Essentials of Investments, 12th Edition By Zvi Bodie, Alex Kane and Alan Marcus TEST BANK by ACADEMIAMILL

CHAPTER 1 1)

Financial assets represent _______ of total assets of U.S. households in 2019. A) about 70% B) over 90% C) under 10% D) about 30%

Real assets in the economy include all but which one of the following? A) Land B) Buildings C) Consumer durables D) Common stock

3) In 2019, net worth represented _______ of the liabilities and net worth of commercial banks. A) about 51% B) about 91% C) about 11% D) about 31%

4) According to the Flow of Funds Accounts of the United States, the largest single asset of U.S. households is _______.

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A) mutual fund shares B) real estate C) pension reserves D) corporate equity

5) According to the Flow of Funds Accounts of the United States, the largest liability of U.S. households is _______. A) mortgages B) consumer credit C) bank loans D) gambling debts

_______ is not a derivative security. A) A share of common stock B) A call option C) A futures contract D) A put option

7) According to the Flow of Funds Accounts of the United States, the largest financial asset of U.S. households is ________. A) mutual fund shares B) corporate equity C) pension reserves D) deposits

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8) Active trading in markets and competition among securities analysts helps ensure that: 1. Security prices approach informational efficiency. 2. Riskier securities are priced to offer higher potential returns. 3. Investors are unlikely to be able to consistently find under- or overvalued securities. A) 1 only B) 1 and 2 only C) 2 and 3 only D) 1, 2, and 3

9) The material wealth of society is determined by the economy's _______, which is a function of the economy's _______. A) investment bankers; financial assets B) investment bankers; real assets C) productive capacity; financial assets D) productive capacity; real assets

10)

Which of the following is not a money market security? A) U.S. Treasury bill B) 6-month maturity certificate of deposit C) common stock D) mortgage backed security

11) _______ assets generate net income to the economy, and _______ assets define allocation of income among investors.

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A) Financial; financial B) Financial; real C) Real; financial D) Real; real

12) Which of the following are financial assets? 1. Debt securities 2. Equity securities 3. Derivative securities A) 1 only B) 1 and 2 only C) 2 and 3 only D) 1, 2, and 3

13)

_______ are examples of financial intermediaries. A) Commercial banks B) Insurance companies C) Investment companies D) All of the choices are correct.

14)

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 the choices are correct.

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15)

Which one of the following best describes the purpose of derivatives markets? A) Transferring risk from one party to another. B) Investing for a short time period to earn a small rate of return. C) Investing for retirement D) Earning interest income

16)

Security selection refers to the _______. A) allocation of the investment portfolio across broad asset classes B) analysis of the broad asset classes C) choice of specific securities within each asset class D) top-down method of investing

17)

Which of the following is an example of an agency problem? A) Managers engage in empire building. B) Managers protect their jobs by avoiding risky projects. C) Managers overconsume luxuries such as corporate jets. D) All of the options are examples of agency problems.

18)

_______ is (are) a mechanism for mitigating potential agency problems. A) Tying income of managers to success of the firm B) Directors defending top management C) Antitakeover strategies D) All of the choices are correct.

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19)

_______ is (are) real assets. A) Bonds B) Production equipment C) Stocks D) Life insurance

20)

_______ portfolio construction starts with selecting attractively priced securities. A) Bottom-up B) Top-down C) Upside-down D) Side-to-side

21)

In a market economy, capital resources are primarily allocated by _______. A) governments B) corporation CEOs C) financial markets D) investment bankers

22)

_______ represents an ownership share in a corporation. A) A call option B) Common stock C) A fixed-income security D) Preferred stock

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23)

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

24)

Commodity and derivative markets allow firms to adjust their _______. A) management styles B) focus from their main line of business to their investment portfolios C) ways of doing business so that they’ll always have positive returns D) exposure to various business risks

25) _______ 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

26)

Financial markets allow for all but which one of the following?

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A) Shift consumption through time from higher-income periods to lower. B) Price securities according to their riskiness. C) Channel funds from lenders of funds to borrowers of funds. D) Allow most participants to routinely earn high returns with low risk.

27)

Financial intermediaries exist because small investors cannot efficiently _______. A) diversify their portfolios B) gather information C) assess and monitor the credit risk of borrowers D) All of the choices are correct.

28) Methods of encouraging managers to act in shareholders’ best interest include: 1. Threat of takeover. 2. Proxy fights for control of the board of directors. 3. Tying managers’ compensation to stock price performance. A) 1 only B) 1 and 2 only C) 2 and 3 only D) 1, 2, and 3

29) Firms that specialize in helping companies raise capital by selling securities to the public are called _______. A) pension funds B) investment banks C) savings banks D) REITs

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30) In securities markets, there should be a risk-return trade-off with higher-risk assets having _______ expected returns than lower-risk assets. A) higher B) lower C) the same D) The answer cannot be determined from the information given.

31) When the market is more optimistic about a firm, its share price will _______; as a result, it will need to issue _______ shares to raise funds that are needed. A) rise; fewer B) fall; fewer C) rise; more D) fall; more

32)

Security selection refers to _______. A) choosing specific securities within each asset class B) deciding how much to invest in each asset class C) deciding how much to invest in the market portfolio versus the riskless asset D) deciding how much to hedge

33)

An example of a derivative security is _______.

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A) a common share of General Motors B) a call option on Intel stock C) a Ford bond D) a U.S. Treasury bond

34)

_______ portfolio construction starts with asset allocation. A) Bottom-up B) Top-down C) Upside-down D) Side-to-side

35) Which one of the following firms falsely claimed to have a $4.8 billion bank account, eventually resulting in the firm’s bankruptcy? A) WorldCom B) Enron C) Parmalat D) Global Crossing

36) Debt securities promise: 1. A fixed stream of income. 2. A stream of income that is determined according to a specific formula. 3. A share in the profits of the issuing entity. A) 1 only B) 1 or 2 only C) 1 and 3 only D) 2 or 3 only

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37) The Sarbanes-Oxley Act tightened corporate governance rules by requiring all but which one of the following? A) Required that corporations have more independent directors. B) Required that the CFO personally vouch for the corporation’s financial statements. C) Required that firms could no longer employ investment bankers to sell securities to the public. D) Required the creation of a new board to oversee the auditing of public companies.

38)

The success of common stock investments depends on the success of _______. A) derivative securities B) fixed-income securities C) the firm and its real assets D) government methods of allocating capital

39) The historical average rate of return on large company stocks since 1926 has been _______. A) about 5% B) about 8% C) about 12% D) about 20%

40)

The average rate of return on U.S. Treasury bills since 1926 was _______.

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A) less than 1% B) less than 4% C) over 4% D) over 12%

41) An example of a real asset is: 1. A college education 2. Customer goodwill 3. A patent A) 1 only B) 2 only C) 1 and 3 only D) 1, 2, and 3

42)

The 2002 law designed to improve corporate governance is titled the _______. A) Pension Reform Act B) ERISA C) Financial Services Modernization Act D) Sarbanes-Oxley Act

43)

Which of the following is not a financial intermediary? A) A mutual fund B) An insurance company C) A real estate brokerage firm D) A credit union

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44) The combined liabilities of American households in 2019 represent approximately _______ of combined assets. A) 11% B) 13% C) 25% D) 33%

45) In 2019 real assets represented approximately ______ of the total asset holdings of American households. A) 29% B) 42% C) 48% D) 55%

46) In 2019, mortgages represented approximately _______ of total liabilities and net worth of American households. A) 9% B) 14% C) 28% D) 42%

47) Liabilities equal approximately _______ of total assets for nonfinancial U.S. businesses in 2019.

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A) 14% B) 24% C) 44% D) 56%

48)

Which of the following is not an example of a financial intermediary? A) Goldman Sachs B) Allstate Insurance C) First Interstate Bank D) IBM

49) Real assets represent about _______ of total assets for commercial banks and savings institutions in 2019. A) 1% B) 15% C) 25% D) 40%

50) Money market securities are characterized by: 1. Maturity less than 1 year 2. Safety of the principal investment 3. Low rates of return A) 1 only B) 1 and 2 only C) 1 and 3 only D) 1, 2, and 3

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51) After much investigation, an investor finds that Intel stock is currently underpriced. This is an example of _______. A) asset allocation B) security analysis C) top-down portfolio management D) passive management

52) After considering current market conditions, an investor decides to place 60% of her funds in equities and the rest in bonds. This is an example of _______. A) asset allocation B) security analysis C) top-down portfolio management D) passive management

53) 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

54)

The efficient market hypothesis suggests that _______.

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A) active portfolio management strategies are the most appropriate investment strategies B) passive portfolio management strategies are the most appropriate investment strategies C) either active or passive strategies may be appropriate, depending on the expected direction of the market D) a bottom-up approach is the most appropriate investment strategy

55)

In a perfectly efficient market the best investment strategy is probably _______. A) an active strategy B) a passive strategy C) asset allocation D) market timing

56) Market signals will help to allocate capital efficiently only if investors are acting _______. A) on the basis of their individual hunches B) as directed by financial experts C) as dominant forces in the economy D) on accurate information

57) Which of the following is (are) true about hedge funds? 1. They are open to institutional investors. 2. They are open to wealthy individuals. 3. They are more likely than mutual funds to pursue simple strategies.

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A) 1 and 2 only B) 1 and 3 only C) 2 and 3 only D) 1, 2, and 3

58)

Venture capital is _______. A) frequently used to expand the businesses of well-established companies B) supplied by venture capital funds and individuals to start-up companies C) illegal under current U.S. laws D) most frequently issued with the help of investment bankers

59) Individuals may find it more advantageous to purchase claims from a financial intermediary rather than directly purchasing claims in capital markets because: 1. Intermediaries are better diversified than most individuals. 2. Intermediaries can exploit economies of scale in investing that individual investors cannot. 3. Intermediated investments usually offer higher rates of return than direct capital market claims. A) 1 only B) 1 and 2 only C) 2 and 3 only D) 1, 2, and 3

60) Surf City Software Company develops new surf forecasting software. It sells the software to Microsoft in exchange for 1,000 shares of Microsoft common stock. Surf City Software has exchanged a _______ asset for a _______ asset in this transaction.

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A) real; real B) financial; financial C) real; financial D) financial; real

61) Stone Harbor Products takes out a bank loan. It receives $100,000 and signs a promissory note to pay back the loan over 5 years. In this transaction, _______. A) a new financial asset was created B) a financial asset was traded for a real asset C) a financial asset was destroyed D) a real asset was created

62) Which of the following firms was not engaged in a major accounting scandal between 2000 and 2005? A) General Electric B) Parmalat C) Enron D) WorldCom

63) Accounting scandals can often be attributed to a concept in the study of finance known as the _______. A) agency problem B) risk-return trade-off C) allocation of risk D) securitization

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64)

An intermediary that pools and manages funds for many investors is called _______. A) an investment company B) an insurance company C) an investment banker D) a commercial bank

65) Financial institutions that specialize in assisting corporations in primary market transactions are called _______. A) mutual funds B) investment bankers C) pension funds D) globalization specialists

66) When a pass-through mortgage security is issued, what does the issuing agency expect to receive? A) The amount of the original loan plus a servicing fee. B) The principal and interest that are paid by the homeowner. C) The principal and interest that are paid by the homeowner, minus a servicing fee. D) The interest paid by the homeowner, plus a servicing fee.

67) In 2008 the largest corporate bankruptcy in U.S. history involved the investment banking firm of _______.

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A) Goldman Sachs B) Lehman Brothers C) Morgan Stanley D) Merrill Lynch

68) The inability of shareholders to influence the decisions of managers, despite overwhelming shareholder support, is a breakdown in what process or mechanism? A) Auditing B) Public finance C) Corporate governance D) Public reporting

69)

Real assets are _______. A) assets used to produce goods and services B) always the same as financial assets C) always equal to liabilities D) claims on a company’s income

70) A major cause of the mortgage market meltdown in 2007 and 2008 was linked to _______. A) private equity investments B) securitization C) negative analyst recommendations D) online trading

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71) In recent years the greatest dollar amount of securitization occurred for which type of loan? A) Home mortgages B) Credit card debt C) Automobile loans D) Equipment leasing

72)

Which of the following is (are) true about nonconforming mortgage loans? A) They are also known as subprime loans. B) They have higher default risk than conforming loans. C) They were able to be offered without due diligence. D) All of the choices are correct.

73)

The systemic risk that led to the financial crisis of 2008 was increased by _______. A) collateralized debt obligations B) subprime mortgages C) credit default swaps D) All of the choices are correct.

74) An investment adviser has decided to purchase gold, real estate, stocks, and bonds in equal amounts. This decision reflects which part of the investment process?

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A) Asset allocation B) Investment analysis C) Portfolio analysis D) Security selection

75)

The Volcker Rule: A) prohibits banks from proprietary trading. B) restricts banks’ investments in hedge funds. C) restricts banks’ investments in private equity funds. D) All of the choices are correct.

76) Until 1999, the _______ Act separated commercial banking and investment banking activities. A) Dodd-Frank Wall Street Reform and Consumer Protection B) Sarbanes-Oxley C) Glass-Steagall D) Volcker Rule

77)

The difference between LIBOR and the Treasury-bill rate: A) is called the TED spread. B) measures credit risk in the banking sector. C) was very low just before the 2008 financial crisis. D) All of the choices are correct.

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78)

The Dodd-Frank Reform Act does all of the following except: A) reduces capital requirements for banks. B) limits the risk-taking in which banks can engage. C) requires public companies to set "claw-back" provisions. D) creates an office within the SEC to oversee credit rating agencies.

79) Which insurance company sold more than $400 billion of CDS contracts on subprime mortgages prior to the 2008 market crash? A) Metlife B) AIG C) Northwestern Mutual D) New York Life

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Answer Key Test name: Chap 01_12e_Bodie 1) A 2) D 3) C 4) B 5) A 6) A 7) C 8) D 9) D 10) C 11) C 12) D 13) D 14) A 15) A 16) C 17) D 18) A 19) B 20) A 21) C 22) B 23) A 24) D 25) C 26) D Version 1

27) D 28) D 29) B 30) A 31) A 32) A 33) B 34) B 35) C 36) B 37) C 38) C 39) C 40) B 41) D 42) D 43) C 44) B 45) A 46) A 47) C 48) D 49) A 50) D 51) B 52) A 53) B 54) B 55) B 56) D Version 1

57) A 58) B 59) B 60) C 61) A 62) A 63) A 64) A 65) B 66) C 67) B 68) C 69) A 70) B 71) A 72) D 73) D 74) A 75) D 76) C 77) D 78) A 79) B

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CHAPTER 2 1)

Which of the following is not a money market instrument? A) Treasury bill B) Commercial paper C) Preferred stock D) Bankers' acceptance

2) T-bills are commonly issued with initial maturities of: 1. 4 weeks 2. 16 weeks 3. 26 weeks 4. 32 weeks A) 1 and 2 only B) 1 and 3 only C) 1, 2, and 3 only D) 1, 2, 3, and 4

When computing the bank discount yield, you would use _______ days in the year. A) 260 B) 360 C) 365 D) 366

A dollar-denominated deposit at a London bank is called _______.

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A) eurodollars B) LIBOR C) fed funds D) bankers' acceptance

5) Money market securities are sometimes referred to as cash equivalents because _______. A) they are safe, marketable, and offer low returns B) they are not liquid C) they are high-risk D) they are low-denomination

The most marketable money market securities are _______. A) Treasury bills B) Bankers' acceptances C) Certificates of deposit D) Common stock

The minimum tick size, or spread between prices in the Treasury bond market, is: A) 1/8 of a point. B) 1/16 of a point. C) 1/32 of a point. D) 1/128 of a point.

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An investor in a T-bill earns interest by _______. A) receiving interest payments every 90 days B) receiving dividend payments every 30 days C) converting the T-bill at maturity into a higher-valued T-note D) buying the bill at a discount from the face value to be received at maturity

_______ would not be included in the EAFE index. A) Australia B) Canada C) France D) Japan

10)

_______ is considered to be an emerging market country. A) France B) Norway C) Brazil D) Canada

11)

Which one of the following is a true statement?

A) Dividends on preferred stocks are tax-deductible to individual investors but not to corporate investors. B) Common dividends cannot be paid if preferred dividends are in arrears on cumulative preferred stock. C) Preferred stockholders have voting power. D) Investors can sue managers for nonpayment of preferred dividends.

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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)

The German stock market is measured by which market index? A) FTSE B) Dow Jones 30 C) DAX D) Nikkei

14)

Deposits of commercial banks at the Federal Reserve are called _______. A) bankers' acceptances B) federal funds C) repurchase agreements D) time deposits

15)

Which of the following is not a true statement regarding municipal bonds?

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A) A municipal bond is a debt obligation issued by state or local governments. B) A municipal bond is a debt obligation issued by the federal government. C) The interest income from a municipal bond is exempt from federal income taxation. D) The interest income from a municipal bond is exempt from state and local taxation in the issuing state.

16)

Which of the following is not a characteristic of a money market instrument? A) Liquidity B) Marketability C) Low risk D) Maturity greater than 1 year

17)

An individual who goes short in a futures position _______. A) has the obligation to deliver the underlying commodity at contract maturity B) has the obligation to purchase the underlying commodity at contract maturity C) has the right to deliver the underlying commodity at contract maturity D) has the right to purchase the underlying commodity at contract maturity

18) Which of the following is not a nickname for an agency associated with the mortgage markets? A) Fannie Mae B) Freddie Mac C) Sallie Mae D) Ginnie Mae

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19)

Commercial paper is a short-term security issued by ______ to raise funds. A) the Federal Reserve B) the New York Stock Exchange C) large well-known companies D) All of the choices are correct.

20)

The maximum maturity on commercial paper is _______. A) 270 days B) 180 days C) 90 days D) 30 days

21) 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 industrial stocks traded on the New York Stock Exchange.

22)

Treasury bills are financial instruments issued by _______ to raise funds.

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A) commercial banks B) the federal government C) large corporations D) state and city governments

23) Which of the following are true statements about T-bills? 1. T-bills typically sell in denominations of $10,000. 2. Income earned on T-bills is exempt from all federal taxes. 3. Income earned on T-bills is exempt from state and local taxes. A) 1 only B) 1 and 2 only C) 1 and 3 only D) 1, 2, and 3

24)

A bond that has no collateral is called a _______. A) callable bond B) debenture C) junk bond D) mortgage

25) A _______ gives its holder the right to sell an asset for a specified exercise price on or before a specified expiration date. A) call option B) futures contract C) put option D) interest rate swap

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26) A T-bill quote sheet has 90-day T-bill quotes with a 4.92 ask and a 4.86 bid. If the bill has a $10,000 face value, an investor could sell this bill for _______. A) $10,000 B) $9,878.50 C) $9,877 D) $9,880.16

27)

Which one of the following is a true statement regarding corporate bonds?

A) A corporate callable bond gives its holder the right to exchange it for a specified number of the company's common shares. B) A corporate debenture is a secured bond. C) A corporate convertible bond gives its holder the right to exchange it for a specified number of the company's common shares. D) Holders of corporate bonds have voting rights in the company.

28)

The yield on tax-exempt bonds is _______. A) usually less than 50% of the yield on taxable bonds B) legally must equal the yield on taxable bonds C) greater than the yield on taxable bonds D) less than the yield on taxable bonds

29)

_______ is not a money market instrument.

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A) A certificate of deposit B) A Treasury bill C) A Treasury bond D) Commercial paper

30) An investor buys a T-bill at a bank discount quote of 4.80 with 150 days to maturityfor $9800. The bill has a face value of $10,000. The investor's bond equivalent yield on this investment is _______. A) 4.8% B) 4.97% C) 5.47% D) 5.74%

31)

The U.K. stock index is the _________. A) DAX B) FTSE C) GSE D) TSE

32) A _______ gives its holder the right to buy an asset for a specified exercise price on or before a specified expiration date. A) call option B) futures contract C) put option D) interest rate swap

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33)

Which one of the following provides the best example of relatively recent securitization? A) Convertible bond B) Call option C) Mortgage pass-through security D) Preferred stock

34) Which of the following indexes are market value-weighted? 1. The NYSE Composite 2. The S&P 500 3.The Wilshire 5000 A) 1 and 2 only B) 2 and 3 only C) 1 and 3 only D) 1, 2, and 3

35) The interest rate charged by large banks in London to lend money among themselves is called _______. A) the prime rate B) the discount rate C) the federal funds rate D) LIBOR

36)

The brokers' call rate represents:

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A) the rate the broker charges an investor on a margin account. B) the rate the broker pays its bank on borrowed funds. C) the return earned by the broker on a margin account. D) the return earned by the investor on a margin account.

37)

Currently, the Dow Jones Industrial Average is computed by _______.

A) adding the prices of 30 large "blue-chip" stocks and dividing by 30 B) calculating the total market value of the 30 firms in the index and dividing by 30 C) measuring the current total market value of the 30 stocks in the index relative to the total value on the previous day D) adding the prices of 30 large "blue-chip" stocks and dividing by a divisor adjusted for stock splits and large stock dividends

38) An investor purchases one municipal bond and one corporate bond that pay rates of return of 5% and 6.4%, respectively. If the investor is in the 15% tax bracket, his after-tax rates of return on the municipal and corporate bonds would be, respectively, _______. A) 5.00% and 6.40% B) 5.00% and 5.44% C) 4.25% and 6.40% D) 5.75% and 5.44%

39) If a Treasury note has a bid price of $996.25, the quoted bid price in the Wall Street Journal would be _________.

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A) 99:5/8 B) 99:6/10 C) 99.6250 D) None of the choices are correct.

40)

TIPS are _______. A) Treasury bonds that pay no interest and are sold at a discount B) U.K. bonds that protect investors from default risk C) securities that trade on the Toronto stock index D) Treasury bonds that protect investors from inflation

41) The price quotations of Treasury bonds in the Wall Street Journal show a bid price of 104.5313 and an ask price of 104.5489. If you sell a Treasury bond, you expect to receive _______. A) $ 1,000.00 B) $ 1,045.00 C) $ 1,045.31 D) $ 1,045.48

42)

Which of the following mortgage scenarios will benefit the homeowner the most? A) Adjustable rate mortgage when interest rate increases. B) Fixed rate mortgage when interest rates falls. C) Fixed rate mortgage when interest rate rises. D) None of these options, as the banker's interest will always be protected.

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43) Investors will earn higher rates of returns on TIPS than on equivalent default-risk standard bonds if _______. A) inflation is lower than anticipated over the investment period B) inflation is higher than anticipated over the investment period C) the U.S. dollar increases in value against the euro D) the spread between commercial paper and Treasury securities remains low

44)

Preferred stock is like long-term debt in that _______. A) it gives the holder voting power regarding the firm's management B) it promises to pay to its holder a fixed stream of income each year C) the preferred dividend is a tax-deductible expense for the firm D) in the event of bankruptcy preferred stock has equal status with debt

45) Which of the following does not approximate the performance of a buy-and-hold portfolio strategy? A) An equally weighted index B) A price-weighted index C) A value-weighted index D) All of these options (Weights are not a factor in this situation.)

46) In calculating the Dow Jones Industrial Average, the adjustment for stock splits occurs _______.

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A) automatically B) by adjusting the denominator C) by adjusting the numerator D) by adjusting the market value weights

47) A bond issued by the state of Alabama is priced to yield 6.25%. If you are in the 28% tax bracket, this bond would provide you with an equivalent taxable yield of _______. A) 4.5% B) 7.25% C) 8.68% D) None of the choices are correct.

48)

The purchase of a futures contract gives the buyer _______. A) the right to buy an item at a specified price B) the right to sell an item at a specified price C) the obligation to buy an item at a specified price D) the obligation to sell an item at a specified price

49) 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) right; buy B) right; sell C) obligation; buy D) obligation; sell

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50) An investor in a 28% tax bracket is trying to decide whether to invest in a municipal bond or a corporate bond. She looks up municipal bond yields ( rm) but wishes to calculate the taxable equivalent yield r. The formula she should use is given by _______. A) r = rm × (1 − 28%) B) r = rm / (1 − 72%) C) r = rm × (1 − 72%) D) r = rm / (1 − 28%)

51) June call and put options on King Books Incorporated are available with exercise prices of $30, $35, and $40. Among the different exercise prices, the call option with the _______ exercise price and the put option with the _______ exercise price will have the greatest value. A) $40; $30 B) $30; $40 C) $35; $35 D) $40; $40

52) Ownership of a call option entitles the owner to the _______ to _______ a specific stock, on or before a specific date, at a specific price. A) right; buy B) right; sell C) obligation; buy D) obligation; sell

53) The _______ the ratio of municipal bond yields to corporate bond yields, the _______ the cutoff tax bracket at which more individuals will prefer to hold municipal debt.

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A) higher; lower B) lower; lower C) higher; higher D) The answer cannot be determined without more information.

54) The Hang Seng index reflects market performance on which of the following major stock markets? A) Japan B) Singapore C) Taiwan D) Hong Kong

55)

The Standard & Poor's 500 is _______ weighted index. A) an equally B) a priceC) a valueD) a share-

56) Large well-known companies often issue their own short-term unsecured debt notes directly to the public, rather than borrowing from banks; their notes are called _______. A) certificates of deposit B) repurchase agreements C) bankers' acceptances D) commercial paper

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57)

Which of the following is most like a short-term collateralized loan? A) Certificate of deposit B) Repurchase agreement C) Bankers' acceptance D) Commercial paper

58)

Eurodollars are _______. A) dollar-denominated deposits at any foreign bank or foreign branch of an American

bank B) dollar-denominated bonds issued by firms outside their home market C) currency issued by Euro Disney and traded in France D) dollars that wind up in banks as a result of money-laundering activities

59)

Which of the following is used to back international sales of goods and services? A) Certificate of deposit B) Bankers' acceptance C) Eurodollar deposits D) Commercial paper

60)

Treasury notes have initial maturities between _______ years. A) 2 and 4 B) 5 and 10 C) 10 and 30 D) 1 and 10

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61)

Which of the following is not a typical characteristic of common stock ownership? A) Residual claimant B) Unlimited liability C) Voting rights D) Right to any dividend paid by the corporation.

62) If you thought prices of stock would be rising over the next few months, you might want to _______ on the stock. A) purchase a call option B) purchase a put option C) sell a futures contract D) place a short-sale order

63)

A typical bond price quote includes all but which one of the following? A) Coupon B) Closing bond price C) Yield to maturity D) Dividend yield

64) What would you expect to have happened to the spread between yields on commercial paper and Treasury bills immediately after September 11, 2001?

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A) No change, as both yields will remain the same. B) Increase, as the spread usually increases in response to a crisis. C) Decrease, as the spread usually decreases in response to a crisis. D) No change, as both yields will move in the same direction.

65) A stock quote indicates a stock price of $60 and a dividend yield of 3%. The latest quarterly dividend received by stock investors must have been ______ per share. A) $0.55 B) $1.80 C) $0.45 D) $1.25

66) 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

67)

Which of the following is not considered a money market investment? A) Bankers' acceptance B) Eurodollar C) Repurchase agreement D) Treasury note

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68)

The rate of interest on short-term loans among financial institutions is _______. A) bankers' acceptances B) brokers' calls C) federal funds rate D) LIBOR

69) You decide to purchase an equal number of shares of stocks of firms to create a portfolio. If you wanted to construct an index to track your portfolio performance, your best match for your portfolio would be to construct _______. A) a value-weighted index B) an equally weighted index C) a price-weighted index D) a bond price index

70) 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) equal-weighted index C) price-weighted index D) bond price index

71) A corporation in a 21% tax bracket invests in the preferred stock of another company and earns a 6% pretax rate of return. An individual investor in a 15% tax bracket invests in the same preferred stock and earns the same pretax return. The after-tax return to the corporation is _______, and the after-tax return to the individual investor is _______.

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A) 3.96%; 5.10% B) 5.37%; 5.10% C) 6.00%; 6.00% D) 3.96%; 6.00%

72)

All but which one of the following indices is value weighted? A) NASDAQ Composite B) S&P 500 C) Wilshire 5000 D) DJIA

73) What is the tax exempt equivalent yield on a 9% bond yield given a marginal tax rate of 28%? A) 6.48% B) 7.25% C) 8.02% D) 9.00%

74) A tax-free municipal bond provides a yield of 3.2%. What is the equivalent taxable yield on the bond given a 35% tax bracket? A) 3.20% B) 3.68% C) 4.92% D) 5.00%

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75)

An index computed from a simple average of returns is a/an ______. A) equal weighted index B) value weighted index C) price weighted index D) share weighted index

76) A tax-free municipal bond provides a yield of 2.34%. What is the equivalent taxable yield on the bond given a 28% tax bracket? A) 2.34% B) 2.68% C) 3.25% D) 4.92%

77) The Hydro Index is a price weighted stock index based on the 5 largest boat manufacturers in the nation. The stock prices for the five stocks are $10, $20, $80, $50 and $40. The price of the last stock was just split 2 for 1 and the stock price was halved from $40 to $20. What is the new divisor for a price weighted index? A) 5.00 B) 4.85 C) 4.50 D) 4.75

78) 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 today, what is the new index value? Version 1

A) 960 B) 970 C) 975 D) 985

79) A benchmark market value index is comprised of three stocks. Yesterday the three stocks were priced at $12, $20, and $60. The number of outstanding shares for each is 600,000 shares, 500,000 shares, and 200,000 shares, respectively. If the stock prices changed to $16, $18, and $62 today respectively, what is the 1-day rate of return on the index? A) 5.78% B) 4.35% C) 6.16% D) 7.42%

80) LIBOR is a key reference rate in the money markets. Many ______ of dollars of loans and derivative assets are tied to it. A) thousands B) millions C) billions D) trillions

81) Which of the following reforms were not included in 2014 regulations regarding money market funds?

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A) Institutional funds will "float" the prices of their shares. B) Funds can limit redemptions or impose a 2% fee if assets fall by more than 30%. C) Increased disclosure of assets’ values and liquidity. D) All of the options were included.

82) What would be the profit or loss per share of stock to an investor who bought an October expiration Apple call option with an exercise price of $130 if Apple closed on the expiration date at $120? Assume the option premium was $3.00. A) $0 B) $3.00 gain C) $3.00 loss D) $7.00 gain

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Answer Key Test name: Chap 02_12e_Bodie 1) C 2) B 3) B 4) A 5) A 6) A 7) D 8) D 9) B 10) C 11) B 12) B 13) C 14) B 15) B 16) D 17) A 18) C 19) C 20) A 21) B 22) B 23) C 24) B 25) C 26) B Version 1

27) C 28) D 29) C 30) B 31) B 32) A 33) C 34) D 35) D 36) B 37) D 38) B 39) C 40) D 41) C 42) C 43) B 44) B 45) A 46) B 47) C 48) C 49) B 50) D 51) B 52) A 53) A 54) D 55) C 56) D Version 1

57) B 58) A 59) B 60) D 61) B 62) A 63) D 64) B 65) C 66) B 67) D 68) C 69) C 70) A 71) B 72) D 73) A 74) C 75) A 76) C 77) C 78) C 79) C 80) D 81) D 82) C

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CHAPTER 2: ALGO 1) A T-bill quote sheet has 60-day T-bill quotes with a 5.55 ask and a 5.49 bid. If the bill has a $10,000 face value, an investor could sell this bill for _____. A) $9,909.75 B) $9,908.50 C) $10,000 D) $9,907.50

2) An investor buys a T-bill at a bank discount quote of 5.20 with 90 days to maturity for 9,870.00.The bill has a face value of $10,000. The investor's bond equivalent yield on this investment is _____. A) 5.34% B) 5.53% C) 5.20% D) 5.27%

3) An investor purchases one municipal bond and one corporate bond that pay rates of return of 7% and 8.6%, respectively. If the investor is in the 20% tax bracket, his after-tax rates of return on the municipal and corporate bonds would be, respectively, _____. A) 7% and 8.6% B) 7% and 6.88% C) 5.60% and 8.6% D) 8.40% and 6.88%

4) A bond issued by the state of Alabama is priced to yield 7.10%. If you are in the 30% tax bracket, this bond would provide you with an equivalent taxable yield of _________.

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A) 4.97% B) 8.10% C) 10.14% D) none of these options

5) A stock quote indicates a stock price of $56 and a dividend yield of 3%. The latest quarterly dividend received by stock investors must have been ______ per share. A) $0.84 B) $1.68 C) $0.42 D) $1.26

6) Three stocks have share prices of $15, $60, and $30 with total market values of $430 million, $380 million, and $180 million, respectively. If you were to construct a price-weighted index of the three stocks, what would be the index value? A) 330 B) 35 C) 45 D) 60

7) What is the tax exempt equivalent yield on a 7% bond yield given a marginal tax rate of 20%? A) 5.60% B) 5.83% C) 8.75% D) 7.00%

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8) The Chompers Index is a price weighted stock index based on the 3 largest fast food chains. The stock prices for the three stocks are $66, $29, and $56. What is the price weighted index value of the Chompers Index? A) 28.33 B) 40.67 C) 50.33 D) 61.00

9) A benchmark index has three stocks priced at $25, $48, and $58. The number of outstanding shares for each is 360,000 shares, 425,000 shares, and 573,000 shares, respectively. If the market value weighted index was 960 yesterday and the prices changed to $25, $46, and $60 today, what is the new index value? A) 951 B) 960 C) 965 D) 955

10) A benchmark market value index is comprised of three stocks. Yesterday the three stocks were priced at $24, $34, and $75. The number of outstanding shares for each is 790,000 shares, 690,000 shares, and 390,000 shares, respectively. If the stock prices changed to $28, $32, and $77 today respectively, what is the 1-day rate of return on the index? A) 3.57% B) 2.48% C) 5.61% D) 4.20%

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Answer Key Test name: Chap 02_12e_Bodie_Algo 1) B 2) A 3) B 4) C 5) C 6) B 7) A 8) C 9) C 10) A

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CHAPTER 3 1)

Underwriting is one of the services provided by _______. A) the SEC B) investment bankers C) publicly traded companies 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. A) red herring B) issuing company C) initial stockholder D) underwriter

Explicit costs of a stock IPO tend to be around _______ of the funds raised. A) 1% B) 7% C) 15% 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?

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A) $90,000 B) $1,290,000 C) $2,390,000 D) $1,690,000

When a firm decides to sell securities it must first ensure _______. A) the preliminary registration statement is approved by the SEC B) the IPO is complete C) the offering is seasoned 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. 3. Privately placed securities trade on secondary markets. A) 1 only B) 1 and 3 only C) 2 and 3 only D) 1, 2, and 3

A level _______ subscriber to the NASDAQ system may enter bid and ask prices. A) 1 B) 2 C) 3 D) 4

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Which one of the following statements about IPOs is not true? A) IPOs generally have been poor long-term investments. B) IPOs often provide very good initial returns to investors. C) IPOs generally provide superior long-term performance as compared to other stocks. 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? A) 9% B) 15% C) 48% D) 57%

10) The NYSE acquired the ECN _______, and NASDAQ recently acquired the ECN _______. A) Archipelago; Instinet B) Instinet; Archipelago C) Island; Instinet 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 3. Dealer markets 4. Direct search markets

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A) 4, 2, 1, 3 B) 1, 3, 4, 2 C) 2, 3, 4, 1 D) 4, 1, 3, 2

12) The largest nongovernmental regulator of securities firms in the United States is _______. A) the CFA Institute B) the Public Company Accounting Oversight Board C) the Financial Industry Regulatory Authority D) the Board of Directors of NYSE Euronext

13)

Which one of the following is not an example of a brokered market? A) Residential real estate market B) Market for large block security transactions C) Primary market for securities D) NASDAQ

14)

More than _______ of all trading is believed to be initiated by computer algorithms. A) 25% B) 40% C) 50% D) 75%

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15)

Purchases of new issues of stock take place _______. A) at the desk of the Fed B) in the primary market C) in the secondary market D) in the tertiary markets

16)

Initial margin requirements on stocks are set by _______. A) the Federal Deposit Insurance Corporation B) the Federal Reserve C) the New York Stock Exchange 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? A) Broker market B) Dealer market C) Continuous auction market D) Direct search market

18)

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

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A) On a stock exchange most buy or sell orders are executed via an electronic system rather than through specialists. B) Specialists cannot trade for their own accounts. C) Specialists maintain limit order books, which contain the outstanding unexecuted limit orders. 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 3. Relatives of corporate directors and officers A) 1 only B) 1 and 2 only C) 2 and 3 only D) 1, 2, and 3

20)

An order to buy or sell a security at the current price is a _______. A) limit order B) market order C) stop-loss order D) stop-buy order

21)

The term inside quotes refers to _______.

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

22)

The term latency refers to _______.

A) the lag between when an order is placed on the NYSE and when it is executed. B) the amount of time it takes to accept, process, and deliver a trading order. C) the time it takes to implement new rules and procedures for stock exchanges and computer trading systems. 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. A) buy stop; stop-loss B) market; limit C) stop-loss; buy stop 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?

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A) $1,375 B) $500 C) $275 D) $1,450

25)

Advantages of ECNs over traditional markets include all but which one of the following? A) Lower transactions costs B) Anonymity of the participants C) Small amount of time needed to execute and order D) Ability to handle very large complex orders

26)

The _______ was established to protect investors from losses if their brokerage firms fail. A) CFTC B) SEC C) SIPC D) AIMR

27)

When matching orders from the public, a specialist is required to use the _______. A) lowest outstanding bid price and highest outstanding ask price B) highest outstanding bid price and highest outstanding ask price C) lowest outstanding bid price and lowest outstanding ask price D) highest outstanding bid price and lowest outstanding ask price

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28) The process of polling potential investors regarding their interest in a forthcoming initial public offering (IPO) is called ______. A) interest building B) book building C) market analysis D) customer identification

29)

The bulk of most initial public offerings (IPOs) of equity securities goes to _______. A) institutional investors B) individual investors C) the firm's current shareholders 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. A) overpriced B) correctly priced C) underpriced 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.

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A) bad; good B) bad; bad C) good; good 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. 3. Specialists are nonprofit entities designed to facilitate market transactions rather than make a profit. A) 1 only B) 1 and 2 only C) 2 and 3 only D) 1, 2, and 3

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. A) best-efforts B) firm-commitment C) private placement D) None of the choices are correct.

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

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A) NYSE; NASDAQ B) NASDAQ; NYSE C) CME; OTC D) AMEX; NYSE

35)

The inside quotes on a limit order book can be found _______. A) at the top of the list B) at the bottom of the list C) by taking the averages of the bid and ask prices on the list 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. A) FAX B) Direct Plus C) NASDAQ D) SUPERDOT

37)

The fully automated trade-execution system installed on the NYSE is called _______. A) FAX B) Direct + C) NASDAQ D) SUPERDOT

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38)

The NYSE Hybrid Market allows _______. A) individuals to send orders directly to a specialist B) individuals to send orders directly to an electronic system C) brokers to send orders directly to a specialist D) brokers to send orders either to an electronic system or to a specialist

39)

The _______ price is the price at which a dealer is willing to purchase a security. A) bid B) ask C) clearing D) settlement

40)

The _______ price is the price at which a dealer is willing to sell a security. A) bid B) ask C) clearing D) settlement

41) 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 _______. A) market spread B) bid-ask spread C) bid-ask gap D) market variation

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42)

The bid-ask spread exists because of _______. A) market inefficiencies B) discontinuities in the markets C) the need for dealers to cover expenses and make a profit D) lack of trading in thin markets

43) 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 3. Impose a tighter limit on bid-ask spreads A) 1 only B) 2 and 3 only C) 1 and 2 only D) 1, 2, and 3

44) The cost of buying and selling a stock includes: 1. Broker's commissions 2. Dealer's bid-asked spread 3. Price concessions that investors may be forced to make A) 1 and 2 only B) 2 and 3 only C) 1 and 3 only D) 1, 2, and 3

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45) Which of the following is (are) true about dark pools? 1. They allow anonymity in trading. 2. They often involve large blocks of stocks. 3. Trades made through them might not be reported. A) 1 and 2 only B) 2 and 3 only C) 1 and 3 only D) 1, 2, and 3

46) You purchased XYZ stock at $50 per share. The stock is currently selling at $65. Your gains could be protected by placing a _______. A) limit buy order B) limit sell order C) market order D) stop-loss order

47) 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 $ 39.75 $ 39.50

Orders Shares 100 100

Limit Sell Orders $ 40.25 $ 40.50

Orders Shares 100 100

A) $39.75 B) $40.25 C) $40.375 D) $40.25 or less

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48) 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? A) $50 B) $25 C) $30 D) $55

49) According to SEC Rule 415 regarding shelf registration, firms can gradually sell securities to the public for _______ following initial registration. A) 1 year B) 2 years C) 3 years D) 4 years

50) 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 onesixteenth of a dollar to one cent in 2001? A) The effective spread increased in 1997 but decreased in 2001. B) The effective spread increased in both cases. C) The effective spread decreased in 1997 but increased in 2001. D) The effective spread decreased in both cases.

51) 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 _______.

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A) $20,000 B) $12,000 C) $8,000 D) $15,000

52) You sold short 300 shares of common stock at $30 per share. The initial margin is 50%. You must put up _________. A) $4,500 B) $6,000 C) $9,000 D) $10,000

53) You short-sell 200 shares of Tuckerton Trading Company, now selling for $50 per share. What is your maximum possible loss? A) $50 B) $150 C) $10,000 D) Unlimited

54) You short-sell 200 shares of Tuckerton Trading Company, now selling for $50 per share. What is your maximum possible gain, ignoring transactions cost? A) $50 B) $150 C) $10,000 D) Unlimited

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55) You short-sell 200 shares of Rock Creek Fly Fishing Company, now selling for $50 per share. If you want to limit your loss to $2,500, you should place a stop-buy order at _______. A) $37.50 B) $62.50 C) $56.25 D) $59.75

56) 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.) A) $26.55 B) $35.71 C) $28.95 D) $30.77

57) 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. A) 35% B) 39% C) 43% D) 28%

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58) You sell short 200 shares of Doggie Treats Incorporated 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.) A) $28.85 B) $35.71 C) $31.50 D) $32.25

59)

Transactions that do not involve the original issue of securities take place in _______. A) primary markets B) secondary markets C) over-the-counter markets D) institutional markets

60) What was the result of high-frequency traders' leaving the market during the flash crash of 2010? A) Market liquidity decreased. B) Market liquidity increased. C) Market volatility decreased. D) Trading frequency increased.

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

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A) Limit orders B) Restricted orders C) Limit loss orders D) Stop-buy orders

62) The market share held by the NYSE Arca system in February 2011 was approximately _______. A) 65% B) 45% C) 25% D) 10%

63) Regulation NMS: 1. Supports the goal of integrating financial markets 2. Requires the use of specialists to execute trades 3. Requires that exchanges honor quotes of other exchanges when they can be executed automatically A) 1 only B) 1 and 2 only C) 1 and 3 only D) 1, 2, and 3

64) 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?

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A) $35 B) $45 C) $53 D) $68

65)

All major stock markets today are effectively _______. A) specialist trading systems B) electronic trading systems C) continuous auction markets D) direct search markets

66)

In 2007, the NASDAQ stock market merged with ______. A) Euronext B) OMX, which operates seven Nordic and Baltic stock exchanges C) the International Securities Exchange (ISE) D) BATS

67) 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 _______. A) an advanced equity offering B) a weathered equity offering C) a seasoned equity offering D) a veteran equity offering

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68) 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 _______. A) market value of the stock − amount owed on the margin loan B) market value of the stock + amount owed on the margin loan C) market value of the stock ÷ margin loan D) margin loan × market value of the stock

69)

The average depth of the limit order book is _______.

A) lower for the large stocks in the S&P 500 Index than for the smaller stocks in the Russell 2000 Index B) higher for the large stocks in the S&P 500 Index than for the smaller stocks in the Russell 2000 Index C) about the same for both the large stocks in the S&P 500 Index and the smaller stocks in the Russell 2000 Index D) unrelated to the sizes of the stocks in the indexes

70)

The CFA Institute Standards of Professional Conduct require that members _______.

A) place their clients' interests before their own B) disclose conflicts of interest to clients C) inform their employers that they are obligated to comply with the Standards of Professional Conduct D) All of the choices are correct.

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71) Trading on inside information is: 1. Prohibited by federal law 2. Prohibited by the CFA Institute Standards of Professional Conduct 3. Monitored by the SEC A) 1 and 2 only B) 2 and 3 only C) 1 and 3 only D) 1, 2, and 3

72) The _______ requires full disclosure of relevant information relating to the issue of new securities. A) Insider Trading Act of 1931 B) Securities Act of 1933 C) Securities Exchange Act of 1934 D) Investment Company Act of 1940

73)

The SIPC was established by the _______. A) Insider Trading Act of 1931 B) Securities Act of 1933 C) Securities Exchange Act of 1934 D) None of the choices are correct.

74)

Maintenance requirements for margin accounts are set by _______.

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A) brokerage firms B) the SEC C) the Federal Reserve System's Board of Governors D) the Supreme Court

75) 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. 3. The short-seller earns interest on any cash deposited with the broker that is used to meet the margin requirement. A) 1 only B) 1 and 3 only C) 1 and 2 only D) 1, 2, and 3

76) 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. A) electronic; Dealers; brokers B) dealer; Brokers; electronic C) direct search; Brokers; electronic D) brokered; Dealers; direct search

77) 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 _______.

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A) 17% B) 12% C) 14% D) 19%

78) 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 _______. A) $20 B) $29.77 C) $30.29 D) $32.45

79)

The New York Stock Exchange is a good example of _______. A) an auction market B) a brokered market C) a dealer market D) a direct search market

80) The primary market where new security issues are offered to the public is a good example of _______. A) an auction market B) a brokered market C) a dealer market D) a direct search market

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81)

The over-the-counter securities market is a good example of ______. A) an auction market B) a brokered market C) a dealer market D) a direct search market

82) 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? A) 17.50% B) 19.67% C) 23.83% D) 25.75%

83)

Level 3 NASDAQ subscribers _______. A) are registered market makers B) can post bid and ask prices C) have the fastest execution of trades D) All of the choices are correct.

84) 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.)

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A) 10.00% B) 20.00% C) 6.67% D) 15.50%

85) The commission structure on a stock purchase is $20 plus $0.02 per share. If you purchase four round lots of a stock selling for $56, what is your commission? A) $20 B) $22 C) $26 D) $28

86)

BATS advertised average latency times of approximately _______. A) 100 microseconds B) 200 microseconds C) 1 second D) 5 seconds

87) The market share held by the "Other" category (which includes dark pools) constitutes roughly _______% of trading volume in NYSE-listed shares. A) 5% B) 10% C) 30% D) 50%

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88)

In 2013, NYSE Euronext was acquired by _______. A) DOT B) ICE C) BATS D) It was not acquired.

89)

SIPC ensures investors against failure of a brokerage firm up to a limit of _______. A) $100,000 B) $250,000 C) $500,000 D) $1,000,000

90)

Privately held firms may have only _______ shareholders. A) 10 B) 99 C) 250 D) 2,000

91)

The term "underwriting syndicate" describes _______. A) the issuing firm B) the lead underwriter only C) the investment banks that participate in the underwriting D) the private investors that purchase the shares

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92) The year with highest average first-day returns for U.S. IPOs was _______ and the year with the highest number of IPOs was _______. A) 1996; 1999 B) 1985, 2017 C) 1999; 1996 D) 2000; 2000

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Answer Key Test name: Chap 03_12e_Bodie 1) B 2) D 3) B 4) D 5) A 6) A 7) C 8) C 9) C 10) A 11) D 12) C 13) D 14) C 15) B 16) B 17) C 18) B 19) D 20) B 21) B 22) B 23) C 24) A 25) D 26) C Version 1

27) D 28) B 29) A 30) C 31) D 32) B 33) B 34) B 35) A 36) D 37) B 38) D 39) A 40) B 41) B 42) C 43) A 44) D 45) D 46) D 47) D 48) D 49) B 50) D 51) C 52) A 53) D 54) C 55) B 56) B Version 1

57) C 58) A 59) B 60) A 61) D 62) D 63) C 64) D 65) B 66) B 67) C 68) A 69) B 70) D 71) D 72) B 73) D 74) A 75) C 76) B 77) A 78) C 79) A 80) B 81) C 82) C 83) D 84) B 85) D 86) A Version 1

87) C 88) B 89) C 90) D 91) C 92) C

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CHAPTER 3: ALGO 1) Barnegat Light sold 200,000 shares in an initial public offering. The underwriter's explicit fees were $70,000. The offering price for the shares was $40, but immediately upon issue, the share price jumped to $50. What is the best estimate of the total cost to Barnegat Light of the equity issue? A) $70,000 B) $1,930,000 C) $2,070,000 D) $2,000,000

2) On a given day a stock dealer maintains a bid price of $1,004.50 for a bond and an ask price of $1,009.25. The dealer made 15 trades that totaled 750 bonds traded that day. What was the dealer's gross trading profit for this security? A) $3,562.50 B) $1,068.75 C) $750.00 D) $4,312.50

3) You find that the bid and ask prices for a stock are $11.45 and $12.00, respectively. If you purchase or sell the stock, you must pay a flat commission of $40. If you buy 200 shares of the stock and immediately sell them, what is your total implied and actual transaction cost in dollars? A) $80 B) $150 C) $190 D) $40

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4) Assume you purchased 500 shares of XYZ common stock on margin at $70 per share from your broker. If the initial margin is 70%, the amount you borrowed from the broker is _________. A) $35,000 B) $24,500 C) $10,500 D) $45,500

5) You short-sell 200 shares of Tuckerton Trading Company, now selling for $46 per share. What is your maximum possible gain, ignoring transactions cost? A) $46 B) $154 C) $9,200 D) unlimited

6) You short-sell 300 shares of Rock Creek Fly Fishing Company, now selling for $25 per share. If you want to limit your loss to $1,200, you should place a stop-buy order at ___. A) $29.00 B) $21.00 C) $42.00 D) $25.00

7) An investor puts up $14,000 but borrows an equal amount of money from his broker to double the amount invested to $28,000. The broker charges 7% on the loan. The stock was originally purchased at $70 per share, and in 1 year the investor sells the stock for $77. The investor's rate of return was ____.

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A) 13.00% B) 3.00% C) 13.50% D) 6.50%

8) You sell short 500 shares of Microsoft that are currently selling at $25 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 $21? (Ignore any dividends.) A) 24.00% B) 56.00% C) 16.00% D) 32.00%

9) The commission structure on a stock purchase is $30 plus $0.03 per share. If you purchase eight round lots of a stock selling for $108, what is your commission? A) $6 B) $30 C) $24 D) $54

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Answer Key Test name: Chap 03_12e_Bodie_Algo 1) C 2) A 3) C 4) C 5) C 6) A 7) A 8) D 9) D

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CHAPTER 4 1)

Which one of the following invests in a portfolio that is fixed for the life of the fund? A) Mutual fund B) Money market fund C) Managed investment company D) Unit investment trust

2) _______ are partnerships of investors with portfolios that are larger than most individual investors but are still too small to warrant managing on a separate basis. A) Commingled funds B) Closed-end funds C) REITs D) Mutual funds

3) A _______ is a private investment pool open only to wealthy or institutional investors that is exempt from SEC regulation and can therefore pursue more speculative policies than mutual funds. A) commingled pool B) unit trust C) hedge fund D) money market fund

4) Advantages of investment companies to investors include all but which one of the following?

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A) Record keeping and administration B) Low-cost diversification C) Professional management D) Guaranteed rates of return

5) Which of the following typically employ significant amounts of leverage? 1. Hedge funds 2. REITs 3. Money market funds 4. Equity mutual funds A) 1 and 2 only B) 2 and 3 only C) 3 and 4 only D) 1, 2, and 3 only

The NAV of which funds is fixed at $1 per share? A) Equity funds B) Money market funds C) Fixed-income funds D) Commingled funds

7) The two principal types of REITs are equity trusts, which _______, and mortgage trusts, which _______.

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A) invest directly in real estate; invest in mortgage and construction loans B) invest in mortgage and construction loans; invest directly in real estate C) use extensive leverage; distribute less than 95% of income to shareholders D) distribute less than 95% of income to shareholders; use extensive leverage

A contingent deferred sales load is commonly called a _______. A) front-end load B) back-end load C) 12b-1 charge D) top-end sales commission

9) In the United States in 2019, there were approximately _______ mutual funds offered by fewer than _______ fund complexes. A) 12,000; 650 B) 7,000; 100 C) 8,000; 850 D) 9,000; 300

10) Part B of a mutual fund prospectus contains information about: 1. Fund holdings by directors and officers 2. Front-end and back-end loads 3. Securities held by the fund at the end of the fiscal year A) 1 only B) 1 and 2 only C) 1 and 3 only D) 1, 2, and 3

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11)

Mutual funds provide the following for their shareholders. A) Diversification B) Professional management C) Record keeping and administration D) All of these choices are correct.

12)

The average maturity of fund investments in a money market mutual fund is _______. A) slightly more than 1 month B) slightly more than 1 year C) about 9 months D) between 2 and 3 years

13) Rank the following fund categories from likely most risky to likely least risky: 1. Equity growth fund 2. Balanced fund 3. Sector fund 4. Money market fund A) 4, 1, 3, 2 B) 3, 2, 4, 1 C) 1, 2, 3, 4 D) 3, 1, 2, 4

14) Which of the following result in a taxable event for investors in mutual funds? 1. Short-term capital gain distributions from the fund 2. Dividend distributions from the fund 3. Long-term capital gain distributions from the fund

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A) 1 only B) 2 only C) 1 and 2 only D) 1, 2, and 3

15)

The type of mutual fund that primarily engages in market timing is called _______. A) a sector fund B) an index fund C) an ETF D) an asset allocation fund

16)

As of 2019, approximately _______ of mutual fund assets were invested in equity funds. A) 5% B) 52% C) 30% D) 12%

17)

As of 2019, approximately _______ of mutual fund assets were invested in bond funds. A) 23% B) 32% C) 37% D) 47%

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18) As of 2019, approximately _______ of mutual fund assets were invested in money market funds. A) 5% B) 17% C) 44% D) 66%

19) Management fees for open-end and closed-end funds typically range between _______ and _______. A) 0.2%; 2.0% B) 0.5%; 5% C) 2%; 5% D) 3%; 8%

20) The primary measurement unit used for assessing the value of one's stake in an investment company is _______. A) net asset value B) average asset value C) gross asset value D) total asset value

21)

Net asset value is defined as _______.

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A) book value of assets divided by shares outstanding B) book value of assets minus liabilities divided by shares outstanding C) market value of assets divided by shares outstanding D) market value of assets minus liabilities divided by shares outstanding

22) Assume that you have just purchased some shares in an investment company reporting $500 million in assets, $50 million in liabilities, and 50 million shares outstanding. What is the net asset value (NAV) of these shares? A) $5 B) $9 C) $10 D) $11

23) Assume that you have recently purchased 100 shares in an investment company. Upon examining the balance sheet, you note that the firm is reporting $225 million in assets, $30 million in liabilities, and 10 million shares outstanding. What is the net asset value (NAV) of these shares? A) $25.50 B) $22.50 C) $19.50 D) $1.95

24) The Vanguard 500 Index Fund tracks the performance of the S&P 500. To do so, the fund buys shares in each S&P 500 company _______.

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A) in proportion to the market value weight of the firm's equity in the S&P 500 B) in proportion to the price weight of the stock in the S&P 500 C) by purchasing an equal number of shares of each stock in the S&P 500 D) by purchasing an equal dollar amount of shares of each stock in the S&P 500

25)

Which of the following is not a type of managed investment company? A) Unit investment trusts B) Closed-end funds C) Open-end funds D) Hedge funds

26)

Which of the following funds invest specifically in stocks of fast-growing companies? A) Balanced funds B) Growth equity funds C) REITs D) Equity income funds

27) A fund that invests in securities worldwide, including the United States of America, is called ______. A) an international fund B) an emerging market fund C) a global fund D) a regional fund

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28)

The greatest percentage of mutual fund assets are invested in _______. A) bond funds B) equity funds C) hybrid funds D) money market funds

29)

Sponsors of unit investment trusts earn a profit by _______. A) deducting management fees from fund assets B) deducting a percentage of any gains in asset value C) selling shares in the trust at a premium to the cost of acquiring the underlying assets D) charging portfolio turnover fees

30)

Investors who want to liquidate their holdings in a unit investment trust may _______. A) sell their shares back to the trustee at a discount B) sell their shares back to the trustee at net asset value C) sell their shares on the open market D) sell their shares at a premium to net asset value

31)

Investors who want to liquidate their holdings in a closed-end fund may _______. A) sell their shares back to the fund at a discount if they wish B) sell their shares back to the fund at net asset value C) sell their shares on the open market D) sell their shares at a premium to net asset value if they wish

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32) _______ fund is defined as one in which the fund charges a sales commission to either buy into or exit from the fund. A) A load B) A no-load C) An index D) A specialized-sector

33)

Which of the following is a false statement regarding open-end mutual funds? A) They offer investors a guaranteed rate of return. B) They offer investors a well-diversified portfolio. C) They redeem shares at their net asset value. D) They offer low-cost diversification.

34)

_______ funds stand ready to redeem or issue shares at their net asset value. A) Closed-end B) Index C) Open-end D) Hedge.

35)

Revenue sharing with respect to mutual funds refers to _______.

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A) fund companies paying brokers if the broker recommends the fund to investors B) allowing certain classes of investors to engage in market timing C) charging loads to new investors in a mutual fund D) directly marketing funds over the Internet

36) Higher portfolio turnover: 1. Results in greater tax liability for investors 2. Results in greater trading costs for the fund, which investors have to pay for 3. Is a characteristic of asset allocation funds A) 1 only B) 2 only C) 1 and 2 only D) 1, 2, and 3

37)

Low-load mutual funds have front-end loads of no more than _______. A) 2% B) 3% C) 4% D) 5%

38)

Most real estate investment trusts (REITs) have a debt ratio of around _______. A) 10% B) 30% C) 50% D) 70%

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39)

Measured by assets, about _______ of funds are hybrid stock/bond funds in 2019. A) 5% B) 8% C) 15% D) 23%

40) Which of the following is not a type of real estate investment trust? 1. Equity trust 2. Debt trust 3. Mortgage trust 4. Unit trust A) 1 and 2 only B) 2 only C) 2 and 4 only D) 1, 2, and 3

41)

_______ are often called mutual funds. A) Unit investment trusts B) Open-end investment companies C) Closed-end investment companies D) REITs

42)

Mutual funds account for roughly _______ of investment company assets in 2019.

