Essentials of Investments 11th Edition by Zvi Bodie Professor – Test Bank

 

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Sample Test

Essentials of Investments, 11e (Bodie)

Chapter 3   Securities Markets

 

1) Underwriting is one of the services provided by ________.

1.   A) the SEC

2.   B) investment bankers

3.   C) publicly traded companies

4.   D) FDIC

 

2) Under firm-commitment underwriting, the ________ assumes the full risk that the shares cannot be sold to the public at the stipulated offering price.

1.   A) red herring

2.   B) issuing company

3.   C) initial stockholder

4.   D) underwriter

 

3) Explicit costs of a stock IPO tend to be around ________ of the funds raised.

1.   A) 1%

2.   B) 7%

3.   C) 15%

4.   D) 25%

 

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?

1.   A) $90,000

2.   B) $1,290,000

3.   C) $2,390,000

4.   D) $1,690,000

 

5) When a firm decides to sell securities it must first ensure ________.

1.   A) the preliminary registration statement is approved by the SEC

2.   B) the IPO is complete

3.   C) the offering is seasoned

4.   D) the lockup period expires

 

6) Private placements can be advantageous, compared to public issue, because:

 

1.   Private placements are cheaper to market than public issues.

2.   Private placements may still be sold to the general public under SEC Rule 144A.

III. Privately placed securities trade on secondary markets.

1.   A) I only

2.   B) I and III only

3.   C) II and III only

4.   D) I, II, and III

 

7) A level ________ subscriber to the NASDAQ system may enter bid and ask prices.

1.   A) 1

2.   B) 2

3.   C) 3

4.   D) 4

 

8) Which one of the following statements about IPOs is not true?

1.   A) IPOs generally have been poor long-term investments.

2.   B) IPOs often provide very good initial returns to investors.

3.   C) IPOs generally provide superior long-term performance as compared to other stocks.

4.   D) Shares in IPOs are often primarily allocated to institutional investors.

 

9) 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?

1.   A) 9%

2.   B) 15%

3.   C) 48%

4.   D) 57%

 

10) The NYSE acquired the ECN ________, and NASDAQ recently acquired the ECN ________.

1.   A) Archipelago; Instinet

2.   B) Instinet; Archipelago

3.   C) Island; Instinet

4.   D) LSE; Euronext

 

11) Rank the following types of markets from least integrated and organized to most integrated and organized:

 

1.   Brokered markets

2.   Continuous auction markets

III. Dealer markets

1.   Direct search markets

2.   A) IV, II, I, III

3.   B) I, III, IV, II

4.   C) II, III, IV, I

5.   D) IV, I, III, II

 

12) As a result of flash crashes, the SEC is trying circuit breakers that will halt trading for 5 minutes if large stocks’ prices change by more than ________ in a 5-minute period.

1.   A) 10%

2.   B) 20%

3.   C) 30%

4.   D) 40%

 

 

 

13) Which one of the following is not an example of a brokered market?

1.   A) residential real estate market

2.   B) market for large block security transactions

3.   C) primary market for securities

4.   D) NASDAQ

 

14) More than ________ of all trading is believed to be initiated by computer algorithms.

1.   A) 25%

2.   B) 40%

3.   C) 50%

4.   D) 75%

 

15) Purchases of new issues of stock take place ________.

1.   A) at the desk of the Fed

2.   B) in the primary market

3.   C) in the secondary market

4.   D) in the money markets

 

16) Initial margin requirements on stocks are set by ________.

1.   A) the Federal Deposit Insurance Corporation

2.   B) the Federal Reserve

3.   C) the New York Stock Exchange

4.   D) the Securities and Exchange Commission

 

17) Which one of the following types of markets requires the greatest level of trading activity to be cost-effective?

1.   A) broker market

2.   B) dealer market

3.   C) continuous auction market

4.   D) direct search market

 

18) Which one of the following is a false statement regarding NYSE specialists?

1.   A) On a stock exchange most buy or sell orders are executed via an electronic system rather than through specialists.

