypothesis
5.
A.
B.
C.
D.
The strong form of the EMH states that ________ must be reflected in the current stock price.
all security price and volume data
all publicly available information
all information, including inside information
all costless information
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-01 Demonstrate why security price changes should be essentially unpredictable in an efficient market.
Topic: Random Walks and the Efficient Market Hypothesis
6.
A.
B.
C.
D.
Random price movements indicate ________.
irrational markets
that prices cannot equal fundamental values
that technical analysis to uncover trends can be quite useful
that markets are functioning efficiently
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 08-01 Demonstrate why security price changes should be essentially unpredictable in an efficient market.
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Topic: Random Walks and the Efficient Market Hypothesis
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7.
A.
B.
C.
D.
When the market risk premium rises, stock prices will ________.
rise
fall
recover
have excess volatility
AACSB: Analytical Thinking
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-02 Cite evidence that supports and contradicts the efficient market hypothesis.
Topic: Are Markets Efficient?
8. The small-firm effect is strongest in which month?
A. January
B. June
C. July
D. December
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 08-03 Provide interpretations of various stock market anomalies.
Topic: Are Markets Efficient?
9. Evidence suggests that there may be _______ momentum and ________ reversal patterns in stock price behavior.
A.
B.
C.
D.
short-run; short-run
long-run; long-run
long-run; short-run
short-run; negligible
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 08-03 Provide interpretations of various stock market anomalies.
Topic: Are Markets Efficient?
10. Proponents of the EMH typically advocate __________.
A.
B.
C.
D.
a conservative investment strategy
a liberal investment strategy
a passive investment strategy
an aggressive investment strategy
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-01 Demonstrate why security price changes should be essentially unpredictable in an efficient market.
Topic: Implications of the EMH
11. Stock prices that are stable over time _______.
A.
B.
C.
D.
indicate that prices are useful indicators of true economic value
indicate that the market is not incorporating new information into current stock prices
ensure that an economy allocates its resources efficiently
indicates that returns follow a random-walk process
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 3 Hard
Learning Objective: 08-01 Demonstrate why security price changes should be essentially unpredictable in an efficient market.
Topic: Random Walks and the Efficient Market Hypothesis
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12. The tendency when the ______ performing stocks in one period are the best performers in the next and the current ________ performers
are lagging the market later is called the reversal effect.
A.
B.
C.
D.
worst; best
worst; worst
best; worst
best; best
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 08-03 Provide interpretations of various stock market anomalies.
Topic: Are Markets Efficient?
13. Which of the following is not a method employed by followers of technical analysis?
A. charting
B. relative strength analysis
C. earnings forecasting
D. trading around support and resistance levels
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-01 Demonstrate why security price changes should be essentially unpredictable in an efficient market.
Topic: Implications of the EMH
14. Which of the following is not a method employed by fundamental analysts?
A. analyzing the Fed's next interest rate move
B. relative strength analysis
C. earnings forecasting
D. estimating the economic growth rate
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-01 Demonstrate why security price changes should be essentially unpredictable in an efficient market.
Topic: Implications of the EMH
15. The primary objective of fundamental analysis is to identify __________.
A.
B.
C.
D.
well-run firms
poorly run firms
mispriced stocks
high P/E stocks
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-01 Demonstrate why security price changes should be essentially unpredictable in an efficient market.
Topic: Implications of the EMH
16. If you believe in the __________ form of the EMH, you believe that stock prices reflect all publicly available information but not information
that is available only to insiders.
A.
B.
C.
D.
semistrong
strong
weak
perfect
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-01 Demonstrate why security price changes should be essentially unpredictable in an efficient market.
Topic: Random Walks and the Efficient Market Hypothesis
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17. If you believe in the __________ form of the EMH, you believe that stock prices reflect all relevant information, including information that
is available only to insiders.
A.
B.
C.
D.
semistrong
strong
weak
perfect
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-01 Demonstrate why security price changes should be essentially unpredictable in an efficient market.
Topic: Random Walks and the Efficient Market Hypothesis
18. Most of the stock price response to a corporate earnings or dividend announcement occurs within ________________.
A.
B.
C.
D.
about 30 seconds
about 10 minutes
6 months
2 years
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 08-01 Demonstrate why security price changes should be essentially unpredictable in an efficient market.
Topic: Random Walks and the Efficient Market Hypothesis
19. __________ is the return on a stock beyond what would be predicted from market movements alone.
A.
B.
C.
D.
A normal return
A subliminal return
An abnormal return
None of these options
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-01 Demonstrate why security price changes should be essentially unpredictable in an efficient market.
Topic: Implications of the EMH
20. You believe that stock prices reflect all information that can be derived by examining market trading data such as the history of past
stock prices, trading volume, or short interest, but you do not believe stock prices reflect all publicly available and inside information.
You are a proponent of the ____________ form of the EMH.
A.
B.
C.
D.
semistrong
strong
weak
perfect
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-01 Demonstrate why security price changes should be essentially unpredictable in an efficient market.
Topic: Random Walks and the Efficient Market Hypothesis
21. You are an investment manager who is currently managing assets worth $6 billion. You believe that active management of your fund
could generate an additional one-tenth of 1% return on the portfolio. If you want to make sure your active strategy adds value, how much
can you spend on security analysis?
A.
B.
C.
D.
$12,000,000
$6,000,000
$3,000,000
$0
(.001)($6 billion) = $6,000,000
AACSB: Reflective Thinking
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 08-01 Demonstrate why security price changes should be essentially unpredictable in an efficient market.
Topic: Random Walks and the Efficient Market Hypothesis
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22. A mutual fund that attempts to hold quantities of shares in proportion to their representation in the market is called an __________ fund.
A.
B.
C.
D.
stock
index
hedge
money market
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-01 Demonstrate why security price changes should be essentially unpredictable in an efficient market.
Topic: Implications of the EMH
23. Choosing stocks by searching for predictable patterns in stock prices is called ________.
A.
B.
C.
D.
fundamental analysis
technical analysis
index management
random-walk investing
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-01 Demonstrate why security price changes should be essentially unpredictable in an efficient market.
Topic: Implications of the EMH
24. Which of the following is not an issue that is central to the debate regarding market efficiency?
A. the magnitude issue
B. the tax-loss selling issue
C. the lucky event issue
D. the selection bias issue
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-02 Cite evidence that supports and contradicts the efficient market hypothesis.
Topic: Are Markets Efficient?
25. Most people would readily agree that the stock market is not _________.
A.
B.
C.
D.
weak-form efficient
semistrong-form efficient
strong-form efficient
efficient at all
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-02 Cite evidence that supports and contradicts the efficient market hypothesis.
Topic: Random Walks and the Efficient Market Hypothesis
26. Small firms have tended to earn abnormal returns primarily in __________.
A.
B.
C.
D.
the month of January
the month July
the trough of the business cycle
the peak of the business cycle
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-03 Provide interpretations of various stock market anomalies.
Topic: Are Markets Efficient?
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27. Fama and French have suggested that many market anomalies can be explained as manifestations of ____________.
A.
B.
C.
D.
regulatory effects
high trading costs
information asymmetry
varying risk premiums
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 08-03 Provide interpretations of various stock market anomalies.
Topic: Are Markets Efficient?
28. Proponents of the EMH think technical analysts __________.
A.
B.
C.
D.
should focus on relative strength
should focus on resistance levels
should focus on support levels
are wasting their time
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-01 Demonstrate why security price changes should be essentially unpredictable in an efficient market.
Topic: Implications of the EMH
29. Evidence supporting semistrong-form market efficiency suggests that investors should _________________________.
A.
B.
C.
D.
rely on technical analysis to select securities
rely on fundamental analysis to select securities
use a passive trading strategy such as purchasing an index fund or an ETF
select securities by throwing darts at the financial pages of the newspaper
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-01 Demonstrate why security price changes should be essentially unpredictable in an efficient market.
Topic: Random Walks and the Efficient Market Hypothesis
30. "Buy a stock if its price moves up by 2% more than the Dow Average" is an example of a _________________.
A.
B.
C.
D.
trading rule
market anomaly
fundamental approach
passive trading strategy
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-01 Demonstrate why security price changes should be essentially unpredictable in an efficient market.
Topic: Implications of the EMH
31. Jaffe found that stock prices __________ after insiders intensively bought shares and __________ after insiders intensively sold shares.
A.
B.
C.
D.
decreased; decreased
decreased; increased
increased; decreased
increased; increased
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 08-02 Cite evidence that supports and contradicts the efficient market hypothesis.
Topic: Are Markets Efficient?
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32. In a 1988 study, Fama and French found that the return on the aggregate stock market was __________ when the dividend yield was higher.
A.
B.
C.
D.
higher
lower
unaffected
more skewed
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 08-02 Cite evidence that supports and contradicts the efficient market hypothesis.
Topic: Are Markets Efficient?
33. In their 2010 study, Fama and French used a four-factor model to analyze excess returns on equity mutual funds. They found that the funds
______.
A. had negative alphas before fees were considered
B. had positive alphas after fees were considered
C. had negative alphas after fees were considered
D. had negative alphas before fees were considered and had negative alphas after fees were considered
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 08-04 Formulate investment strategies that make sense in informationally efficient markets.
Topic: Mutual Fund and Analyst Performance
34. Joe bought a stock at $57 per share. The price promptly fell to $55. Joe held on to the stock until it again reached $57, and then he sold
it once he had eliminated his loss. If other investors do the same to establish a trading pattern, this would contradict _______.
A.
B.
C.
D.
the strong-form EMH
the weak-form EMH
technical analysis
the semistrong-form EMH
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 08-01 Demonstrate why security price changes should be essentially unpredictable in an efficient market.
Topic: Random Walks and the Efficient Market Hypothesis
35. According to 1968 research by Ball and Brown, securities markets fully adjust to earnings announcements _______.
A.
B.
C.
D.
instantly
in 1 day
in 1 week
gradually over time
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 08-02 Cite evidence that supports and contradicts the efficient market hypothesis.
Topic: Are Markets Efficient?
36. When stock returns exhibit positive serial correlation, this means that __________ returns tend to follow ___________ returns.
A.
B.
C.
D.
positive; positive
positive; negative
negative; positive
positive; zero
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-02 Cite evidence that supports and contradicts the efficient market hypothesis.
Topic: Are Markets Efficient?
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37. Basu found that firms with high P/E ratios __________.
A.
B.
C.
D.
earned higher average returns than firms with low P/E ratios
earned the same average returns as firms with low P/E ratios
earned lower average returns than firms with low P/E ratios
had higher dividend yields than firms with low P/E ratios
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 08-02 Cite evidence that supports and contradicts the efficient market hypothesis.
Topic: Are Markets Efficient?
38. Fundamental analysis is likely to yield best results for _______.
A.
B.
C.
D.
NYSE stocks
neglected stocks
stocks that are frequently in the news
fast-growing companies
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 08-01 Demonstrate why security price changes should be essentially unpredictable in an efficient market.
Topic: Implications of the EMH
39. You are looking to invest in one of three stocks. All other things being equal, Stock A has high expected earnings growth, stock B has
only modest expected earnings growth, and stock C is expected to generate poor earnings growth. According to LaPorta's 1996 study,
which stock is likely to generate the greatest alpha for you?
A.
B.
C.
D.
Stock A
Stock B
Stock C
The answer cannot be determined from the information given.
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 08-02 Cite evidence that supports and contradicts the efficient market hypothesis.
Topic: Are Markets Efficient?
40. You believe that you can earn 2% more on your portfolio if you engage in full-time stock research. However, the additional trading costs and
tax liability from active management will cost you about .5%. You have an $800,000 stock portfolio. What is the most you can afford to
spend on your research?
A.
B.
C.
D.
$4,000
$8,000
$12,000
$16,000
(.02 - .005)($800,000) = $12,000
AACSB: Analytical Thinking
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-01 Demonstrate why security price changes should be essentially unpredictable in an efficient market.
Topic: Implications of the EMH
41. Even if the markets are efficient, professional portfolio management is still important because it provides investors with:
I. Low-cost diversification
II. A portfolio with a specified risk level
III. Better risk-adjusted returns than an index
A.
B.
C.
D.
I only
I and II only
II and III only
I, II, and III
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 08-01 Demonstrate why security price changes should be essentially unpredictable in an efficient market.
Topic: Implications of the EMH
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42. Banz found that, on average, the risk-adjusted returns of small firms __________.
A.
B.
C.
