Investment Bkm 5th Editon

ch1 1 Derivative securities can be issued based on __________. A) precious metals B) stock market index C) treasury bonds D) All of the above 2 A __________ represents an ownership share in a corporation. A) preferred stock B) bond C) common stock D) All of the above 3 In securities markets, there should be a risk-return trade-off with assets with lower expected returns having__________ risk than assets with higher expected returns. A) higher B) lower C) the same D) None of the above 4 Allocation of the investment portfolio across broad asset classes refers to the __________. A) security analysis B) top-down portfolio construction C) asset allocation D) None of the above 5 Analysis of the value of securities refers to the __________. A) top-down portfolio construction B) security analysis C) asset allocation D) None of the above 6 Money Market securities are characterized by _________. A) longer than 10 years to maturity B) 5 to 10 years to maturity C) a very short term to maturity D) a variable term to maturity 7 A futures contract of orange juice is an example of a __________. A) financial asset B) real asset C) mutual fund D) None of the above 8 Firms that specialize in helping companies raise capital by selling securities are called __________. A) industrial banks B) commercial banks C) investment banks D) None of the above 9 __________ are real assets. A) Options B) Factories C) Mortgage bonds D) None of the above ch2 1 Which of the following is(are) characteristic of common stock ownership? A) voting rights B) double taxation C) residual claimant D) All of the above are characteristics of stock ownership 2 Which of the following method is used to adjust for a stock split in calculating the standard and Poor's 500 Index?

A) Nothing B) Adjusting the divisor C) Adjusting the numerator D) None of the above 3 A10-year annual coupon bond issued by the State of New York has a yield to maturity of 7%. If you are in the 25% tax bracket this bond would provide you with an equivalent taxable yield of __________ A) 7.00% B) 9.33% C) 8.75% D) None of the above 4 The asked discount yield on a treasury bill is 3%. The ask price of the bill is ________ if it matures in 90 days and has a face value of $1,000. A) $992.50 B) $994.67 C) $952.38 D) indeterminable 5 The price which the owner of a put option will receive from selling the stock named in the option contract is called the __________ A) put price B) exercise price C) expiration price D) None of the above 6 A bond that has no collateral is called __________. A) a straight bond B) a mortgage bond C) a debenture D) None of the above 7 The Nikkei reflects market performance on which of the following major stock markets? A) Japan B) Singapore C) Taiwan D) New Zealand 8 In the event of the company's bankruptcy, __________. A) the firm's bondholders are personally liable for the firm's obligations B) the most shareholders can lose is their original investment in the firm's stock plus any legal costs C) common shareholders are the last in line to receive their claims on the firm's assets D) bondholders have claim to what is left from the liquidation of the firm's assets after paying shareholders 9 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) obligation, buy B) obligation, sell C) right, sell D) right, buy 10 The effective annual yield of a treasury bill that has a face value of $10,000, a current selling price of $9,900, and a maturity of 75 days is __________. A) 5.01% B) 4.67% C) 5.42% D) 6.96% ch3 1 Assume you purchased 500 shares of ABC common stock on margin at $40 per share from your broker. If the initial margin is 70%, the amount you borrowed from the broker is __________. A) $4,000 B) $6,400 C) $9,600 D) $6,000

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2 Purchases of newly issued stock take place __________. A) in the primary market B) in the open market C) in the secondary market D) in the over the counter market 3 The _________ price is the price at which an investor pays to a dealer to purchase a security. A) market B) ask C) bid D) None of the above 4 The Nasdaq Stock Market is an example of A) a primary market B) a secondary market C) the third market D) All of the above 5 __________ determines the initial margin requirements on stocks. A) The Securities and Exchange Commission B) Stock broker C) The Federal Reserve D) The Federal Deposit Insurance Corporation 6 You purchased 400 shares of XYZ common stock on margin at $20 per share. Assume the initial margin is 60% and the maintenance margin is 30%. You would get a margin call if the stock price is below __________. Assume the stock pays no dividend and ignore interest on margin. A) $15.71 B) $11.43 C) $13.57 D) $10.14 7 You purchased 200 shares of AAA common stock on margin for $40 per share. The initial margin is 60% and the stock pays no dividend. Your rate of return would be __________ if you sell the stock at $35 per share. A) 21% B) 13% C) -13% D) -21% 8 You purchased ABC stock at $50 per share. The stock is currently selling at $49. Your potential loss could be reduced by placing a __________. A) limit-buy order B) limit-sell order C) market order D) stop-loss order 9 Short selling a stock is profitable when the stock price __________. A) does not change B) goes down C) goes up D) None of the above 10 You sold short 200 shares of XYZ common stock at $40 per share. The initial margin is 70%. Your initial investment was __________. A) $4,000 B) $2,400 C) $8,000 D) $5,600