2.   B) Specialists cannot trade for their own accounts.

3.   C) Specialists maintain limit order books, which contain the outstanding unexecuted limit orders.

4.   D) Specialists stand ready to trade at narrower bid-ask spreads in cases where the spread has become too wide.

 

 

 

19) Restrictions on trading involving insider information apply to:

 

1.   Corporate officers and directors

2.   Major stockholders

III. Relatives of corporate directors and officers

1.   A) I only

2.   B) I and II only

3.   C) II and III only

4.   D) I, II, and III

 

20) An order to buy or sell a security at the current price is a ________.

1.   A) limit order

2.   B) market order

3.   C) stop-loss order

4.   D) stop-buy order

 

21) The term insidequotes refers to ________.

1.   A) the difference between the lowest bid price and the highest ask price in the limit order book.

2.   B) the difference between the highest bid price and the lowest ask price in the limit order book.

3.   C) the difference between the lowest bid price and the lowest ask price in the limit order book.

4.   D) the difference between the highest bid price and the highest ask price in the limit order book.

 

22) The term latency refers to ________.

1.   A) the lag between when an order is placed on the NYSE and when it is executed.

2.   B) the amount of time it takes to accept, process, and deliver a trading order.

3.   C) the time it takes to implement new rules and procedures for stock exchanges and computer trading systems.

4.   D) the lag between when an order is executed and when the investor takes possession of the securities.

 

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.

1.   A) buy stop; stop-loss

2.   B) market; limit

3.   C) stop-loss; buy stop

4.   D) limit; market

 

24) On a given day a stock dealer maintains a bid price of $1,000.50 for a bond and an ask price of $1003.25. The dealer made 10 trades that totaled 500 bonds traded that day. What was the dealer’s gross trading profit for this security?

1.   A) $1,375

2.   B) $500

3.   C) $275

4.   D) $1,450

 

 

 

25) Advantages of ECNs over traditional markets include all but which one of the following?

1.   A) lower transactions costs

2.   B) anonymity of the participants

3.   C) small amount of time needed to execute and order

4.   D) ability to handle very large orders

 

26) The ________ was established to protect investors from losses if their brokerage firms fail.

1.   A) CFTC

2.   B) SEC

3.   C) SIPC

4.   D) AIMR

 

27) When matching orders from the public, a specialist is required to use the ________.

1.   A) lowest outstanding bid price and highest outstanding ask price

2.   B) highest outstanding bid price and highest outstanding ask price

3.   C) lowest outstanding bid price and lowest outstanding ask price

4.   D) highest outstanding bid price and lowest outstanding ask price

 

28) The process of polling potential investors regarding their interest in a forthcoming initial public offering (IPO) is called ________.

1.   A) interest building

2.   B) book building

3.   C) market analysis

4.   D) customer identification

 

29) The bulk of most initial public offerings (IPOs) of equity securities goes to ________.

1.   A) institutional investors

2.   B) individual investors

3.   C) the firm’s current shareholders

4.   D) day traders

 

30) Initial public offerings (IPOs) are usually ________ relative to the levels at which their prices stabilize after they begin trading in the secondary market.

1.   A) overpriced

2.   B) correctly priced

3.   C) underpriced

4.   D) mispriced, but without any particular bias

 

31) According to multiple studies by Ritter, initial public offerings tend to exhibit ________ performance initially and ________ performance over the long term.

1.   A) bad; good

2.   B) bad; bad

3.   C) good; good

4.   D) good; bad

 

 

 

32) Specialists try to maintain a narrow bid-ask spread because:

 

1.   If the spread is too large, they will not participate in as many trades, losing commission income.

2.   The exchange requires specialists to maintain price continuity.

III. Specialists are nonprofit entities designed to facilitate market transactions rather than make a profit.

1.   A) I only

2.   B) I and II only

3.   C) II and III only

4.   D) I, II, and III

 

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.

1.   A) best-efforts

2.   B) firm-commitment

3.   C) private placement

4.   D) none of these options

 

34) The ________ is the most important dealer market in the United States, and the ________ is the most important auction market.

1.   A) NYSE; NASDAQ

2.   B) NASDAQ; NYSE

3.   C) CME; OTC

4.   D) AMEX; NYSE

 

35) The inside quotes on a limit order book can be found ________.

