FINA 3315 FINAL

Traditional portfolio managers prefer well known companies because−
I. stocks of well known firms tend to be less risky than stocks of lesser known firms.− −
II. individuals are more apt to purchase a mutual fund if it contains stocks of well known firms.−
III. window dressing encourages the purchase of well known stocks.−
IV. institutional investors tend to exhibit "herd like" behavior.

D. I, II , III and IV

A holding period return is calculated by adding the current income to the capital gains and dividing this sum by the

A.beginning investment value.
B.total income received.
C.selling price of the investment.
D.average investment value.

A. beginning investment value.

The primary market tends to be more active when

A.early in the calendar year.
B.interest rates are rising.
C.the economy is slowing and stock prices are falling.
D.the economy is expanding and stock prices are rising.

D. the economy is expanding and stock prices are rising.

Open end mutual funds may charge which of the following fees?
I. A front end load at the time of purchase.−
II. A back end load when shares are sold.−
III. Annual fees based on marketing and distribution costs.
IV. Annual performance fees up to 20% of increases in net asset value.

B. I, II, and III only

The ability to obtain a given equity position at a reduced capital investment, and therefore magnify returns, is known as

A.triple witching.
B.leverage.
C.straddling.
D.hedging.

B. leverage.

The returns on the stock of DEF and GHI companies over a 4 year period are shown below:
Year DEF GHI
1 8% 11%
2 12% 9%
3 5%− 9%−
4 6% 13%
From this limited data you should conclude that returns on

A.DEF and GHI are somewhat positively correlated.
B.DEF and GHI are perfectly positively correlated.
C.DEF and GHI are uncorrelated.
D.DEF and GHI are negatively correlated.

A. DEF and GHI are somewhat positively correlated.

Mary wrote a 40 call on ABC stock at a price of $275. She does not own any shares of ABC. Mary has
I. limited her losses to $275.
II. unlimited loss potential.
III. limited her gains to $275.
IV. unlimited profit potential.

D. II and III only

Although the major commodities exchanges continue to operate separately, ownership has been concentrated under

A.The New York Stock Exchange.
B.The New York Mercantile Exchange.
C.The Chicago Mercantile Exchange.
D.The Chicago Board of Trade.

C. The Chicago Mercantile Exchange.

Which one of the following statements is correct concerning bond investors?

A.Conservative investors buy bonds when interest rates are high.
B.Aggressive investors purchase bonds when they believe interest rates will rise.
C.Aggressive investors want to lock in high interest rates.
D.Conservative investors seek capital gains.

A. Conservative investors buy bonds when interest rates are high.

Betas for actively traded stocks. are readily available from online sources.

True
False

True

A bond with 14 years to maturity and a coupon rate of 6.375% has a yield-to-maturity (YTM) of 4.5%. Assuming the bond's YTM remains
constant, the bond's value as it approaches maturity will most likely:
(Select the best answer below.)

A.remain constant.
B.decrease.
C.increase.

B. decrease.

The futures market contains two primary types of traders: hedgers and speculators. In this context, hedgers:

A.trade futures contracts because of a need to protect a position in an underlying commodity.
B.trade futures contracts solely to earn a profit on expected swings in the price of the contract.
C.are usually professional traders rather than producers or users of the commodity.
D.provide the liquidity required by specualtors.

A. trade futures contracts because of a need to protect a position in an underlying commodity.

The confidence index indicates a strong stock market when the

A.ratio between the average yield on S&P 500 stocks to the average yield on high grade corporate bonds rises.
B.demand for bonds declines relative to the demand for equity securities.
C.consumer confidence index rises above its long term trend.−
D.ratio of the average yield on high grade corporate bonds to the average yield on
low grade corporate bonds rises.

D. ratio of the average yield on high grade corporate bonds to the average yield on low grade corporate bonds rises.

The expected rate of return and standard deviations, respectively for four stocks are given below:
ABC 9%, 3%
CDE 11%, 9%
FGH 12%, 8%
IJK 14%, 10%
Which stock is clearly least desirable?

