Problem Set 1
Investments
7
Name: __________________
112302034
Student ID: _____________
MULTIPLE CHOICE - Choose the one alternative that best completes the
statement or answers the question. (100%)
D
1. (5%) _______ are financial assets.
O
A) Bonds and land
C
B) Machines and derivatives
-
C) Stocks and intellectual property
D) Bonds and stocks
C
E) Bonds, machines, and stocks
B
2. (5%) Financial assets:
A) directly contribute to the country’s productive capacity.
B) indirectly contribute to the country’s productive capacity.
C) contribute to the country’s productive capacity, both directly and indirectly.
D) do not contribute to the country’s productive capacity, either directly or indirectly.
E) are of no value to anyone.
D
3. (5%) An example of a derivative security is:
A) a common share of Microsoft but not a commodity futures contract.
B) a call option on Intel stock but not a commodity futures contract.
C) a commodity futures contract or a common share of Microsoft.
D) a call option on Intel stock or a commodity futures contract.
=
E) a common share of Microsoft or a call option on Intel stock.
1
A
4. (5%) Which of the following portfolio construction methods starts
with asset allocation?
-
A) Top-down
B) Bottom-up
-
C) Middle-out
D) Buy and hold
E) Asset allocation
E
-
5. (5%) _______ are examples of financial intermediaries.
A) Commercial banks
B) Insurance companies
C) Investment companies
D) Credit unions
E) All of the options are correct.
C
6. (5%) Commercial paper is a short-term security issued by ________ to raise
funds.
A) the Federal Reserve Bank
Fi
B) commercial banks
C) large, well-known companies
D) the New York Stock Exchange
E) state and local governments
D
7. (10%) Consider the following three stocks:
Stock
Price
Number of shares outstanding
Stock A
Stock B
Stock C
$ 40
$ 70
$ 10
200
500
600
So
The price-weighted index constructed with the three stocks is ($40+$70+$10)/3 =
$40. The value-weighted index constructed with the three stocks using a divisor of
100 is:
A) 1.2
B) 1200
C) 490
D) 4900
1900
2
E) 49
B
tax-free
L
8. (10%) An investor purchases one municipal and one corporate bond that pay rates
of return of 7.5% and 10.0%, respectively. If the investor is in the 20% marginal tax
bracket, his or her after-tax rates of return on the municipal and corporate bonds
would be ________ and ________, respectively.
O
A) 7.5%; 12.0%
B) 7.5%; 8.0%
C) 5.63%; 12.0%
D) 5.63%; 8.0%
E) 10%; 10%
X
B
9. (5%) What marginal tax bracket would suggest indifference between corporate bonds
(yielding 10%) and municipal bonds (yielding 8%)?
-
A) 0%
B) 20%
C) 21%
D) 25%
E) Unable to determine given the information provided.
C
10. (5%) You want to buy 100 shares of Hotstock Incorporated at the best possible price
as quickly as possible. You would most likely place a:
A) stop-loss order
B) stop-buy order
C) market order
D) limit-sell order
E) limit-buy order
A
11. (10%) You want to purchase KO stock at $60 from your broker using as little of your
own money as possible. If initial margin is 50% and you have $3,000 to invest, how
many shares can you buy?
e
A) 100 shares
B) 200 shares
C) 50 shares
3000 X 2
D) 500 shares
=
6 000
,
E) 25 shares
$6
,00
3
100
shares
A
12. (10%) Over the past year, you earned a nominal rate of interest of 9% on your money.
The inflation rate was 3% over the same period. The exact actual growth rate of
your purchasing power was:
A) 6.0%.
B) 10.0%.
C) 5.8%.
D) 4.8%.
*
E) 15.0%.
13. (5%) When a distribution is positively skewed,
C
A) standard deviation overestimates risk.
B) standard deviation correctly estimates risk.
C) standard deviation underestimates risk.
D) the tails are fatter than in a normal distribution.
E) None of the options are correct.
B
14. (5%) You purchase a share of CAT stock for $90. One year later, after receiving a
dividend of $4, you sell the stock for $97. What was your holding-period return?
-
A) 14.44%
B) 12.22%
= 12
C) 13.33%
D) 5.56%
E
.
%
22
15. (10%) You have been given this probability distribution for the holding-period return
for a stock:
Stock of the Economy
Boom
Normal growth
Recession
Probability
0.40
0.35
0.25
HPR
22%
11%
–9%
What is the expected holding-period return for the stock?
A) 11.67%
B) 8.33%
22
C) 9.56%
D) 12.4%
% x0 4
.
9 %
-
E) None of the options are correct.
=
4
=
+
.
10
2
% x0 35
.
x0 . 25
8 8 %
-
11
.
%
+
25 %
3 85 %
.