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A) 16% B) 47% C) 73% D) 83%

43) An official description of a mutual fund's planned investment policy can be found in the fund's _______. A) prospectus B) indenture C) investment statement D) 12b-1 forms

44) Mutual funds that hold both equities and fixed-income securities in relatively stable proportions are called _______. A) income funds B) balanced funds C) asset allocation funds D) index funds

45) _______ are mutual funds that vary the proportions of funds invested in particular market sectors according to the fund manager's forecast of the performance of that market sector. A) Asset allocation funds B) Balanced funds C) Index funds D) Income funds

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46)

Specialized-sector funds concentrate their investments in _______. A) bonds of a particular maturity B) geographic segments of the real estate market C) government securities D) securities issued by firms in a particular industry

47)

If a mutual fund has multiple-class shares, which class typically has a front-end load? A) Class A B) Class B C) Class C D) Class I

48) The commission, or front-end load, paid when you purchase shares in mutual funds may not exceed _______. A) 3.50% B) 6.00% C) 8.50% D) 10.00%

49) You are considering investing in one of several mutual funds. All the funds under consideration have various combinations of front-end and back-end loads and/or 12b-1 fees. The longer you plan on remaining in the fund you choose, the more likely you will prefer a fund with a _______ rather than a _______, everything else equal.

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A) 12b-1 fee; front-end load B) front-end load; back-end load C) back-end load; front-end load D) 12b-1 fee; back-end load

50) Under SEC rules, the managers of certain funds are allowed to deduct charges for advertising, brokerage commissions, and other sales expenses directly from the fund assets rather than billing investors. These fees are known as _______. A) direct operating expenses B) back-end loads C) 12b-1 charges D) front-end loads

51) The SEC requires funds to disclose: 1. After-tax returns for the past year 2. After-tax returns for the last 5-year period 3. The tax impact of portfolio turnover A) 1 only B) 1 and 2 only C) 1 and 3 only D) 1, 2, and 3

52) SEC Rule 12b-1 allows managers of certain funds to deduct _______ expenses from fund assets; however, these expenses may not exceed _______ of the fund's average net assets per year.

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A) marketing; 1% B) marketing; 5% C) administrative; 0.50% D) administrative; 2%

53) Consider a mutual fund with $300 million in assets at the start of the year and 12 million shares outstanding. If the gross return on assets is 18% and the total expense ratio is 2% of the year-end value, what is the rate of return on the fund? A) 15.64% B) 16% C) 17.25% D) 17.50%

54) Consider a no-load mutual fund with $200 million in assets and 10 million shares at the start of the year and with $250 million in assets and 11 million shares at the end of the year. During the year investors have received income distributions of $2 per share and capital gain distributions of $.25 per share. Assuming that the fund carries no debt, and that the total expense ratio is 1%, what is the rate of return on the fund? A) 11.19% B) 23.75% C) 24.64% D) The answer cannot be determined from the information given.

55) Consider a no-load mutual fund with $400 million in assets, 50 million in debt, and 15 million shares at the start of the year and with $500 million in assets, 40 million in debt, and 18 million shares at the end of the year. During the year investors have received income distributions of $0.50 per share and capital gain distributions of $0.30 per share. If the total expense ratio is 0.75%, what is the rate of return on the fund?

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A) 12.09% B) 12.99% C) 8.25% D) The answer cannot be determined from the information given.

56)

Mutual fund returns may be granted pass-through status if _______. A) virtually all income is distributed to shareholders B) the fund qualifies for pass-through status according to the U.S. tax code C) the fund is sufficiently diversified D) All of these options combined.

57)

_______ is an example of an exchange-traded fund. A) An SPDR or spider B) A samurai C) A Vanguard D) An open-end fund

58) If you place an order to buy or sell a share of a mutual fund during the trading day, the order will be executed at _______. A) the NAV calculated at the market close at 4 pm New York time B) the real time NAV C) the NAV delayed 15 minutes D) the NAV calculated at the opening of the next day's trading

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59) According to the 2019 Investment Company Fact Book, _______ of total assets were in taxable money market funds and _______ were tax-exempt money market funds. A) 35.00%; 14.00% B) 12.30%; 75.00% C) 16.30%; 0.80% D) 5.00%; 47.00%

60) In his 1970 study, Malkiel found that mutual funds that do well in one period have an approximately _______ chance of doing well in the subsequent-year period. A) 33% B) 52% C) 65% D) 85%

61) In a recent study, Malkiel found that evidence of persistence in the performance of mutual funds _______ in the 1980s. A) grew stronger B) remained about the same C) became slightly weaker D) virtually disappeared

62) The ratio of trading activity of a portfolio to the assets of the portfolio is called the _______.

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A) reinvestment ratio B) trading rate C) portfolio turnover D) tax yield

63)

Which of the following ETFs tracks the S&P 500 Index? A) Qubes B) Diamonds C) Vipers D) Spiders

64) The Stone Harbor Fund is a closed-end investment company with a portfolio currently worth $300 million. It has liabilities of $5 million and 9 million shares outstanding. If the fund sells for $30 a share, what is its premium or discount as a percent of NAV? A) 9.26% premium B) 8.47% premium C) 9.26% discount D) 8.47% discount

65)

The difference between balanced funds and asset allocation funds is that _______.

A) balanced funds invest in bonds while asset allocation funds do not B) asset allocation funds invest in bonds while balanced funds do not C) balanced funds have relatively stable proportions of stocks and bonds while the proportions may vary dramatically for asset allocation funds D) balanced funds make no capital gain distributions and asset allocation funds make both dividend and capital gain distributions

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66) The Wildwood Fund sells Class A shares with a front-end load of 5% and Class B shares with a 12b-1 fee of 1% annually. If you plan to sell the fund after 4 years, are Class A or Class B shares the better choice? Assume a 10% annual return net of expenses before the 12b-1 fee is applied. A) Class A. B) Class B. C) There is no difference. D) The answer cannot be determined from the information given.

67) A mutual fund has total assets outstanding of $69 million. During the year the fund bought and sold assets equal to $17.25 million. This fund's turnover rate was _______. A) 25.00% B) 28.50% C) 18.63% D) 33.40%

68)

Which type of investment fund is known to invest in options and futures in large scale? A) Commingled funds B) Hedge funds C) ETFs D) REITs

69)

Advantages of ETFs over mutual funds include all but which one of the following?

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A) ETFs trade continuously, so investors can trade throughout the day. B) ETFs can be sold short or purchased on margin, unlike fund shares. C) ETF providers do not have to sell holdings to fund redemptions. D) ETF values can diverge from NAV.

70)

Which of the following funds is most likely to have a debt ratio of 70% or higher? A) Bond fund B) Commingled fund C) Equity fund D) REIT

71)

_______ have become the main way for investors to speculate in precious metals. A) Strategic income funds B) Balanced funds C) Specialized-sector funds D) Exchange-traded funds

72) From 1971 to 2018 the average return on the Wilshire 5000 Index was _______ the return of the average mutual fund. A) identical to B) 1.00% higher than C) 0.90% lower than D) 1.30% higher than

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73) An open-end fund has a NAV of $16.50 per share. The fund charges a 6% load. What is the offering price? A) $14.57 B) $15.95 C) $17.55 D) $16.49

74) The offer price of an open-end fund is $18 and the fund is sold with a front-end load of 5%. What is the fund's NAV? A) $18.74 B) $17.10 C) $15.40 D) $16.57

75) A mutual fund has $50 million in assets at the beginning of the year and 1 million shares outstanding throughout the year. Throughout the year assets grow at 12%. The fund imposes a 12b-1 fee on all shares equal to 1%. The fee is imposed on year-end asset values. If there are no distributions, what is the end-of-year NAV for the fund? A) $50 B) $55.44 C) $56.12 D) $54.55

76) The assets of a mutual fund are $25 million. The liabilities are $4 million. If the fund has 700,000 shares outstanding and pays a $3 dividend, what is the dividend yield?

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A) 5% B) 10% C) 15% D) 20%

77)

Which of the following funds are usually most tax-efficient? A) Equity funds B) Bond Funds C) ETFs D) Specialized-sector funds

78) You invest in a mutual fund that charges a 3% front-end load, 1% total annual fees, and a 2% back-end load, which decreases 0.5% per year. How much will you pay in fees on a $10,000 investment that does not grow if you cash out after 3 years of no gain? A) $103 B) $219 C) $553 D) $635

79) You invest in a mutual fund that charges a 3% front-end load, 1% total annual fees, and a 0% back-end load on Class A shares. The same fund charges a 0% front-end load, 1% total annual fees, and a 2% back-end load on Class B shares. What are the total fees in year 1 on a Class A investment of $20,000 with no growth in value?

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A) $658 B) $794 C) $885 D) $902

80) You invest in a mutual fund that charges a 3% front-end load, 1% total annual fees, and a 0% back-end load on Class A shares. The same fund charges a 0% front-end load, 1% total annual fees, and a 2% back-end load on Class B shares. What are the total fees in year 1 on a Class B investment of $20,000 if you redeem shares with no growth in value? A) $596 B) $794 C) $885 D) $902

81) You pay $21,600 to the Laramie Fund, which has a NAV of $18 per share at the beginning of the year. The fund deducted a front-end load of 4%. The securities in the fund increased in value by 10% during the year. The fund's expense ratio is 1.3% and is deducted from year-end asset values. What is your rate of return on the fund if you sell your shares at the end of the year? A) 4.35% B) 4.23% C) 6.45% D) 5.63%

82) Which one of the following statements about returns reported by mutual funds is not correct?

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A) Reported returns are net of management expenses. B) Reported returns are net of 12b-1 fees. C) Reported returns are net of brokerage fees paid on the fund's trading activity. D) None of these options are correct. (All of the items are included in reported returns.)

83)

The top Morningstar mutual fund performance rating is _______. A) five stars B) four stars C) three stars D) two stars

84) You are considering investing in a no-load mutual fund with an annual expense ratio of 0.60% and an annual 12b-1 fee of 0.75%. You could also invest in a bank CD paying 6.50% per year. What minimum annual rate of return must the fund earn to make you better off in the fund than in the CD? A) 7.10% B) 7.45% C) 7.25% D) 7.85%

85)

The five-star Morningstar rating implies: A) superior returns compared to risk. B) superior risk compared to return. C) lowest turnover compared to peers. D) lowest fees compared to peers.

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86)

Which type of fund is often priced at a significant discount to net asset value? A) Open-end fund B) Closed-end fund C) Hedge fund D) ETF

87)

Which type of fund generally has the lowest average expense ratio? A) Actively managed bond funds B) Hedge funds C) Indexed funds D) Actively managed international funds

88)

Disadvantages of ETFs include all of the following except: A) investors incur a bid-ask spread when purchasing. B) investors must pay a broker fee when purchasing. C) prices are only quoted once each day. D) prices can depart from NAV at times.

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Answer Key Test name: Chap 04_12e_Bodie 1) D 2) A 3) C 4) D 5) A 6) B 7) A 8) B 9) C 10) C 11) D 12) A 13) D 14) D 15) D 16) B 17) A 18) B 19) A 20) A 21) D 22) B 23) C 24) A 25) A 26) B Version 1

27) C 28) B 29) C 30) B 31) C 32) A 33) A 34) C 35) A 36) D 37) B 38) D 39) B 40) C 41) B 42) D 43) A 44) B 45) A 46) D 47) A 48) C 49) C 50) C 51) D 52) A 53) A 54) B 55) A 56) D Version 1

57) A 58) A 59) C 60) C 61) D 62) C 63) D 64) D 65) C 66) B 67) A 68) B 69) D 70) D 71) D 72) B 73) C 74) B 75) B 76) B 77) C 78) D 79) B 80) A 81) B 82) D 83) A 84) D 85) A 86) B Version 1

87) C 88) C

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CHAPTER 4: ALGO 1) Assume that you have just purchased some shares in an investment company reporting $945 million in assets, $45 million in liabilities, and 45 million shares outstanding. What is the net asset value (NAV) of these shares? A) $22 B) $20 C) $21 D) $1

2) Assume that you have recently purchased 260 shares in an investment company. Upon examining the balance sheet, you note that the firm is reporting $325 million in assets, $65 million in liabilities, and 26 million shares outstanding. What is the net asset value (NAV) of these shares? A) $15.00 B) $11.50 C) $10.00 D) $1.00

3) Consider a no-load mutual fund with $350 million in assets and 14 million shares at the start of the year and with $400 million in assets and 15 million shares at the end of the year. During the year investors have received income distributions of $2 per share and capital gain distributions of $0.25 per share. Assuming that the fund carries no debt, and that the total expense ratio is 1%, what is the rate of return on the fund? A) 13.83% B) 14.60% C) 26.65% D) The answer cannot be determined from the information given.

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4) The Stone Harbor Fund is a closed-end investment company with a portfolio currently worth $330 million. It has liabilities of $5 million and 10 million shares outstanding. If the fund sells for $30 a share, what is its premium or discount as a percent of NAV? A) 8.33% premium B) 7.69% premium C) 8.33% discount D) 7.69% discount

5) A mutual fund has total assets outstanding of $49 million. During the year the fund bought and sold assets equal to $12.25 million. This fund's turnover rate was _____. A) 25.00% B) 33.33% C) 20.00% D) 30.00%

6) An open-end fund has a NAV of $24.50 per share. The fund charges a 8% load. What is the offering price? A) $26.46 B) $22.69 C) $26.63 D) $24.42

7) The offer price of an open-end fund is $15 and the fund is sold with a front-end load of 6%. What is the fund's NAV?

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A) $15.90 B) $14.10 C) $14.94 D) $15.96

8) You invest in a mutual fund that charges a 3% front-end load, 1% total annual fees, and a 2% back-end load, which decreases 0.5% per year. How much will you pay in fees on a $11,200 investment that does not grow if you cash out after 3 years of no gain? A) $113 B) $336 C) $553 D) $711

9) You pay $23,300 to the Laramie Fund, which has a NAV of $25 per share at the beginning of the year. The fund deducted a front-end load of 3%. The securities in the fund increased in value by 10% during the year. The fund's expense ratio is 1.3% and is deducted from year-end asset values. What is your rate of return on the fund if you sell your shares at the end of the year? A) 16.59% B) 5.31% C) 15.10% D) 17.11%

10) You are considering investing in a no-load mutual fund with an annual expense ratio of 0.7% and an annual 12b-1 fee of 0.85%. You could also invest in a bank CD paying 6.5% per year. What minimum annual rate of return must the fund earn to make you better off in the fund than in the CD?

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A) 7.20% B) 7.35% C) 7.80% D) 8.05%

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Answer Key Test name: Chap 04_12e_Bodie_Algo 1) B 2) C 3) B 4) D 5) A 6) C 7) B 8) D 9) B 10) D

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CHAPTER 5 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 __________. A) 4.00% B) 3.50% C) 7.00% D) 11.00%

The __________ measure of returns ignores compounding. A) geometric average B) arithmetic average C) IRR 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 __________. A) geometric average return B) arithmetic average return C) dollar-weighted return D) index return

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

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A) Geometric average return B) Arithmetic average return C) Dollar-weighted return D) Historical average return

5) Rank the following from highest average historical return to lowest average historical return from 1926 to 2019. 1. Small stocks 2. Long-term bonds 3. Large stocks 4. T-bills A) 1, 2, 3, 4 B) 3, 4, 2, 1 C) 1, 3, 2, 4 D) 3, 1, 2, 4

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 3. Large stocks 4. T-bills A) 1, 2, 3, 4 B) 3, 4, 2, 1 C) 1, 3, 2, 4 D) 3, 1, 2, 4

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 __________. Version 1

A) dollar-weighted return B) geometric average return C) arithmetic average return D) index return

The complete portfolio refers to the investment in __________. A) the risk-free asset B) the risky portfolio C) the risk-free asset and the risky portfolio combined 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 overall average historical performance of the investments you have chosen? Which method provides the best measure of your individual portfolio performance? A) Dollar-weighted return; geometric average return B) Geometric average return; dollar-weighted return C) Arithmetic average return; dollar-weighted return D) Arithmetic average return; geometric average return

10)

The holding period return on a stock is equal to __________. A) the capital gain yield over the period plus the inflation rate B) the capital gain yield over the period plus the dividend yield C) the current yield plus the dividend yield D) the dividend yield plus the risk premium

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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? A) dollar-weighted return B) geometric average return C) arithmetic average return D) mean holding-period return

12)

Published data on past returns earned by mutual funds are required to be __________. A) dollar-weighted returns B) geometric returns C) excess returns D) index returns

13)

The arithmetic average of −11%, 15%, and 20% is __________. A) 15.67% B) 8.00% C) 11.22% D) 6.45%

14)

The geometric average of −12%, 20%, and 25% is __________.

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A) 8.42% B) 11.00% C) 9.70% D) 18.88%

15)

Another name for the dollar-weighted return is the __________. A) difference between cash inflows and cash outflows B) arithmetic average return C) geometric average return 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 __________. A) 41.68% B) 11.32% C) 3.64% D) 13.00%

17) Annual percentage rates can be converted to effective annual rates by means of the following formula: A) [1 + (APR/n)]n − 1 B) APR × n C) APR/ n D) (periodic rate) × ( n)

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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? A) 3.01% B) 3.09% C) 12.42% 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? A) 2.04% B) 12.00% C) 12.24% 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? A) 6.38% B) 12.77% C) 13.17% D) 14.25%

21)

You have an APR of 7.5% with continuous compounding. The EAR is __________.

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A) 7.50% B) 7.65% C) 7.79 % D) 8.25%

22) You have an EAR of 9%. The equivalent APR with continuous compounding is __________. A) 8.47% B) 8.62% C) 8.88% D) 9.42%

23)

The market risk premium is best approximated by __________.

A) the difference between the return on an index fund and the return on Treasury bills B) the difference between the return on a small-firm mutual fund and the return on the Standard & Poor's 500 Index C) the difference between the return on the risky asset with the lowest returns and the return on Treasury bills 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 __________. A) rate of return that can be earned with certainty B) rate of return in excess of the Treasury-bill rate C) rate of return in excess of a predicted model like CAPM D) index return

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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. A) risky assets; Treasury bills B) Treasury bills; risky assets C) excess returns; risky assets D) index assets; bonds

26)

The reward-to-volatility ratio is given by __________. A) the slope of the capital allocation line B) the second derivative of the capital allocation line C) the point at which the second derivative of the investor's indifference curve reaches

zero 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? A) 12.80% B) 11.00% C) 8.90% D) 9.20%

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?

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A) 5.14% B) 7.59% C) 9.29% D) 8.43%

29) During the 1927-2018 period the geometric mean return on small/value stocks was __________. A) 28.21% B) 5.56% C) 8.99% D) 15.38%

30) During the 1927-2018 period the geometric mean return on big/growth stocks was __________. A) 8.07% B) 9.07% C) 9.34% D) 18.35%

31) During the 1927-2018 period the Sharpe ratio was greatest for which of the following asset classes? A) Small/growth U.S. stocks B) Big/value U.S. stocks C) Long-term U.S. Treasury bonds D) Bond world portfolio return in U.S. dollars

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32) During the 1986-2013 period, the Sharpe ratio was lowest for which of the following asset classes? A) Small U.S. stocks B) Large U.S. stocks C) Long-term U.S. Treasury bonds D) Equity world portfolio in U.S. dollars

33) During the 1927-2018 period which one of the following asset classes provided the lowest real return? A) Small U.S. stocks B) Large U.S. stocks C) Long-term U.S. Treasury bonds 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 __________. A) is normally risk neutral B) requires a risk premium to take on the risk C) knows he or she will not lose money 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.

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A) the same B) lower C) higher 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 __________. A) small firms are better run than large firms B) government subsidies available to small firms produce effects that are discernible in stock market statistics C) small firms are riskier than large firms 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 3. A number for which the unit is percentage of returns A) 1 only B) 1 and 2 only C) 1 and 3 only D) 1, 2, and 3

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?

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A) 5.48% B) 8.74% C) 9.00% D) 12.00%

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? A) 4.85% B) 8.00% C) 11.00% D) 11.24%

40)

One method of forecasting the risk premium is to use the __________. A) coefficient of variation of analysts' earnings forecasts B) variations in the risk-free rate over time C) average historical excess returns for the asset under consideration 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, E(rQ) is at least __________. A) 8.67% B) 9.84% C) 21.28% D) 14.68%

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42) In the mean standard deviation graph, the line that connects the risk-free rate and the optimal risky portfolio, P, is called the __________. A) capital allocation line B) indifference curve C) investor's utility line D) security market line

43)

Most studies indicate that investors' risk aversion is in the range __________. A) −1.0 – 0.0 B) 0.0 – 1.5 C) 1.5 – 4.0 D) 4.0 – 6.0

44) Two assets have the following expected returns and standard deviations when the riskfree 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. A) only asset A is acceptable B) only asset B is acceptable C) neither asset A nor asset B is acceptable 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 __________.

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A) stocks B) bonds C) money market funds D) Treasury bills

46)

<p>The formula

is used to calculate the __________.

A) Sharpe ratio B) Treynor measure C) coefficient of variation D) real rate of return

47) A portfolio with a 25% standard deviation generated a return of 15% last year when Tbills were paying 4.5%. This portfolio had a Sharpe ratio of __________. A) 0.22 B) 0.60 C) 0.42 D) 0.25

48) Consider a Treasury bill with a rate of return of 5% and the following risky securities: Security A: E(r) = 0.15; variance = 0.0400 Security B: E(r) = 0.10; variance = 0.0225 Security C: E(r) = 0.12; variance = 0.1000 Security D: E(r) = 0.13; variance = 0.0625 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 __________.

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A) security A B) security B C) security C 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 __________. A) − 3.57% B) − 3.45% C) 4.31% 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. 3. The Sharpe ratio of A will be higher than the Sharpe ratio of B. A) 1 only B) 2 only C) 2 and 3 only D) 1, 2, and 3

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 __________.

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A) $0.25 B) $1.00 C) $2.00 D) $4.25

52) An investor invests 70% of her wealth in a risky asset with an expected rate of return of 15% and a variance of 5%, and she puts 30% in a Treasury bill that pays 5%. Her portfolio's expected rate of return and standard deviation are __________ and __________ respectively. A) 10.00%; 6.75% B) 12.00%; 22.40% C) 12.00%; 15.65% D) 10.00%; 35.65%

53) The holding-period return on a stock was 32%. Its beginning price was $25, and its cash dividend was $1.50. Its ending price must have been __________. A) $28.50 B) $33.20 C) $31.50 D) $29.75

54) Consider the following two investment alternatives: First, a risky portfolio that pays a 15% rate of return with a probability of 40% or a 5% rate of return with a probability of 60%. Second, a Treasury bill that pays 6%. The risk premium on the risky investment is __________.

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A) 1% B) 3% C) 6% D) 9%

55) Consider the following two investment alternatives: First, a risky portfolio that pays a 20% rate of return with a probability of 60% or a 5% rate of return with a probability of 40%. Second, a Treasury bill that pays 6%. If you invest $50,000 in the risky portfolio, your expected profit after one year would be __________. A) $3,000 B) $7,000 C) $7,500 D) $10,000

56) You invest $10,000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 15% and a standard deviation of 21% and a Treasury bill with a rate of return of 5%. How much money should be invested in the risky asset to form a portfolio with an expected return of 11%? A) $6,000 B) $4,000 C) $7,000 D) $3,000

57) You invest $1,000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 16% and a standard deviation of 20% and a Treasury bill with a rate of return of 6%. __________ of your complete portfolio should be invested in the risky portfolio if you want your complete portfolio to have a standard deviation of 9%.

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A) 100% B) 55% C) 45% D) 15%

58) You invest $1,000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 16% and a standard deviation of 20% and a Treasury bill with a rate of return of 6%. A portfolio that has an expected value in 1 year of $1,100 could be formed if you __________. A) place 40% of your money in the risky portfolio and the rest in the risk-free asset B) place 55% of your money in the risky portfolio and the rest in the risk-free asset C) place 60% of your money in the risky portfolio and the rest in the risk-free asset D) place 75% of your money in the risky portfolio and the rest in the risk-free asset

59) You invest $1,000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 16% and a standard deviation of 20% and a Treasury bill with a rate of return of 6%. The slope of the capital allocation line formed with the risky asset and the risk-free asset is approximately __________. A) 1.04 B) 0.80 C) 0.50 D) 0.25

60) You have $500,000 available to invest. The risk-free rate, as well as your borrowing rate, is 8%. The return on the risky portfolio is 16%. If you wish to earn a 22% return, you should __________.

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A) invest $125,000 in the risk-free asset B) invest $375,000 in the risk-free asset C) borrow $125,000 D) borrow $375,000

61) The return on the risky portfolio is 15%. The risk-free rate, as well as the investor's borrowing rate, is 10%. The standard deviation of return on the risky portfolio is 20%. If the standard deviation on the complete portfolio is 25%, the expected return on the complete portfolio is __________. A) 6.00% B) 8.75 % C) 10.25% D) 16.25%

62) You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40%, respectively. X has an expected rate of return of 14%, and Y has an expected rate of return of 10%. To form a complete portfolio with an expected rate of return of 11%, you should invest __________ of your complete portfolio in Treasury bills. A) 19.00% B) 25.50% C) 36.00% D) 50.00%

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63) You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40% respectively. X has an expected rate of return of 14%, and Y has an expected rate of return of 10%. To form a complete portfolio with an expected rate of return of 8%, you should invest approximately __________ in the risky portfolio. This will mean you will also invest approximately __________ and __________ of your complete portfolio in security X and Y, respectively. A) 0%; 60%; 40% B) 25%; 45%; 30% C) 40%; 24%; 16% D) 50%; 30%; 20%

64) You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40%, respectively. X has an expected rate of return of 14%, and Y has an expected rate of return of 10%. If you decide to hold 25% of your complete portfolio in the risky portfolio and 75% in the Treasury bills, then the dollar values of your positions in X and Y, respectively, would be __________ and __________. A) $300; $450 B) $150; $100 C) $100; $150 D) $450; $300

65) You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40%, respectively. X has an expected rate of return of 14%, and Y has an expected rate of return of 10%. The dollar values of your positions in X, Y, and Treasury bills would be __________, __________, and __________, respectively, if you decide to hold a complete portfolio that has an expected return of 8%.

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A) $162; $595; $243 B) $243; $162; $595 C) $595; $162; $243 D) $595; $243; $162

66) You have the following rates of return for a risky portfolio for several recent years: r2016 = 35.23% r2017 = 18.67% r2018 = −9.87% r2019 = 23.45% If you invested $1,000 at the beginning of 2013, your investment at the end of 2016 would be worth __________. A) $2,176.60 B) $1,785.56 C) $1,645.53 D) $1,247.87

67) You have the following rates of return for a risky portfolio for several recent years: r2016 = 35.23% r2017 = 18.67% r2018 = −9.87% r2019 = 23.45% The annualized (geometric) average return on this investment is __________. A) 16.15% B) 16.87% C) 21.32% D) 15.60%

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68) A security with normally distributed returns has an annual expected return of 18% and standard deviation of 23%. The probability of getting a return between −28% and 64% in any one year is __________. A) 68.26% B) 95.44% C) 99.74% D) 100.00%

69) The Manhawkin Fund has an expected return of 16% and a standard deviation of 20%. The risk-free rate is 4%. What is the reward-to-volatility ratio for the Manhawkin Fund? A) 0.80 B) 0.60 C) 9.00 D) 1.00

70) From 1927 to 2018 the world stock portfolio offered __________ return and __________ volatility than the portfolio of large U.S. stocks. A) lower; higher B) lower; lower C) higher; lower D) higher; higher

71) The price of a stock is $55 at the beginning of the year and $50 at the end of the year. If the stock paid a $3 dividend and inflation was 3%, what is the real holding-period return for the year?

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A) −3.64% B) −6.36% C) −6.44% D) −11.74%

72) The price of a stock is $38 at the beginning of the year and $41 at the end of the year. If the stock paid a $2.50 dividend, what is the holding-period return for the year? A) 6.58% B) 8.86% C) 14.47% D) 18.66%

73) You invest all of your money in 1-year T-bills. Which of the following statements is (are) correct? 1. Your nominal return on the T-bills is riskless. 2. Your real return on the T-bills is riskless. 3. Your nominal Sharpe ratio is zero. A) 1 only B) 1 and 3 only C) 2 only D) 1, 2, and 3

74) Which one of the following would be considered a risk-free asset in real terms as opposed to nominal?

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A) Money market fund B) U.S. T-bill C) Short-term corporate bonds D) U.S. T-bill whose return was indexed to inflation

75) 7%?

What is the geometric average return of the following quarterly returns: 3%, 5%, 4%, and

A) 3.72% B) 4.23% C) 4.74% D) 4.90%

76)

What is the geometric average return if the quarterly returns are 8%, 9%, 5%, and 12%? A) 8.00% B) 8.33% C) 8.47% D) 8.50%

77) If the nominal rate of return on investment is 6% and inflation is 2% over a holding period, what is the real rate of return on this investment? A) 3.92% B) 4.00% C) 4.12% D) 6.00%

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78) According to historical data, over the long run which of the following assets has the best chance to provide the best after-inflation, after-tax rate of return? A) long-term Treasury bonds B) corporate bonds C) common stocks D) preferred stocks

79) The buyer of a new home is quoted a mortgage rate of 0.5% per month. What is the APR on the loan? A) 0.50% B) 5.00% C) 6.00% D) 6.17%

80)

A loan for a new car costs the borrower 0.8% per month. What is the EAR? A) 0.80% B) 6.87% C) 9.6% D) 10.03%

81) The CAL provided by combinations of 1-month T-bills and a broad index of common stocks is called the __________.

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A) SML B) CAPM C) CML D) total return line

82) Which of the following arguments supporting passive investment strategies is (are) correct? 1. Active trading strategies may not guarantee higher returns but guarantee higher costs. 2. Passive investors can free-ride on the activity of knowledge investors whose trades force prices to reflect currently available information. 3. Passive investors are guaranteed to earn higher rates of return than active investors over sufficiently long time horizons. A) 1 only B) 1 and 2 only C) 2 and 3 only D) 1, 2, and 3

83) You have the following rates of return for a risky portfolio for several recent years. Assume that the stock pays no dividends. Year 2016 2017 2018 2019

Beginning of Year Price $ 50.00 $ 55.00 $ 51.00 $ 54.00

# of Shares Bought or Sold 100 bought 50 bought 75 sold 75 sold

What is the geometric average return for the period? A) 2.87% B) 0.74% C) 2.60% D) 2.21%

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84) You have the following rates of return for a risky portfolio for several recent years. Assume that the stock pays no dividends. Year 2016 2017 2018 2019

Beginning of Year Price $ 50.00 $ 55.00 $ 51.00 $ 54.00

# of Shares Bought or Sold 100 bought 50 bought 75 sold 75 sold

What is the dollar-weighted return over the entire time period? A) 2.87% B) 0.74% C) 2.6% D) 2.21%

85) If you believe you have a 60% chance of doubling your money, a 30% chance of gaining 15%, and a 10% chance of losing your entire investment, what is your expected return? A) 5.00% B) 15.00% C) 54.50% D) 114.50%

86)

The normal distribution is completely described by its __________. A) mean and standard deviation B) mean C) mode and standard deviation D) median and variance

87) Which measure of downside risk predicts the worst loss that will be suffered with a given probability?

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A) Standard deviation B) Variance C) Value at risk D) Sharpe ratio

88) What is the VaR of a $10 million portfolio with normally distributed returns at the 5% VaR? Assume the expected return is 13% and the standard deviation is 20%. A) 13.00% B) −13.00% C) 19.90% D) −19.90%

89) Your great aunt Zelda invested $100 in 1925 in a portfolio of large U.S. stocks that earned a compound return of 10% annually. If she left that money to you, how much would be in the account 92 years later in 2017? A) $1,000 B) $9,900 C) $642,875.74 D) $5,843,325

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Answer Key Test name: Chap 05_12e_Bodie 1) D 2) B 3) C 4) A 5) C 6) C 7) C 8) C 9) B 10) B 11) A 12) B 13) B 14) C 15) D 16) B 17) A 18) B 19) C 20) C 21) C 22) B 23) A 24) B 25) B 26) A Version 1

27) D 28) A 29) D 30) A 31) B 32) C 33) C 34) B 35) C 36) C 37) B 38) B 39) D 40) C 41) C 42) A 43) C 44) C 45) A 46) A 47) C 48) A 49) C 50) B 51) C 52) C 53) C 54) B 55) B 56) A Version 1

57) C 58) A 59) C 60) D 61) D 62) A 63) C 64) B 65) B 66) B 67) D 68) B 69) B 70) B 71) C 72) C 73) B 74) D 75) C 76) C 77) A 78) C 79) C 80) D 81) C 82) B 83) C 84) B 85) C 86) A Version 1

87) C 88) D 89) C

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CHAPTER 5: ALGO 1) You put up $50 at the beginning of the year for an investment. The value of the investment grows 5% and you earn a dividend of $4.00. Your HPR was __________. A) 5.0% B) 4.0% C) 8.0% D) 13.0%

The arithmetic average of –18%, 29%, and 34% is __________. A) 27.00% B) 15.00% C) 21.00% D) 11.25%

The geometric average of −18%, 35%, and 40% is __________. A) 14.25% B) 19.00% C) 15.72% D) 30.65%

4) An investment earns 13% the first year, earns 20% the second year, and loses 15% the third year. The total compound return over the 3 years was __________.

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A) 55.94% B) 15.26% C) 18.00% D) 5.09%

5) Treasury bills are paying a 9% rate of return. A risk-averse investor with a risk aversion of A = 2 should invest entirely in a risky portfolio with a standard deviation of 26% only if the risky portfolio's expected return is at least __________. A) 15.76% B) 11.26% C) 22.52% D) 4.52%

6) A portfolio with a 25% standard deviation generated a return of 19% last year when Tbills were paying 4.5%. This portfolio had a Sharpe ratio of __________. A) 0.83 B) 0.25 C) 0.58 D) 0.39

7) You purchased a share of stock for $27. One year later you received $2.35 as dividend and sold the share for $26. Your holding-period return was __________. A) -5.19% B) -8.70% C) 5.00% D) 9.04%

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8) You invest $2,200 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 16% and a standard deviation of 25% and a Treasury bill with a rate of return of 6%. __________ of your complete portfolio should be invested in the risky portfolio if you want your complete portfolio to have a standard deviation of 14%. A) 12% B) 37% C) 56% D) 10%

9) You are considering investing $1,500 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40% respectively. X has an expected rate of return of 15%, and Y has an expected rate of return of 12%. To form a complete portfolio with an expected rate of return of 9%, you should invest approximately __________ in the risky portfolio. This will mean you will also invest approximately __________ and __________ of your complete portfolio in security X and Y, respectively. A) 0%; 60%; 40% B) 50%; 30%; 20% C) 45%; 27%; 18% D) 27%; 45%; 28%

10) You have the following rates of return for a risky portfolio for several recent years. Assume that the stock pays no dividends. Year 2016 2017 2018 2019

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Beginning of Year Price $30 $35 $31 $34

# of Shares Bought or Sold 110 bought 60 bought 85 sold 85 sold

What is the geometric average return for the period? A) 8.56% B) 3.18% C) 4.26% D) 6.46%

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Answer Key Test name: Chap 05_12e_Bodie_Algo 1) D 2) B 3) C 4) B 5) C 6) C 7) C 8) C 9) C 10) C

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CHAPTER 6 1)

Risk that can be eliminated through diversification is called __________ risk. A) unique B) firm-specific C) diversifiable D) All of these options are correct.

The __________ decision should take precedence over the __________ decision. A) asset allocation; security selection B) bond selection; mutual fund selection C) stock selection; asset allocation D) stock selection; mutual fund selection

3) Many current and retired Enron Corporation employees had their 401k retirement accounts wiped out when Enron collapsed because __________. A) they had to pay huge fines for obstruction of justice B) their 401k accounts were held outside the company C) their 401k accounts were not well diversified D) None of these options are correct.

4) Based on the outcomes in the following table, choose which of the statements below is (are) correct? Scenario Recession Normal Boom

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Security A Return > E(r) Return = E(r) Return < E(r)

Security B Return = E(r) Return = E(r) Return = E(r)

Security C Return < E(r) Return = E(r) Return > E(r) 1

1.The covariance of security A and security B is zero. 2.The correlation coefficient between securities A and C is negative. 3.The correlation coefficient between securities B and C is positive.

A) 1 only B) 1 and 2 only C) 2 and 3 only D) 1, 2, and 3

5) Asset A has an expected return of 15% and a reward-to-variability ratio of 0.4. Asset B has an expected return of 20% and a reward-to-variability ratio of 0.3. A risk-averse investor would prefer a portfolio using the risk-free asset and __________. A) asset A B) asset B C) no risky asset D) The answer cannot be determined from the data given.

6) Adding additional risky assets to the investment opportunity set will generally move the efficient frontier __________ and to the __________. A) up; right B) up; left C) down; right D) down; left

An investor's degree of risk aversion will determine their __________.

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A) optimal risky portfolio B) risk-free rate C) optimal mix of the risk-free asset and risky asset D) capital allocation line

8) The _________ is the covariance divided by the product of the standard deviations of the returns on each fund. A) covariance B) correlation coefficient C) standard deviation D) reward-to-variability ratio

Which of the following statistics cannot be negative? A) Covariance B) Variance C) E(r) D) Correlation coefficient

10) Asset A has an expected return of 20% and a standard deviation of 25%. The risk-free rate is 10%. What is the reward-to-variability ratio? A) 0.40 B) 0.50 C) 0.75 D) 0.80

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11)

The correlation coefficient between two assets equals __________. A) their covariance divided by the product of their variances B) the product of their variances divided by their covariance C) the sum of their expected returns divided by their covariance D) their covariance divided by the product of their standard deviations

12)

Diversification is most effective when security returns are __________. A) high B) negatively correlated C) positively correlated D) uncorrelated

13)

The expected rate of return of a portfolio of risky securities is __________. A) the sum of the individual securities' covariance B) the sum of theindividual securities' variance C) the weighted sum of the individual securities' expected returns D) the weighted sum of theindividual securities' variance

14)

Beta is a measure of security responsiveness to __________. A) firm-specific risk B) diversifiable risk C) market risk D) unique risk

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15)

The risk that can be diversified away is __________. A) beta B) firm-specific risk C) market risk D) systematic risk

16) Approximately how many securities does it take to diversify almost all of the unique risk from a portfolio? A) 2 B) 6 C) 8 D) 20

17) Consider an investment opportunity set formed with two securities that are perfectly negatively correlated. The global minimum-variance portfolio has a standard deviation that is always __________. A) equal to the sum of the securities' standard deviations B) equal to −1 C) equal to 0 D) greater than 0

18)

Market risk is also called __________ and __________.

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A) systematic risk; diversifiable risk B) systematic risk; nondiversifiable risk C) unique risk; nondiversifiable risk D) unique risk; diversifiable risk

19)

Firm-specific risk is also called __________ and __________. A) systematic risk; diversifiable risk B) systematic risk; nondiversifiable risk C) unique risk; nondiversifiable risk D) unique risk; diversifiable risk

20)

Which one of the following stock return statistics fluctuates the most over time? A) Covariance of returns B) Variance of returns C) Average return D) Correlation coefficient

21)

Harry Markowitz is best known for his Nobel Prize-winning work on __________. A) strategies for active securities trading B) techniques used to identify efficient portfolios of risky assets C) techniques used to measure the systematic risk of securities D) techniques used in valuing securities options

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22) Suppose that a stock portfolio and a bond portfolio have a zero correlation. This means that __________. A) the returns on the stock and bond portfolios tend to move inversely B) the returns on the stock and bond portfolios tend to vary independently of each other C) the returns on the stock and bond portfolios tend to move together D) the covariance of the stock and bond portfolios will be positive

23) You put half of your money in a stock portfolio that has an expected return of 14% and a standard deviation of 24%. You put the rest of your money in a risky bond portfolio that has an expected return of 6% and a standard deviation of 12%. The stock and bond portfolios have a correlation of 0.55. The standard deviation of the resulting portfolio will be __________. A) more than 18% but less than 24% B) equal to 18% C) more than 12% but less than 18% D) equal to 12%

24) On a standard expected return versus standard deviation graph, investors will prefer portfolios that lie __________ the current investment opportunity set. A) left and above B) left and below C) right and above D) right and below

25)

The term complete portfolio refers to a portfolio consisting of __________.

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A) the risk-free asset combined with at least one risky asset B) the market portfolio combined with the minimum-variance portfolio C) securities from domestic markets combined with securities from foreign markets D) common stocks combined with bonds

26)

Rational risk-averse investors will always prefer portfolios __________. A) located on the efficient frontier to those located on the capital market line B) located on the capital market line to those located on the efficient frontier C) at or near the minimum-variance point on the risky asset efficient frontier D) that are risk-free to all other asset choices

27) The optimal risky portfolio can be identified by finding: 1. The minimum-variance point on the efficient frontier 2. The maximum-return point on the efficient frontier and the minimum-variance point on the efficient frontier 3. The tangency point of the capital market line and the efficient frontier 4. The line with the steepest slope that connects the risk-free rate to the efficient frontier A) 1 and 2 only B) 2 and 3 only C) 3 and 4 only D) 1 and 4 only

28) line.

The __________ reward-to-variability ratio is found on the __________ capital market

A) lowest; steepest B) highest; flattest C) highest; steepest D) lowest; flattest

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29) A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 24%, while stock B has a standard deviation of return of 18%. Stock A comprises 60% of the portfolio, while stock B comprises 40% of the portfolio. If the variance of return on the portfolio is 0.0380, the correlation coefficient between the returns on A and B is __________. A) 0.583 B) 0.225 C) 0.327 D) 0.128

30) The standard deviation of return on investment A is 10%, while the standard deviation of return on investment B is 5%. If the covariance of returns on A and B is 0.0030, the correlation coefficient between the returns on A and B is __________. A) 0.12 B) 0.36 C) 0.60 D) 0.77

31) A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 35%, while stock B has a standard deviation of return of 15%. The correlation coefficient between the returns on A and B is 0.45. Stock A comprises 40% of the portfolio, while stock B comprises 60% of the portfolio. The standard deviation of the return on this portfolio is __________. A) 23.0% B) 19.76% C) 18.45% D) 17.67%

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32) The standard deviation of return on investment A is 10%, while the standard deviation of return on investment B is 4%. If the correlation coefficient between the returns on A and B is −0.50, the covariance of returns on A and B is __________. A) −0.0447 B) −0.0020 C) 0.0020 D) 0.0447

33) Consider two perfectly negatively correlated risky securities, A and B. Security A has an expected rate of return of 16% and a standard deviation of return of 20%. B has an expected rate of return of 10% and a standard deviation of return of 30%. The weight of security B in the minimum-variance portfolio is __________. A) 10% B) 20% C) 40% D) 60%

34) An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 18% and a standard deviation of return of 20%. Stock B has an expected return of 14% and a standard deviation of return of 5%. The correlation coefficient between the returns of A and B is 0.50. The risk-free rate of return is 10%. The proportion of the optimal risky portfolio that should be invested in stock A is __________. A) 0% B) 40% C) 60% D) 100%

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35) An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 18% and a standard deviation of return of 20%. Stock B has an expected return of 14% and a standard deviation of return of 5%. The correlation coefficient between the returns of A and B is 0.50. The risk-free rate of return is 10%. The expected return on the optimal risky portfolio is __________. A) 14.0% B) 15.6% C) 16.4% D) 18.0%

36) An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 18% and a standard deviation of return of 20%. Stock B has an expected return of 14% and a standard deviation of return of 5%. The correlation coefficient between the returns of A and B is 0.50. The risk-free rate of return is 10%. The standard deviation of return on the optimal risky portfolio is __________. A) 0% B) 5% C) 7% D) 20%

37) An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 21% and a standard deviation of return of 39%. Stock B has an expected return of 14% and a standard deviation of return of 20%. The correlation coefficient between the returns of A and B is 0.4. The risk-free rate of return is 5%. The proportion of the optimal risky portfolio that should be invested in stock B is approximately __________.

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A) 29% B) 44% C) 56% D) 71%

38) An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 21% and a standard deviation of return of 39%. Stock B has an expected return of 14% and a standard deviation of return of 20%. The correlation coefficient between the returns of A and B is 0.4. The risk-free rate of return is 5%. The expected return on the optimal risky portfolio is approximately __________. (Hint: Find weights first.) A) 14% B) 16% C) 18% D) 19%

39) An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 21% and a standard deviation of return of 39%. Stock B has an expected return of 14% and a standard deviation of return of 20%. The correlation coefficient between the returns of A and B is 0.4. The risk-free rate of return is 5%. The standard deviation of returns on the optimal risky portfolio is _________. A) 25.5% B) 22.3% C) 21.4% D) 20.7%

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40) An investor can design a risky portfolio based on two stocks, A and B. The standard deviation of return on stock A is 24%, while the standard deviation on stock B is 14%. The correlation coefficient between the returns on A and B is 0.35. The expected return on stock A is 25%, while on stock B it is 11%. The proportion of the minimum-variance portfolio that would be invested in stock B is approximately __________. A) 45.54% B) 67.00% C) 85.39% D) 92.34%

41) An investor can design a risky portfolio based on two stocks, A and B. The standard deviation of return on stock A is 20%, while the standard deviation on stock B is 15%. The correlation coefficient between the returns on A and B is 0%. The rate of return for stocks A and B is 20% and 10% respectively. The expected return on the minimum-variance portfolio is approximately __________. A) 10.0% B) 13.6% C) 15.6% D) 19.4%

42) An investor can design a risky portfolio based on two stocks, A and B. The standard deviation of return on stock A is 20%, while the standard deviation on stock B is 15%. The correlation coefficient between the returns on A and B is 0%.The rate of return for stocks A and B is 20% and 10% respectively. The standard deviation of return on the minimum-variance portfolio is ___________. A) 0% B) 6% C) 12% D) 17%

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43)

A measure of the riskiness of an asset held in isolation is __________. A) beta B) standard deviation C) covariance D) alpha

44) Semitool Corporation has an expected excess return of 6% for next year. However, for every unexpected 1% change in the market, Semitool's return responds by a factor of 1.2. Suppose it turns out that the economy and the stock market do better than expected by 1.5% and Semitool's products experience more rapid growth than anticipated, pushing up the stock price by another 1%. Based on this information, what was Semitool's actual excess return? A) 7.00% B) 8.50% C) 8.80% D) 9.25%

45) The part of a stock's return that is systematic is a function of which of the following variables? 1. Volatility in excess returns of the stock market 2. The sensitivity of the stock's returns to changes in the stock market 3. The variance in the stock's returns that is unrelated to the overall stock market A) 1 only B) 1 and 2 only C) 2 and 3 only D) 1, 2, and 3

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46) Stock A has a beta of 1.2, and stock B has a beta of 1. The returns of stock A are __________ sensitive to changes in the market than are the returns of stock B. A) 20% more B) 120% more C) 20% less D) 83% less

47) Which risk can be partially or fully diversified away as additional securities are added to a portfolio? 1.Total risk 2.Systematic risk 3.Firm-specific risk

A) 1 only B) 1 and 2 only C) 1, 2, and 3 D) 1 and 3

48) According to Tobin's separation property, portfolio choice can be separated into two independent tasks consisting of __________ and __________. A) identifying all investor imposed constraints; identifying the set of securities that conform to the investor's constraints and offer the best risk-return trade-offs B) identifying the investor's degree of risk aversion; choosing securities from industry groups that are consistent with the investor's risk profile C) identifying the optimal risky portfolio; constructing a complete portfolio from T-bills and the optimal risky portfolio based on the investor's degree of risk aversion D) choosing which risky assets an investor prefers according to the investor's riskaversion level; minimizing the CAL by lending at the risk-free rate

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49) You are constructing a scatter plot of excess returns for stock A versus the market index. If the correlation coefficient between stock A and the index is -1, you will find that the points of the scatter diagram __________ and the line of best fit has a __________. A) all fall on the line of best fit; positive slope B) all fall on the line of best fit; negative slope C) are widely scattered around the line; positive slope D) are widely scattered around the line; negative slope

50)

The term excess return refers to __________.

A) returns earned illegally by means of insider trading B) the difference between the rate of return earned and the risk-free rate C) the difference between the rate of return earned on a particular security and the rate of return earned on other securities of equivalent risk D) the portion of the return on a security that represents tax liability and therefore cannot be reinvested

51) You are recalculating the risk of ACE stock in relation to the market index, and you find that the ratio of the systematic variance to the total variance has risen. You must also find that the __________. A) covariance between ACE and the market has fallen B) correlation coefficient between ACE and the market has fallen C) correlation coefficient between ACE and the market has risen D) unsystematic risk of ACE has risen

52) StockA has a correlation with the market of 0.45. The standard deviation of the market is 21%, and the standard deviation of the stock is 35%. What is the stock's beta?

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A) 1 B) 0.75 C) 0.60 D) 0.55

53)

The values of beta coefficients of securities are __________. A) always positive B) always negative C) always between positive 1 and negative 1 D) usually positive but are not restricted in any particular way

54)

A security's beta coefficient will be negative if __________. A) its returns are negatively correlated with market-index returns B) its returns are positively correlated with market-index returns C) its stock price has historically been very stable D) market demand for the firm's shares is very low

55) The market value weighted-average beta of all firms included in the market index will always be __________. A) 0 B) between 0 and 1 C) 1 D) none of these options (There is no particular rule concerning the average beta of firms included in the market index.)

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56)

Diversification can reduce or eliminate __________ risk. A) all B) systematic C) nonsystematic D) only insignificant

57) To construct a riskless portfolio using two risky stocks, one would need to find two stocks with a correlation coefficient of __________. A) -0.5 B) 0.0 C) 0.5 D) -1.0

58) Some diversification benefits can be achieved by combining securities in a portfolio as long as the correlation between the securities is __________. A) 1 B) less than 1 C) between 0 and 1 (and therefore not negative) D) less than or equal to 0 (and therefore not positive)

59) If an investor does not diversify his portfolio and instead puts all of his money in one stock, the appropriate measure of security risk for that investor is the __________.

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A) stock's standard deviation B) variance of the market C) stock's beta D) covariance with the market index

60)

Which of the following provides the best example of a systematic-risk event? A) A strike by union workers hurts a firm's quarterly earnings. B) Mad Cow disease in Montana hurts local ranchers and buyers of beef. C) The Federal Reserve increases interest rates 50 basis points. D) A senior executive at a firm embezzles $10 million and escapes to South America.

61) A project has a 60% chance of doubling your investment in 1 year and a 40% chance of losing half your money. What is the standard deviation of this investment? A) 20.00% B) 50.00% C) 62.23% D) 73.48%

62) A project has a 50% chance of doubling your investment in 1 year and a 50% chance of losing half your money. What is the expected return on this investment project? A) 0% B) 25% C) 50% D) 75%

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63) You run a regression for a stock's return on a market index and find the following Excel output: Multiple R R-Square Adjusted R-Square Standard Error Observations

0.35 0.12 0.02 38.45 12 Coefficients

Intercept Market

4.05 1.32

Standard Error 15.44 0.97

t-Stat

p-Value

0.26 1.36

0.80 0.10

The beta of this stock is __________. A) 0.12 B) 0.35 C) 1.32 D) 4.05

64) You run a regression for a stock's return on a market index and find the following Excel output: Multiple R R-Square Adjusted R-Square Standard Error Observations

Intercept Market

0.35 0.12 0.02 38.45 12 Coefficients 4.05 1.32

Standard Error 15.44 0.97

t-Stat

p-Value

0.26 1.36

0.80 0.10

This stock has greater systematic risk than a stock with a beta of __________.

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A) 0.50 B) 1.50 C) 2.00 D) Both 0.50 and 1.50

65) You run a regression for a stock's return on a market index and find the following Excel output: Multiple R R-Square Adjusted R-Square Standard Error Observations

Intercept Market

0.35 0.12 0.02 38.45 12 Coefficients 4.05 1.32

Standard Error 15.44 0.97

t-Stat

p-Value

0.26 1.36

0.80 0.10

The characteristic line for this stock is rstock = __________ + __________ rM. A) 0.35; 0.12 B) 4.05; 1.32 C) 15.44; 0.97 D) 0.26; 1.36

66) You run a regression for a stock's return on a market index and find the following Excel output: Multiple R R-Square Adjusted R-Square Standard Error Observations

Intercept

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0.35 0.12 0.02 38.45 12 Coefficients 4.05

Standard Error 15.44

t-Stat

p-Value

0.26

0.80

Market

1.32

0.97

1.36

0.10

__________ of the variance is explained by this regression. A) 12.00% B) 35.05% C) 4.05% D) 80.00%

67) You run a regression for a stock's return on a market index and find the following Excel output: Multiple R R-Square Adjusted R-Square Standard Error Observations

Intercept Market

0.35 0.12 0.02 38.45 12 Coefficients 4.05 1.32

Standard Error 15.44 0.97

t-Stat

p-Value

0.26 1.36

0.80 0.10

The stock is __________ riskier than the typical stock. A) 32.00% B) 15.44% C) 12.07% D) 38.45%

68)

Decreasing the number of stocks in a portfolio from 50 to 10 would likely __________.

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A) increase the systematic risk of the portfolio B) increase the unsystematic risk of the portfolio C) increase the return of the portfolio D) decrease the variation in returns the investor faces in any one year

69) If you want to know the portfolio standard deviation for a three-stock portfolio, you will have to __________. A) calculate two covariances and one trivariance B) calculate only two covariances C) calculate three covariances D) average the variances of the individual stocks

70) Which of the following correlation coefficients will produce the least diversification benefit? A) −0.6 B) −0.3 C) 0.0 D) 0.8

71) Which of the following correlation coefficients will produce the most diversification benefits?

A) −0.6 B) −0.9 C) 0.0 D) 0.4

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72) What is the most likely correlation coefficient between a stock-index mutual fund and the S&P 500? A) −1.0 B) 0.0 C) 1.0 D) −0.5

73) risk?

Investing in two assets with a correlation coefficient of −0.5 will reduce what kind of

A) Market risk B) Nondiversifiable risk C) Systematic risk D) Unique risk

74)

Investing in two assets with a correlation coefficient of 1 will reduce which kind of risk? A) Market risk B) Unique risk C) Unsystematic risk D) With a correlation of 1, no risk will be reduced.

75) A portfolio of stocks fluctuates when the Treasury yields change. Since this risk cannot be eliminated through diversification, it is called __________.

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A) firm-specific risk B) systematic risk C) unique risk D) None of the options are correct.

76) As you lengthen the time horizon of your investment period and decide to invest for multiple years, you will find that: 1.The average risk per year may be smaller over longer investment horizons. 2.The overall risk of your investment will compound over time. 3.Your overall risk on the investment will fall.

A) 1 only B) 1 and 2 only C) 3 only D) 1, 2, and 3

77) You are considering adding a new security to your portfolio. To decide whether you should add the security, you need to know the security's: 1.Expected return 2.Standard deviation 3.Correlation with your portfolio

A) 1 only B) 1 and 2 only C) 1 and 3 only D) 1, 2, and 3

78) Which of the following is a correct expression concerning the formula for the standard deviation of returns of a two-asset portfolio where the correlation coefficient is positive?

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A) B) C) D)

79) What is the standard deviation of a portfolio of two stocks given the following data: Stock A has a standard deviation of 18%. Stock B has a standard deviation of 14%. The portfolio contains 40% of stock A, and the correlation coefficient between the two stocks is −0.23. A) 9.73% B) 12.23% C) 14.45% D) 15.68%

80) What is the standard deviation of a portfolio of two stocks given the following data: Stock A has a standard deviation of 30%. Stock B has a standard deviation of 18%. The portfolio contains 60% of stock A, and the correlation coefficient between the two stocks is -1. A) 0.00% B) 10.80% C) 18.85% D) 24.17%

81) The expected return of a portfolio is 8.9%, and the risk-free rate is 3.5%. If the portfolio standard deviation is 12%, what is the reward-to-variability ratio of the portfolio?

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A) 0.00 B) 0.45 C) 0.74 D) 1.35

82) The figures below show plots of monthly excess returns for two stocks plotted against excess returns for a market index.

Which stock is likely to further reduce risk for an investor currently holding her portfolio in a well-diversified portfolio of common stock? A) Stock A B) Stock B C) There is no difference between A or B. D) The answer cannot be determined from the information given.

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83) The figures below show plots of monthly excess returns for two stocks plotted against excess returns for a market index.

Which stock is riskier to a nondiversified investor who puts all his money in only one of these stocks? A) Stock A is riskier. B) Stock B is riskier. C) Both stocks are equally risky. D) The answer cannot be determined from the information given.

84)

The efficient frontier represents a set of portfolios that: A) maximize expected return for a given level of risk. B) minimize expected return for a given level of risk. C) maximize risk for a given level of return. D) None of the options are correct.

85) The portfolio with the lowest standard deviation for any risk premium is called the __________.

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A) CAL portfolio B) efficient frontier portfolio C) global minimum variance portfolio D) optimal risky portfolio

86) Lear Corporation has an expected excess return of 8% next year. Assume Lear’s beta is 1.43. If the economy booms and the stock market beats expectations by 5%, what was Lear’s actual excess return? A) 7.15% B) 13.00% C) 15.15% D) 18.59 %

87) The plot of a security’s excess return relative to the market’s excess return is called the __________. A) efficient frontier B) security characteristic line C) capital allocation line D) capital market line

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Answer Key Test name: Chap 06_12e_Bodie 1) D 2) A 3) C 4) B 5) A 6) B 7) C 8) B 9) B 10) A 11) D 12) B 13) C 14) C 15) B 16) D 17) C 18) B 19) D 20) C 21) B 22) B 23) C 24) A 25) A 26) B Version 1

27) C 28) C 29) A 30) C 31) B 32) B 33) C 34) A 35) A 36) B 37) D 38) B 39) C 40) C 41) B 42) C 43) B 44) C 45) B 46) A 47) D 48) C 49) B 50) B 51) C 52) B 53) D 54) A 55) C 56) C Version 1

57) D 58) B 59) A 60) C 61) D 62) B 63) C 64) A 65) B 66) A 67) A 68) B 69) C 70) D 71) B 72) C 73) D 74) D 75) B 76) B 77) D 78) D 79) A 80) B 81) B 82) A 83) A 84) A 85) C 86) C Version 1

87) B

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CHAPTER 6: ALGO 1) Asset A has an expected return of 17% and a standard deviation of 25%. The risk-free rate is 11%. What is the reward-to-variability ratio? A) 0.24 B) 0.35 C) 0.75 D) 0.83

2) A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 29%, while stock B has a standard deviation of return of 20%. Stock A comprises 60% of the portfolio, while stock B comprises 40% of the portfolio. If the variance of return on the portfolio is 0.051, the correlation coefficient between the returns on A and B is __________. A) 0.515 B) 0.309 C) 0.206 D) 0.103

3) The standard deviation of return on investment A is 11%, while the standard deviation of return on investment B is 6%. If the covariance of returns on A and B is 0.004, the correlation coefficient between the returns on A and B is __________. A) 0.004 B) −0.606 C) 0.606 D) −0.004

4) The standard deviation of return on investment A is 23%, while the standard deviation of return on investment B is 18%. If the correlation coefficient between the returns on A and B is −0.266, the covariance of returns on A and B is __________. Version 1

A) −0.2082 B) −0.0110 C) 0.0110 D) 0.2082

5) An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 16% and a standard deviation of return of 20.0%. Stock B has an expected return of 12% and a standard deviation of return of 5%. The correlation coefficient between the returns of A and B is 0.50. The risk-free rate of return is 8%. The proportion of the optimal risky portfolio that should be invested in stock A is __________. A) 0% B) 50% C) 30% D) 58%

6) An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 15% and a standard deviation of return of 29%. Stock B has an expected return of 10% and a standard deviation of return of 14%. The correlation coefficient between the returns of A and B is 0.5. The risk-free rate of return is 5%. The proportion of the optimal risky portfolio that should be invested in stock B is approximately __________. A) 30% B) 48% C) 52% D) 70%

7) A stock has a correlation with the market of 0.51. The standard deviation of the market is 27%, and the standard deviation of the stock is 35%. What is the stock's beta?