2 What is the rate of return on a mutual fund that has $500 million in assets at the start of the year, 20 million shares outstanding, a gross return on assets of 12%, and a total expense ratio of 1%? A) 12% B) 11% C) 13% D) There is not sufficient information to answer this question 3 Mutual funds are ______________________. A) specialty investment companies B) open-end investment companies C) international investment companies D) closed-end investment companies 4 A mutual fund reports $150 million in assets, $25 million in liabilities, and has 12.5 million shares outstanding. What is the Net Asset Value (NAV) of these shares? A) $20 B) $25 C) $15 D) $10 5 Real estate investment trusts are exempt from __________ as long as they distribute 95% of their taxable income to shareholders. A) taxes B) regulations C) auditing D) All of the above 6 Investors who wish to buy some shares of a closed-end fund may ______. A) buy the shares at a premium B) buy the shares from the company C) buy the shares the at net asset value from other investors D) None of the above 7 Mutual funds that hold both stocks and bonds in relatively stable proportions are called ____________________. A) growth and income funds B) safe funds C) asset allocation funds D) balanced funds 8 The most common benchmark for comparing the performance of equity mutual funds is the __________. A) Standard & Poor's 500 Index B) New York Composite Index C) Dow Jones Industrial Index D) NASDAQ Composite Index 9 Sector mutual funds concentrate their investments in _________________. A) different geographical regions of the US B) geographical segments of the real estate market C) securities issued by firms in a particular segment of the economy D) government securities 10 Mutual funds perform the function of __________ for their shareholders. A) investment insurance B) tax preparation C) record keeping and administration D) All of the above

ch4 1 Money market fund's NAV is fixed at _____ per share. A) $1 B) $2 C) $3 D) None of the above

ch5 1 What was the beginning price of a stock if its ending price was $23, its cash dividend was $1, and the holding period return on a stock was 20%? A) $20 B) $24 C) $21

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D) $18 2 You purchased 100 shares of stock for $25. One year later you received $2 cash dividend and sold the shares for $22 each. Your holding-period return was ____. A) 4% B) 8.33% C) 8% D) -4% 3 The geometric average of 10%, -20% and 10% is __________. A) 0% B) 1.08% C) -1.08% D) -2% 4 An investor invests 80% of her funds in a risky asset with an expected rate of return of 12% and a standard deviation of 20% and 20% in a treasury bill that pays 3%. Her portfolio's expected rate of return and standard deviation are __________ and __________ respectively. A) 12%, 20% B) 7.5%, 10% C) 9.6%, 10% D) 10.2%, 16% 5 The sample standard deviation of returns of 12%, 15%, -10% and 20% is ______. A) 9.25% B) 13.25% C) 11.482% D) 20% 6 Suppose stock ABC has an average return of 12% and a standard deviation of 20%. Determine the range of returns that ABC's actual returns will fall within 95% of the time. A) Between -28% and 52% B) Between -8% and 32% C) Between 12% and 20% D) None of the above 7 What is the expected real rate of return on an investment that has expected nominal return of 20%, assuming the expected rate of inflation to be 6%? A) 14% B) 13.2% C) 20% D) 18.4% 8 What is the ending price of a stock if its beginning price was $30, its cash dividend was $2, and the holding period return on a stock was 20%? A) $32 B) $34 C) $36 D) $28 9 Historical returns have generally been __________ for stocks than for bonds. A) the same B) lower C) higher D) none of the above 10 Geometric average returns are generally __________ arithmetic average returns. A) the same as B) lower than C) higher than D) none of the above ch6 1 Some diversification benefits can be achieved by combining securities in a portfolio as long as the correlation coefficient between the securities is ________________.

A) 1 B) less than or equal to 0 C) between 0 and 1 D) less than 1 2 Which of the following is correct concerning efficient portfolios? A) They have zero risk. B) They have the lowest risk. C) They have the highest risk/return tradeoff. D) They have the highest expected return. 3 The standard deviation of return on stock A is 0.25 while the standard deviation of return on stock B is 0.30. If the covariance of returns on A and B is 0.06, the correlation coefficient between the returns on A and B is __________. A) 0.2 B) 0.6 C) 0.7 D) 0.8 4 reward-to-variability ratio of a high-risk stock is _______ that of a low-risk stock. A) the same as B) higher than C) lower than D) none of the above 5 According to the systematic risk principle, which one of the following risks is rewarded? A) Unsystematic risk. B) Total risk. C) Systematic risk. D) Industry risk. 6 Which one of the following statements is correct concerning a two-stock portfolio? A) Portfolio return is a weighted average of the two stocks’ returns if the stocks have a positive correlation coefficient. B) Portfolio standard deviation can be a weighted average of the two stocks’ standard deviations in theory. C) Portfolio standard deviation is zero if the two stocks have a correlation coefficient of 0. D) None of the above is correct. 7 The standard deviation of return on investment A is 0.2 while the standard deviation of return on investment B is 0.3. If the correlation coefficient between the returns on A and B is -0.8, the covariance of returns on A and B is ________. A) -0.048 B) -0.06 C) 0.06 D) 0.048 8 A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 20% while stock B has a standard deviation of return of 30%. Stock A comprises 40% of the portfolio while stock B comprises 60% of the portfolio. What is the standard deviation of return on the portfolio if the correlation coefficient between the returns on A and B is 0.5? A) 23.1% B) 25% C) 26% D) 24.7% 9 A portfolio is composed of two stocks, A and B. Stock A has an expected return of 10% while stock B has an expected return of 18%. What is the proportion of stock A in the portfolio so that the expected return of the portfolio is 16.4%? A) 0.2 B) 0.8 C) 0.4 D) 0.6