1.   A) at the top of the list

2.   B) at the bottom of the list

3.   C) by taking the averages of the bid and ask prices on the list

4.   D) only by direct contact with the specialist who maintains the book

 

36) The ________ system enables exchange members to send orders directly to a specialist over computer lines.

1.   A) FAX

2.   B) Direct Plus

3.   C) NASDAQ

4.   D) SUPERDOT

 

37) The fully automated trade-execution system installed on the NYSE is called ________.

1.   A) FAX

2.   B) Direct +

3.   C) NASDAQ

4.   D) SUPERDOT

 

 

 

38) The NYSE Hybrid Market allows ________.

1.   A) individuals to send orders directly to a specialist

2.   B) individuals to send orders directly to an electronic system

3.   C) brokers to send orders directly to a specialist

4.   D) brokers to send orders either to an electronic system or to a specialist

 

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.

1.   A) 50%

2.   B) 25%

3.   C) 60%

4.   D) 75%

 

40) The ________ price is the price at which a dealer is willing to purchase a security.

1.   A) bid

2.   B) ask

3.   C) clearing

4.   D) settlement

 

41) The ________ price is the price at which a dealer is willing to sell a security.

1.   A) bid

2.   B) ask

3.   C) clearing

4.   D) settlement

 

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 ________.

1.   A) market spread

2.   B) bid-ask spread

3.   C) bid-ask gap

4.   D) market variation

 

43) The bid-ask spread exists because of ________.

1.   A) market inefficiencies

2.   B) discontinuities in the markets

3.   C) the need for dealers to cover expenses and make a profit

4.   D) lack of trading in thin markets

 

 

 

44) The NYSE has lost market share to ECNs in recent years. Part of the NYSE’s response to the growth of ECNs has been to:

 

1.   Purchase Archipelago, a major ECN, and rename it NYSE Arca

2.   Enable automatic trade execution through its new Market Center

III. Impose a tighter limit on bid-ask spreads

1.   A) I only

2.   B) II and III only

3.   C) I and II only

4.   D) I, II, and III

 

45) The cost of buying and selling a stock includes:

 

1.   Broker’s commissions

2.   Dealer’s bid-asked spread

III. Price concessions that investors may be forced to make

1.   A) I and II only

2.   B) II and III only

3.   C) I and III only

4.   D) I, II, and III

 

46) Which of the following is (are) true about dark pools?

 

1.   They allow anonymity in trading.

2.   They often involve large blocks of stocks.

III. Trades made through them might not be reported.

1.   A) I and II only

2.   B) II and III only

3.   C) I and III only

4.   D) I, II, and III

 

47) You purchased XYZ stock at $50 per share. The stock is currently selling at $65. Your gains could be protected by placing a ________.

1.   A) limit buy order

2.   B) limit sell order

3.   C) market order

4.   D) stop-loss order

 

 

 

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?

 

Limit Buy Price	Orders Shares			Limit Sell Orders		Orders Shares
$39.75		100			$40.25			100
$39.50		100			$40.50			100

 

39.                A) $39.75

40.                B) $40.25

41.                C) $40.375

42.                D) $40.25 or less

 

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?

1.   A) $50

2.   B) $25

3.   C) $30

4.   D) $55

 

50) According to SEC Rule 415 regarding shelf registration, firms can gradually sell securities to the public for ________ following initial registration.

1.   A) 1 year

2.   B) 2 years

3.   C) 3 years

4.   D) 4 years

 

51) What happened to the effective spread on trades when the SEC allowed the minimum tick size to move from one-eighth of a dollar to one-sixteenth of a dollar in 1997 and from one-sixteenth of a dollar to one cent in 2001?

2001.         A) The effective spread increased in 1997 but decreased in 2001.

2002.         B) The effective spread increased in both cases.

2003.         C) The effective spread decreased in 1997 but increased in 2001.

2004.         D) The effective spread decreased in both cases.

 

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 ________.

1.   A) $20,000

2.   B) $12,000

3.   C) $8,000

4.   D) $15,000

 

 

 

53) You sold short 300 shares of common stock at $30 per share. The initial margin is 50%. You must put up ________.