D.
were higher than the risk-adjusted returns of large firms
were the same as the risk-adjusted returns of large firms
were lower than the risk-adjusted returns of large firms
were negative
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 08-02 Cite evidence that supports and contradicts the efficient market hypothesis.
Topic: Are Markets Efficient?
43. If the U.S. capital markets are not informationally efficient, ______.
A.
B.
C.
D.
the markets cannot be allocationally efficient
systematic risk does not matter
no type of analysis can be used to generate abnormal returns
returns must follow a random walk
AACSB: Reflective Thinking
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-01 Demonstrate why security price changes should be essentially unpredictable in an efficient market.
Topic: Implications of the EMH
44. "Active investment management may at times generate additional returns of about .1%. However, the standard deviation of the typical
well-diversified portfolio is about 20%, so it is very difficult to statistically identify any increase in performance." Even if true, this statement
is an example of the _________ problem in deciding how efficient the markets are.
A.
B.
C.
D.
magnitude
selection bias
lucky event
allocation
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 08-02 Cite evidence that supports and contradicts the efficient market hypothesis.
Topic: Are Markets Efficient?
45. DeBondt and Thaler (1985) found that the poorest-performing stocks in one time period experienced __________ performance in the
following period and that the best-performing stocks in one time period experienced __________ performance in the following time period.
A.
B.
C.
D.
good; good
good; poor
poor; good
poor; poor
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 08-02 Cite evidence that supports and contradicts the efficient market hypothesis.
Topic: Are Markets Efficient?
46. J. M. Keyes put all his money in one stock, and the stock doubled in value in a matter of months. He did this three times in a row with
three different stocks. J. M. got his picture on the front page of the Wall Street Journal. However, the paper never mentioned the
thousands of investors who made similar bets on other stocks and lost most of their money. This is an example of the ________ problem
in deciding how efficient the markets are.
A.
B.
C.
D.
magnitude
selection bias
lucky event
small firm
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 08-02 Cite evidence that supports and contradicts the efficient market hypothesis.
Topic: Are Markets Efficient?
47. Most tests of semistrong efficiency are _________.
A.
B.
C.
D.
designed to test whether inside information can be used to generate abnormal returns
based on technical trading rules
unable to generate any evidence of market anomalies
joint tests of market efficiency and the risk-adjustment measure
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 08-02 Cite evidence that supports and contradicts the efficient market hypothesis.
Topic: Are Markets Efficient?
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48. The _________ effect may explain much of the small-firm anomaly.
I. January
II. neglected
III. liquidity
A.
B.
C.
D.
I only
II only
II and III only
I, II, and III
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 08-03 Provide interpretations of various stock market anomalies.
Topic: Are Markets Efficient?
49. The effect of liquidity on stock returns might be related to:
I. The small-firm effect
II The book-to-market effect
III The neglected-firm effect
IV. The P/E effect
A.
B.
C.
D.
I and II only
I and III only
II and IV only
I, II, and III only
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 3 Hard
Learning Objective: 08-03 Provide interpretations of various stock market anomalies.
Topic: Are Markets Efficient?
50. The broadest information set is included in the _____.
A.
B.
C.
D.
weak-form efficiency argument
semistrong-form efficiency argument
strong-form efficiency argument
technical analysis trading method
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-01 Demonstrate why security price changes should be essentially unpredictable in an efficient market.
Topic: Random Walks and the Efficient Market Hypothesis
51. The Fama and French evidence that high book-to-market firms outperform low book-to-market firms even after adjusting for beta means that
_________.
A.
B.
C.
D.
high book-to-market firms are underpriced or the book-to-market ratio is a proxy for a unique risk factor
low book-to-market firms are underpriced or the book-to-market ratio is a proxy for a systematic risk factor
either high book-to-market firms are underpriced or the book-to-market ratio is a proxy for a systematic risk factor
high book-to-market firms have more post-earnings drift
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 08-03 Provide interpretations of various stock market anomalies.
Topic: Are Markets Efficient?
52. According to results by Seyhun, __________.
A.
B.
C.
D.
investors cannot usually earn abnormal returns by following inside trades after knowledge of the trades are made public
investors can usually earn abnormal returns by following inside trades after knowledge of the trades are made public
investors cannot earn abnormal returns by following inside trades before knowledge of the trades are made public
investors cannot earn abnormal returns by trading before insiders
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 3 Hard
Learning Objective: 08-02 Cite evidence that supports and contradicts the efficient market hypothesis.
Topic: Are Markets Efficient?
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53. If the daily returns on the stock market are normally distributed with a mean of .05% and a standard deviation of 1%, the probability that
the stock market would have a return of -23% or worse on one particular day (as it did on Black Monday) is approximately __________.
A. .0%
B. .1%
C. 1%
D. 10%
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 3 Hard
Learning Objective: 08-01 Demonstrate why security price changes should be essentially unpredictable in an efficient market.
Topic: Random Walks and the Efficient Market Hypothesis
54. According to the semistrong form of the efficient markets hypothesis, ____________.
A.
B.
C.
D.
stock prices do not rapidly adjust to new information
future changes in stock prices cannot be predicted from any information that is publicly available
corporate insiders should have no better investment performance than other investors even if allowed to trade freely
arbitrage between futures and cash markets should not produce extraordinary profits
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-01 Demonstrate why security price changes should be essentially unpredictable in an efficient market.
Topic: Random Walks and the Efficient Market Hypothesis
55. The term random walk is used in investments to refer to ______________.
A.
B.
C.
D.
stock price changes that are random but predictable
stock prices that respond slowly to both old and new information
stock price changes that are random and unpredictable
stock prices changes that follow the pattern of past price changes
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-01 Demonstrate why security price changes should be essentially unpredictable in an efficient market.
Topic: Random Walks and the Efficient Market Hypothesis
56. Among the important characteristics of market efficiency is (are) that:
I. There are no arbitrage opportunities.
II. Security prices react quickly to new information.
III. Active trading strategies will not consistently outperform passive strategies.
A.
B.
C.
D.
I only
II only
I and III only
I, II, and III
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-01 Demonstrate why security price changes should be essentially unpredictable in an efficient market.
Topic: Random Walks and the Efficient Market Hypothesis
57. Stock market analysts have tended to be ___________ in their recommendations to investors.
A.
B.
C.
D.
slightly overly optimistic
overwhelmingly optimistic
slightly overly pessimistic
overwhelmingly pessimistic
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 08-04 Formulate investment strategies that make sense in informationally efficient markets.
Topic: Mutual Fund and Analyst Performance
58. Assume that a company announces unexpectedly high earnings in a particular quarter. In an efficient market one might expect
_____________.
A.
B.
C.
D.
an abnormal price change immediately after the announcement
an abnormal price increase before the announcement
an abnormal price decrease after the announcement
no abnormal price change before or after the announcement
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-01 Demonstrate why security price changes should be essentially unpredictable in an efficient market.
Topic: Random Walks and the Efficient Market Hypothesis
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59. Market anomaly refers to _______.
A.
B.
C.
D.
an exogenous shock to the market that is sharp but not persistent
a price or volume event that is inconsistent with historical price or volume trends
a trading or pricing structure that interferes with efficient buying and selling of securities
price behavior that differs from the behavior predicted by the efficient market hypothesis
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 08-03 Provide interpretations of various stock market anomalies.
Topic: Are Markets Efficient?
60. Which of the following contradicts the proposition that the stock market is weakly efficient?
A.
B.
C.
D.
Over 25% of mutual funds outperform the market on average.
Insiders earn abnormal trading profits.
Every January, the stock market earns above-normal returns.
Applications of technical trading rules fail to earn abnormal returns.
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 08-01 Demonstrate why security price changes should be essentially unpredictable in an efficient market.
Topic: Random Walks and the Efficient Market Hypothesis
61. Which of the following would violate the efficient market hypothesis?
A.
B.
C.
D.
Intel has consistently generated large profits for years.
Prices for stocks before stock splits show, on average, consistently positive abnormal returns.
Investors earn abnormal returns months after a firm announces surprise earnings.
High-earnings growth stocks fail to generate higher returns for investors than do low earnings growth stocks.
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 08-01 Demonstrate why security price changes should be essentially unpredictable in an efficient market.
Topic: Random Walks and the Efficient Market Hypothesis
62. Which of the following stock price observations would appear to contradict the weak form of the efficient market hypothesis?
A.
B.
C.
D.
The average rate of return is significantly greater than zero.
The correlation between the market return one week and the return the following week is zero.
You could have consistently made superior returns by buying stock after a 10% rise in price and selling after a 10% fall.
You could have consistently made superior returns by forecasting future earnings performance with your new Crystal Ball
forecast methodology.
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 08-01 Demonstrate why security price changes should be essentially unpredictable in an efficient market.
Topic: Random Walks and the Efficient Market Hypothesis
63. The semistrong-form of the efficient market hypothesis implies that ____________ generate abnormal returns and ____________ generate
abnormal returns.
A.
B.
C.
D.
technical analysis cannot; fundamental analysis can
technical analysis can; fundamental analysis can
technical analysis can; fundamental analysis cannot
technical analysis cannot; fundamental analysis cannot
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 08-01 Demonstrate why security price changes should be essentially unpredictable in an efficient market.
Topic: Random Walks and the Efficient Market Hypothesis
64. An implication of the efficient market hypothesis is that __________.
A.
B.
C.
D.
high-beta stocks are consistently overpriced
low-beta stocks are consistently overpriced
nonzero alphas will quickly disappear
growth stocks are better buys than value stocks
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 08-01 Demonstrate why security price changes should be essentially unpredictable in an efficient market.
Topic: Implications of the EMH
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65. One type of passive portfolio management is ________.
A.
B.
C.
D.
investing in a well-diversified portfolio without attempting to search out mispriced securities
investing in a well-diversified portfolio while only seeking out passively mispriced securities
investing an equal dollar amount in index stocks
investing in an equal amount of shares in each of the index stocks
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 08-01 Demonstrate why security price changes should be essentially unpredictable in an efficient market.
Topic: Implications of the EMH
66. The four-factor model used to construct performance benchmarks for mutual funds uses the three Fama and French factors and one
additional factor related to _________.
A.
B.
C.
D.
the tenure of the fund manager
momentum
fees
the age of the fund manager
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-04 Formulate investment strategies that make sense in informationally efficient markets.
Topic: Mutual Fund and Analyst Performance
67. Value stocks may provide investors with better returns than growth stocks if:
I. Value stocks are out of favor with investors.
II. Prices of growth stocks include premiums for overly optimistic growth levels.
III. Value stocks are likely to generate positive-earnings surprises.
A.
B.
C.
D.
I only
II only
I and III only
I, II, and III
AACSB: Reflective Thinking
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-03 Provide interpretations of various stock market anomalies.
Topic: Are Markets Efficient?
68. Value stocks usually exhibit ______ price-to-book ratios and ______ price-to-earnings ratios.
A.
B.
C.
D.
low; low
low; high
high; low
high; high
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 08-03 Provide interpretations of various stock market anomalies.
Topic: Are Markets Efficient?
69. Growth stocks usually exhibit ______ price-to-book ratios and ______ price-to-earnings ratios.
A.
B.
C.
D.
low; low
low; high
high; low
high; high
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 08-03 Provide interpretations of various stock market anomalies.
Topic: Are Markets Efficient?
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70. A day trade with an average stock holding period of under 8 minutes might be most closely associated with which trading philosophy?
A.
B.
C.
D.
EMH
fundamental analysis
strong-form market efficiency
technical analysis
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-01 Demonstrate why security price changes should be essentially unpredictable in an efficient market.
Topic: Implications of the EMH
71. A technical analyst is most likely to be affiliated with which investment philosophy?
A. active management
B. buy and hold
C. passive investment
D. index funds
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-01 Demonstrate why security price changes should be essentially unpredictable in an efficient market.
Topic: Implications of the EMH
72. Someone who invests in the Vanguard Index 500 mutual fund could most accurately be described as using which approach?
A.
B.
C.
D.
Active management
Arbitrage
Fundamental analysis
Passive investment
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-01 Demonstrate why security price changes should be essentially unpredictable in an efficient market.
Topic: Implications of the EMH
73. Evidence by Blake, Elton, and Gruber indicates that, on average, actively managed bond funds ______.
A.
B.
C.
D.
outperform passive fixed-income indexes
underperform passive fixed-income indexes by a wide margin
perform as well as passive fixed-income indexes
underperform passive fixed-income indexes by an amount equal to fund expenses
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 08-04 Formulate investment strategies that make sense in informationally efficient markets.