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10 Which of the following portfolios cannot lie on the efficient frontier? Portfolio Expected Return Standard Deviation X 10% 15% Y 12% 20% Z 15% 20% A) Portfolio Z B) Portfolio X C) Portfolio Y D) All portfolios should lie on the efficient frontier ch7 1 Stock A has an estimated rate of return of 12% and a beta of 1.2. The market expected rate of return is 12% and the risk-free rate is 2%. The alpha of the stock is __________. A) 0% B) -2% C) 2% D) -4% 2 You invest $8,000 in stock A with a beta of 1.4 and $12,000 in security B with a beta of 0.8. The beta of this formed portfolio is __________. A) 1.10 B) 1.20 C) 1.04 D) 2.20 3 Which of the following is(are) correct according to the CAPM: A) There is a linear and positive relationship between a stock's beta and its required return. B) The expected return of a stock will be doubled if its beta increases from 1 to 2. C) There is a linear and positive relationship between a portfolio's standard deviation and its required return. D) All of the above are correct. 4 Which one of the following stocks is relatively more risky when held in a well-diversified portfolio? Stock Standard Deviation Beta ABC 35% 1.2 XYZ 30% 1.6 A) ABC because its beta is lower. B) XYZ because its beta is higher. C) ABC because its standard deviation is higher. D) XYZ because its standard deviation is lower. 5 The expected market rate of return is 14% while the risk-free rate expected return is 4%. If you expect stock A with a beta of 1.2 to offer a rate of return of 20%, then you should __________. A) buy stock A because it is overpriced B) buy stock A because it is underpriced C) sell short stock A because it is overpriced D) sell short stock A because it is underpriced 6 Stock A has an expected rate of return of 14%. The market expected rate of return is 12% and the risk-free rate is 2%. The beta of the stock is __________. A) 1.2 B) 1.0 C) 0.8 D) 1.4 7 The slope of the Security Market Line is ____________. A) the beta B) the risk-free rate of return C) the market return D) the market risk premium 8 The expected return on the market is 12%. The expected return on a stock with a beta of 1.5 is 17%. What is the risk-free rate of return according to the CAPM? A) 2%

B) 6% C) 8% D) 5% 9 According to the CAPM, a stock with a high standard deviation must have a beta ________ that of a stock with a low standard deviation. A) higher than B) lower than C) the same as D) There is not sufficient information to determine. 10 The expected risk-free rate of return is 4%. The expected return on a stock with a beta of 1.2 is 16%. What is the expected return on the market according to the CAPM? A) 12% B) 14% C) 18% D) 15% ch8 1 When the market risk premium declines, stock prices will ________. A) rise B) fall C) recover D) have excess volatility 2 According to the efficient market hypothesis, __________. A) positive alphas on stocks will disappear quickly B) low beta stocks are consistently underpriced C) high beta stocks are consistently overpriced D) None of the above answers is correct 3 Research on the strong form of market efficiency shows that ________ are generally able to achieve superior returns. A) members of the SEC B) the majority of professional mutual fund managers C) corporate insiders D) stock brokers 4 The ______________ of the efficient market hypothesis suggests that there is little or nothing to be gained from studying past stock price trends. A) weak form B) semi-weak form C) semi-strong form D) strong form 5 Which one of the following forms of market efficiency is violated if you can earn excess return by buying stocks of firms which make merger announcements? A) Weak form. B) Semi-weak form. C) Semi-strong form. D) Strong form. 6 The efficient market hypothesis suggests that ___________. A) no investors can earn a positive return at any point in time. B) no investors can earn a positive return persistently over time. C) no investors can earn an excess return at any point in time. D) no investors can earn an excess return persistently over time. 7 The January effect of small firms is greatest ________. A) in leap years B) in presidential election years C) late in the month D) early in the month 8 Which of the following has(have) been considered market anomalies?

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A) the reversal effect B) the book-to-market effect C) the small-firm January effect D) All of the above have been considered market anomalies 9 Empirical evidence supporting the semi-strong form market efficiency suggests that investors should follow ____________ investment strategy. A) a passive B) an active C) a conservative D) an aggressive 10 If stock returns exhibit negative serial correlation, this means that __________ returns tend to follow ___________ returns. A) positive; positive B) positive ; negative C) negative; negative D) None of the above ch9 1 According to the Capital Asset Pricing Model (CAPM), a well-diversified portfolio's rate of return is a function of A) unique risk B) reinvestment risk C) market risk. D) unsystematic risk. E) none of the above. 2 The market portfolio has a beta of A) 0.25 B) -1. C) 1. D) 0.5. E) none of the above 3 Which statement is not true regarding the market portfolio? A) It includes all publicly traded financial assets. B) It is the tangency point between the capital market line and the indifference curve. C) All securities in the market portfolio are held in proportion to their market values. D) It lies on the efficient frontier. E) none of the above are true. 4 The market risk, beta, of a security is equal to A) the covariance between the security's return and the market return 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. E) none of the above. 5 According to the Capital Asset Pricing Model (CAPM), the expected rate of return on any security is equal to A) Rf + ?[E(RM)]. B) Rf + ?[E(RM - Rf]. C) Rf + ?[E(RM) - Rf]. D) E(RM) + Rf. E) none of the above. 6 According to the Capital Asset Pricing Model (CAPM), fairly priced securities A) have positive betas. B) have positive alphas. C) have negative betas. D) have zero alphas. E) none of the above. 7 In a well diversified portfolio