1.   A) $4,500

2.   B) $6,000

3.   C) $9,000

4.   D) $10,000

 

54) You short-sell 200 shares of Tuckerton Trading Co., now selling for $50 per share. What is your maximum possible loss?

1.   A) $50

2.   B) $150

3.   C) $10,000

4.   D) unlimited

 

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?

1.   A) $50

2.   B) $150

3.   C) $10,000

4.   D) unlimited

 

56) You short-sell 200 shares of Rock Creek Fly Fishing Co., now selling for $50 per share. If you want to limit your loss to $2,500, you should place a stop-buy order at ________.

37.                A) $37.50

38.                B) $62.50

39.                C) $56.25

40.                D) $59.75

 

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.)

26.                A) $26.55

27.                B) $35.71

28.                C) $28.95

29.                D) $30.77

 

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.

1.   A) 35%

2.   B) 39%

3.   C) 43%

4.   D) 28%

 

 

 

59) You sell short 200 shares of Doggie Treats Inc. that 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.)

28.                A) $28.85

29.                B) $35.71

30.                C) $31.50

31.                D) $32.25

 

60) Transactions that do not involve the original issue of securities take place in ________.

1.   A) primary markets

2.   B) secondary markets

3.   C) over-the-counter markets

4.   D) institutional markets

 

61) What was the result of high-frequency traders’ leaving the market during the flash crash of 2010?

1.   A) Market liquidity decreased.

2.   B) Market liquidity increased.

3.   C) Market volatility decreased.

4.   D) Trading frequency increased.

 

62) ________ often accompany short sales and are used to limit potential losses from the short position.

1.   A) Limit orders

2.   B) Restricted orders

3.   C) Limit loss orders

4.   D) Stop-buy orders

 

63) The market share held by the NYSE Arca system in February 2011 was approximately ________.

1.   A) 65%

2.   B) 45%

3.   C) 25%

4.   D) 10%

 

64) Regulation NMS:

 

1.   Supports the goal of integrating financial markets

2.   Requires the use of specialists to execute trades

III. Requires that exchanges honor quotes of other exchanges when they can be executed automatically

1.   A) I only

2.   B) I and II only

3.   C) I and III only

4.   D) I, II, and III

 

65) The commission structure on a stock purchase is $50 plus $.03 per share. If you purchase 600 shares of a stock selling for $65, what is your commission?

1.   A) $35

2.   B) $45

3.   C) $53

4.   D) $68

 

66) All major stock markets today are effectively ________.

1.   A) specialist trading systems

2.   B) electronic trading systems

3.   C) continuous auction markets

4.   D) direct search markets

 

67) In 2007, the NASDAQ stock market merged with ________.

1.   A) Euronext

2.   B) OMX, which operates seven Nordic and Baltic stock exchanges

3.   C) the International Securities Exchange (ISE)

4.   D) BATS

 

68) You hold 5,000 shares of the 1 million outstanding shares of Wealthy Wranglers common stock. You’ve just learned that the company plans to issue more shares, so that 2 million shares will be outstanding. This is called ________.

1.   A) an advanced equity offering

2.   B) a weathered equity offering

3.   C) a seasoned equity offering

4.   D) a veteran equity offering

 

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 ________.

1.   A) market value of the stock – amount owed on the margin loan

2.   B) market value of the stock + amount owed on the margin loan

3.   C) market value of the stock ÷ margin loan

4.   D) margin loan × market value of the stock

 

70) The average depth of the limit order book is ________.

1.   A) lower for the large stocks in the S&P 500 Index than for the smaller stocks in the Russell 2000 Index

2.   B) higher for the large stocks in the S&P 500 Index than for the smaller stocks in the Russell 2000 Index

3.   C) about the same for both the large stocks in the S&P 500 Index and the smaller stocks in the Russell 2000 Index

4.   D) unrelated to the sizes of the stocks in the indexes

 

 

 

71) The CFA Institute Standards of Professional Conduct require that members ________.