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A) 1.51 B) 0.66 C) 0.39 D) 0.34

8) You find that the annual Sharpe ratio for stock A returns is equal to 1.95. For a 2-year holding period, the Sharpe ratio would equal _______. A) 1.38 B) 2.83 C) 2.76 D) 0.73

9) The expected return of a portfolio is 9.7%, and the risk-free rate is 3%. If the portfolio standard deviation is 20%, what is the reward-to-variability ratio of the portfolio? A) 0.52 B) 0.34 C) 1.06 D) 0.66

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Answer Key Test name: Chap 06_12e_Bodie_Algo 1) A 2) A 3) C 4) B 5) A 6) D 7) B 8) C 9) B

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CHAPTER 7 1)

The measure of risk used in the capital asset pricing model is __________. A) specific risk B) the standard deviation of returns C) reinvestment risk D) beta

2) Fama and French claim that after controlling for firm size and the ratio of the firm's book value to market value, beta is: 1. Highly significant in predicting future stock returns 2. Relatively useless in predicting future stock returns 3. A good predictor of the firm's specific risk A) 1 only B) 2 only C) 1 and 3 only D) 1, 2, and 3

Which of the following are assumptions of the simple CAPM model?

1. Individual trades of investors do not affect a stock's price. 2. All investors plan for one identical holding period. 3. All investors analyze securities in the same way and share the same economic view of the world. 4. All investors have the same level of risk aversion. A) 1, 2, and 4 only B) 1, 2, and 3 only C) 2, 3, and 4 only D) 1, 2, 3, and 4

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4) When all investors analyze securities in the same way and share the same economic view of the world, we say they have __________. A) heterogeneous expectations B) equal risk aversion C) asymmetric information D) homogeneous expectations

In a simple CAPM world which of the following statements is (are) correct?

1. All investors will choose to hold the market portfolio, which includes all risky assets in the world. 2. Investors' complete portfolio will vary depending on their risk aversion. 3. The return per unit of risk will be identical for all individual assets. 4. The market portfolio will be on the efficient frontier, and it will be the optimal risky portfolio. A) 1, 2, and 3 only B) 2, 3, and 4 only C) 1, 3, and 4 only D) 1, 2, 3, and 4

6) Consider the CAPM. The risk-free rate is 6%, and the expected return on the market is 18%. What is the expected return on a stock with a beta of 1.3? A) 6.00% B) 15.60% C) 18.00% D) 21.60%

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7) Consider the CAPM. The risk-free rate is 5%, and the expected return on the market is 15%. What is the beta on a stock with an expected return of 17%? A) 0.5 B) 0.7 C) 1.0 D) 1.2

8) Consider the CAPM. The expected return on the market is 18%. The expected return on a stock with a beta of 1.2 is 20%. What is the risk-free rate? A) 2% B) 6% C) 8% D) 12%

The arbitrage pricing theory was developed by __________. A) Henry Markowitz B) Stephen Ross C) William Sharpe D) Eugene Fama

10) In the context of the capital asset pricing model, the systematic measure of risk is best captured by __________.

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A) unique risk B) beta C) the standard deviation of returns D) the variance of returns

11)

Empirical results estimated from historical data indicate that betas __________. A) are always close to zero B) are constant over time C) of all securities are always between zero and 1 D) seem to regress toward 1 over time

12) If enough investors decide to purchase stocks, they are likely to drive up stock prices, thereby causing __________ and __________. A) expected returns to fall; risk premiums to fall B) expected returns to rise; risk premiums to fall C) expected returns to rise; risk premiums to rise D) expected returns to fall; risk premiums to rise

13)

The market portfolio has a beta of __________. A) −1.0 B) 0.0 C) 0.5 D) 1.0

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14)

In a well-diversified portfolio, __________ risk is negligible. A) nondiversifiable B) market C) systematic D) unsystematic

15)

The capital asset pricing model was developed by __________. A) Kenneth French B) Stephen Ross C) William Sharpe D) Eugene Fama

16) If all investors become more risk averse, the SML will __________ and stock prices will __________. A) shift upward; rise B) shift downward; fall C) have the same intercept with a steeper slope; fall D) have the same intercept with a flatter slope; rise

17)

According to the capital asset pricing model, a security with a __________. A) negative alpha is considered a good buy B) positive alpha is considered overpriced C) positive alpha is considered underpriced D) zero alpha is considered a good buy

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18)

Arbitrage is based on the idea that __________. A) assets with identical risks must have the same expected rate of return B) securities with similar risk should sell at different prices C) the expected returns from equally risky assets are different D) markets are perfectly efficient

19)

Investors require a risk premium as compensation for bearing __________. A) unsystematic risk B) alpha risk C) residual risk D) systematic risk

20) According to the capital asset pricing model, a fairly priced security will plot __________. A) above the security market line B) on the security market line C) below the security market line D) at no relation to the security market line

21)

According to the capital asset pricing model, fairly priced securities have __________.

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A) negative betas B) positive alphas C) positive betas D) zero alphas

22) You have a $50,000 portfolio consisting of Intel, GE, and Con Edison. You put $20,000 in Intel, $12,000 in GE, and the rest in Con Edison. Intel, GE, and Con Edison have betas of 1.3, 1, and 0.8, respectively. What is your portfolio beta? A) 1.048 B) 1.033 C) 1.000 D) 1.037

23) The graph of the relationship between expected return and beta in the CAPM context is called the __________. A) CML B) CAL C) SML D) SCL

24) Research has revealed that regardless of what the current estimate of a firm's beta is, beta will tend to move closer to __________ over time. A) 1.0 B) 0.0 C) −1.0 D) 0.5

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25)

According to the capital asset pricing model, in equilibrium __________. A) all securities' returns must lie below the capital market line B) all securities' returns must lie on the security market line C) the slope of the security market line must be less than the market risk premium D) any security with a beta of 1 must have an excess return of zero

26) According to the CAPM, which of the following is not a true statement regarding the market portfolio. A) All securities in the market portfolio are held in proportion to their market values. B) It includes all risky assets in the world, including human capital. C) It is always the minimum-variance portfolio on the efficient frontier. D) It lies on the efficient frontier.

27) In a world where the CAPM holds, which one of the following is not a true statement regarding the capital market line? A) The capital market line always has a positive slope. B) The capital market line is also called the security market line. C) The capital market line is the best-attainable capital allocation line. D) The capital market line is the line from the risk-free rate through the market portfolio.

28) Consider the single factor APT. Portfolio A has a beta of 1.3 and an expected return of 21%. Portfolio B has a beta of 0.7 and an expected return of 17%. The risk-free rate of return is 8%. If you wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio __________ and a long position in portfolio __________.

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A) A; A B) A; B C) B; A D) B; B

29) Consider the single factor APT. Portfolio A has a beta of 0.2 and an expected return of 13%. Portfolio B has a beta of 0.4 and an expected return of 15%. The risk-free rate of return is 10%. If you wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio __________ and a long position in portfolio __________. A) A; A B) A; B C) B; A D) B; B

30) Consider the multifactor APT with two factors. Portfolio A has a beta of 0.5 on factor 1 and a beta of 1.25 on factor 2. The risk premiums on the factor 1 and 2 portfolios are 1% and 7%, respectively. The risk-free rate of return is 7%. The expected return on portfolio A is __________ if no arbitrage opportunities exist. A) 13.50% B) 15.00% C) 16.25% D) 23.25%

31) Consider the one-factor APT. The variance of the return on the factor portfolio is 0.08. The beta of a well-diversified portfolio on the factor is 1.2. The variance of the return on the well-diversified portfolio is approximately __________.

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A) 0.1152 B) 0.1270 C) 0.1521 D) 0.1342

32) Security X has an expected rate of return of 13% and a beta of 1.15. The risk-free rate is 5%, and the market expected rate of return is 15%. According to the capital asset pricing model, security X is __________. A) fairly priced B) overpriced C) underpriced D) None of these answers are correct.

33)

The possibility of arbitrage arises when __________.

A) there is no consensus among investors regarding the future direction of the market, and thus trades are made arbitrarily B) mispricing among securities creates opportunities for riskless profits C) two identically risky securities carry the same expected returns D) investors do not diversify

34)

Building a zero-investment portfolio will always involve __________. A) an unknown mixture of short and long positions B) only short positions C) only long positions D) equal investments in a short and a long position

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35)

An important characteristic of market equilibrium is __________. A) the presence of many opportunities for creating zero-investment portfolios B) all investors exhibit the same degree of risk aversion C) the absence of arbitrage opportunities D) the lack of liquidity in the market

36) Consider the capital asset pricing model. The market degree of risk aversion, A, is 3. The risk premium is 2.25%. If the risk-free rate of return is 4%, the expected return on the market portfolio is __________. A) 6.75% B) 9.25% C) 10.75% D) 12.00%

37) You invest $600 in security A with a beta of 1.5 and $400 in security B with a beta of 0.90. The beta of this portfolio is __________. A) 1.14 B) 1.20 C) 1.26 D) 1.55

38)

In a single-factor market model the beta of a stock ________.

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A) measures the stock's contribution to the standard deviation of the market portfolio B) measures the stock's unsystematic risk C) changes with the variance of the residuals D) measures the stock's contribution to the standard deviation of the stock

39) Security A has an expected rate of return of 12% and a beta of 1.1. The market expected rate of return is 8%, and the risk-free rate is 5%. The alpha of the stock is __________. A) −1.7% B) 3.7% C) 5.5% D) 8.7%

40) The variance of the return on the market portfolio is 0.04 and the expected return on the market portfolio is 20%. If the risk-free rate of return is 10%, the market degree of risk aversion, A, is __________. A) 0.5 B) 2.5 C) 3.5 D) 5.5

41) The risk-free rate is 4%. The expected market rate of return is 11%. If you expect stock X with a beta of 0.8 to offer a rate of return of 12%, then you should __________. A) buy stock X because it is overpriced B) buy stock X because it is underpriced C) sell short stock X because it is overpriced D) sell short stock X because it is underpriced

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42) Consider the one-factor APT. The standard deviation of return on a well-diversified portfolio is 20%. The standard deviation on the factor portfolio is 12%. The beta of the welldiversified portfolio is approximately __________. A) 0.60 B) 1 C) 1.67 D) 3.20

43) The risk-free rate and the expected market rate of return are 6% and 16%, respectively. According to the capital asset pricing model, the expected rate of return on security X with a beta of 1.2 is equal to __________. A) 12% B) 17% C) 18% D) 23%

44) Consider two stocks, A and B. Stock A has an expected return of 10% and a beta of 1.2. Stock B has an expected return of 14% and a beta of 1.8. The expected market rate of return is 9% and the risk-free rate is 5%. Security __________ would be considered the better buy because __________. A) A; it offers an expected excess return of 0.2% B) A; it offers an expected excess return of 2.2% C) B; it offers an expected excess return of 1.8% D) B; it offers an expected return of 2.4%

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45) According to the CAPM, the risk premium an investor expects to receive on any stock or portfolio is __________. A) directly related to the risk aversion of the particular investor B) inversely related to the risk aversion of the particular investor C) directly related to the beta of the stock D) inversely related to the alpha of the stock

46)

In his famous critique of the CAPM, Roll argued that the CAPM __________. A) is not testable because the true market portfolio can never be observed B) is of limited use because systematic risk can never be entirely eliminated C) should be replaced by the APT D) should be replaced by the Fama-French three-factor model

47) Which of the following variables do Fama and French claim do a better job explaining stock returns than beta? 1. Book-to-market ratio 2. Unexpected change in industrial production 3. Firm size A) 1 only B) 1 and 2 only C) 1 and 3 only D) 1, 2, and 3

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48) In a study conducted by Jagannathan and Wang, it was found that the performance of beta in explaining security returns could be considerably enhanced by: 1. Including the unsystematic risk of a stock 2. Including human capital in the market portfolio 3. Allowing for changes in beta over time A) 1 and 2 only B) 2 and 3 only C) 1 and 3 only D) 1, 2, and 3

49)

The SML is valid for __________, and the CML is valid for __________.

A) only individual assets; well-diversified portfolios only B) only well-diversified portfolios; only individual assets C) both well-diversified portfolios and individual assets; both well-diversified portfolios and individual assets D) both well-diversified portfolios and individual assets; well-diversified portfolios only

50)

Liquidity is a risk factor that __________. A) has yet to be accurately measured and incorporated into portfolio management B) is unaffected by trading mechanisms on various stock exchanges C) has no effect on the market value of an asset D) affects bond prices but not stock prices

51)

Beta is a measure of __________.

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A) total risk B) relative systematic risk C) relative nonsystematic risk D) relative business risk

52) According to capital asset pricing theory, the key determinant of portfolio returns is __________. A) the degree of diversification B) the systematic risk of the portfolio C) the firm-specific risk of the portfolio D) economic factors

53)

The expected return of the risky-asset portfolio with minimum variance is __________. A) the market rate of return B) zero C) the risk-free rate D) The answer cannot be determined from the information given.

54)

According to the CAPM, investors are compensated for all but which of the following? A) Expected inflation B) Systematic risk C) Time value of money D) Residual risk

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55) The most significant conceptual difference between the arbitrage pricing theory (APT) and the capital asset pricing model (CAPM) is that the CAPM __________. A) places less emphasis on market risk B) recognizes multiple unsystematic risk factors C) recognizes only one systematic risk factor D) recognizes multiple systematic risk factors

56)

An investor should do which of the following for stocks with negative alphas? A) Go long B) Sell short C) Hold D) Do nothing

57)

A stock's alpha measures the stock's __________. A) expected return B) abnormal return C) excess return D) residual return

58)

The measure of unsystematic risk can be found from an index model as __________. A) residual standard deviation B) R-square C) degrees of freedom D) sum of squares of the regression

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59)

Standard deviation of portfolio returns is a measure of __________. A) total risk B) relative systematic risk C) relative nonsystematic risk D) relative business risk

60)

One of the main problems with the arbitrage pricing theory is __________.

A) its use of several factors instead of a single market index to explain the risk-return relationship B) the introduction of nonsystematic risk as a key factor in the risk-return relationship C) that the APT requires an even larger number of unrealistic assumptions than does the CAPM D) the model fails to identify the key macroeconomic variables in the risk-return relationship

61)

You run a regression of a stock's returns versus a market index and find the following:

Intercept Slope

Coefficients

Lower 95%

Upper 95%

0.789 0.890

−1.556 0.6541

3.457 1.465

Based on the data, you know that the stock __________. A) earned a positive alpha that is statistically significantly different from zero B) has a beta precisely equal to 0.890 C) has a beta that is likely to be anything between 0.6541 and 1.465 inclusive D) has no systematic risk

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62) The expected return on the market portfolio is 15%. The risk-free rate is 8%. The expected return on SDA Corporation common stock is 16%. The beta of SDA Corporation common stock is 1.25. Within the context of the capital asset pricing model, __________. A) SDA Corporation stock is underpriced B) SDA Corporation stock is fairly priced C) SDA Corporation stock's alpha is −0.75% D) SDA Corporation stock alpha is 0.75%

63) Assume that both X and Y are well-diversified portfolios and the risk-free rate is 8%. Portfolio X has an expected return of 14% and a beta of 1. Portfolio Y has an expected return of 9.5% and a beta of 0.25. In this situation, you would conclude that portfolios X and Y ________. A) are in equilibrium B) offer an arbitrage opportunity C) are both underpriced D) are both fairly priced

64) What is the expected return on the market?

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A) 0% B) 5% C) 10% D) 15%

65) What is the beta for a portfolio with an expected return of 12.5%? A) 0.5 B) 1.0 C) 1.5 D) 2.5

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66) What is the expected return for a portfolio with a beta of 0.5? A) 5.5% B) 7.5% C) 12.5% D) 15.0%

67) What is the alpha of a portfolio with a beta of 2 and actual return of 15%? A) 0% B) 13% C) 15% D) 17%

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68) If the simple CAPM is valid and all portfolios are priced correctly, which of the situations below is possible? Consider each situation independently, and assume the risk-free rate is 5%. A) Portfolio A Market

Expected Return 15% 15%

Beta

Expected Return 20% 15%

Beta

Expected Return 20% 15%

Beta

Expected Return 30% 15%

Beta

1.2 1.0

B) Portfolio A Market

12% 20

C) Portfolio A Market

1.2 1.0

D) Portfolio A Market

2.5 1.0

A) Option A B) Option B C) Option C D) Option D

69) Two investment advisers are comparing performance. Adviser A averaged a 20% return with a portfolio beta of 1.5, and adviser B averaged a 15% return with a portfolio beta of 1.2. If the T-bill rate was 5% and the market return during the period was 13%, which adviser was the better stock picker? A) Advisor A was better because he generated a larger alpha. B) Advisor B was better because she generated a larger alpha. C) Advisor A was better because he generated a higher return. D) Advisor B was better because she achieved a good return with a lower beta.

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70)

The expected return on the market is the risk-free rate plus the __________. A) diversified returns B) equilibrium risk premium C) historical market return D) unsystematic return

71) You consider buying a share of stock at a price of $25. The stock is expected to pay a dividend of $1.50 next year, and your advisory service tells you that you can expect to sell the stock in 1 year for $28. The stock's beta is 1.1, rf is 6%, and E(rm) = 16%. What is the stock's abnormal return? A) 1.00% B) 2.05% C) −1.00% D) −2.05%

72) If the beta of the market index is 1 and the standard deviation of the market index increases from 12% to 18%, what is the new beta of the market index? A) 0.8 B) 1.0 C) 1.2 D) 1.5

73) According to the CAPM, what is the market risk premium given an expected return on a security of 13.6%, a stock beta of 1.2, and a risk-free interest rate of 4%?

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A) 4.00% B) 4.80% C) 6.65% D) 8.00%

74) According to the CAPM, what is the expected market return given an expected return on a security of 15.8%, a stock beta of 1.2, and a risk-free interest rate of 5%? A) 5% B) 9% C) 13% D) 14%

75) What is the expected return on a stock with a beta of 0.8, given a risk-free rate of 3.5% and an expected market return of 15.5%? A) 3.80% B) 13.10% C) 15.65% D) 19.10%

76) Research has identified two systematic factors that affect U.S. stock returns. The factors are growth in industrial production and changes in long-term interest rates. Industrial production growth is expected to be 3%, and long-term interest rates are expected to increase by 1%. You are analyzing a stock that has a beta of 1.2 on the industrial production factor and 0.5 on the interest rate factor. It currently has an expected return of 12%. However, if industrial production actually grows 5% and interest rates drop 2%, what is your best guess of the stock's return?

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A) 15.90% B) 12.90% C) 13.20% D) 12.00%

77) A stock has a beta of 1.3. The systematic risk of this stock is __________ the stock market as a whole. A) higher than B) lower than C) equal to D) indeterminable compared to

78) The risk premium for exposure to aluminum commodity prices is 4%, and the firm has a beta relative to aluminum commodity prices of 0.6. The risk premium for exposure to GDP changes is 6%, and the firm has a beta relative to GDP of 1.2. If the risk-free rate is 4%, what is the expected return on this stock? A) 10.0% B) 11.5% C) 13.6% D) 14.0%

79) The two-factor model on a stock provides a risk premium for exposure to market risk of 9%, a risk premium for exposure to interest rate risk of −1.3%, and a risk-free rate of 3.5%. The beta for exposure to market risk is 1, and the beta for exposure to interest rate risk is also 1. What is the expected return on the stock?

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A) 8.70% B) 11.20% C) 13.85% D) 15.25%

80) The risk premium for exposure to exchange rates is 5%, and the firm has a beta relative to exchange rates of 0.4. The risk premium for exposure to the consumer price index is −6%, and the firm has a beta relative to the CPI of 0.8. If the risk-free rate is 3%, what is the expected return on this stock? A) 0.20% B) 1.55% C) 3.69% D) 4.04%

81) The two-factor model on a stock provides a risk premium for exposure to market risk of 12%, a risk premium for exposure to silver commodity prices of 3.5%, and a risk-free rate of 4%. The beta for exposure to market risk is 1, and the beta for exposure to commodity prices is also 1. What is the expected return on the stock? A) 11.64% B) 13.05% C) 15.35% D) 19.50%

82)

The CAPM __________.

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A) predicts the relationship between risk and expected return of an asset B) provides a benchmark rate of return for evaluating possible investments C) helps us make an educated guess as to expected return on assets that have not yet traded in the marketplace D) All of the options are correct.

83)

One can profit from an arbitrage opportunity by:

A) taking a long position in the cheaper market and a short position in the expensive market. B) taking a short position in the cheaper market and a long position in the expensive market. C) taking a long position in both markets. D) taking a short position in both markets.

84) One extensive study found that about __________ of financial managers use CAPM to estimate cost of capital. A) one-third B) one-half C) seventy five percent D) ninety percent

85) Compensation of money managers is __________ based on alpha or other appropriate risk-adjusted measures. A) never B) rarely C) almost always D) always

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Answer Key Test name: Chap 07_12e_Bodie 1) D 2) B 3) B 4) D 5) D 6) D 7) D 8) C 9) B 10) B 11) D 12) A 13) D 14) D 15) C 16) C 17) C 18) A 19) D 20) B 21) D 22) A 23) C 24) A 25) B 26) C Version 1

27) B 28) B 29) C 30) C 31) A 32) B 33) B 34) D 35) C 36) C 37) C 38) A 39) B 40) B 41) B 42) C 43) C 44) C 45) C 46) A 47) C 48) B 49) D 50) A 51) B 52) B 53) D 54) D 55) C 56) B Version 1

57) B 58) A 59) A 60) D 61) C 62) C 63) A 64) C 65) C 66) B 67) A 68) D 69) A 70) B 71) A 72) B 73) D 74) D 75) B 76) B 77) A 78) C 79) B 80) A 81) D 82) D 83) A 84) C 85) B

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CHAPTER 7: ALGO 1) Consider the CAPM. The risk-free rate is 6%, and the expected return on the market is 16%. What is the expected return on a stock with a beta of 1.9? A) 36% B) 35.8% C) 11.3% D) 25.0%

2) Consider the CAPM. The expected return on the market is 15%. The expected return on a stock with a beta of 1.4 is 19%. What is the risk-free rate? A) 4% B) 14% C) 5% D) 7%

3) You have a $55,000 portfolio consisting of Intel, GE, and Con Edison. You put $22,000 in Intel, $14,000 in GE, and the rest in Con Edison. Intel, GE, and Con Edison have betas of 1.3, 1, and 0.8, respectively. What is your portfolio beta? A) 1.051 B) 0.994 C) 0.808 D) 1.366

4) Consider the single factor APT. Portfolio A has a beta of 1.4 and an expected return of 24%. Portfolio B has a beta of 0.8 and an expected return of 20%. The risk-free rate of return is 5%. If you wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio __________ and a long position in portfolio __________.

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A) A;A B) A;B C) B;B D) B;A

5) You invest $1,200 in security A with a beta of 1.5 and $1,000 in security B with a beta of 0.9. The beta of this portfolio is __________. A) 1.35 B) 1.80 C) 1.23 D) 2.40

6) The expected return on the market portfolio is 18%. The risk-free rate is 11%. The expected return on SDA Corporation common stock is 17%. The beta of SDA Corporation common stock is 1.30. Within the context of the capital asset pricing model, __________. A) SDA Corporation stock is underpriced B) SDA Corporation stock is fairly priced C) SDA Corporation stock's alpha is –3.10% D) SDA Corporation stock's alpha is 3.1%%

7) If the simple CAPM is valid and all portfolios are priced correctly, which of the situations below is possible? Consider each situation independently, and assume the risk-free rate is 5%. A) Portfolio A Market

Expected Return 17% 17%

Beta

Expected

Standard

1.0 1.0

B) Portfolio

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A Market

Return 20% 15%

Deviation 10% 18%

Expected Return 20% 15%

Beta

Expected Return 24.2% 17%

Beta

C) Portfolio A Market

1.0 1.0

D) Portfolio A Market

1.6 1.0

A) Option A B) Option B C) Option C D) Option D

8) You consider buying a share of stock at a price of $21. The stock is expected to pay a dividend of $.99 next year, and your advisory service tells you that you can expect to sell the stock in 1 year for $24. The stock's beta is 0.6, rf is 10%, and E[rm] = 20%. What is the stock's abnormal return? A) 3% B) 6% C) 5% D) 0%

9) According to the CAPM, what is the market risk premium given an expected return on a security of 18.2%, a stock beta of 1.2, and a risk-free interest rate of 8%?

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A) 9.60% B) 6.60% C) 8.00% D) 8.50%

10) According to the CAPM, what is the expected market return given an expected return on a security of 13.6%, a stock beta of 1.2, and a risk-free interest rate of 4%? A) 11.3% B) 11.5% C) 4.8% D) 12%

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Answer Key Test name: Chap 07_12e_Bodie_Algo 1) D 2) C 3) A 4) B 5) C 6) C 7) D 8) A 9) D 10) D

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CHAPTER 8 1) Which of the following beliefs would not preclude charting as a method of portfolio management? A) The market is strong-form efficient. B) The market is semistrong-form efficient. C) The market is weak-form efficient. D) Stock prices follow recurring patterns.

In a 1953 study of stock prices, Maurice Kendall found that __________. A) there were no predictable patterns in stock prices B) stock prices exhibited strong serial autocorrelation C) day-to-day stock prices followed consistent trends D) fundamental analysis could be used to generate abnormal returns

3) The weak-form of the EMH states that __________ must be reflected in the current stock price. A) all past information, including security price and volume data B) all publicly available information C) all information, including inside information D) all costless information

4) The semistrong-form of the EMH states that __________ must be reflected in the current stock price.

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A) all security price and volume data B) all publicly available information C) all information, including inside information D) all costless information

5) The strong form of the EMH states that __________ must be reflected in the current stock price. A) all security price and volume data B) all publicly available information C) all information, including inside information D) all costless information

Random price movements indicate __________. A) irrational markets B) that prices cannot equal fundamental values C) that technical analysis to uncover trends can be quite useful D) that markets are functioning efficiently

When the market risk premium rises, stock prices will __________. A) rise B) fall C) recover D) have excess volatility

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The small-firm effect is strongest in which month? A) January B) June C) July D) December

9) Evidence suggests that there may be __________ momentum and __________ reversal patterns in stock price behavior. A) short-run; short-run B) long-run; long-run C) long-run; short-run D) short-run; long-run

10)

Proponents of the EMH typically advocate __________. A) a conservative investment strategy B) a liberal investment strategy C) a passive investment strategy D) an aggressive investment strategy

11)

Stock prices that are stable over time __________. A) indicate that prices are useful indicators of true economic value B) indicate that the market has not incorporated new information into current stock

prices C) ensure that an economy allocates its resources efficiently D) indicates that returns follow a random-walk process

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12) The tendency when the __________ performing stocks in one period are the best performers in the next and the current __________ performers are lagging the market later is called the reversal effect. A) worst; best B) worst; worst C) best; worst D) best; best

13)

Which of the following is not a method employed by followers of technical analysis? A) Charting B) Relative strength analysis C) Earnings forecasting D) Trading around support and resistance levels

14)

Which of the following is not a method employed by fundamental analysts? A) Analyzing the Fed's next interest rate move B) Relative strength analysis C) Earnings forecasting D) Estimating the economic growth rate

15)

The primary objective of fundamental analysis is to identify __________.

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A) well-run firms B) poorly run firms C) mispriced stocks D) high P/E stocks

16) If you believe in the __________-form of the EMH, you believe that stock prices reflect all publicly available information but not information that is available only to insiders. A) semistrong B) strong C) weak D) perfect

17) If you believe in the __________-form of the EMH, you believe that stock prices reflect all relevant information, including information that is available only to insiders. A) semistrong B) strong C) weak D) perfect

18) Most of the stock price response to a corporate earnings or dividend announcement occurs within __________. A) about 30 seconds B) about 10 minutes C) 6 months D) 2 years

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19) __________ is the return on a stock beyond what would be predicted from market movements alone. A) A normal return B) A subliminal return C) An abnormal return D) An excess return

20) You believe that stock prices reflect all information that can be derived by examining market trading data such as the history of past stock prices, trading volume, or short interest, but you do not believe stock prices reflect all publicly available and inside information. You are a proponent of the __________ form of the EMH. A) semistrong B) strong C) weak D) perfect

21) You are an investment manager who is currently managing assets worth $6 billion. You believe that active management of your fund could generate an additional one-tenth of 1% return on the portfolio. If you want to make sure your active strategy adds value, how much can you spend on security analysis? A) Up to $12,000,000 B) Up to $6,000,000 C) Up to $3,000,000 D) $0

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22) A mutual fund that attempts to hold quantities of shares in proportion to their representation in the market is called an __________ fund. A) stock B) index C) hedge D) money market

23) Choosing stocks by searching for predictable patterns in stock prices is called _________. A) fundamental analysis B) technical analysis C) index management D) random walk investing

24) Which of the following is not an issue that is central to the debate regarding market efficiency? A) The magnitude issue B) The tax-loss selling issue C) The lucky event issue D) The selection bias issue

25)

Most people would readily agree that the stock market is not __________. A) weak-form efficient B) semistrong-form efficient C) strong-form efficient D) efficient at all

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26)

Small firms have tended to earn abnormal returns primarily in __________. A) the month of January B) the month of July C) the trough of the business cycle D) the peak of the business cycle

27) Fama and French have suggested that many market anomalies can be explained as manifestations of __________. A) regulatory effects B) high trading costs C) information asymmetry D) varying risk premiums

28)

Proponents of the EMH think technical analysts __________. A) should focus on relative strength B) should focus on resistance levels C) should focus on support levels D) are wasting their clients’ time

29) Evidence supporting semistrong-form market efficiency suggests that investors should __________.

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A) rely on technical analysis to select securities B) rely on fundamental analysis to select securities C) use a passive trading strategy such as purchasing an index fund or an ETF D) rely on a combination of technical and fundamental analysis to select securities

30) "Buy a stock if its price moves up by 2% more than the Dow Average" is an example of a __________. A) trading rule B) market anomaly C) fundamental approach D) passive trading strategy

31) In a 1974 study, Jaffe found that stock prices __________ after insiders intensively bought shares and __________ after insiders intensively sold shares. A) decreased; decreased B) decreased; increased C) increased; decreased D) increased; increased

32) In a 1988 study, Fama and French found that the return on the aggregate stock market was __________ when the dividend yield was higher. A) higher B) lower C) unaffected D) more skewed

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33) In their 2010 study, Fama and French used a four-factor model to analyze excess returns on equity mutual funds. They found that the funds __________. A) had negative alphas before fees were considered B) had positive alphas after fees were considered C) had negative alphas after fees were considered D) had negative alphas before fees were considered and had negative alphas after fees were considered

34) Joe bought a stock at $57 per share. The price promptly fell to $55. Joe held on to the stock until it again reached $57, and then he sold it once he had eliminated his loss. If other investors do the same to establish a trading pattern, this would contradict __________. A) the strong-form EMH B) the weak-form EMH C) technical analysis D) the semistrong-form EMH

35) According to 1968 research by Ball and Brown, securities markets fully adjust to earnings announcements __________. A) instantly B) in 1 day C) in 1 week D) gradually over time

36) When stock returns exhibit positive serial correlation, this means that __________ returns tend to follow __________ returns.

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A) positive; positive B) positive; negative C) negative; positive D) positive; zero

37)

Two studies by Basu (1977, 1983) found that firms with high P/E ratios __________. A) earned higher average returns than firms with low P/E ratios B) earned the same average returns as firms with low P/E ratios C) earned lower average returns than firms with low P/E ratios D) had higher dividend yields than firms with low P/E ratios

38)

Fundamental analysis is likely to yield best results for __________. A) NYSE stocks B) neglected stocks C) stocks that are frequently in the news D) fast-growing companies

39) You are looking to invest in one of three stocks. All other things being equal, Stock A has high expected earnings growth, stock B has only modest expected earnings growth, and stock C is expected to generate poor earnings growth. According to LaPorta's 1996 study, which stock is likely to generate the greatest alpha for you? A) Stock A B) Stock B C) Stock C D) The answer cannot be determined from the information given.

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40) You believe that you can earn 2% more on your portfolio if you engage in full-time stock research. However, the additional trading costs and tax liability from active management will cost you about .5%. You have an $800,000 stock portfolio. What is the most you can afford to spend on your research? A) Up to $4,000 B) Up to $8,000 C) Up to $12,000 D) Up to $16,000

41) Even if the markets are efficient, professional portfolio management is still important because it provides investors with: 1. Low-cost diversification 2. A portfolio with a specified risk level 3. Better risk-adjusted returns than an index A) 1 only B) 1 and 2 only C) 2 and 3 only D) 1, 2, and 3

42) In a 1981 study, Banz found that on average, the risk-adjusted returns of small firms __________. A) were higher than the risk-adjusted returns of large firms B) were the same as the risk-adjusted returns of large firms C) were lower than the risk-adjusted returns of large firms D) were negative

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43)

If the U.S. capital markets are not informationally efficient, __________. A) the markets cannot be allocationally efficient B) systematic risk does not matter C) no type of analysis can be used to generate abnormal returns D) returns must follow a random walk

44) "Active investment management may at times generate additional returns of about .1%. However, the standard deviation of the typical well-diversified portfolio is about 20%, so it is very difficult to statistically identify any increase in performance." Even if true, this statement is an example of the __________ problem in deciding how efficient the markets are. A) magnitude B) selection bias C) lucky event D) allocation

45) DeBondt and Thaler (1985) found that the poorest-performing stocks in one time period experienced __________ performance in the following period and that the best-performing stocks in one time period experienced __________ performance in the following time period. A) good; good B) good; poor C) poor; good D) poor; poor

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46) J. M. Keyes put all his money in one stock, and the stock doubled in value in a matter of months. He did this three times in a row with three different stocks. J. M. got his picture on the front page of the Wall Street Journal. However, the paper never mentioned the thousands of investors who made similar bets on other stocks and lost most of their money. This is an example of the __________ problem in deciding how efficient the markets are. A) magnitude B) selection bias C) lucky event D) small firm

47)

Most tests of semistrong-form efficiency are __________. A) designed to test whether inside information can be used to generate abnormal returns B) based on technical trading rules C) unable to generate any evidence of market anomalies D) joint tests of market efficiency and the risk-adjustment measure

48)

The __________ effect(s) may explain much of the small-firm anomaly.

1. January 2. neglected 3. liquidity A) 1 only B) 2 only C) 2 and 3 only D) 1, 2, and 3

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49)

The effect of liquidity on stock returns might be related to:

1. The small-firm effect 2. The book-to-market effect 3. The neglected-firm effect 4. The P/E effect A) 1 and 2 only B) 1 and 3 only C) 2 and 4 only D) 1, 2, and 3 only

50)

The broadest information set is included in the __________. A) weak-form efficiency argument B) semistrong-form efficiency argument C) strong-form efficiency argument D) technical analysis trading method

51) The Fama and French evidence that high book-to-market firms outperform low book-tomarket firms even after adjusting for beta means that __________. A) high book-to-market firms are underpriced or the book-to-market ratio is a proxy for a unique risk factor B) low book-to-market firms are underpriced or the book-to-market ratio is a proxy for a systematic risk factor C) either high book-to-market firms are underpriced or the book-to-market ratio is a proxy for a systematic risk factor D) high book-to-market firms have more post-earnings drift

52)

According to results by Seyhun, __________.

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A) investors cannot usually earn abnormal returns by following inside trades after knowledge of the trades are made public B) investors can usually earn abnormal returns by following inside trades after knowledge of the trades are made public C) investors cannot earn abnormal returns by following inside trades before knowledge of the trades are made public D) investors cannot earn abnormal returns by trading before insiders

53) If the daily returns on the stock market are normally distributed with a mean of 0.05% and a standard deviation of 1%, the probability that the stock market would have a return of −23% or worse on one particular day (as it did on Black Monday) is approximately __________. A) 0.0% B) 0.1% C) 1.0% D) 10.0%

54)

According to the semistrong-form of the efficient market hypothesis, ____________.

A) stock prices do not rapidly adjust to new information B) future changes in stock prices cannot be predicted from any information that is publicly available C) corporate insiders should have no better investment performance than other investors even if allowed to trade freely D) arbitrage between futures and cash markets should not produce extraordinary profits

55)

The term random walk is used in investments to refer to __________.

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A) stock price changes that are random but predictable B) stock prices that respond slowly to both old and new information C) stock price changes that are random and unpredictable D) stock prices changes that follow the pattern of past price changes

56)

Among the important characteristics of market efficiency is (are) that:

1. There are no arbitrage opportunities. 2. Security prices react quickly to new information. 3. Active trading strategies will not consistently outperform passive strategies. A) 1 only B) 2 only C) 1 and 3 only D) 1, 2, and 3

57) Stock market analysts have tended to be __________ in their recommendations to investors. A) slightly overly optimistic B) overwhelmingly optimistic C) slightly overly pessimistic D) overwhelmingly pessimistic

58) Assume that a company announces unexpectedly high earnings in a particular quarter. In an efficient market one might expect __________.

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A) an abnormal price change immediately after the announcement B) an abnormal price increase before the announcement C) an abnormal price decrease after the announcement D) no abnormal price change before or after the announcement

59)

Market anomaly refers to __________.

A) an exogenous shock to the market that is sharp but not persistent B) a price or volume event that is inconsistent with historical price or volume trends C) a trading or pricing structure that interferes with efficient buying and selling of securities D) price behavior that differs from the behavior predicted by the efficient market hypothesis

60) Which of the following contradicts the proposition that the stock market is weakly efficient? A) Over 25% of mutual funds outperform the market on average. B) Insiders earn abnormal trading profits. C) Every January, the stock market earns above-normal returns. D) Applications of technical trading rules fail to earn abnormal returns.

61)

Which of the following would violate the efficient market hypothesis?

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A) Intel has consistently generated large profits for years. B) Prices for stocks before stock splits show, on average, consistently positive abnormal returns. C) Investors earn abnormal returns months after a firm announces surprise earnings. D) High-earnings growth stocks fail to generate higher returns for investors than do low earnings growth stocks.

62) Which of the following stock price observations would appear to contradict the weakform of the efficient market hypothesis? A) The average rate of return is significantly greater than zero. B) The correlation between the market return one week and the return the following week is zero. C) You could have consistently made superior returns by buying stock after a 10% rise in price and selling after a 10% fall. D) You could have consistently made superior returns by forecasting future earnings performance with your new Crystal Ball forecast methodology.

63) The semistrong-form of the efficient market hypothesis implies that __________ generate abnormal returns and __________ generate abnormal returns. A) technical analysis cannot; fundamental analysis can B) technical analysis can; fundamental analysis can C) technical analysis can; fundamental analysis cannot D) technical analysis cannot; fundamental analysis cannot

64)

An implication of the efficient market hypothesis is that __________.

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A) high-beta stocks are consistently overpriced B) low-beta stocks are consistently overpriced C) nonzero alphas will quickly disappear D) growth stocks are better buys than value stocks

65)

One type of passive portfolio management is __________.

A) investing in a well-diversified portfolio without attempting to search out mispriced securities B) investing in a well-diversified portfolio while only seeking out passively mispriced securities C) investing an equal dollar amount in ind ex stocks D) investing in an equal amount of shares in each of the index stocks

66) The four-factor model used to construct performance benchmarks for mutual funds uses the three Fama and French factors and one additional factor related to _________. A) the tenure of the fund manager B) momentum C) fees D) the age of the fund manager

67)

Value stocks may provide investors with better returns than growth stocks if:

1. Value stocks are out of favor with investors. 2. Prices of growth stocks include premiums for overly optimistic growth levels. 3. Value stocks are likely to generate positive-earnings surprises.

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A) 1 only B) 2 only C) 1 and 3 only D) 1, 2, and 3

68) Value stocks usually exhibit __________ price-to-book ratios and __________ price-toearnings ratios. A) low; low B) low; high C) high; low D) high; high

69) A day trade with an average stock holding period of under 8 minutes might be most closely associated with which trading philosophy? A) EMH B) Fundamental analysis C) Strong-form market efficiency D) Technical analysis

70)

A technical analyst is most likely to be affiliated with which investment philosophy? A) Active management B) Buy and hold C) Passive investment D) Index funds

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71) Someone who invests in the Vanguard Index 500 mutual fund could most accurately be described as using which approach? A) Active management B) Arbitrage C) Fundamental analysis D) Passive investment

72) Evidence by Blake, Elton, and Gruber indicates that, on average, actively managed bond funds __________. A) outperform passive fixed-income indexes B) underperform passive fixed-income indexes by a wide margin C) perform as well as passive fixed-income indexes D) underperform passive fixed-income indexes by an amount equal to fund expenses

73) Insiders are able to profitably trade and earn abnormal returns prior to the announcement of positive news. This is a violation of which form of efficiency? A) Weak-form efficiency B) Semistrong-form efficiency C) Strong-form efficiency D) Technical analysis

74) In an efficient market and for an investor who believes in a passive approach to investing, what is the primary duty of a portfolio manager?

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A) Accounting for results B) Diversification C) Identifying undervalued stocks D) No need for a portfolio manager

75)

Which of the following is not a topic related to the debate over market efficiency? A) IPO results B) Lucky event issue C) Magnitude issue D) Selection bias

76) Which Fidelity Magellan portfolio manager is often referenced as an exception to the general conclusion of efficient markets? A) Jeff Vinik B) Peter Lynch C) Robert Stansky D) William Hayes

77) The tendency of poorly performing stocks and well-performing stocks in one period to continue their performance into the next period is called the __________. A) fad effect B) martingale effect C) momentum effect D) reversal effect

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78) Which of the following is not a concept related to explaining abnormal excess stock returns? A) January effect B) Neglected-firm effect C) P/E effect D) Preferred stock effect

79) The lack of adequate trading volume in stock that may ultimately lead to its ability to produce excess returns is referred to as the __________. A) January effect B) liquidity effect C) neglected-firm effect D) P/E effect

80) Fundamental analysis determines that the price of a firm's stock is too low, given its intrinsic value. The information used in the analysis is available to all market participants, yet the price does not seem to react. The stock does not trade on a major exchange. What concept might explain the ability to produce excess returns on this stock? A) January effect B) Neglected-firm effect C) P/E effect D) Reversal effect

81) When testing mutual fund performance over time, one must be careful of __________, which means that a certain percentage of poorer-performing funds fail over time, making the performance of remaining funds seem more consistent over time. Version 1

A) survivorship bias B) lucky event bias C) magnitude bias D) mean reversion bias

82)

Most evidence indicates that U.S. stock markets are __________. A) reasonably weak-form and semistrong-form efficient B) strong-form efficient C) reasonably weak-form but not semistrong- or strong-form efficient D) neither weak-, semistrong-, nor strong-form efficient

83)

Which of the following statements is (are) correct? A) If a market is weak-form efficient, it is also semistrong- and strong-form efficient. B) If a market is semistrong-form efficient, it is also strong-form efficient. C) If a market is strong-form efficient, it is also semistrong- but not weak-form efficient. D) If a market is strong-form efficient, it is also semistrong- and weak-form efficient.

84) According to Markowitz and other proponents of modern portfolio theory, which of the following activities would not be expected to produce any benefits? A) Diversifying B) Investing in treasury bills C) Investing in stocks of utility companies D) Engaging in active portfolio management to enhance returns

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85) According to results by Seyhun, the main reason that investors cannot earn excess returns by following inside trades after they become public is that __________. A) the information isn't available for at least 2 weeks B) transaction costs offset abnormal returns C) the SEC late-disclosure rule doesn't apply to insiders D) insiders don't have to disclose their trades

86)

Approximately what percentage of assets in equity mutual funds were indexed in 2019? A) 10% B) 15% C) 20% D) 30%

87) McLean and Pontiff (2016) identify more than __________ characteristics associated with abnormal returns. A) 10 B) 25 C) 95 D) 1,000

88)

Del Guercio and Reuter (2014) find:

A) direct-purchase mutual fund investors outperform those who purchase through brokers. B) broker-purchase mutual fund investors outperform those who direct purchase directly. C) both types of investors did as well or better than index funds. D) both types of investors underperformed index funds.

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89) Which famous economist suggested that asset bubbles arise naturally as investors become more willing to take on added risk during stable periods, leading to increased asset prices? A) Milton Friedman B) Hyman Minsky C) F.A. Hayek D) John Keynes

90) Keown and Pinkerton (1981) found cumulative abnormal returns begin roughly __________ days prior to the announcement of a takeover. A) 15 B) 30 C) 45 D) 60

91) Testing many different trading rules until you find one that would have worked in the past is called __________. A) data mining B) perceived patterning C) pattern searching D) behavioral analysis

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Answer Key Test name: Chap 08_12e_Bodie 1) D 2) A 3) A 4) B 5) C 6) D 7) B 8) A 9) D 10) C 11) B 12) A 13) C 14) B 15) C 16) A 17) B 18) B 19) C 20) C 21) B 22) B 23) B 24) B 25) C 26) A Version 1

27) D 28) D 29) C 30) A 31) C 32) A 33) C 34) B 35) D 36) A 37) C 38) B 39) C 40) C 41) B 42) A 43) A 44) A 45) B 46) C 47) D 48) D 49) B 50) C 51) C 52) A 53) A 54) B 55) C 56) D Version 1

57) B 58) A 59) D 60) C 61) C 62) C 63) D 64) C 65) A 66) B 67) D 68) A 69) D 70) A 71) D 72) D 73) C 74) B 75) A 76) B 77) C 78) D 79) B 80) B 81) A 82) A 83) D 84) D 85) B 86) D Version 1

87) C 88) A 89) B 90) A 91) A

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CHAPTER 9 1) Models of financial markets that emphasize psychological factors affecting investor behavior are called __________. A) data mining B) fundamental analysis C) charting D) behavioral finance

2) The put/call ratio is a __________ indicator; while the trin statistics is a __________ indicator. A) sentiment; sentiment B) flow of funds; sentiment C) market structure; trend D) fundamental; trend

Relative strength is __________ indicator. A) a fundamental B) an economic C) a technical D) an international

4) Short interest is a __________ indicator, while moving averages are __________ indicators.

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A) sentiment; trend B) flow of funds; sentiment C) market structure; sentiment D) fundamental; sentiment

5) text?

Which of the following case studies illustrates a limit to arbitrage as discussed in the

A) "Siamese twin" companies B) equity carve-outs C) closed-end funds D) All of the options are correct.

Market breadth is a __________ indicator. A) sentiment B) flow of funds C) technical D) fundamental

7) The cumulative tally of the number of advancing stocks minus declining stocks is called the __________. A) market breadth B) market volume C) trin ratio D) relative strength ratio

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8) A high amount of short interest is typically considered as a __________ signal, and contrarians may consider it as a __________ signal. A) bearish; bullish B) bullish; bearish C) bearish; false D) bullish; false

Technical analysis focuses on __________. A) finding opportunities for risk-free investing B) finding repeating trends and patterns in prices C) changing prospects for earnings growth of particular firms or industries D) forecasting technical regulatory changes

10) Behaviorists point out that even if market prices are __________, there may be __________. A) distorted; limited arbitrage opportunities B) distorted; fundamental efficiency C) allocationally efficient; limitless arbitrage opportunities D) distorted; allocational efficiency

11) According to market technicians, it is time to sell stock in a head-and-shoulders formation when __________.

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A) the price index pierces the left shoulder B) the price index pierces the right shoulder C) the price index pierces the head D) none of these options takes place

12) When a stock price breaks through the moving average from below, this is considered to be __________. A) the starting point for a new moving average B) a bearish signal C) a bullish signal D) None of these options is correct.

13) When the stock price falls below a moving average, a possible conclusion is that __________. A) market momentum has become positive B) market momentum has become negative C) there is no regular pattern for this stock's market momentum D) professional analysts' opinions are invalid until the stock price rises again

14)

Following a period of falling prices, the moving average will __________. A) be below the current price B) be above the current price C) be equal to the current price D) become more volatile than it had been before prices fell

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15)

A moving average of stock prices __________. A) always lies above the most recent price B) always lies below the most recent price C) is less volatile than the actual prices D) is more volatile than the actual prices

16)

When the housing bubble burst in 2007, it set off the worst financial crisis __________. A) in 25 years B) in 40 years C) in 50 years D) in 75 years

17)

A support level is __________. A) a level beyond which the market is unlikely to rise B) a level below which the market is unlikely to fall C) an equilibrium price level justified by characteristics such as earnings and cash flows D) the peak of a market wave or cycle

18) According to Kondratieff, the macroeconomy moves in a series of waves that recur at intervals of approximately __________.

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A) 18 months B) 4 years C) 8 years D) 50 years

19) According to Elliot's wave theory, stock market behavior can be explained as __________. A) a series of medium-term wave cycles with no short-term trend B) a series of long-term wave cycles with no short-term trend C) a series of superimposed long-term and short-term wave cycles D) sine and cosine functions

20) Conventional finance theory assumes investors are __________, and behavioral finance assumes some systematic __________. A) rational; irrationality B) irrational; rationality C) greedy; philanthropic behavior D) philanthropic; irrationality

21)

Behavioral patterns persist in prices if __________. A) markets are weak-form efficient B) there are limits to arbitrage activity C) there are no significant trading costs D) market psychology is inconsistent over time

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22) In the context of a point and figure chart, a horizontal band of Xs and Os is a __________. A) buy signal B) sell signal C) congestion area D) trend reversal

23) Even though indexing is growing in popularity, only about __________ of equity in the mutual fund industry is held in indexed funds. This may be a sign that investors and managers __________. A) 15%; are excessively conservative B) 30%; overestimate their ability C) 15%; suffer from framing biases D) 30%; engage in mental accounting

24) If investors are too slow to update their beliefs about a stock's future performance when new evidence arises, they are exhibiting __________. A) representativeness bias B) framing error C) conservatism D) memory bias

25) If investors overweight recent performance in forecasting the future, they are exhibiting __________.

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A) representativeness bias B) framing error C) memory bias D) overconfidence

26)

Trading activity and average returns in brokerage accounts tend to be __________. A) uncorrelated B) negatively correlated C) positively correlated D) positively correlated for women and negatively correlated for men

27) Your two best friends each tell you about a person they know who successfully started a small business. That's it, you decide; if they can do it, so can you. This is an example of __________. A) mental accounting B) framing bias C) conservatism D) representativeness bias

28)

Which of the following is not a sentiment indicator? A) Confidence index B) Short interest C) Relative strength D) Put/call ratio

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29) The price of a stock fluctuates between $43 and $60. If the time frame referenced encompasses the primary trend, the $43 price may be considered the __________. A) intermediate trend level B) minor trend level C) resistance level D) support level

30)

Which of the following is considered a sentiment indicator? A) a 200-day moving average B) short interest C) credit balances in brokerage accounts D) relative strength

31) An investor holds a very conservative portfolio invested for retirement, but she takes some extra cash she earned from her year-end bonus and buys gold futures. She appears to be engaging in __________. A) overconfidence B) representativeness C) forecast errors D) mental accounting

32) Which of the following analysts focus more on past price movements of a firm's stock than on the underlying determinants of its future profitability?

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A) Credit analysts B) Fundamental analysts C) Systems analysts D) Technical analysts

33)

A TRIN ratio of greater than 1 is considered a __________.

A) bearish signal B) bullish signal C) bearish signal by some technical analysts and a bullish signal by other technical analysts D) trend reversal signal

34)

Contrarian investors consider a high put/call ratio a __________. A) bearish signal B) bullish signal C) trend confirmation signal D) signal to enter the options market

35) The ratio of the average yield on 10 top-rated corporate bonds to the average yield on 10 intermediate-grade bonds is called the __________. A) bond price index B) confidence index C) relative strength index D) TRIN ratio

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36) An investor needs cash to pay some hospital bills. He is willing to use his dividend income to pay the bills, but he will not sell any stock to do so. He is engaging in __________. A) overconfidence B) representativeness C) forecast errors D) mental accounting

37) Bill and Shelly are friends. Bill invests in a portfolio of hot stocks that almost all his friends are invested in. Shelly invests in a portfolio that is totally different from the portfolios of all her friends. Both Bill's and Shelly's stocks fall 15%. According to regret theory, __________. A) Bill will have more regret over the loss than Shelly B) Shelly will have more regret over the loss than Bill C) Bill and Shelly will have equal regret over their losses D) Bill's and Shelly's risk aversion will increase in the future

38) The most common measure of __________ is the spread between the number of stocks that advance in price and the number of stocks that decline in price. A) market breadth B) market volume C) odd-lot trading D) short interest

39) Jill is offered a choice between receiving $50 with certainty or possibly receiving the proceeds from a gamble. In the gamble a fair coin is tossed, and if it comes up heads, Jill will receive $100; if the coin comes up tails, she will receive nothing. Jill chooses the $50 instead of the gamble. Jill's behavior indicates __________.

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A) regret avoidance B) overconfidence C) that she has a diminishing marginal utility of wealth D) prospect theory loss aversion

40) When the market breaks through the moving average line from below, a technical analyst would probably suggest that it is a good time to __________. A) buy the stock B) hold the stock C) sell the stock D) short the stock

41) At the beginning of the month, the healthcare index was 134, and the stock market index was 2100. At the end of the month, the healthcare index was 147, and the stock market index was 2214. Consider the ratio of the healthcare index to the market index at the beginning and end of the month. The healthcare index is __________ the market index, and technical analysts who use relative strength would advise __________ the healthcare index. A) underperforming; buying B) underperforming; selling C) outperforming; buying D) outperforming; selling

42)

According to technical analysts, a shift in market fundamentals will __________.

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A) be reflected in stock prices immediately B) lead to a gradual price change that can be recognized as a trend C) lead to high volatility in stock market prices D) leave prices unchanged

43)

It is difficult to test the Kondratieff wave theory because __________. A) it applies to only Russian stocks B) its main proponent found contrary research results C) only two independent data points are generated each century D) the stock market is too volatile to generate smooth waves

44)

A __________ is a value above which it is difficult for the market to rise. A) book value B) resistance level C) support level D) confidence level

45)

__________ is a tool that can help identify the direction of a stock's price. A) Prospect theory B) Framing C) A moving average D) Conservatism

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46) If the utility you derive from your next dollar of wealth increases by less than a loss of a dollar reduces it, you are exhibiting __________. A) loss aversion B) regret avoidance C) mental accounting D) framing bias

47) A possible limit on arbitrage activity that may allow behavioral biases to persist is __________. A) technical trends in prices B) momentum effects C) fundamental risk D) trend reversals

48)

If you are not a contrarian, you consider a high put/call ratio to be a __________. A) bearish signal B) trend confirmation signal C) signal to enter the options market D) bullish signal

49) On day 1, the stock price of Ford was $12, and the automotive stock index was 127. On day 2, the stock price of Ford was $15, and the automotive stock index was 139. Consider the ratio of Ford to the automotive stock index at day 1 and day 2. Ford is __________ the automotive industry, and technical analysts who follow relative strength would advise __________ the stock.

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A) outperforming; buying B) outperforming; selling C) underperforming; buying D) underperforming; selling

50) At the end of July, the average yields on 10 top-rated corporate bonds and 10 intermediate-grade bonds were 7.65% and 8.42%, respectively. At the end of August, the average yields on 10 top-rated corporate bonds and 10 intermediate-grade bonds were 6% and 6.71%, respectively. The confidence index __________ during August, and bond technical analysts are likely to be __________. A) increased; bullish B) increased; bearish C) decreased; bullish D) decreased; bearish

51) On a particular day, there were 890 stocks that advanced on the NYSE and 723 that declined. The volume in advancing issues was 80,846,000, and the volume in declining issues was 70,397,000. The common measure of market breadth is __________. A) −10,449,000 B) −167 C) 167 D) 10,449,000

52) On a particular day, there were 920 stocks that advanced on the NYSE and 723 that declined. The volume in advancing issues was 80,846,000, and the volume in declining issues was 70,397,000. The trin ratio is __________, and technical analysts are likely to be __________.

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A) 0.90; bullish B) 0.90; bearish C) 1.11; bullish D) 1.11; bearish

53)

A point and figure chart:

1. Gives a sell signal when the stock price penetrates previous lows 2. Tracks significant upward or downward movements 3. Has no time dimension 4. Indicates congestion areas A) 1 and 2 only B) 2 and 3 only C) 1, 3, and 4 only D) 1, 2, 3, and 4

54) When technical analysts say a stock has good "relative strength," they mean that in the recent past __________. A) it has performed well compared to its closest competitors B) it has exceeded its own historical high C) trading volume in the stock has exceeded the normal trading volume D) it has outperformed the market index

55)

Technical traders view mutual fund investors as __________ market timers.

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A) excellent B) frequent C) neutral D) poor

56) An important assumption underlying the use of technical analysis techniques is that __________. A) security prices adjust rapidly to new information B) security prices adjust gradually to new information C) security dealers will provide enough liquidity to keep price changes relatively small D) all investors have immediate and costless access to information

57) If the put/call ratio increases, market contrarians may interpret this as what kind of signal? A) Buy signal B) Sell signal C) Hold signal D) This is not interpreted as a signal.

58)

The tendency of investors to hold on to losing investments is called the __________. A) overweighting effect B) head-in-the-sand effect C) disposition effect D) prospector effect

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59)

Which one of the following best describes fundamental risk?

A) A stock is overpriced, but your fund does not allow you to engage in short sales. B) Your models indicate a stock is mispriced, but you are not sure if this is a real profit opportunity or a model input error. C) You buy a stock that you believe is underpriced, and the underpricing persists for a long time, hurting your short-term results. D) A stock is trading in two different markets at two different prices.

