Exam 1 – Sample Questions
1. Asset allocation refers to _________.
A. the allocation of the investment portfolio across broad asset classes B. the analysis of the value of securities
C. the choice of specific assets within each asset class D. none of these options
2. Security selection refers to the ________.
A. allocation of the investment portfolio across broad asset classes B. analysis of the value of securities
C. choice of specific securities within each asset class D. top-down method of investing
3. The value of a derivative security _________. A. depends on the value of another related security B. affects the value of a related security
C. is unrelated to the value of a related security D. can be integrated only by calculus professors
4. __________ portfolio management calls for holding diversified portfolios without spending effort or resources attempting to improve investment performance through security analysis.
A. Active B. Momentum C. Passive D. Market-timing
5. Suppose an investor is considering one of two investments that are identical in all respects except for risk. If the investor anticipates a fair return for the risk of the security he invests in, he can expect to _____. A. earn no more than the Treasury-bill rate on either security.
B. pay less for the security that has higher risk. C. pay less for the security that has lower risk. D. earn more if interest rates are lower.
6. Accounting scandals can often be attributed to a particular concept in the study of finance known as the _____.
A. agency problem B. risk-return trade-off C. allocation of risk D. securitization
7. You are thinking of investing in one of two assets. Asset A has higher systematic risk than asset B. You can be sure that asset A's _______ return will be higher than asset B's, but you can't be sure if asset A's _______ return will be higher than asset B's.
A. realized; expected B. real; nominal C. expected; realized D. nominal; expected
8. The two most important factors in describing an individual's or organization's investment objectives are ________________.
A. income level and age
C. age and risk tolerance
D. return requirement and risk tolerance
9. In a defined contribution pension plan, the _____ bears all of the fund's investment performance risk. A. employer
B. employee
C. fund manager D. government
10. My pension plan will pay me a yearly retirement amount equal to 2% of my highest annual salary for each year of service. I must have ___________.
A. a defined benefit plan B. a defined contribution plan C. an endowment fund D. a variable annuity
11. Suppose that the pretax holding-period returns on two stocks are the same. Stock A has a high dividend payout policy and stock B has a low dividend payout policy. If you are a high-tax rate individual and do not intend to sell the stocks during the holding period, __________.
A. stock A will have a higher after-tax holding-period return than stock B B. the after-tax holding period returns on stocks A and B will be the same C. stock B will have a higher after-tax holding-period return than stock A D. The answer cannot be determined from the information given.
12. The bid price of a Treasury bill is _________.
A. the price at which the dealer in Treasury bills is willing to sell the bill B. the price at which the dealer in Treasury bills is willing to buy the bill C. greater than the ask price of the Treasury bill expressed in dollar terms D. the price at which the investor can buy the Treasury bill
13. Which one of the following is a true statement regarding the Dow Jones Industrial Average? A. It is a value-weighted average of 30 large industrial stocks.
B. It is a price-weighted average of 30 large industrial stocks.
C. It is a price-weighted average of 100 large stocks traded on the New York Stock Exchange. D. It is a value-weighted average of all stocks traded on the New York Stock Exchange.
14. If a Treasury note has a bid price of $996.25 and the tick size is 1/32, the quoted bid price in the Wall Street Journal would be _________.
A. 99:25 B. 99:63
C. 99:20
D. 99:08 Quoted price =
15. Three stocks have share prices of $12, $75, and $30 with total market values of $400 million, $350 million, and $150 million, respectively. If you were to construct a price-weighted index of the three stocks, what would be the index value?
A. 300
B. 39
C. 43 D. 30
16. In a ___________ index, changes in the value of the stock with the greatest market value will move the index value the most, everything else equal.
A. value-weighted index B. equally weighted index C. price-weighted index D. bond price index
17. A benchmark index has three stocks priced at $23, $43, and $56. The number of outstanding shares for each is 350,000 shares, 405,000 shares, and 553,000 shares, respectively. If the market value weighted index was 970 yesterday and the prices changed to $23, $41, and $58, what is the new index value? A. 960
B. 970
C. 975
D. 985
18. Consider the following limit order book of a specialist. The last trade in the stock occurred at a price of $40. If a market buy order for 100 shares comes in, at what price will it be filled?
A. $39.75 B. $40.25 C. $40.375 D. $40.25 or less
19. __________ often accompany short sales and are used to limit potential losses from the short position. A. Limit orders
B. Restricted orders C. Limit loss orders D. Stop-buy orders
20. 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 ____.