1.   A) place their clients’ interests before their own

2.   B) disclose conflicts of interest to clients

3.   C) inform their employers that they are obligated to comply with the Standards of Professional Conduct

4.   D) all of these options

 

72) Trading on inside information is:

 

1.   Prohibited by federal law

2.   Prohibited by the CFA Institute Standards of Professional Conduct

III. Monitored by the SEC

1.   A) I and II only

2.   B) II and III only

3.   C) I and III only

4.   D) I, II, and III

 

73) The ________ requires full disclosure of relevant information relating to the issue of new securities.

1.   A) Insider Trading Act of 1931

2.   B) Securities Act of 1933

3.   C) Securities Exchange Act of 1934

4.   D) Investment Company Act of 1940

 

74) The SIPC was established by the ________.

1.   A) Insider Trading Act of 1931

2.   B) Securities Act of 1933

3.   C) Securities Exchange Act of 1934

4.   D) none of these options

 

75) Maintenance requirements for margin accounts are set by ________.

1.   A) brokerage firms

2.   B) the SEC

3.   C) the Federal Reserve System’s Board of Governors

4.   D) the Supreme Court

 

76) Which of the following are true concerning short sales of exchange-listed stocks?

 

1.   Proceeds from the short sale must be kept on deposit with the broker.

2.   Short-sellers must post margin with their broker to cover potential losses on the position.

III. The short-seller earns interest on any cash deposited with the broker that is used to meet the margin requirement.

1.   A) I only

2.   B) I and III only

3.   C) I and II only

4.   D) I, II, and III

 

77) The largest nongovernmental regulator of securities firms in the United States is ________.

1.   A) the CFA Institute

2.   B) the Public Company Accounting Oversight Board

3.   C) the Financial Industry Regulatory Authority

4.   D) the Board of Directors of NYSE Euronext

 

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.

1.   A) electronic; Dealers; brokers

2.   B) dealer; Brokers; electronic

3.   C) direct search; Brokers; electronic

4.   D) brokered; Dealers; direct search

 

79) An investor puts up $5,000 but borrows an equal amount of money from his 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 1 year the investor sells the stock for $28. The investor’s rate of return was ________.

1.   A) 17%

2.   B) 12%

3.   C) 14%

4.   D) 19%

 

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 1 year the investor has interest payable and gets a margin call. At the time of the margin call the stock’s price must have been less than ________.

 

 

1.   A) $20

2.   B) $29.77

3.   C) $30.29

4.   D) $32.45

 

81) The New York Stock Exchange is a good example of ________.

1.   A) an auction market

2.   B) a brokered market

3.   C) a dealer market

4.   D) a direct search market

 

82) The primary market where new security issues are offered to the public is a good example of ________.

1.   A) an auction market

2.   B) a brokered market

3.   C) a dealer market

4.   D) a direct search market

 

83) The over-the-counter securities market is a good example of ________.

1.   A) an auction market

2.   B) a brokered market

3.   C) a dealer market

4.   D) a direct search market

 

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 $.50-per-share dividend in 1 year, and then the stock is sold at $23 per share. What was the investor’s rate of return?

17.                A) 17.5%

18.                B) 19.67%

19.                C) 23.83%

20.                D) 25.75%

 

85) Level 3 NASDAQ subscribers ________.

1.   A) are registered market makers

2.   B) can post bid and ask prices

3.   C) have the fastest execution of trades

4.   D) all of these options

 

86) You sell short 300 shares of Microsoft that 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 1 year if Microsoft is selling at $27? (Ignore any dividends.)

1.   A) 10%

2.   B) 20%

3.   C) 6.67%

4.   D) 15%

 

87) The commission structure on a stock purchase is $20 plus $.02 per share. If you purchase four round lots of a stock selling for $56, what is your commission?

1.   A) $20

2.   B) $22

3.   C) $26

4.   D) $28

 

88) In 2014, BATS advertised average latency times of approximately ________.

1.   A) 100 microseconds

2.   B) 200 microseconds

3.   C) 1 second

4.   D) 5 seconds

 

 

 

89) The market share held by the “Other” category (which includes dark pools) constitutes roughly ________% of trading volume in NYSE-listed shares.