A.CDE
B.IJK
C.FGH
D.ABC

A. CDE

Technical analysts consider the stock market to be strong when volume ________ in a rising market and ________ during a declining
market.

A.increases; decreases
B.decreases; decreases
C.decreases; increases
D.increases; increases

A. increases; decreases

To hedge a bond portfolio, an investor should use

A.a foreign currency future.−
B.an interest rate future.
C.a stock index future.−
D.a certificate of deposit.

B. an interest rate future.

Target date funds

A.liquidate their assets and distribute the proceeds when the target date is reached.
B.invest in bonds with durations that match the target date.
C.invest in more conservative assets as the target date approaches.
D.guarantee a minimum net asset value once the target date is reached.

C. invest in more conservative assets as the target date approaches.

The market rate of return increased by 8% while the rate of return on XYZ stock increased by 4%. The beta of XYZ stock is

A.2.0.
B.2.0.−
C.0.50.
D.0.40.

C. 0.50.

Which one of the following best describes "semi strong" market efficiency?-

A.Transactions are faster and less expensive than in the past, but not as fast or inexpensive as
they could be.
B.All public information is quickly reflected in security prices.
C.All information about a company, both private and public, is quickly reflected in its stock price.
D.The market is generally efficient, but some anomalies remain unexplained.

B. All public information is quickly reflected in security prices.

If the present value of an investment's benefits equals the present value of the investment's costs, then the investor would earn a

A.return greater than the discount rate.
B.negative rate of return.
C.0% rate of return.
D.return equal to the discount rate.

D. return equal to the discount rate.

A farmer who grows soy beans can hedge against the risk that bad weather will damage her crop by

A.buying soy bean futures for delivery near the time of harvest.
B.buying contracts in unrelated commodities for delivery near the time of harvest.
C.buying contracts in alternative crops for delivery near the time of harvest.
D.selling soy bean futures for delivery near the time of harvest.

A. buying soy bean futures for delivery near the time of harvest.

ABC Company stock currently has a market value equivalent to its intrinsic value. Marco perceives that ABC Company is increasing its
level of risk and therefore Marco increases his required rate of return on ABC stock. This change in the required rate of return

A.will increase the intrinsic value of ABC stock to Marco.
B.will change the intrinsic value but the direction of the change cannot be determined.
C.is a signal to Marco that he should buy more ABC Company stock.
D.will reduce the intrinsic value of ABC stock to Marco.

D. will reduce the intrinsic value of ABC stock to Marco.

The extraordinary run up in stock prices during the late 1990s primarily affected

A.technology stocks.
B.pharmaceutical stocks.
C.energy stocks.
D.retail stocks.

A. technology stocks.

Conversion privileges, offered by many mutual fund families, refer to the ability to:

A.automatically convert dividends and capital gains into more shares in the fund.
B.switch from one fund to another within the same family, often without paying a commission.
C.redeem mutual fund shares for cash.
D.switch from one fund to another in the same family without incurring any tax liability.

B. switch from one fund to another within the same family, often without paying a commission.

Two assets have a coefficient of correlation of .4.−

A.Combining these assets will have no effect on risk.
B.Combining these assets will increase risk.
C.Combining these assets will reduce risk.
D.Combining these assets may either raise or lower risk.

C. Combining these assets will reduce risk.

An investor who exercises a call option on a S&P 500 ETF will

A.purchase ETF shares at the strike price.
B.receive a cash settlement equivalent to the difference between the strike price and 100 times
the current level of the index.
C.receive a cash settlement equivalent to the difference between the strike price and the
current level of the index.
D.receive a cash settlement equivalent to the difference between the strike price and the
current price of the ETF.

A. purchase ETF shares at the strike price.

Government securities money funds are structured to eliminate

A.inflation risk.
B.interest rate risk.
C.market risk.
D.default risk.