A. 17%
B. 12% C. 14% D. 19%
21. Rank the following fund categories from most risky to least risky: I. Equity growth fund
II. Balanced fund III. Sector fund
A. IV, I, III, II B. III, II, IV, I C. I, II, III, IV D. III, I, II, IV
22. An increase in the value of the yen against the U.S. dollar can cause the Japanese automaker Toyota to either _____________ on its U.S. sales.
A. lose market share or reduce its profit margin B. gain market share or reduce its profit margin C. lose market share or increase its profit margin D. gain market share or increase its profit margin
23. Which one of the following stocks represents industries with below-average sensitivity to the state of the economy?
A. Financials B. Technology
C. Food and beverage D. Cyclicals
24. The yield curve spread between the 10-year T-bond yield and the federal funds rate is a _______ economic indicator.
A. leading B. lagging C. coincident D. mixed
25. To obtain an approximate estimate of the real interest rate, one must _________ the __________ the nominal risk-free rate.
A. add; default premium to B. subtract; default premium from C. add; expected inflation to
D. subtract; expected inflation from
26. If you believe the economy is about to go into a recession, you might change your asset allocation by selling _______ and buying ______.
A. growth stocks; long-term bonds B. long-term bonds; growth stocks C. defensive stocks; growth stocks D. defensive stocks; long-term bonds
27. If you are holding a premium bond, you must expect a _______ each year until maturity. (Assume that the yield to maturity remains stable over time.)
A. capital gain B. capital loss
C. either capital loss or capital gain D. neither capital loss, nor capital gain
28. Everything else equal, the __________ the maturity of a bond and the __________ the coupon, the greater the sensitivity of the bond's price to interest rate changes.
29. A callable bond pays annual interest of $60, has a par value of $1,000, matures in 20 years but is callable in 10 years at a price of $1,100, and has a value today of $1055.84. The yield to call on this bond is _________.
A. 6%
B. 6.58% C. 7.2% D. 8%
30. $1,000 par value zero-coupon bonds (ignore liquidity premiums):
The expected 1-year interest rate 1 year from now should be about _________.
A. 6% B. 7.5 % C. 9.02% D. 10.08% 1.0752 = 1.06(1 + f2) 1.155625 = 1.06(1 + f2) 1 + f2 = 1.55625/1.06 = 1.0902123 f2 = 9.02%
31. A 6% coupon U.S. Treasury note pays interest on May 31 and November 30 and is traded for settlement on August 10. The accrued interest on the $100,000 face amount of this note is _________.
A. $581.97 B. $1,163.93 C. $2,327.87 D. $3,000
Accrued interest = 100,000(.06/2)(71/183) = 1163.93
32. On May 1, 2007, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds.
Suppose market interest rates decline by 100 basis points (i.e., 1%). The effect of this decline would be ______.
A. The price of the Wildwood bond would decline by more than the price of the Asbury bond. B. The price of the Wildwood bond would decline by less than the price of the Asbury bond.
C. The price of the Wildwood bond would increase by more than the price of the Asbury bond. D. The price of the Wildwood bond would increase by less than the price of the Asbury bond.
33. A corporate bond has a 10-year maturity and pays interest semiannually. The quoted coupon rate is 6%, and the bond is priced at par. The bond is callable in 3 years at 110% of par. What is the bond's yield to call?
A. 6.72% B. 9.17% C. 4.49%
1,000 = r/2 = 4.489% r = YTC = 8.98%
Calculator entries are N = 6, PV = -1,000, PMT = 30, FV = 1,100, CPT I/Y 4.4892 (semiannual) Annual YTC = 2 × 4.4892 = 8.9784
34. Generally speaking, the higher a firm's ROA, the _________ the dividend payout ratio and the _________ the firm's growth rate of earnings.
A. higher; lower B. higher; higher C. lower; lower D. lower; higher
35. Assuming all other factors remain unchanged, __________ would increase a firm's price-earnings ratio. A. an increase in the dividend payout ratio
B. a reduction in investor risk aversion C. an expected increase in the level of inflation D. an increase in the yield on Treasury bills
Mini Case
A. Prepare the nominal pre-tax return objectives of an investment policy statement (IPS) for the Ingrams. Show your calculations.
B. Characterize the Ingrams as below-average, average or above-average in their ability to take risk. Justify your response with three reasons based on the Ingrams’ specific circumstances.