1.   A) 5%

2.   B) 10%

3.   C) 30%

4.   D) 50%

 

90) In 2013, NYSE Euronext was acquired by ________.

1.   A) DOT

2.   B) ICE

3.   C) BATS

4.   D) It was not acquired.

 

91) SIPC ensures investors against failure of a brokerage firm up to a limit of ________.

1.   A) $100,000

2.   B) $250,000

3.   C) $500,000

4.   D) $1,000,000

 

92) Privately held firms may have only ________ shareholders.

1.   A) 10

2.   B) 99

3.   C) 250

4.   D) 2,000

 

93) The term “underwriting syndicate” describes ________.

1.   A) the issuing firm

2.   B) the lead underwriter

3.   C) the investment banks that participate in the underwriting

4.   D) the private investors that purchase the shares

 

94) The non-European country with the highest average first-day returns in 2014 was ________.

1.   A) Canada

2.   B) United States

3.   C) China

4.   D) Jordan

 

Essentials of Investments, 11e (Bodie)

Chapter 5   Risk, Return, and the Historical Record

 

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 ________.

1.   A) 4%

2.   B) 3.5%

3.   C) 7%

4.   D) 11%

 

2) The ________ measure of returns ignores compounding.

1.   A) geometric average

2.   B) arithmetic average

3.   C) IRR

4.   D) dollar-weighted

 

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 ________.

1.   A) geometric average return

2.   B) arithmetic average return

3.   C) dollar-weighted return

4.   D) index return

 

4) Which one of the following measures time-weighted returns and allows for compounding?

1.   A) geometric average return

2.   B) arithmetic average return

3.   C) dollar-weighted return

4.   D) historical average return

 

5) Rank the following from highest average historical return to lowest average historical return from 1926 to 2017.

 

1.   Small stocks

2.   Long-term bonds

III. Large stocks

1.   T-bills

2.   A) I, II, III, IV

3.   B) III, IV, II, I

4.   C) I, III, II, IV

5.   D) III, I, II, IV

 

 

 

6) Rank the following from highest average historical standard deviation to lowest average historical standard deviation from 1926 to 2017.

 

1.   Small stocks

2.   Long-term bonds

III. Large stocks

1.   T-bills

2.   A) I, II, III, IV

3.   B) III, IV, II, I

4.   C) I, III, II, IV

5.   D) III, I, II, IV

 

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 ________.

1.   A) dollar-weighted return

2.   B) geometric average return

3.   C) arithmetic average return

4.   D) index return

 

8) The complete portfolio refers to the investment in ________.

1.   A) the risk-free asset

2.   B) the risky portfolio

3.   C) the risk-free asset and the risky portfolio combined

4.   D) the risky portfolio and the index

 

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?

1.   A) dollar-weighted return

2.   B) geometric average return

3.   C) arithmetic average return

4.   D) index return

 

10) The holding period return on a stock is equal to ________.

1.   A) the capital gain yield over the period plus the inflation rate

2.   B) the capital gain yield over the period plus the dividend yield

3.   C) the current yield plus the dividend yield

4.   D) the dividend yield plus the risk premium

 

 

 

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?

1.   A) dollar-weighted return

2.   B) geometric average return

3.   C) arithmetic average return

4.   D) mean holding-period return

 

12) Published data on past returns earned by mutual funds are required to be ________.

1.   A) dollar-weighted returns

2.   B) geometric returns

3.   C) excess returns

4.   D) index returns

 

13) The arithmetic average of -11%, 15%, and 20% is ________.

15.                A) 15.67%

16.                B) 8%

17.                C) 11.22%

18.                D) 6.45%

 

14) The geometric average of -12%, 20%, and 25% is ________.

8.   A) 8.42%

9.   B) 11%

10.                C) 9.7%

11.                D) 18.88%

 

15) The dollar-weighted return is the ________.

1.   A) difference between cash inflows and cash outflows

2.   B) arithmetic average return

3.   C) geometric average return

4.   D) internal rate of return

 

16) An investment earns 10% the first year, earns 15% the second year, and loses 12% the third year. The total compound return over the 3 years was ________.