A) market risk is negligible. B) unsystematic risk is negligible. C) systematic risk is negligible. D) nondiversifiable risk is negligible. E) none of the above. 8 What is the expected return of a zero-beta security? A) The risk-free rate. B) Zero rate of return. C) A negative rate of return. D) The market rate of return. E) None of the above. 9 The market price of risk A) is the market risk premium divided by the standard deviation of the market returns. B) has a reward-to-risk ratio of [E(rM ) - rf]/?2M. C) is the price of a U. S. T-bill. D) a and b. E) b and c. 10 In equilibrium, the marginal price of risk for a risky security must be A) less than the marginal price of risk for the market portfolio. B) greater than the marginal price of risk for the market portfolio. C) equal to the marginal price of risk for the market portfolio. D) adjusted by its degree of nonsystematic risk. E) all of the above are true. ch11 1 Which pricing model provides no guidance concerning the determination of the risk premium on factor portfolios? A) The multifactor APT B) The CAPM C) Both the CAPM and the multifactor APT D) Neither the CAPM nor the multifactor APT E) None of the above is a true statement. 2 The exploitation of security mispricing in such a way that risk-free economic profits may be earned is called A) factoring B) capital asset pricing C) arbitrage D) fundamental analysis E) none of the above 3 A zero-investment portfolio with a positive expected return arises when A) an investor has downside risk only B) the opportunity set is not tangent to the capital allocation line C) a risk-free arbitrage opportunity exists D) the law of prices is not violated E) none of the above 4 The APT differs from the CAPM because the APT _________. A) places more emphasis on market risk B) recognizes multiple systematic risk factors C) recognizes multiple unsystematic risk factors D) minimizes the importance of diversification E) all of the above 5 The following factors might affect stock returns: A) interest rate fluctuations. B) the business cycle. C) inflation rates. D) a and b. E) all of the above. 6 Portfolio X has expected return of 10% and standard deviation of 19%. Portfolio Y has expected return of 12% and standard deviation of 17%. Rational investors will A) Borrow at the risk free rate and buy X.

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B) Sell Y short and buy X. C) Sell X short and buy Y. D) Borrow at the risk free rate and buy Y. E) Lend at the risk free rate and buy Y. 7 A professional who searches for mispriced securities in specific areas such as merger-target stocks, rather than one who seeks strict (risk-free) arbitrage opportunities is engaged in A) risk arbitrage. B) option arbitrage. C) pure arbitrage. D) equilibrium arbitrage. E) none of the above. 8 Imposing the no-arbitrage condition on a single-factor security market implies which of the following statements? I) the expected return-beta relationship is maintained for all individual securities. II) the expected return-beta relationship is maintained for all well-diversified portfolios. III) the expected return-beta relationship is maintained for all but a small number of well-diversified portfolios. IV) the expected return-beta relationship is maintained for all but a small number of individual securities. A) I and III are correct. B) I and IV are correct. C) II and III are correct. D) II and IV are correct. E) Only IV is correct. 9 To take advantage of an arbitrage opportunity, an investor would I) short sell the asset in the low-priced market and buy it in the high-priced market. II) construct a zero investment portfolio that will yield a sure profit. III) make simultaneous trades in two markets without any net investment. IV) construct a zero beta investment portfolio that will yield a sure profit. A) I and IV B) I and III C) II and III D) I, III, and IV E) II, III, and IV 10 The factor F in the APT model represents A) the deviation from its expected value of a factor that affects all security returns. B) firm-specific risk. C) a factor that affects all security returns. D) the sensitivity of the firm to that factor. E) a random amount of return attributable to firm events. ch12 1 Proponents of the EMH typically advocate A) a passive investment strategy B) investing in an index fund C) an active trading strategy D) a and b E) b and c 2 If you believe in the reversal effect, you should A) buy bonds in this period if you held stocks in the last period B) buy stocks this period that performed poorly last period C) buy stocks in this period if you held bonds in the last period D) go short E) a and b 3 A daily fluctuation of little importance is called