D. default risk.

Socially responsible funds are distinguished from other mutual funds because they

A.invest only in over the counter stocks.− −
B.invest only in companies that meet specified moral, ethical, or environmental standards.
C.do not charge any sales commission or management fees.
D.will sell their shares only to investors who sign a statement saying they do not smoke tobacco
or use alcohol.

B. invest only in companies that meet specified moral, ethical, or environmental standards.

The dominant options exchange is the

A.Philadelphia Options Exchange.
B.Pacific Stock Exchange.
C.Chicago Board Options Exchange.
D.American Stock Exchange.

C. Chicago Board Options Exchange.

The index used to represent market returns is always assigned a beta of 1.0.

True
False

True

Futures contracts exist for:

I. corn.
II. hogs.
III. crude oil.
IV. lumber.

B. I, II, III and IV

Systematic risks

A.are forces that affect all investment categories.
B.can be eliminated by investing in a variety of economic sectors.
C.result from random firm specific events.−
D.are unique to certain types of investment.

A. are forces that affect all investment categories.

The dividend valuation model (DVM) is very sensitive to the growth rate (g) being used, because it affects both the model's numerator
and its denominator.

True
False

True

Securitization is the process of creating marketable securities from various types of loans.

True
False

True

The constant growth dividend valuation model is best suited for use with−

A.the stocks of mature, dividend paying companies.−
B.the stocks of cyclical companies.
C.stocks of new or emerging companies.
D.small cap stocks within growing industries.

A. the stocks of mature, dividend paying companies.

The on balance volume (OBV) indicator

A.considers only the amount of daily trading volume.
B.indicates an up market when heavy volume accompanies price increases.
C.rises by 10,000 on a day when the trading volume is 5,000 shares and the price rises by $2.
D.is divergent when the OBV is falling and prices are also falling.

B. indicates an up market when heavy volume accompanies price increases.

American investors can participate in international stock markets by

A.purchasing shares of a U.S. based company such as Coca Cola or McDonald's with
extensive international operations.
B.purchasing ADSs (American Depositary shares).
C.purchasing shares in a mutual fund that invests in foreign companies.
D.all of the above.

D. all of the above.

One characteristic of bond funds is the

A.requirement of a minimum initial investment of $5,000 or more.
B.fluctuation in value in response to changing interest rates.
C.extremely aggressive trading approach.
D.high anticipated short term growth potential.−

B. fluctuation in value in response to changing interest rates.

The major attraction of convertible bonds is

A.the absence of a call provision allows the value of the bonds to increase at the same rate as
the company's stock while the owner still collects interest.
B.the option to convert subordinated debentures into senior securities.
C.the option to convert the bond into shares of the company's stock.
D.the option to convert the bonds into longer term securities when they mature.

C. the option to convert the bond into shares of the company's stock.

Which of the following will affect the firm's future cash flows?

I. state of the economy
II. state of the industry
III. the firm's recent and current earnings
IV. new products in the firm's pipeline

B. I, II and IV only

Both modern portfolio theory and traditional portfolio management result in diversified portfolios, but they take different approaches to
diversification.

True
False

True

There is strong evidence that investors who trade frequently outperform the market.

True
False

False

The number of shares available in an exchange traded fund (ETF) can be increased or decreased according to demand for the shares.−

True
False

True

If you expect market interest rates to rise, you should purchase

A.short term, low coupon bonds.
B.long term, high coupon bonds.
C.short term, high coupon bonds.
D.long term, low coupon bonds.

C. short term, high coupon bonds.

Which of the following best fits the description "blue chip stock"?

A.Under Armour
B.General Electric
C.Facebook
D.Chipotle Mexican Grill

B. General Electric

One drawback of investing in mutual funds is the

A.annual management fee.
B.lack of liquidity of fund shares.
C.lack of information on the performance of the fund.
D.amount required for the initial investment.

A. annual management fee.

Writers of option contracts

A.earn a profit when the option expires without being exercised.
B.have a limited liability specified in the contract.
C.hope to exercise the option on favorable terms.
D.earn a commission no matter what subsequently happens to the contract.