41.                A) 41.68%

42.                B) 11.32%

43.                C) 3.64%

44.                D) 13%

 

17) Annual percentage rates can be converted to effective annual rates by means of the following formula:

1.   A) [1 + (APR/n)]n– 1

2.   B) (APR)(n)

3.   C) (APR/n)

4.   D) (periodic rate)(n)

 

18) Suppose you pay $9,700 for a $10,000 par Treasury bill maturing in 3 months. What is the holding-period return for this investment?

3.   A) 3.01%

4.   B) 3.09%

5.   C) 12.42%

6.   D) 16.71%

 

19) Suppose you pay $9,800 for a $10,000 par Treasury bill maturing in 2 months. What is the annual percentage rate of return for this investment?

2.   A) 2.04%

3.   B) 12 %

4.   C) 12.24%

5.   D) 12.89%

 

20) Suppose you pay $9,400 for a $10,000 par Treasury bill maturing in 6 months. What is the effective annual rate of return for this investment?

6.   A) 6.38%

7.   B) 12.77%

8.   C) 13.17%

9.   D) 14.25%

 

21) You have an APR of 7.5% with continuous compounding. The EAR is ________.

7.   A) 7.5%

8.   B) 7.65%

9.   C) 7.79 %

10.                D) 8.25%

 

22) You have an EAR of 9%. The equivalent APR with continuous compounding is ________.

8.   A) 8.47%

9.   B) 8.62%

10.                C) 8.88%

11.                D) 9.42%

 

23) The market risk premium is defined as ________.

1.   A) the difference between the return on an index fund and the return on Treasury bills

2.   B) the difference between the return on a small-firm mutual fund and the return on the Standard & Poor’s 500 Index

3.   C) the difference between the return on the risky asset with the lowest returns and the return on Treasury bills

4.   D) the difference between the return on the highest-yielding asset and the return on the lowest-yielding asset

 

24) The excess return is the ________.

1.   A) rate of return that can be earned with certainty

2.   B) rate of return in excess of the Treasury-bill rate

3.   C) rate of return to risk aversion

4.   D) index return

 

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.

1.   A) risky assets; Treasury bills

2.   B) Treasury bills; risky assets

3.   C) excess returns; risky assets

4.   D) index assets; bonds

 

26) The reward-to-volatility ratio is given by ________.

1.   A) the slope of the capital allocation line

2.   B) the second derivative of the capital allocation line

3.   C) the point at which the second derivative of the investor’s indifference curve reaches zero

4.   D) the portfolio’s excess return

 

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?

12.                A) 12.8%

13.                B) 11%

14.                C) 8.9%

15.                D) 9.2%

 

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?

5.   A) 5.14%

6.   B) 7.59%

7.   C) 9.29%

8.   D) 8.43%

 

29) During the 1926-2013 period the geometric mean return on small-firm stocks was ________.

5.   A) 5.31%

6.   B) 5.56%

7.   C) 9.34%

8.   D) 11.82%

 

30) During the 1926-2013 period the geometric mean return on Treasury bonds was ________.

5.   A) 5.07%

6.   B) 5.56%

7.   C) 9.34%

8.   D) 11.43%

 

 

 

31) During the 1926-2013 period the Sharpe ratio was greatest for which of the following asset classes?

1.   A) small U.S. stocks

2.   B) large U.S. stocks

3.   C) long-term U.S. Treasury bonds

4.   D) bond world portfolio return in U.S. dollars

 

32) During the 1986-2013 period, the Sharpe ratio was lowest for which of the following asset classes?

1.   A) small U.S. stocks

2.   B) large U.S. stocks

3.   C) long-term U.S. Treasury bonds

4.   D) equity world portfolio in U.S. dollars

 

33) During the 1926-2013 period which one of the following asset classes provided the lowest real return?

1.   A) Small U.S. stocks

2.   B) Large U.S. stocks

3.   C) Long-term U.S. Treasury bonds

4.   D) Equity world portfolio in U.S. dollars

 

34) Both investors and gamblers take on risk. The difference between an investor and a gambler is that an investor ________.