A) a market trend B) a primary trend C) an intermediate trend D) a minor trend E) none of the above 4 The debate over whether markets are efficient will probably never be resolved because of A) the selection bias issue B) the magnitude issue C) the lucky event issue D) none of the above E) all of the above 5 A common strategy for passive management is ____________. A) creating an investment club B) creating a small firm fund C) creating an index fund D) a and b E) b and c 6 Researchers have found that most of the small firm effect occurs A) during the summer months B) during the spring months C) in January D) in December E) randomly 7 A study by Ball, Kothari and Shanken (1995) examines the reversal effect and finds A) the reversal effect is substantially diminished when portfolios are formed based on mid-year performance rather than December results. B) the reversal effect seems to be concentrated in lowpriced shares. C) the risk-adjusted return from trying to exploit the reversal effect is effectively zero. D) none of the above are true. E) all of the above. 8 Proponents of the EMH think technical analysts A) are wasting their time B) should focus on resistance levels C) should focus on support levels D) should focus on financial statements E) should focus on relative strength 9 Fama and French (1988) found that the return on the aggregate stock market A) is higher when bank failures are high B) is lower when the dividend yield is high C) is unrelated to the dividend yield D) is higher when the dividend yield is high E) is unrelated to the economy 10 In an efficient market the correlation coefficient between stock returns for two non-overlapping time periods should be A) positive and large. B) positive and small. C) negative and large. D) negative and small. E) zero ch14 1 The current yield on a bond is equal to ________. A) the internal rate of return B) the yield to maturity C) annual interest divided by the current market price D) annual interest divided by the par value E) none of the above 2 To earn a high rating from the bond rating agencies, a firm should have A) a low times interest earned ratio B) a low debt to equity ratio

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C) a high quick ratio D) b and c E) a and c 3 Ceteris paribus, the price and yield on a bond are A) negatively related. B) positively related. C) sometimes positively and sometimes negatively related. D) not related. E) indefinitely related. 4 A coupon bond is a bond that A) does not pay interest on a regular basis but pays a lump sum at maturity B) pays interest on a regular basis (typically every six months) C) can always be converted into a specific number of shares of common stock in the issuing company D) always sells at par E) none of the above 5 Consider two bonds, X and Y. Both bonds presently are selling at their par value of $1,000. Each pays interest of $150 annually. Bond A will mature in 6 years while bond B will mature in 7 years. If the yields to maturity on the two bonds change from 15% to 12% A) both bonds will increase in value, but bond X will increase more than bond Y B) both bonds will decrease in value, but bond X will decrease more than bond Y C) both bonds will increase in value, but bond Y will increase more than bond X D) both bonds will decrease in value, but bond Y will decrease more than bond X E) none of the above 6 The yield to maturity on a bond is A) the discount rate that will set the present value of the payments equal to the bond price. B) below the coupon rate when the bond sells at a discount, and equal to the coupon rate when the bond sells at a premium. C) based on the assumption that any payments received are reinvested at the coupon rate. D) all of the above. E) none of the above 7 Consider a 5-year bond with a 10% coupon that has a present yield to maturity of 8%. If interest rates remain constant, one year from now the price of this bond will be A) $1,000 B) higher C) lower D) the same E) cannot be determined 8 Which one of the following statements about convertibles is true? A) The longer the call protection on a convertible, the less the security is worth. B) Convertibles are not callable. C) The smaller the spread between the dividend yield on the stock and the yield-to-maturity on the bond, the more the convertible is worth. D) The collateral that is used to secure a convertible bond is one reasons convertibles are more attractive than the underlying stock. E) The more volatile the underlying stock, the greater the value of the conversion feature. 9 The bond indenture includes A) the maturity date of the bond. B) the par value of the bond. C) the coupon rate of the bond. D) all of the above. E) none of the above.

10 Most corporate bonds are traded A) over the counter by bond dealers linked by a computer quotation system. B) by the issuing corporation. C) on a formal exchange operated by the New York Stock Exchange. D) on a formal exchange operated by the American Stock Exchange. E) on a formal exchange operated by the Philadelphia Stock Exchange. ch15 1 The yield curve shows at any point in time: A) the relationship between yield on a bond and the time to maturity on the bond. B) the relationship between the coupon rate on a bond and time to maturity of the bond. C) the relationship between the yield on a bond and the duration of the bond. D) all of the above. E) none of the above. 2 According to the expectations hypothesis, a normal yield curve implies that A) interest rates are expected to remain stable in the future. B) interest rates are expected to decline in the future. C) interest rates are expected to increase first, then decrease. D) interest rates are expected to decline first, then increase. E) interest rates are expected to increase in the future. 3 The expectations theory of the term structure of interest rates states that A) yields on long- and short-maturity bonds are determined by the supply and demand for the securities. B) forward rates exceed the expected future interest rates. C) forward rates are determined by investors' expectations of future interest rates. D) all of the above. E) none of the above. 4 The market segmentation theory of the term structure of interest rates A) theoretically can explain all shapes of yield curves. B) assumes that markets for different maturities are separate markets. C) definitely holds in the "real world". D) a and b. E) a and c. 5 When computing yield to maturity, the implicit reinvestment assumption is that the interest payments are reinvested at the: A) Coupon rate. B) Yield to maturity at the time of the investment. C) Current yield. D) Prevailing yield to maturity at the time interest payments are received. E) The average yield to maturity throughout the investment period. 6 The concepts of spot and forward rates are most closely associated with which one of the following explanations of the term structure of interest rates. A) Expectations Hypothesis B) Segmented Market theory C) Preferred Habitat Hypothesis D) Liquidity Premium theory E) None of the above 7 The pure yield curve can be estimated A) by using corporate bonds with different risk ratings. B) by using zero-coupon bonds.