60) Day Advances Declines Volume advancing(m) Volume declining(m) Yield on top-rated corporate bonds

1 870 880 580 670 6.8%

2 760 990 620 580 6.7%

3 960 790 480 720 6.7%

4 840 910 510 520 6.6%

Yield on intermediate-grade corporate bonds

7.4%

7.5%

7.6%

The TRIN on day 2 is __________. A) 0.72 B) 1.04 C) 0.92 D) 0.55

61) Day

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Advances Declines Volume advancing(m) Volume declining(m) Yield on top-rated corporate bonds

870 880 580 670 6.8%

760 990 620 580 6.7%

960 790 480 720 6.7%

840 910 510 520 6.6%

Yield on intermediate-grade corporate bonds

7.4%

7.5%

7.6%

Day Advances Declines Volume advancing(m) Volume declining(m) Yield on top-rated corporate bonds

1 870 880 580 670 6.8%

2 760 990 620 580 6.7%

3 960 790 480 720 6.7%

4 840 910 510 520 6.6%

Yield on intermediate-grade corporate bonds

7.4%

7.5%

7.6%

The confidence index on day 1 is __________. A) 0.82 B) 0.89 C) 0.92 D) 1.09

62)

The breadth on day 3 is __________.

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A) −70 B) 10 C) 90 D) 170

63) Day Advances Declines Volume advancing(m) Volume declining(m) Yield on top-rated corporate bonds

1 870 880 580 670 6.8%

2 760 990 620 580 6.7%

3 960 790 480 720 6.7%

4 840 910 510 520 6.6%

Yield on intermediate-grade corporate bonds

7.4%

7.5%

7.6%

1 870 880 580 670 6.8%

2 760 990 620 580 6.7%

3 960 790 480 720 6.7%

4 840 910 510 520 6.6%

The cumulative breadth for the first 2 days is __________. A) −240 B) −50 C) 110 D) 250

64) Day Advances Declines Volume advancing(m) Volume declining(m) Yield on top-rated corporate bonds

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Yield on intermediate-grade corporate bonds

7.4%

7.5%

7.6%

Cumulative breadth for the 4 days is __________, which is __________. A) −140; bullish B) −140; bearish C) −300; bullish D) −300; bearish

65) Day Advances Declines Volume advancing(m) Volume declining(m) Yield on top-rated corporate bonds

1 870 880 580 670 6.8%

2 760 990 620 580 6.7%

3 960 790 480 720 6.7%

4 840 910 510 520 6.6%

Yield on intermediate-grade corporate bonds

7.4%

7.5%

7.6%

From day 1 to day 4, the TRIN has __________ and is __________, unless you are a contrarian. A) increased; bullish B) increased; bearish C) decreased; bullish D) decreased; bearish

66) Version 1

Day Advances Declines Volume advancing(m) Volume declining(m) Yield on top-rated corporate bonds

1 870 880 580 670 6.8%

2 760 990 620 580 6.7%

3 960 790 480 720 6.7%

4 840 910 510 520 6.6%

Yield on intermediate-grade corporate bonds

7.4%

7.5%

7.6%

From day 1 to day 4, the confidence index has __________. This is __________. A) increased; bullish B) decreased; bullish C) increased; bearish D) decreased; bearish

67)

Problems with behavioral finance include:

1. The behavioralists tell us nothing about how to exploit any irrationality. 2. The implications of behavioral patterns are inconsistent from case to case, sometimes suggesting overreaction, sometimes underreaction. 3. As with technical trading rules, behavioralists can always find some pattern in past data that supports a behavioralist trait. A) 1 only B) 2 only C) 1 and 3 only D) 1, 2, and 3

68)

A major problem with technical trading strategies is that __________.

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A) it is very difficult to identify a true trend before the fact B) it is very difficult to identify the correct trend after the fact C) it is so easy to identify trends that all investors quickly do so D) Kondratieff showed that you can't identify trends without 48 to 60 years of data

69) The Elliott wave theory gives a buy signal when you can identify a primary bull trend by identifying __________. A) when the long-term direction of the market is positive B) when the long-term direction of the market is negative C) when the long-term direction of the market is stable D) good stocks without regard to the long-term direction of the market

70) In 1997, CSX successfully purchased a significant share of Conrail. Immediately after the first offer was announced and the acquisition eventually consummated, the price of CSX fell below pre-acquisition levels and took many years to recover. This may be an example of __________. A) loss aversion B) mental accounting C) overreaction D) overconfidence

71) An investor has her money segregated into checking, savings, and investments. The allocation among the categories is subjective, yet the investor spends freely from the checking account and not the others. This behavior can be explained as __________.

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A) loss aversion B) mental accounting C) overreaction D) winner's curse

72) Stock Price X X X X

X O O O

X X X

X O O O

X X

46 O O O

44 42 40

Identify the resistance-level stock price. A) $40 B) $42 C) $44 D) $46

73) Stock Price X X X X

X O O O

X X X

X O O O

X X

46 O O O

44 42 40

Identify the support level stock price.

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A) $40 B) $42 C) $44 D) $46

74) Investors gravitate toward the latest hot stock even though it has never paid a dividend. Even though net income is projected to fall over the current and next several years, the price of the stock continues to rise. What behavioral concept may explain this price pattern? A) Overconfidence B) Loss aversion C) Mental accounting D) Calendar bias

75) During a period when prices have been rising, the __________ will be __________ the current price. A) relative strength index; declining with B) relative strength index; declining faster than C) moving average; above D) moving average; below

76) An investor purchases shares of an index fund. The investor could take on the same level of risk by taking out a loan and purchasing a higher-risk specialty fund. The Sharpe ratio on this complete portfolio is higher than his existing investment. What behavioral concept prevents the investor from taking out the loan and investing in the index fund?

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A) Framing bias B) Excessive volatility C) Loss aversion D) Mental accounting

77)

The moving average generates buy signal(s) __________. A) on days 3, 11, and 15 B) on days 2, 8, and 16 C) on days 5, 9, and 13 D) on no days

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78)

The moving average generates sell signals __________. A) on days 3, 11, and 15 B) on days 7, 15, and 18 C) on days 5, 9, and 13 D) on day 16

79) The price of a stock fluctuates over a period of 10 days. The movement of the stock price below the 10-day minimum price of $25 triggers a rash of selling. The $25 price might now be considered the __________. A) congestion area B) penetration point C) resistance level D) support level

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80)

Trend analysts who follow bonds are most likely to monitor the __________. A) confidence index B) odd-lot trading C) short interest D) TRIN statistic

81) You find that the confidence index is down, the market breadth is up, and the trin ratio is down. In total, how many bullish signs do you have? A) 0 B) 1 C) 2 D) 3

82) You find that the TRIN ratio is up, the market breadth is down, and the market has closed below its 50-day moving average. In total, how many bearish signs do you have? A) 0 B) 1 C) 2 D) 3

83) High P/E firms tend to be poor investments. This illustrates which of the following information processing errors? A) Limited attention, underreaction, and overreaction B) Over-confidence C) Conservatism D) Sample-size neglect and representativeness

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Answer Key Test name: Chap 09_12e_Bodie 1) D 2) A 3) C 4) A 5) D 6) C 7) A 8) A 9) B 10) A 11) B 12) C 13) B 14) B 15) C 16) D 17) B 18) D 19) C 20) A 21) B 22) C 23) B 24) C 25) A 26) B Version 1

27) D 28) C 29) D 30) B 31) D 32) D 33) A 34) B 35) B 36) D 37) B 38) A 39) C 40) A 41) C 42) B 43) C 44) B 45) C 46) A 47) C 48) A 49) A 50) D 51) C 52) D 53) D 54) D 55) D 56) B Version 1

57) A 58) C 59) C 60) A 61) C 62) D 63) A 64) B 65) C 66) D 67) D 68) A 69) A 70) D 71) B 72) D 73) A 74) A 75) D 76) C 77) B 78) B 79) B 80) A 81) C 82) D 83) A

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CHAPTER 10 1)

The invoice price of a bond is the __________. A) stated or flat price in a quote sheet plus accrued interest B) stated or flat price in a quote sheet minus accrued interest C) bid price D) average of the bid and ask price

Sinking funds are commonly viewed as protecting the __________ of the bond. A) issuer B) underwriter C) holder D) dealer

A bond that is secured by other securities held by the firm is called a: A) debenture. B) collateral trust bond. C) securitized default bond. D) vanilla bond.

4) If you are holding a premium bond, you must expect a __________ each year until maturity. If you are holding a discount bond, you must expect a __________ each year until maturity. (In each case assume that the yield to maturity remains stable over time.)

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A) capital gain; capital loss B) capital gain; capital gain C) capital loss; capital gain D) capital loss; capital loss

Floating-rate bonds have a __________ that is adjusted with current market interest rates. A) maturity date B) coupon payment date C) coupon rate D) dividend yield

Inflation-indexed Treasury securities are commonly called __________. A) PIKs B) CARs C) TIPS D) STRIPS

In regard to bonds, convexity relates to the __________. A) shape of the bond price curve with respect to interest rates B) shape of the yield curve with respect to maturity C) slope of the yield curve with respect to liquidity premiums D) size of the bid-ask spread

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8) A Japanese firm issued and sold a pound-denominated bond in the United Kingdom. A U.S. firm issued bonds denominated in dollars but sold the bonds in Japan. Which one of the following statements is correct? A) Both bonds are examples of Eurobonds. B) The Japanese bond is a Eurobond, and the U.S. bond is termed a foreign bond. C) The U.S. bond is a Eurobond, and the Japanese bond is termed a foreign bond. D) Neither bond is a Eurobond.

The primary difference between Treasury notes and bonds is __________. A) maturity at issue B) default risk C) coupon rate D) tax status

10)

TIPS offer investors inflation protection by __________ by the inflation rate each year. A) increasing only the coupon rate B) increasing only the par value C) increasing both the par value and the coupon payment D) increasing the promised yield to maturity

11)

You would typically find all but which one of the following in a bond contract? A) A dividend restriction clause B) A sinking fund clause C) A requirement to subordinate any new debt issued D) A price-earnings ratio

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12) To earn a high rating from the bond rating agencies, a company would want to have: 1.a low times-interest-earned ratio. 2.a low debt-to-equity ratio. 3.a high quick ratio.

A) 1 only B) 2 and 3 only C) 1 and 3 only D) 1, 2, and 3

13) According to the liquidity preference theory of the term structure of interest rates, an increase in the yield on long-term corporate bonds versus short-term bonds could be due to __________. A) declining liquidity premiums B) an expectation of an upcoming recession C) a decline in future inflation expectations D) an increase in expected interest rate volatility

14)

__________ are examples of synthetically created zero-coupon bonds. A) COLTS B) OPOSSMS C) STRIPS D) ARMs

15) A __________ bond gives the bondholder the right to cash in the bond before maturity at a specific price after a specific date. Version 1

A) callable B) coupon C) puttable D) Treasury

16)

TIPS are an example of __________. A) Eurobonds B) convertible bonds C) indexed bonds D) catastrophe bonds

17) Bonds issued in the currency of the issuer's country but sold in other national markets are called __________. A) Eurobonds B) Yankee bonds C) Samurai bonds D) foreign bonds

18) You buy a TIPS at issue at par for $1,000. The bond has a 3% coupon. Inflation turns out to be 2%, 3%, and 4% over the next 3 years. The total annual coupon income you will receive in year 3 is __________. A) $30.00 B) $33.57 C) $32.78 D) $30.90

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19) The bonds of Elbow Grease Dishwashing Company have received a rating of C by Moody's. The C rating indicates that the bonds are __________. A) high grade B) intermediate grade C) investment grade D) junk bonds

20) Bonds rated __________ or better by Standard & Poor's and __________ or better by Moody’s are considered investment grade. A) AA; Aa B) BBB; Baa C) BB; Ba D) CCC; CbA

21) Consider the liquidity preference theory of the term structure of interest rates. On average, one would expect investors to require __________. A) a higher yield on short-term bonds than on long-term bonds B) a higher yield on long-term bonds than on short-term bonds C) the same yield on both short-term bonds and long-term bonds D) None—The liquidity preference theory cannot be used to make any of the other statements.

22) Consider two bonds, A and B. Both bonds presently are selling at their par value of $1,000. Each pays interest of $120 annually. Bond A will mature in 5 years, while bond B will mature in 6 years. If the yields to maturity on the two bonds change from 12% to 14%, __________. Version 1

A) both bonds will increase in value but bond A will increase more than bond B B) both bonds will increase in value but bond B will increase more than bond A C) both bonds will decrease in value but bond A will decrease more than bond B D) both bonds will decrease in value but bond B will decrease more than bond A

23) You hold a subordinated debenture in a firm. In the event of bankruptcy you will be paid off before which one of the following? A) Mortgage bonds B) Senior debentures C) Preferred stock D) Equipment obligation bonds

24) Bonds with coupon rates that fall when the general level of interest rates rise are called _____________. A) asset-backed bonds B) convertible bonds C) inverse floaters D) index bonds

25) __________ bonds represent a novel way of obtaining insurance from capital markets against specified disasters. A) Asset-backed bonds B) TIPS C) Catastrophe D) Pay-in-kind

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26) The issuer of __________ bond may choose to pay interest either in cash or in additional bonds. A) an asset-backed B) a TIPS C) a catastrophe D) a pay-in-kind

27) Everything else equal, the __________ maturity of a bond and the __________ coupon, the greater the sensitivity of the bond's price to interest rate changes. A) longer; higher B) longer; lower C) shorter; higher D) shorter; lower

28)

Which one of the following statements is correct? A) Invoice price = flat price − accrued interest B) Invoice price = flat price + accrued interest C) Flat price = invoice price + accrued interest − settlement price D) Invoice price = settlement price − accrued interest

29) A __________ bond gives the issuer an option to retire the bond before maturity at a specific price after a specific date.

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A) callable B) coupon C) puttable D) Treasury

30) Which of the following possible provisions of a bond indenture is designed to ease the burden of principal repayment by spreading it out over several years? A) Callable feature B) Convertible feature C) Subordination clause D) Sinking fund

31)

Serial bonds are associated with __________. A) staggered maturity dates B) collateral C) coupon payment dates D) conversion features

32) In an era of particularly low interest rates, which of the following bonds is most likely to be called? A) Zero-coupon bonds B) Coupon bonds selling at a discount C) Coupon bonds selling at a premium D) Floating-rate bonds

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33) Consider the expectations theory of the term structure of interest rates. If the yield curve is downward-sloping, this indicates that investors expect short-term interest rates to __________ in the future. A) increase B) decrease C) not change D) change in an unpredictable manner

34) A convertible bond has a par value of $1,000, but its current market price is $975. The current price of the issuing company's stock is $26, and the conversion ratio is 34 shares. The bond's market conversion value is __________. A) $1,000 B) $884 C) $933 D) $980

35) A convertible bond has a par value of $1,000, but its current market price is $950. The current price of the issuing company's stock is $19, and the conversion ratio is 40 shares. The bond's conversion premium is __________. A) $50 B) $190 C) $200 D) $240

36) A coupon bond that pays interest of 4% annually has a par value of $1,000, matures in 5 years, and is selling today at $785. The actual yield to maturity on this bond is __________. Version 1

A) 7.24% B) 8.82% C) 9.12% D) 9.62%

37) A coupon bond that pays interest of $60 annually has a par value of $1,000, matures in 5 years, and is selling today at an $84.52 discount from par value. The yield to maturity on this bond is __________. A) 6.00% B) 7.23% C) 8.12% D) 9.45%

38) A coupon bond that pays interest of $60 annually has a par value of $1,000, matures in 5 years, and is selling today at a $75.25 discount from par value. The current yield on this bond is __________. A) 6.00% B) 6.49% C) 6.73% D) 7.37%

39) 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 __________.

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A) 6.00% B) 6.58% C) 7.25% D) 8.00%

40) A coupon bond that pays interest semiannually has a par value of $1,000, matures in 8 years, and has a yield to maturity of 6%. If the coupon rate is 7%, the intrinsic value of the bond today will be __________. A) $1,000.00 B) $1,062.81 C) $1,081.82 D) $1,100.03

41) A coupon bond that pays interest annually has a par value of $1,000, matures in 5 years, and has a yield to maturity of 12%. If the coupon rate is 9%, the intrinsic value of the bond today will be __________. A) $856.04 B) $891.86 C) $926.47 D) $1,000.00

42) A coupon bond that pays semiannual interest is reported in the Wall Street Journal as having an ask price of 117% of its $1,000 par value. If the last interest payment was made 2 months ago and the coupon rate is 6%, the invoice price of the bond will be __________.

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A) $1,140 B) $1,170 C) $1,180 D) $1,200

43) A Treasury bond due in 1 year has a yield of 6.3%, while a Treasury bond due in 5 years has a yield of 8.8%. A bond due in 5 years issued by High Country Marketing Corp. has a yield of 9.6%, while a bond due in 1 year issued by High Country Marketing Corp. has a yield of 6.8%. The default risk premiums on the 1-year and 5-year bonds issued by High Country Marketing Corp. are, respectively, __________ and __________. A) 0.4%; 0.3% B) 0.4%; 0.5% C) 0.5%; 0.5% D) 0.5%; 0.8%

44) A zero-coupon bond has a yield to maturity of 5% and a par value of $1,000. If the bond matures in 16 years, it should sell for a price of __________ today. A) $458.11 B) $641.11 C) $789.11 D) $1,100.11

45) Yields on municipal bonds are typically __________ yields on corporate bonds of similar risk and time to maturity.

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A) lower than B) slightly higher than C) identical to D) twice as high as

46) You purchased a 5-year annual-interest coupon bond 1 year ago. Its coupon interest rate was 6%, and its par value was $1,000. At the time you purchased the bond, the yield to maturity was 4%. If you sold the bond after receiving the first interest payment and the bond's yield to maturity had changed to 3%, your annual total rate of return on holding the bond for that year would have been approximately _________. A) 5.0% B) 5.5% C) 7.6% D) 8.9%

47) Analysis of bond returns over a multiyear horizon based on forecasts of the bond's yield to maturity and reinvestment rate of coupons is called __________. A) multiyear analysis B) horizon analysis C) maturity analysis D) reinvestment analysis

48)

$1,000 par value zero-coupon bonds (ignore liquidity premiums)

Bond A B C

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Years to Maturity 1 2 3

Yield to Maturity 6.00% 7.50% 7.99%

D E

4 5

8.49% 10.70%

The expected 1-year interest rate 1 year from now should be about __________. A) 6.03% B) 7.50% C) 9.02% D) 10.08%

49)

$1,000 par value zero-coupon bonds (ignore liquidity premiums)

Bond A B C D E

Years to Maturity 1 2 3 4 5

Yield to Maturity 6.00% 7.50% 7.99% 8.49% 10.70%

One year from now bond C should sell for __________. A) $827.58 B) $894.37 C) $835.64 D) $921.87

50)

$1,000 par value zero-coupon bonds (ignore liquidity premiums)

Bond A B C D E

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Years to Maturity 1 2 3 4 5

Yield to Maturity 6.00% 7.50% 7.99% 8.49% 10.70%

The expected 2-year interest rate 3 years from now should be __________. A) 9.55% B) 11.74% C) 14.89% D) 13.73%

51) The __________ of a bond is computed as the ratio of the annual coupon payment to the market price. A) nominal yield B) current yield C) yield to maturity D) yield to call

52) A bond has a par value of $1,000, a time to maturity of 10 years, and a coupon rate of 8% with interest paid annually. If the current market price is $750, what is the capital gain yield of this bond over the next year? A) 0.72% B) 1.85% C) 2.58% D) 3.42%

53)

Consider the following $1,000 par value zero-coupon bonds:

Bond A B C

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Years to Maturity 1 2 3

Yield to Maturity 6.00% 7.50% 8.00%

D E

4 5

8.50% 10.25%

The expected 1-year interest rate 2 years from now should be __________. A) 7% B) 8% C) 9% D) 10%

54)

Which of the following bonds would most likely sell at the lowest yield? A) A callable debenture B) A puttable mortgage bond C) A callable mortgage bond D) A puttable debenture

55)

A 1% decline in yield will have the least effect on the price of a bond with a __________. A) 10-year maturity, selling at 80 B) 10-year maturity, selling at 100 C) 20-year maturity, selling at 80 D) 20-year maturity, selling at 100

56)

Consider the following $1,000 par value zero-coupon bonds:

Bond A B C D E

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Years to Maturity 1 2 3 4 5

Yield to Maturity 6.00% 7.00% 8.32% 8.49% 10.70%

The expected 1-year interest rate 3 years from now should be __________. A) 7% B) 8% C) 9% D) 10%

57)

Consider the following $1,000 par value zero-coupon bonds:

Bond A B C D E

Years to Maturity 1 2 3 4 5

Yield to Maturity 6.00% 7.00% 7.99% 9.41% 10.70%

The expected 1-year interest rate 4 years from now should be ___________. A) 16% B) 18% C) 20% D) 22%

58)

You can be sure that a bond will sell at a premium to par when __________. A) its coupon rate is greater than its yield to maturity B) its coupon rate is less than its yield to maturity C) its coupon rate is equal to its yield to maturity D) its coupon rate is less than its conversion value

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59) 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% D) 8.98%

60) Consider a 7-year bond with a 9% coupon and a yield to maturity of 12%. If interest rates remain constant, 1 year from now the price of this bond will be __________. A) higher B) lower C) the same D) indeterminate

61) Under the pure expectations hypothesis and constant real interest rates for different maturities, an upward-sloping yield curve would indicate __________. A) expected increases in inflation over time B) expected decreases in inflation over time C) the presence of a liquidity premium D) that the equilibrium interest rate in the short-term part of the market is lower than the equilibrium interest rate in the long-term part of the market

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62)

The yield to maturity on a bond is:

1.above the coupon rate when the bond sells at a discount and below the coupon rate when the bond sells at a premium. 2.the discount rate that will set the present value of the payments equal to the bond price. 3.equal to the true compound return on investment only if all interest payments received are reinvested at the yield to maturity.

A) 1 only B) 2 only C) 1 and 2 only D) 1, 2, and 3

63) Yields on municipal bonds are generally lower than yields on similar corporate bonds because of differences in __________. A) marketability B) risk C) taxation D) call protection

64) Assuming semiannual compounding, a 20-year zero coupon bond with a par value of $1,000 and a required return of 12% would be priced at __________. A) $97.22 B) $104.49 C) $364.08 D) $732.14

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65) A discount bond that pays interest semiannually will: 1.have a lower price than an equivalent annual payment bond. 2.have a higher EAR than an equivalent annual payment bond. 3.sell for less than its conversion value.

A) 1 and 2 only B) 1 and 3 only C) 2 and 3 only D) 1, 2, and 3

66) 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) $1,170.33 C) $2,327.87 D) $3,000.00

67) The yield to maturity of a 10-year zero-coupon bond with a par value of $1,000 and a market price of $625 is __________. A) 4.81% B) 6.10% C) 7.76% D) 10.45%

68) Consider a newly issued TIPS bond with a 3-year maturity, par value of $1,000, and coupon rate of 5%. Assume annual coupon payments.

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Time Inflation in year just ended 0 1

Par value

$ 1,000.00 $ 1,030.00 $ 1,050.60 $ 1,092.62

Coupon payment

$ 51.50 $ 52.53 $ 54.63

+ Principal = Total payment repayment

$ 51.50

$ 52.53

$ 1,092.62

$ 1,147.25

What is the nominal rate of return on the TIPS bond in the first year? A) 5.00% B) 5.15% C) 8.15% D) 9.00%

69) Consider a newly issued TIPS bond with a 3-year maturity, par value of $1,000, and coupon rate of 5%. Assume annual coupon payments. Time Inflation in year just ended 0 1

Par value

$ 1,000.00 $ 1,030.00 $ 1,050.60 $ 1,092.62

Coupon payment

$ 51.50 $ 52.53 $ 54.63

+ Principal = Total payment repayment

$ 51.50

$ 52.53

$1,092.62

$ 1,147.25

What is the real rate of return on the TIPS bond in the first year?

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A) 5.00% B) 8.15% C) 7.15% D) 4.00%

70) On May 1, 2019, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds. Description Wildwood, due May 1, 2027 Asbury, due May 1, 2027

Coupon 5.0%

Price $100

Callable noncallable

Call Price NA

5.4%

$100

currently callable

$102

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

71) On May 1, 2019, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds. Description Wildwood, due May 1, 2027 Asbury, due May 1, 2027

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Coupon 5.0%

Price $100

Callable noncallable

Call Price NA

5.4%

$100

currently callable

$102

If interest rates are expected to rise, then Joe Hill should __________. A) prefer the Wildwood bond to the Asbury bond B) prefer the Asbury bond to the Wildwood bond C) be indifferent between the Wildwood bond and the Asbury bond D) The answer cannot be determined from the information given.

72) On May 1, 2019, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds. Description Wildwood, due May 1, 2027 Asbury, due May 1, 2027

Coupon 5.0%

Price $100

Callable noncallable

Call Price NA

5.4%

$100

currently callable

$102

If the volatility of interest rates is expected to increase, then Joe Hill should __________. A) prefer the Wildwood bond to the Asbury bond B) prefer the Asbury bond to the Wildwood bond C) be indifferent between the Wildwood bond and the Asbury bond D) The answer cannot be determined from the information given.

73) One-, two-, and three-year maturity, default-free, zero-coupon bonds have yields to maturity of 7%, 8%, and 9%, respectively. What is the implied 1-year forward rate 1 year from today? A) 2.07% B) 8.03% C) 9.01% D) 11.12%

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74) If the quote for a Treasury bond is listed in the newspaper as 98.2812 bid, 98.4062 ask, the actual price at which you can purchase this bond given a $10,000 par value is __________. A) $9,828.12 B) $9,809.38 C) $9,840.62 D) $9,813.42

75) If the price of a $10,000 par Treasury bond is $10,237.50, the quote would be listed in the newspaper as __________. A) 102.237 B) 102.102 C) 102.375 D) 102.750

76) A bond pays a semiannual coupon, and the last coupon was paid 61 days ago. If the annual coupon payment is $75, what is the accrued interest? (Assume 182 days in the 6-month period.) A) $13.21 B) $12.57 C) $15.44 D) $16.32

77) A bond has a flat price of $985, and it pays an annual coupon. The last coupon payment was made 90 days ago. What is the invoice price if the annual coupon is $69?

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A) $999.55 B) $1,002.01 C) $1,007.45 D) $1,012.13

78) If the quote for a Treasury bond is listed in the newspaper as 99.25 bid, 99.26 ask, the actual price at which you can sell this bond given a $10,000 par value is __________. A) $9,828.12 B) $9,925.00 C) $9,934.37 D) $9,955.43

79) A bond has a 5% coupon rate. The coupon is paid semiannually, and the last coupon was paid 35 days ago. If the bond has a par value of $1,000, what is the accrued interest? A) $4.81 B) $14.24 C) $25.03 D) $50.50

80) The price on a Treasury bond is 104.3625, with a yield to maturity of 3.45%. The price on a comparable maturity corporate bond is 103.75, with a yield to maturity of 4.59%. What is the approximate percentage value of the credit risk of the corporate bond? A) 1.14% B) 3.45% C) 4.59% D) 8.04%

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81) You buy a bond with a $1,000 par value today for a price of $875. The bond has 6 years to maturity and makes annual coupon payments of $75 per year. You hold the bond to maturity, but you do not reinvest any of your coupons. What was your effective EAR over the holding period? A) 10.4% B) 9.57% C) 7.45% D) 8.78%

82) You buy an 8-year $1,000 par value bond today that has a 6% yield and a 6% annual payment coupon. In 1 year yields have risen to 7%. Your 1-year holding-period return was __________. A) 0.61% B) −1.28% C) 1.28% D) 3.25%

83) You buy a 10-year $1,000 par value zero-coupon bond priced to yield 6%. You do not sell the bond. If you are in a 28% tax bracket, you will owe taxes on this investment after the first year equal to __________. A) $0.00 B) $4.27 C) $9.38 D) $33.51

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84) You buy a 10-year $1,000 par value 4% annual-payment coupon bond priced to yield 6%. You do not sell the bond at year-end. If you are in a 15% tax bracket, at year-end you will owe taxes on this investment equal to __________. A) $9.10 B) $4.25 C) $7.68 D) $5.20

85) An investor pays $989.40 for a bond. The bond has an annual coupon rate of 4.8%. What is the current yield on this bond? A) 4.80% B) 4.85% C) 9.60% D) 9.74%

86) If the coupon rate on a bond is 4.5% and the bond is selling at a premium, which of the following is the most likely yield to maturity on the bond? A) 4.30% B) 4.50% C) 5.20% D) Unknowable

87) The price of a bond (with par value of $1,000) at the beginning of a period is $980 and at the end of the period is $975. What is the holding-period return if the annual coupon rate is 4.5%?

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A) 4.08% B) 4.50% C) 5.11% D) 5.64%

88) A bond was purchased at a premium and is now selling at a discount because of a change in market interest rates. If the bond pays a 4% annual coupon, what is the likely impact on the holding-period return if an investor decides to sell now? A) Increased B) Decreased C) Stayed the same D) The answer cannot be determined from the information given.

89) The __________ is the document that defines the contract between the bond issuer and the bondholder. A) indenture B) covenant agreement C) trustee agreement D) collateral statement

90) Which of the following rates represents a bond’s annual interest payment per dollar of par value? A) holding period return B) coupon rate C) IRR D) YTM

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91)

Which type of risk is most significant fornearly all bonds? A) Maturity risk B) Default risk C) Interest rate risk D) Reinvestment rate risk

92)

Which of the following yield curves generally implies a normal healthy economy? A) Positive slope B) Negative slope C) Flat D) Hump-shaped curve

93)

Which country experienced the largest-ever sovereign default in 2012? A) Germany B) Ireland C) Greece D) Portugal

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Answer Key Test name: Chap 10_12e_Bodie 1) A 2) C 3) B 4) C 5) C 6) C 7) A 8) C 9) A 10) C 11) D 12) B 13) D 14) C 15) C 16) C 17) A 18) C 19) D 20) B 21) B 22) D 23) C 24) C 25) C 26) D Version 1

27) B 28) B 29) A 30) D 31) A 32) C 33) B 34) B 35) B 36) D 37) C 38) B 39) A 40) B 41) B 42) C 43) D 44) A 45) A 46) C 47) B 48) C 49) B 50) C 51) B 52) B 53) C 54) B 55) B 56) C Version 1

57) A 58) A 59) D 60) A 61) A 62) D 63) C 64) A 65) A 66) B 67) A 68) C 69) A 70) C 71) B 72) B 73) C 74) C 75) C 76) B 77) B 78) B 79) A 80) A 81) D 82) A 83) C 84) C 85) B 86) A Version 1

87) A 88) B 89) A 90) B 91) C 92) A 93) C

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CHAPTER 10: ALGO 1) You buy a TIPS at issue at par for $1,000. The bond has a 3.3% coupon. Inflation turns out to be 2.3%, 3.3%, and 4.3% over the next 3 years. The total annual coupon income you will receive in year 3 is __________. A) $33.00 B) $34.09 C) $36.37 D) $36.30

2) A coupon bond that pays interest of $53 annually has a par value of $1,000, matures in 5 years, and is selling today at a $73.50 discount from par value. The current yield on this bond is __________. A) 5.30% B) 5.72% C) 7.76% D) 5.60%

3) A coupon bond that pays semiannual interest is reported in the Wall Street Journal as having an ask price of 125% of its $1,000 par value. If the last interest payment was made 3 months ago and the coupon rate is 6.80%, the invoice price of the bond will be __________. A) $1,250.00 B) $1,284.00 C) $1,267.00 D) $1,216.00

Consider the following $1,000 par value zero-coupon bonds: Bond

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Years to Maturity

Yield to Maturity

A B C D E

1 2 3 4 5

5.40% 6.90% 7.40% 7.90% 10.50%

The expected 1-year interest rate 2 years from now should be __________. A) 10.96% B) 21.54% C) 8.41% D) 17.54%

5) Assuming semiannual compounding, a 20-year zero coupon bond with a par value of $1,000 and a required return of 10.4% would be priced at __________. A) $131.63 B) $138.24 C) $905.80 D) $950.57

6) Consider a newly issued TIPS bond with a 3-year maturity, par value of $1,000, and coupon rate of 4.20%. Assume annual coupon payments. Time

Inflation in year just ended

Par value

Coupon payment

Principal repayment

= Total payment

$ 1,000.00

2.2%

$ 1,022.00

$ 42.92

1.2%

$ 1,034.26

$ 43.44

3.2%

$ 1,067.36

$ 44.83

$ 1,067.36

$ 1,112.19

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What is the nominal rate of return on the TIPS bond in the first year? A) 3.40% B) 4.29% C) 6.49% D) 6.60%

7) If the price of a $10,000 par Treasury bond is $10,218.75, the quote would be listed in the newspaper as __________. A) 102.050 B) 101.915 C) 102.188 D) 102.562

8) You buy a bond with a $1,000 par value today for a price of $925. The bond has 7 years to maturity and makes annual coupon payments of $85 per year. You hold the bond to maturity, but you do not reinvest any of your coupons. What was your effective EAR over the holding period? A) 10.04% B) 7.05% C) 10.23% D) 8.09%

9) You buy an 9-year $1,000 par value bond today that has a 6.60% yield and a 6.60% annual payment coupon. In 1 year promised yields have risen to 7.60%. Your 1-year holdingperiod return was __________.

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A) 0.77% B) –5.83% C) 1.54% D) –3.69%

10) You buy a 9-year $1,000 par value 4.10% annual-payment coupon bond priced to yield 6.10%. You do not sell the bond at year-end. If you are in a 15% tax bracket, at year-end you will owe taxes on this investment equal to __________. A) $9.15 B) $4.39 C) $7.91 D) $6.15

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Answer Key Test name: Chap 10_12e_Bodie_Algo 1) C 2) B 3) C 4) C 5) A 6) C 7) C 8) D 9) A 10) C

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CHAPTER 11 1)

All other things equal (YTM = 10%), which of the following has the longest duration? A) A 30-year bond with a 10% coupon B) A 20-year bond with a 9% coupon C) A 20-year bond with a 7% coupon D) A 10-year zero-coupon bond

All other things equal (YTM = 10%), which of the following has the shortest duration? A) A 30-year bond with a 10% coupon B) A 20-year bond with a 9% coupon C) A 20-year bond with a 7% coupon D) A 10-year bond with a 9% coupon

3) A pension fund must pay out $1 million next year, $2 million the following year, and then $3 million the year after that. If the discount rate is 8%, what is the duration of this set of payments? A) 2 years B) 2.15 years C) 2.29 years D) 2.53 years

All other things equal, which of the following has the longest duration?

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A) A 20-year bond with a 10% coupon yielding 10% B) A 20-year bond with a 10% coupon yielding 11% C) A 20-year zero-coupon bond yielding 10% D) A 21-year bond with a 10% coupon yielding 10%

The duration of a perpetuity varies __________ with interest rates. A) directly B) inversely C) convexly D) randomly

6) Because of convexity, when interest rates change, the actual bond price will __________ the bond price predicted by duration. A) always be higher than B) sometimes be higher than C) always be lower than D) sometimes be lower than

7) You find a 5-year AA Xerox bond priced to yield 6%. You find a similar-risk 5-year Canon bond priced to yield 6.5%. If you expect interest rates to rise, which of the following should you do? A) Short the Canon bond, and buy the Xerox bond. B) Buy the Canon bond, and short the Xerox bond. C) Short both the Canon bond and the Xerox bond. D) Buy both the Canon bond and the Xerox bond.

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8) A forecast of bond returns based largely on a prediction of the yield curve at the end of the investment horizon is called a __________. A) contingent immunization B) dedication strategy C) duration analysis D) horizon analysis

A bond's price volatility __________ at __________ rate as maturity increases. A) increases; an increasing B) increases; a decreasing C) decreases; an increasing D) decreases; a decreasing

10) As a result of bond convexity, an increase in a bond's price when yield to maturity falls is __________ the price decrease resulting from an increase in yield of equal magnitude. A) greater than B) equivalent to C) smaller than D) The answer cannot be determined from the information given.

11)

All else equal, bond price volatility is greater for __________.

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A) higher coupon rates B) lower coupon rates C) shorter maturity D) lower default risk

12) Bond prices are __________ sensitive to changes in yield when the bond is selling at a __________ initial yield to maturity. A) more; lower B) more; higher C) less; lower D) equally; higher or lower

13)

The pioneer of the duration concept was __________. A) Eugene Fama B) John Herzog C) Frederick Macaulay D) Harry Markowitz

14) A portfolio manager sells Treasury bonds and buys corporate bonds because the spread between corporate- and Treasury-bond yields is higher than its historical average. This is an example of __________ swap. A) a pure yield pickup B) a rate anticipation C) a substitution D) an intermarket spread

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15)

The duration of a 5-year zero-coupon bond is __________ years. A) 4.5 B) 5.0 C) 5.5 D) 3.5

16) A portfolio manager believes interest rates will drop and decides to sell short-duration bonds and buy long-duration bonds. This is an example of __________ swap. A) a pure yield pickup B) a rate anticipation C) a substitution D) an intermarket spread

17)

Target date immunization would primarily be of interest to __________. A) banks B) mutual funds C) pension funds D) individual investors

18)

Duration is a concept that is useful in assessing a bond's _________.

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A) credit risk B) liquidity risk C) price volatility D) convexity risk

19) A pension fund has an average duration of its liabilities equal to 15 years. The fund is looking at 5-year maturity zero-coupon bonds and 4% yield perpetuities to immunize its interest rate risk. How much of its portfolio should it allocate to the zero-coupon bonds to immunize if there are no other assets funding the plan? A) 52.38% B) 48.38% C) 33.58% D) 25.48%

20) You own a bond that has a duration of 6 years. Interest rates are currently 7%, but you believe the Fed is about to increase interest rates by 25 basis points. Your predicted price change on this bond is __________. A) +1.4% B) −1.4% C) −2.51% D) +2.51%

21)

Given its time to maturity, the duration of a zero-coupon bond is __________.

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A) higher when the discount rate is higher B) higher when the discount rate is lower C) lowest when the discount rate is equal to the risk-free rate D) the same regardless of the discount rate

22) An increase in a bond's yield to maturity results in a price decline that is __________ the price increase resulting from a decrease in yield of equal magnitude. A) greater than B) equivalent to C) smaller than D) The answer cannot be determined.

23)

All other things equal, a bond's duration is __________. A) higher when the yield to maturity is higher B) lower when the yield to maturity is higher C) the same at all yield rates D) indeterminable when the yield to maturity is high

24) A bank has an average duration of its liabilities equal to 2 years. The bank's average duration of its assets is 3.5 years. The bank's market value of equity is at risk if __________. A) interest rates fall B) credit spreads fall C) interest rates rise D) the price of all fixed-income securities rises

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25)

All other things equal, a bond's duration is __________. A) higher when the coupon rate is higher B) lower when the coupon rate is higher C) the same when the coupon rate is higher D) indeterminable when the coupon rate is high

26)

Banks and other financial institutions can best manage interest rate risk by __________. A) maximizing the duration of assets and minimizing the duration of liabilities B) minimizing the duration of assets and maximizing the duration of liabilities C) matching the durations of their assets and liabilities D) matching the maturities of their assets and liabilities

27) In the context of a bond portfolio, price risk and reinvestment rate risk exactly cancel out at a time horizon equal to the __________. A) average bond maturity in the portfolio B) duration of the portfolio C) difference between the shortest duration and longest duration of the individual bonds in the portfolio D) average of the shortest duration and longest duration of the bonds in the portfolio

28)

Bond portfolio immunization techniques balance __________ and __________ risk.

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A) price; reinvestment B) price; liquidity C) credit; reinvestment D) credit; liquidity

29) You have purchased a guaranteed investment contract (GIC) from an insurance firm that promises to pay you a 5% compound rate of return per year for 6 years. If you pay $10,000 for the GIC today and receive no interest along the way, you will get __________ in 6 years (Round your answer to the nearest dollar amount.) . A) $12,565 B) $13,000 C) $13,401 D) $13,676

30)

The duration of a portfolio of bonds can be calculated as __________. A) the coupon weighted average of the durations of the individual bonds in the portfolio B) the yield weighted average of the durations of the individual bonds in the portfolio C) the value weighted average of the durations of the individual bonds in the portfolio D) averages of the durations of the longest- and shortest-duration bonds in the portfolio

31) Pension fund managers can generally best bring about an effective reduction in their interest rate risk by holding __________.

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A) long-maturity bonds B) long-duration bonds C) short-maturity bonds D) short-duration bonds

32)

Which of the following is not a type of bond swap used in active portfolio management? A) Intermarket spread swap B) Substitution swap C) Rate anticipation swap D) Asset-liability swap

33) The exchange of one bond for a bond that has similar attributes but is more attractively priced is called __________. A) a substitution swap B) an intermarket spread swap C) a rate anticipation swap D) a pure yield pickup swap

34) Rank the interest sensitivity of the following from the most sensitive to an interest rate change to the least sensitive: 1. 8% coupon, noncallable 20-year maturity par bond 2. 9% coupon, currently callable 20-year maturity premium bond 3. Zero-coupon 30-year maturity bond

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A) 1, 2, 3 B) 2, 3, 1 C) 3, 1, 2 D) 3, 2, 1

35)

A bond swap made in response to forecasts of interest rate changes is called __________. A) a substitution swap B) an intermarket spread swap C) a rate anticipation swap D) a pure yield pickup swap

36)

Moving to higher-yield bonds, usually with longer maturities, is called __________. A) a substitution swap B) an intermarket spread swap C) a rate anticipation swap D) a pure yield pickup swap

37)

In a pure yield pickup swap, __________ bonds are exchanged for __________ bonds. A) longer-duration; shorter-duration B) shorter-duration; longer-duration C) high-coupon; high-yield D) low-yield; high-yield

38)

The duration rule always __________ the value of a bond following a change in its yield.

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A) underestimates B) provides an unbiased estimate of C) overestimates D) The estimated price may be biased either upward or downward, depending on whether the bond is trading at a discount or a premium.

39)

Where y = yield to maturity, the duration of a perpetuity would be __________. A) y B) y/(1 + y) C) 1/ y D) (1 + y)/ y

40) A bond currently has a price of $1,050. The yield on the bond is 6%. If the yield increases 25 basis points, the price of the bond will go down to $1,030. The Macaulay’s duration of this bond is __________ years. A) 7.46 B) 8.08 C) 9.02 D) 10.11

41) A bond has a current price of $1,030. The yield on the bond is 8%. If the yield changes from 8% to 8.1%, the price of the bond will go down to $1,025.88. The modified duration of this bond is __________.

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A) 4.32 B) 4.00 C) 3.25 D) 3.75

42) A bank has $50 million in assets, $47 million in liabilities, and $3 million in shareholders' equity. If the duration of its liabilities is 1.3 and the bank wants to immunize its net worth against interest rate risk and thus set the duration of equity equal to zero, it should select assets with an average duration of __________. A) 1.22 B) 1.55 C) 1.62 D) 2.00

43) A perpetuity pays $100 each and every year forever. The duration of this perpetuity will be __________ if its yield is 9%. A) 7.01 B) 9.00 C) 9.39 D) 12.11

44) A bond pays annual interest. Its coupon rate is 9%. Its value at maturity is $1,000. It matures in 4 years. Its yield to maturity is currently 6%. The duration of this bond is __________ years.

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A) 2.44 B) 3.23 C) 3.56 D) 4.10

45) A bond pays annual interest. Its coupon rate is 9%. Its value at maturity is $1,000. It matures in 4 years. Its yield to maturity is currently 6%. The modified duration of this bond is __________ years. A) 4.98 B) 3.56 C) 3.36 D) 3.05

46) A bond has a maturity of 12 years and a duration of 9.5 years at a promised yield rate of 8%. What is the bond's modified duration? A) 12.0 years B) 11.1 years C) 9.5 years D) 8.8 years

47) A 20-year maturity bond pays interest of $90 once per year and has a face value of $1,000. Its yield to maturity is 10%. You expect that interest rates will decline over the upcoming year and that the yield to maturity on this bond will be only 8% a year from now. Using horizon analysis, the return you expect to earn by holding this bond over the upcoming year is __________.

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A) 10.00% B) 12.24% C) 21.65% D) 29.64%

48) A bond with a 9-year duration is worth $1,080, and its yield to maturity is 8%. If the yield to maturity falls to 7.84%, you would predict that the new value of the bond will be approximately __________. A) $1,035 B) $1,036 C) $1,094 D) $1,124

49) When interest rates increase, the duration of a 20-year bond selling at a premium __________. A) increases B) decreases C) remains the same D) increases at first and then declines

50) The historical yield spread between the AA bond and the AAA bond has been 25 basis points. Currently the spread is only 9 basis points. If you believe the spread will soon return to its historical levels, you should __________.

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A) buy the AA and short the AAA B) buy both the AA and the AAA C) buy the AAA and short the AA D) short both the AA and the AAA

51) The duration of a bond normally increases with an increase in: 1.Term to maturity 2.Yield to maturity 3.Coupon rate

A) 1 only B) 1 and 2 only C) 2 and 3 only D) 1, 2, and 3

52) Compute the duration of an 8%, 5-year corporate bond with a par value of $1,000 and yield to maturity of 10%. A) 3.92 B) 4.28 C) 4.55 D) 5.00

53) Compute the modified duration of a 9% coupon, 3-year corporate bond with a yield to maturity of 12%.

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A) 2.45 B) 2.75 C) 2.88 D) 3.00

54) An 8%, 30-year bond has a yield to maturity of 10% and a modified duration of 8 years. If the market yield drops by 15 basis points, there will be a __________ in the bond's price. A) 1.15% decrease B) 1.20% increase C) 1.53% increase D) 2.43% decrease

55) To create a portfolio with a duration of 4 years using a 5-year zero-coupon bond and a 3year 8% annual coupon bond with a yield to maturity of 10%, one would have to invest __________ of the portfolio value in the zero-coupon bond. A) 50.00% B) 54.95% C) 60.25% D) 75.05%

56) Which of the following set of conditions will result in a bond with the greatest price volatility? A) A high coupon and a short maturity B) A high coupon and a long maturity C) A low coupon and a short maturity D) A low coupon and a long maturity

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57) An investor who expects declining interest rates would maximize her capital gain by purchasing a bond that has a __________ coupon and a __________ term to maturity. A) low; long B) high; short C) high; long D) zero; long

58) If you choose a zero-coupon bond with a maturity that matches your investment horizon, which of the following statements is (are) correct? 1.You will have no interest rate risk on this bond. 2.In the absence of default, you can be sure you will earn the promised yield rate. 3.The duration of your bond is less than the time to your investment horizon.

A) 1 only B) 1 and 2 only C) 2 and 3 only D) 1, 2, and 3

59) As compared with equivalent maturity bonds selling at par, deep discount bonds will have __________. A) greater reinvestment risk B) greater price volatility C) less call protection D) shorter average maturity

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60) Steel Pier Company has issued bonds that pay semiannually with the following characteristics: Coupon 10%

Yield to Maturity 10%

Maturity 10 years

Macaulay Duration 6.76 years

The modified duration for the Steel Pier bond is __________. A) 6.15 years B) 5.95 years C) 6.49 years D) 9.09 years

61) Steel Pier Company has issued bonds that pay semiannually with the following characteristics: Coupon 10%

Yield to Maturity 10%

Maturity 10 years

Macaulay Duration 6.76 years

If the bond's coupon was smaller than 10%, the modified duration would be __________ compared to the original modified duration. A) larger B) unchanged C) smaller D) The answer cannot be determined from the information given.

62) Steel Pier Company has issued bonds that pay semiannually with the following characteristics: Coupon 10%

Yield to Maturity 10%

Maturity 10 years

Macaulay Duration 6.76 years

If the maturity of the bond was less than 10 years, the modified duration would be __________ compared to the original modified duration.

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A) larger B) unchanged C) smaller D) The answer cannot be determined from the information given.

63) Steel Pier Company has issued bonds that pay semiannually with the following characteristics: Coupon 10%

Yield to Maturity 10%

Maturity 10 years

Macaulay Duration 6.76 years

If the yield to maturity decreases to 8.045%, the expected percentage change in the price of the bond using modified duration would be __________. A) 11.11% B) 13.22% C) 12.01% D) 10.00%

64) A 20-year maturity corporate bond has a 6.5% coupon rate (the coupons are paid annually). The bond currently sells for $925.50. A bond market analyst forecasts that in 5 years yields on such bonds will be at 7%. You believe that you will be able to reinvest the coupons earned over the next 5 years at a 6% rate of return. What is your expected annual compound rate of return if you plan on selling the bond in 5 years? A) 7.37% B) 7.56% C) 8.12% D) 8.54%

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65) When bonds sell above par, what is the relationship of price sensitivity to rising interest rates? A) Price volatility increases at an increasing rate. B) Price volatility increases at a decreasing rate. C) Price volatility decreases at a decreasing rate. D) Price volatility decreases at an increasing rate.

66) A zero-coupon bond is selling at a deep discount price of $430. It matures in 13 years. If the yield to maturity of the bond is 6.7%, what is the duration of the bond? A) 6.7 years B) 8.0 years C) 10.0 years D) 13.0 years

67) You have an investment that in today's dollars returns 15% of your investment in year 1, 12% in year 2, 9% in year 3, and the remainder in year 4. What is the duration of this investment? A) 4.00 years B) 3.55 years C) 3.22 years D) 2.95 years

68) If an investment returns a higher percentage of your money back sooner, it will __________.

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A) be less price-volatile B) have a higher credit rating C) be less liquid D) have a higher modified duration

69) Which one of the following statements correctly describes the weights used in the Macaulay duration calculation? The weight in year t is equal to __________. A) the dollar amount of the investment received in year t B) the percentage of the future value of the investment received in year t C) the present value of the dollar amount of the investment received in year t D) the percentage of the total present value of the investment received in year t

70)

The duration is independent of the coupon rate only for which one of the following? A) Discount bonds B) Premium bonds C) Perpetuities D) Short-term bonds

71) You have an investment horizon of 6 years. You choose to hold a bond with a duration of 10 years. Your realized rate of return will be larger than the promised yield on the bond if __________. A) interest rates increase B) interest rates stay the same C) interest rates fall D) The answer cannot be determined from the information given.

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72) A bond portfolio manager notices a hump in the yield curve at the 5-year point. How might a bond manager take advantage of this event? A) Buy the 5-year bonds, and short the surrounding maturity bonds. B) Buy the 5-year bonds, and buy the surrounding maturity bonds. C) Short the 5-year bonds, and short the surrounding maturity bonds. D) Short the 5-year bonds, and buy the surrounding maturity bonds.

73) Market economists all predict a rise in interest rates. An astute bond manager wishing to maximize her capital gain might employ which strategy? A) Switch from low-duration to high-duration bonds. B) Switch from high-duration to low-duration bonds. C) Switch from high-grade to low-grade bonds. D) Switch from low-coupon to high-coupon bonds.

74) You have an investment horizon of 6 years. You choose to hold a bond with a duration of 4 years. Your realized rate of return will be larger than the promised yield on the bond if __________. A) interest rates increase B) interest rates stay the same C) interest rates fall D) The answer cannot be determined from the information given.

75) What strategy might an insurance company employ to ensure that it will be able to meet the obligations of annuity holders?

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A) Cash flow matching B) Index tracking C) Yield pickup swaps D) Substitution swap

76) You have an investment horizon of 6 years. You choose to hold a bond with a duration of 6 years and continue to match your investment horizon and duration throughout your holding period. Your realized rate of return will be the same as the promised yield on the bond if: 1.Interest rates increase. 2.Interest rates stay the same. 3.Interest rates fall.

A) 1 only B) 2 only C) 1 and 2 only D) 1, 2, and 3

77) Immunization of coupon-paying bonds does not imply that the portfolio manager is inactive because: 1.The portfolio must be rebalanced every time interest rates change. 2.The portfolio must be rebalanced over time even if interest rates don't change. 3.Convexity implies duration-based immunization strategies don't work.

A) 1 only B) 1 and 2 only C) 2 only D) 1, 2, and 3

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78) Advantages of cash flow matching and dedicated strategies include: 1.Once the cash flows are matched, there is no need for rebalancing. 2.Cash flow matching typically earns a higher rate of return than active bond portfolio management. 3.Financial institutions' liabilities often exceed the maturity of available bonds, making cash matching even more desirable.

A) 1 only B) 2 only C) 1 and 3 only D) 1, 2, and 3

79) Convexity implies that duration predictions: 1.Underestimate the percentage increase in bond price when the yield falls. 2.Underestimate the percentage decrease in bond price when the yield rises. 3.Overestimate the percentage increase in bond price when the yield falls. 4.Overestimate the percentage decrease in bond price when the yield rises.

A) 1 and 3 only B) 2 and 4 only C) 1 and 4 only D) 2 and 3 only

80) You have a 25-year maturity, 10% coupon, 10% yield bond with a duration of 10 years and a convexity of 135.5. If the interest rate were to fall 125 basis points, your predicted new price for the bond (including convexity) is __________.

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A) $1,098.45 B) $1,104.56 C) $1,113.41 D) $1,124.22

81) You have a 15-year maturity, 4% coupon, 6% yield bond with duration of 10.5 years and a convexity of 128.75. The bond is currently priced at $805.76. If the interest rate were to increase 200 basis points, your predicted new price for the bond (including convexity) is __________. A) $638.85 B) $642.54 C) $666.88 D) $705.03

82)

Convexity of a bond is __________. A) the same as horizon analysis B) the rate of change of the slope of the price-yield curve divided by the bond price C) a measure of bond duration D) None of these options are correct.

83) In 2012, the S&P 500 increased 16%. Given the low interest rate environment, many large companies had to pour billions of dollars into their pension funds. This example illustrates __________.

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A) horizon analysis B) convexity C) cash flow matching and dedication D) duration mismatch

84)

A __________ investment strategy takes market prices of securities as set fairly. A) passive B) active C) interest rate focused D) convex

85)

Which of the following statements is false?

A) Bond prices and yields are inversely related. B) An increase in a bond’s YTM results in a smaller price change than a decrease in yield of equal magnitude. C) Prices of short-term bonds tend to be more sensitive to interest rate changes than prices of long-term bonds. D) Interest rate risk is inversely related to the bond’s coupon rate.

86)

Duration measures:

A) the effective maturity of a bond. B) the weighted average of the time until each payment is received, with weights proportional to the present value of the payment. C) the average maturity of the bond’s promised cash flows. D) All of these options are correct.

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87) At a 4% yield, the duration of a perpetuity that pays $100 once a year forever is __________. A) 3.85 years B) 4.00 years C) 26.00 years D) 100.50 years

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Answer Key Test name: Chap 11_12e_Bodie 1) A 2) D 3) C 4) C 5) B 6) A 7) B 8) D 9) B 10) A 11) B 12) A 13) C 14) D 15) B 16) B 17) C 18) C 19) A 20) B 21) D 22) C 23) B 24) C 25) B 26) C Version 1

27) B 28) A 29) C 30) C 31) B 32) D 33) A 34) C 35) C 36) D 37) B 38) A 39) D 40) B 41) B 42) A 43) D 44) C 45) C 46) D 47) D 48) C 49) B 50) C 51) A 52) B 53) A 54) B 55) B 56) D Version 1

57) D 58) B 59) B 60) A 61) A 62) C 63) B 64) A 65) C 66) D 67) C 68) A 69) D 70) C 71) C 72) A 73) B 74) A 75) A 76) D 77) B 78) A 79) C 80) D 81) C 82) B 83) D 84) A 85) C 86) D Version 1

87) C

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CHAPTER 11: ALGO 1) A pension fund has an average duration of its liabilities equal to 12 years. The fund is looking at 5-year maturity zero-coupon bonds and 4% yield perpetuities to immunize its interest rate risk. How much of its portfolio should it allocate to the zero-coupon bonds to immunize if there are no other assets funding the plan? A) 66.67% B) 33.33% C) 41.67% D) 26.00%

2) You own a bond that has a duration of 6 years. Interest rates are currently 7%, but you believe the Fed is about to increase interest rates by 21 basis points. Your predicted price change on this bond is __________. (Select the closest answer.) A) +1.18% B) −1.18% C) −5.61% D) +5.61%

3) You have purchased a guaranteed investment contract (GIC) from an insurance firm that promises to pay you a 5% compound rate of return per year for 5 years. If you pay $10,000 for the GIC today and receive no interest along the way, you will get __________ in 5 years (to the nearest dollar). (Round your answer to the nearest whole dollar). A) $12,500 B) $12,760 C) $12,763 D) $12,155

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4) A bond currently has a price of $1,050. The yield on the bond is 5%. If the yield increases 22 basis points, the price of the bond will go down to $1,038. The duration of this bond is __________ years. (Select the closest answer.) A) 4.92 B) 5.45 C) 5.53 D) 5.18

5) A perpetuity pays $100 each and every year forever. The duration of this perpetuity will be __________ if its yield is 8.0%. A) 7.41 B) 8.00 C) 6.00 D) 13.50

6) A bond pays annual interest. Its coupon rate is 7.0%. Its value at maturity is $1,000. It matures in 4 years. Its yield to maturity is currently 4.0%. The duration of this bond is __________ years. A) 4.00 B) 3.51 C) 3.65 D) 3.30

7) A bond pays annual interest. Its coupon rate is 10.7%. Its value at maturity is $1,000. It matures in 4 years. Its yield to maturity is currently 7.7%. The modified duration of this bond is __________ years.

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A) 4.00 B) 3.48 C) 3.23 D) 2.99

8) A bond with a 9-year duration is worth $1,075, and its yield to maturity is 7.5%. If the yield to maturity falls to 7.39%, you would predict that the new value of the bond will be approximately __________. (Select the closest answer.) A) $1,073.82 B) $1,075.00 C) $1,084.89 D) $1,076.18

9) A fixed-income portfolio manager sets a minimum acceptable rate of return on the bond portfolio at 5.6% per year over the next 4 years. The portfolio is currently worth $10 million. One year later interest rates are at 6.6%. What is the portfolio value trigger point at this time that would require the manager to immunize the portfolio? A) $12,435,283 B) $10,265,593 C) $9,630,013 D) $10,560,000

10) You have a 25-year maturity, 9.7% coupon, 9.7% yield bond with a duration of 10 years and a convexity of 135.2. If the interest rate were to fall 122 basis points, your predicted new price for the bond (including convexity) is __________. (Select the closest answer.)