A. earn a profit when the option expires without being exercised.

Yield curves for corporate and government securities have similar shapes, but the corporate rates track below the government rates.

True
False

False

A type of fund that invests in real estate and/or mortgages is known as a

A.REIT.
B.hedge fund.
C.ETF.
D.sector fund.

A. REIT.

The expectations hypothesis states that investors

A.normally expect the yield curve to be downsloping.
B.expect higher long term interest rates because of the lack of liquidity for long term bonds.− −
C.require higher long term interest rates today if they expect higher inflation rates in the
future.
D.require the real rate of return to rise in direct proportion to the length of time to maturity.

C. require higher long term interest rates today if they expect higher inflation rates in the future.

Purchasers of call options:

A.have the obligation to buy a certain number of underlying shares at a specified price.
B.have the right to buy a certain number of underlying shares at a specified price.
C.have the right to sell a certain number of underlying shares at a specified price.
D.have the obligation to sell a certain number of underlying shares at a specified price.

B. have the right to buy a certain number of underlying shares at a specified price.

Meaningful measures of an investment's return must consider both income and capital gains.

True
False

True

A portfolio that offers the lowest risk for a given level of return is known as an efficient portfolio.

True
False

True

A long straddle

A.consists of buying a call at one strike price and then writing a call at a higher strike price.
B.is a strategy that produces profits when the price of the underlying security moves
significantly in either direction.
C.is a strategy based on the expectation that the price of the underlying security will be
relatively constant.
D.consists of selling and writing an equal number of puts and calls with different strike prices
but the same expiration date and the same underlying security.

B. is a strategy that produces profits when the price of the underlying security moves significantly in either direction.

When the stock market has bottomed out and is beginning to recover, the best portfolio to own is the one with a beta of

A.+0.5.
B.+1.5.
C.0.0.
D.+2.0.

D. +2.0.

Historically speaking, the standard deviation of returns on U.S. Treasury Bills is zero.

True
False

False

The date on which an investor must be a registered shareholder of the firm in order to receive a dividend is called the

A.date of record.
B.ex dividend date.−
C.purchase date.
D.payment date.

A. date of record.

One characteristic of most index funds is that such funds typically

A.charge high front end loads.−
B.produce a large dollar amount of realized capital gains every year.
C.have a very low cost structure with respect to management fees and transaction fees.
D.are designed to "beat the market."

C. have a very low cost structure with respect to management fees and transaction fees.

Yankee bonds are issued by the U.S. government, but sold only to foreign investors.

True
False

False

The major forces behind earnings per share are

A.gross revenue and the stock price.
B.net income and the number of shares outstanding.
C.return on assets and total asset value.
D.growth and the number of shares outstanding.

B. net income and the number of shares outstanding.

Which one of the following was the first listed exchange for stock options in the United States?

A.New York Stock Exchange
B.Chicago Board Options Exchange
C.Stock Index Board
D.Philadelphia Board of Trade

B. Chicago Board Options Exchange

Like ordinary stocks, exchange traded funds (ETFs) can be sold short.−

True
False

True

When a corporation declares a stock split, it usually does so because

A.there are too many shares of stock outstanding.
B.it wants to make its stock more affordable to average investors.
C.investors sometimes require nontaxable returns.
D.the firm's retained earnings are excessive.

B. it wants to make its stock more affordable to average investors.

The required return on a bond is equal to

A.the real rate of return plus a risk premium plus an expected inflation premium.
B.the real rate of return plus the coupon rate plus an inflation rate.
C.the real rate plus a risk premium.
D.the risk free rate plus a risk premium plus an expected inflation premium.

A. the real rate of return plus a risk premium plus an expected inflation premium.

Which one of the following statements about common stock returns is true?

A.Returns from dividends usually exceed returns from capital gains.
B.Returns from stock provided less protection from inflation than returns from bonds.
C.Over the last 5 decades, stock market returns have averaged between 10% and 12%.
D.Returns from stock are more predictable than returns from bonds.