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C) by using coupon bonds if each coupon is treated as a separate "zero." D) by estimating liquidity premiums for different maturities. E) b and c. 8 An inverted yield curve is one A) constructed by using convertible bonds. B) with a hump in the middle. C) that slopes downward. D) that plots the inverse relationship between bond prices and bond yields. E) that is relatively flat. 9 Investors can use publicly available financial date to determine which of the following? I) future short-term rates II) the direction the Dow indexes are heading III) the shape of the yield curve IV) the actions to be taken by the Federal Reserve A) I and II B) I and III C) I, II, and III D) I, III, and IV E) I, II, III, and IV 10 The Liquidity Preference Theory states that A) Stocks are preferred to bonds because they are generally more liquid. B) Treasury Bonds are preferred to corporate bonds because they are more liquid. C) Liquidity premiums can be measured precisely. D) Bonds of large corporations are preferred because they have the highest liquidity. E) The liquidity premium is expected to be positive because short-term investors dominate the market. ch16 1 The duration of a bond is a function of the bond's A) coupon rate. B) time to maturity. C) yield to maturity. D) all of the above. E) none of the above. 2 The "modified duration" used by practitioners is equal to the Macaulay duration A) times the change in interest rate. B) times (one plus the bond's yield to maturity). C) divided by (one plus the bond's yield to maturity). D) divided by (one minus the bond's yield to maturity). E) none of the above. 3 Which of the following two bonds is more price sensitive to changes in interest rates? 1) A par value bond, X, with a 5-year-to-maturity and a 10% coupon rate. 2) A zero-coupon bond, Y, with a 5-year-to-maturity and a 10% yield-to-maturity. A) Bond Y because of the longer duration. B) Bond X because of the longer time to maturity. C) Bond X because of the higher yield to maturity. D) Both have the same sensitivity because both have the same yield to maturity. E) None of the above 4 Which of the following is not true? A) Holding other things constant, the duration of a bond increases with time to maturity. B) Given time to maturity and yield to maturity, the duration of a bond is higher when the coupon rate is lower. C) Given time to maturity, the duration of a zero-coupon decreases with yield to maturity. D) Duration is a better measure of price sensitivity to interest rate changes than is time to maturity.

E) None of the above. 5 Active bond portfolio management strategies include all of the following except A) immunization. B) rate anticipation swap. C) intermarket spread. D) substitution swap. E) none of the above. 6 The two components of interest-rate risk are A) price risk and default risk. B) price risk and reinvestment risk. C) call risk and price risk. D) reinvestment risk and systematic risk. E) none of the above. 7 Indexing of bond portfolios is difficult because A) the number of bonds included in the major indexes is so large that it would be difficult to purchase them in the proper proportions. B) many bonds are thinly traded so it is difficult to purchase them at a fair market price. C) the composition of bond indexes is constantly changing. D) all of the above are true. E) both b and c are true. 8 Duration A) assesses the time element of bonds in terms of both coupon and term to maturity. B) is a direct comparison between bond issues with different levels of risk. C) allows structuring a portfolio to avoid interest-rate risk. D) a and b. E) a and c. 9 The duration of a bond normally increases with an increase in A) yield to maturity. B) term to maturity. C) coupon rate. D) all of the above. E) none of the above. 10 Immunization is not a strictly passive strategy because A) it requires choosing an asset portfolio that matches an index. B) there is likely to be a gap between the values of assets and liabilities in most portfolios. C) durations of assets and liabilities fall at the same rate. D) it requires frequent rebalancing as maturities and interest rates change. E) none of the above. ch18 1 Since 1955, Treasury bond yields and earnings yields on stocks were A) identical B) positively correlated C) negatively correlated D) uncorrelated 2 Historically, P/E ratios have tended to be A) lower when inflation has been high B) higher when inflation has been high C) uncorrelated with inflation rates but correlated with other macroeconomic variables D) uncorrelated with any macroeconomic variables including inflation rates E) none of the above 3 Recent empirical research indicates A) that real rates of return on stocks are negatively correlated with inflation

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B) that real rates of return on stocks are uncorrelated with inflation C) that real rates of return on stocks are positively correlated with inflation D) nothing about real rates of return on stocks E) the ratio of the real rate of return on stocks to inflation is 1.0. 4 One of the problems with attempting to forecast stock market values is that A) there are no variables that seem to predict market return. B) the earnings multiplier approach can only be used at the firm level. C) dividend payout ratios are highly variable. D) the level of uncertainty surrounding the forecast will always be quite high. E) none of the above. 5 A firm's earnings per share increased from $12 to $15, dividends increased from $3.00 to $3.60, and the share price increased from $70 to $80. Given this information, it follows that A) the firm increased the number of shares outstanding B) the firm had a decrease in dividend payout ratio C) the stock experienced a drop in the P/E ratio D) the required rate of return decreased E) none of the above 6 A company whose stock is selling at a P/E ratio greater than the P/E ratio of a market index most likely has A) an anticipated earnings growth rate which is less than that of the average firm B) greater cyclicality of earnings growth than that of the average firm C) less predictable earnings growth than that of the average firm D) a dividend yield which is less than that of the average firm greater cyclicality of earnings growth than that of the average firm E) none of the above. 7 If a firm has a required rate of return equal to the ROE A) the amount of earnings retained by the firm does not affect market price or the P/E. B) the firm can increase market price and P/E by increasing the growth rate. C) the firm can increase market price and P/E by retaining more earnings. D) a and b. E) none of the above. 8 The goal of fundamental analysts is to find securities A) with high market capitalization rates. B) with a positive present value of growth opportunities. C) whose intrinsic value exceeds market price. D) all of the above. E) none of the above. 9 Many stock analysts assume that a mispriced stock will A) immediately return to its intrinsic value. B) gradually approach its intrinsic value over several years. C) never return to its intrinsic value. D) return to its intrinsic value within a few days. E) none of the above. 10 Because the DDM requires multiple estimates, investors should A) carefully examine inputs to the model. B) not use this model without expert assistance. C) perform sensitivity analysis on price estimates. D) feel confident that DDM estimates are correct. E) both a and c.