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A) $1,111.20 B) $1,101.14 C) $1,091.16 D) $1,121.30

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Answer Key Test name: Chap 11_12e_Bodie_Algo 1) A 2) B 3) C 4) B 5) D 6) C 7) C 8) C 9) B 10) D

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CHAPTER 12 1)

A top-down analysis of a firm's prospects starts with an analysis of the __________. A) firm's position in its industry B) U.S. economy or even the global economy C) industry D) specific firm under consideration

2) In 1980 the dollar-yen exchange rate was about $.0045. In 2019 the yen-dollar exchange rate was about 91 yen per dollar. A Japanese producer would have had to increase the dollar price of a good sold in the United States by approximately __________ to maintain the same yen price in 2019. A) 144.20% B) 79.50% C) 265.40% D) 36.04%

3) 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

4) You estimate that the present value of a firm's cash flow is valued at $15 million. The break up value of the firm if you were to sell the major assets and divisions separately would be $20 million. This is an example of what Peter Lynch would call __________.

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A) a stalwart B) slow growth C) a star D) an asset play

5) If interest rates increase, business investment expenditures are likely to __________ and consumer durable expenditures are likely to __________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease

6) 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

7) 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

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The Conference Board's Consumer Confidence Index is released __________. A) daily B) weekly C) monthly D) quarterly

You can earn abnormal returns on your investments via macro forecasting __________. A) if you can forecast the economy at all B) if you can forecast the economy as well as the average forecaster C) if you can forecast the economy better than the average forecaster D) only if you can forecast the economy with perfect accuracy

10)

Which of the following industries would most analysts classify as mature? A) Internet service providers B) Biotechnology C) Wireless communication D) Auto manufacturing

11) Which one of the following stocks represents industries with below-average sensitivity to the state of the economy?

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A) Financials B) Technology C) Food and beverage D) Cyclicals

12)

The most widely used monetary policy tool is __________. A) altering the discount rate B) altering reserve requirements C) open market operations D) increasing the budget deficit

13) According to __________ economists, the growth of the U.S. economy in the 1980s can be attributed to lower marginal tax rates, which improved the incentives for people to work. A) Keynesian B) monetarist C) supply-side D) demand-side

14) The market value of all final goods and services produced during a given period is called __________. A) GDP B) industrial production C) capacity utilization D) factory orders

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15)

A big increase in government spending is an example of a __________. A) positive demand shock B) positive supply shock C) negative demand shock D) negative supply shock

16)

GDP refers to __________. A) the amount of personal disposable income in the economy B) the difference between government spending and government revenues C) the total manufacturing output in the economy D) the total production of goods and services in the economy

17)

Portfolio manager Peter Lynch would likely classify Coca-Cola as __________. A) an asset play B) a slow grower C) a stalwart D) a turnaround

18) Attempting to forecast future earnings and dividends is consistent with which of the following approaches to securities analysis? A) Technical analysis B) Fundamental analysis C) Both technical analysis and fundamental analysis D) Indexing

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19)

The analysis of the determinants of firm value is called __________. A) fundamental analysis B) technical analysis C) momentum analysis D) indexing

20)

Which of the following companies is the best example of a turnaround? A) Coca-Cola B) Microsoft C) ExxonMobil D) Chrysler

21)

Inflation is caused by __________. A) unions B) rapid growth of the money supply C) excess supply D) low rates of capacity utilization

22) Everything else equal, if you expect a larger interest rate increase than other market participants, you should __________.

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A) buy long-term bonds B) buy short-term bonds C) buy common stocks D) buy preferred stocks

23) 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

24)

Which of the following would not be considered a supply shock? A) A change in the price of imported oil B) Frost damage to the orange crop C) A change in the level of education of the average worker D) An increase in the level of government spending

25) If economic conditions are such that very slow growth is expected in the foreseeable future, one would want to invest in industries with __________ sensitivity to economic conditions. A) below-average B) average C) above-average D) Since growth is expected to be slow, sensitivity to economic conditions is not an issue.

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26)

Which of the following is not an example of fiscal policy? A) Social Security spending B) Medicare spending C) Fed purchases of Treasury securities D) Changes in the tax rate

27)

Supply-side economics tends to focus on __________. A) government spending B) price controls C) monetary policy D) increasing productive capacity

28) Which one of the following describes the amount by which government spending exceeds government revenues? A) balance of trade B) budget deficit C) gross domestic product D) output gap

29) Which one of the following is probably the most direct and immediate way to stimulate or slow the economy, although it is not very useful for fine-tuning economic performance?

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A) Fiscal policy B) Monetary policy C) Supply-side policy D) Rising minimum wages

30) In macroeconomic terms, an increase in the price of imported oil or a decrease in the availability of oil is an example of a __________. A) demand shock B) supply shock C) monetary shock D) refinery shock

31)

__________ in interest rates are associated with stock market declines. A) Anticipated increases B) Unanticipated increases C) Anticipated decreases D) Unanticipated decreases

32)

The average duration of unemployment is __________. A) a leading economic indicator B) a coincidental economic indicator C) a lagging economic indicator D) both a coincidental indicator and a lagging indicator

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33)

The ratio of the purchasing power of two economies is termed the __________. A) balance of trade B) real exchange rate C) real interest rate D) nominal exchange rate

34) Everything else equal, an increase in the government budget deficit would: 1.Increase the government's demand for funds 2.Shift the demand curve for funds to the left 3.Increase the interest rate in the economy

A) 2 only B) 1 and 2 only C) 1 and 3 only D) 1, 2, and 3

35) Which of the following affects a firm's sensitivity of its earnings to the business cycle? 1.Financial leverage 2.Operating leverage 3.Type of product

A) 2 only B) 1 and 2 only C) 1 and 3 only D) 1, 2, and 3

36) Which of the following describes the rate at which your ability to purchase grows while you hold an interest-earning investment? Version 1

A) The nominal exchange rate B) The nominal interest rate C) The real exchange rate D) The real interest rate

37)

An example of a highly cyclical industry is the __________. A) automobile industry B) tobacco industry C) pharmaceutical industry D) utility industry

38) The stock price index and contracts and orders for nondefense capital goods are __________. A) leading economic indicators B) coincidental economic indicators C) lagging economic indicators D) leading and coincidental indicators, respectively

39)

Which one of the following is not a demand shock? A) Increase in government spending B) Increases in the money supply C) Reductions in consumer spending D) Improvements in education of U.S. workers

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40)

Which one of the following is not a U.S. supply shock? A) Unions force an increase in national wage rates. B) The oil supply from the Middle East drops 30%. C) Extended droughts reduce U.S. food production 25%. D) Chinese purchases of U.S. exports increase.

41) Pharmaceuticals, food, and other necessities would be relatively good performers during the __________ stage of the business cycle. A) peak B) contraction C) trough D) expansion

42) Capital goods industries such as industrial equipment, transportation, and construction would be good investments during the __________ stage of the business cycle. A) peak B) contraction C) trough D) expansion

43) If you are going to earn abnormal returns based on your macroeconomic analysis, it will most likely have to be because __________. A) you have more information than others B) you are a better analyst than others C) you have the same information as others D) you are an equally good analyst as others

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44) If the economy is going into a recession, a good industry to invest in would be the __________ industry. A) automobile B) banking C) construction D) medical services

45) Members of the Board of Governors of the Federal Reserve System are appointed by __________ to serve __________ terms. A) the Senate; 10-year B) the House of Representatives; 8-year C) the President; 14-year D) the Secretary of the Treasury; 6-year

46)

A firm in the early stages of its industry life cycle will likely have __________. A) low dividend payout rates B) low rates of investment C) low rates of return on investment D) low R&D spending

47) Which of the following describes the percentage of the total labor force that has yet to find work?

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A) the capacity utilization rate B) the participation rate C) the unemployment rate D) the natural rate

48) Which of the following is the rate at which the general level of prices for goods and services is rising? A) The exchange rate B) The gross domestic product growth rate C) The inflation rate D) The real interest rate

49) An analyst starts by examining the broad economic environment and then considers the implications of the economy on the industry in which the firm operates. Finally, the firm's position within the industry is examined. This is called __________ analysis. A) bottom-up B) outside-inside C) top-down D) upside-down

50) Assume that the Federal Reserve increases the money supply. This will likely cause: 1.Interest rates to decrease 2.Consumption and investment to decrease 3.Inflation to fall

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A) 1 only B) 1 and 2 only C) 2 and 3 only D) 1, 2, and 3

51)

The discount rate is the __________. A) interest rate banks charge each other for overnight loans of deposits on reserve at the

Fed B) interest rate the Fed charges commercial banks on short-term loans C) interest rate that the U.S. Treasury pays on its bills D) interest rate that banks charge their best corporate customers

52) If the currency of your country is depreciating, this should __________ exports and __________ imports. A) stimulate; stimulate B) stimulate; discourage C) discourage; stimulate D) discourage; discourage

53) If interest rates increase, business investment expenditures are likely to __________ and consumer durable expenditures are likely to _________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease

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54) Increases in the money supply will cause demand for investment and consumption goods to __________ in the short run and may cause prices to __________ in the long run. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease

55) The nominal interest rate is 6%. The inflation rate is 3%. The exact real interest rate must be __________. A) 2.91% B) 3.85% C) 1.45% D) 2.12%

56) The nominal interest rate is 10%. The real interest rate is 4%. The inflation rate must be __________. A) −6.00% B) 4.57% C) 5.77% D) 14.40%

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57) Order the following stages in the industry life cycle from the earliest to latest to occur after the start-up phase: 1.Maturity 2.Relative decline 3.Consolidation

A) 3, 1, 2 B) 1, 3, 2 C) 3, 2, 1 D) 1, 2, 3

58) An investment strategy that entails shifting the portfolio into industry sectors that are expected to outperform others based on macroeconomic forecasts is termed __________. A) sector rotation B) contraction/expansion analysis C) life-cycle analysis D) business-cycle shifting

59) Firm A produces gadgets. The price of gadgets is $2 each. Firm A has total fixed costs of $1,000,000 and variable costs of $1 per gadget. The corporate tax rate is 30% (Federal and State combined). If the economy is strong, the firm will sell 2,000,000 gadgets. If the economy enters a recession, the firm will sell only half as many gadgets. If the economy enters a recession, the after-tax profit of firm A will be __________. A) $0 B) $90,000 C) $180,000 D) $270,000

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60) Firm B produces gadgets. The price of gadgets is $2 each. Firm B has total fixed costs of $300,000 and variable costs of $1.40 per gadget. The corporate tax rate is 30% (Federal and State combined). If the economy is strong, the firm will sell 2,000,000 gadgets. If the economy enters a recession, the firm will sell only half as many gadgets. If the economy is strong, the after-tax profit of firm B will be __________. A) $90,000 B) $210,000 C) $300,000 D) $630,000

61)

The fed funds rate is the __________. A) interest rate that banks charge their best corporate customers B) interest rate banks charge each other for overnight loans of deposits on reserve at the

Fed C) interest rate the Fed charges commercial banks on short-term loans D) interest rate that the U.S. Treasury pays on its bills

62) Firm B produces gadgets. The price of gadgets is $2 each. Firm B has total fixed costs of $300,000 and variable costs of $1.40 per gadget. The corporate tax rate is 30% (Federal and State combined). What is the breakeven number of gadgets B must sell to make a zero after-tax profit? A) 300,000 B) 400,000 C) 500,000 D) 600,000

63)

The goal of supply-side policies is to __________.

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A) increase government involvement in the economy B) create an environment where workers and owners of capital have the maximum incentive and ability to produce and develop goods C) maximize tax revenues of the government D) focus more on wealth redistribution policies

64) An industry analysis for manufacturers of a small personal care gadget observed the following characteristics: 1.Industry sales have grown at 15%-20% per year in recent years and are expected to grow at 10%-15% per year over the next 3 years, still well above the economic growth rate. 2.Some U.S. manufacturers are attempting to enter fast-growing non-U.S. markets, which remain largely unexploited. 3.Some manufacturers have created a new niche in the industry by selling directly to customers through mail order. Sales for this industry segment are growing at 40% per year. 4.The current penetration rate in the United States is 60% of households and will be difficult to increase. 5.Manufacturers compete fiercely on the basis of price, and price wars within the industry are common. 6.Some manufacturers are able to develop new, unexploited niche markets in the United States based on company reputation, quality, and service. 7.Several manufacturers have recently merged, and it is expected that consolidation in the industry will increase. 8.New manufacturers continue to enter the market. Characteristics 4 and 5 would indicate that the industry is in the __________ stage. A) start-up B) consolidation C) maturity D) relative decline

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65) An industry analysis for manufacturers of a small personal care gadget observed the following characteristics: 1.Industry sales have grown at 15%-20% per year in recent years and are expected to grow at 10%-15% per year over the next 3 years, still well above the economic growth rate. 2.Some U.S. manufacturers are attempting to enter fast-growing non-U.S. markets, which remain largely unexploited. 3.Some manufacturers have created a new niche in the industry by selling directly to customers through mail order. Sales for this industry segment are growing at 40% per year. 4.The current penetration rate in the United States is 60% of households and will be difficult to increase. 5.Manufacturers compete fiercely on the basis of price, and price wars within the industry are common. 6.Some manufacturers are able to develop new, unexploited niche markets in the United States based on company reputation, quality, and service. 7.Several manufacturers have recently merged, and it is expected that consolidation in the industry will increase. 8.New manufacturers continue to enter the market. Characteristics __________ would be typical of an industry that is in the start-up stage. A) 4 and 7 B) 1 and 4 C) 2 and 5 D) None of these options are correct.

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66) An industry analysis for manufacturers of a small personal care gadget observed the following characteristics: 1.Industry sales have grown at 15%-20% per year in recent years and are expected to grow at 10%-15% per year over the next 3 years, still well above the economic growth rate. 2.Some U.S. manufacturers are attempting to enter fast-growing non-U.S. markets, which remain largely unexploited. 3.Some manufacturers have created a new niche in the industry by selling directly to customers through mail order. Sales for this industry segment are growing at 40% per year. 4.The current penetration rate in the United States is 60% of households and will be difficult to increase. 5.Manufacturers compete fiercely on the basis of price, and price wars within the industry are common. 6.Some manufacturers are able to develop new, unexploited niche markets in the United States based on company reputation, quality, and service. 7.Several manufacturers have recently merged, and it is expected that consolidation in the industry will increase. 8.New manufacturers continue to enter the market. Characteristics __________ would be typical of an industry that is in the consolidation stage. A) 6 and 7 B) 1 and 4 C) 5 and 6 D) 2 and 8

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67) An industry analysis for manufacturers of a small personal care gadget observed the following characteristics: 1.Industry sales have grown at 15%-20% per year in recent years and are expected to grow at 10%-15% per year over the next 3 years, still well above the economic growth rate. 2.Some U.S. manufacturers are attempting to enter fast-growing non-U.S. markets, which remain largely unexploited. 3.Some manufacturers have created a new niche in the industry by selling directly to customers through mail order. Sales for this industry segment are growing at 40% per year. 4.The current penetration rate in the United States is 60% of households and will be difficult to increase. 5.Manufacturers compete fiercely on the basis of price, and price wars within the industry are common. 6.Some manufacturers are able to develop new, unexploited niche markets in the United States based on company reputation, quality, and service. 7.Several manufacturers have recently merged, and it is expected that consolidation in the industry will increase. 8.New manufacturers continue to enter the market. Which of the characteristics would be typical of an industry that is in the maturity stage? A) 1, 2, and 3 B) 4 and 5 C) 6, 7, and 8 D) All of these options are correct.

68)

Countercyclical fiscal policy is best described by which of the following statements?

A) Government surpluses are planned during economic booms, and deficits are planned during economic recessions. B) The annual budget should always be balanced. C) Deficits should always equal surpluses. D) Government deficits are planned during economic booms, and surpluses are planned during economic recessions.

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69)

A supply-side economist would likely agree with which of the following statements?

A) Real output and aggregate employment are primarily determined by aggregate demand. B) Real income will rise when government expenditures and tax rates increase. C) Real output and aggregate employment are primarily determined by tax rates. D) Increasing the money supply will increase real output without causing higher inflation.

70) Which of the following actions should the central bank take if monetary authorities want to reduce the supply of money to slow the rate of inflation? A) Sell government bonds, reducing money supply, increasing interest rates, and slowing aggregate demand. B) Buy government bonds, reducing money supply, increasing interest rates, and slowing aggregate demand. C) Decrease the discount rate, lowering interest rates and causing both costs and prices to fall. D) Increase taxes, reducing costs and causing prices to fall.

71) The decline in the value of the dollar relative to the yen will have what impact on the purchase of U.S. goods in Japan? A) U.S. goods will increase in cost, and Japan will import more. B) U.S. goods will increase in cost, and Japan will import less. C) U.S. goods will decrease in cost, and Japan will import more. D) U.S. goods will increase in cost, and Japan will export less.

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72) Which of the following are examples of cyclical industries? 1.Washing Machines 2.Computer chip manufacturers 3.Kellogg's Frosted Flakes 4.Pfizer

A) 1 and 2 only B) 1, 2, and 3 only C) 2, 3, and 4 only D) 1, 2, 3, and 4

73) You would expect the beta of cyclical industries to be __________ and the beta of defensive industries to be __________. A) greater than 1; less than 1 B) less than 1; less than 1 C) less than 1; greater than 1 D) greater than 1; greater than 1

74)

What economic variable is most closely associated with increasing corporate profits? A) Exchange rates B) Inflation C) Gross domestic product D) Budget deficits

75) The federal government decides to pay for the transition to private social security accounts with a one-time $1 trillion bond issue. What will be the biggest concern to businesses relative to the "crowding out" effect?

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A) Higher interest rates due to the new government borrowing B) Inflation resulting from more government purchases C) A negative supply shock D) Shortage of investment due to new accounts

76) An expanding economy requires more workers. If the supply of workers becomes inadequate to meet the demand, what is the likely impact on the economy? A) An economic slowdown is likely B) Employment trends will reverse and unemployment will occur C) Government deficits will result from capacity utilization D) Inflation may result from upward wage pressures

77) An expanding economy puts stress on the manufacturing ability of a company. When a firm turns business down during periods of economic expansion, a problem exists in the area of __________. A) asset allocation B) capacity utilization C) employment management D) strategic planning

78) The expansion of the money supply at a rate that exceeds the increase in goods and services will likely result in __________. A) expanding economy B) increased inflation C) interest rate declines D) lower GDP

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79)

The supply of funds in the economy is controlled primarily by __________. A) the Federal Reserve System B) Congress C) money center banks D) the Treasury department

80) The classification system used to classify firms into industries is now called the __________ code. A) SICC B) NAICS C) ISO 57 D) ISM

81) During 2004 China increased its use of global oil by 40%. This followed a 100% increase during the previous 5 years. How do economists refer to this kind of economic event? A) Demand shock B) Equilibrium event C) Expanding commodity event D) Supply shock

82) Whenever OPEC attempts to influence the price of oil by significantly altering production, economists refer to this type of event as a __________.

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A) demand shock B) equilibrium event C) expanding commodity event D) supply shock

83) Items that are __________ and product purchases for which __________ is not important tend to be less cyclical in nature. A) necessities; income B) luxuries; leverage C) discretionary goods; time of purchase D) produced with high fixed costs; entertainment

84)

Cash cows are typically found in the __________ stage of the industry life cycle. A) start-up B) consolidation C) maturity D) relative decline

85) At what point in the industry life cycle are inefficiencies in competitors most likely to be removed? A) Start-up stage B) Consolidation stage C) Maturity stage D) Relative decline stage

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86)

Large-growth companies generally emerge in the __________ stage. A) start-up B) consolidation C) maturity D) relative decline

87) Which of the following are barriers to entry? 1.Large economies of scale required to be profitable 2.Established brand loyalty 3.Patent protection for the firm's product 4.Rapid industry growth

A) 1 and 2 only B) 1, 2, and 3 only C) 2, 3, and 4 only D) 3 and 4 only

88)

Stock prices tend to __________ when corporate earnings __________. A) rise; rise B) rise; fall C) fall; rise D) None of these options are correct.

89)

Stock prices are __________ measures of firm value.

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A) backward-looking B) forward-looking C) coincident D) lagging

90)

Which industry had the highest ROE in 2018 according to the text? A) electric utilities B) business software C) grocery and food D) money center banks

91)

Which industry had the highest stock price performance in 2018 according to the text? A) biotech B) electric utilities C) software applications D) airlines

92)

Which industry would you expect to find the highest dividend payout yields? A) biotech B) technology C) electric utility D) business software

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Answer Key Test name: Chap 12_12e_Bodie 1) B 2) A 3) A 4) D 5) D 6) A 7) A 8) C 9) C 10) D 11) C 12) C 13) C 14) A 15) A 16) D 17) C 18) B 19) A 20) D 21) B 22) B 23) D 24) D 25) A 26) C Version 1

27) D 28) B 29) A 30) B 31) B 32) C 33) B 34) C 35) D 36) D 37) A 38) A 39) D 40) D 41) B 42) C 43) B 44) D 45) C 46) A 47) C 48) C 49) C 50) A 51) B 52) B 53) D 54) A 55) A 56) C Version 1

57) A 58) A 59) A 60) D 61) B 62) C 63) B 64) C 65) D 66) A 67) B 68) A 69) C 70) A 71) C 72) A 73) A 74) C 75) A 76) D 77) B 78) B 79) A 80) B 81) A 82) D 83) A 84) C 85) B 86) B Version 1

87) B 88) A 89) B 90) C 91) C 92) C

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CHAPTER 13 1) The accounting measure of a firm's equity value generated by applying accounting principles to asset and liability acquisitions is called __________. A) book value B) market value C) liquidation value D) Tobin's q

2) The price-to-sales ratio is probably most useful for firms in which phase of the industry life cycle? A) Start-up phase B) Consolidation C) Maturity D) Relative decline

If a firm increases its plowback ratio, this will definitely result in __________ P/E ratio. A) a higher B) a lower C) an unchanged D) The answer cannot be determined from the information given.

The value of Internet companies is based primarily on __________.

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A) current profits B) Tobin's q C) growth opportunities D) replacement cost

5) New-economy companies generally have higher __________ than old-economy companies. A) book value per share B) P/E multiples C) profits D) asset values

P/E ratios tend to be __________ when inflation is __________. A) higher; higher B) lower; lower C) higher; lower D) they are unrelated

Which one of the following statements about market and book value is correct? A) All firms sell at a market-to-book ratio above 1. B) All firms sell at a market-to-book ratio greater than or equal to 1. C) All firms sell at a market-to-book ratio below 1. D) Most firms have a market-to-book ratio above 1, but not all.

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Earnings yields tend to __________ when Treasury yields fall. A) fall B) rise C) remain unchanged D) fluctuate wildly

9) Which one of the following is a common term for the market consensus value of the required return on a stock? A) Dividend payout ratio B) Intrinsic value C) Market capitalization rate D) Plowback ratio

10) Which one of the following is equal to the ratio of common shareholders' equity (from the balance sheet) to common shares outstanding? A) Book value per share B) Liquidation value per share C) Market value per share D) Tobin's q

11) A firm has current assets that could be sold for their book value of $10 million. The book value of its fixed assets is $60 million, but they could be sold for $95 million today. The firm has total debt at a book value of $40 million, but interest rate changes have increased the value of the debt to a current market value of $50 million. This firm's market-to-book ratio is __________.

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A) 1.83 B) 1.50 C) 1.35 D) 1.46

12)

If a stock is correctly priced, then you know that __________.

A) the dividend payout ratio is optimal B) the stock's required return is equal to the growth rate in earnings and dividends C) the sum of the stock's expected capital gain and dividend yield is equal to the stock's required rate of return D) the present value of growth opportunities is equal to the value of assets in place

13) A stock has an intrinsic value of $15 and an actual stock price of $13.50. You know that this stock __________. A) has a Tobin's q value < 1 B) will generate a positive alpha C) has an expected return less than its required return D) has a beta > 1

14) Bill, Jim, and Shelly are all interested in buying the same stock that pays dividends. Bill plans on holding the stock for 1 year. Jim plans on holding the stock for 3 years. Shelly plans on holding the stock until she retires in 10 years. Which one of the following statements is correct?

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A) Bill will be willing to pay the most for the stock because he will get his money back in 1 year when he sells. B) Jim should be willing to pay three times as much for the stock as Bill will pay because his expected holding period is three times as long as Bill's. C) Shelly should be willing to pay the most for the stock because she will hold it the longest and hence will get the most dividends. D) All three should be willing to pay the same amount for the stock regardless of their holding period.

15) A firm that has an ROE of 12% is considering cutting its dividend payout. The stockholders of the firm desire a dividend yield of 4% and a capital gain yield of 9%. Given this information, which of the following statements is (are)definitely correct? 1. All else equal, the firm's growth rate will accelerate after the payout change. 2. All else equal, the firm's stock price will go up after the payout change. 3. All else equal, the firm's P/E ratio will increase after the payout change. A) 1 only B) 1 and 2 only C) 2 and 3 only D) 1, 2, and 3

16)

A firm cuts its dividend payout ratio. As a result, you know that the firm's __________. A) return on assets will increase B) earnings retention ratio will increase C) earnings growth rate will fall D) stock price will fall

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17) __________ is the amount of money per common share that could be realized by breaking up the firm, selling its assets, repaying its debt, and distributing the remainder to shareholders. A) Book value per share B) Liquidation value per share C) Market value per share D) Tobin's q

18) An underpriced stock provides an expected return that is __________ the required return based on the capital asset pricing model (CAPM). A) less than B) equal to C) greater than D) greater than or equal to

19) Stockholders of Dogs R Us Pet Supply expect a 12% rate of return on their stock. Management has consistently been generating an ROE of 15% over the last 5 years but now believes that ROE will be 12% for the next 5 years. Given this, the firm's optimal dividend payout ratio is now __________. A) 0% B) 100% C) between 0% and 50% D) between 50% and 100%

20) The constant-growth dividend discount model (DDM) can be used only when the ___________.

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A) growth rate is less than or equal to the required return B) growth rate is greater than or equal to the required return C) growth rate is less than the required return D) growth rate is greater than the required return

21) Suppose that in 2018 the expected dividends of the stocks in a broad market index equaled $240 million when the discount rate was 8% and the expected growth rate of the dividends equaled 6%. Using the constant-growth formula for valuation, if interest rates increase to 9%, the value of the market index will change by __________. A) −10% B) −20% C) −25% D) −33%

22) You want to earn a return of 10% on each of two stocks, A and B. Each of the stocks is expected to pay a dividend of $4 in the upcoming year. The expected growth rate of dividends is 6% for stock A and 5% for stock B. Using the constant-growth DDM, the intrinsic value of stock A __________. A) will be higher than the intrinsic value of stock B B) will be the same as the intrinsic value of stock B C) will be less than the intrinsic value of stock B D) The answer cannot be determined from the information given.

23) Each of two stocks, A and B, is expected to pay a dividend of $7 in the upcoming year. The expected growth rate of dividends is 6% for both stocks. You require a return of 10% on stock A and a return of 12% on stock B. Using the constant-growth DDM, the intrinsic value of stock A __________.

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A) will be higher than the intrinsic value of stock B B) will be the same as the intrinsic value of stock B C) will be less than the intrinsic value of stock B D) The answer cannot be determined from the information given.

24) You want to earn a return of 11% on each of two stocks, A and B. Stock A is expected to pay a dividend of $3 in the upcoming year, while stock B is expected to pay a dividend of $2 in the upcoming year. The expected growth rate of dividends for both stocks is 4%. Using the constant-growth DDM, the intrinsic value of stock A __________. A) will be higher than the intrinsic value of stock B B) will be the same as the intrinsic value of stock B C) will be less than the intrinsic value of stock B D) The answer cannot be determined from the information given.

25) You are considering acquiring a common share of Sahali Shopping Center Corporation that you would like to hold for 1 year. You expect to receive both $1.25 in dividends and $35 from the sale of the share at the end of the year. The maximum price you would pay for a share today is __________ if you wanted to earn a 12% return. A) $31.25 B) $32.37 C) $38.47 D) $41.32

26) The market capitalization rate on the stock of Aberdeen Wholesale Company is 10%. Its expected ROE is 12%, and its expected EPS is $5. If the firm's plowback ratio is 50%, its P/E ratio will be __________.

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A) 8.33 B) 12.50 C) 19.23 D) 24.15

27) The market capitalization rate on the stock of Aberdeen Wholesale Company is 10%. Its expected ROE is 12%, and its expected EPS is $5. If the firm's plowback ratio is 60%, its P/E ratio will be _________. A) 7.14 B) 14.29 C) 16.67 D) 22.22

28) Weyerhaeuser Incorporated has a balance sheet that lists $70 million in assets, $45 million in liabilities, and $25 million in common shareholders' equity. It has 1 million common shares outstanding. The replacement cost of its assets is $85 million. Its share price in the market is $49. Its book value per share is _________. A) $16.67 B) $25.00 C) $37.50 D) $40.83

29) Eagle Brand Arrowheads has expected earnings of $1.25 per share and a market capitalization rate of 12%. Earnings are expected to grow at 5% per year indefinitely. The firm has a 40% plowback ratio. By how much does the firm's ROE exceed the market capitalization rate?

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A) 0.5% B) 1.0% C) 1.5% D) 2.0%

30) Gagliardi Way Corporation has an expected ROE of 15%. If it pays out 30% of its earnings as dividends, its dividend growth rate will be __________. A) 4.5% B) 10.5% C) 15% D) 30%

31) A preferred share of Coquihalla Corporation will pay a dividend of $8 in the upcoming year and every year thereafter; that is, dividends are not expected to grow. You require a return of 7% on this stock. Using the constant-growth DDM to calculate the intrinsic value, a preferred share of Coquihalla Corporation is worth __________. A) $13.50 B) $45.50 C) $91.87 D) $114.29

32) Brevik Builders has an expected ROE of 25%. Its dividend growth rate will be __________ if it follows a policy of paying 30% of earnings in the form of dividends.

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A) 5.25% B) 15.25% C) 17.50% D) 45.50%

33) A firm is planning on paying its first dividend of $2 three years from today. After that, dividends are expected to grow at 6% per year indefinitely. The stock's required return is 14%. What is the intrinsic value of a share today? A) $25.00 B) $16.87 C) $19.24 D) $20.99

34) Rose Hill Trading Company is expected to have EPS in the upcoming year of $8. The expected ROE is 18%. An appropriate required return on the stock is 14%. If the firm has a plowback ratio of 70%, its dividend in the upcoming year should be __________. A) $1.12 B) $1.44 C) $2.40 D) $5.60

35) Rose Hill Trading Company is expected to have EPS in the upcoming year of $6. The expected ROE is 18%. An appropriate required return on the stock is 14%. If the firm has a plowback ratio of 70%, its intrinsic value should be __________.

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A) $20.93 B) $69.77 C) $128.57 D) $150.56

36) Cache Creek Manufacturing Company is expected to pay a dividend of $3.36 in the upcoming year. Dividends are expected to grow at 8% per year. The risk-free rate of return is 4%, and the expected return on the market portfolio is 14%. Investors use the CAPM to compute the market capitalization rate and use the constant-growth DDM to determine the value of the stock. The stock's current price is $84. Using the constant-growth DDM, the market capitalization rate is __________. A) 9% B) 12% C) 14% D) 18%

37) Grott and Perrin, Incorporated, has expected earnings of $3 per share for next year. The firm's ROE is 20%, and its earnings retention ratio is 70%. If the firm's market capitalization rate is 15%, what is the present value of its growth opportunities? A) $20 B) $70 C) $90 D) $115

38) Ace Ventures, Incorporated, has expected earnings of $5 per share for next year. The firm's ROE is 15%, and its earnings retention ratio is 40%. If the firm's market capitalization rate is 10%, what is the present value of its growth opportunities?

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A) $25 B) $50 C) $75 D) $100

39) Annie's Donut Shops, Incorporated, has expected earnings of $3 per share for next year. The firm's ROE is 18%, and its earnings retention ratio is 60%. If the firm's market capitalization rate is 12%, what is the value of the firm excluding any growth opportunities? A) $25.00 B) $50.25 C) $83.33 D) $208.08

40) Flanders, Incorporated, has expected earnings of $4 per share for next year. The firm's ROE is 8%, and its earnings retention ratio is 40%. If the firm's market capitalization rate is 15%, what is the present value of its growth opportunities? A) −$6.33 B) $0.00 C) $20.34 D) $26.67

41) Firm A is high-risk, and Firm B is low-risk. Everything else equal, which firm would you expect to have a higher P/E ratio?

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A) Firm A B) Firm B C) Both would have the same P/E if they were in the same industry. D) There is not necessarily any linkage between risk and P/E ratios.

42) Firms with higher expected growth rates tend to have P/E ratios that are __________ the P/E ratios of firms with lower expected growth rates. A) higher than B) equal to C) lower than D) There is not necessarily any linkage between risk and P/E ratios.

43)

Value stocks are more likely to have a PEG ratio __________. A) less than 1 B) equal to 1 C) greater than 1 D) less than zero

44) Generally speaking, as a firm progresses through the industry life cycle, you would expect the PVGO to __________ as a percentage of share price. A) increase B) decrease C) stay the same D) No typical pattern can be expected.

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45) Cache Creek Manufacturing Company is expected to pay a dividend of $4.20 in the upcoming year. Dividends are expected to grow at the rate of 8% per year. The risk-free rate of return is 4%, and the expected return on the market portfolio is 14%. Investors use the CAPM to compute the market capitalization rate on the stock and use the constant-growth DDM to determine the intrinsic value of the stock. The stock is trading in the market today at $84. Using the constant-growth DDM and the CAPM, the beta of the stock is __________. A) 1.4 B) 0.9 C) 0.8 D) 0.5

46) Westsyde Tool Company is expected to pay a dividend of $1.50 in the upcoming year. The risk-free rate of return is 6%, and the expected return on the market portfolio is 14%. Analysts expect the price of Westsyde Tool Company shares to be $29 a year from now. The beta of Westsyde Tool Company's stock is 1.2. Using the CAPM, an appropriate required return on Westsyde Tool Company's stock is _________. A) 8.00% B) 10.80% C) 15.60% D) 16.85%

47) Westsyde Tool Company is expected to pay a dividend of $2 in the upcoming year. The risk-free rate of return is 6%, and the expected return on the market portfolio is 12%. Analysts expect the price of Westsyde Tool Company shares to be $29 a year from now. The beta of Westsyde Tool Company's stock is 1.2. Using a one-period valuation model, the intrinsic value of Westsyde Tool Company stock today is __________.

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A) $24.29 B) $27.39 C) $31.13 D) $34.52

48) Todd Mountain Development Corporation is expected to pay a dividend of $2.50 in the upcoming year. Dividends are expected to grow at the rate of 8% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 12%. The stock of Todd Mountain Development Corporation has a beta of 0.75. Using the CAPM, the return you should require on the stock is _________. A) 7.25% B) 10.25% C) 14.75% D) 21.00%

49) Todd Mountain Development Corporation is expected to pay a dividend of $3 in the upcoming year. Dividends are expected to grow at the rate of 8% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 17%. The stock of Todd Mountain Development Corporation has a beta of 0.75. Using the constant-growth DDM, the intrinsic value of the stock is __________. A) $4.35 B) $17.65 C) $37.50 D) $50.00

50) Generally speaking, the higher a firm's ROA, the __________ the dividend payout ratio and the __________ the firm's growth rate of earnings.

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A) higher; lower B) higher; higher C) lower; lower D) lower; higher

51) Interior Airline is expected to pay a dividend of $3 in the upcoming year. Dividends are expected to grow at the rate of 10% per year. The risk-free rate of return is 4%, and the expected return on the market portfolio is 13%. The stock of Interior Airline has a beta of 1.4. Using the constant-growth DDM, the intrinsic value of the stock is __________. A) $45.45 B) $22.73 C) $27.78 D) $41.67

52) Caribou Gold Mining Corporation is expected to pay a dividend of $4 in the upcoming year. Dividends are expected to decline at the rate of 3% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 13%. The stock of Caribou Gold Mining Corporation has a beta of 0.5. Using the CAPM, the return you should require on the stock is __________. A) 2% B) 5% C) 8% D) 9%

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53) Caribou Gold Mining Corporation is expected to pay a dividend of $6 in the upcoming year. Dividends are expected to decline at the rate of 3% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 13%. The stock of Caribou Gold Mining Corporation has a beta of 0.5. Using the constant-growth DDM, the intrinsic value of the stock is __________. A) $50 B) $100 C) $150 D) $200

54) Lifecycle Motorcycle Company is expected to pay a dividend in year 1 of $2, a dividend in year 2 of $3, and a dividend in year 3 of $4. After year 3, dividends are expected to grow at the rate of 7% per year. An appropriate required return for the stock is 12%. Using the multistage DDM, the stock should be worth __________ today. A) $63.80 B) $65.13 C) $67.95 D) $85.60

55) Ace Frisbee Corporation produces a good that is very mature in the firm's product life cycles. Ace Frisbee Corporation is expected to pay a dividend in year 1 of $3, a dividend in year 2 of $2, and a dividend in year 3 of $1. After year 3, dividends are expected to decline at the rate of 2% per year. An appropriate required return for the stock is 8%. Using the multistage DDM, the stock should be worth __________ today. A) $13.07 B) $13.58 C) $18.25 D) $18.78

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56) A firm's earnings per share increased from $10 to $12, its dividends increased from $4 to $4.40, and its share price increased from $80 to $100. Given this information, it follows that __________. A) the stock experienced a drop in its P/E ratio B) the company had a decrease in its dividend payout ratio C) both earnings and share price increased by 20% D) the required rate of return increased

57) Assuming all other factors remain unchanged, __________ would increase a firm's priceearnings 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

58) A company with an expected earnings growth rate which is greater than that of the typical company in the same industry most likely has __________. A) a dividend yield which is greater than that of the typical company B) a dividend yield which is less than that of the typical company C) less risk than the typical company D) less sensitivity to market trends than the typical company

59) Everything else equal, which variable is negatively related to the intrinsic value of a company?

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A) D1 B) D0 C) g D) k

60) Sanders, Incorporated, paid a $4 dividend per share last year and is expected to continue to pay out 60% of its earnings as dividends for the foreseeable future. If the firm is expected to generate a 13% return on equity in the future, and if you require a 15% return on the stock, the value of the stock is __________. A) $26.67 B) $35.19 C) $42.94 D) $59.89

61) A firm has PVGO of 0 and a market capitalization rate of 12%. What is the firm's P/E ratio? A) 12.00 B) 8.33 C) 10.25 D) 18.55

62) A firm has an earnings retention ratio of 40%. The stock has a market capitalization rate of 15% and an ROE of 18%. What is the stock's P/E ratio?

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A) 12.82 B) 7.69 C) 8.33 D) 9.46

63) A common stock pays an annual dividend per share of $1.80. The risk-free rate is 5%, and the risk premium for this stock is 4%. If the annual dividend is expected to remain at $1.80 per share, what is the value of the stock? A) $17.78 B) $20.00 C) $40.00 D) None of these options are correct.

64) Transportation stocks currently provide an expected rate of return of 15%. TTT, a large transportation company, will pay a year-end dividend of $3 per share. If the stock is selling at $60 per share, what must be the market's expectation of the constant-growth rate of TTT dividends? A) 5% B) 10% C) 20% D) None of these options are correct.

65) A stock is priced at $45 per share. The stock has earnings per share of $3 and a market capitalization rate of 14%. What is the stock's PVGO?

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A) $23.57 B) $15.00 C) $19.78 D) $21.34

66)

A firm increases its dividend plowback ratio. All else equal, you know that __________ A) earnings growth will increase and the stock's P/E will increase B) earnings growth will decrease and the stock's P/E will increase C) earnings growth will increase and the stock's P/E will decrease D) earnings growth will increase and the stock's P/E may or may not increase

67) A firm has a stock price of $54.75 per share. The firm's earnings are $75 million, and the firm has 20 million shares outstanding. The firm has an ROE of 15% and a plowback of 65%. What is the firm's PEG ratio? A) 1.50 B) 1.25 C) 1.15 D) 1.00

68) ART has come out with a new and improved product. As a result, the firm projects an ROE of 25%, and it will maintain a plowback ratio of 0.20. Its earnings this coming year will be $3 per share. Investors expect a 12% rate of return on the stock. At what price would you expect ART to sell?

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A) $25 B) $34.29 C) $42.86 D) $45.67

69) ART has come out with a new and improved product. As a result, the firm projects an ROE of 25%, and it will maintain a plowback ratio of 0.20. Its earnings this coming year will be $3 per share. Investors expect a 12% rate of return on the stock. At what P/E ratio would you expect ART to sell? A) 8.33 B) 11.43 C) 14.29 D) 15.25

70) ART has come out with a new and improved product. As a result, the firm projects an ROE of 25%, and it will maintain a plowback ratio of 0.20. Its earnings this coming year will be $3 per share. Investors expect a 12% rate of return on the stock. What is the present value of growth opportunities for ART? A) $8.57 B) $9.29 C) $14.29 D) $16.29

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71) ART has come out with a new and improved product. As a result, the firm projects an ROE of 25%, and it will maintain a plowback ratio of 0.20. Its earnings this coming year will be $3 per share. Investors expect a 12% rate of return on the stock. What price do you expect ART shares to sell for in 4 years? A) $53.96 B) $44.95 C) $41.68 D) $39.76

72) The EBIT of a firm is $300, the tax rate is 35%, the depreciation is $20, capital expenditures are $60, and the increase in net working capital is $30. What is the free cash flow to the firm? A) $85 B) $125 C) $185 D) $305

73) A firm reports EBIT of $100 million. The income statement shows depreciation of $20 million. If the tax rate is 35% and total capital expenditures and increases in working capital total $10 million, what is the free cash flow to the firm? A) $57 B) $65 C) $75 D) $95

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74) The free cash flow to the firm is $300 million in perpetuity, the cost of equity equals 14%, and the WACC is 10%. If the market value of the debt is $1 billion, what is the value of the equity using the free cash flow valuation approach? A) $1 billion B) $2 billion C) $3 billion D) $4 billion

75) If a firm has a free cash flow equal to $50 million and that cash flow is expected to grow at 3% forever, what is the total firm value given a WACC of 9.5%? A) $679.81 million B) $715.54 million C) $769.23 million D) $803.03 million

76) The free cash flow to the firm is reported as $405 million. The interest expense to the firm is $76 million. If the tax rate is 35% and the net debt of the firm increased by $50 million, what is the free cash flow to the equity holders of the firm? A) $405.6 million B) $454.2 million C) $505.8 million D) $553.5 million

77) The free cash flow to the firm is reported as $275 million. The interest expense to the firm is $60 million. If the tax rate is 35% and the net debt of the firm increased by $33 million, what is the free cash flow to the equity holders of the firm?

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A) $269 million B) $296 million C) $305 million D) $327 million

78) The free cash flow to the firm is reported as $205 million. The interest expense to the firm is $22 million. If the tax rate is 35% and the net debt of the firm increased by $25 million, what is the approximate market value of the firm if the FCFE grows at 2% and the cost of equity is 11%? A) $2,168 billion B) $2,445 billion C) $2,565 billion D) $2,998 billion

79) The free cash flow to the firm is reported as $198 million. The interest expense to the firm is $15 million. If the tax rate is 35% and the net debt of the firm increased by $20 million, what is the approximate market value of the firm if the FCFE grows at 3% and the cost of equity is 14%? A) $1,950 billion B) $2,497 billion C) $2,585 billion D) $3,098 billion

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80) Firm A has a stock price of $35, and 60% of the value of the stock is in the form of PVGO. Firm B also has a stock price of $35, but only 20% of the value of stock B is in the form of PVGO. We know that: 1. Stock A will give us a higher return than Stock B. 2. An investment in stock A is probably riskier than an investment in stock B. 3. Stock A has higher forecast earnings growth than stock B. A) 1 only B) 1 and 2 only C) 2 and 3 only D) 1, 2, and 3

81) A firm is expected to produce earnings next year of $3 per share. It plans to reinvest 25% of its earnings at 20%. If the cost of equity is 11%, what should be the value of the stock? A) $27.27 B) $37.50 C) $66.67 D) $70.00

82) Next year's earnings are estimated to be $5. The company plans to reinvest 20% of its earnings at 15%. If the cost of equity is 9%, what is the present value of growth opportunities? A) $9.09 B) $10.10 C) $11.11 D) $12.21

83) Next year's earnings are estimated to be $6. The company plans to reinvest 33% of its earnings at 12%. If the cost of equity is 8%, what is the present value of growth opportunities? Version 1

A) $6.00 B) $24.50 C) $44.44 D) $75.00

84) When Google's share price reached $475 per share, Google had a P/E ratio of about 68 and an estimated market capitalization rate of 11.5%. Google pays no dividends. Approximately what percentage of Google's stock price was represented by PVGO? A) 92% B) 87% C) 77% D) 64%

85) In what industry are investors likely to use the dividend discount model and arrive at a price close to the observed market price? A) Import/export trade B) Software C) Telecommunications D) Utility

86) Estimates of a stock's intrinsic value calculated with the free cash flow methodology depend most critically on __________. A) the terminal value used B) whether one uses FCFF or FCFE C) the time period used to estimate the cash flows D) whether the firm is currently paying dividends

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87)

The greatest value to an analyst from calculating a stock's intrinsic value is __________.

A) how easy it is to come up with accurate model inputs B) the precision of the value estimate C) how the process forces analysts to understand the critical variables that have the greatest impact on value D) how all the different models typically yield identical value results

88) Which of the following valuation measures is often used to compare firms that have no earnings? A) Price-to-book ratio B) P/E ratio C) Price-to-cash-flow ratio D) Price-to-sales ratio

89)

The term “residual claimant” refers to: A) bond holders. B) option holders. C) equity/shareholders. D) suppliers.

90) The SEC requires public U.S. companies to file registration statements and periodic reports electronically through:

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A) Yahoo. B) Google. C) EDGAR. D) FINRA.

91)

The PEG ratio normalizes the P/E ratio by the: A) tax rate. B) growth rate. C) market cap. D) book rate.

92) You are considering purchasing the Zions Bank $4.50 preferred stock. If you require a 4% return on this investment, what should you be willing to pay for this stock? A) $11.25 B) $112.50 C) $4.50 D) $45.00

93) Cash Cow, Incorporated earned $750,000,000 last year. If it retains 40% of its earnings, and has 100 million shares outstanding, what was its dividend last year? A) $3.00 B) $3.75 C) $4.50 D) $7.50

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Answer Key Test name: Chap 13_12e_Bodie 1) A 2) A 3) D 4) C 5) B 6) C 7) D 8) A 9) C 10) A 11) A 12) C 13) B 14) D 15) A 16) B 17) B 18) C 19) B 20) C 21) D 22) A 23) A 24) A 25) B 26) B Version 1

27) B 28) B 29) A 30) B 31) D 32) C 33) C 34) C 35) C 36) B 37) B 38) A 39) A 40) A 41) C 42) A 43) A 44) B 45) B 46) C 47) B 48) B 49) D 50) D 51) A 52) D 53) A 54) C 55) A 56) B Version 1

57) B 58) B 59) D 60) C 61) B 62) B 63) B 64) B 65) A 66) D 67) A 68) B 69) B 70) B 71) C 72) B 73) C 74) B 75) C 76) A 77) A 78) B 79) A 80) C 81) B 82) C 83) B 84) B 85) D 86) A Version 1

87) C 88) D 89) C 90) C 91) B 92) B 93) C

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CHAPTER 13: ALGO 1) You are considering acquiring a common share of Sahali Shopping Center Corporation that you would like to hold for 1 year. You expect to receive both $1.75 in dividends and $35 from the sale of the share at the end of the year. The maximum price you would pay for a share today is __________ if you wanted to earn a 13% return. A) $30.97 B) $32.52 C) $31.97 D) $42.24

2) The market capitalization rate on the stock of Aberdeen Wholesale Company is 8%. Its expected ROE is 10%, and its expected EPS is $3. If the firm's plowback ratio is 55%, its P/E ratio will be __________. A) 18.00 B) 40.00 C) 12.41 D) 20.91

3) Weyerhaeuser Incorporated has a balance sheet that lists $72 million in assets, $50 million in liabilities, and $22 million in common shareholders' equity. It has 1 million common shares outstanding. The replacement cost of its assets is $95 million. Its share price in the market is $44. Its book value per share is __________. A) $23 B) $22 C) $51 D) $45

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4) Todd Mountain Development Corporation is expected to pay a dividend of $2 in the upcoming year. Dividends are expected to grow at the rate of 9% per year. The risk-free rate of return is 4%, and the expected return on the market portfolio is 19%. The stock of Todd Mountain Development Corporation has a beta of 0.60. Using the constant-growth DDM, the intrinsic value of the stock is __________. A) 3.60 B) 9.09 C) 22.22 D) 50.00

5) Sanders, Incorporated, paid a $3 dividend per share last year and is expected to continue to pay out 60% of its earnings as dividends for the foreseeable future. If the firm is expected to generate a 14% return on equity in the future, and if you require a 16% return on the stock, the value of the stock is __________. A) $14.67 B) $28.12 C) $30.46 D) $42.79

6) A firm has PVGO of 0 and a market capitalization rate of 13.0%. What is the firm's P/E ratio? A) 13.00 B) 7.69 C) 10.35 D) 18.04

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7) A firm has a stock price of $56.85 per share. The firm's earnings are $75 million, and the firm has 30 million shares outstanding. The firm has an ROE of 15% and a plowback of 65%. What is the firm's PEG ratio? A) 2.33 B) 2.12 C) 1.08 D) 0.87

8) ART has come out with a new and improved product. As a result, the firm projects an ROE of 29%, and it will maintain a plowback ratio of 0.15. Its earnings this year will be $3.0 per share. Investors expect a 14% rate of return on the stock. What price do you expect ART shares to sell for in 4 years? A) $30.03 B) $40.62 C) $31.33 D) $34.33

9) Next year's earnings are estimated to be $4. The company plans to reinvest 20% of its earnings at 10%. If the cost of equity is 7%, what is the present value of growth opportunities? A) $5.86 B) $7.86 C) $6.86 D) $7.07

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Answer Key Test name: Chap 13_12e_Bodie_Algo 1) B 2) A 3) B 4) D 5) C 6) B 7) A 8) C 9) C

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CHAPTER 14 1)

Which of the following assets is most liquid? A) Cash equivalents B) Receivables C) Inventories D) Plant and equipment

Cost of goods sold refers to __________. A) direct costs attributable to producing the product sold by the firm B) salaries, advertising, and selling expenses C) payments to the firm's creditors D) payments to federal and local governments

Many observers believe that firms "manage" their income statements to __________. A) minimize taxes over time B) maximize expenditures C) smooth their earnings over time D) generate level sales

Depreciation expense is in what broad category of expenditures? A) Operating expenses B) General and administrative expenses C) Debt interest expense D) Tax expenditures

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5) Firm A acquires firm B when firm B has a book value of assets of $155 million and a book value of liabilities of $35 million. Firm A actually pays $175 million for firm B. This purchase would result in goodwill for firm A equal to __________. A) $175 million B) $155 million C) $120 million D) $55 million

One of the biggest impediments to a global capital market has been __________. A) volatile exchange rates B) the lack of common accounting standards C) lower disclosure standards in the United States than abroad D) the lack of transparent reporting standards across the EU

7) Benjamin Graham thought that the benefits from detailed analysis of a firm's financial statements had __________ over his long professional life. A) increased greatly B) increased slightly C) remained constant D) decreased

8) If the interest rate on debt is higher than the ROA, then by using debt a firm's ROE will __________.

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A) decrease B) increase C) not change D) change but in an indeterminable manner

9) Which of the following is not one of the three key financial statements available to investors in publicly traded firms? A) Income statement B) Balance sheet C) Statement of operating earnings D) Statement of cash flows

10) In 2020 Burke Packing repurchased shares of common stock worth $5,241 million and made dividend payments of $894 million. Other financing activities raised $196 million, and Burke-Packing's total cash flow from financing was −$6,077 million. How much did the longterm debt accounts of Burke-Packing change? A) Increased $138 million B) Decreased $138 million C) Increased $836 million D) Decreased $836 million

11)

Cash Flow Data for Interceptors, Incorporated.

Beginning Cash Cash from Operations Net Capital Spending Cash from Financing

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2018

2019

2020

2018

$ 35 $ 127 ($ 140) $ 18

$ 40 $ 125 ($ 130) $ 15

$ 45 $ 122 ($ 140) $ 23

$ 50 $ 117 ($ 145)

Ending Cash

$ 40

$ 45

$ 50

$ 55

What must cash flow from financing have been in 2018 for Interceptors, Incorporated? A) $5 B) $28 C) $30 D) $33

12)

Cash Flow Data for Interceptors, Incorporated.

Beginning Cash Cash from Operations Net Capital Spending Cash from Financing Ending Cash

2018

2019

2020

2018

$ 35 $ 127 ($ 140) $ 18

$ 40 $ 125 ($ 130) $ 15

$ 45 $ 122 ($ 140) $ 23

$ 50 $ 117 ($ 145)

$ 40

$ 45

$ 50

$ 55

Based on the cash flow data in the table for Interceptors Incorporated, which of the following statements is (are) correct? 1.This firm appears to be a good investment because of its steady growth in cash. 2.This firm has been able to generate growing cash flows only by borrowing or selling equity to offset declining operating cash flows. 3.Financing activities have been increasingly important for this firm's operations, at least in the short run.

A) 1 only B) 2 and 3 only C) 2 only D) 1 and 2 only

13)

Common-size balance sheets are prepared by dividing all quantities by __________.

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A) total assets B) total liabilities C) shareholders' equity D) fixed assets

14)

Operating ROA is calculated as __________, while ROE is calculated as __________. A) EBIT/total assets; net profit/total assets B) net profit/total assets; EBIT/total assets C) EBIT/total assets; net profit/equity D) net profit/EBIT; sales/total assets

15) A firm increases its financial leverage when its ROA is greater than the cost of debt. Everything else equal, this change will probably increase the firm's: 1.Beta 2.Earnings variability over the business cycle 3.ROE 4.Stock price

A) 1 and 2 only B) 3 and 4 only C) 1, 3, and 4 only D) 1, 2, and 3 only

16) The highest possible value for the interest-burden ratio is __________, and this occurs when the firm __________.

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A) 0; uses as much debt as possible B) 1; uses debt to the point where ROA = interest cost of debt C) 1; uses no interest-bearing debt D) –1; pays down its existing debts

17)

Which one of the following ratios is used to calculate the times-interest-earned ratio? A) Net profit/Interest expense B) Pretax profit/EBIT C) EBIT/Sales D) EBIT/Interest expense

18) The process of decomposing ROE into a series of component ratios is called __________. A) DuPont analysis B) technical analysis C) comparative analysis D) liquidity analysis

19)

Which of the following is not a ratio used in the DuPont analysis? A) Interest burden B) Profit margin C) Asset turnover D) Earnings yield ratio

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20)

Which of the following is NOT a liquidity ratio? A) Inventory turnover ratio B) Current ratio C) Quick ratio D) Cash ratio

21)

Operating ROA(Return on Assets) can be found as the product of __________. A) return on sales × total asset turnover B) tax burden × interest burden C) interest burden × leverage ratio D) return on equity × dividend payout ratio

22) A firm has an ROE of 20% and a market-to-book ratio of 2.38. Its P/E ratio is __________. A) 8.40 B) 11.90 C) 17.62 D) 47.62

23) If a firm has a positive tax rate and a positive operating ROA, and the interest rate on debt is the same as the operating ROA, then operating ROA will be __________.

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A) greater than zero, but it is impossible to determine how operating ROA will compare to ROE B) equal to ROE C) greater than ROE D) less than ROE

24) You find that a firm that uses debt has a compound leverage factor less than 1. This tells you that __________. A) the firm's use of financial leverage is positively contributing to ROE B) the firm's use of financial leverage is negatively contributing to ROE C) the firm's use of operating leverage is positively contributing to ROE D) the firm's use of operating leverage is negatively contributing to ROE

25) A firm has a P/E ratio of 24 and an ROE of 12%. Its market-to-book-value ratio is __________. A) 2.88 B) 2.44 C) 1.75 D) 0.69

26) A firm has an ROA of 8% and a debt/equity ratio of 1.5; its ROE is __________ if it faces a tax rate of 20% and pays 6% on its debt obligations. A) 4.70% B) 6.25% C) 8.80% D) 12.00%

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27) A firm has a tax burden of 0.7, a leverage ratio of 1.3, an interest burden of 0.8, and a return-on-sales ratio of 10%. The firm generates $2.28 in sales per dollar of assets. What is the firm's ROE? A) 12.4% B) 14.5% C) 16.6% D) 17.8%

28)

Economic value added (EVA) is:

A) the difference between the return on assets and the opportunity cost of capital times the capital base. B) ROA × ROE. C) a measure of the firm's abnormal return. D) largest for high-growth firms.

29)

Which of the following statements is true concerning economic value added? A) A growing number of firms tie managers' compensation to EVA. B) A profitable firm will always have a positive EVA. C) EVA recognizes that the cost of capital is not a real cost. D) If a firm has positive present value of growth opportunities, it will have positive

EVA.

30)

The financial statements of Flathead Lake Manufacturing Company are shown below. Income Statement 2020

Sales

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$ 9,300,000

Cost of Goods Sold Depreciation Expense

5,750,000 550,000

Gross Profit Selling and Administrative Expenses

$ 3,000,000 2,200,000

EBIT Interest Expense

$ 800,000 200,000

Income before Tax Taxes

$ 600,000 375,000

Net Income

$ 225,000 Flathead Lake Manufacturing Comparative Balance Sheets 2020

Cash Accounts Receivable Inventory

2019

$ 50,000 570,000 530,000

$ 40,000 600,000 460,000

$ 1,150,000 2,050,000

$ 1,100,000 1,400,000

Total Assets

$ 3,200,000

$ 2,500,000

Accounts Payable Bank Loans

$ 320,000 480,000

$ 300,000 400,000

Total Current Liabilities Long-term Bonds

$ 800,000 1,500,000

$ 700,000 1,000,000

Total Liabilities Common Stock (200,000 shares) Retainded Earnings

$ 2,300,000 200,000 700,000

$ 1,700,000 200,000 600,000

$ 900,000

$ 800,000

$ 3,200,000

$ 2,500,000

Total Current Assets Fixed Assets

Total Equity Total Liabilities and Equity

Note: The common shares are trading in the stock market for $15 per share. Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's current ratio for 2020 indicates that Flathead's liquidity has __________ since 2019. A) risen B) fallen C) stayed the same D) The answer cannot be determined from the information given.