Topic: Mutual Fund and Analyst Performance
74. Insiders are able to profitably trade and earn abnormal returns prior to the announcement of positive news. This is a violation of which form
of efficiency?
A. weak-form efficiency
B. semistrong-form efficiency
C. strong-form efficiency
D. technical analysis
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 08-01 Demonstrate why security price changes should be essentially unpredictable in an efficient market.
Topic: Random Walks and the Efficient Market Hypothesis
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75. In an efficient market and for an investor who believes in a passive approach to investing, what is the primary duty of a portfolio manager?
A. accounting for results
B. diversification
C. identifying undervalued stocks
D. no need for a portfolio manager
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 08-01 Demonstrate why security price changes should be essentially unpredictable in an efficient market.
Topic: Implications of the EMH
76. Which of the following is not a topic related to the debate over market efficiency?
A.
B.
C.
D.
IPO results
lucky event issue
magnitude issue
selection bias
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 08-02 Cite evidence that supports and contradicts the efficient market hypothesis.
Topic: Are Markets Efficient?
77. Which Fidelity Magellan portfolio manager is often referenced as an exception to the general conclusion of efficient markets?
A.
B.
C.
D.
Jeff Vinik
Peter Lynch
Robert Stansky
William Hayes
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 08-04 Formulate investment strategies that make sense in informationally efficient markets.
Topic: Mutual Fund and Analyst Performance
78. The tendency of poorly performing stocks and well-performing stocks in one period to continue their performance into the next period is
called the ________________.
A.
B.
C.
D.
fad effect
martingale effect
momentum effect
reversal effect
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 08-02 Cite evidence that supports and contradicts the efficient market hypothesis.
Topic: Are Markets Efficient?
79. Which of the following is not a concept related to explaining abnormal excess stock returns?
A. January effect
B. neglected-firm effect
C. P/E effect
D. preferred stock effect
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-03 Provide interpretations of various stock market anomalies.
Topic: Are Markets Efficient?
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80. The lack of adequate trading volume in stock that may ultimately lead to its ability to produce excess returns is referred to as the
____________________.
A.
B.
C.
D.
January effect
liquidity effect
neglected-firm effect
P/E effect
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-03 Provide interpretations of various stock market anomalies.
Topic: Are Markets Efficient?
81. Fundamental analysis determines that the price of a firm's stock is too low, given its intrinsic value. The information used in the analysis is
available to all market participants, yet the price does not seem to react. The stock does not trade on a major exchange. What concept
might explain the ability to produce excess returns on this stock?
A.
B.
C.
D.
January effect
neglected-firm effect
P/E effect
reversal effect
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 08-03 Provide interpretations of various stock market anomalies.
Topic: Are Markets Efficient?
82. When testing mutual fund performance over time, one must be careful of ___________, which means that a certain percentage of
poorer-performing funds fail over time, making the performance of remaining funds seem more consistent over time.
A.
B.
C.
D.
survivorship bias
lucky event bias
magnitude bias
mean reversion bias
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 08-02 Cite evidence that supports and contradicts the efficient market hypothesis.
Topic: Mutual Fund and Analyst Performance
83. Most evidence indicates that U.S. stock markets are _______________________.
A.
B.
C.
D.
reasonably weak-form and semistrong-form efficient
strong-form efficient
reasonably weak-form but not semistrong- or strong-form efficient
neither weak-, semistrong-, nor strong-form efficient
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 08-02 Cite evidence that supports and contradicts the efficient market hypothesis.
Topic: Are Markets Efficient?
84. Which of the following statements is (are) correct?
A.
B.
C.
D.
If a market is weak-form efficient, it is also semistrong- and strong-form efficient.
If a market is semistrong-form efficient, it is also strong-form efficient.
If a market is strong-form efficient, it is also semistrong- but not weak-form efficient.
If a market is strong-form efficient, it is also semistrong- and weak-form efficient.
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 08-01 Demonstrate why security price changes should be essentially unpredictable in an efficient market.
Topic: Random Walks and the Efficient Market Hypothesis
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85. According to Markowitz and other proponents of modern portfolio theory, which of the following activities would not be expected to produce
any benefits?
A. diversifying
B. investing in treasury bills
C. investing in stocks of utility companies
D. engaging in active portfolio management to enhance returns
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-01 Demonstrate why security price changes should be essentially unpredictable in an efficient market.
Topic: Implications of the EMH
86. According to results by Seyhun, the main reason that investors cannot earn excess returns by following inside trades after they become public is
that ______________.
A.
B.
C.
D.
the information isn't available for at least 2 weeks
transaction costs offset abnormal returns
the SEC late-disclosure rule doesn't apply to insiders
insiders don't have to disclose their trades
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 08-02 Cite evidence that supports and contradicts the efficient market hypothesis.
Topic: Are Markets Efficient?
87. Approximately what percentage of assets in equity mutual funds were indexed in 2014?
A. 10%
B. 15%
C. 20%
D. 25%
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-02 Cite evidence that supports and contradicts the efficient market hypothesis.
Topic: Implications of the EMH
88. McLean and Pontiff (2012) identify more than ______ characteristics associated with abnormal returns.
A. 10
B. 25
C. 80
D. 100
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-04 Formulate investment strategies that make sense in informationally efficient markets.
Topic: Mutual Fund and Analyst Performance
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89. Del Guercio and Reuter (2014) find
A. direct -purchase mutual fund investors outperform those who purchase through brokers.
B. broker -purchase mutual fund investors outperform those who direct purchase directly.
C. both types of investors did as well or better than index funds.
D. both types of investors underperformed index funds.
AACSB: Analytical
Thinking
Blooms: Remember
Difficulty: 1
Easy
Learning Objective: 08-04 Formulate investment strategies that make sense in informationally efficient markets.
Topic: Mutual Fund and Analyst
Performance
90. Which famous economist suggested that asset bubbles arise naturally as investors become more willing to take on added risk during stable
periods, leading to increased asset prices?
A. Milton Friedman
B. Hyman Minsky
C. Al Gore
D. John Keynes
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-03 Provide interpretations of various stock market anomalies.
Topic: Are Markets Efficient?
91. Keown and Pinkerton (1981) found cumulative abnormal returns begin roughly ___¬¬__days prior to the announcement of a takeover.
A. 15
B. 30
C. 45
D. 60
AACSB: Analytical
Thinking
Blooms:
Remember
Difficulty: 1
Easy
Learning Objective: 08-01 Demonstrate why security price changes should be essentially unpredictable in an efficient market.
Topic: Random Walks and the Efficient Market Hypothesis
Downloaded by Marco Manouchakian (marco.manouchakian@gmail.com)
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1.
A.
B.
C.
D.
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
AACSB: Analytical Thinking Blooms: Remember Difficulty: 2
Medium
Learning Objective: 09-04 Use indicators such as volume; put/call ratios; breadth; short interest; or confidence indexes to measure the "technical conditions" of the market. Topic: Technical Analysis and Behavioral
Finance
2.
A.
B.
C.
D.
Models of financial markets that emphasize psychological factors affecting investor behavior are called _______.
data mining
fundamental analysis
charting
behavioral finance
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-01 Describe several behavioral biases; and explain how they could lead to anomalies in stock market prices and returns.
Topic: The Behavioral Critique
3. The TRIN statistic is a ______ indicator.
A.
B.
C.
D.
sentiment
flow of funds
market structure
fundamental
AACSB: Analytical Thinking Blooms: Remember Difficulty: 1
Easy
Learning Objective: 09-04 Use indicators such as volume; put/call ratios; breadth; short interest; or confidence indexes to measure the "technical conditions" of the market. Topic: Technical Analysis and Behavioral
Finance
4.
The put/call ratio is a ______ indicator.
A. sentiment
B. flow of funds
C. market structure
D. fundamental
AACSB: Analytical Thinking Blooms: Remember Difficulty: 1
Easy
Learning Objective: 09-04 Use indicators such as volume; put/call ratios; breadth; short interest; or confidence indexes to measure the "technical conditions" of the market. Topic: Technical Analysis and Behavioral
Finance
5.
A.
B.
C.
D.
Relative strength is ______ indicator.
a fundamental
an economic
a technical
an international
AACSB: Analytical Thinking Blooms: Remember Difficulty: 1
Easy
Learning Objective: 09-04 Use indicators such as volume; put/call ratios; breadth; short interest; or confidence indexes to measure the "technical conditions" of the market. Topic: Technical Analysis and Behavioral
Finance
6.
A.
B.
C.
D.
Short interest is a ______ indicator.
sentiment
flow of funds
market structure
fundamental
AACSB: Analytical Thinking Blooms: Remember Difficulty: 1
Easy
Learning Objective: 09-04 Use indicators such as volume; put/call ratios; breadth; short interest; or confidence indexes to measure the "technical conditions" of the market. Topic: Technical Analysis and Behavioral
Finance
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7.
A.
B.
C.
D.
Moving averages are ______ indicators.
sentiment
flow of funds
trend
fundamental
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-03 Identify reasons why technical analysis may be profitable.
Topic: Technical Analysis and Behavioral Finance
8.
A.
B.
C.
D.
Market breadth is a ______ indicator.
sentiment
flow of funds
technical
fundamental
AACSB: Analytical Thinking Blooms: Remember Difficulty: 1
Easy
Learning Objective: 09-04 Use indicators such as volume; put/call ratios; breadth; short interest; or confidence indexes to measure the "technical conditions" of the market. Topic: Technical Analysis and Behavioral
Finance
9.
A.
B.
C.
D.
The cumulative tally of the number of advancing stocks minus declining stocks is called the ______________.
market breadth
market volume
trin ratio
relative strength ratio
AACSB: Analytical Thinking Blooms: Remember Difficulty: 1
Easy
Learning Objective: 09-04 Use indicators such as volume; put/call ratios; breadth; short interest; or confidence indexes to measure the "technical conditions" of the market. Topic: Technical Analysis and Behavioral
Finance
10. A high amount of short interest is typically considered as a __________ signal, and contrarians may consider it as a _________ signal.
A.
B.
C.
D.
bearish; bullish
bullish; bearish
bearish; false
bullish; false
AACSB: Analytical Thinking Blooms: Remember Difficulty: 2
Medium
Learning Objective: 09-04 Use indicators such as volume; put/call ratios; breadth; short interest; or confidence indexes to measure the "technical conditions" of the market. Topic: Technical Analysis and Behavioral
Finance
11. Technical analysis focuses on _____________________.
A.
B.
C.
D.
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
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-03 Identify reasons why technical analysis may be profitable.
Topic: Technical Analysis and Behavioral Finance
12. Behaviorists point out that even if market prices are ____________, there may be _______________.
A.
B.
C.
D.
distorted; limited arbitrage opportunities
distorted; fundamental efficiency
allocationally efficient; limitless arbitrage opportunities
distorted; allocational efficiency
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 3 Hard
Learning Objective: 09-02 Explain why limits to arbitrage might allow anomalies due to behavioral biases to persist over time.
Topic: Limits to Arbitrage
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13. According to market technicians, it is time to sell stock in a head-and-shoulders formation when ___________.
A.
B.
C.
D.
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
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 09-03 Identify reasons why technical analysis may be profitable.
Topic: Technical Analysis and Behavioral Finance
14. When a stock price breaks through the moving average from below, this is considered to be ______.
A.
B.
C.
D.
the starting point for a new moving average
a bearish signal
a bullish signal
none of these options
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-03 Identify reasons why technical analysis may be profitable.
Topic: Technical Analysis and Behavioral Finance
15. When the stock price falls below a moving average, a possible conclusion is that _____.
A.
B.
C.
D.
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
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-03 Identify reasons why technical analysis may be profitable.
Topic: Technical Analysis and Behavioral Finance
16. Following a period of falling prices, the moving average will _____.
A.
B.
C.
D.
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
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-03 Identify reasons why technical analysis may be profitable.
Topic: Technical Analysis and Behavioral Finance
17. A moving average of stock prices _________________.
A.
B.
C.
D.
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
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-03 Identify reasons why technical analysis may be profitable.
Topic: Technical Analysis and Behavioral Finance
18. When the housing bubble burst in 2007, it set off the worst financial crisis _____.
A.
B.
C.
D.
in 25 years.
in 40 years.
in 50 years.
in 75 years.
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-03 Identify reasons why technical analysis may be profitable.