ch20 1 An American put option allows the holder to A) potentially benefit from a stock price decrease with less risk than short selling the stock. B) sell the underlying asset at the striking price on or before the expiration date. C) buy the underlying asset at the striking price on or before the expiration date. D) b and c. E) a and b. 2 A European call option can be exercised A) only on the expiration date. B) any time in the future. C) if the price of the underlying asset declines below the exercise price. D) immediately after dividends are paid. E) none of the above. 3 The maximum loss a buyer of a stock call option can suffer is equal to A) the striking price minus the stock price. B) the stock price minus the value of the call. C) the stock price.. D) the call premium E) none of the above. 4 The intrinsic value of an out-of-the-money call option is equal to A) the call premium. B) the stock price minus the exercise price. C) zero D) the striking price. E) none of the above. 5 The maximum loss the writer of a stock put option can suffer is equal to A) the striking price minus the put premium. B) the striking price. C) the stock price minus the put premium. D) the put premium. E) none of the above. 6 According to the put-call parity theorem, the value of a European put option on a non-dividend paying stock is equal to: A) the call value plus the present value of the exercise price plus the stock price. B) the present value of the stock price minus the exercise price minus the call price. C) the call value plus the present value of the exercise price minus the stock price. D) the present value of the stock price plus the exercise price minus the call price. E) none of the above. 7 Before expiration, the time value of a call option is equal to A) zero. B) the actual call price plus the intrinsic value of the call. C) the intrinsic value of the call. D) the actual call price minus the intrinsic value of the call. E) none of the above. 8 The value of a stock put option is positively related to the following factors except A) the time to expiration. B) the stock price. C) the striking price. D) all of the above. E) none of the above. 9 The put-call parity theorem A) allows for arbitrage opportunities if violated. B) represents the proper relationship between put and call prices.

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C) may be violated by small amounts, but not enough to earn arbitrage profits, once transaction costs are considered. D) all of the above. E) none of the above. 10 A callable bond should be priced the same as A) a convertible bond. B) a straight bond plus a call option. C) a straight bond plus a put option. D) a straight bond plus warrants. E) a straight bond. ch21 1 Before expiration the time value of an in the money stock option is always A) equal to zero. B) negative. C) positive. D) equal to the stock price minus the exercise price. E) none of the above. 2 Other things equal, the price of a stock call option is positively correlated with the following factors except A) the exercise price. B) the time to expiration. C) the stock volatility. D) the stock price. E) none of the above. 3 A hedge ratio of 0.60 implies that a hedged portfolio should consist of A) long 0.60 shares for each short stock. B) short 0.60 calls for each long stock. C) long 0.60 shares for each call written D) long 0.60 shares for each long call. E) none of the above. 4 The dollar change in the value of a stock call option is always A) higher than the dollar change in the value of the stock. B) lower than the dollar change in the value of the stock. C) negatively correlated with the change in the value of the stock. D) b and c. E) a and b. 5 The elasticity of a stock call option is always A) smaller than one. B) greater than one. C) negative. D) infinite. E) none of the above. 6 A put option on the S&P 500 index will best protect A) a portfolio that corresponds to the S&P 500. B) a portfolio of 50 bonds. C) a portfolio of 100 shares of IBM stock. D) a portfolio of 50 shares of AT&T and 50 shares of Xerox stocks. E) a portfolio that replicates the Dow. 7 Which one of the following variables influence the value of options? I) Dividend yield of underlying stock. II) Time to expiration of the option. III) Level of interest rates. IV) Stock price volatility. A) I and IV only. B) II and III only. C) I, II, and IV only. D) I, II, III, and IV. E) I, II and III only. 8 Relative to European puts, otherwise identical American put options A) are more valuable.