1.   A) is normally risk neutral

2.   B) requires a risk premium to take on the risk

3.   C) knows he or she will not lose money

4.   D) knows the outcomes at the beginning of the holding period

 

35) Historical returns have generally been ________ for stocks of small firms as (than) for stocks of large firms.

1.   A) the same

2.   B) lower

3.   C) higher

4.   D) none of these options (There is no evidence of a systematic relationship between returns on small-firm stocks and returns on large-firm stocks.)

 

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 ________.

1.   A) small firms are better run than large firms

2.   B) government subsidies available to small firms produce effects that are discernible in stock market statistics

3.   C) small firms are riskier than large firms

4.   D) small firms are not being accurately represented in the data

 

 

 

37) In calculating the variance of a portfolio’s returns, squaring the deviations from the mean results in:

 

1.   Preventing the sum of the deviations from always equaling zero

2.   Exaggerating the effects of large positive and negative deviations

III. A number for which the unit is percentage of returns

1.   A) I only

2.   B) I and II only

3.   C) I and III only

4.   D) I, II, and III

 

38) If you are promised a nominal return of 12% on a 1-year investment, and you expect the rate of inflation to be 3%, what real rate do you expect to earn?

5.   A) 5.48%

6.   B) 8.74%

7.   C) 9%

8.   D) 12%

 

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?

1.   A) 3%

2.   B) 8%

3.   C) 11%

4.   D) 11.24%

 

40) One method of forecasting the risk premium is to use the ________.

1.   A) coefficient of variation of analysts’ earnings forecasts

2.   B) variations in the risk-free rate over time

3.   C) average historical excess returns for the asset under consideration

4.   D) average abnormal return on the index portfolio

 

41) Treasury bills are paying a 4% rate of return. A risk-averse investor with a risk aversion of A = 3 should invest entirely in a risky portfolio with a standard deviation of 24% only if the risky portfolio’s expected return is at least ________.

8.   A) 8.67%

9.   B) 9.84%

10.                C) 21.28%

11.                D) 14.68%

 

42) In the mean standard deviation graph, the line that connects the risk-free rate and the optimal risky portfolio, P, is called the ________.

1.   A) capital allocation line

2.   B) indifference curve

3.   C) investor’s utility line

4.   D) security market line

 

43) Most studies indicate that investors’ risk aversion is in the range ________.

1.   A) 1-3

2.   B) 1.5-4

3.   C) 3-5.2

4.   D) 4-6

 

44) Two assets have the following expected returns and standard deviations when the risk-free rate is 5%:

 

Asset A E(rA) = 10% σA = 20%

Asset B E(rB) = 15% σB = 27%

An investor with a risk aversion of A = 3 would find that ________ on a risk-return basis.

1.   A) only asset A is acceptable

2.   B) only asset B is acceptable

3.   C) neither asset A nor asset B is acceptable

4.   D) both asset A and asset B are acceptable

 

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 ________.

1.   A) stocks

2.   B) bonds

3.   C) money market funds

4.   D) Treasury bills

 

46) The formula is used to calculate the ________.

1.   A) Sharpe ratio

2.   B) Treynor measure

3.   C) coefficient of variation

4.   D) real rate of return

 

47) A portfolio with a 25% standard deviation generated a return of 15% last year when T-bills were paying 4.5%. This portfolio had a Sharpe ratio of ________.

1.   A) .22

2.   B) .60

3.   C) .42

4.   D) .25

 

 

 

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 her complete portfolio to achieve the best CAL would be ________.

1.   A) security A

2.   B) security B

3.   C) security C

4.   D) security D

 

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 ________.

3.   A) -3.57%

4.   B) -3.45%

5.   C) 4.31%

6.   D) 8.03%

 

50) Security A has a higher standard deviation of returns than security B. We would expect that:

 

1.   Security A would have a risk premium equal to security B.

2.   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 ratio of A will be higher than the Sharpe ratio of B.

1.   A) I only

2.   B) II only

3.   C) II and III only

4.   D) I, II, and III

 

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 ________.

1.   A) $.25

2.   B) $1

3.   C) $2

4.   D) $4