Topic: Technical Analysis and Behavioral Finance
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Downloaded by Marco Manouchakian (marco.manouchakian@gmail.com)
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19. A support level is ___________________.
A.
B.
C.
D.
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
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-01 Describe several behavioral biases; and explain how they could lead to anomalies in stock market prices and returns.
Topic: The Behavioral Critique
20. According to Kondratieff, the macro economy moves in a series of waves that recur at intervals of approximately _________________.
A.
B.
C.
D.
18 months
4 years
8 years
50 years
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-03 Identify reasons why technical analysis may be profitable.
Topic: Technical Analysis and Behavioral Finance
21. According to Elliot's wave theory, stock market behavior can be explained as _________________.
A. a series of medium-term wave cycles with no short-term trend
B. a series of long-term wave cycles with no short-term trend
C. a series of superimposed long-term and short-term wave cycles
D. sine and cosine functions
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-03 Identify reasons why technical analysis may be profitable.
Topic: Technical Analysis and Behavioral Finance
22. Conventional finance theory assumes investors are _______, and behavioral finance assumes investors are _______.
A.
B.
C.
D.
rational; irrational
irrational; rational
greedy; philanthropic
philanthropic; greedy
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-01 Describe several behavioral biases; and explain how they could lead to anomalies in stock market prices and returns.
Topic: The Behavioral Critique
23. The only way for behavioral patterns to persist in prices is if ______________.
A.
B.
C.
D.
markets are not weak-form efficient
there are limits to arbitrage activity
there are no significant trading costs
market psychology is inconsistent over time
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-02 Explain why limits to arbitrage might allow anomalies due to behavioral biases to persist over time.
Topic: Limits to Arbitrage
24. In the context of a point and figure chart, a horizontal band of Xs and Os is a _____________.
A.
B.
C.
D.
buy signal
sell signal
congestion area
trend reversal
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-03 Identify reasons why technical analysis may be profitable.
Topic: Technical Analysis and Behavioral Finance
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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 __________.
A. 5%; are excessively conservative
B. 20%; overestimate their ability
C. 15%; suffer from framing biases
D. 25%; engage in mental accounting
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 09-01 Describe several behavioral biases; and explain how they could lead to anomalies in stock market prices and returns.
Topic: The Behavioral Critique
26. If investors are too slow to update their beliefs about a stock's future performance when new evidence arises, they are exhibiting _______.
A.
B.
C.
D.
representativeness bias
framing error
conservatism
memory bias
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-01 Describe several behavioral biases; and explain how they could lead to anomalies in stock market prices and returns.
Topic: The Behavioral Critique
27. If investors overweight recent performance in forecasting the future, they are exhibiting _______.
A.
B.
C.
D.
representativeness bias
framing error
memory bias
overconfidence
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 09-01 Describe several behavioral biases; and explain how they could lead to anomalies in stock market prices and returns.
Topic: The Behavioral Critique
28. Trading activity and average returns in brokerage accounts tend to be _________.
A.
B.
C.
D.
uncorrelated
negatively correlated
positively correlated
positively correlated for women and negatively correlated for men
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 09-01 Describe several behavioral biases; and explain how they could lead to anomalies in stock market prices and returns.
Topic: The Behavioral Critique
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 _____________.
A.
B.
C.
D.
mental accounting
framing bias
conservatism
representativeness bias
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 3 Hard
Learning Objective: 09-01 Describe several behavioral biases; and explain how they could lead to anomalies in stock market prices and returns.
Topic: The Behavioral Critique
30. Which of the following is not a sentiment indicator?
A. confidence index
B. short interest
C. relative strength
D. put/call ratio
AACSB: Analytical Thinking Blooms: Remember Difficulty: 1
Easy
Learning Objective: 09-04 Use indicators such as volume; put/call ratios; breadth; short interest; or confidence indexes to measure the "technical conditions" of the market. Topic: Technical Analysis and Behavioral
Finance
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31. Which of the following is considered a sentiment indicator?
A. a 200-day moving average
B. short interest
C. credit balances in brokerage accounts
D. relative strength
AACSB: Analytical Thinking Blooms: Remember Difficulty: 1
Easy
Learning Objective: 09-04 Use indicators such as volume; put/call ratios; breadth; short interest; or confidence indexes to measure the "technical conditions" of the market. Topic: Technical Analysis and Behavioral
Finance
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 ___________.
A.
B.
C.
D.
overconfidence
representativeness
forecast errors
mental accounting
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 09-01 Describe several behavioral biases; and explain how they could lead to anomalies in stock market prices and returns.
Topic: The Behavioral Critique
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?
A. credit analysts
B. fundamental analysts
C. systems analysts
D. technical analysts
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-03 Identify reasons why technical analysis may be profitable.
Topic: Technical Analysis and Behavioral Finance
34. A TRIN ratio of greater than 1 is considered a __________.
A.
B.
C.
D.
bearish signal
bullish signal
bearish signal by some technical analysts and a bullish signal by other technical analysts
trend reversal signal
AACSB: Analytical Thinking Blooms: Remember Difficulty: 1
Easy
Learning Objective: 09-04 Use indicators such as volume; put/call ratios; breadth; short interest; or confidence indexes to measure the "technical conditions" of the market. Topic: Technical Analysis and Behavioral
Finance
35. Contrarian investors consider a high put/call ratio a __________.
A.
B.
C.
D.
bearish signal
bullish signal
trend confirmation signal
signal to enter the options market
AACSB: Analytical Thinking Blooms: Remember Difficulty: 2
Medium
Learning Objective: 09-04 Use indicators such as volume; put/call ratios; breadth; short interest; or confidence indexes to measure the "technical conditions" of the market. Topic: Technical Analysis and Behavioral
Finance
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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 __________.
A.
B.
C.
D.
bond price index
confidence index
relative strength index
TRIN ratio
AACSB: Analytical Thinking Blooms: Remember Difficulty: 1
Easy
Learning Objective: 09-04 Use indicators such as volume; put/call ratios; breadth; short interest; or confidence indexes to measure the "technical conditions" of the market.
Topic: Technical Analysis and Behavioral Finance
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
___________.
A.
B.
C.
D.
overconfidence
representativeness
forecast errors
mental accounting
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 09-01 Describe several behavioral biases; and explain how they could lead to anomalies in stock market prices and returns.
Topic: The Behavioral Critique
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,
_________________________________________.
A.
B.
C.
D.
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
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-01 Describe several behavioral biases; and explain how they could lead to anomalies in stock market prices and returns.
Topic: The Behavioral Critique
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.
A.
B.
C.
D.
market breadth
market volume
odd-lot trading
short interest
AACSB: Analytical Thinking Blooms: Remember Difficulty: 1
Easy
Learning Objective: 09-04 Use indicators such as volume; put/call ratios; breadth; short interest; or confidence indexes to measure the "technical conditions" of the market. Topic: Technical Analysis and Behavioral
Finance
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
__________________.
A.
B.
C.
D.
regret avoidance
overconfidence
that she has a diminishing marginal utility of wealth
prospect theory loss aversion
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 3 Hard
Learning Objective: 09-01 Describe several behavioral biases; and explain how they could lead to anomalies in stock market prices and returns.
Topic: The Behavioral Critique
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
___________.
A.
B.
C.
D.
buy the stock
hold the stock
sell the stock
short the stock
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-03 Identify reasons why technical analysis may be profitable.
Topic: Technical Analysis and Behavioral Finance
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42. If you believed in the reversal effect, you should __________.
A.
B.
C.
D.
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
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-03 Identify reasons why technical analysis may be profitable.
Topic: Technical Analysis and Behavioral Finance
43. According to technical analysts, a shift in market fundamentals will __________.
A.
B.
C.
D.
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
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-03 Identify reasons why technical analysis may be profitable.
Topic: Technical Analysis and Behavioral Finance
44.
A.
B.
C.
D.
According to market technicians, a TRIN statistic of less than 1 is considered a __________.
bearish signal
bullish signal
volume decline
signal reversal
AACSB: Analytical Thinking Blooms: Remember Difficulty: 1
Easy
Learning Objective: 09-04 Use indicators such as volume; put/call ratios; breadth; short interest; or confidence indexes to measure the "technical conditions" of the market. Topic: Technical Analysis and Behavioral
Finance
45. It is difficult to test the Kondratieff wave theory because _________.
A.
B.
C.
D.
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
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-03 Identify reasons why technical analysis may be profitable.
Topic: Technical Analysis and Behavioral Finance
46. A _________ is a value above which it is difficult for the market to rise.
A.
B.
C.
D.
book value
resistance level
support level
confidence level
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-01 Describe several behavioral biases; and explain how they could lead to anomalies in stock market prices and returns.
Topic: Technical Analysis and Behavioral Finance
47. _____________ is a tool that can help identify the direction of a stock's price.
A. Prospect theory
B. Framing
C. A moving average
D. Conservatism
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-01 Describe several behavioral biases; and explain how they could lead to anomalies in stock market prices and returns.
Topic: The Behavioral Critique
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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 __________.
A.
B.
C.
D.
loss aversion
regret avoidance
mental accounting
framing bias
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 3 Hard
Learning Objective: 09-01 Describe several behavioral biases; and explain how they could lead to anomalies in stock market prices and returns.
Topic: The Behavioral Critique
49. In technical analysis, __________ is a value below which the market is relatively unlikely to fall.
A.
B.
C.
D.
book value
resistance level
support level
the Dow line
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-01 Describe several behavioral biases; and explain how they could lead to anomalies in stock market prices and returns.
Topic: Technical Analysis and Behavioral Finance
50. A possible limit on arbitrage activity that may allow behavioral biases to persist is _______.
A.
B.
C.
D.
technical trends in prices
momentum effects
fundamental risk
trend reversals
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 09-02 Explain why limits to arbitrage might allow anomalies due to behavioral biases to persist over time.
Topic: Limits to Arbitrage
51.
A.
B.
C.
D.
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
AACSB: Analytical Thinking Blooms: Remember Difficulty: 2
Medium
Learning Objective: 09-04 Use indicators such as volume; put/call ratios; breadth; short interest; or confidence indexes to measure the "technical conditions" of the market.
Topic: Technical Analysis and Behavioral Finance
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.
A.
B.
C.
D.
outperforming; buying
outperforming; selling
underperforming; buying
underperforming; selling
AACSB: Reflective Thinking Blooms: Apply Difficulty: 2
Medium
Learning Objective: 09-04 Use indicators such as volume; put/call ratios; breadth; short interest; or confidence indexes to measure the "technical conditions" of the market.
Topic: Technical Analysis and Behavioral Finance
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 ________.
A.
B.
C.
D.
increased; bullish
increased; bearish
decreased; bullish
decreased; bearish
AACSB: Analytical Thinking Blooms: Apply Difficulty: 2
Medium
Learning Objective: 09-04 Use indicators such as volume; put/call ratios; breadth; short interest; or confidence indexes to measure the "technical conditions" of the market.
Topic: Technical Analysis and Behavioral Finance
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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 __________.
A.
B.
C.
D.
-10,449,000
-167
167
10,449,000
Market breadth = 890 - 723 = 167
AACSB: Analytical Thinking Blooms: Apply Difficulty: 2
Medium
Learning Objective: 09-04 Use indicators such as volume; put/call ratios; breadth; short interest; or confidence indexes to measure the "technical conditions" of the market.
Topic: Technical Analysis and Behavioral Finance
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 __________.
A. .90; bullish
B. .90; bearish
C. 1.11; bullish
D. 1.11; bearish
AACSB: Analytical Thinking Blooms: Apply Difficulty: 2
Medium
Learning Objective: 09-04 Use indicators such as volume; put/call ratios; breadth; short interest; or confidence indexes to measure the "technical conditions" of the market.
Topic: Technical Analysis and Behavioral Finance
56. 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
A. I and II only
B. II and III only
C. I, III, and IV only
D. I, II, III, and IV
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-03 Identify reasons why technical analysis may be profitable.
Topic: Technical Analysis and Behavioral Finance
57. When technical analysts say a stock has good "relative strength," they mean that in the recent past __________.
A.
B.
C.
D.
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
AACSB: Analytical Thinking Blooms: Remember Difficulty: 2
Medium
Learning Objective: 09-04 Use indicators such as volume; put/call ratios; breadth; short interest; or confidence indexes to measure the "technical conditions" of the market. Topic: Technical Analysis and Behavioral
Finance
58. Technical traders view mutual fund investors as _________ market timers.
A.