C. Over the last 5 decades, stock market returns have averaged between 10% and 12%.

Followers of the efficient market hypothesis believe that

A.the needed information to assess the market is available only to corporate insiders.
B.individual traders can have a significant impact on the price of a security.
C.very few investors actually analyze or evaluate stocks before they make a purchase decision.
D.investors react quickly and accurately to new information.

D. investors react quickly and accurately to new information.

As investors approach retirement age, they should hold more bonds and less stock.

True
False

True

The purchasing manager of a jewelry manufacturer is worried that the rising price of gold will have a negative impact on profit margins on
items it has promised to merchants in 3 months. She should

A.sell short a futures contract today.
B.sell short one futures contract and offset it by buying an equivalent long futures contract.
C.buy gold bullion today and then sell an equivalent amount of gold futures.
D.buy a gold futures contract today.

D. buy a gold futures contract today.

Which of the following is an example of a tangible asset?

A.stocks
B.mutual funds
C.bonds
D.real estate

D. real estate

A stock will be an attractive investment if the required rate of return exceeds the expected rate of return.

True
False

False

Which of the following is a contrary indicator?

A.the advance/decline line
B.odd lot trading−
C.the TRIN measure
D.breadth of market

B. odd lot trading

One motive for issuing classified stock with different voting rights is to

A.increase the market value of the company.
B.allow the company's founders to retain control of the company.
C.avoid SEC reporting requirements.
D.facilitate the issue of additional shares in the future.

B. allow the company's founders to retain control of the company.

Which of the following statements about short selling is (are) true?

I. Short selling requires an initial margin deposit.
II. Short sellers begin a transaction with a sale and end it with a purchase.
III. Short sellers profit when the stock prices rises.
IV. Short selling can be a risky strategy.

C. I, II and IV only

An inverted yield curve

A.rewards long term investors for the additional risk they are assuming.−
B.means that long term bonds are yielding more than short term bonds.− −
C.sometimes results from actions by the Federal Reserve to control inflation.
D.results when investor demand for longer maturities exceeds the demand for shorter
maturities.

C. sometimes results from actions by the Federal Reserve to control inflation.

A mutual fund is generally more tax efficient when it has a ________ turnover rate and a ________ dividend yield.

A.high; high
B.low; low
C.low; high
D.high; low

B. low; low

Debt securities issued by the Federal Home Loan Bank, the Student Loan Marketing Association and the Government National Mortgage
Association are known as

A.organizational bonds.
B.municipal bonds.
C.Treasury bonds.
D.agency bonds.

D. agency bonds.

Which of the following increase(s) the time premium of a call option?

I. a market price that exceeds the strike price
II. increasing volatility in the market price of the underlying security
III. decreasing market interest rates
IV. decreasing the time to option expiration

C. II only

A company's board of directors must declare a dividend if the firm is profitable.

True
False

False

If the Canadian dollar became stronger relative to the U.S. dollar, the price of

A.a put option on the Canadian dollar will increase.
B.a call option on the Canadian dollar will decrease.
C.a call option on the Canadian dollar will increase.
D.both the call and the put options on the Canadian dollar will decrease.

C. a call option on the Canadian dollar will increase.

Investors seeking to increase their wealth as quickly as possible would invest in

A.smaller companies pursuing rapid growth.
B.government bonds and low risk income stocks.−
C.large company stocks with high dividends.
D.corporate bonds and preferred stock.

A. smaller companies pursuing rapid growth.

Which of the following affect the value of puts and calls written on shares of common stock?

I. price volatility of the underlying stock
II. current market price of the underlying stock
III. length of time until the option expiration date
IV. current market interest rate

D. I, II, III and IV

The purchaser of a futures contract

A.is affected by the daily procedure known as mark to the market.− − −
B.is required to obtain a margin loan equal in amount to the cost of the contract minus the cash
down payment.
C.is generally required to make a cash deposit of 10 to 20% of the contract price at the time the
contract is entered.
D.does not have to worry about margin calls since margin loans are not required.