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31)

The financial statements of Flathead Lake Manufacturing Company are shown below. Income Statement 2020

Sales Cost of Goods Sold Depreciation Expense

$ 9,300,000 5,750,000 550,000

Gross Profit Selling and Administrative Expenses

$ 3,000,000 2,200,000

EBIT Interest Expense

$ 800,000 200,000

Income before Tax Taxes

$ 600,000 375,000

Net Income

$ 225,000 Flathead Lake Manufacturing Comparative Balance Sheets 2020

Cash Accounts Receivable Inventory

2019

$ 50,000 570,000 530,000

$ 40,000 600,000 460,000

$ 1,150,000 2,050,000

$ 1,100,000 1,400,000

Total Assets

$ 3,200,000

$ 2,500,000

Accounts Payable Bank Loans

$ 320,000 480,000

$ 300,000 400,000

Total Current Liabilities Long-term Bonds

$ 800,000 1,500,000

$ 700,000 1,000,000

Total Liabilities Common Stock (200,000 shares) Retainded Earnings

$ 2,300,000 200,000 700,000

$ 1,700,000 200,000 600,000

$ 900,000

$ 800,000

$ 3,200,000

$ 2,500,000

Total Current Assets Fixed Assets

Total Equity Total Liabilities and Equity

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Note: The common shares are trading in the stock market for $15 per share. Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's inventory turnover ratio is __________. (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.) A) 11.62 B) 10.25 C) 9.55 D) 7.72

32)

The financial statements of Flathead Lake Manufacturing Company are shown below. Income Statement 2020

Sales Cost of Goods Sold Depreciation Expense

$ 9,300,000 5,750,000 550,000

Gross Profit Selling and Administrative Expenses

$ 3,000,000 2,200,000

EBIT Interest Expense

$ 800,000 200,000

Income before Tax Taxes

$ 600,000 375,000

Net Income

$ 225,000 Flathead Lake Manufacturing Comparative Balance Sheets 2020

Cash Accounts Receivable Inventory

2019

$ 50,000 570,000 530,000

$ 40,000 600,000 460,000

$ 1,150,000 2,050,000

$ 1,100,000 1,400,000

Total Assets

$ 3,200,000

$ 2,500,000

Accounts Payable Bank Loans

$ 320,000 480,000

$ 300,000 400,000

Total Current Assets Fixed Assets

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Total Current Liabilities Long-term Bonds

$ 800,000 1,500,000

$ 700,000 1,000,000

Total Liabilities Common Stock (200,000 shares) Retainded Earnings

$ 2,300,000 200,000 700,000

$ 1,700,000 200,000 600,000

$ 900,000

$ 800,000

$ 3,200,000

$ 2,500,000

Total Equity Total Liabilities and Equity

Note: The common shares are trading in the stock market for $15 per share. Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's debt-toequity ratio for 2020 is __________. A) 2.13 B) 2.44 C) 2.56 D) 2.89

33)

The financial statements of Flathead Lake Manufacturing Company are shown below. Income Statement 2020

Sales Cost of Goods Sold Depreciation Expense

$ 9,300,000 5,750,000 550,000

Gross Profit Selling and Administrative Expenses

$ 3,000,000 2,200,000

EBIT Interest Expense

$ 800,000 200,000

Income before Tax Taxes

$ 600,000 375,000

Net Income

$ 225,000 Flathead Lake Manufacturing Comparative Balance Sheets 2020

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2019

Cash Accounts Receivable Inventory

$ 50,000 570,000 530,000

$ 40,000 600,000 460,000

$ 1,150,000 2,050,000

$ 1,100,000 1,400,000

Total Assets

$ 3,200,000

$ 2,500,000

Accounts Payable Bank Loans

$ 320,000 480,000

$ 300,000 400,000

Total Current Liabilities Long-term Bonds

$ 800,000 1,500,000

$ 700,000 1,000,000

Total Liabilities Common Stock (200,000 shares) Retainded Earnings

$ 2,300,000 200,000 700,000

$ 1,700,000 200,000 600,000

$ 900,000

$ 800,000

$ 3,200,000

$ 2,500,000

Total Current Assets Fixed Assets

Total Equity Total Liabilities and Equity

Note: The common shares are trading in the stock market for $15 per share. Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's cash flow from operating activities for 2020 was __________. A) $810,000 B) $775,000 C) $755,000 D) $735,000

34)

The financial statements of Flathead Lake Manufacturing Company are shown below.

Income Statement 2020 Sales Cost of Goods Sold Depreciation Expense Gross Profit Selling and Administrative Expenses

Version 1

$ 9,300,000 5,750,000 550,000 $ 3,000,000 2,200,000

EBIT Interest Expense

$ 800,000 200,000

Income before Tax Taxes

$ 600,000 375,000

Net Income

$ 225,000 Flathead Lake Manufacturing Comparative Balance Sheets 2020

Cash Accounts Receivable Inventory

2019

$ 50,000 570,000 530,000

$ 40,000 600,000 460,000

$ 1,150,000 2,050,000

$ 1,100,000 1,400,000

Total Assets

$ 3,200,000

$ 2,500,000

Accounts Payable Bank Loans

$ 320,000 480,000

$ 300,000 400,000

Total Current Liabilities Long-term Bonds

$ 800,000 1,500,000

$ 700,000 1,000,000

Total Liabilities Common Stock (200,000 shares) Retainded Earnings

$ 2,300,000 200,000 700,000

$ 1,700,000 200,000 600,000

$ 900,000

$ 800,000

$ 3,200,000

$ 2,500,000

Total Current Assets Fixed Assets

Total Equity Total Liabilities and Equity

Note: The common shares are trading in the stock market for $15 per share. Refer to the financial statements of Flathead Lake Manufacturing Company. The industry average collection period (ACP) is 32 days. How is Flathead doing in its collections relative to the industry? (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.) A) Flathead's receivables are outstanding about 9 fewer days than the industry average. B) Flathead's receivables are outstanding about 15 fewer days than the industry average. C) Flathead's receivables are outstanding about 12 more days than the industry average. D) Flathead's receivables are outstanding about 6 more days than the industry average.

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35)

The financial statements of Flathead Lake Manufacturing Company are shown below. Income Statement 2020

Sales Cost of Goods Sold Depreciation Expense

$ 9,300,000 5,750,000 550,000

Gross Profit Selling and Administrative Expenses

$ 3,000,000 2,200,000

EBIT Interest Expense

$ 800,000 200,000

Income before Tax Taxes

$ 600,000 375,000

Net Income

$ 225,000 Flathead Lake Manufacturing Comparative Balance Sheets 2020

Cash Accounts Receivable Inventory

2019

$ 50,000 570,000 530,000

$ 40,000 600,000 460,000

$ 1,150,000 2,050,000

$ 1,100,000 1,400,000

Total Assets

$ 3,200,000

$ 2,500,000

Accounts Payable Bank Loans

$ 320,000 480,000

$ 300,000 400,000

Total Current Liabilities Long-term Bonds

$ 800,000 1,500,000

$ 700,000 1,000,000

Total Liabilities Common Stock (200,000 shares) Retainded Earnings

$ 2,300,000 200,000 700,000

$ 1,700,000 200,000 600,000

$ 900,000

$ 800,000

$ 3,200,000

$ 2,500,000

Total Current Assets Fixed Assets

Total Equity Total Liabilities and Equity

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Note: The common shares are trading in the stock market for $15 per share. Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's total asset turnover for 2020 is __________. (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.) A) 3.56 B) 3.26 C) 3.14 D) 3.02

36)

The financial statements of Flathead Lake Manufacturing Company are shown below. Income Statement 2020

Sales Cost of Goods Sold Depreciation Expense

$ 9,300,000 5,750,000 550,000

Gross Profit Selling and Administrative Expenses

$ 3,000,000 2,200,000

EBIT Interest Expense

$ 800,000 200,000

Income before Tax Taxes

$ 600,000 375,000

Net Income

$ 225,000 Flathead Lake Manufacturing Comparative Balance Sheets 2020

Cash Accounts Receivable Inventory Total Current Assets Fixed Assets Total Assets

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2019

$ 50,000 570,000 530,000

$ 40,000 600,000 460,000

$ 1,150,000 2,050,000

$ 1,100,000 1,400,000

$ 3,200,000

$ 2,500,000

Accounts Payable Bank Loans

$ 320,000 480,000

$ 300,000 400,000

Total Current Liabilities Long-term Bonds

$ 800,000 1,500,000

$ 700,000 1,000,000

Total Liabilities Common Stock (200,000 shares) Retainded Earnings

$ 2,300,000 200,000 700,000

$ 1,700,000 200,000 600,000

$ 900,000

$ 800,000

$ 3,200,000

$ 2,500,000

Total Equity Total Liabilities and Equity

Note: The common shares are trading in the stock market for $15 per share. Refer to the financial statements of Flathead Lake Manufacturing Company. In 2020 Flathead generated __________ of EBIT for every dollar of sales. A) $0.075 B) $0.086 C) $0.092 D) $0.099

37)

The financial statements of Flathead Lake Manufacturing Company are shown below. Income Statement 2020

Sales Cost of Goods Sold Depreciation Expense

$ 9,300,000 5,750,000 550,000

Gross Profit Selling and Administrative Expenses

$ 3,000,000 2,200,000

EBIT Interest Expense

$ 800,000 200,000

Income before Tax Taxes

$ 600,000 375,000

Net Income

$ 225,000 Flathead Lake Manufacturing Comparative Balance Sheets

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2020

2019

$ 50,000 570,000 530,000

$ 40,000 600,000 460,000

$ 1,150,000 2,050,000

$ 1,100,000 1,400,000

Total Assets

$ 3,200,000

$ 2,500,000

Accounts Payable Bank Loans

$ 320,000 480,000

$ 300,000 400,000

Total Current Liabilities Long-term Bonds

$ 800,000 1,500,000

$ 700,000 1,000,000

Total Liabilities Common Stock (200,000 shares) Retainded Earnings

$ 2,300,000 200,000 700,000

$ 1,700,000 200,000 600,000

$ 900,000

$ 800,000

$ 3,200,000

$ 2,500,000

Cash Accounts Receivable Inventory Total Current Assets Fixed Assets

Total Equity Total Liabilities and Equity

Note: The common shares are trading in the stock market for $15 per share. Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's return on equity ratio for 2020 is __________. (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.) A) 16.50% B) 26.47% C) 33.44% D) 38.08%

38)

The financial statements of Flathead Lake Manufacturing Company are shown below. Income Statement 2020

Sales Cost of Goods Sold

Version 1

$ 9,300,000 5,750,000

Depreciation Expense

550,000

Gross Profit Selling and Administrative Expenses

$ 3,000,000 2,200,000

EBIT Interest Expense

$ 800,000 200,000

Income before Tax Taxes

$ 600,000 375,000

Net Income

$ 225,000 Flathead Lake Manufacturing Comparative Balance Sheets 2020

Cash Accounts Receivable Inventory

2019

$ 50,000 570,000 530,000

$ 40,000 600,000 460,000

$ 1,150,000 2,050,000

$ 1,100,000 1,400,000

Total Assets

$ 3,200,000

$ 2,500,000

Accounts Payable Bank Loans

$ 320,000 480,000

$ 300,000 400,000

Total Current Liabilities Long-term Bonds

$ 800,000 1,500,000

$ 700,000 1,000,000

Total Liabilities Common Stock (200,000 shares) Retainded Earnings

$ 2,300,000 200,000 700,000

$ 1,700,000 200,000 600,000

$ 900,000

$ 800,000

$ 3,200,000

$ 2,500,000

Total Current Assets Fixed Assets

Total Equity Total Liabilities and Equity

Note: The common shares are trading in the stock market for $15 per share. Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's P/E ratio for 2020 is __________. A) 3.39 B) 3.65 C) 13.33 D) 10.67

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39)

The financial statements of Flathead Lake Manufacturing Company are shown below. Income Statement 2020

Sales Cost of Goods Sold Depreciation Expense

$ 9,300,000 5,750,000 550,000

Gross Profit Selling and Administrative Expenses

$ 3,000,000 2,200,000

EBIT Interest Expense

$ 800,000 200,000

Income before Tax Taxes

$ 600,000 375,000

Net Income

$ 225,000 Flathead Lake Manufacturing Comparative Balance Sheets 2020

Cash Accounts Receivable Inventory

2019

$ 50,000 570,000 530,000

$ 40,000 600,000 460,000

$ 1,150,000 2,050,000

$ 1,100,000 1,400,000

Total Assets

$ 3,200,000

$ 2,500,000

Accounts Payable Bank Loans

$ 320,000 480,000

$ 300,000 400,000

Total Current Liabilities Long-term Bonds

$ 800,000 1,500,000

$ 700,000 1,000,000

Total Liabilities Common Stock (200,000 shares) Retainded Earnings

$ 2,300,000 200,000 700,000

$ 1,700,000 200,000 600,000

$ 900,000

$ 800,000

$ 3,200,000

$ 2,500,000

Total Current Assets Fixed Assets

Total Equity Total Liabilities and Equity

Version 1

Note: The common shares are trading in the stock market for $15 per share. Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's compound leverage ratio is __________. (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.) r A) 1.59 B) 2.42 C) 2.51 D) 3.05

40)

The financial statements of Burnaby Mountain Trading Company are shown below. Income Statement 2020

Sales Cost of Goods Sold

$ 7,000,000 5,000,000

Gross Profit Selling and Administrative Expenses

$ 2,000,000 1,700,000

EBIT Interest Expense

$ 300,000 50,000

Income before Tax Taxes

$ 250,000 100,000

Net Income

$ 150,000 Burnaby Mountain Trading Company Comparative Balance Sheets 2020

Cash Accounts Receivable Inventory

2019

$ 90,000 810,000 800,000

$ 80,000 800,000 720,000

$ 1,700,000 2,600,000

$ 1,600,000 2,400,000

Total Assets

$ 4,300,000

$ 4,000,000

Accounts Payable Bank Loans

$ 500,000 100,000

$ 400,000 100,000

$ 600,000

$ 500,000

Total Current Assets Fixed Assets

Total Current Liabilities

Version 1

Long-term Bonds

400,000

300,000

$ 1,000,000 500,000 2,800,000

$ 800,000 500,000 2,700,000

Total Equity

$ 3,300,000

$ 3,200,000

Total Liabilities and Equity

$ 4,300,000

$ 4,000,000

Total Liabilities Common Stock (200,000 shares) Retainded Earnings

Note: The common shares are trading in the stock market for $27 each. Refer to the financial statements of Burnaby Mountain Trading Company. The firm's current ratio for 2020 is __________. A) 1.30 B) 1.55 C) 1.69 D) 2.83

41)

The financial statements of Burnaby Mountain Trading Company are shown below. Burnaby Mountain Trading Company Income Statement 2020

Sales Cost of Goods Sold

$ 7,000,000 5,000,000

Gross Profit Selling and Administrative Expenses

$ 2,000,000 1,700,000

EBIT Interest Expense

$ 300,000 50,000

Income before Tax Taxes

$ 250,000 100,000

Net Income

$ 150,000 Burnaby Mountain Trading Company Comparative Balance Sheets 2020

Cash Accounts Receivable Inventory Total Current Assets

Version 1

2019

$ 90,000 810,000 800,000

$ 80,000 800,000 720,000

$ 1,700,000

$ 1,600,000

Fixed Assets

2,600,000

2,400,000

Total Assets

$ 4,300,000

$ 4,000,000

Accounts Payable Bank Loans

$ 500,000 100,000

$ 400,000 100,000

Total Current Liabilities Long-term Bonds

$ 600,000 400,000

$ 500,000 300,000

Total Liabilities Common Stock (200,000 shares) Retainded Earnings

$ 1,000,000 500,000 2,800,000

$ 800,000 500,000 2,700,000

Total Equity

$ 3,300,000

$ 3,200,000

Total Liabilities and Equity

$ 4,300,000

$ 4,000,000

Note: The common shares are trading in the stock market for $27 each. Refer to the financial statements of Burnaby Mountain Trading Company. The firm's quick ratio for 2020 is __________. A) 1.35 B) 1.50 C) 1.69 D) 2.83

42)

The financial statements of Burnaby Mountain Trading Company are shown below. Income Statement 2020

Sales Cost of Goods Sold

$ 7,000,000 5,000,000

Gross Profit Selling and Administrative Expenses

$ 2,000,000 1,700,000

EBIT Interest Expense

$ 300,000 50,000

Income before Tax Taxes

$ 250,000 100,000

Net Income

$ 150,000 Burnaby Mountain Trading Company Comparative Balance Sheets 2020

Version 1

2019

Cash Accounts Receivable Inventory

$ 90,000 810,000 800,000

$ 80,000 800,000 720,000

$ 1,700,000 2,600,000

$ 1,600,000 2,400,000

Total Assets

$ 4,300,000

$ 4,000,000

Accounts Payable Bank Loans

$ 500,000 100,000

$ 400,000 100,000

Total Current Liabilities Long-term Bonds

$ 600,000 400,000

$ 500,000 300,000

Total Liabilities Common Stock (200,000 shares) Retainded Earnings

$ 1,000,000 500,000 2,800,000

$ 800,000 500,000 2,700,000

Total Equity

$ 3,300,000

$ 3,200,000

Total Liabilities and Equity

$ 4,300,000

$ 4,000,000

Total Current Assets Fixed Assets

Note: The common shares are trading in the stock market for $27 each. Refer to the financial statements of Burnaby Mountain Trading Company. The firm's leverage ratio for 2020 is __________. A) 1.30 B) 1.50 C) 1.69 D) 2.83

43)

The financial statements of Burnaby Mountain Trading Company are shown below. Income Statement 2020

Sales Cost of Goods Sold

$ 7,000,000 5,000,000

Gross Profit Selling and Administrative Expenses

$ 2,000,000 1,700,000

EBIT Interest Expense

Version 1

$ 300,000 50,000

Income before Tax Taxes

$ 250,000 100,000

Net Income

$ 150,000 Burnaby Mountain Trading Company Comparative Balance Sheets 2020

Cash Accounts Receivable Inventory

2019

$ 90,000 810,000 800,000

$ 80,000 800,000 720,000

$ 1,700,000 2,600,000

$ 1,600,000 2,400,000

Total Assets

$ 4,300,000

$ 4,000,000

Accounts Payable Bank Loans

$ 500,000 100,000

$ 400,000 100,000

Total Current Liabilities Long-term Bonds

$ 600,000 400,000

$ 500,000 300,000

Total Liabilities Common Stock (200,000 shares) Retainded Earnings

$ 1,000,000 500,000 2,800,000

$ 800,000 500,000 2,700,000

Total Equity

$ 3,300,000

$ 3,200,000

Total Liabilities and Equity

$ 4,300,000

$ 4,000,000

Total Current Assets Fixed Assets

Note: The common shares are trading in the stock market for $27 each. Refer to the financial statements of Burnaby Mountain Trading Company. The firm's timesinterest-earned ratio for 2020 is __________. A) 2.85 B) 6.00 C) 9.00 D) 11.11

44)

The financial statements of Burnaby Mountain Trading Company are shown below.

Version 1

Income Statement 2020 Sales Cost of Goods Sold

$ 7,000,000 5,000,000

Gross Profit Selling and Administrative Expenses

$ 2,000,000 1,700,000

EBIT Interest Expense

$ 300,000 50,000

Income before Tax Taxes

$ 250,000 100,000

Net Income

$ 150,000 Burnaby Mountain Trading Company Comparative Balance Sheets 2020

Cash Accounts Receivable Inventory

2019

$ 90,000 810,000 800,000

$ 80,000 800,000 720,000

$ 1,700,000 2,600,000

$ 1,600,000 2,400,000

Total Assets

$ 4,300,000

$ 4,000,000

Accounts Payable Bank Loans

$ 500,000 100,000

$ 400,000 100,000

Total Current Liabilities Long-term Bonds

$ 600,000 400,000

$ 500,000 300,000

Total Liabilities Common Stock (200,000 shares) Retainded Earnings

$ 1,000,000 500,000 2,800,000

$ 800,000 500,000 2,700,000

Total Equity

$ 3,300,000

$ 3,200,000

Total Liabilities and Equity

$ 4,300,000

$ 4,000,000

Total Current Assets Fixed Assets

Note: The common shares are trading in the stock market for $27 each. Refer to the financial statements of Burnaby Mountain Trading Company. The firm's fixed-asset turnover ratio for 2020 is __________. (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)

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A) 2.80 B) 6.05 C) 9.57 D) 11.11

45)

The financial statements of Burnaby Mountain Trading Company are shown below. Income Statement 2020

Sales Cost of Goods Sold

$ 7,000,000 5,000,000

Gross Profit Selling and Administrative Expenses

$ 2,000,000 1,700,000

EBIT Interest Expense

$ 300,000 50,000

Income before Tax Taxes

$ 250,000 100,000

Net Income

$ 150,000 Burnaby Mountain Trading Company Comparative Balance Sheets 2020

Cash Accounts Receivable Inventory

2019

$ 90,000 810,000 800,000

$ 80,000 800,000 720,000

$ 1,700,000 2,600,000

$ 1,600,000 2,400,000

Total Assets

$ 4,300,000

$ 4,000,000

Accounts Payable Bank Loans

$ 500,000 100,000

$ 400,000 100,000

Total Current Liabilities Long-term Bonds

$ 600,000 400,000

$ 500,000 300,000

Total Liabilities Common Stock (200,000 shares) Retainded Earnings

$ 1,000,000 500,000 2,800,000

$ 800,000 500,000 2,700,000

Total Equity

$ 3,300,000

$ 3,200,000

Total Liabilities and Equity

$ 4,300,000

$ 4,000,000

Total Current Assets Fixed Assets

Version 1

Note: The common shares are trading in the stock market for $27 each. Refer to the financial statements of Burnaby Mountain Trading Company. The firm's asset turnover ratio for 2020 is __________. (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.) A) 1.30 B) 1.54 C) 1.69 D) 2.83

46)

The financial statements of Burnaby Mountain Trading Company are shown below. Income Statement 2020

Sales Cost of Goods Sold

$ 7,000,000 5,000,000

Gross Profit Selling and Administrative Expenses

$ 2,000,000 1,700,000

EBIT Interest Expense

$ 300,000 50,000

Income before Tax Taxes

$ 250,000 100,000

Net Income

$ 150,000 Burnaby Mountain Trading Company Comparative Balance Sheets 2020

Cash Accounts Receivable Inventory Total Current Assets Fixed Assets

Version 1

2019

$ 90,000 810,000 800,000

$ 80,000 800,000 720,000

$ 1,700,000 2,600,000

$ 1,600,000 2,400,000

Total Assets

$ 4,300,000

$ 4,000,000

Accounts Payable Bank Loans

$ 500,000 100,000

$ 400,000 100,000

Total Current Liabilities Long-term Bonds

$ 600,000 400,000

$ 500,000 300,000

Total Liabilities Common Stock (200,000 shares) Retainded Earnings

$ 1,000,000 500,000 2,800,000

$ 800,000 500,000 2,700,000

Total Equity

$ 3,300,000

$ 3,200,000

Total Liabilities and Equity

$ 4,300,000

$ 4,000,000

Note: The common shares are trading in the stock market for $27 each. Refer to the financial statements of Burnaby Mountain Trading Company. The firm's return-onsales ratio for 2020 is __________. A) 0.0409 B) 0.0429 C) 0.0475 D) 0.0753

47)

The financial statements of Burnaby Mountain Trading Company are shown below. Income Statement 2020

Sales Cost of Goods Sold

$ 7,000,000 5,000,000

Gross Profit Selling and Administrative Expenses

$ 2,000,000 1,700,000

EBIT Interest Expense

$ 300,000 50,000

Income before Tax Taxes

$ 250,000 100,000

Net Income

$ 150,000 Burnaby Mountain Trading Company Comparative Balance Sheets

Version 1

2020

2019

$ 90,000 810,000 800,000

$ 80,000 800,000 720,000

$ 1,700,000 2,600,000

$ 1,600,000 2,400,000

Total Assets

$ 4,300,000

$ 4,000,000

Accounts Payable Bank Loans

$ 500,000 100,000

$ 400,000 100,000

Total Current Liabilities Long-term Bonds

$ 600,000 400,000

$ 500,000 300,000

Total Liabilities Common Stock (200,000 shares) Retainded Earnings

$ 1,000,000 500,000 2,800,000

$ 800,000 500,000 2,700,000

Total Equity

$ 3,300,000

$ 3,200,000

Total Liabilities and Equity

$ 4,300,000

$ 4,000,000

Cash Accounts Receivable Inventory Total Current Assets Fixed Assets

Note: The common shares are trading in the stock market for $27 each. Refer to the financial statements of Burnaby Mountain Trading Company. The firm's return-onequity ratio for 2020 is __________. (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.) A) 0.0409 B) 0.0429 C) 0.0462 D) 0.0923

48)

The financial statements of Burnaby Mountain Trading Company are shown below. Income Statement 2020

Sales Cost of Goods Sold

Version 1

$ 7,000,000 5,000,000

Gross Profit Selling and Administrative Expenses

$ 2,000,000 1,700,000

EBIT Interest Expense

$ 300,000 50,000

Income before Tax Taxes

$ 250,000 100,000

Net Income

$ 150,000 Burnaby Mountain Trading Company Comparative Balance Sheets 2020

Cash Accounts Receivable Inventory

2019

$ 90,000 810,000 800,000

$ 80,000 800,000 720,000

$ 1,700,000 2,600,000

$ 1,600,000 2,400,000

Total Assets

$ 4,300,000

$ 4,000,000

Accounts Payable Bank Loans

$ 500,000 100,000

$ 400,000 100,000

Total Current Liabilities Long-term Bonds

$ 600,000 400,000

$ 500,000 300,000

Total Liabilities Common Stock (200,000 shares) Retainded Earnings

$ 1,000,000 500,000 2,800,000

$ 800,000 500,000 2,700,000

Total Equity

$ 3,300,000

$ 3,200,000

Total Liabilities and Equity

$ 4,300,000

$ 4,000,000

Total Current Assets Fixed Assets

Note: The common shares are trading in the stock market for $27 each. Refer to the financial statements of Burnaby Mountain Trading Company. The firm's P/E ratio for 2020 is __________. A) 2.80 B) 3.60 C) 6.05 D) 11.11

Version 1

49)

The financial statements of Burnaby Mountain Trading Company are shown below. Income Statement 2020

Sales Cost of Goods Sold

$ 7,000,000 5,000,000

Gross Profit Selling and Administrative Expenses

$ 2,000,000 1,700,000

EBIT Interest Expense

$ 300,000 50,000

Income before Tax Taxes

$ 250,000 100,000

Net Income

$ 150,000 Burnaby Mountain Trading Company Comparative Balance Sheets 2020

Cash Accounts Receivable Inventory

2019

$ 90,000 810,000 800,000

$ 80,000 800,000 720,000

$ 1,700,000 2,600,000

$ 1,600,000 2,400,000

Total Assets

$ 4,300,000

$ 4,000,000

Accounts Payable Bank Loans

$ 500,000 100,000

$ 400,000 100,000

Total Current Liabilities Long-term Bonds

$ 600,000 400,000

$ 500,000 300,000

Total Liabilities Common Stock (200,000 shares) Retainded Earnings

$ 1,000,000 500,000 2,800,000

$ 800,000 500,000 2,700,000

Total Equity

$ 3,300,000

$ 3,200,000

Total Liabilities and Equity

$ 4,300,000

$ 4,000,000

Total Current Assets Fixed Assets

Note: The common shares are trading in the stock market for $27 each. Refer to the financial statements of Burnaby Mountain Trading Company. The firm's market-tobook value for 2020 is __________.

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A) 0.1708 B) 0.1529 C) 0.1462 D) 0.1636

50) A firm has a net profit/pretax profit ratio of 0.6, a leverage ratio of 1.5, a pretax profit/EBIT of 0.7, an asset turnover ratio of 4, a current ratio of 2, and a return-on-sales ratio of 6%. Its ROE is __________. A) 7.56% B) 15.12% C) 20.16% D) 30.24%

51) A firm has an ROA of 19%, a debt/equity ratio of 1.8, and a tax rate of 30%, and the interest rate on its debt is 7%. Its ROE is __________. A) 15.12% B) 28.42% C) 37.24% D) 40.62%

52) The level of real income of a firm can be distorted by the reporting of depreciation and interest expense. During periods of low inflation, the level of reported depreciation tends to __________ income, and the level of interest expense reported tends to __________ income.

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A) understate; overstate B) understate; understate C) overstate; understate D) overstate; overstate

53) If a firm's ratio of stockholders' equity/total assets is lower than the industry average and its ratio of long-term debt/stockholders' equity is also lower than the industry average, this would suggest that the firm __________. A) has more current liabilities than the industry average B) has more leased assets than the industry average C) will be less profitable than the industry average D) has more current assets than the industry average

54) A firm has a lower inventory turnover, a longer ACP, and a lower fixed-asset turnover than the industry averages. You should not be surprised to find that this firm has: 1.Lower Asset Turnover Ratio than the industry average 2.Lower Return on Assets Ratio than the industry average 3.Lower Return on Equity Ratio than the industry average

A) 1 only B) 1 and 2 only C) 2 and 3 only D) 1, 2, and 3

55)

A high price-to-book ratio may indicate which one of the following?

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A) The firm expanded its plant and equipment in the past few years. B) The firm is doing a poorer job controlling its inventory expense than other related firms. C) Investors may believe that this firm will earn a rate of return greater than the market capitalization rate. D) All of these options are correct.

56) A firm has an ROE equal to the industry average, but its price-to-book ratio is below the industry average. You know that the firm's __________. A) earnings yield is above the industry average B) P/E ratio is above the industry average C) dividend payout ratio is too high D) interest burden must be below the industry average

57) Use the following cash flow data of Haven Hardware for the year ended December 31, 2020. Cash Dividend Purchase of Land Cash Payment on Interest Cash Payment on Salaries Sales of Equipment Retirement of Common Stock Purchase of Equipment Cash Payments to Suppliers Cash Collections from Customers Cash at the Beginning of the Year

$ 70,000 $ 28,000 $ 20,000 $ 90,000 $ 76,000 $ 50,000 $ 60,000 $ 170,000 $ 500,000 $ 100,000

What is the net cash provided by operating activities of Haven Hardware?

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A) −$30,000 B) $220,000 C) $320,000 D) $780,000

58) Use the following cash flow data of Haven Hardware for the year ended December 31, 2020. Cash Dividend Purchase of Land Cash Payment on Interest Cash Payment on Salaries Sales of Equipment Retirement of Common Stock Purchase of Equipment Cash Payments to Suppliers Cash Collections from Customers Cash at the Beginning of the Year

$ 70,000 $ 28,000 $ 20,000 $ 90,000 $ 76,000 $ 50,000 $ 60,000 $ 170,000 $ 500,000 $ 100,000

What is the net cash provided by or used in investing activities of Haven Hardware? A) −$12,000 B) −$62,000 C) $12,000 D) $164,000

59) Use the following cash flow data of Haven Hardware for the year ended December 31, 2020. Cash Dividend Purchase of Land Cash Payment on Interest

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$ 70,000 $ 28,000 $ 20,000

Cash Payment on Salaries Sales of Equipment Retirement of Common Stock Purchase of Equipment Cash Payments to Suppliers Cash Collections from Customers Cash at the Beginning of the Year

$ 90,000 $ 76,000 $ 50,000 $ 60,000 $ 170,000 $ 500,000 $ 100,000

What is the net cash provided by or used in financing activities of Haven Hardware? A) −$10,000 B) −$120,000 C) $10,000 D) $120,000

60) Use the following cash flow data of Haven Hardware for the year ended December 31, 2020. Cash Dividend Purchase of Land Cash Payment on Interest Cash Payment on Salaries Sales of Equipment Retirement of Common Stock Purchase of Equipment Cash Payments to Suppliers Cash Collections from Customers Cash at the Beginning of the Year

$ 70,000 $ 28,000 $ 20,000 $ 90,000 $ 76,000 $ 50,000 $ 60,000 $ 170,000 $ 500,000 $ 100,000

What is the net increase or decrease in cash for Haven Hardware for 2020?

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A) −$94,000 B) −$88,000 C) $88,000 D) $188,000

61) Use the following cash flow data of Haven Hardware for the year ended December 31, 2020. Cash Dividend Purchase of Land Cash Payment on Interest Cash Payment on Salaries Sales of Equipment Retirement of Common Stock Purchase of Equipment Cash Payments to Suppliers Cash Collections from Customers Cash at the Beginning of the Year

$ 70,000 $ 28,000 $ 20,000 $ 90,000 $ 76,000 $ 50,000 $ 60,000 $ 170,000 $ 500,000 $ 100,000

What is the cash at the end of 2020 for Haven Hardware? A) $6,000 B) $94,000 C) $736,000 D) $188,000

62)

All of the following ratios are related to efficiency except __________. A) total asset turnover B) fixed-asset turnover C) average collection period D) cash ratio

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63) Which of the following would result in a cash inflow under the heading "Cash flow from investing" in the statement of cash flows? A) Purchase of capital equipment B) Payments to suppliers for inventory C) Collections on receivables D) Sale of production machinery

64) When assessing the sustainability of a firm's cash flows, analysts will prefer to see cash growth generated from which of the following sources? A) Cash flow from investment activities B) Cash flow from operating activities C) Cash flow from financing D) Cash flow from extraordinary events

65) The ABS company has a capital base of $100 million, an opportunity cost of capital ( k) of 15%, a return on assets (ROA) of 9%, and a return on equity (ROE) of 18%. What is the economic value added (EVA) for ABS? A) $8 million B) –$6 million C) $3 million D) –$4 million

66)

Another term for EVA is __________.

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A) net income B) operating income C) residual income D) market-based income

67) Which of the following transactions will result in a decrease in cash flow from operations? A) Increase in accounts receivable B) Decrease in inventories C) Increase in taxes payable D) Decrease in bonds outstanding

68) Which of the following transactions will result in a decrease in cash flow from investments? A) Acquisition of another business B) Capital gain from sale of a subsidiary C) Decrease in net investments D) Sale of equipment

69)

Which of the following will result in an increase in cash to the firm? A) Dividends paid B) A delay in collecting on accounts receivable C) Net new investments D) An increase in accounts payable

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70)

The table below shows some data for Key Biscuit Company: Year 2018 2019 2020

Tax Burden 0.60 0.60 0.60

Interest Burden 0.70 0.55 0.45

ROS

ATO

Leverage

ROE

0.40 0.40 0.40

0.45 0.45 0.45

1.20 1.45 1.65

9.07% 8.61% 8.02%

What must have caused the firm's ROE to drop? A) The firm began using more debt as a percentage of financing. B) The firm began using less debt as a percentage of financing. C) The compound leverage ratio was less than 1. D) The operating ROA was declining.

71) A firm purchases goods on credit worth $150. The same firm pays off $100 in old credit purchases. An investment is made via the purchase of a new facility, and equity is issued in the amount of $300 to pay for the purchase. What is the change in net cash provided by operations? A) $50 increase B) $100 increase C) $150 increase D) $250 increase

72) A firm purchases goods on credit worth $100. The same firm pays off $80 in old credit purchases. An investment is made via the purchase of a new facility, and equity is issued in the amount of $200 to pay for the purchase. What is the change in net cash provided by financing? A) $20 increase B) $80 increase C) $100 increase D) $200 increase

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73) A firm purchases goods on credit worth $90. The same firm pays off $100 in old credit purchases. An investment is made via the purchase of a new facility, and equity is issued in the amount of $180 to pay for the purchase. What is the change in net cash provided by investments? A) $10 decrease B) $90 decrease C) $180 decrease D) $190 decrease

74) The net income of the company is $120. Accounts payable increase by $20, depreciation is $15, and equipment is purchased for $40. If the firm issued $110 in new bonds, what is the total change in cash for the firm for all activities? A) Increase of $225 B) Increase of $130 C) Decrease of $195 D) Decrease of $110

75)

The term quality of earnings refers to __________. A) how well reported earnings conform to GAAP B) the realism and sustainability of reported earnings C) whether actual earnings matched expected earnings D) how well reported earnings fit a trend line of earnings growth

76) The practice of "selling" large quantities of goods to customers to get quarterly sales up while allowing these customers to return the goods next quarter is termed __________.

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A) channel stuffing B) clogging the network C) spamming the johns D) artificial sales

77) What ratio will definitely increase when a firm increases its annual sales with no corresponding increase in assets? A) Asset turnover B) Current ratio C) Liquidity ratio D) Quick ratio

78) A firm's leverage ratio is 1.2, interest-burden ratio is 0.81, and profit margin is 0.25, and its asset turnover is 1.1. What is the firm's compound leverage factor? A) 0.243 B) 0.267 C) 0.826 D) 0.972

79) The tax burden of the firm is 0.4, the interest burden is 0.65, the return on sales is 0.05, the asset turnover is 0.90, and the leverage ratio is 1.35. What is the ROE of the firm? A) 1.58% B) 5.68% C) 12.20% D) 13.33%

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80) The tax burden of the firm is 0.5, the interest burden is 0.55, the profit margin is 0.25, the asset turnover is 1.5, and the leverage ratio is 1.65. What is the ROE of the firm? A) 1.88% B) 6.68% C) 12.15% D) 17.02%

81) The major difference between IFRS and GAAP is that U.S. standards are __________ and IFRS standards are __________. A) strictly enforced; weakly enforced B) rules-based; principles-based C) evolutionary; devolutionary D) based on government standards; based on corporate practice

82)

The quick ratio is a measure of a firm's __________. A) asset turnover B) market valuation C) liquidity D) interest burden

83) The firm's leverage ratio is 1.2, interest-burden ratio is 0.81, and profit margin is 0.24, and its asset turnover is 1.25. What is the firm's ROA?

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A) 0.25 B) 0.30 C) 0.33 D) 0.37

84)

A firm has a compound leverage factor greater than 1; this indicates that __________. A) the firm has no interest payments B) the firm uses less debt as a percentage of financing C) the firm's interest payments are equal to the firm's pretax profits D) the firm's debt has a positive contribution to the firm's ROA

85)

If a firm’s borrowing rate exceeds its ROA, then ROE will __________. A) increase by an amount that depends on the equity/debt ratio. B) increase by an amount that depends on the debt/equity ratio. C) decline by an amount that depends on the equity/debt ratio. D) decline by an amount that depends on the debt/equity ratio.

86)

The impact of using LIFO over FIFO is to __________. A) bias ROE downward since investments are undervalued B) bias ROE downward since investments are overvalued C) bias ROE upward since investments are undervalued D) bias ROE upward since investments are overvalued

87) According the Financial Accounting Standards Board’s Statement No. 157 on fair value accounting, Level 3 assets __________.

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A) must be reduced to book value B) must be compared to market valuations C) are hardest to value D) are easiest to value

88)

When choosing a benchmark, it is best to use __________. A) numerous firms in the same industry B) your number one competitor C) the aspirational firm you wish to emulate D) standards established by the FASB

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Answer Key Test name: Chap 14_12e_Bodie 1) A 2) A 3) C 4) A 5) D 6) B 7) D 8) A 9) C 10) B 11) D 12) B 13) A 14) C 15) D 16) C 17) D 18) A 19) D 20) A 21) A 22) B 23) C 24) B 25) A 26) C Version 1

27) C 28) A 29) A 30) B 31) A 32) C 33) C 34) A 35) B 36) B 37) B 38) C 39) C 40) D 41) B 42) A 43) B 44) A 45) C 46) B 47) C 48) B 49) D 50) B 51) B 52) A 53) A 54) D 55) C 56) A Version 1

57) B 58) A 59) B 60) C 61) D 62) D 63) D 64) B 65) B 66) C 67) A 68) A 69) D 70) C 71) A 72) D 73) C 74) A 75) B 76) A 77) A 78) D 79) A 80) D 81) B 82) C 83) B 84) D 85) D 86) C Version 1

87) C 88) A

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CHAPTER 14: ALGO 1) Firm A acquires firm B when firm B has a book value of assets of $215 million and a book value of liabilities of $65 million. Firm A actually pays $235 million for firm B. This purchase would result in goodwill for firm A equal to __________. A) $235 million B) $215 million C) $150 million D) $85 million

2) In 2020, Burke-Packing repurchased shares of common stock worth $5,253 million and made dividend payments of $898 million. Other financing activities raised $206 million, and Burke-Packing's total cash flow from financing was −$6,101 million. How much did the longterm debt accounts of Burke-Packing change? A) Increased $156 million B) Decreased $156 million C) Increased $848 million D) Decreased $848 million

Cash Flow Data for Interceptors, Incorporated are as follows: Ending Cash Cash from operations Net capital spending Cash from financing

2015

2016

2017

2018

$ 54 $ 146 $ 178 $ 56

$ 78 $ 144 $ 173 $ 53

$ 102 $ 141 $ 178 $ 61

$ 126 $ 136 $ 183

What must cash flow from financing have been in 2018 for Interceptors, Incorporated?

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A) $24 B) $47 C) $68 D) $71

4) A firm has an ROE of 18% and a market-to-book ratio of 2.34. Its P/E ratio is __________. A) 7.69 B) 13.00 C) 15.66 D) 42.12

5) A firm has a P/E ratio of 27 and an ROE of 8%. Its market-to-book-value ratio is __________. A) 3.38 B) 1.81 C) 1.56 D) 2.16

6) A firm has a tax burden of 0.8, a leverage ratio of 1.7, an interest burden of 0.6, and a return-on-sales ratio of 10%. The firm generates $2.42 in sales per dollar of assets. What is the firm's ROE? A) 11.6% B) 4.8% C) 19.7% D) 14.5%

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The financial statements of Flathead Lake Manufacturing Company are shown below: Flathead Lake Manufacturing Company Income Statement 2020 Sales $ 9,650,000 Cost of Goods Sold 5,785,000 Depreciation Expense 564,000 Gross Profit $ 3,301,000 Selling and Administrative Expenses 2,550,000 EBIT $ 751,000 Interest Expense 235,000 Income before Tax $ 516,000 Taxes 326,000 Net Income

$ 190,000 Flathead Lake Manufacturing Company Comparative Balance Sheets 2020

Cash Accounts Receivable Inventory Total Current Assets Fixed Assets

2019

$ 53,000 605,000 565,000 $ 1,223,000 2,120,000

$41,000 642,000 488,000 $ 1,171,000 $ 1,463,000

$ 3,343,000

$ 2,634,000

Accounts Payable Bank Loans Total Current Liabilities Long-term Bonds Total Liabilities Common Stock (200,000 shares) Retained Earnings Total Equity

$ 316,000 487,000 $ 803,000 1,570,000 $ 2,373,000 200,000 770,000 $ 970,000

$ 283,000 411,000 $ 694,000 1,105,000 $ 1,799,000 200,000 635,000 $835,000

Total Liabilities and Equity

$ 3,343,000

$ 2,634,000

Total Assets

Note: The common shares are trading in the stock market for $10 per share Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's cash flow from operating activities for 2020 was __________. Version 1

A) $794,000 B) $754,000 C) $747,000 D) $685,000

8) Use the following cash flow data of Haven Hardware for the year ended December 31, 2020. Cash Dividend Purchase of Land Cash Payment on Interest Cash Payment on Salaries Sales of Equipment Retirement of Common Stock Purchase of Equipment Cash Payments to Suppliers Cash Collections from Customers Cash at the Beginning of the year

$ 83,000 $ 41,000 $ 46,000 $ 103,000 $ 89,000 $ 63,000 $ 73,000 $ 183,000 $ 565,000 $ 100,000

What is the net increase or decrease in cash for Haven Hardware for 2020? A) $78,000 net decrease B) $62,000 net decrease C) $62,000 net increase D) $162,000 net increase

9) The ABS company has a capital base of $110 million, an opportunity cost of capital (k) of 16%, a return on assets (ROA) of 6%, and a return on equity (ROE) of 26%. What is the economic value added (EVA) for ABS?

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A) $22 million B) −$11 million C) $11 million D) $12 million

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Answer Key Test name: Chap 14_12e_Bodie_Algo 1) D 2) B 3) D 4) B 5) D 6) C 7) C 8) C 9) B

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CHAPTER 15 1) You purchase one MBI July 120 call contract (equaling 100 shares) for a premium of $5. You hold the option until the expiration date, when MBI stock sells for $123 per share. You will realize a __________ on the investment. A) $200 profit B) $200 loss C) $300 profit D) $300 loss

2) You purchase one MBI July 125 call contract (equaling 100 shares) for a premium of $5. You hold the option until the expiration date, when MBI stock sells for $123 per share. You will realize a __________ on the investment. A) $200 profit B) $200 loss C) $500 profit D) $500 loss

3) You purchase one MBI July 120 put contract (equaling 100 shares) for a premium of $3. You hold the option until the expiration date, when MBI stock sells for $123 per share. You will realize a __________ on the investment. A) $300 profit B) $300 loss C) $500 loss D) $200 profit

4) You write one MBI July 120 call contract (equaling 100 shares) for a premium of $4. You hold the option until the expiration date, when MBI stock sells for $121 per share. You will realize a __________ on the investment.

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A) $300 profit B) $200 loss C) $600 loss D) $200 profit

__________ option can only be exercised on the expiration date. A) A Mexican B) An Asian C) An American D) A European

6) All else the same, an American-style option will be __________ valuable than a __________-style option. A) more; European B) less; European C) more; Canadian D) less; Canadian

7) At contract maturity the value of a call option is __________, where X equals the option's strike price and ST is the stock price at contract expiration. A) max (0, ST − X) B) min (0, ST − X) C) max (0, X − ST) D) min (0, X − ST)

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8) At contract maturity the value of a put option is __________, where X equals the option's strike price and ST is the stock price at contract expiration. A) max (0, ST − X) B) min (0, ST − X) C) max (0, X − ST) D) min (0, X − ST)

An American put option gives its holder the right to __________. A) buy the underlying asset at the exercise price on or before the expiration date B) buy the underlying asset at the exercise price only at the expiration date C) sell the underlying asset at the exercise price on or before the expiration date D) sell the underlying asset at the exercise price only at the expiration date

10)

An Asian call option gives its holder the right to __________.

A) buy the underlying asset at the exercise price on or before the expiration date B) buy the underlying asset at a price determined by the average stock price during some specified portion of the option's life C) sell the underlying asset at the exercise price on or before the expiration date D) sell the underlying asset at a price determined by the average stock price during some specified portion of the option's life

11)

An Asian put option gives its holder the right to __________.

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12)

A time spread may be executed by __________.

A) selling an option with one exercise price and buying a similar one with a different exercise price B) buying two options that have the same expiration dates but different strike prices C) selling two options that have the same expiration dates but different strike prices D) selling an option with one expiration date and buying a similar option with a different expiration date

13) Which of the following statements about convertible bonds are true? 1.The conversion price does not change over time. 2.The associated stocks may not pay dividends as long as the bonds are outstanding. 3.Most convertibles are also callable at the discretion of the firm. 4.They may be thought of as straight bonds plus a call option.

A) 1 and 3 only B) 1 and 4 only C) 1, 2, and 4 only D) 3 and 4 only

14)

A quanto provides its holder with the right to __________.

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A) participate in the payoffs from a portfolio of gambling casino stocks B) exchange a fixed amount of a foreign currency for dollars at a specified exchange rate C) participate in the investment performance of a foreign security D) exchange the payoff from a foreign investment for dollars at a fixed exchange rate

15) You purchase a call option on a stock. The profit at contract maturity of the option position is __________, where X equals the option's strike price, ST is the stock price at contract expiration, and C0 is the original purchase price of the option. A) max (−C0, ST − X − C0) B) min (−C0, ST − X − C0) C) max (C0, ST − X + C0) D) max (0, ST − X − C0)

16)

Strips and straps are variations of __________. A) straddles B) collars C) money spreads D) time spreads

17) You write a put option on a stock. The profit at contract maturity of the option position is __________, where X equals the option's strike price, ST is the stock price at contract expiration, and P0 is the original premium of the put option. A) max (P0, X − ST − P0) B) min (−P0, X − ST − P0) C) min (P0, ST − X + P0) D) max (0, ST − X − P0)

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18) Longer-term American-style options with maturities of up to 3 years are called __________. A) warrants B) LEAPS C) GICs D) CATs

19)

The initial maturities of most exchange-traded options are generally __________. A) less than 1 year B) less than 2 years C) between 1 and 2 years D) between 1 and 3 years

20)

A futures call option provides its holder with the right to __________. A) purchase a particular stock at some time in the future at a specified price B) purchase a futures contract for the delivery of options on a particular stock C) purchase a futures contract at a specified price for a specified period of time D) deliver a futures contract and receive a specified price at a specific date in the future

21)

Exchange-traded stock options expire on the __________ of the expiration month.

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A) second Monday B) third Wednesday C) second Thursday D) third Friday

22)

The writer of a put option __________. A) agrees to sell shares at a set price if the option holder desires B) agrees to buy shares at a set price if the option holder desires C) has the right to buy shares at a set price D) has the right to sell shares at a set price

23) Advantages of exchange-traded options over OTC options include all but which one of the following? A) Ease and low cost of trading B) Anonymity of participants C) Contracts that are tailored to meet the needs of market participants D) No concerns about counterparty credit risk

24) Each listed stock option contract gives the holder the right to buy or sell __________ shares of stock. A) 1 B) 10 C) 100 D) 1,000

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25) Exercise prices for listed stock options usually occur in increments of __________ and bracket the current stock price. A) $1 B) $5 C) $20 D) $25

26) You buy a call option and a put option on General Electric. Both the call option and the put option have the same exercise price and expiration date. This strategy is called a __________. A) time spread B) long straddle C) short straddle D) money spread

27) In 1973, trading of standardized options on a national exchange started on the __________. A) AMEX B) CBOE C) NYSE D) CFTC

28)

An American call option gives the buyer the right to __________.

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A) buy the underlying asset at the exercise price on or before the expiration date B) buy the underlying asset at the exercise price only at the expiration date C) sell the underlying asset at the exercise price on or before the expiration date D) sell the underlying asset at the exercise price only at the expiration date

29) A put option on Dr. Pepper Snapple Group, Incorporated, has an exercise price of $45. The current stock price is $41. The put option is __________. A) at the money B) in the money C) out of the money D) knocked out

30) You buy a call option on Merritt Corporation with an exercise price of $50 and an expiration date in July, and you write a call option on Merritt Corporation with an exercise price of $55 and an expiration date in July. This is called a __________. A) time spread B) long straddle C) short straddle D) money spread

31) A call option on Brocklehurst Corporation has an exercise price of $30. The current stock price of Brocklehurst Corporation is $32. The call option is __________. A) at the money B) in the money C) out of the money D) knocked in

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32) You invest in the stock of Rayleigh Corporation and write a call option on Rayleigh Corporation This strategy is called a __________. A) covered call B) long straddle C) naked call D) money spread

33) You buy a call option on Summit Corporation with an exercise price of $40 and an expiration date in September, and you write a call option on Summit Corporation with an exercise price of $40 and an expiration date in October. This strategy is called a __________. A) time spread B) long straddle C) short straddle D) money spread

34)

A European call option gives the buyer the right to __________. A) buy the underlying asset at the exercise price on or before the expiration date B) buy the underlying asset at the exercise price only at the expiration date C) sell the underlying asset at the exercise price on or before the expiration date D) sell the underlying asset at the exercise price only at the expiration date

35) You invest in the stock of Valleyview Corporation and purchase a put option on Valleyview Corporation This strategy is called a __________.

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A) long straddle B) naked put C) protective put D) short stroll

36) The value of a listed call option on a stock is lower when: 1.The exercise price is higher. 2.The contract approaches maturity. 3.The stock decreases in value. 4.A stock split occurs.

A) 2, 3, and 4 only B) 1, 3, and 4 only C) 1, 2, and 3 only D) 1, 2, 3, and 4

37)

The Option Clearing Corporation is owned by __________. A) the exchanges on which stock options are traded B) the Federal Deposit Insurance Corporation C) the Federal Reserve System D) major U.S. banks

38) The value of a listed put option on a stock is lower when: 1.The exercise price is higher. 2.The contract approaches maturity. 3.The stock decreases in value. 4.A stock split occurs.

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A) 2 only B) 2 and 4 only C) 1, 2, and 3 only D) 1, 2, 3, and 4

39)

The maximum loss a buyer of a stock call option can suffer is the __________. A) call premium B) stock price C) stock price minus the value of the call D) strike price minus the stock price

40) Which one of the statements about margin requirements on option positions is not correct? A) The margin required will be lower if the option is in the money. B) If the required margin exceeds the posted margin, the option writer will receive a margin call. C) A buyer of a put or call option does not have to post margin. D) Even if the writer of a call option owns the stock, the writer will have to meet the margin requirement in cash.

41)

A European put option gives its holder the right to __________. A) buy the underlying asset at the exercise price on or before the expiration date B) buy the underlying asset at the exercise price only at the expiration date C) sell the underlying asset at the exercise price on or before the expiration date D) sell the underlying asset at the exercise price only at the expiration date

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42)

The potential loss for a writer of a naked call option on a stock is __________. A) equal to the call premium B) larger the lower the stock price C) limited D) unlimited

43) A writer of a call option will want the value of the underlying asset to __________, and a buyer of a put option will want the value of the underlying asset to __________. A) decrease; decrease B) decrease; increase C) increase; decrease D) increase; increase

44) Buyers of listed options __________ required to post margins, and writers of naked listed options __________ required to post margins. A) are; are not B) are; are C) are not; are D) are not; are not

45) Which of the following expressions represents the value of a call option to its holder on the expiration date?

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A) ST − X if ST > X, 0 if ST ≤ X B) − (ST − X) if ST > X, 0 if ST ≤ X C) 0 if ST ≥ X, X − ST if ST < X D) 0 if ST ≥ X, − (X − ST) if ST < X

46)

A "bet" option is also called a __________ option. A) barrier B) lookback C) digital D) foreign exchange

47) Which one of the following is the ticker symbol for the CBOE option contract on the S&P 100 Index? A) SPX B) DJX C) CME D) OEX

48) The May 17, 2020, price quotation for a Boring call option with a strike price of $50 due to expire in November is $20.80, while the stock price of Boring is $69.80. The premium on one Boring November 50 call contract is __________. A) $1,980 B) $4,900 C) $5,000 D) $2,080

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49) You purchase one MBI March 120 put contract for a put premium of $10. The maximum profit that you could gain from this strategy is __________. A) $120 B) $1,000 C) $11,000 D) $12,000

50) You buy one Huge-Packing August 50 call contract and one Huge-Packing August 50 put contract. The call premium is $1.25, and the put premium is $4.50. Your highest potential loss from this position is __________. A) $125 B) $450 C) $575 D) unlimited

51) You sell one Huge-Packing August 50 call contract and sell one Huge-Packing August 50 put contract. The call premium is $1.25 and the put premium is $4.50. Your strategy will pay off only if the stock price is __________ in August. A) either lower than $44.25 or higher than $55.75 B) between $44.25 and $55.75 C) higher than $55.75 D) lower than $44.25

52) Suppose you purchase one Texas Instruments August 75 call contract quoted at $8.50 and write one Texas Instruments August 80 call contract quoted at $6. If, at expiration, the price of a share of Texas Instruments stock is $79, your profit would be __________.

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A) $150 B) $400 C) $600 D) $1,850

53) __________ is theriskiest transaction to undertake in the stock-index option markets if the stock market is expected to fall substantially after the transaction is completed. A) Writing an uncovered call option B) Writing an uncovered put option C) Buying a call option D) Buying a put option

54)

Which one of the following is a correct statement?

A) Exercise of warrants results in more outstanding shares of stock, while exercise of listed call options does not. B) A convertible bond consists of a straight bond plus a specified number of detachable warrants. C) Call options always have an initial maturity greater than 1 year, while warrants have an initial maturity less than 1 year. D) Call options may be convertible into the stock, while warrants are not convertible into the stock.

55) A put on Sanders stock with a strike price of $35 is priced at $2 per share, while a call with a strike price of $35 is priced at $3.50. The maximum per-share loss to the writer of an uncovered put is __________, and the maximum per-share gain to the writer of an uncovered call is __________.

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A) $33; $3.50 B) $33; $31.50 C) $35; $3.50 D) $35; $35.00

56) You are cautiously bullish on the common stock of the Wildwood Corporation over the next several months. The current price of the stock is $50 per share. You want to establish a bullish money spread to help limit the cost of your option position. You find the following option quotes: Wildwood Corporation Expiration June June June

Underlying Stock price: $ 50.00 Strike Call Put $ 45.00 $ 8.50 $ 2.00 $ 50.00 $ 4.50 $ 3.00 $ 55.00 $ 2.00 $ 7.50

To establish a bull money spread with calls, you would __________. A) buy the 55 call and sell the 45 call B) buy the 45 call and buy the 55 call C) buy the 45 call and sell the 55 call D) sell the 45 call and sell the 55 call

57) You are cautiously bullish on the common stock of the Wildwood Corporation over the next several months. The current price of the stock is $50 per share. You want to establish a bullish money spread to help limit the cost of your option position. You find the following option quotes: Wildwood Corporation Expiration June June

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Underlying Stock price: $ 50.00 Strike Call Put $ 45.00 $ 8.50 $ 2.00 $ 50.00 $ 4.50 $ 3.00

June

$ 55.00

$ 2.00

$ 7.50

Ignoring commissions, the cost to establish the bull money spread with calls would be __________. A) $1,050 B) $650 C) $400 D) $400 income rather than cost

58) You are cautiously bullish on the common stock of the Wildwood Corporation over the next several months. The current price of the stock is $50 per share. You want to establish a bullish money spread to help limit the cost of your option position. You find the following option quotes: Wildwood Corporation Expiration June June June

Underlying Stock price: $ 50.00 Strike Call Put $ 45.00 $ 8.50 $ 2.00 $ 50.00 $ 4.50 $ 3.00 $ 55.00 $ 2.00 $ 7.50

If in June the stock price is $53, your net profit on the bull money spread (buy the 45 call and sell the 55 call) would be __________. A) $300 B) −$400 C) $150 D) $50

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59) You are cautiously bullish on the common stock of the Wildwood Corporation over the next several months. The current price of the stock is $50 per share. You want to establish a bullish money spread to help limit the cost of your option position. You find the following option quotes: Wildwood Corporation Expiration June June June

Underlying Stock price: $ 50.00 Strike Call Put $ 45.00 $ 8.50 $ 2.00 $ 50.00 $ 4.50 $ 3.00 $ 55.00 $ 2.00 $ 7.50

To establish a bull money spread with puts, you would __________. A) sell the 55 put and buy the 45 put B) buy the 45 put and buy the 55 put C) buy the 55 put and sell the 45 put D) sell the 45 put and sell the 55 put

60) You are cautiously bullish on the common stock of the Wildwood Corporation over the next several months. The current price of the stock is $50 per share. You want to establish a bullish money spread to help limit the cost of your option position. You find the following option quotes: Wildwood Corporation Expiration June June June

Underlying Stock price: $ 50.00 Strike Call Put $ 45.00 $ 8.50 $ 2.00 $ 50.00 $ 4.50 $ 3.00 $ 55.00 $ 2.00 $ 7.50

Suppose you establish a bullish money spread with the puts. In June the stock's price turns out to be $52. Ignoring commissions, the net profit on your position is __________. Version 1

A) $500 B) $700 C) $200 D) $250

61) The common stock of the Avalon Corporation has been trading in a narrow range around $40 per share for months, and you believe it is going to stay in that range for the next 3 months. The price of a 3-month put option with an exercise price of $40 is $3, and a call with the same expiration date and exercise price sells for $4. What would be a simple options strategy using a put and a call to exploit your conviction about the stock price's future movement? A) sell a call B) purchase a put C) sell a straddle D) buy a straddle

62) The common stock of the Avalon Corporation has been trading in a narrow range around $40 per share for months, and you believe it is going to stay in that range for the next 3 months. The price of a 3-month put option with an exercise price of $40 is $3, and a call with the same expiration date and exercise price sells for $4. Selling a straddle would generate total premium income of __________. A) $300 B) $400 C) $500 D) $700

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63) The common stock of the Avalon Corporation has been trading in a narrow range around $40 per share for months, and you believe it is going to stay in that range for the next 3 months. The price of a 3-month put option with an exercise price of $40 is $3, and a call with the same expiration date and exercise price sells for $4. Suppose you write a strap and the stock price winds up to be $42 at contract expiration. What was your net profit on the strap? A) $200 B) $300 C) $700 D) $400

64) The common stock of the Avalon Corporation has been trading in a narrow range around $40 per share for months, and you believe it is going to stay in that range for the next 3 months. The price of a 3-month put option with an exercise price of $40 is $3, and a call with the same expiration date and exercise price sells for $4. How can you create a position involving a put, a call, and riskless lending that would have the same payoff structure as the stock at expiration? A) Buy the call, sell the put; lend the present value of $40. B) Sell the call, buy the put; lend the present value of $40. C) Buy the call, sell the put; borrow the present value of $40. D) Sell the call, buy the put; borrow the present value of $40.