B.
C.
D.
excellent
frequent
neutral
poor
AACSB: Analytical Thinking Blooms: Remember Difficulty: 1
Easy
Learning Objective: 09-04 Use indicators such as volume; put/call ratios; breadth; short interest; or confidence indexes to measure the "technical conditions" of the market. Topic: Technical Analysis and Behavioral
Finance
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59. An important assumption underlying the use of technical analysis techniques is that ___________________.
A.
B.
C.
D.
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
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 09-03 Identify reasons why technical analysis may be profitable.
Topic: Technical Analysis and Behavioral Finance
60. If the put/call ratio increases, market contrarians may interpret this as what kind of signal?
A. buy signal
B. sell signal
C. hold signal
D. this is not interpreted as a signal
AACSB: Analytical Thinking Blooms: Remember Difficulty: 1
Easy
Learning Objective: 09-04 Use indicators such as volume; put/call ratios; breadth; short interest; or confidence indexes to measure the "technical conditions" of the market. Topic: Technical Analysis and Behavioral
Finance
61. The tendency of investors to hold on to losing investments is called the ________.
A.
B.
C.
D.
overweighting effect
head-in-the-sand effect
disposition effect
prospector effect
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-03 Identify reasons why technical analysis may be profitable.
Topic: Technical Analysis and Behavioral Finance
62. Which one of the following best describes fundamental risk?
A.
B.
C.
D.
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.
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 3 Hard
Learning Objective: 09-02 Explain why limits to arbitrage might allow anomalies due to behavioral biases to persist over time.
Topic: Limits to Arbitrage
63.
The TRIN on day 2 is ___.
A. .72
B. 1.04
C. .92
D. .55
AACSB: Analytical Thinking Blooms: Apply Difficulty: 2
Medium
Learning Objective: 09-04 Use indicators such as volume; put/call ratios; breadth; short interest; or confidence indexes to measure the "technical conditions" of the market.
Topic: Technical Analysis and Behavioral Finance
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64.
The confidence index on day 1 is _____.
A. .82
B. .89
C. .92
D. 1.09
AACSB: Analytical Thinking Blooms: Apply Difficulty: 2
Medium
Learning Objective: 09-04 Use indicators such as volume; put/call ratios; breadth; short interest; or confidence indexes to measure the "technical conditions" of the market.
Topic: Technical Analysis and Behavioral Finance
65.
The breadth on day 3 is _______.
A.
B.
C.
D.
-70
10
90
170
AACSB: Analytical Thinking Blooms: Apply Difficulty: 1
Easy
Learning Objective: 09-04 Use indicators such as volume; put/call ratios; breadth; short interest; or confidence indexes to measure the "technical conditions" of the market.
Topic: Technical Analysis and Behavioral Finance
66.
The cumulative breadth for the first 2 days is ___.
A.
B.
C.
D.
-240
-50
110
250
AACSB: Analytical Thinking Blooms: Apply Difficulty: 2
Medium
Learning Objective: 09-04 Use indicators such as volume; put/call ratios; breadth; short interest; or confidence indexes to measure the "technical conditions" of the market.
Topic: Technical Analysis and Behavioral Finance
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67.
Cumulative breadth for the 4 days is ___, which is ___.
A.
B.
C.
D.
-140; bullish
-140; bearish
-300; bullish
-300; bearish
AACSB: Analytical Thinking Blooms: Apply Difficulty: 3
Hard
Learning Objective: 09-04 Use indicators such as volume; put/call ratios; breadth; short interest; or confidence indexes to measure the "technical conditions" of the market.
Topic: Technical Analysis and Behavioral Finance
68.
From day 1 to day 4, the TRIN has ___ and is ___.
A.
B.
C.
D.
increased; bullish
increased; bearish
decreased; bullish
decreased; bearish
AACSB: Analytical Thinking Blooms: Apply Difficulty: 3
Hard
Learning Objective: 09-04 Use indicators such as volume; put/call ratios; breadth; short interest; or confidence indexes to measure the "technical conditions" of the market.
Topic: Technical Analysis and Behavioral Finance
69.
From day 1 to day 4, the confidence index has _____. This is _____.
A.
B.
C.
D.
increased; bullish
decreased; bullish
increased; bearish
decreased; bearish
AACSB: Analytical Thinking Blooms: Apply Difficulty: 3
Hard
Learning Objective: 09-04 Use indicators such as volume; put/call ratios; breadth; short interest; or confidence indexes to measure the "technical conditions" of the market.
Topic: Technical Analysis and Behavioral Finance
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70. 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.
A.
B.
C.
D.
I only
II only
I and III only
I, II, and III
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 09-01 Describe several behavioral biases; and explain how they could lead to anomalies in stock market prices and returns.
Topic: The Behavioral Critique
71. A major problem with technical trading strategies is that ________.
A.
B.
C.
D.
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
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-01 Describe several behavioral biases; and explain how they could lead to anomalies in stock market prices and returns.
Topic: The Behavioral Critique
72. The Elliott wave theory gives a buy signal when you can identify a primary bull trend by identifying _________.
A.
B.
C.
D.
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
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-03 Identify reasons why technical analysis may be profitable.
Topic: Technical Analysis and Behavioral Finance
73. 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
________________.
A.
B.
C.
D.
loss aversion
mental accounting
overreaction
managerial overconfidence
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-01 Describe several behavioral biases; and explain how they could lead to anomalies in stock market prices and returns.
Topic: The Behavioral Critique
74. 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 _______________.
A.
B.
C.
D.
loss aversion
mental accounting
overreaction
winner's curse
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-01 Describe several behavioral biases; and explain how they could lead to anomalies in stock market prices and returns.
Topic: The Behavioral Critique
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75.
Identify the resistance-level stock price.
A.
B.
C.
D.
$40
$42
$44
$46
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-03 Identify reasons why technical analysis may be profitable.
Topic: Technical Analysis and Behavioral Finance
76.
Identify the support level stock price.
A.
B.
C.
D.
$40
$42
$44
$46
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-03 Identify reasons why technical analysis may be profitable.
Topic: Technical Analysis and Behavioral Finance
77. 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?
A.
B.
C.
D.
Overconfidence
Loss aversion
Mental accounting
Calendar bias
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-01 Describe several behavioral biases; and explain how they could lead to anomalies in stock market prices and returns.
Topic: The Behavioral Critique
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78. During a period when prices have been rising, the _________ will be _______ the current price.
A.
B.
C.
D.
relative strength index; declining with
relative strength index; declining faster than
moving average; above
moving average; below
AACSB: Analytical Thinking Blooms: Remember Difficulty: 3
Hard
Learning Objective: 09-04 Use indicators such as volume; put/call ratios; breadth; short interest; or confidence indexes to measure the "technical conditions" of the market. Topic: Technical Analysis and Behavioral
Finance
79. 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?
A.
B.
C.
D.
Framing bias
Excessive volatility
Loss aversion
Mental accounting
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 09-01 Describe several behavioral biases; and explain how they could lead to anomalies in stock market prices and returns.
Topic: The Behavioral Critique
80. 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
___________.
A.
B.
C.
D.
intermediate trend level
minor trend level
resistance level
support level
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-01 Describe several behavioral biases; and explain how they could lead to anomalies in stock market prices and returns.
Topic: Technical Analysis and Behavioral Finance
81.
The moving average generates buy signal(s) _____.
A.
B.
C.
D.
on days 3, 11, and 15
on days 2 and 16
on days 5, 9, and 13
on no days
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 09-03 Identify reasons why technical analysis may be profitable.
Topic: Technical Analysis and Behavioral Finance
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82.
The moving average generates sell signals _____.
A.
B.
C.
D.
on days 3, 11, and 15
on days 7, 15, and 18
on days 5, 9, and 13
on day 16
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 09-03 Identify reasons why technical analysis may be profitable.
Topic: Technical Analysis and Behavioral Finance
83. 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 _______________.
A.
B.
C.
D.
congestion area
penetration point
resistance level
support level
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 09-03 Identify reasons why technical analysis may be profitable.
Topic: Technical Analysis and Behavioral Finance
84. Trend analysts who follow bonds are most likely to monitor the ____________.
A. confidence index
B. odd-lot trading
C. short interest
D. TRIN statistic
AACSB: Analytical Thinking Blooms: Remember Difficulty: 1
Easy
Learning Objective: 09-04 Use indicators such as volume; put/call ratios; breadth; short interest; or confidence indexes to measure the "technical conditions" of the market. Topic: Technical Analysis and Behavioral
Finance
85. 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?
A.
B.
C.
D.
0
1
2
3
AACSB: Analytical Thinking Blooms: Remember Difficulty: 2
Medium
Learning Objective: 09-04 Use indicators such as volume; put/call ratios; breadth; short interest; or confidence indexes to measure the "technical conditions" of the market.
Topic: Technical Analysis and Behavioral Finance
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86. 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?
A.
B.
C.
D.
0
1
2
3
AACSB: Analytical Thinking Blooms: Remember Difficulty: 2
Medium
Learning Objective: 09-04 Use indicators such as volume; put/call ratios; breadth; short interest; or confidence indexes to measure the "technical conditions" of the market.
Topic: Technical Analysis and Behavioral Finance
87. High P/E firms tend to be poor investments. This illustrates which of the following information processing errors?
A. forecasting error
B. over-confidence
C. conservatism
D. sample-size neglect and representativeness
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-01 Describe several behavioral biases; and explain how they could lead to anomalies in stock market prices and returns.
Topic: The Behavioral Critique
88. Statman, Fisher, and Anginer (2008) found that stocks ranked high in Fortune’s Survey of Most Admired Companies tended to have lower average risk-adjusted returns
than the least admired firms. This could be attributed to
A. framing
B. mental accounting
C. affect
D. prospect theory
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: Describe several behavioral biases; and explain how they could lead to anomalies in stock market prices and returns.
Topic: The Behavioral Critique
89. Which of the following case studies illustrates a limit to arbitrage as discussed in the text?
A. “Siamese twin” companies
B. equity carve-outs
C. closed-end funds
D. all of the options.
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: Describe several behavioral biases; and explain how they could lead to anomalies in stock market prices and returns.
Topic: The Behavioral Critique
90. At the beginning of the month, the healthcare index was 134 and the stock market index was 2100. At the end of the month, the healthcare index was 147 and the
stock market index was 2214. Consider the ratio of the healthcare index to the market index at the beginning and end of the month. The healthcare index is _______
the market index, and technical analysts who use relative strength would advise ________ the healthcare index.
A. underperforming; buying
B. underperforming; selling
C. outperforming; buying
D. outperforming; selling
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-02 Explain why limits to arbitrage might allow anomalies due to behavioral biases to persist over time.
Topic: Technical Analysis and Behavioral Finance
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Chapter 10 - Bond Prices and Yields
91. The ___________ is the document defining the contract between the bond issuer and the
bondholder.
A. indenture
B. covenant agreement
C. trustee agreement
D. collateral statement
92. You hold a subordinated debenture in a firm. In the event of bankruptcy you will be paid
off before which one of the following?
A. Mortgage bonds
B. Senior debentures
C. Preferred stock
D. Equipment obligation bonds
93. 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.
A. capital gain; capital loss
B. capital gain; capital gain
C. capital loss; capital gain
D. capital loss; capital loss
Chapter 10 Bond Prices and Yields Answer Key
Multiple Choice Questions
10-23
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Chapter 10 - Bond Prices and Yields
1. The invoice price of a bond is the ______.
A. stated or flat price in a quote sheet plus accrued interest
B. stated or flat price in a quote sheet minus accrued interest
C. bid price
D. average of the bid and ask price
Difficulty: Medium
2. Sinking funds are commonly viewed as protecting the _______ of the bond.
A. issuer
B. underwriter
C. holder
D. dealer
Difficulty: Easy
3. A collateral trust bond is _______.
A. secured by other securities held by the firm
B. secured by equipment owned by the firm
C. secured by property owned by the firm
D. unsecured
Difficulty: Easy
4. A mortgage bond is _______.
A. secured by other securities held by the firm
B. secured by equipment owned by the firm
C. secured by property owned by the firm
D. unsecured
Difficulty: Easy
10-24
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Chapter 10 - Bond Prices and Yields
5. A debenture is _________.
A. secured by other securities held by the firm
B. secured by equipment owned by the firm
C. secured by property owned by the firm
D. unsecured
Difficulty: Easy
6. Bonds issued in the U.S. are __________ and most bonds issued overseas are
___________.
A. bearer bonds; registered bonds
B. registered bonds; bearer bonds
C. straight bonds; convertible bonds
D. puttable bonds; callable
Difficulty: Easy
7. Floating rate bonds have a __________ that is adjusted with current market interest rates.
A. maturity date
B. coupon payment date
C. coupon rate
D. dividend yield
Difficulty: Easy
8. Inflation-indexed Treasury securities are commonly called ____.
A. PIKs
B. CARs
C. TIPS
D. STRIPS
Difficulty: Easy
10-25
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Chapter 10 - Bond Prices and Yields
9. When discussing bonds, convexity relates to the _______.
A. shape of the bond price curve with respect to interest rates
B. shape of the yield curve with respect to maturity
C. slope of the yield curve with respect to liquidity premiums
D. size of the bid-ask spread
Difficulty: Medium
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?