A. is affected by the daily procedure known as mark to the market.

Portfolio risk is:

A.equal to the sum of the standard deviations of each of the securities in the portfolio.
B.not equal to the weighted average of the risks of the individual securities in the portfolio.
C.not dependent on the relative weights of the securities in the portfolio.

B. not equal to the weighted average of the risks of the individual securities in the portfolio.

Investing in emerging markets is an effective means of diversifying a U.S. portfolio.

True
False

True

A closed end fund is selling at a premium when the NAV exceeds the market price.

True
False

False

In the futures markets, gains and losses in a contract's value are calculated every day and added to or subtracted from the trader's
account. This procedure is called

A.settling.
B.checking the maintenance deposit.
C.mark to the market.− − −
D.checking the maintenance margin.

C. mark to the market.

Beta can be defined as the slope of the line that explains the relationship between

A.the returns on a security and various points in time.
B.the return on a security and the return on the market.
C.the risk free rate of return versus the market rate of return.
D.the return on stocks and the returns on bonds.

B. the return on a security and the return on the market.

The value of an interest rate futures contract will go up when−

A.gold prices fall.
B.interest rates go up.
C.gold prices rise.
D.interest rates go down.

D. interest rates go down.

The return on a futures contract

A.is solely related to the current price of the underlying item.
B.tends to be fairly stable from one trading day to the next.
C.is highly related to the low margin requirement.
D.is always equal to or greater than zero.

C. is highly related to the low margin requirement.

Market segmentation theory explains the typical upward sloping shape of yield curves as a function of

A.normally greater demand for long term bonds than for short term notes.− −
B.the greater liquidity of short term notes as compared to long term bonds.− −
C.expectations that inflation will be higher in the future than it is now.
D.normally greater demand for short term notes than for long term bonds.

D. normally greater demand for short term notes than for long term bonds.

Most bonds pay interest quarterly.

True
False

False

American depositary shares (ADS) are

A.American currency deposits in foreign banks.
B.shares of American companies traded on foreign markets.
C.foreign currency deposits in American banks.
D.shares of foreign companies traded on the U.S. markets.

D. shares of foreign companies traded on the U.S. markets.

The most important lesson investors can learn from behavioral finance is

A.to have confidence in their instincts and first impressions.
B.to have the humility to let professionals manage their investments.
C.to understand psychological factors influencing long term price movement.−
D.how to avoid letting their emotions and biases affect their investment decisions.

D. how to avoid letting their emotions and biases affect their investment decisions.

The random walk hypothesis

A.implies that security analysis is unable to predict future market behavior.
B.has been disproved based on recent computer simulations.
C.suggests that random patterns appear but only over long periods of time.
D.accounts for market anomalies such as calendar effects.

A. implies that security analysis is unable to predict future market behavior.

A REIT or real estate investment trust may invest in all of the following except

A.apartment complexes.
B.stocks of companies engaged in construction and building materials.
C.office buildings.
D.mortgages.

B. stocks of companies engaged in construction and building materials.

As gasoline prices fell in 2015, sales of hybrid and electric vehicles dropped sharply. This is an example of

A.purchasing power risk.
B.business risk.
C.liquidity risk.
D.event risk.

B. business risk.

Evidence suggests that the price of a stock continues to move up or down for a period of

A.1 to 3 years.
B.6 to 12 months.
C.3 to 5 years.
D.a decade or more.

B. 6 to 12 months.

A sell signal is indicated by a security's price

A.running parallel to the moving average.
B.falling below the moving average.
C.rising above the moving average.
D.equaling the moving average.

B. falling below the moving average.

A forum in which suppliers and demanders of funds make financial transactions is called a financial

A.institution.
B.instrument.
C.bank.
D.market.

D. market.

Income from ________ is exempt from federal income taxes?

A.REITs
B.money market funds
C.municipal bond funds
D.government bond funds

C. municipal bond funds