B) are less valuable. C) are equal in value. D) will always be exercised earlier. E) none of the above. 9 If the company unexpectedly announces it will pay its first-ever dividend 3 months from today, you would expect that A) the call price would increase. B) the call price would not change. C) the call price would not decrease. D) the put price would decrease. E) the put price would not change. 10 In volatile markets, dynamic hedging may be difficult to implement because A) as volatility increases, historical deltas are too low. B) prices move too quickly for effective rebalancing. C) price quotes may be delayed so that correct hedge ratios cannot be computed. D) volatile markets may cause trading halts. E) all of the above. ch24 1 Trading activity by mutual funds just prior to quarterly reporting dates is known as A) insider trading B) window dressing C) passive security selection D) program trading E) none of the above 2 Most professionally managed equity funds generally __________. A) outperform the S&P 500 index on both raw and riskadjusted return measures B) underperform the S&P 500 index on raw return measures and outperform the S&P 500 index on riskadjusted return measures C) outperform the S&P 500 index on raw return measures and underperform the S&P 500 index on riskadjusted return measures D) underperform the S&P 500 index on both raw and risk-adjusted return measures E) match the performance of the S&P 500 index on both raw and risk-adjusted return measures 3 Suppose two portfolios have the same average return, the same standard deviation of returns, but portfolio X has a higher beta than portfolio Y. According to the Sharpe measure, the performance of portfolio X __________. A) is the same as the performance of portfolio Y B) is better than the performance of portfolio Y C) is poorer than the performance of portfolio Y D) cannot be measured as there is no data on the alpha of the portfolio E) none of the above is true. 4 Suppose a particular investment earns an arithmetic return of 10% in year 1, 20% in year 2 and 30% in year 3. The geometric average return for the year period will be A) less than the arithmetic average return B) equal to the arithmetic average return C) greater than the arithmetic average return D) equal to the market return E) cannot tell from the information given 5 The __________ measures the reward to volatility tradeoff by dividing the average portfolio excess return by the standard deviation of returns. A) Jensen measure B) Treynor measure C) Sharpe measure

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D) appraisal ratio E) none of the above 6 Risk-adjusted mutual fund performance measures have decreased in popularity because A) in nearly efficient markets it is extremely difficult for portfolio managers to outperform the market. B) the high rates of return earned by the mutual funds in recent years have made the measures useless. C) the measures usually result in negative performance results for the portfolio managers. D) a and c. E) all of the above. 7 The Jensen portfolio evaluation measure A) is an absolute measure of return over and above that predicted by the CAPM. B) is a measure of return per unit of risk, as measured by standard deviati C) is a measure of return per unit of risk, as measured by beta. D) a and b. E) b and c. 8 The M-squared measure A) considers only the return when evaluating mutual funds. B) considers only the market risk when evaluating mutual funds. C) considers only the total risk when evaluating mutual funds. D) considers the risk-adjusted return when evaluating mutual funds. E) none of the above. 9 The dollar-weighted return on a portfolio is equivalent to A) the time-weighted return. B) the portfolio's internal rate of return. C) the arithmetic average return. D) the geometric average return. E) none of the above. 10 A portfolio manager's ranking within a comparison universe may not provide a good measure of performance because A) portfolio durations can vary across managers. B) portfolio returns may not be calculated in the same way. C) if managers follow a particular style or subgroup, portfolios may not be comparable. D) both a and c. E) none of the above. ch27 1 If a portfolio manager consistently obtains a high Sharpe measure, the manager's forecasting ability A) is average B) is above average C) is below average D) does not exist. E) cannot be determined based on the Sharpe measure 2 Active portfolio management consists of A) market timing B) indexing C) security analysis D) a and b E) a and c 3 The critical variable in the determination of the success of the active portfolio is A) alpha/nonsystematic risk B) alpha/systematic risk C) gamma/nonsystematic risk D) gamma/systematic risk E) none of the above

4 Active portfolio managers try to construct a risky portfolio with A) a lower Sharpe measure than a passive strategy B) a higher Sharpe measure than a passive strategy C) the same Sharpe measure as a passive strategy D) very few securities E) none of the above 5 There appears to be a role for a theory of active portfolio management because A) some anomalies in realized returns have been persistent enough to suggest that portfolio managers who identified these anomalies in a timely fashion could have outperformed a passive strategy over prolonged periods. B) the "noise" in the realized returns is enough to prevent the rejection of the hypothesis that some money managers have outperformed a passive strategy by a statistically small, yet economic, margin. C) some portfolio managers have produced sequences of abnormal returns that are difficult to label as lucky outcomes. D) a and b. E) all of the above. 6 A purely passive strategy is defined as A) one that uses only index funds. B) one that is mean-variance efficient. C) one that allocates assets in fixed proportions that do not vary with market conditions. D) both a and c. E) all of the above. 7 One property of a risky portfolio that combines an active portfolio of mispriced securities with a market portfolio is that, when optimized, its squared Sharpe measure increases by the square of the active portfolio's A) Sharpe ratio. B) alpha C) appraisal ratio.. D) Treynor measure. E) none of the above. 8 When you are examining the record of a perfect market timer it is important to realize that A) the average rate of return is a misleading measure. B) the standard deviation is a misleading measure. C) the average excess return is a misleading measure. D) the coefficient of skewness is a misleading measure. E) he has based most of his decisions on inside information. 9 The appropriate measure of forecasting ability is A) the proportion of bull markets correctly forecast plus the proportion of bear markets correctly forecast minus one. B) the proportion of bull markets correctly forecast. C) the proportion of bear markets correctly forecast. D) the average of the above items. E) the proportion of correct forecasts. 10 An active portfolio manager faces a tradeoff between I) using the Sharpe measure. II) holding too much of the risk-free asset. III) exploiting perceived security mispricings. IV) using mean-variance analysis. V) letting a few stocks dominate the portfolio. A) I and II B) II and V C) III and V D) III and IV E) II and III

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