A. Both bonds are examples of Eurobonds.
B. The Japanese bond is a Eurobond and the U.S. bond is termed a foreign bond.
C. The U.S. bond is a Eurobond and the Japanese bond is termed a foreign bond.
D. Neither bond is a Eurobond.
Difficulty: Hard
11. The primary difference between Treasury notes and bonds is ________.
A. maturity at issue
B. default risk
C. coupon rate
D. tax status
Difficulty: Easy
12. TIPS offer investors inflation protection by ______________ by the inflation rate each
year.
A. increasing only the coupon rate
B. increasing only the par value
C. increasing both the par value and the coupon payment
D. increasing the promised yield to maturity
Difficulty: Easy
10-26
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Chapter 10 - Bond Prices and Yields
13. You would typically find all but which one of the following in a bond contract?
A. A dividend restriction clause
B. A sinking fund clause
C. A requirement to subordinate any new debt issued
D. A price-earnings ratio
Difficulty: Easy
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
A. I only
B. II and III only
C. I and III only
D. I, II and III
Difficulty: Easy
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
_______.
A. declining liquidity premiums
B. expectation of an upcoming recession
C. a decline in future inflation expectations
D. increase in expected interest rate volatility
Difficulty: Hard
10-27
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Chapter 10 - Bond Prices and Yields
16. __________ are examples of synthetically created zero coupon bonds.
A. COLTS
B. OPOSSMS
C. STRIPS
D. ARMs
Difficulty: Easy
17. A __________ bond is a bond where the bondholder has the right to cash in the bond
before maturity at a specific price after a specific date.
A. callable
B. coupon
C. puttable
D. treasury
Difficulty: Easy
18. TIPS are an example of _______________.
A. Eurobonds
B. convertible bonds
C. indexed bonds
D. catastrophe bonds
Difficulty: Easy
19. Bonds issued in the currency of the issuer's country but sold in other national markets are
called _____________.
A. Eurobonds
B. Yankee bonds
C. Samurai bonds
D. foreign bonds
Difficulty: Easy
10-28
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Chapter 10 - Bond Prices and Yields
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 three years. The total annual coupon income you will
receive in year three is _________.
A. $30.00
B. $33.00
C. $32.78
D. $30.90
($30)(1.02)(1.03)(1.04) = $32.78
Difficulty: Medium
21. The bonds of Elbow Grease Dishwashing Company have received a rating of "C" by
Moody's. The "C" rating indicates the bonds are _________.
A. high grade
B. intermediate grade
C. investment grade
D. junk bonds
Difficulty: Easy
22. Bonds rated _____ or better by Standard and Poor's are considered investment grade.
A. AA
B. BBB
C. BB
D. CCC
Difficulty: Easy
10-29
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Chapter 10 - Bond Prices and Yields
23. Consider the liquidity preference theory of the term structure of interest rates. On average,
one would expect investors to require _________.
A. a higher yield on short term bonds than long term bonds
B. a higher yield on long term bonds than short term bonds
C. the same yield on both short term bonds and long term bonds
D. the liquidity preference theory cannot be used to make any of the other statements.
Difficulty: Easy
24. Consider two bonds, A and B. Both bonds presently are selling at their par value of
$1,000. Each pay 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%,
_________.
A. both bonds will increase in value but bond A will increase more than bond B
B. both bonds will increase in value but bond B will increase more than bond A
C. both bonds will decrease in value but bond A will decrease more than bond B
D. both bonds will decrease in value but bond B will decrease more than bond A
Difficulty: Medium
25. Everything else equal _________ bonds will require a higher promised YTM than
________ bonds.
A. catastrophe; standard
B. non-callable; callable
C. mortgage; debenture
D. AAA rated; BAA rated
Difficulty: Medium
10-30
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Chapter 10 - Bond Prices and Yields
26. Bonds with coupon rates that fall when the general level of interest rates rise are called
_____________.
A. asset-backed bonds
B. convertible bonds
C. inverse floaters
D. index bonds
Difficulty: Easy
27. _______ bonds represent a novel way of obtaining insurance from capital markets against
specified disasters.
A. Asset backed bonds
B. TIPS
C. Catastrophe
D. Pay in Kind
Difficulty: Easy
28. The issuer of a/an ________ bond may choose to pay interest either in cash or in
additional bonds.
A. asset backed bonds
B. TIPS
C. catastrophe
D. pay in kind
Difficulty: Easy
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.
A. longer; higher
B. longer; lower
C. shorter; higher
D. shorter; lower
Difficulty: Medium
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30. Which one of the following statements is correct?
A. Invoice price = Flat price - Accrued Interest
B. Invoice price = Flat price + Accrued Interest
C. Flat price = Invoice price + Accrued Interest
D. Invoice price = Settlement price - Accrued Interest
Difficulty: Easy
31. A __________ bond is a bond where the issuer has an option to retire the bond before
maturity at a specific price after a specific date.
A. callable
B. coupon
C. puttable
D. treasury
Difficulty: Easy
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?
A. Callable feature
B. Convertible feature
C. Subordination clause
D. Sinking fund
Difficulty: Easy
33. Serial bonds are associated with _________.
A. staggered maturity dates
B. collateral
C. coupon payment dates
D. conversion features
Difficulty: Medium
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34. In an era of particularly low interest rates, which of the following bonds is most likely to
be called?
A. Zero coupon bonds
B. Coupon bonds selling at a discount
C. Coupon bonds selling at a premium
D. Floating rate bonds
Difficulty: Medium
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.
A. increase
B. decrease
C. not change
D. change in an unpredictable manner
Difficulty: Medium
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 _________.
A. $1,000
B. $884
C. $933
D. $980
($26)(34) = $884
Difficulty: Medium
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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 _________.
A. $50.00
B. $190.00
C. $200.00
D. $240.00
Conversion Premium = 950 - 40(19) = 190.00
Difficulty: Medium
38. A coupon bond which 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 _________.
A. 7.2%
B. 8.8%
C. 9.1%
D. 9.6%
$785 = $40
Difficulty: Hard
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39. A coupon bond which pays interest of $60 annually, has a par value of $1,000, matures in
5 years, and is selling today at a $84.52 discount from par value. The approximate yield to
maturity on this bond is _________.
A. 6%
B. 7%
C. 8%
D. 9%
Difficulty: Medium
40. A coupon bond which 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 _________.
A. 6.00%
B. 6.49%
C. 6.73%
D. 7.00%
Difficulty: Medium
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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 _________.
A. 6.00%
B. 6.58%
C. 7.20%
D. 8.00%
1055.84 = 60
Difficulty: Medium
42. A coupon bond which pays interest semi-annually 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 __________ (to the nearest dollar).
A. $1,000
B. $1,063
C. $1,081
D. $1,100
= 1,063
Difficulty: Medium
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43. A coupon bond which 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 approximately _________.
A. $856
B. $892
C. $926
D. $1,000
PV0 = $90
Difficulty: Medium
44. A coupon bond pays semi-annual interest is reported as having an ask price of 117% of its
$1,000 par value in the Wall Street Journal. If the last interest payment was made 2 months
ago and the coupon rate is 6%, the invoice price of the bond will be _________.
A. $1,140
B. $1,170
C. $1,180
D. $1,200
Invoice Price =
Difficulty: Medium
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Chapter 10 - Bond Prices and Yields
45. A treasury bond due in one 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 Corporation
has a yield of 9.6% while a bond due in one year issued by High Country Marketing
Corporation has a yield of 6.8%. The default risk premiums on the one-year and 5-year bonds
issued by High Country Marketing Corp. are respectively __________ and _________.
A. 0.4%, 0.3%
B. 0.4%, 0.5%
C. 0.5%, 0.5%
D. 0.5%, 0.8%
Default premium for 1-Year Bond = .068 - .063 = .005
Default premium for 5-Year Bond = .096 - .088 = .008
Difficulty: Medium
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.
A. $458.00
B. $641.00
C. $789.00
D. $1,100.00
PV0 =
Difficulty: Medium
47. Yields on municipal bonds are typically ___________ yields on corporate bonds of
similar risk and time to maturity.
A. lower than
B. slightly higher than
C. identical to
D. twice as high as
Difficulty: Easy
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48. You purchased a 5-year annual interest coupon bond one 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 _________.
A. 5.0%
B. 5.5%
C. 7.6%
D. 8.9%
PV0 = 60
PV1 = 60
Difficulty: Hard
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 ______.
A. multiyear analysis
B. horizon analysis
C. maturity analysis
D. reinvestment analysis
Difficulty: Easy
$1,000 par value zero coupon bonds, ignore liquidity premiums
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Chapter 10 - Bond Prices and Yields
50. The expected one-year interest rate one year from now should be about _________.
A. 6.00%
B. 7.50 %
C. 9.00%
D. 10.00%
Difficulty: Hard
51. One year from now Bond C should sell for ________ (to the nearest dollar).
A. $857
B. $842
C. $835
D. $821
1.07993 = (1.06)(1 + 1F3)2; (1 + 1F3)2 = 1.188
P1 =
= $841.69
Difficulty: Hard
52. The expected two year interest rate three years from now should be _________.
A. 9.55%
B. 11.74%
C. 14.89%
D. 13.73%
(1 + 0R5)5 = (1 + 0R3)3(1 + 3F5)2
1.10705 = (1.07993)(1 + 3F5)2; 3F5 = 14.89%
Difficulty: Hard
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53. The __________ of a bond is computed as the ratio of coupon payments to market price.
A. nominal yield
B. current yield
C. yield to maturity
D. yield to call
Difficulty: Easy
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 approximate capital
gain yield of this bond over the next year?
A. 0.7%
B. 1.8%
C. 2.5%
D. 3.4%
Difficulty: Hard
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55. Consider the following $1,000 par value zero-coupon bonds:
The expected one-year interest rate two years from now should be _________.
A. 7.00%
B. 8.00%
C. 9.00%
D. 10.00%
Difficulty: Hard
56. Which of the following bonds would most likely sell at the lowest yield?
A. A callable debenture
B. A putable mortgage bond
C. A callable mortgage bond
D. A putable debenture
Difficulty: Medium
57. A 1% decline in yield will have the least effect on the price of the bond with a
_________.
A. 10-year maturity, selling at 80
B. 10-year maturity, selling at 100
C. 20-year maturity, selling at 80
D. 20-year maturity, selling at 100
Difficulty: Medium
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Chapter 10 - Bond Prices and Yields
58. Consider the following $1,000 par value zero-coupon bonds:
The expected one-year interest rate three years from now should be _________.
A. 7.00%
B. 8.00%
C. 9.00%
D. 10.00%
Difficulty: Hard
59. Consider the following $1,000 par value zero-coupon bonds:
The expected one-year interest rate four years from now should be _________.
A. 16.00%
B. 18.00%
C. 20.00%
D. 22.00%
Difficulty: Hard
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Chapter 10 - Bond Prices and Yields
60. You can be sure that a bond will sell at a premium to par when _________.
A. its coupon rate is greater than its yield to maturity
B. its coupon rate is less than its yield to maturity
C. its coupon rate equal to its yield to maturity
D. its coupon rate is less than its conversion value
Difficulty: Medium
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?
A. 6.72%
B. 9.17%
C. 4.49%
D. 8.98%
1000 =
r = YTC = 8.98%
Difficulty: Hard
62. Consider a 7-year bond with a 9% coupon and a yield to maturity of 12%. If interest rates
remain constant, one year from now the price of this bond will be _________.
A. higher
B. lower
C. the same
D. indeterminate
Difficulty: Medium
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63. Under the pure expectations hypothesis and constant real interest rates for different
maturities, an upward sloping yield curve would indicate __________________.