65) A stock is trading at $50. You believe there is a 60% chance the price of the stock will increase by 10% over the next 3 months. You believe there is a 30% chance the stock will drop by 5%, and you think there is only a 10% chance of a major drop in price of 20%. At-the-money 3-month puts are available at a cost of $650 per contract. What is the expected dollar profit for a writer of a naked put at the end of 3 months?

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A) $300 B) $200 C) $475 D) $0

66)

A covered call strategy benefits from what environment? A) Falling interest rates B) Price stability C) Price volatility D) Unexpected events

67) You sell one MBI July 90 call contract for a premium of $4 and two puts for a premium of $3 each. You hold the position until the expiration date, when MBI stock sells for $95 per share. You will realize a ______ on this strip. A) $300 profit B) $100 loss C) $500 profit D) $200 profit

68) Which strategy benefits from upside price movement and has some protection should the price of the security fall? A) Bull spread B) Long put C) Short call D) Straddle

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69)

What combination of puts and calls can simulate a long stock investment? A) long call and short put B) long call and long put C) short call and short put D) short call and long put

70) An investor purchases a long call at a price of $2.50. The strike price at expiration is $35. If the current stock price is $35.10, what is the break-even point for the investor? A) $32.50 B) $35.00 C) $37.50 D) $37.60

71) An investor is bearish on a particular stock and decided to buy a put with a strike price of $25. Ignoring commissions, if the option was purchased for a price of $0.85, what is the breakeven point for the investor? A) $24.15 B) $25.00 C) $25.87 D) $27.86

72)

Which of the following strategies makes a profit if the stock price stays stable?

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A) long call and short put B) long call and long put C) short call and short put D) short call and long put

73) Which of the following strategies makes a profit when the stock price declines and loses money when the stock price increases? A) long call and short put B) long call and long put C) short call and short put D) short call and long put

74) If you combine a long stock position with selling an at-the-money call option, the resulting net payoff profile will resemble the payoff profile of a __________. A) long call B) short call C) short put D) long put

75)

What strategy could be considered insurance for an investment in a portfolio of stocks? A) covered call B) protective put C) short put D) straddle

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76) What strategy is designed to ensure a value within the bounds of two different stock prices? A) Collar B) Covered Call C) Protective put D) Straddle

77) You are convinced that a stock's price will move by at least 15% over the next 3 months. You are not sure which way the price will move, but you believe that the results of a patent hearing are definitely going to have a major effect on the stock price. You are somewhat more bullish than bearish however. Which one of the following options strategies best fits this scenario? A) Buy a strip. B) Buy a strap. C) Buy a straddle. D) Write a straddle.

78)

When issued, most convertible bonds are issued __________. A) deep in the money B) deep out of the money C) slightly out of the money D) slightly in the money

79) A convertible bond is deep in the money. This means the bond price will closely track the __________.

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A) straight debt value of the bond B) conversion value of the bond C) straight debt value of the bond minus the conversion value D) straight debt value of the bond plus the conversion value

80) Warrants differ from listed options in that: 1.Exercise of warrants results in dilution of a firm's earnings per share. 2.When warrants are exercised, new shares of stock must be created. 3.Warrant exercise results in cash flows to the firm, whereas exercise of listed options does not.

A) 1 only B) 1 and 2 only C) 2 and 3 only D) 1, 2, and 3

81) Suppose you find two bonds identical in all respects except that bond A is convertible to common stock and bond B is not. Bond A is priced at $1,245, and bond B is priced at $1,120. Bond A has a promised yield to maturity of 5.6%, and bond B has a promised yield to maturity of 6.7%. The stock of bond A is trading at $49.80 per share. Which of the following statements is (are) correct? 1.The value of the conversion option for bond A is $125. 2.The lower promised yield to maturity of bond A indicates that the bond is priced according to its straight debt value rather than its conversion value. 3.If bond A can be converted into 25 shares of stock, the investor would break even at the current prices.

A) 2 only B) 1 and 3 only C) 3 only D) 1, 2, and 3

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82) You find digital option quotes on jobless claims. You can buy a call option with a strike price of 300,000 jobless claims. This option pays $100 if actual claims exceed the strike price and pays zero otherwise. The option costs $68. A second digital call with a strike price of 305,000 jobless claims is available at a cost of $53. Suppose you buy the option with the 300,000 strike and sell the option with the 305,000 strike and jobless claims actually wind up at 303,000. Your net profit on the position is __________. A) −$15 B) $200 C) $85 D) $185

83) Bill Jones inherited 5,000 shares of stock priced at $45 per share. He does not want to sell the stock this year due to tax reasons, but he is concerned that the stock will drop in value before year-end. Bill wants to use a collar to ensure that he minimizes his risk and doesn't incur too much cost in deferring the gain. January call options with a strike of $50 are quoted at a cost of $2, and January puts with a $40 exercise price are quoted at a cost of $3. If Bill establishes the collar and the stock price winds up at $35 in January, Bill's net position value including the option profit or loss and the stock is __________. A) $195,000 B) $220,000 C) $175,000 D) $215,000

84) You own a stock portfolio worth $50,000. You are worried that stock prices may take a dip before you are ready to sell, so you are considering purchasing either at-the-money or out-ofthe-money puts. If you decide to purchase the out-of-the-money puts, your maximum loss is __________ than if you buy at-the-money puts and your maximum gain is __________.

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A) greater; lower B) greater; greater C) lower; greater D) lower; lower

85) You purchase one MBI July 90 call contract for a premium of $4. The stock has a 2-for-1 split prior to the expiration date. You hold the option until the expiration date, when MBI stock sells for $48 per share. You will realize a __________ on the investment. A) $300 profit B) $100 loss C) $400 loss D) $200 profit

86) You own $75,000 worth of stock, and you are worried the price may fall by year-end in 6 months. You are considering using either puts or calls to hedge this position. Given this, which of the following statements is (are) correct? 1.One way to hedge your position would be to buy puts. 2.One way to hedge your position would be to write calls. 3.If major stock price declines are likely, hedging with puts is probably better than hedging with short calls.

A) 1 only B) 2 only C) 1 and 3 only D) 1, 2, and 3

87) At expiration of an option contract, which phrase describes the point at which both calls and puts have the same gross profit?

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A) At the money B) In the money C) Out of the money D) Knocked in

88) If you anticipate a dramatic a decline in stock prices, which naked strategy will make you the most profit? A) Long call B) Long put C) Short call D) Short put

89) Why is the holder of an option not required to post margin under the Option Clearing Corporation rules? A) Once an option is purchased, no further money is at risk. B) The seller pays all costs. C) The credit worthiness of the holder covers all potential losses. D) The holder must post securities instead of margin.

90)

If the gross profit is positive and the net profit is negative, you will __________. A) let the option expire with no action B) not exercise the option C) exercise the option D) sell the option for less than the gross profit

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Answer Key Test name: Chap 15_12e_Bodie 1) B 2) D 3) B 4) A 5) D 6) A 7) A 8) C 9) C 10) B 11) D 12) D 13) D 14) D 15) A 16) A 17) C 18) B 19) A 20) C 21) D 22) B 23) C 24) C 25) B 26) B Version 1

27) B 28) A 29) B 30) D 31) B 32) A 33) A 34) B 35) C 36) C 37) A 38) A 39) A 40) D 41) D 42) D 43) A 44) C 45) A 46) C 47) D 48) D 49) C 50) C 51) B 52) A 53) B 54) A 55) A 56) C Version 1

57) B 58) C 59) A 60) D 61) C 62) D 63) C 64) A 65) C 66) B 67) C 68) A 69) A 70) C 71) A 72) C 73) D 74) C 75) B 76) A 77) B 78) B 79) B 80) D 81) B 82) C 83) A 84) B 85) D 86) D Version 1

87) A 88) B 89) A 90) C

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CHAPTER 15: ALGO 1) You purchase one MBI July 134 call contract (equaling 100 shares) for a premium of $15. You hold the option until the expiration date, when MBI stock sells for $141 per share. You will realize a ______ on the investment. A) $800 profit B) $800 loss C) $700 profit D) $700 loss

2) You write one MBI July 122 call contract (equaling 100 shares) for a premium of $5. You hold the option until the expiration date, when MBI stock sells for $125 per share. You will realize a __________ on the investment. A) $200 profit B) $300 loss C) $800 loss D) $300 profit

3) The May 17, 2020, price quotation for a Boring call option with a strike price of $72 due to expire in November is $26.30, while the stock price of Boring is $75.30. The premium on one Boring November 72 call contract is __________. A) $2,530 B) $7,100 C) $7,200 D) $2,630

4) You purchase one MBI March 155 put contract for a put premium of $12. The maximum profit that you could gain from this strategy is _________.

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A) $155 B) $1,200 C) $14,300 D) $15,500

5) You buy one Huge-Packing August 50 call contract and one Huge-Packing August 50 put contract. The call premium is $2.05, and the put premium is $5.30. Your highest potential loss from this position is __________. A) $205 B) $530 C) $735 D) unlimited

6) You are cautiously bullish on the common stock of the Wildwood Corporation over the next several months. The current price of the stock is $61 per share. You want to establish a bullish money spread to help limit the cost of your option position. You find the following option quotes: Wildwood Corporation Expiration June June June

Underlying Stock price: $61.00 Strike Call Put $ 56.00 $ 9.60 $ 3.10 $ 61.00 $ 5.05 $ 4.10 $ 66.00 $ 2.55 $ 8.60

Ignoring commissions, the cost to establish the bull money spread with calls would be __________. A) $1,215 B) $705 C) $455 D) $455 income rather than cost

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7) You are cautiously bullish on the common stock of the Wildwood Corporation over the next several months. The current price of the stock is $51 per share. You want to establish a bullish money spread to help limit the cost of your option position. You find the following option quotes: Wildwood Corporation Expiration June June June

Underlying Stock price: $51.00 Strike Call Put $ 46.00 $ 8.60 $ 2.05 $ 51.00 $ 4.55 $ 3.10 $ 56.00 $ 2.05 $ 7.60

Suppose you establish a bullish money spread with the puts. In June the stock's price turns out to be $54. Ignoring commissions, the net profit on your position is _______________. A) $504 B) $804 C) $300 D) $355

8) A stock is trading at $62. You believe there is a 80% chance the price of the stock will increase by 15% over the next 3 months. You believe there is a 15% chance the stock will drop by 5%, and you think there is only a 5% chance of a major drop in price of 10%. At-the-money 3-month puts are available at a cost of $770 per contract. What is the expected dollar profit for a writer of a naked put at the end of 3 months? A) $0 B) $460 C) −$150 D) $692.50

9) An investor purchases a long call at a price of $2.60. The strike price at expiration is $37. If the current stock price is $37.10, what is the break-even point for the investor? (Do not round intermediate calculations. Round your final answer to 2 decimal places.) Version 1

A) $34.40 B) $37.00 C) $39.60 D) $39.70

10) An investor is bearish on a particular stock and decided to buy a put with a strike price of $36. Ignoring commissions, if the option was purchased for a price of $0.85, what is the breakeven point for the investor? (Do not round intermediate calculations. Round your final answer to 2 decimal places.) A) $35.15 B) $36.00 C) $36.85 D) $30.60

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Answer Key Test name: Chap 15_12e_Bodie_Algo 1) B 2) A 3) D 4) C 5) C 6) B 7) D 8) D 9) C 10) A

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CHAPTER 16 1) If the Black-Scholes formula is solved to find the standard deviation consistent with the current market call premium, that standard deviation would be called the __________. A) variability B) enabled volatility C) implied volatility D) deviance

2) The __________ of the option is the stock price minus exercise price, or the profit that could be attained by immediate exercise of an in-the-money call option. A) intrinsic value B) time value C) stated value D) discounted value

The __________ is the difference between the actual call price and the intrinsic value. A) stated value B) strike value C) time value D) binomial value

4) A call option with several months until expiration has a strike price of $55 when the stock price is $50. The option has __________ intrinsic value and __________ time value.

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A) negative; positive B) positive; negative C) zero; zero D) zero; positive

All else equal, call option values are __________ if the __________ is lower. A) higher; stock price B) higher; exercise price C) lower; dividend payout D) higher; lower volatility

6) A __________ is an option valuation model based on the assumption that stock prices can move to only two values over any short time period. A) nominal model B) binomial model C) time model D) Black-Scholes model

The Black-Scholes option-pricing formula was developed for __________. A) American options B) European options C) Tokyo options D) out-of-the-money options

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8) A put option with several months until expiration has a strike price of $55 when the stock price is $50. The option has __________ intrinsic value and __________ time value. A) negative; positive B) positive; positive C) zero; zero D) zero; positive

The hedge ratio is often called the option's __________. A) delta B) gamma C) theta D) beta

10) A stock with a current market price of $50 and a strike price of $45 has an associated call option priced at $6.50. This call has an intrinsic value of __________ and a time value of __________. A) $5; $1.50 B) $1.50; $5 C) $0; $6.50 D) $6.50; $0

11) A stock with a current market price of $50 and a strike price of $45 has an associated put option priced at $3.50. This put has an intrinsic value of __________ and a time value of __________.

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A) $3.50; $0 B) $5; $3.50 C) $3.50; $5 D) $0; $3.50

12) Investor A bought a call option that expires in 6 months. Investor B wrote a put option with a 9-month maturity. All else equal, as the time to expiration approaches, the value of investor A's position will __________ and the value of investor B's position will __________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease

13) Investor A bought a call option, and investor B bought a put option. All else equal, if the interest rate increases, the value of investor A's position will __________ and the value of investor B's position will __________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease

14) Investor A bought a call option, and investor B bought a put option. All else equal, if the underlying stock price volatility increases, the value of investor A's position will __________ and the value of investor B's position will __________.

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A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease

15) The percentage change in the call option price divided by the percentage change in the stock price is the __________ of the option. A) delta B) elasticity C) gamma D) theta

16)

Before expiration, the time value of an out-of-the-money stock option is __________. A) equal to the stock price minus the exercise price B) equal to zero C) negative D) positive

17)

The intrinsic value of a call option is equal to __________. A) the stock price minus the exercise price B) the exercise price minus the stock price C) the stock price minus the exercise price plus any expected dividends D) the exercise price minus the stock price plus any expected dividends

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18) The divergence between an option's intrinsic value and its market value is usually greatest when __________. A) the option is deep in the money B) the option is approximately at the money C) the option is far out of the money D) time to expiration is very low

19)

The value of a call option increases with all of the following except __________. A) stock price B) time to maturity C) volatility D) dividend yield

20)

The value of a put option increases with all of the following except __________. A) stock price B) time to maturity C) volatility D) dividend yield

21)

Perfect dynamic hedging requires __________. A) a smaller capital outlay than static hedging B) less commission expense than static hedging C) daily rebalancing D) continuous rebalancing

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22)

The delta of an option is __________.

A) the change in the dollar value of an option for a dollar change in the price of the underlying asset B) the change in the dollar value of the underlying asset for a dollar change in the call price C) the percentage change in the value of an option for a 1% change in the value of the underlying asset D) the percentage change in the value of the underlying asset for a 1% change in the value of the call

23) If you know that a call option will be profitably exercised, then the Black-Scholes model price will simplify to __________. A) S0 − X B) X − S0 C) S0 − PV(X) D) PV(X) − S0

24)

Hedge ratios for long calls are always __________. A) between −1 and 0 B) between 0 and 1 C) 1 D) greater than 1

25)

Which of the following is a true statement?

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A) The actual value of a call option is greater than its intrinsic value prior to expiration. B) The intrinsic value of a call option is always greater than its time value prior to expiration. C) The intrinsic value of a call option is always positive prior to expiration. D) The intrinsic value of a call option is greater than its actual value prior to expiration.

26) A longer time to maturity will unambiguously increase the value of a call option because: 1.The longer maturity time reduces the effect of a dividend on call price. 2.With a longer time to maturity the present value of the exercise price falls. 3.With a longer time to maturity the range of possible stock prices at expiration increases.

A) 1 only B) 1 and 2 only C) 2 and 3 only D) 1, 2, and 3

27)

Strike prices of options are adjusted for __________ but not for __________. A) dividends; stock splits B) stock splits; cash dividends C) exercise of warrants; stock splits D) stock price movements; stock dividends

28) A high dividend payout will __________ the value of a call option and __________ the value of a put option.

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A) increase; decrease B) increase; increase C) decrease; increase D) decrease; decrease

29) According to the Black-Scholes option-pricing model, two options on the same stock but with different exercise prices should always have the same __________. A) price B) expected return C) implied volatility D) maximum loss

30) When the returns of an option and stock are perfectly correlated as in a two-state binomial option model, the hedge ratio must be equal to the ratio of __________. A) the range of the option outcomes to the range of the stock outcomes B) the range of the stock outcomes to the range of the option outcomes C) the standard deviation of the option returns to the standard deviation of the stock returns D) the standard deviation of the stock returns to the standard deviation of the option returns

31)

The Black-Scholes hedge ratio for a long call option is equal to __________. A) N(d1) B) N(d2) C) N(d1) − 1 D) N(d2) − 1

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32)

The Black-Scholes hedge ratio for a long put option is equal to __________. A) N(d1) B) N(d2) C) N(d1) − 1 D) N(d2) − 1

33) In a binomial option model with three subintervals, the probability that the stock price moves up every possible time is __________. A) 25.00% B) 15.55% C) 12.50% D) 8.50%

34) In the Black-Scholes model, if an option is not likely to be exercised, both N(d1) and N(d2) will be close to __________. If the option is very likely to be exercised, N(d1) and N(d2) will be close to __________. A) 1; 0 B) 0; 1 C) −1; 1 D) 1; −1

35) In the Black-Scholes model, as the stock's price increases, the values of N(d1) and N(d2) will __________ for a call and __________ for a put option.

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A) increase; decrease B) increase; increase C) decrease; increase D) decrease; decrease

36) Research suggests that option-pricing models that allow for the possibility of __________ provide more accurate pricing than does the basic Black-Scholes option-pricing model. 1.early exercise 2.changing expected returns of the stock 3.time varying stock price volatility

A) 2 only B) 1 and 3 only C) 2 and 3 only D) 1, 2, and 3

37) Research suggests that the performance of the Black-Scholes option-pricing model has __________. A) improved in recent years B) remained about the same over time C) been deficient for stocks with high dividend payouts D) varied widely over the years since 1973

38) Research conducted by Rubinstein (1994) suggests that __________ command a disproportionately high time value.

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A) out-of-the-money call options B) out-of-the-money put options C) in-the-money call options D) in-the-money put options

39) Of the variables in the Black-Scholes option pricing model, the __________ is not directly observable. A) price of the underlying asset B) risk-free rate of interest C) time to expiration D) variance of the underlying asset return

40) The practice of using options or dynamic hedging strategies to provide protection against investment losses while maintaining upside potential is called __________. A) trading on gamma B) index optioning C) portfolio insurance D) index arbitrage

41)

The delta of a put option on a stock is always __________. A) between 0 and −1 B) between −1 and 1 C) positive but less than 1 D) greater than 1

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42) The price of a stock put option is __________ correlated with the stock price and __________ correlated with the exercise price. A) negatively; negatively B) negatively; positively C) positively; negatively D) positively; positively

43)

The delta of a call option on a stock is always __________. A) negative and less than −1 B) between −1 and 1 C) positive D) positive but less than 1

44) Hedge ratios for long call positions are __________, and hedge ratios for long put positions are __________. A) negative; negative B) negative; positive C) positive; negative D) positive; positive

45) A higher-dividend payout policy will have a __________ impact on the value of a put and a __________ impact on the value of a call.

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A) negative; negative B) negative; positive C) positive; negative D) positive; positive

46) A one-dollar increase in a stock's price would result in __________ in the call option's value of __________ than one dollar. A) a decrease; less B) a decrease; more C) an increase; less D) an increase; more

47)

A hedge ratio of 0.70 implies that a hedged portfolio should consist of __________. A) long 0.70 calls for each short stock B) long 0.70 shares for each long call C) long 0.70 shares for each short call D) short 0.70 calls for each long stock

48) If a stock price increases, the price of a put option on the stock will __________ and the price of a call option on the stock will __________. A) decrease; decrease B) decrease; increase C) increase; decrease D) increase; increase

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49) The current stock price of Alcoco is $70, and the stock does not pay dividends. The instantaneous risk-free rate of return is 6%. The instantaneous standard deviation of Alcoco's stock is 40%. You want to purchase a call option on this stock with an exercise price of $75 and an expiration date 30 days from now. Based on the Black-Scholes option pricing model, the call option's delta will be __________. A) 0.28 B) 0.31 C) 0.62 D) 0.70

50) The current stock price of Alcoco is $70, and the stock does not pay dividends. The instantaneous risk-free rate of return is 6%. The instantaneous standard deviation of Alcoco's stock is 40%. You want to purchase a put option on this stock with an exercise price of $75 and an expiration date 30 days from now. According to the Black-Scholes option pricing model, you should hold __________ shares of stock per 100 put options to hedge your risk. A) 30 B) 34 C) 69 D) 74

51) The current stock price of National Paper is $69, and the stock does not pay dividends. The instantaneous risk-free rate of return is 10%. The instantaneous standard deviation of National Paper's stock is 25%. You want to purchase a call option on this stock with an exercise price of $70 and an expiration date 73 days from now. Using the Black-Scholes option pricing model, the call option should be worth __________ today.

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A) $2.50 B) $2.94 C) $3.26 D) $3.50

52) The current stock price of National Paper is $69, and the stock does not pay dividends. The instantaneous risk-free rate of return is 10%. The instantaneous standard deviation of National Paper's stock is 25%. You want to purchase a put option on this stock with an exercise price of $70 and an expiration date 73 days from now. Using the Black-Scholes, the put option should be worth __________ today. A) $1.50 B) $2.88 C) $2.55 D) $3.00

53) The current stock price of Howard & Howard is $64, and the stock does not pay dividends. The instantaneous risk-free rate of return is 5%. The instantaneous standard deviation of H&H's stock is 20%. You want to purchase a call option on this stock with an exercise price of $55 and an expiration date 73 days from now. Using the Black-Scholes option pricing model, the call option should be worth __________ today. A) $0.01 B) $0.08 C) $9.26 D) $9.62

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54) The current stock price of Howard & Howard is $64, and the stock does not pay dividends. The instantaneous risk-free rate of return is 5%. The instantaneous standard deviation of H&H's stock is 20%. You want to purchase a put option on this stock with an exercise price of $55 and an expiration date 73 days from now. Using Black-Scholes, the put option should be worth __________ today. A) $0.01 B) $0.07 C) $9.26 D) $9.62

55) The stock price of Apax Incorporated is currently $105. The stock price a year from now will be either $130 or $90 with equal probabilities. The interest rate at which investors can borrow is 10%. Using the binomial option pricing model, the value of a call option with an exercise price of $110 and an expiration date 1 year from now should be worth __________ today. A) $11.59 B) $15.56 C) $20.34 D) $40.94

56) The stock price of Bravo Corporation is currently $100. The stock price a year from now will be either $160 or $60 with equal probabilities. The interest rate at which investors invest in riskless assets is 6%. Using the binomial option pricing model, the value of a put option with an exercise price of $135 and an expiration date 1 year from now should be worth __________ today. A) $34.09 B) $37.50 C) $38.21 D) $45.45

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57) If you have an extremely "bullish" outlook on the stock market, you could attempt to maximize your rate of return by __________. A) purchasing out-of-the-money call options B) purchasing at-the-money bull spreads C) purchasing in-the-money call options D) purchasing at-the-money call options

58)

Which one of the following will increase the value of a put option? A) a decrease in the exercise price B) a decrease in time to expiration of the put C) an increase in the volatility of the underlying stock D) an increase in stock price

59) You find the option prices for three June call options on the same stock. The 95 call has an implied volatility of 25%, the 100 call has an implied volatility of 25%, and the 105 call has an implied volatility of 30%. If you believe this represents a mispricing situation. you may want to __________. A) buy the 105 call and write the 100 call B) buy the 105 call and write the 95 call C) buy either the 95 or the 100 call and write the 105 call D) write the 105 call and write either the 95 or the 100 call

60) You are considering purchasing a call option with a strike price of $35. The price of the underlying stock is currently $27. Without any further information, you would expect the hedge ratio for this option to be __________.

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A) negative and near 0 B) negative and near −1 C) positive and near 0 D) positive and near 1

61) According to the put-call parity theorem, the payoffs associated with ownership of a call option can be replicated by __________. A) shorting the underlying stock, borrowing the present value of the exercise price, and writing a put on the same underlying stock and with the same exercise price B) buying the underlying stock, borrowing the present value of the exercise price, and buying a put on the same underlying stock and with the same exercise price C) buying the underlying stock, borrowing the present value of the exercise price, and writing a put on the same underlying stock and with the same exercise price D) shorting the underlying stock, lending the present value of the exercise price, and buying a put on the same underlying stock and with the same exercise price

62) You are considering purchasing a put option on a stock with a current price of $33. The exercise price is $35, and the price of the corresponding call option is $2.25. According to the put-call parity theorem, if the risk-free rate of interest is 4% and there are 90 days until expiration, the value of the put should be __________. A) $2.25 B) $3.91 C) $4.05 D) $5.52

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63) The stock price of Atlantis Corporation is $43 today. The risk-free rate of return is 10%, and Atlantis Corporation pays no dividends. A call option on Atlantis Corporation stock with an exercise price of $40 and an expiration date 6 months from now is worth $5 today. A put option on Atlantis Corporation stock with an exercise price of $40 and an expiration date 6 months from now should be worth __________ today. A) $0.05 B) $0.14 C) $2.14 D) $3.95

64) The stock price of Harper Corporation is $33 today. The risk-free rate of return is 6%, and Harper Corporation pays no dividends. A put option on Harper Corporation stock with an exercise price of $30 and an expiration date 73 days from now is worth $0.95 today. A call option on Harper Corporation stock with an exercise price of $30 and the same expiration date should be worth __________ today. A) $2.25 B) $3.14 C) $3.99 D) $4.31

65) A call option on Juniper Corporation stock with an exercise price of $75 and an expiration date 1 year from now is worth $3 today. A put option on Juniper Corporation stock with an exercise price of $75 and an expiration date 1 year from now is worth $2.50 today. The risk-free rate of return is 8%, and Juniper Corporation pays no dividends. The stock should be worth __________ today. A) $69.73 B) $71.69 C) $73.12 D) $77.25

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66) You would like to hold a protective put position on the stock of Avalon Corporation to lock in a guaranteed minimum value of $50 at year-end. Avalon currently sells for $50. Over the next year, the stock price will increase by 10% or decrease by 10%. The T-bill rate is 5%. Unfortunately, no put options are traded on Avalon Company. Suppose the desired put options with X = 50 were traded. What would be the hedge ratio for the option? A) −1.0 B) −0.5 C) 0.5 D) 1.0

67) You would like to hold a protective put position on the stock of Avalon Corporation to lock in a guaranteed minimum value of $50 at year-end. Avalon currently sells for $50. Over the next year, the stock price will increase by 10% or decrease by 10%. The T-bill rate is 5%. Unfortunately, no put options are traded on Avalon Company. Suppose the desired put options with X = 50 were traded. How much would it cost to purchase? A) $1.19 B) $2.38 C) $5.84 D) $3.33

68) You would like to hold a protective put position on the stock of Avalon Corporation to lock in a guaranteed minimum value of $50 at year-end. Avalon currently sells for $50. Over the next year, the stock price will increase by 10% or decrease by 10%. The T-bill rate is 5%. Unfortunately, no put options are traded on Avalon Company. What would have been the cost of a protective put portfolio?

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A) $48.81 B) $51.19 C) $52.38 D) $53.38

69) You would like to hold a protective put position on the stock of Avalon Corporation to lock in a guaranteed minimum value of $50 at year-end. Avalon currently sells for $50. Over the next year, the stock price will increase by 10% or decrease by 10%. The T-bill rate is 5%. Unfortunately, no put options are traded on Avalon Company. What portfolio position in stock and T-bills will ensure you a payoff equal to the payoff that would be provided by a protective put with X = $50? A) ½ share of stock and $25 in bills B) 1 share of stock and $50 in bills C) ½ share of stock and $26.19 in bills D) 1 share of stock and $26.19 in bills

70) You calculate the Black-Scholes value of a call option as $3.50 for a stock that does not pay dividends, but the actual call price is $3.75. The most likely explanation for the discrepancy is that either the option is __________ or the volatility you input into the model is too __________. A) overvalued and should be written; low B) undervalued and should be written; low C) overvalued and should be purchased; high D) undervalued and should be purchased; high

71)

What combination of variables is likely to lead to the lowest time value?

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A) short time to expiration and low volatility B) long time to expiration and high volatility C) short time to expiration and high volatility D) long time to expiration and low volatility

72) The time value of a call option is likely to decline most rapidly __________ days before expiration? A) 10 B) 30 C) 60 D) 90

73) The fact that American put values may not equal the price implied by put-call parity is attributable to the possibility of what event? A) Changes in the dividend B) Early exercise C) Interest rate declines D) Interest rate rises

74) Calculate the price of a call option using the Black Scholes model and the following data: stock price = $47.30, exercise price = $50, time to expiration = 85 days, risk-free rate = 3%, standard deviation = 35%. A) $1.11 B) $2.22 C) $3.33 D) $4.44

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75) Calculate the price of a European call option using the Black Scholes model and the following data: stock price = $56.80, exercise price = $55, time to expiration = 15 days, risk-free rate = 2.5%, standard deviation = 22%, dividend yield = 8%. A) $1.49 B) $1.79 C) $2.04 D) $2.19

76)

The intrinsic value of an out-of-the-money call option __________. A) is negative B) is positive C) is zero D) cannot be determined

77) A call option has an exercise price of $30 and a stock price of $34. If the call option is trading for $5.25, what is the intrinsic value of the option? A) $0.00 B) $1.25 C) $4.00 D) $5.25

78) A call option has an exercise price of $35 and a stock price of $36.50. If the call option is trading at $2.25, what is the time value embedded in the option?

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A) $0.05 B) $0.75 C) $1.50 D) $2.25

79) What aspect of the time value of money does the factor of e represent in the BlackScholes option value formula? A) annual compounding B) compounding at the expiration time frame C) continuous compounding D) daily compounding

80) Suppose you purchase a call and write a put on the same stock with the same exercise price and expiration. If prices are at equilibrium, the value of this portfolio is __________. A) S0 − Xe−rt B) S0 − X C) S0 + Xe−rt D) S0 + X

81) A stock priced at $65 has a standard deviation of 30%. Three-month calls and puts with an exercise price of $60 are available. The calls have a premium of $7.27, and the puts cost $1.10. The risk-free rate is 5%. Since the theoretical value of the put is $1.525, you believe the puts are undervalued. If you want to construct a riskless arbitrage to exploit the mispriced puts, you should __________.

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A) buy the call and sell the put B) write the call and buy the put C) write the call and buy the put and buy the stock and borrow the present value of the exercise price D) buy the call and buy the put and short the stock and lend the present value of the exercise price

82) A stock priced at $65 has a standard deviation of 30%. Three-month calls and puts with an exercise price of $60 are available. The calls have a premium of $7.27, and the puts cost $1.10. The risk-free rate is 5%. Since the theoretical value of the put is $1.525, you believe the puts are undervalued. If you construct a riskless arbitrage to exploit the mispriced puts, your arbitrage profit will be __________. A) $5.75 B) $6.17 C) $0.96 D) $0.42

83)

The option smirk in the Black-Scholes option model indicates that __________. A) implied volatility changes unpredictably as the exercise price rises B) stock prices may fall by a larger amount than the model assumes C) stock prices evolve continuously in today's actively traded markets D) stocks with lower exercise prices are more likely to pay dividends

84) A put option has a strike price of $35 and a stock price of $38. If the put option is trading at $1.25, what is the time value embedded in the option?

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A) $0.00 B) $0.75 C) $1.25 D) $3.00

85) Which combination of stock, exercise, and option prices are most likely associated with an American call option? A) stock = $60, exercise = $65, option = $5 B) stock = $65, exercise = $60, option = $5 C) stock = $65, exercise = $60, option = $7 D) stock = $60, exercise = $65, option = $7

86) A stock with a stock and exercise price of $20 can either increase to $26 or decrease to $18 over the course of one year. In a one-period binomial option model, given an interest rate of 5% and equal probabilities, what is the likely option price? (Use annual compounding.) A) $2.36 B) $2.50 C) $2.88 D) $3.00

87) Given a stock price of $18, an exercise price of $20, and an interest rate of 7%, what are the intrinsic values which will occur for a one-period binomial Call option model if the stock price goes up to $23 or down to $16? A) $3 and $0 B) $3 and −$4 C) $4 and $3 D) $4 and $2

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88)

In order for a binomial option price to approach the Black Scholes price, __________.

A) the number of subintervals must increase substantially B) the volatility must be low C) the probability of each subinterval needs to be similar to the stock’s standard deviation D) the interest rate needs to increase

89) The current stock price of KMW is $27, the risk-free rate of return is 4%, and the standard deviation is 30%. What is the price of a 63-day call option with an exercise price of $25? A) $2.50 B) $2.65 C) $2.89 D) $3.12

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Answer Key Test name: Chap 16_12e_Bodie 1) C 2) A 3) C 4) D 5) B 6) B 7) B 8) B 9) A 10) A 11) D 12) C 13) B 14) A 15) B 16) D 17) A 18) B 19) D 20) A 21) D 22) A 23) C 24) B 25) A 26) C Version 1

27) B 28) C 29) C 30) A 31) A 32) C 33) C 34) B 35) A 36) B 37) C 38) B 39) D 40) C 41) A 42) B 43) D 44) C 45) C 46) C 47) C 48) B 49) B 50) C 51) C 52) B 53) D 54) B 55) A 56) C Version 1

57) A 58) C 59) C 60) C 61) B 62) B 63) A 64) D 65) A 66) B 67) A 68) B 69) C 70) A 71) A 72) A 73) B 74) B 75) C 76) C 77) C 78) B 79) C 80) A 81) C 82) D 83) B 84) C 85) C 86) C Version 1

87) A 88) A 89) B

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CHAPTER 16: ALGO 1) A stock with a current market price of $42.90 has an associated call option priced at $7.60 and a strike price of $37.50. This call has an intrinsic value of __________ and a time value of __________. A) $7.60; $0 B) $5.40; $2.20 C) $2.20; $5.40 D) $0; $7.60

2) The current stock price of Alcoco is $45, and the stock does not pay dividends. The instantaneous risk-free rate of return is 3%. The instantaneous standard deviation of Alcoco's stock is 30%. You want to purchase a put option on this stock with an exercise price of $50 and an expiration date 30 days from now. According to the Black-Scholes OPM, you should hold __________ shares of stock per 100 put options to hedge your risk.Assume 365 days in a year A) 49 B) 53 C) 88 D) 93

3) The current stock price of Johnson & Johnson (J&J) is $54, and the stock does not pay dividends. The instantaneous risk-free rate of return is 5%. The instantaneous standard deviation of J&J's stock is 40%. You want to purchase a put option on this stock with an exercise price of $45 and an expiration date 65 days from now. Assume 365 days in a year Using Black-Scholes, the put option should be worth __________ today. A) $0.53 B) $0.46 C) $9.57 D) $9.93

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4) The stock price of Bravo Corporation is currently $140. The stock price a year from now will be either $240 or $100 with equal probabilities. The interest rate at which investors invest in riskless assets is 6%. Using the binomial OPM, the value of a put option with an exercise price of $175 and an expiration date 1 year from now should be worth __________ today. (Round intermediate calculation to 2 decimal places.) A) $34.46 B) $57.50 C) $46.66 D) $25.06

5) You are considering purchasing a put option on a stock with a current price of $58. The exercise price is $61, and the price of the corresponding call option is $4.25. According to the put-call parity theorem, if the risk-free rate of interest is 7% and there are 90 days until expiration, the value of the put should be __________. Assume 365 days in a year A) $4.25 B) $6.24 C) $6.35 D) $7.82

6) A call option on Juniper Corporation stock with an exercise price of $35 and an expiration date 1 year from now is worth $2.30 today. A put option on Juniper Corporation stock with an exercise price of $35 and an expiration date 1 year from now is worth $1.80 today. The risk-free rate of return is 7%, and Juniper Corporation pays no dividends. The stock should be worth __________ today. A) $33.13 B) $35.09 C) $36.52 D) $40.65

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Answer Key Test name: Chap 16_12e_Bodie_Algo 1) B 2) C 3) A 4) C 5) B 6) A

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CHAPTER 17 1)

Today's futures markets are dominated by trading in __________ contracts. A) metals B) agriculture C) financial D) commodity

2) A person with a long position in a commodity futures contract wants the price of the commodity to __________. A) decrease substantially B) increase substantially C) remain unchanged D) increase or decrease substantially

3) If an asset price declines, the investor with a __________ is exposed to the largest potential loss. A) long call option B) long put option C) long futures contract D) short futures contract

The clearing corporation has a net position equal to __________.

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A) the open interest B) the open interest times 2 C) the open interest divided by 2 D) zero

5) The S&P 500 Index futures contract is an example of a(n) __________ delivery contract. The pork bellies contract is an example of a(n) __________ delivery contract. A) cash; cash B) cash; actual C) actual; cash D) actual; actual

Which one of the following contracts requires no cash to change hands when initiated? A) Listed put option B) Short futures contract C) Forward contract D) Listed call option

7) Synthetic stock positions are commonly used by __________ because of their __________. A) market timers; lower transaction cost B) banks; lower risk C) wealthy investors; tax treatment D) money market funds; limited exposure

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8) __________ are likely to close their positions before the expiration date, while __________ are likely to make or take delivery. A) Investors; regulators B) Hedgers; speculators C) Speculators; hedgers D) Regulators; investors

Futures contracts have many advantages over forward contracts except that __________. A) futures positions are easier to trade B) futures contracts are tailored to the specific needs of the investor C) futures trading preserves the anonymity of the participants D) counterparty credit risk is not a concern on futures

10) An investor who is hedging a corporate bond portfolio using a T-bond futures contract is said to have __________. A) an arbitrage B) a cross-hedge C) an over hedge D) a spread hedge

11)

The open interest on silver futures at a particular time is the number of __________.

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A) all outstanding silver futures contracts B) long and short silver futures positions counted separately on a particular trading day C) silver futures contracts traded during the day D) silver futures contracts traded the previous day

12) An investor who goes short in a futures contract will __________ any increase in value of the underlying asset and will __________ any decrease in value in the underlying asset. A) pay; pay B) pay; receive C) receive; pay D) receive; receive

13) An investor who goes long in a futures contract will __________ any increase in value of the underlying asset and will __________ any decrease in value in the underlying asset. A) pay; pay B) pay; receive C) receive; pay D) receive; receive

14) The advantage that standardization of futures contracts brings is that __________ is improved because __________. A) liquidity; all traders must trade a small set of identical contracts B) credit risk; all traders understand the risk of the contracts C) pricing; convergence is more likely to take place with fewer contracts D) trading cost; trading volume is reduced

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15) The fact that the exchange is the counterparty to every futures contract issued is important because it eliminates __________ risk. A) market B) credit C) interest rate D) basis

16)

In the futures market the short position's loss is __________ the long position's gain. A) greater than B) less than C) equal to D) sometimes less than and sometimes greater than

17) A wheat farmer should __________ in order to reduce his exposure to risk associated with fluctuations in wheat prices. A) sell wheat futures B) buy wheat futures C) buy a contract for delivery of wheat now and sell a contract for delivery of wheat at harvest time D) sell wheat futures if the basis is currently positive and buy wheat futures if the basis is currently negative

18)

Which of the following provides the profit to a long position at contract maturity?

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A) Original futures price − spot price at maturity B) Spot price at maturity − original futures price C) Zero D) Basis

19) You take a long position in a futures contract of one maturity and a short position in a contract of a different maturity, both on the same commodity. This is called a __________. A) cross-hedge B) reversing trade C) spread position D) straddle

20)

Interest rate futures contracts exist for all of the following except __________. A) federal funds B) Eurodollars C) banker's acceptances D) repurchase agreements

21) Initial margin is usually set in the region of __________ of the total value of a futures contract. A) 5%-15% B) 10%-20% C) 15%-25% D) 20%-30%

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22)

Margin must be posted by __________. A) buyers of futures contracts only B) sellers of futures contracts only C) both buyers and sellers of futures contracts D) speculators only

23)

The daily settlement of obligations on futures positions is called __________. A) a margin call B) marking to market C) a variation margin check D) the initial margin requirement

24)

Margin requirements for futures contracts can be met by __________. A) cash only B) cash or highly marketable securities such as Treasury bills C) cash or any marketable securities D) cash or warehouse receipts for an equivalent quantity of the underlying commodity

25) An established value below which a trader's margin may not fall is called the __________.

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A) daily limit B) daily margin C) maintenance margin D) convergence limit

26)

Which one of the following is a true statement?

A) A margin deposit can be met only by cash. B) All futures contracts require the same margin deposit. C) The maintenance margin is the amount of money you post with your broker when you buy or sell a futures contract. D) The maintenance margin is the value of the margin account below which the holder of a futures contract receives a margin call.

27) At maturity of a futures contract, the spot price and futures price must be approximately the same because of __________. A) marking to market B) the convergence property C) the open interest D) the triple witching hour

28)

A futures contract __________.

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A) is a contract to be signed in the future by the buyer and the seller of a commodity B) is an agreement to buy or sell a specified amount of an asset at a predetermined price on the expiration date of the contract C) is an agreement to buy or sell a specified amount of an asset at whatever the spot price happens to be on the expiration date of the contract D) gives the buyer the right, but not the obligation, to buy an asset some time in the future

29) Which one of the following exploits differences between actual future prices and their theoretically correct parity values? A) Index arbitrage B) Marking to market C) Reversing trades D) Settlement transactions

30)

The most actively traded interest rate futures contract is for __________. A) LIBOR B) Treasury bills C) Eurodollars D) Treasury bonds

31)

The CME weather futures contract is an example of __________. A) a cash-settled contract B) an agricultural contract C) a financial future D) a commodity future

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32)

Single stock futures, as opposed to stock index futures, are __________. A) not yet being offered by any exchanges B) offered overseas but not in the United States C) currently trading on OneChicago, a joint venture of several exchanges D) scheduled to begin trading in 2015 on several exchanges

33) You are currently long in a futures contract. You instruct a broker to enter the short side of a futures contract to close your position. This is called __________. A) a cross-hedge B) a reversing trade C) a speculation D) marking to market

34) A company that mines bauxite, an aluminum ore, decides to short aluminum futures. This is an example of __________ to limit its risk. A) cross-hedging B) long hedging C) spreading D) speculating

35)

Futures markets are regulated by the __________.

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A) CFA Institute B) CFTC C) CIA D) SEC

36)

A hog farmer decides to sell hog futures. This is an example of __________ to limit risk. A) cross-hedging B) short hedging C) spreading D) speculating

37) On May 21, 2012, you could have purchased a futures contract from Intrade for a price of $5.70 that would pay you $10 if Barack Obama won the 2012 presidential election. This tells you __________. A) that the market believed that Obama had a 57% chance of winning B) that the market believed that Obama would not win the election C) nothing about the market's belief concerning the odds of Obama winning D) that the market believed Obama's chances of winning were about 43%

38)

An investor would want to __________ to exploit an expected fall in interest rates. A) sell S&P 500 Index futures B) sell Treasury-bond futures C) buy Treasury-bond futures D) buy wheat futures

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39) Forward contracts __________ traded on an organized exchange, and futures contracts __________ traded on an organized exchange. A) are; are B) are; are not C) are not; are D) are not; are not

40) If the S&P 500 Index futures contract is overpriced relative to the spot S&P 500 Index, you should __________. A) buy all the stocks in the S&P 500 and write put options on the S&P 500 Index B) sell all the stocks in the S&P 500 and buy call options on S&P 500 Index C) sell S&P 500 Index futures and buy all the stocks in the S&P 500 D) sell short all the stocks in the S&P 500 and buy S&P 500 Index futures

41) A long hedge is a simultaneous __________ position in the spot market and a __________ position in the futures market. A) long; long B) long; short C) short; long D) short; short

42) Investors who take short positions in futures contract agree to __________ delivery of the commodity on the delivery date, and those who take long positions agree to __________ delivery of the commodity.

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A) make; make B) make; take C) take; make D) take; take

43)

An investor would want to __________ to hedge a long position in Treasury bonds. A) buy interest rate futures B) buy Treasury bonds in the spot market C) sell interest rate futures D) sell S&P 500 futures

44)

Futures contracts are said to exhibit the property of convergence because __________. A) the profits from long positions and short positions must ultimately be equal B) the profits from long positions and short positions must ultimately net to zero C) price discrepancies would open arbitrage opportunities for investors who identify

them D) the futures price and spot price of any asset must ultimately net to zero

45)

In the context of a futures contract, the basis is defined as __________. A) the futures price minus the spot price B) the spot price minus the futures price C) the futures price minus the initial margin D) the profit on the futures contract

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46) The __________ is among the world's largest derivatives exchanges and operates a fully electronic trading and clearing platform. A) CBOE B) CBOT C) CME D) Eurex

47)

Violation of the spot-futures parity relationship results in __________. A) fines and other penalties imposed by the SEC B) arbitrage opportunities for investors who identify them C) suspension of delivery privileges D) suspension of trading

48) When dividend-paying assets are involved, the spot-futures parity relationship can be stated as __________. A) F1 = S0(1 + rf) B) F0 = S0(1 + rf − d)T C) F0 = S0(1 + rf + d)T D) F0 = S0(1 + rf)T

49) An investor establishes a long position in a futures contract now (time 0) and holds the position until maturity (time T). The sum of all daily settlements will be __________.

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A) F0 − FT B) F0 − S0 C) FT − F0 D) FT − S0

50) A short hedge is a simultaneous __________ position in the spot market and a __________ position in the futures market. A) long; long B) long; short C) short; long D) short; short

51)

Approximately __________ of futures contracts result in actual delivery. A) 0% B) less than 1% to 3% C) between than 5% to 15% D) more than 60%

52) A long hedger will __________ from an increase in the basis; a short hedger will __________. A) be hurt; be hurt B) be hurt; profit C) profit; be hurt D) profit; profit

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53)

At year-end, taxes on a futures position __________. A) must be paid if the position has been closed out B) must be paid if the position has not been closed out C) must be paid regardless of whether the position has been closed out or not D) need not be paid if the position supports a hedge

54) A speculator will often prefer to buy a futures contract rather than the underlying asset because: 1. Gains in futures contracts can be larger due to leverage. 2. Transaction costs in futures are typically lower than those in spot markets. 3. Futures markets are often more liquid than the markets of the underlying commodities. A) 1 and 2 only B) 2 and 3 only C) 1 and 3 only D) 1, 2, and 3

55) On January 1, you sold one April S&P 500 Index futures contract at a futures price of 3,000. If the April futures price is 2,950 on February 1, your profit would be __________ if you close your position. (The contract multiplier is 250.) A) −$12,500 B) −$15,000 C) $15,000 D) $12,500

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56) The current level of the S&P 500 is 3,000. The dividend yield on the S&P 500 is 3%. The risk-free interest rate is 6%. The futures price quote for a contract on the S&P 500 due to expire 6 months from now should be __________. A) $3,000.00 B) $3,017.22 C) $3,044.67 D) $3,090.00

57) The spot price for gold is $1,550 per ounce. The dividend yield on the S&P 500 is 2.5%. The risk-free interest rate is 3.5%. The futures price for gold for a 6-month contract on gold should be __________. A) $1,504.99 B) $1,569.08 C) $1,554.04 D) $1,557.73

58) If you expect a stock market downturn, one potential defensive strategy would be to __________. A) buy stock-index futures B) sell stock-index futures C) buy stock-index options D) sell foreign exchange futures

59)

At contract maturity the basis should equal ___________.

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A) 1 B) 0 C) the risk-free interest rate D) −1

60) You believe that the spread between the September T-bond contract and the June T-bond futures contract is too large and will soon correct. This market exhibits positive cost of carry for all contracts. To take advantage of this, you should __________. A) buy the September contract and sell the June contract B) sell the September contract and buy the June contract C) sell the September contract and sell the June contract D) buy the September contract and buy the June contract

61) A 1-year gold futures contract is selling for $1,645. Spot gold prices are $1,592 and the 1-year risk-free rate is 3%. The arbitrage profit implied by these prices is __________. A) $3.27 B) $4.39 C) $5.24 D) $6.72

62) A 1-year gold futures contract is selling for $1,645. Spot gold prices are $1,592 and the 1-year risk-free rate is 3%. Based on the above data, which of the following set of transactions will yield positive riskless arbitrage profits?

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A) Buy gold in the spot with borrowed money, and sell the futures contract. B) Buy the futures contract, and sell the gold spot and invest the money earned. C) Buy gold spot with borrowed money, and buy the futures contract. D) Buy the futures contract, and buy the gold spot using borrowed money.

63) A hypothetical futures contract on a nondividend-paying stock with a current spot price of $100 has a maturity of 1 year. If the T-bill rate is 5%, what should the futures price be? A) $95.24 B) $100.00 C) $105.00 D) $107.00

64) A hypothetical futures contract on a nondividend-paying stock with a current spot price of $100 has a maturity of 4 years. If the T-bill rate is 7%, what should the futures price be? A) $76.29 B) $93.46 C) $107.22 D) $131.08

65) On Monday morning you sell one June T-bond futures contract at $97,843.75. The contract's face value is $100,000. The initial margin requirement is $2,700, and the maintenance margin requirement is $2,000 per contract. Use the following price data to answer the following questions. Day Monday Tuesday Wednesday

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Settle $ 97,406.25 $ 98,000.00 $ 100,000.00

After Monday's close the balance on your margin account will be __________. A) $2,700 B) $2,000 C) $3,137.50 D) $2,262.50

66) On Monday morning you sell one June T-bond futures contract at $97,843.75. The contract's face value is $100,000. The initial margin requirement is $2,700, and the maintenance margin requirement is $2,000 per contract. Use the following price data to answer the following questions. Day Monday Tuesday Wednesday

Settle $ 97,406.25 $ 98,000.00 $ 100,000.00

At the close of day on Tuesday your cumulative rate of return on your investment is __________. A) −16.21% B) −5.79% C) 5.79% D) 16.21%

67) On Monday morning you sell one June T-bond futures contract at $97,843.75. The contract's face value is $100,000. The initial margin requirement is $2,700, and the maintenance margin requirement is $2,000 per contract. Use the following price data to answer the following questions. Day Monday Tuesday Wednesday

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Settle $ 97,406.25 $ 98,000.00 $ 100,000.00

On which of the given days do you get a margin call? A) Monday B) Tuesday C) Wednesday D) None of the options are correct.

68) On Monday morning you sell one June T-bond futures contract at $97,843.75. The contract's face value is $100,000. The initial margin requirement is $2,700, and the maintenance margin requirement is $2,000 per contract. Use the following price data to answer the following questions. Day Monday Tuesday Wednesday

Settle $ 97,406.25 $ 98,000.00 $ 100,000.00

The cumulative rate of return on your investment after Wednesday is a __________. A) 79.86% loss B) 2.63% loss C) 33.00% gain D) 53.95% loss

69) The swap market is a huge component of the derivatives market, with around __________ in interest rate and exchange rate swap agreements outstanding. A) $40 million B) $400 million C) $400 billion D) $400 trillion

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70)

If the risk-free rate is greater than the dividend yield, then we know that __________. A) the futures price will be higher as contract maturity increases B) F0 < S0 C) FT > ST D) arbitrage profits are possible

71) Sahali Trading Company has issued $100 million worth of long-term bonds at a fixed rate of 9%. Sahali Trading Company then enters into an interest rate swap where it will pay LIBOR and receive a fixed 8% on a notional principal of $100 million. After all these transactions are considered, Sahali's cost of funds is __________. A) 17% B) LIBOR C) LIBOR + 1% D) LIBOR − 1%

72)

Interest rate swaps involve the exchange of __________. A) actual fixed-rate bonds for actual floating-rate bonds B) actual floating-rate bonds for actual fixed-rate bonds C) net interest payments and an actual principal swap D) net interest payments based on notional principal, but no exchange of principal

73) From the perspective of determining profit and loss, the long futures position most closely resembles a levered investment in a ____________.

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A) long call B) short call C) short stock position D) long stock position

74)

The __________ contract dominates trading in stock-index futures. A) S&P 500 B) DJIA C) Nasdaq 100 D) Russell 2000

75) The __________ and the __________ have the lowest correlations with the large-cap indexes. A) Nasdaq Composite; Russell 2000 B) NYSE; DJIA C) S&P 500; DJIA D) Russell 2000; S&P 500

76) The use of leverage is practiced in the futures markets due to the existence of __________. A) banks B) brokers C) clearinghouses D) margin

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77) You purchase an interest rate futures contract that has an initial margin requirement of 15% and a futures price of $115,098. The contract has a $100,000 underlying par value bond. If the futures price falls to $108,000, you will experience a __________ loss on your money invested. A) 31.00% B) 41.11% C) 52.22% D) 64.33%

78) You own a $15 million bond portfolio with a modified duration of 11 years. Interest rates are expected to decrease by 5 basis points, or 0.05%. What is the price value of a basis point? A) $10,400 B) $14,300 C) $16,500 D) $21,300

79) The price of a corn futures contract is $2.65 per bushel when the contract is issued, and the commodity spot price is $2.55. When the contract expires, the two prices are identical. What principle is represented by this price behavior? A) Convergence B) Margin C) Basis D) Volatility

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80) A corporation will be issuing bonds in 6 months, and the treasurer is concerned about unfavorable interest rate moves in the interim. The best way for her to hedge the risk is to __________. A) buy T-bond futures B) sell T-bond futures C) buy stock-index futures D) sell stock-index futures

81) A farmer sells futures contracts at a price of $2.75 per bushel. The spot price of corn is $2.55 at contract expiration. The farmer harvested 12,500 bushels of corn and sold futures contracts on 10,000 bushels of corn. What are the farmer's proceeds from the sale of corn? A) $27,500 B) $31,875 C) $33,875 D) $35,950

82) A farmer sells futures contracts at a price of $2.75 per bushel. The spot price of corn is $2.55 at contract expiration. The farmer harvested 12,500 bushels of corn and sold futures contracts on 10,000 bushels of corn. Ignoring the transaction costs, how much did the farmer improve his cash flow by hedging sales with the futures contracts? A) $0 B) $2,000 C) $31,875 D) $33,875

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83) A bank has made long-term fixed-rate mortgages and has financed them with short-term deposits. To hedge out its interest rate risk, the bank could __________. A) sell T-bond futures B) buy T-bond futures C) buy stock-index futures D) sell stock-index futures

84) A market timer now believes that the economy will soften over the rest of the year as the housing market slump continues, and she also believes that foreign investors will stop buying U.S. fixed-income securities in the large quantities that they have in the past. One way the timer could take advantage of this forecast is to __________. A) buy T-bond futures and sell stock-index futures B) sell T-bond futures and buy stock-index futures C) buy stock-index futures and buy T-bond futures D) sell stock-index futures and sell T-bond futures

85) The Student Loan Marketing Association (SLMA) has short-term student loans funded by long-term debt. To hedge out this interest rate risk, SLMA could: 1. Engage in a swap to pay fixed and receive variable interest payments 2. Engage in a swap to pay variable and receive fixed interest payments 3. Buy T-bond futures 4. Sell T-bond futures A) 1 and 2 only B) 1 and 4 only C) 2 and 3 only D) 2 and 4 only

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86) The only money exchanged by both the long and short at the creation of a futures contract is called the __________. A) spot price B) futures price C) margin D) collateral

87)

The overwhelming majority of trading in futures contracts is done via __________. A) trading pits B) phone C) open outcry D) electronic networks

88) The spot price of a futures contract is different than the price for which an investor can buy the underlying commodity for immediate delivery. This represents an opportunity for __________. A) arbitrage B) hedging C) speculation D) loss leading

89) A stock index spot price is $1,287. The zero coupon interest rate is 3.8%. What is the potential arbitrage profit if the 6-month futures contract on the index is priced at $1,350?

