FIN 550 MIDTERM EXAM
Question 1
The uncertainty of investment returns associated with how a firm finances its investments is known as
Business risk.
Liquidity risk.
Exchange rate risk.
Financial risk.
Market risk.
Question 2
Measures of risk for an investment include
Variance of returns and business risk
Coefficient of variation of returns and financial risk
Business risk and financial risk
Variance of returns and coefficient of variation of returns
Question 3
In the phrase “nominal risk free rate,” nominal means
Computed.
Historical.
Market.
Average.
Risk adverse.
Question 4
All of the following are major sources of uncertainty EXCEPT
Business risk
Financial risk
Default risk
Country risk
Liquidity risk
Question 5
For an investor with a time horizon of 12 years and higher risk tolerance, an appropriate asset allocation strategy would be
100% stocks
30% cash, 50% bonds, and 20% stocks
10% cash, 30% bonds, and 60% stocks
50% bonds and 50% stocks
100% bonds
Question 6
Which of the following is not a step in the portfolio management process?
Develop a policy statement.
Study current financial and economic conditions.
Construct the portfolio.
Monitor investor’s needs and market conditions.
Sell all assets and reinvestment proceeds at least once a year.
Question 7
____ phase is the stage when investors in their early-to-middle earning years attempt to accumulate assets to satisfy near-term needs, e.g., children’s education or down payment on a home.
Accumulation
Spending
Gifting
Consolidation
Divestiture
Question 8
____ refer(s) to the ability to convert assets to cash quickly and at a fair market price and often increase(s) as one approaches the later stages of the investment life cycle.
Liquidity needs
Time horizons
Liquidation values
Liquidation essentials
Capital liquidations
Question 9
An agreement that provides for the future delivery or receipt of an asset at a specified date for a specified price is a
Eurobonds contract.
Futures contract.
Put option contract.
Call option contract.
Warrant contract.
Question 10
The original maturity of a United States Treasury bond is
Zero years to five years.
Six months to ten years.
One year or less.
One year to ten years.
Over ten years.
Question 11
The purchase and sale of commodities for current delivery and consumption is known as dealing in the ____ market.
Futures
Spot
Money
Capital
Options
Question 12
Which of the following is not a characteristic of a warrant?
The right to buy common stock in a corporation.
Issued by the corporation or an individual.
Typically valid for longer time periods than options.
Similar to a call option with respect to a striking price.
Question 13
An order that specifies the highest buy or lowest sell price is a
Limit order.
Short sale.
Market order.
Margin call.
Stop loss.
Question 14
Which of the following is not a function of the specialist?
Assists the Federal Reserve in controlling the money supply
Acts as a broker who handles the limit orders or special orders placed with member brokers
Buys and sells securities in order to stabilize the market
Acts as a dealer in assigned stocks to maintain a fair and orderly market
Question 15
All of the following are characteristics of a dealer market except:
Also referred to as a quote-driven market
NASDAQ market is a dealer market
Individual dealers buy and sell shares for themselves
Centralized trading location
Question 16
A block trade is one which involves a minimum of
1,000 shares.
5,000 shares.
10,000 shares.
100,000 shares.
1,000,000 shares.
Question 17
The implication of efficient capital markets and a lack of superior analysts have led to the introduction of
Balanced funds.
Naive funds.
January funds.
Index funds.
Futures options.
Question 18
Fama and French examined the relationship between the Book Value to Market Value ratio and average stock returns and found
No evidence of a relationship for U.S. stocks.
Evidence of a negative relationship in U.S. stocks only.
Evidence of a positive relationship for Japanese stocks only.
Evidence of a negative relationship for U.S. and Japanese stocks.
Evidence of a positive relationship for U.S. and Japanese stocks.
Question 19
The results of studies that have looked at the relationship between PEG ratios and subsequent stock returns
Find an inverse relationship, with annual rebalancing.
Find no relationship, with monthly or quarterly rebalancing.
Find an inverse relationship, with monthly or quarterly rebalancing.
Find a direct relationship, with monthly or quarterly rebalancing.
Find a direct relationship with annual rebalancing
Question 20
A “runs test” on successive stock price changes which supports the efficient market hypothesis would show the actual number of runs
Falls into the range expected of a random series.
Falls into the range expected of a dependent series.
Is small.
Is large.
Would approximate N/2.
Question 21
A portfolio manager is considering adding another security to his portfolio. The correlations of the 5 alternatives available are listed below. Which security would enable the highest level of risk diversification?
0.0
0.25
−0.25
−0.75
1.0
Question 22
Between 1980 and 2000, the standard deviation of the returns for the NIKKEI and the DJIA indexes were 0.08 and 0.10, respectively, and the covariance of these index returns was 0.0007. What was the correlation coefficient between the two market indicators?
.0906
.0985
.0796
.0875
.0654
Question 23
Between 1994 and 2004, the standard deviation of the returns for the S&P 500 and the NYSE indexes were 0.27 and 0.14, respectively, and the covariance of these index returns was 0.03. What was the correlation coefficient between the two market indicators?
1.26
0.7937
0.2142
0.1111
0.44
Question 24
All of the following are common risk measurements except
Standard deviation
Variance
Semivariance
Covariance
Range of returns
Question 25
If an individual owns only one security the most appropriate measure of risk is:
Standard deviation
Correlation
Beta
Covariance
Question 26
The line of best fit for a scatter diagram showing the rates of return of an individual risky asset and the market portfolio of risky assets over time is called the
Security market line.
Capital asset pricing model.
Characteristic line.
Line of least resistance.
Market line.
Question 27
The fact that tests have shown the CAPM intercept to be greater than the RFR is consistent with a(n)
Zero beta model.
unstable beta or a higher borrowing rate.
Zero beta model or a higher borrowing rate.
higher borrowing rate.
unstable beta.
Question 28
Utilizing the security market line an investor owning a stock with a beta of −2 would expect the stock’s return to ____ in a market that was expected to decline 15 percent.
Rise or fall an indeterminate amount
Fall by 3%
Fall by 30%
Rise by 13%
Rise by 30%
Question 29
Assume that you are embarking on a test of the small-firm effect using APT. You form 10 size-based portfolios. The following finding would suggest there is evidence supporting APT:
The top five size based portfolios should have excess returns that exceed the bottom five size based portfolios.
The bottom five size based portfolios should have excess returns that exceed the top five size based portfolios.
The ten portfolios must have excess returns not significantly different from zero.
The ten portfolios must have excess returns significantly different from zero.
Question 30
Under the following conditions, what are the expected returns for stocks A and C?
l0 = 0.07 ba,1 = 0.95
k1 = 0.04 ba,2 = 1.10
k2 = 0.03 bc,1 = 1.10
bc,2 = 2.35
14.1% and 17.65%
14.1% and 18.45%
17.65% and 18.45%
18.45% and 17.52%
Question 31
Under the following conditions, what are the expected returns for stocks X and Y?
l0 = 0.05 bx,1 = 0.90
k1 = 0.03 bx,2 = 1.60
k2 = 0.04 by,1 = 1.50
by,2 = 0.85
14.1% and 12.9%
12.5% and 19.5%
19.5% and 18.5%
21.2% and 18.5%
Question 32
The equation for the single-index market model is
RFRit = ai + bRmt + et
Rit = ai + bRmt + et
Rit = ai + bRFRt + et
Rmt = ai + bRit + et
Rit = ai + b(Rmt − RFRt) + et
Here’s the SOLUTION