A. expected increases in inflation over time
B. expected decreases in inflation over time
C. the presence of a liquidity premium
D. 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
Difficulty: Medium
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
A. I only
B. II only
C. I and II only
D. I, II and III
Difficulty: Medium
65. Yields on municipal bonds are generally lower than yields on similar corporate bonds
because of differences in _________.
A. marketability
B. risk
C. taxation
D. call protection
Difficulty: Medium
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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 _________.
A. $97
B. $104
C. $364
D. $732
Difficulty: Medium
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
A. I and II only
B. I and III only
C. II and III only
D. I, II and III
Difficulty: Hard
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 $100,000 face amount of this note is
_________.
A. $581.97
B. $1,163.93
C. $2,327.87
D. $3,000.00
Difficulty: Medium
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69. The yield to maturity of an 10-year zero coupon bond, with a par value of $1,000 and a
market price of $625, is _____.
A. 4.8%
B. 6.1%
C. 7.7%
D. 10.4%
Difficulty: Medium
Consider a newly issued TIPS bond with a three year maturity, par value of $1000, and a
coupon rate of 5%. Assume annual coupon payments.
70. What is the nominal rate of return on the TIPS bond in the first year?
A. 5.00%
B. 5.15%
C. 8.15%
D. 9.00%
HPRNom =
Difficulty: Medium
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Chapter 10 - Bond Prices and Yields
71. What is the real rate of return on the TIPS bond in the first year?
A. 5.00%
B. 8.15%
C. 7.15%
D. 4.00%
HPRNom =
HPRreal =
Difficulty: Medium
On May 1, 2007, Joe Hill is considering one of the following newly-issued 10 year AAA
corporate bonds.
72. Suppose market interest rates decline by 100 basis points (i.e., 1%). The effect of this
decline would be:
A. The price of Wildwood bond would decline by more than the Asbury bond.
B. The price of Wildwood bond would decline by less than the Asbury bond.
C. The price of Wildwood bond would increase by more than the Asbury bond.
D. The price of Wildwood bond would increase by less than the Asbury bond.
Difficulty: Medium
73. If interest rates are expected to rise, then Joe Hill should ____.
A. prefer the Wildwood bond to the Asbury bond
B. prefer the Asbury bond to the Wildwood bond
C. be indifferent between the Wildwood bond and the Asbury bond
D. there is not enough information given to tell
Difficulty: Medium
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74. If the volatility of interest rates is expected to increase, the Joe Hill should __.
A. prefer the Wildwood bond to the Asbury bond
B. prefer the Asbury bond to the Wildwood bond
C. be indifferent between the Wildwood bond and the Asbury bond
D. there is not enough information given to tell
Difficulty: Medium
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 one-year forward rate, one year from
today?
A. 2.0%
B. 8.0%
C. 9.0%
D. 11.1%
Implied forward rate = I
(1.07) (1 + I) = (1.08)2
Difficulty: Medium
76. If the quote for a Treasury bond is listed in the newspaper as 98:09 bid, 98:13 ask, the
actual price for you to purchase this bond given a $10,000 par value is _____________.
A. $9,828.12
B. $9,809.38
C. $9,840.62
D. $9,813.42
Difficulty: Medium
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77. If the price of a $10,000 par Treasury bond is $10,237.50 the quote would be listed in the
newspaper as ________.
A. 102:10
B. 102:11
C. 102:12
D. 102:13
Difficulty: Medium
78. A bond pays a semi-annual coupon and the last coupon was paid 61 days ago. If the
annual coupon payment is $75, what is the accrued interest?
A. $13.21
B. $12.57
C. $15.44
D. $16.32
= $12.57
Difficulty: Medium
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Chapter 10 - Bond Prices and Yields
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?
A. $999.55
B. $1,002.01
C. $1,007.45
D. $1,012.13
Invoice = 985 + (69)
= $1,002.01
Difficulty: Medium
80. If the quote for a Treasury bond is listed in the newspaper as 99:08 bid, 99:11 ask, the
actual price you can sell this bond given a $10,000 par value is _____________.
A. $9,828.12
B. $9,925.00
C. $9,934.37
D. $9,955.43
Difficulty: Medium
81. A bond has a 5% coupon rate. The coupon is paid semi-annually and the last coupon was
paid 35 days ago. If the bond has a par value of $1,000, what is the accrued interest?
A. $4.81
B. $14.24
C. $25.00
D. $50.00
Accrued interest = (50/2) x (35/182) = 4.81
Difficulty: Medium
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Chapter 10 - Bond Prices and Yields
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?
A. 1.14%
B. 3.45%
C. 4.59%
D. 8.04%
Credit risk premium = 4.59 - 3.45 = 1.14%
Difficulty: Medium
83. You buy a bond with a $1,000 par 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?
A. 10.40%
B. 9.57%
C. 7.45%
D. 8.78%
(875)(1 + EAR)6 = 1000 + (75)(6); EAR = 8.78%
Difficulty: Hard
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84. You buy an 8 year $1000 par value bond today that has a 6% yield and a 6% annual
payment coupon. In one year promised yields have risen to 7%. Your one year holding period
return was ___.
A. 0.61%
B. -5.39%
C. 1.28%
D. -3.25%
P1 = (60)
HPR =
= 0.61%
Difficulty: Hard
85. You buy a 10 year $1,000 par 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 _______.
A. $0
B. $4.27
C. $9.38
D. $33.51
Taxes owed ($591.90 - $558.39)(0.28) = $9.38
Difficulty: Hard
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Chapter 10 - Bond Prices and Yields
86. You buy a 10 year $1,000 par 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 _______.
A. $9.10
B. $4.25
C. $7.68
D. $5.20
Taxes owed ($863.97 - $852.80 + $40)(0.15) = $7.68
Difficulty: Hard
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?
A. 4.80%
B. 4.85%
C. 9.60%
D. 9.70%
Current yield = 48/989.4 = .0485
Difficulty: Medium
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Chapter 10 - Bond Prices and Yields
88. If the coupon rate on a bond is 4.50% and the bond is selling at a premium, which of the
following is the most likely yield to maturity on the bond?
A. 4.30%
B. 4.50%
C. 5.20%
D. 5.50%
A bond sells at premium when coupon rate > YTM.
Difficulty: Medium
89. The price of a bond at the beginning of a period is $980.00 and $975.00 at the end of the
period. What is the holding period return if the annual coupon rate is 4.5%?
A. 4.08%
B. 4.50%
C. 5.10%
D. 5.6%
HPR = (975 - 980 + 45)/980 = 4.08%
Difficulty: Medium
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 in an investor decides to sell now?
A. Increased
B. Decreased
C. Stayed the same
D. Can not be determined
Difficulty: Easy
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91. The ___________ is the document defining the contract between the bond issuer and the
bondholder.
A. indenture
B. covenant agreement
C. trustee agreement
D. collateral statement
Difficulty: Easy
92. You hold a subordinated debenture in a firm. In the event of bankruptcy you will be paid
off before which one of the following?
A. Mortgage bonds
B. Senior debentures
C. Preferred stock
D. Equipment obligation bonds
Difficulty: Easy
93. 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.
A. capital gain; capital loss
B. capital gain; capital gain
C. capital loss; capital gain
D. capital loss; capital loss
Difficulty: Easy
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Chapter 12 Macroeconomic and Industry Analysis
Answer Key
Multiple Choice Questions
1. 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
Difficulty: Easy
2. In 1980 the dollar to yen exchange rate was about $0.0045. In 2007 the yen to dollar
exchange rate was about 121 yen per dollar. A Japanese producer would have had to increase
the dollar price of a good sold in the U.S. by _____ to maintain the same yen price in 2007.
A. 83.7%
B. 79.5%
C. 65.4%
D. 59.3%
e0 = 0.0045 e1 = 1/121 = 0.00826
% e =
Difficulty: Medium
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3. 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.
A. lose market share or reduce its profit margin
B. gain market share or reduce its profit margin
C. lose market share or increase its profit margin
D. gain market share or increase its profit margin
Difficulty: Medium
4. 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 give
$20 million. This is an example of what Peter Lynch would call a/an ___________.
A. stalwart
B. slow growth
C. star
D. asset play
Difficulty: Medium
5. Since 1999, the purchasing power of the U.S. dollar has increased relative to the purchasing
power of _______.
A. UK
B. Euro
C. Switzerland
D. Canada
Difficulty: Medium
6. If you believe the economy is about to go into a recession you might change your asset
allocation by selling _______ and buying ______.
A. growth stocks; long-term bonds
B. long-term bonds; growth stocks
C. defensive stocks; growth stocks
D. defensive stocks; long-term bonds
Difficulty: Medium
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7. The yield curve spread between 10-year T-bond and federal funds rate is a _______
economic indicator.
A. leading
B. lagging
C. coincident
D. mixed
Difficulty: Easy
8. The Conference Board's Consumer Confidence Index is released ______.
A. daily
B. weekly
C. monthly
D. quarterly
Difficulty: Medium
9. You can earn abnormal returns on your investments via macro forecasting ______.
A. if you can forecast the economy at all
B. if you can forecast the economy as well as the average forecaster
C. if you can forecast the economy better than the average forecaster
D. only if you can forecast the economy with perfect accuracy
Difficulty: Medium
10. Which of the following industries would most analysts classify as mature?
A. Internet service providers
B. Biotechnology
C. Wireless communication
D. Auto manufacturing
Difficulty: Medium
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11. Which one of the following stocks represents industries with below-average sensitivity to
the state of the economy?
A. Financials
B. Technology
C. Food and beverage
D. Cyclicals
Difficulty: Easy
12. The most widely used monetary policy tool is _________.
A. altering the discount rate
B. altering reserve requirements
C. open market operations
D. increasing the budget deficit
Difficulty: Easy
13. Which one of the following is the ratio of actual output from factories to potential output
from factories?
A. Capacity utilization
B. Participation rate
C. Durable goods orders
D. Industrial production
Difficulty: Easy
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.
A. Keynesian
B. monetarist
C. supply-side
D. demand-side
Difficulty: Easy
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15. The market value of all goods and services produced during a given time period is called
______.
A. GDP
B. industrial production
C. capacity utilization
D. factory orders
Difficulty: Easy
16. A big increase in government spending is an example of _________.
A. a positive demand shock
B. a positive supply shock
C. a negative demand shock
D. a negative supply shock
Difficulty: Medium
17. GDP refers to _________.
A. the amount of personal disposable income in the economy
B. the difference between government spending and government revenues
C. the total manufacturing output in the economy
D. the total production of goods and services in the economy
Difficulty: Easy
18. Portfolio manager Peter Lynch would classify Coca-Cola as _________.
A. an asset play
B. a slow grower
C. a stalwart
D. a turnaround
Difficulty: Medium
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19. Attempting to forecast future earnings and dividends is consistent with which of the
following approaches to securities analysis?
A. Technical analysis
B. Fundamental analysis
C. Both technical analysis and fundamental analysis
D. Indexing
Difficulty: Easy
20. The analysis of the determinants of firm value is called _____________.
A. fundamental analysis
B. technical analysis
C. momentum analysis
D. indexing
Difficulty: Easy
21. Which of the following companies will be the best example of a turnaround? Portfolio
manager Peter Lynch would classify Coca-Cola as _________.
A. Coca Cola
B. Microsoft
C. Exxon-Mobil
D. Kmart
Difficulty: Medium
22. Inflation is caused by ________________.
A. unions
B. rapid growth of money supply
C. excess supply
D. low rates of capacity utilization
Difficulty: Easy
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23. Everything else equal, if you expect a larger interest rate increase than other market
participants, you should _________.
A. buy long-term bonds
B. buy short-term bonds
C. buy common stocks
D. buy preferred stocks
Difficulty: Easy
24. To obtain an approximate estimate of the real interest rate, one must _________ the
__________ the nominal risk-free rate.
A. add; default premium to the
B. subtract; default premium from the
C. add; expected inflation to
D. subtract; expected inflation from
Difficulty: Easy
25. Which of the following would not be considered a supply shock?
A. A change in the price of imported oil
B. Frost damage to the orange crop
C. A change in the level of education of the average worker
D. An increase in the level of government spending
Difficulty: Easy
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.
A. below average
B. average
C. above average
D. since growth is expected to be slow, sensitivity to economic conditions is not an issue
Difficulty: Easy
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27. Which of the following is not an example of fiscal policy?
A. Social Security spending
B. Medicare spending
C. Fed purchases of Treasury securities
D. Changes in the tax rate
Difficulty: Easy
28. Supply side economics tends to focus on _______________.
A. government spending
B. price controls
C. monetary policy
D. increasing productive capacity
Difficulty: Easy
29. Which one of the following describes the amount by which government spending exceeds
government revenues?
A. Balance of trade
B. Budget deficit
C. Gross domestic product
D. Output gap
Difficulty: Easy
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?
A. Fiscal policy
B. Monetary policy
C. Supply-side policy
D. Rising minimum wages
Difficulty: Easy
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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 _________.
A. demand shock
B. supply shock
C. monetary shock
D. refinery shock
Difficulty: Easy
32. ______________ in interest rates are associated with stock market declines.
A. Anticipated increases
B. Unanticipated increases
C. Anticipated decreases
D. Unanticipated decreases
Difficulty: Easy
33. The average duration of unemployment is _________.
A. a leading economic indicator
B. a coincidental economic indicator
C. a lagging economic indicator
D. both coincidental and lagging
Difficulty: Medium
34. The ratio of the purchasing power of two economies is termed the _______.
A. balance of trade
B. real exchange rate
C. real interest rate
D. nominal exchange rate
Difficulty: Easy
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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
A. II only
B. I and II only
C. I and III only
D. I, II and III
Difficulty: Medium
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
A. II only
B. I and II only
C. I and III only
D. I, II and III
Difficulty: Medium
37. Which of the following describes the rate at which your ability to purchase grows while
you hold an interest-earning investment?
A. The nominal exchange rate
B. The nominal interest rate
C. The real exchange rate
D. The real interest rate
Difficulty: Easy
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38. An example of a highly cyclical industry is _________.
A. the automobile industry
B. the tobacco industry
C. the pharmaceutical industry
D. the utility industry
Difficulty: Easy
39. The stock price index and contracts and orders for non defense capital goods are
_________.
A. leading economic indicators
B. coincidental economic indicators
C. lagging economic indicators
D. leading and coincidental indicators respectively
Difficulty: Medium
40. Which one of the following is not a demand shock?
A. Increase in government spending
B. Increases in the money supply
C. Reductions in consumer spending
D. Improvements in education of U.S. workers
Difficulty: Medium
41. Which one of the following is not a U.S. supply shock?
A. Unions force an increase in national wage rates
B. 30% drop in oil supply from the Middle East
C. Extended droughts reduce U.S. food production 25%
D. Increases in Chinese purchases of U.S. exports
Difficulty: Medium
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42. Pharmaceuticals, food, and other necessities would be good performers during the ____
stage of the business cycle.
A. peak
B. contraction
C. trough
D. expansion
Difficulty: Easy
43. Capital goods industries such as industrial equipment, transportation or construction
would be good investments during the _____ stage of the business cycle.
A. peak
B. contraction
C. trough
D. expansion
Difficulty: Easy
44. If you are going to earn abnormal returns based on your macroeconomic analysis it will
most likely have to be because __________.
A. you have more information than others
B. you are a better analyst than others
C. you have the same information as others
D. you are an equally good analyst as others
Difficulty: Easy
45. If the economy is going into a recession, a good industry to invest in would be the
__________ industry.
A. automobile
B. banking
C. construction
D. medical services
Difficulty: Easy
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46. The Board of Governors of the Federal Reserve System are appointed by ____________
to serve _____________ terms.
A. the Senate; 10 year
B. the House of Representatives; 8 year
C. the President; 14 year
D. the Secretary of the Treasury; 6 year
Difficulty: Medium
47. A firm in the early stages of its industry life cycle will likely have _________.
A. low dividend payout rates
B. low rates of investment
C. low rates of return on investment
D. low R&D spending
Difficulty: Easy
48. Which of the following describes the ratio of the number of people classified as out of
work to the total labor force?
A. The capacity utilization rate
B. The participation rate
C. The unemployment rate
D. The natural rate
Difficulty: Easy
49. Which of the following is the rate at which the general level of prices for goods and
services is rising?
A. The exchange rate
B. The gross domestic product growth rate
C. The inflation rate
D. The real interest rate
Difficulty: Easy
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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.
A. bottom-up
B. outside-inside
C. top-down
D. upside-down
Difficulty: Easy
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
A. I only
B. I and II only
C. II and III only
D. I, II and III
Difficulty: Medium
52. The discount rate is the ________.
A. interest rate banks charge each other for overnight loans of deposits on reserve at the Fed
B. interest rate the Fed charges commercial banks on short term loans
C. interest rate that the U.S. Treasury pays on its bills
D. interest rate that banks charge their best corporate customers
Difficulty: Medium
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53. If the currency of your country is depreciating, this should __________ exports and
__________ imports.
A. stimulate; stimulate
B. stimulate; discourage
C. discourage; stimulate
D. discourage; discourage
Difficulty: Medium
54. If interest rates increase, business investment expenditures are likely to __________ and
consumer durable expenditures are likely to _________.
A. increase; increase
B. increase; decrease
C. decrease; increase
D. decrease; decrease
Difficulty: Medium
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.
A. increase; increase
B. increase; decrease
C. decrease; increase
D. decrease; decrease
Difficulty: Medium
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56. The nominal interest rate is 6%. The inflation rate is 3%. The exact real interest rate must
be _________.
A. 2.91%
B. 3.85%
C. 1.45%
D. 2.12%
Difficulty: Medium
57. The nominal interest rate is 10%. The real interest rate is 4%. The inflation rate must be
_________.
A. -6.00%
B. 4.00%
C. 5.77%
D. 14.40%
inflation
Difficulty: Medium
58. Order the following stages in the industry life cycle from earliest to latest that occur after
the start up phase ________.
I. maturity
II. relative decline
III. consolidation
A. III, I, II
B. I, III, II
C. III, II, I
D. I, II, III
Difficulty: Medium
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59. An investment strategy which entails shifting the portfolio into industry sectors that are
forecast to outperform others based on macroeconomic forecasts is termed ______________.
A. sector rotation
B. contraction/expansion analysis
C. life cycle analysis
D. business cycle shifting
Difficulty: Easy
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 $1.00 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 it
will sell only half as many gadgets. If the economy enters a recession, the after-tax profit of
Firm A will be _________.
A. $0
B. $90,000
C. $180,000
D. $270,000
Difficulty: Medium
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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 it
will sell only half as many gadgets. If the economy is strong, the after-tax profit of Firm B
will be _________.
A. $90,000
B. $210,000
C. $300,000
D. $630,000
Difficulty: Hard
62. The Fed funds rate is the __________.
A. interest rate that banks charge their best corporate customers
B. interest rate banks charge each other for overnight loans of deposits on reserve at the Fed
C. interest rate the Fed charges commercial banks on short term loans
D. interest rate that the U.S. Treasury pays on its bills
Difficulty: Easy
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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?
A. 300,000
B. 400,000
C. 500,000
D. 600,000
Breakeven =
Difficulty: Hard
64. The goal of supply side policies is to _______.
A. increase government involvement in the economy
B. create an environment where workers and owners of capital have the maximum incentive
and ability to produce and develop goods
C. maximize tax revenues of the government
D. focus more on wealth redistribution policies
Difficulty: Easy
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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 are expected to grow at 1015% per year over the next three 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 U.S. 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 U.S. 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.
65. Characteristics 4 and 5 would indicate that the industry is in the _________ stage.
A. start-up
B. consolidation
C. maturity
D. relative decline
Difficulty: Easy
66. Characteristics _______ would be typical of an industry that is in the start-up stage.
A. 4 and 7
B. 1 and 4
C. 2 and 5
D. none of the characteristics listed match the start-up stage
Difficulty: Medium
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67. Characteristics ____ would be typical of an industry that is in the consolidation stage.
A. 6 and 7
B. 1 and 4
C. 5 and 6
D. 2 and 8
Difficulty: Medium
68. Which of the characteristics would be typical of an industry that is in the maturity stage?
A. 1, 2 and 3
B. 4 and 5
C. 6, 7 and 8
D. all characteristics fit the maturity stage
Difficulty: Medium
69. Counter-cyclical fiscal policy is best described by which of the following statements?
A. Government surpluses are planned during economic booms, and deficits are planned
during economic recessions.
B. The annual budget should always be balanced.
C. Deficits should always equal surpluses.
D. Government deficits are planned during economic booms, and surpluses are planned
during economic recessions.
Difficulty: Medium
70. A supply side economist would likely agree with which of the following statements?
A. Real output and aggregate employment are primarily determined by aggregate demand.
B. Real income will rise when government expenditures and tax rates increase.
C. Real output and aggregate employment are primarily determined by tax rates.
D. Increasing the money supply will increase real output without causing higher inflation.
Difficulty: Medium
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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?
A. Sell government bonds, reducing money supply, increasing interest rates and slowing
aggregate demand.
B. Buy government bonds, reducing money supply, increasing interest rates and slowing
aggregate demand.
C. Decrease the discount rate, lowering interest rates, causing both costs and prices to fall.
D. Increase taxes, reducing costs, causing prices to fall.
Difficulty: Medium
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?
A. U.S. goods will increase in cost and Japan will import more.
B. U.S. goods will increase in cost and Japan will import less.
C. U.S. goods will decrease in cost and Japan will import more.
D. U.S. goods will increase in cost and Japan will export less.
Difficulty: Medium
73. Which of the following are examples of cyclical industries?
I. Maytag
II. Computer chip manufacturers
III. Kellogg's Frosted Flakes
IV. Pfizer
A. I and II only
B. I, II and III only
C. II, III and IV only
D. I, II, III and IV
Difficulty: Medium
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74. You would expect the beta of cyclical industries to be ______ and the beta of defensive
industries to be ______.
A. greater than 1; less than 1
B. less than 1; less than 1
C. less than 1; greater than 1
D. greater than 1; greater than 1
Difficulty: Easy
75. What economic variable is most closely associated with increasing corporate profits?
A. Exchange rates
B. Inflation
C. Gross domestic product
D. Budget deficits
Difficulty: Medium
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?
A. Higher interest rates due to the new government borrowing
B. Inflation resulting from more government purchases
C. A negative supply shock
D. Shortage of investment due to new accounts
Difficulty: Medium
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?
A. An economic slowdown is likely
B. Employment trends will reverse and unemployment will occur
C. Government deficits will result from capacity utilization
D. Inflation may result from upward wage pressures
Difficulty: Medium
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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 exist in the area of
____________.
A. asset allocation
B. capacity utilization
C. employment management
D. strategic planning
Difficulty: Medium
79. The expansion of the money supply at a rate that exceeds the increase in goods and
services will likely result in ___________.
A. expanding economy
B. increased inflation
C. interest rate declines
D. lower GDP
Difficulty: Medium
80. The supply of funds in the economy is controlled primarily by ____________.
A. the Federal Reserve System
B. the Congress
C. money center banks
D. the Treasury department
Difficulty: Easy
81. The classification system used to classify firms into industries is now called the _____
code.
A. SIC
B. NAICS
C. ISO 57
D. ISM
Difficulty: Easy
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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?
A. Demand shock
B. Equilibrium event
C. Expanding commodity event
D. Supply shock
Difficulty: Medium
83. Whenever OPEC attempts to influence the price of oil by significantly altering production,
economists refer to this type of event as a ______________.
A. demand shock
B. equilibrium event
C. expanding commodity event
D. supply shock
Difficulty: Medium
84. Items that are ____________ and product purchases where ________ is not important
tend to be less cyclical in nature.
A. necessities; income
B. luxuries; leverage
C. discretionary goods; time of purchase
D. produced with high fixed costs; entertainment
Difficulty: Medium
85. Cash cows are typically found in the _________ stage of the industry life cycle.
A. startup
B. consolidation
C. maturity
D. relative decline
Difficulty: Easy
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86. At what point in an industry life cycle are inefficiencies in competitors most likely to be
removed?
A. Start up stage
B. Consolidation stage
C. Maturity stage
D. Relative decline stage
Difficulty: Medium
87. Stalwarts are typically found in the _________ stage of the industry life cycle.
A. startup
B. consolidation
C. maturity
D. relative decline
Difficulty: Easy
88. Large growth companies generally emerge in the __________ stage.
A. start up
B. consolidation
C. maturity
D. relative decline
Difficulty: Medium
89. Which of the following comprise 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
A. I and II only
B. I, II and III only
C. II, III and IV only
D. III and IV only
Difficulty: Medium
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