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A) $19.22 B) $31.50 C) $63.17 D) $38.78

90) A stock index spot price is $1,350. The zero-coupon interest rate is 2.6%. What is the potential arbitrage profit if the 6-month futures contract on the index is priced at $1,342? A) $8.42 B) $25.44 C) $32.38 D) $39.46

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Answer Key Test name: Chap 17_12e_Bodie 1) C 2) B 3) C 4) D 5) B 6) C 7) A 8) C 9) B 10) B 11) A 12) B 13) C 14) A 15) B 16) C 17) A 18) B 19) C 20) D 21) A 22) C 23) B 24) B 25) C 26) D Version 1

27) B 28) B 29) A 30) D 31) A 32) C 33) B 34) A 35) B 36) B 37) A 38) C 39) C 40) C 41) C 42) B 43) C 44) C 45) A 46) D 47) B 48) B 49) C 50) B 51) B 52) C 53) C 54) D 55) D 56) C Version 1

57) D 58) B 59) B 60) B 61) C 62) A 63) C 64) D 65) C 66) B 67) C 68) A 69) C 70) A 71) C 72) D 73) D 74) A 75) A 76) D 77) B 78) C 79) A 80) B 81) C 82) B 83) A 84) D 85) C 86) C Version 1

87) D 88) A 89) D 90) B

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CHAPTER 17: ALGO 1) On January 1, you sold one April S&P 500 Index futures contract at a futures price of 1,570. If the April futures price is 1,550 on February 1, your profit would be __________ if you close your position. (The contract multiplier is 250.) A) −$5,000 B) −$7,500 C) $7,500 D) $5,000

2) The current level of the S&P 500 is 1,100. The dividend yield on the S&P 500 is 5%. The risk-free interest rate is 9%. The futures price quote for a contract on the S&P 500 due to expire 3 months from now should be __________. A) 1,116.56 B) 1,128.98 C) 1,110.84 D) 1,133.52

3) The spot price for gold is $1,450 per ounce. The dividend yield on the S&P 500 is 4.0%. The risk-free interest rate is 7.4%. The futures price for gold for a 6-month contract on gold should be __________. A) $1,421.70 B) $1,485.79 C) $1,470.75 D) $1,474.44

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4) A 1-year gold futures contract is selling for $2,110. Spot gold prices are $2,046 and the 1-year risk-free rate is 3%. The arbitrage profit implied by these prices is _____________. A) $.65 B) $1.77 C) $2.62 D) $4.10

5) A hypothetical futures contract on a nondividend-paying stock with a current spot price of $30 has a maturity of 1 year. If the T-bill rate is 6%, what should the futures price be? A) $28.20 B) $30.00 C) $31.80 D) $33.80

6) A hypothetical futures contract on a nondividend-paying stock with a current spot price of $60 has a maturity of 3 years. If the T-bill rate is 5%, what should the futures price be? A) $60.00 B) $57.00 C) $71.46 D) $69.46

7) You purchase an interest rate futures contract that has an initial margin requirement of 12% and a futures price of $149,841. The contract has a $125,000 underlying par value bond. If the futures price falls to $145,000, you will experience a __________ loss on your money invested.

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A) 17.00% B) 26.92% C) 37.92% D) 49.92%

8) You own a $14 million bond portfolio with a modified duration of 7 years. Interest rates are expected to increase by 4 basis points, or 0.04%. What is the price value of a basis point? A) $3,700 B) $7,600 C) $9,800 D) $14,600

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Answer Key Test name: Chap 17_12e_Bodie_Algo 1) D 2) C 3) D 4) C 5) C 6) D 7) B 8) C

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CHAPTER 18 1) Hedge funds: 1. are appropriate as a sole investment vehicle for an investor. 2. should only be added to an already well-diversified portfolio. 3. pose performance-evaluation issues due to nonlinear factor exposures. 4. have down-market betas that are typically larger than up-market betas. 5. have symmetrical betas. A) 1 only B) 2 and 5 C) 1, 3, and 4 D) 2, 3, and 4

2) Mutual funds show __________ evidence of serial correlation, and hedge funds show __________ evidence of serial correlation. A) almost no; almost no B) almost no; substantial C) substantial; substantial D) substantial; almost no

The comparison universe is: A) a concept found only in astronomy. B) the set of all mutual funds in the world. C) the set of all mutual funds in the U.S. D) a set of mutual funds with similar risk characteristics to your mutual fund.

The comparison universe is:

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A) a concept found only in astronomy. B) the set of all mutual funds in the world. C) the set of all mutual funds in the U.S. D) a set of mutual funds with similar risk characteristics to your mutual fund.

5) __________ did not develop a popular method for risk-adjusted performance evaluation of mutual funds. A) Eugene Fama B) Michael Jensen C) William Sharpe D) Jack Treynor

6) Henriksson (1984) found that, on average, betas of funds __________ during market advances. A) increased very significantly B) increased slightly C) decreased slightly D) decreased very significantly

Most professionally managed equity funds generally:

A) outperform the S&P 500 Index on both raw and risk-adjusted return measures. B) underperform the S&P 500 Index on both raw and risk-adjusted return measures. C) outperform the S&P 500 Index on raw return measures and underperform the S&P 500 Index on risk-adjusted return measures. D) underperform the S&P 500 Index on raw return measures and outperform the S&P 500 Index on risk-adjusted return measures.

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8) Suppose two portfolios have the same average return and the same standard deviation of returns, but portfolio A has a higher beta than portfolio B. According to the Sharpe measure, the performance of portfolio A: A) is better than the performance of portfolio B. B) is the same as the performance of portfolio B. C) is poorer than the performance of portfolio B. D) cannot be measured as there are no data on the alpha of the portfolio.

9) Suppose two portfolios have the same average return and the same standard deviation of returns, but portfolio A has a higher beta than portfolio B. According to the Treynor measure, the performance of portfolio A: A) is better than the performance of portfolio B. B) is the same as the performance of portfolio B. C) is poorer than the performance of portfolio B. D) cannot be measured as there are no data on the alpha of the portfolio.

10) Morningstar's RAR method: 1. is one of the most widely-used performance measures. 2. indicates poor performance by placing up to 5 darts next to the fund's name. 3. computes fund returns adjusted for loads. 4. computes fund returns adjusted for risk. 5. produces ranking results that are the same as those produced with the Sharpe measure. A) 1, 2, and 4 B) 1, 3, and 4 C) 1, 4, and 5 D) 1, 2, 4, and 5

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11) Suppose you purchase 100 shares of GM stock at the beginning of year 1 and purchase another 100 shares at the end of year 1. You sell all 200 shares at the end of year 2. Assume that the price of GM stock is $50 at the beginning of year 1, $55 at the end of year 1, and $65 at the end of year 2. Assume no dividends were paid on GM stock. Your dollar-weighted return on the stock will be __________ your time-weighted return on the stock. A) higher than B) the same as C) less than D) exactly proportional to

12) Suppose the risk-free return is 4%. The beta of a managed portfolio is 1.2, the alpha is 1%, and the average return is 14%. Based on Jensen's measure of portfolio performance, you would calculate the return on the market portfolio as: A) 11.50%. B) 14.45%. C) 15.00%. D) 16.20%.

13) Suppose the risk-free return is 3%. The beta of a managed portfolio is 1.75, the alpha is 0%, and the average return is 16%. Based on Jensen's measure of portfolio performance, you would calculate the return on the market portfolio as: A) 12.30%. B) 10.40%. C) 15.11%. D) 16.70%.

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14) Suppose the risk-free return is 6% and the market returns 12%. The alpha of the managed portfolio is 3%, and its average return is 18%. Based on Jensen's measure of portfolio performance, you would calculate the beta on the portfolio as:

A) 1.0 B) 1.2 C) 1.5 D) 2.0

15) 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 period will be: A) greater than the arithmetic average return. B) equal to the arithmetic average return. C) less than the arithmetic average return. D) equal to the market return.

16) Suppose you buy 100 shares of Abolishing Dividend Corporation at the beginning of year 1 for $80. Abolishing Dividend Corporation pays no dividends. The stock price at the end of year 1 is $100, $120 at the end of year 2, and $150 at the end of year 3. The stock price declines to $100 at the end of year 4, and you sell your 100 shares. For the four years, your geometric average return is: A) 0.07%. B) 1.00%. C) 5.74%. D) 9.24%.

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17) You want to evaluate three mutual funds using the information ratio measure for performance evaluation. The risk-free return during the sample period is 6%, and the average return on the market portfolio is 19%. The average returns, residual standard deviations, and betas for the three funds are given below.

Fund A Fund B Fund C

Average Return 20% 21% 23%

Residual Standard Beta Deviation 4.00% 1.25% 1.20%

0.8 1.0 1.2

The fund with the highest information ratio measure is: A) Fund A. B) Fund B. C) Fund C. D) Funds A and B (tied for highest).

18) You want to evaluate three mutual funds using the Sharpe measure for performance evaluation. The risk-free return during the sample period is 6%. The average returns, standard deviations, and betas for the three funds are given below, as are the data for the S&P 500 Index. Average Return Fund A Fund B Fund C S&P 500

24% 12% 22% 18%

Standard Deviation 30% 10% 20% 16%

The fund with the highest Sharpe measure is: A) Fund A. B) Fund B. C) Fund C. D) Funds A and B (tied for highest).

19) You want to evaluate three mutual funds using the Sharpe measure for performance evaluation. The risk-free return during the sample period is 4%. The average returns, standard deviations, and betas for the three funds are given below, as are the data for the S&P 500 Index.

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Fund A Fund B Fund C S&P 500

Average Return 18% 15% 11% 10%

Standard Deviation

Beta

38% 27% 24% 22%

1.6 1.3 1.0 1.0

The fund with the highest Sharpe measure is: A) Fund A. B) Fund B. C) Fund C. D) Funds A and B (tied for highest).

20) You want to evaluate three mutual funds using the Sharpe measure for performance evaluation. The risk-free return during the sample period is 5%. The average returns, standard deviations, and betas for the three funds are given below, as are the data for the S&P 500 Index.

Fund A Fund B Fund C S&P 500

Average Return 23% 20% 19% 18%

Standard Deviation 30% 19% 17% 15%

Beta 1.3 1.2 1.1 1.0

The investment with the highest Sharpe measure is: A) Fund A. B) Fund B. C) Fund C. D) the index.

21) You want to evaluate three mutual funds using the Treynor measure for performance evaluation. The risk-free return during the sample period is 6%. The average returns, standard deviations, and betas for the three funds are given below, in addition to information regarding the S&P 500 Index. Average Return

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Standard Deviation

Beta

Fund A Fund B Fund C S&P 500

13% 19% 25% 18%

10% 20% 30% 16%

0.5 1.0 1.5 1.0

The fund with the highest Treynor measure is: A) Fund A. B) Fund B. C) Fund C. D) Funds A and B (tied for highest).

22) You want to evaluate three mutual funds using the Jensen measure for performance evaluation. The risk-free return during the sample period is 6%, and the average return on the market portfolio is 18%. The average returns, standard deviations, and betas for the three funds are given below.

Fund A Fund B Fund C

Average Return 17.6% 17.5% 17.4%

Standard Deviation Beta 10% 20% 30%

1.2 1.0 0.8

The fund with the highest Jensen measure is: A) Fund A. B) Fund B. C) Fund C. D) Funds A and B (tied for highest).

23) Suppose you purchase one share of the stock of Volatile Engineering Corporation at the beginning of year 1 for $36. At the end of year 1, you receive a $2 dividend and buy one more share for $30. At the end of year 2, you receive total dividends of $4 (i.e., $2 for each share) and sell the shares for $36.45 each. The time-weighted return on your investment is:

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A) −1.75%. B) 4.08%. C) 6.74%. D) 11.46%.

24) Suppose you purchase one share of the stock of Volatile Engineering Corporation at the beginning of year 1 for $36. At the end of year 1, you receive a $2 dividend and buy one more share for $30. At the end of year 2, you receive total dividends of $4 (i.e., $2 for each share) and sell the shares for $36.45 each. The dollar-weighted return on your investment is: A) −1.75%. B) 4.08%. C) 8.53%. D) 12.35%.

25) Suppose you purchase one share of the stock of Cereal Correlation Company at the beginning of year 1 for $50. At the end of year 1, you receive a $1 dividend and buy one more share for $72. At the end of year 2, you receive total dividends of $2 (i.e., $1 for each share) and sell the shares for $67.20 each. The time-weighted return on your investment is: A) 10.06%. B) 8.77%. C) 19.73%. D) 17.60%.

26) Suppose you purchase one share of the stock of Cereal Correlation Company at the beginning of year 1 for $50. At the end of year 1, you receive a $1 dividend and buy one more share for $72. At the end of year 2, you receive total dividends of $2 (i.e., $1 for each share) and sell the shares for $67.20 each. The dollar-weighted return on your investment is:

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A) 10.00%. B) 8.78%. C) 19.71%. D) 20.36%.

27) Suppose you own two stocks, A and B. In year 1, stock A earns a 2% return and stock B earns a 9% return. In year 2, stock A earns an 18% return and stock B earns an 11% return. __________ has the higher arithmetic average return. A) Stock A B) Stock B C) The two stocks have the same arithmetic average return. D) At least three periods are needed to calculate the arithmetic average return.

28) Suppose you own two stocks, A and B. In year 1, stock A earns a 2% return and stock B earns a 9% return. In year 2, stock A earns an 18% return and stock B earns an 11% return. Which stock has the higher geometric average return? A) Stock A B) Stock B C) The two stocks have the same geometric average return. D) At least three periods are needed to calculate the geometric average return.

29) The following data are available relating to the performance of Hayek Stock Fund and the market portfolio: Hayek Average return Standard deviations of returns Beta Residual standard deviation

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20% 44% 1.8 2.0%

Market Portfolio 11% 19% 1.0 0.0% 10

The risk-free return during the sample period was 3%. What is the Sharpe measure of performance evaluation for Hayek Stock Fund? A) 0.013 B) 0.040 C) 0.087 D) 0.386

30) The following data are available relating to the performance of Hayek Stock Fund and the market portfolio: Hayek Average return Standard deviations of returns Beta Residual standard deviation

20% 44% 1.8 2.0%

Market Portfolio 11% 19% 1.0 0.0%

The risk-free return during the sample period was 3%. What is the Treynor measure of performance evaluation for Hayek Stock Fund? A) 0.010 B) 0.048 C) 0.087 D) 0.094

31) The following data are available relating to the performance of Hayek Stock Fund and the market portfolio: Hayek Average return Standard deviations of returns Beta Residual standard deviation

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20% 44% 1.8 2.0%

Market Portfolio 11% 19% 1.0 0.0%

The risk-free return during the sample period was 3%. Calculate the Jensen measure of performance evaluation for Hayek Stock Fund. A) 2.60% B) 4.00% C) 8.67% D) 31.43%

32) The following data are available relating to the performance of Hayek Stock Fund and the market portfolio: Hayek Average return Standard deviations of returns Beta Residual standard deviation

20% 44% 1.8 2.0%

Market Portfolio 11% 19% 1.0 0.0%

The risk-free return during the sample period was 3%. Calculate the information ratio for Hayek Stock Fund. A) 1.53 B) 1.30 C) 2.60 D) 9.51

33) The following data are available relating to the performance of Friedman Stock Fund and the market portfolio: Friedman Average return Standard deviations of returns Beta Residual standard deviation

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16% 26% 1.15 1%

Market Portfolio 12% 22% 1.00 0%

The risk-free return during the sample period was 4%. Calculate Jensen's measure of performance for Friedman Stock Fund. What is Jensen’s measure of performance for the market? A) 1.00%; 0.00% B) 2.80%; 0.00% C) 4.40%; 8.00% D) 50.00%; 8.00%

34) The following data are available relating to the performance of Friedman Stock Fund and the market portfolio: Friedman Average return Standard deviations of returns Beta Residual standard deviation

16% 26% 1.15 1%

Market Portfolio 12% 22% 1.00 0%

The risk-free return during the sample period was 4%. What is the information ratio measure of performance evaluation for Friedman Stock Fund? A) 0.04 B) 2.80 C) 0.15 D) 1.15

35) The following data are available relating to the performance of Friedman Stock Fund and the market portfolio: Friedman Average return Standard deviations of returns Beta Residual standard deviation

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16% 26% 1.15 1%

Market Portfolio 12% 22% 1.00 0%

The risk-free return during the sample period was 4%. Calculate Sharpe's measure of performance for Friedman Stock Fund and the market. A) 0.01; 0.36 B) 0.46; 0.36 C) 0.44; 1.00 D) 0.55; 1.00

36) The following data are available relating to the performance of Friedman Stock Fund and the market portfolio: Friedman Average return Standard deviations of returns Beta Residual standard deviation

16% 26% 1.15 1%

Market Portfolio 12% 22% 1.00 0%

The risk-free return during the sample period was 4%. Calculate Treynor's measure of performance for Friedman Stock Fund and the market. A) 0.10; 0.08 B) 0.07; 0.12 C) 1.75; 1.00 D) 1.15; 0.12

37) The following data are available relating to the performance of Burke Fund and the market portfolio: Burke Average return Standard deviations of returns Beta Residual standard deviation

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18% 30% 1.4 4.0%

Market Portfolio 14% 22% 1.0 0.0%

The risk-free return during the sample period was 6%. If you wanted to evaluate the Burke Fund using the M2 measure, what percent of the adjusted portfolio would need to be invested in T-Bills? A) −36.67% (borrow) B) 36.67% C) 26.67% D) 100.00%

38) The following data are available relating to the performance of Burke Fund and the market portfolio: Burke Average return Standard deviations of returns Beta Residual standard deviation

18% 30% 1.4 4.0%

Market Portfolio 14% 22% 1.0 0.0%

The risk-free return during the sample period was 6%. Calculate the M2 measure for the Burke Fund. A) 4.00% B) 0.40% C) 2.86% D) 0.80%

39) If an investor has a portfolio that has constant proportions in T-bills and the market portfolio, the portfolio's characteristic line will plot as a line with __________. If the investor can time bull markets, the characteristic line will plot as a line with __________.

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A) a positive slope; a negative slope B) a negative slope; a positive slope C) a constant slope; a positive slope D) a negative slope; a constant slope

40) Studies of style analysis have found that __________ of fund returns can be explained by asset allocation alone. A) between 50% and 60% B) less than 10% C) between 40 and 50% D) over 90%

41) The following data are available relating to the performance of Locke Fund and the market portfolio: Locke Average return Standard deviations of returns Beta Residual standard deviation

18% 25% 1.25 2%

Market Portfolio 15% 20% 1.00 0%

The risk-free return during the sample period was 7%. What is the information ratio measure of performance evaluation for Locke Fund? A) 0.01 B) 0.08 C) 0.44 D) 0.50

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42) The following data are available relating to the performance of Locke Fund and the market portfolio: Locke Average return Standard deviations of returns Beta Residual standard deviation

18% 25% 1.25 2%

Market Portfolio 15% 20% 1.00 0%

The risk-free return during the sample period was 7%. Calculate Sharpe's measure of performance for the Locke Fund. A) 0.01 B) 0.08 C) 0.44 D) 0.50

43) The following data are available relating to the performance of Locke Fund and the market portfolio: Locke Average return Standard deviations of returns Beta Residual standard deviation

18% 25% 1.25 2%

Market Portfolio 15% 20% 1.00 0%

The risk-free return during the sample period was 7%. Calculate Treynor's measure of performance for Locke Fund. A) 0.01 B) 0.09 C) 0.44 D) 0.50

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44) The following data are available relating to the performance of Locke Fund and the market portfolio: Locke Average return Standard deviations of returns Beta Residual standard deviation

18% 25% 1.25 2%

Market Portfolio 15% 20% 1.00 0%

The risk-free return during the sample period was 7%. Calculate Jensen's measure of performance for Locke Fund. A) 1.00% B) 1.80% C) 4.00% D) 5.25%

45) The following data are available relating to the performance of Rand Stock Fund and the market portfolio: Rand Average return Standard deviations of returns Beta Residual standard deviation

19% 35% 1.5 3.0%

Market Portfolio 12% 15% 1.0 0.0%

The risk-free return during the sample period was 6%. What is the Sharpe measure of performance evaluation for Rand Stock Fund? A) 0.01 B) 0.04 C) 0.25 D) 0.37

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46) The following data are available relating to the performance of Rand Stock Fund and the market portfolio: Rand Average return Standard deviations of returns Beta Residual standard deviation

19% 35% 1.5 3.0%

Market Portfolio 12% 15% 1.0 0.0%

The risk-free return during the sample period was 6%. What is the Treynor measure of performance evaluation for Rand Stock Fund? A) 0.0133 B) 0.0425 C) 0.0867 D) 0.3143

47) The following data are available relating to the performance of Rand Stock Fund and the market portfolio: Rand Average return Standard deviations of returns Beta Residual standard deviation

19% 35% 1.5 3.0%

Market Portfolio 12% 15% 1.0 0.0%

The risk-free return during the sample period was 6%. Calculate the Jensen measure of performance evaluation for Rand Stock Fund. A) 1.33% B) 4.00% C) 8.25% D) 3.40%

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48) The following data are available relating to the performance of Rand Stock Fund and the market portfolio: Rand Average return Standard deviations of returns Beta Residual standard deviation

Market Portfolio 12% 15% 1.0 0.0%

19% 35% 1.5 3.0%

The risk-free return during the sample period was 6%. Calculate the information ratio for Rand Stock Fund. A) 1.33 B) 4.00 C) 0.33 D) 3.11

49) In a particular year, Rawls Mutual Fund earned a return of 1% by making the following investments in asset classes: Bonds Stocks

Weight

Return

20% 80%

5% 0%

The return on a bogey portfolio was 2%, calculated from the following information. Bonds (Bloomberg Barclays Aggregate Bond Index) Stocks (S&P 500 Index)

Weight

Return

50% 50%

5% −1%

The total abnormal return on the Rawls Fund's managed portfolio was: A) −1.80%. B) −1.00%. C) 0.80%. D) 1.00%.

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50) In a particular year, Rawls Mutual Fund earned a return of 1% by making the following investments in asset classes: Bonds Stocks

Weight

Return

20% 80%

5% 0%

The return on a bogey portfolio was 2%, calculated from the following information. Bonds (Bloomberg Barclays Aggregate Bond Index) Stocks (S&P 500 Index)

Weight

Return

50% 50%

5% −1%

The contribution of asset allocation across markets to the Rawls Fund's total abnormal return was: A) −1.80%. B) −1.00%. C) 0.80%. D) 1.00%.

51) In a particular year, Rawls Mutual Fund earned a return of 1% by making the following investments in asset classes: Bonds Stocks

Weight

Return

20% 80%

5% 0%

The return on a bogey portfolio was 2%, calculated from the following information. Bonds (Bloomberg Barclays Aggregate Bond Index) Stocks (S&P 500 Index)

Weight

Return

50% 50%

5% −1%

The contribution of selection within markets to the Rawls Fund's total abnormal return was: A) −1.80%. B) −1.00%. C) 0.80%. D) 1.00%.

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52) In a particular year, the Taleb Mutual Fund earned a return of 15% by making the following investments in the following asset classes: Bonds Stocks

Weight

Return

10% 90%

6% 16%

The return on a bogey portfolio was 10%, calculated as follows: Bonds (Bloomberg Barclays Aggregate Bond Index) Stocks (S&P 500 Index)

Weight

Return

50% 50%

5% 15%

The total abnormal return on the Taleb managed portfolio was: A) 1%. B) 3%. C) 4%. D) 5%.

53) In a particular year, the Taleb Mutual Fund earned a return of 15% by making the following investments in the following asset classes: Bonds Stocks

Weight

Return

10% 90%

6% 16%

The return on a bogey portfolio was 10%, calculated as follows: Bonds (Bloomberg Barclays Aggregate Bond Index) Stocks (S&P 500 Index)

Weight

Return

50% 50%

5% 15%

The contribution of asset allocation across markets to the total abnormal return was: A) 1%. B) 3%. C) 4%. D) 5%.

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54) In a particular year, the Taleb Mutual Fund earned a return of 15% by making the following investments in the following asset classes: Weight

Return

10% 90%

6% 16%

Bonds Stocks

The return on a bogey portfolio was 10%, calculated as follows: Bonds (Bloomberg Barclays Aggregate Bond Index) Stocks (S&P 500 Index)

Weight

Return

50% 50%

5% 15%

The contribution of selection within markets to total abnormal return was: A) 1%. B) 3%. C) 4%. D) 5%.

55) In measuring the comparative performance of different fund managers, the preferred method of calculating rate of return is: A) internal rate of return. B) arithmetic average. C) dollar weighted. D) time weighted.

56) The __________ measures the reward to volatility trade-off by dividing the average portfolio excess return by the standard deviation of returns.

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A) Sharpe measure B) Treynor measure C) Jensen measure D) Information Ratio

57) A pension fund that begins with $500,000 earns 15% the first year and 10% the second year. At the beginning of the second year, the sponsor contributes another $300,000. The fund withdrawals all of the money at the end of the second year. The dollar-weighted and timeweighted rates of return, respectively, were: A) 11.25% and 12.50%. B) 11.95% and 12.47%. C) 12.50% and 11.95%. D) 12.50% and 12.15%.

58) The Value Line Index is an equally-weighted geometric average of the returns of about 1,700 firms. The value of an index based on the geometric average returns of three stocks where the returns on the three stocks during a given period were 32%, 5%, and −10%, respectively, is: A) 4.35%. B) 7.65%. C) 9.00%. D) 13.04%.

59)

Risk-adjusted mutual fund performance measures have decreased in popularity because:

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A) in nearly efficient markets, it is extremely difficult for portfolio managers to outperform the market. B) the measures usually result in positive performance results for the portfolio managers. C) the high rates of return earned by the mutual funds have made the measures useless. D) measures of risk are poorly defined.

60) The Sharpe, Treynor, and Jensen portfolio performance measures are derived from the CAPM, A) therefore, it does not matter which measure is used to evaluate a portfolio manager. B) however, the Sharpe and Treynor measures use different risk measures. Therefore, the measures vary as to whether or not they are appropriate, depending on the investment scenario. C) therefore, all measure the same attributes. D) therefore, it does not matter which measure is used to evaluate a portfolio manager. However, the Sharpe and Treynor measures use different risk measures, so therefore, the measures vary as to whether or not they are appropriate, depending on the investment scenario.

61)

The Jensen portfolio evaluation measure: A) is a measure of return per unit of risk, as measured by standard deviation. B) is an absolute measure of return in excess of that predicted by the CAPM. C) is a measure of return per unit of risk, as measured by beta. D) is an absolute measure of return in excess of the risk-free rate of return.

62)

The M-squared measure considers:

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A) only the return when evaluating mutual funds. B) the risk-adjusted return when evaluating mutual funds. C) only the total risk when evaluating mutual funds. D) only the market risk when evaluating mutual funds.

63)

The dollar-weighted return on a portfolio is equivalent to: A) the time-weighted return. B) the geometric average return. C) the arithmetic average return. D) the portfolio's internal rate of return.

64) A portfolio manager's ranking within a comparison universe may not provide a good measure of performance because: A) portfolio returns may not be calculated in the same way. B) portfolio durations can vary across managers but modified duration cannot. C) portfolio volatility may not be calculated in the same way. D) portfolio durations can vary across managers and if managers follow a particular style or subgroup, portfolios may not be comparable.

65)

The geometric average rate of return is based on: A) the market's volatility. B) the concept of expected return. C) the standard deviation of returns. D) the principle of compounding.

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66)

The M2 measure was developed by: A) Merton and Miller. B) Miller and Miller. C) Modigliani and Miller. D) Modigliani and Modigliani.

67) Rodney holds a portfolio of risky assets that represents his entire risky investment. To evaluate the performance of Rodney's portfolio, in which order would you complete the steps listed? 1. Compare the Sharpe measure of Rodney's portfolio to the Sharpe measure of the best portfolio. 2. State your conclusions. 3. Assume that past security performance is representative of expected performance. 4. Determine the benchmark portfolio that Rodney would have held if he had chosen a passive strategy. A) 1, 3, 4, 2 B) 3, 4, 1, 2 C) 4, 3, 1, 2 D) 3, 2, 1, 4

68)

The Modigliani M2 measure and the Treynor T2 measure: A) are identical. B) are nearly identical and will rank portfolios the same way. C) are nearly identical, but might rank portfolios differently. D) are somewhat different; M2 can be used to rank portfolios, but T2 cannot.

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69)

To determine whether portfolio performance is statistically significant requires: A) a very long observation period due to the high variance of stock returns. B) a short observation period due to the high variance of stock returns. C) a very long observation period due to the low variance of stock returns. D) a short observation period due to the low variance of stock returns.

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Answer Key Test name: Chap 18_12e_Bodie 1) D 2) B 3) D 4) D 5) A 6) C 7) B 8) B 9) C 10) B 11) A 12) A 13) B 14) C 15) C 16) C 17) B 18) C 19) B 20) D 21) A 22) C 23) C 24) D 25) D 26) B Version 1

27) C 28) B 29) D 30) D 31) A 32) B 33) B 34) B 35) B 36) A 37) C 38) D 39) C 40) D 41) D 42) C 43) B 44) A 45) D 46) C 47) B 48) A 49) B 50) A 51) C 52) D 53) C 54) A 55) D 56) A Version 1

57) B 58) B 59) A 60) B 61) B 62) B 63) D 64) D 65) D 66) D 67) B 68) C 69) A

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CHAPTER 19 1)

Shares of several foreign firms are traded in the U.S. markets in the form of: A) ADRs. B) ECUs. C) single-country funds. D) All of the options are correct.

2) __________ refers to the possibility of expropriation of assets, changes in tax policy, and the possibility of restrictions on foreign exchange transactions. A) Default risk B) Foreign exchange risk C) Market risk D) Political risk

__________ are mutual funds that invest in one country only. A) ADRs B) ECUs C) Single-country funds D) All of the options are correct.

The performance of an internationally-diversified portfolio may be affected by:

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A) country selection. B) currency selection. C) stock selection. D) All of the options are correct.

5) Over the period 2014−2018, most correlations between the U.S. stock index and stockindex portfolios of other countries were: A) negative. B) positive but less than 0.9. C) approximately zero. D) 0.9 or above.

The __________ index is a widely used index of non-U.S. stocks. A) CBOE B) Dow Jones C) EAFE D) All of the options are correct.

7) According to PRS, in 2015 and 2016, which country had the highest composite risk rating on a scale of 0 (most risky) to 100 (least risky)? A) Switzerland B) Canada C) Germany D) U.S.

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Which country is the leader in GDP per capita in 2017? A) Switzerland B) Luxembourg C) Germany D) U.S.

Which country has the largest stock market compared to GDP? A) Japan B) Germany C) Hong Kong D) U.S.

10)

Using local currency returns, the S&P 500 has the highest correlation with: A) Euronext. B) FTSE. C) Nikkei. D) Toronto.

11)

In 2015, the U.S. equity market represented __________ of the world equity market. A) 79.5% B) 60.0% C) 45.5% D) 40.5%

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12) The straightforward generalization of the simple CAPM to international stocks is problematic because: A) inflation-risk perceptions by different investors in different countries will differ as consumption baskets differ. B) investors in different countries view exchange-rate risk from the perspective of different domestic currencies. C) taxes, transaction costs, and capital barriers across countries make it difficult for investors to hold a world-index portfolio. D) All of the options are correct.

13) The yield on a 1-year bill in the U.K. is 8%, and the present exchange rate is 1 pound = U.S. $1.60. If you expect the exchange rate to be 1 pound = U.S. $1.50 a year from now, the return a U.S. investor can expect to earn by investing in U.K. bills is: A) −6.70%. B) 0.00%. C) 8.25%. D) 1.25%.

14) Suppose the 1-year risk-free rate of return in the U.S. is 5%. The current exchange rate is 1 pound = U.S. $1.60. The 1-year forward rate is 1 pound = $1.57. What is the minimum yield on a 1-year risk-free security in Britain that would induce a U.S. investor to invest in the British security? A) 2.44% B) 3.03% C) 7.01% D) 7.62%

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15) The interest rate on a 1-year Canadian security is 8%. The current exchange rate is C$ = US $0.78. The 1-year forward rate is C$ = US $0.76. The return (denominated in U.S. $) that a U.S. investor can earn by investing in the Canadian security is: A) 3.59%. B) 8.00%. C) 5.23%. D) 10.84%.

16) Suppose the 1-year risk-free rate of return in the U.S. is 4%, and the 1-year risk-free rate of return in Britain is 7%. The current exchange rate is 1 pound = U.S. $1.65. A 1-year future exchange rate of __________ for the pound would make a U.S. investor indifferent between investing in the U.S. security and investing in the British security. A) $1.60 B) $2.04 C) $1.75 D) $2.34

17) The present exchange rate is C$ = U.S. $0.78. The 1-year future rate is C$ = U.S. $0.76. The yield on a 1-year U.S. bill is 4%. A yield of __________ on a 1-year Canadian bill will make an investor indifferent between investing in the U.S. bill and the Canadian bill. A) 2.40% B) 1.33% C) 4.00% D) 6.74%

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18) Assume there is a fixed exchange rate between the Canadian and U.S. dollar. The expected return and standard deviation of return on the U.S. stock market are 18% and 15%, respectively. The expected return and standard deviation on the Canadian stock market are 13% and 20%, respectively. The covariance of returns between the U.S. and Canadian stock markets is 1.5%. If you invested 50% of your money in the Canadian stock market and 50% in the U.S. stock market, the expected return on your portfolio would be: A) 12.00%. B) 12.50%. C) 13.00%. D) 15.50%.

19) Assume there is a fixed exchange rate between the Canadian and U.S. dollar. The expected return and standard deviation of return on the U.S. stock market are 18% and 15%, respectively. The expected return and standard deviation on the Canadian stock market are 13% and 20%, respectively. The covariance of returns between the U.S. and Canadian stock markets is 1.5%. If you invested 50% of your money in the Canadian stock market and 50% in the U.S. stock market, the standard deviation of return of your portfolio would be: A) 12.53%. B) 15.21%. C) 17.50%. D) 18.75%.

20) The major concern that has been raised with respect to the weighting of countries within the EAFE index is:

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A) currency volatilities are not considered in the weighting. B) cross-correlations are not considered in the weighting. C) inflation is not represented in the weighting. D) the weights are not proportional to the asset bases of the respective countries.

21) You are a U.S. investor who purchased British securities for 2,000 pounds, one year ago when the British pound cost $1.50. No dividends were paid on the British securities in the past year. Your total return based on U.S. dollars was __________ if the value of the securities is now 2,400 pounds and the pound is worth $1.60. A) 16.75% B) 20.05% C) 28.00% D) 40.43%

22)

U.S. investors:

A) can trade derivative securities based on prices in foreign security markets. B) cannot trade foreign derivative securities. C) can trade options and futures on the Nikkei stock index of 225 stocks traded on the Tokyo stock exchange and on FTSE (Financial Times Share Exchange) indexes of U.K. and European stocks. D) both A and C are correct.

23)

Exchange-rate risk:

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A) results from changes in the exchange rates between the currency of the investor and the country in which the investment is made. B) can be hedged by futures contracts but not forward contracts in foreign exchange. C) cannot be eliminated. D) can be hedged by forward contracts but not futures contracts in foreign exchange.

24)

International investing: A) should be measured against a local passive benchmark, such as the S&P 500. B) can be measured against a widely-used index of non-U.S. stocks, the EAFE Index. C) cannot be measured against international indexes. D) is illegal except for accredited investors.

25)

Investors looking for effective international diversification should: A) invest about 20% of their money in foreign stocks. B) short the EAFE and go long on the S&P500. C) speculate in currency markets. D) None of the options are correct.

26) The manager of Quantitative International Fund uses EAFE as a benchmark. Last year's performance for the fund and the benchmark were as follows: EAFE's EAFE’s Weight Return Europe 0.30 10% Australia 0.10 5% Far East 0.60 15%

Currency Selection Manager’s Manager's E1 / E0 −1 Weight Return 10% 0.25 9% −10% 0.25 8% 30% 0.50 16%

Calculate Quantitative's currency selection return contribution.

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A) 20.00% B) −5.00% C) 15.00% D) 5.00%

27) The manager of Quantitative International Fund uses EAFE as a benchmark. Last year's performance for the fund and the benchmark were as follows: EAFE's EAFE’s Weight Return Europe 0.30 10% Australia 0.10 5% Far East 0.60 15%

Currency Selection Manager’s Manager's E1 / E0 −1 Weight Return 10% 0.25 9% −10% 0.25 8% 30% 0.50 16%

Calculate Quantitative's country selection return contribution. A) 12.50% B) −12.50% C) 11.25% D) −1.25%

28) The manager of Quantitative International Fund uses EAFE as a benchmark. Last year's performance for the fund and the benchmark were as follows: EAFE's EAFE’s Weight Return Europe 0.30 10% Australia 0.10 5% Far East 0.60 15%

Currency Selection Manager’s Manager's E1 / E0 −1 Weight Return 10% 0.25 9% −10% 0.25 8% 30% 0.50 16%

Calculate Quantitative's stock selection return contribution.

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A) 1.00% B) −1.00% C) 3.00% D) 0.25%

29)

Using the S&P 500 portfolio as a proxy of the market portfolio:

A) is appropriate because U.S. securities represent more than 60% of world equities. B) is appropriate because most U.S. investors are primarily interested in U.S. securities. C) is appropriate because most U.S. and non-U.S. investors are primarily interested in U.S. securities. D) is inappropriate because U.S. securities make up less than 41% of world equities.

30)

The average country equity market share is: A) less than 2%. B) between 3% and 4%. C) between 5% and 7%. D) between 7% and 8%.

31)

When an investor adds international stocks to his U.S. stock portfolio, A) it will raise his risk relative to the risk he would face just holding U.S. stocks. B) he can reduce the risk of his portfolio. C) he will increase his expected return but must also take on more risk. D) it will have no impact on either the risk or the return of his portfolio.

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32)

Using local currency returns, the S&P 500 has the lowest correlation with: A) Euronext. B) FTSE. C) Nikkei. D) Shanghai.

33)

"ADRs" stands for __________, and "WEBS" stands for __________. A) additional dollar returns; weekly equity and bond survey B) additional daily returns; world equity and bond survey C) American dollar returns; world equity and bond statistics D) American depository receipts; world equity benchmark shares

34)

WEBS portfolios: A) are passively managed. B) are shares that can be sold by investors. C) are free from brokerage commissions. D) are passively managed and are shares that can be sold by investors.

35)

The EAFE is: A) the East Asia Foreign Equity index. B) the Economic Advisor's Foreign Estimator index. C) the European and Asian Foreign Equity index. D) the European, Australian, Far East index.

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36)

Home bias refers to: A) the tendency to purchase regional stocks. B) the tendency to believe that your home currency is stronger than other countries. C) the tendency to give preferential treatment to people from your home country. D) the tendency to overweight investments in your home country.

37) The possibility of experiencing a drop in revenue or an increase in cost in an international transaction due to a change in foreign exchange rates is called: A) foreign exchange risk. B) political risk. C) translation exposure. D) hedging risk.

38)

As exchange rates change, they: A) change the relative purchasing power between countries. B) can affect imports and exports between those two countries. C) will affect the flow of funds between the countries. D) All of the options are correct.

39)

When Country A's currency strengthens against Country B's, citizens of Country A will:

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A) pay less to buy Country B's products. B) pay more to buy Country B's products. C) pay more to buy domestically-produced products. D) not be affected by the change in their currency's value.

40) The interplay between interest rate differentials and exchange rates, such that each adjusts until the foreign exchange market and the money market reach equilibrium, is called the: A) Purchasing Power Parity Theory. B) Balance of Payments. C) Interest Rate Parity Theory. D) None of the options are correct.

41) The yield on a 1-year bill in the U.K. is 6%, and the present exchange rate is 1 pound = U.S. $1.65. If you expect the exchange rate to be 1 pound = U.S. $1.55 a year from now, the return a U.S. investor can expect to earn by investing in U.K. bills is: A) −6.75%. B) 0.16%. C) 8.14%. D) −0.42%.

42) The yield on a 1-year bill in the Euro is 6%, and the present exchange rate is 1 Euro = U.S. $1.19. If you expect the exchange rate to be 1 Euro = U.S. $1.14 a year from now, the return a U.S. investor can expect to earn by investing in Euro bills is:

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A) 1.55%. B) 0.55%. C) 8.55%. D) −0.55%.

43) Suppose the 1-year risk-free rate of return in the U.S. is 2% and the 1-year risk-free rate of return in Mexico is 8%. The current exchange rate is 1 peso = U.S. $.051. A 1-year future exchange rate of __________ for the peso would make a U.S. investor indifferent between investing in the U.S. security and investing in the Mexican security. A) $0.51 B) $0.41 C) $0.48 D) $0.54

44) You are a U.S. investor who purchased 234 shares of British securities for £10 per share one year ago when the British pound cost $1.52. Dividends of £1 were paid on the British securities at the end of the year. Your total return based on U.S. dollars was __________ if the value of the securities is now 2,457 pounds and the pound is worth $1.61. A) 5.92% B) 20.00% C) 21.81% D) 10.40%

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45) Assume there is a fixed exchange rate between the Euro and U.S. dollar. The expected return and standard deviation of return on the U.S. stock market are 16% and 13%, respectively. The expected return and standard deviation on the DAX stock market are 11% and 18%, respectively. The covariance of returns between the U.S. and German stock market is 1.5%. If you invested 130% of your money in the German (DAX) stock market (by shorting the U.S. stock market), the expected return on your portfolio would be: A) 12.05%. B) 16.45%. C) 27.00%. D) 24.10%.

46) Assume there is a fixed exchange rate between the Canadian and U.S. dollar. The expected return and standard deviation of return on the U.S. stock market are 18% and 15%, respectively. The expected return and standard deviation on the Canadian stock market are 13% and 20%, respectively. The covariance of returns between the U.S. and Canadian stock markets is 1.5%. If you invested 125% of your money in the Canadian stock market (by shorting the U.S. market), the expected standard deviation on your portfolio would be: A) 18.65%. B) 23.35%. C) 24.96%. D) 26.50%.

47) Assume there is a fixed exchange rate between the Swiss Franc and U.S. dollar. The expected return and standard deviation of return on the U.S. stock market are 14% and 11%, respectively. The expected return and standard deviation on the Swiss Stock Exchange (SIX) are 9% and 14%, respectively. The covariance of returns between the U.S. and the SIXis 1.75%. If you invested 35% of your money in the Swiss (SIX) stock market and 65% in the U.S. stock market, the expected return on your portfolio would be:

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A) 12.25%. B) 12.50%. C) 13.00%. D) 13.50%.

48) The present exchange rate is 1 Nigerian Niara (NGN) = U.S. $0.002896. The 1-year future rate is NGN = U.S. $0.002774. The yield on a 1-year U.S. bill is 3.2%. A yield of __________ on a 1-year Nigerian bill will make an investor indifferent between investing in the U.S. bill and the Nigerian bill (NTB). A) 2.94% B) 1.73% C) 6.04% D) 7.74%

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Answer Key Test name: Chap 19_12e_Bodie 1) A 2) D 3) C 4) D 5) B 6) C 7) A 8) B 9) C 10) D 11) D 12) D 13) D 14) C 15) C 16) A 17) D 18) D 19) B 20) D 21) C 22) D 23) A 24) B 25) D 26) B Version 1

27) D 28) A 29) D 30) A 31) B 32) D 33) D 34) D 35) D 36) D 37) A 38) D 39) A 40) C 41) D 42) A 43) C 44) C 45) D 46) B 47) A 48) D

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CHAPTER 20 1) Which of the following are characteristics of a hedge fund? 1. Pooling of assets 2. Strict regulatory oversight by the SEC 3. Investing in equities, debt instruments, and derivative instruments 4. Professional management of assets A) 1 and 2 only B) 2 and 3 only C) 3 and 4 only D) 1, 3, and 4 only

Hedge funds are typically set up as __________. A) limited liability partnerships B) corporations C) REITs D) mutual funds

3) A(n) __________ hedge fund attempts to profit from situations such as mergers, acquisitions, restructuring, bankruptcy, or reorganization. A) multistrategy B) managed futures C) dedicated short bias D) event-driven

4) __________ are private partnerships of a small number of wealthy investors, are often subject to lock-up periods, and are allowed to pursue a wide range of investment activities.

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A) Hedge funds B) Closed-end funds C) REITs D) Mutual funds

5) Which of the following typically employ(s) significant amounts of leverage? 1. Hedge funds 2. Equity mutual funds 3. Money market funds 4. Income mutual funds A) 1 only B) 1 and 2 only C) 3 and 4 only D) 1, 2, and 3 only

As of 2019, hedge funds had approximately __________ under management. A) $0.5 trillion B) $1 trillion C) $3 trillion D) $3 billion

7) A restriction under which investors cannot withdraw their funds for as long as several months or years is called __________. A) transparency B) a lock-up period C) a back-end load D) convertible arbitrage

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Hedge fund managers are compensated by __________.

A) deducting management fees from fund assets and receiving incentive bonuses for beating index benchmarks B) deducting a percentage of any gains in asset value C) selling shares in the trust at a premium to the cost of acquiring the underlying assets D) charging portfolio turnover fees

Management fees for hedge funds typically range between __________ and __________. A) 0.5%; 1.5% B) 1%; 2% C) 2%; 5% D) 5%; 8%

10) Hedge funds can invest in various investment options that are not generally available to mutual funds. These include: 1. Futures and options 2. Merger arbitrage 3. Currency contracts 4. Companies undergoing Chapter 11 restructuring and reorganization A) 1 only B) 1 and 2 only C) 1, 2, and 3 only D) 1, 2, 3, and 4

11) A typical traditional initial investment in a hedge fund generally is in the range between __________ and __________.

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A) $1,000; $5,000 B) $5,000; $25,000 C) $25,000; $250,000 D) $500,000; $1,000,000

12) The difference between market-neutral and long-short hedges is that market-neutral hedge funds __________. A) establish long and short positions on both sides of the market to eliminate market risk and to benefit from security asset mispricing whereas long-short hedges establish positions only on one side of the market B) allocate money to several other funds while long-short funds do not C) invest in relatively stable proportions of stocks and bonds while the proportions may vary dramatically for long-short funds D) invest only in equities and bonds while long-short funds use only derivatives

13)

Convertible arbitrage hedge funds __________. A) attempt to profit from mispriced interest-sensitive securities B) hold long positions in convertible bonds and offsetting short positions in stocks C) establish long and short positions in global capital markets D) use derivative products to hedge their short positions in convertible bonds

14) Assuming positive basis and negligible borrowing cost, which of the following transactions could yield positive arbitrage profits if pursued by a hedge fund?

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A) Buy gold in the spot market, and sell the futures contract. B) Buy the futures contract, and sell the gold spot and invest the money earned. C) Buy gold spot with borrowed money, and buy the futures contract. D) Buy the futures contract, and buy the gold spot using borrowed money.

15)

An example of a neutral pure play is __________. A) pairs trading B) statistical arbitrage C) convergence arbitrage D) directional strategy

16) You believe that the spread between the September S&P 500 future and the S&P 500 Index is too large and will soon correct. To take advantage of this mispricing, a hedge fund should __________. A) buy all the stocks in the S&P 500 and write put options on the S&P 500 Index B) sell all the stocks in the S&P 500 and buy call options on the S&P 500 Index C) sell S&P 500 Index futures and buy all the stocks in the S&P 500 D) sell short all the stocks in the S&P 500 and buy S&P 500 Index futures

17) You believe that the spread between the September S&P 500 future and the S&P 500 Index is too large and will soon correct. This is an example of __________. A) pairs trading B) convergence play C) statistical arbitrage D) a long-short equity hedge

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18) A 1-year oil futures contract is selling for $74.50. Spot oil prices are $68, and the 1-year risk-free rate is 3.25%. The 1-year oil futures price should be equal to __________. A) $68.00 B) $70.21 C) $71.25 D) $74.88

19) A 1-year oil futures contract is selling for $74.50. Spot oil prices are $68, and the 1-year risk-free rate is 3.25%. The arbitrage profit implied by these prices is __________. A) $6.50 B) $5.44 C) $4.29 D) $3.25

20) A 1-year oil futures contract is selling for $74.50. Spot oil prices are $68, and the 1-year risk-free rate is 3.25%. Based on the above data, which of the following sets of transactions will yield positive riskless arbitrage profits? A) Buy oil in the spot market with borrowed money, and sell the futures contract. B) Buy the futures contract, and sell the oil spot and invest the money earned. C) Buy the oil spot with borrowed money, and buy the futures contract. D) Buy the futures contract, and buy the oil spot using borrowed money.

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21) Assume that you have invested $500,000 to purchase shares in a hedge fund reporting $800 million in assets, $100 million in liabilities, and 70 million shares outstanding. Your initial lockout period is 3 years. How many shares did you purchase? A) 13,333 B) 25,000 C) 50,000 D) 66,000

22) Assume that you have invested $500,000 to purchase shares in a hedge fund reporting $800 million in assets, $100 million in liabilities, and 70 million shares outstanding. Your initial lockout period is 3 years. If the share price after 3 years increases to $15.28, what is the value of your investment? A) $553,600 B) $625,000 C) $733,800 D) $764,000

23) Assume that you have invested $500,000 to purchase shares in a hedge fund reporting $800 million in assets, $100 million in liabilities, and 70 million shares outstanding. Your initial lockout period is 3 years. What is your annualized return over the 3-year holding period?

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A) 14.45% B) 15.18% C) 16.00% D) 17.73%

24)

Which of the following are not managed investment companies? A) hedge funds B) closed-end funds C) open-end funds D) All are managed investment companies.

25) You manage a $15 million hedge fund portfolio with beta = 1.2 and alpha = 2% per quarter. Assume the risk-free rate is 2% per quarter and the current value of the S&P 500 Index is 3,000. You want to exploit the positive alpha, but you are afraid that the stock market may fall and you want to hedge your portfolio by selling 3-month S&P 500 future contracts. The S&P contract multiplier is $250. How many S&P 500 contracts do you need to sell to hedge your portfolio? A) 24 B) 36 C) 54 D) 64

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26) You manage a $15 million hedge fund portfolio with beta = 1.2 and alpha = 2% per quarter. Assume the risk-free rate is 2% per quarter and the current value of the S&P 500 Index is 3,000. You want to exploit the positive alpha, but you are afraid that the stock market may fall and you want to hedge your portfolio by selling 3-month S&P 500 future contracts. The S&P contract multiplier is $250. When you fully hedge your stock portfolio with futures contracts, the value of your portfolio beta is __________. A) 0 B) 1 C) 1.2 D) The answer cannot be determined from the information given.

27) You manage a $15 million hedge fund portfolio with beta = 1.2 and alpha = 2% per quarter. Assume the risk-free rate is 2% per quarter and the current value of the S&P 500 Index is 3,000. You want to exploit the positive alpha, but you are afraid that the stock market may fall and you want to hedge your portfolio by selling 3-month S&P 500 future contracts. The S&P contract multiplier is $250. What is the expected quarterly return on the hedged portfolio? A) 0% B) 2% C) 3% D) 4%

28) You manage a $15 million hedge fund portfolio with beta = 1.2 and alpha = 2% per quarter. Assume the risk-free rate is 2% per quarter and the current value of the S&P 500 Index is 1,200. You want to exploit the positive alpha, but you are afraid that the stock market may fall and you want to hedge your portfolio by selling 3-month S&P 500 future contracts. The S&P contract multiplier is $250. How much is the portfolio expected to be worth 3 months from now? Version 1

A) $15,000,000 B) $15,300,000 C) $15,600,000 D) $16,000,000

29) You manage a $15 million hedge fund portfolio with beta = 1.2 and alpha = 2% per quarter. Assume the risk-free rate is 2% per quarter and the current value of the S&P 500 Index is 1,200. You want to exploit the positive alpha, but you are afraid that the stock market may fall and you want to hedge your portfolio by selling 3-month S&P 500 future contracts. The S&P contract multiplier is $250. Hedging this portfolio by selling S&P 500 futures contracts is an example of __________. A) statistical arbitrage B) pure play C) a short equity hedge D) fixed-income arbitrage

30) Hedge funds that change strategies and types of securities invested and also vary the proportions of assets invested in particular market sectors according to the fund manager's outlook are called __________. A) asset allocation funds B) multistrategy funds C) event-driven funds D) market-neutral funds

31) When a short-selling hedge fund advertises in a prospectus that it is a 120/20 fund, this means that the fund may sell short up to __________ for every $100 in net assets and increase the long position to __________ for every $100 in net assets.

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A) $120; $20 B) $20; $120 C) $20; $20 D) $120; $120

32) The collapse of the Long Term Capital Management hedge fund in 1998 was a case of an extremely unlikely statistical event called __________. A) statistical arbitrage B) an unhedged play C) a tail event D) a liquidity trap

33) Which of the following investment styles could be the best description of the Long Term Capital Management market-neutral strategies? A) convergence arbitrage B) statistical arbitrage C) pairs trading D) convertible arbitrage

34) Consider a hedge fund with $250 million in assets at the start of the year. If the gross return on assets is 18% and the total expense ratio is 2.5% of the year-end value, what is the rate of return on the fund? A) 15.05% B) 15.50% C) 17.25% D) 18.75%

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35) Consider a hedge fund with $200 million at the start of the year. The benchmark S&P 500 Index was up 16.5% during the same period. The gross return on assets is 21%, and the expense ratio is 2%. For each 1% above the benchmark return, the fund managers receive a .1% incentive bonus. What was the management cost for the year? A) $4,877,000 B) $4,900,000 C) $5,929,000 D) $6,446,000

36) Consider a hedge fund with $200 million at the start of the year. The benchmark S&P 500 Index was up 16.5% during the same period. The gross return on assets is 21%, and the expense ratio is 2%. For each 1% above the benchmark return, the fund managers receive a .1% incentive bonus. What was the annual return on this fund? A) 16.52% B) 18.04% C) 18.85% D) 21.11%

37) Consider a hedge fund with $400 million in assets, $60 million in debt, and 16 million shares at the start of the year and with $500 million in assets, $40 million in debt, and 20 million shares at the end of the year. During the year, investors have received an income dividend of $.75 per share. Assuming that the total expense ratio is 2.75%, what is the rate of return on the fund?

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A) 6.45% B) 8.52% C) 8.95% D) 9.46%

38) Market-neutral hedge funds may experience considerable volatility. The source of volatile returns is the use of __________. A) pure play B) leverage C) directional bests D) net short positions

39) A hedge fund has $150 million in assets at the beginning of the year and 10 million shares outstanding throughout the year. Throughout the year assets grow at 12%. The fund charges a 3% management fee on the assets. The fee is imposed on year-end asset values. What is the end-of-year NAV for the fund? A) $15.00 B) $15.60 C) $16.30 D) $17.55

40) You pay $216,000 to the Capital Hedge Fund, which has a price of $18 per share at the beginning of the year. The fund deducted a front-end commission of 4%. The securities in the fund increased in value by 15% during the year. The fund's expense ratio is 2% and is deducted from year-end asset values. What is your rate of return on the fund if you sell your shares at the end of the year?

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A) 5.35% B) 7.23% C) 8.19% D) 10.21%

41) A hedge fund owns a $15 million bond portfolio with a modified duration of 11 years and needs to hedge risk, but T-bond futures are available only with a modified duration of the deliverable instrument of 10 years. The futures are priced at $105,000. The proper hedge ratio to use is __________. A) 143 B) 157 C) 196 D) 218

42) Unlike market-neutral hedge funds, which have betas near __________, directional long funds exhibit highly __________ betas. A) zero; positive B) positive; negative C) positive; zero D) negative; positive

43) Portfolio A has a beta of 0.2 and an expected return of 14%. Portfolio B has a beta of 0.5 and an expected return of 16%. The risk-free rate of return is 10%. If you manage a longshort equity fund and want to take advantage of an arbitrage opportunity, you should take a short position in portfolio __________ and a long position in portfolio __________.

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A) A; A B) A; B C) B; A D) B; B

44) Research by Aragon (2007) indicates that lock-up restrictions tend to hold __________ portfolios. A) less liquid B) more liquid C) event-driven D) shorter-maturity

45) Higher returns of equity hedge funds as compared to the S&P 500 Index reflect positive compensation for __________ risk. A) market B) liquidity C) systematic D) interest rate

46) Portfolio A has a beta of 1.3 and an expected return of 21%. Portfolio B has a beta of 0.7 and an expected return of 17%. The risk-free rate of return is 9%. If a hedge fund manager wants to take advantage of an arbitrage opportunity, she should take a short position in portfolio __________ and a long position in portfolio __________.

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A) A; A B) A; B C) B; A D) B; B

47) In a 2011 study, Agarwal, Daniel, and Naik documented that hedge funds tend to report average returns in __________ that are __________ than their average returns in other months. A) September; lower B) January; higher C) January; lower D) December; higher

48) To attract new clients, hedge funds often include past returns of funds only if they were successful. This is called __________. A) long-short bias B) survivorship bias C) backfill bias D) incentive bias

49) Some argue that abnormally high returns of hedge funds are tainted by __________, which arises when unsuccessful funds cease operations, leaving only successful ones. A) reporting bias B) survivorship bias C) backfill bias D) incentive bias

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50) Malkiel and Saha (2005) estimate that the survivorship bias for hedge funds equals 4.4%, which is __________ the survivorship bias for mutual funds. A) about the same as B) much lower than C) much higher than D) only slightly lower than

51) Hedge fund managers receive incentive bonuses when they increase portfolio assets beyond a stipulated benchmark but lose nothing when they fail to perform. This is equivalent to __________. A) writing a call option B) receiving a free call option C) writing a put option D) receiving a free put option

52) A typical hedge fund incentive bonus is usually equal to __________ of investment profits beyond a predetermined benchmark index. A) 5% B) 10% C) 20% D) 25%

53) The fastest-growing category of hedge funds is feeder funds. These funds invest in __________.

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A) other hedge funds B) convertible securities and preferred stock C) equities and bonds D) managed futures and options

54) A high-water mark is a limiting factor of hedge fund manager compensation. This means that managers can't charge incentive fees __________. A) when a fund stays flat B) when a fund falls and does not recover to its previous high value C) when a fund falls by 10% or more D) None of the choices are correct. (Managers can always charge incentive fees.)

55) If the risk-free interest rate is rf and equals the fund's benchmark, the portfolio's net asset value is S0, and the hedge fund manager incentive fee is 20% of profit beyond that, the incentive fee is equivalent to receiving __________ call(s) with exercise price __________. A) 0.2; S0 B) 1; S0 × (1 + rf) C) 1.2; S0 D) 0.2; S0 × (1 + rf)

56) Assume the risk-free interest rate is 10% and is equal to the fund's benchmark, the portfolio's net asset value is $100, and the fund's standard deviation is 20%. Also assume a time horizon of 1 year. What is the exercise price on the incentive fee?

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A) $100 B) $105 C) $110 D) $115

57) Assume the risk-free interest rate is 10% and is equal to the fund's benchmark, the portfolio's net asset value is $100, and the fund's standard deviation is 20%. Also assume a time horizon of 1 year. What is the Black-Scholes value of the call option on the management incentive fee? A) $6.67 B) $8.20 C) $9.75 D) $10.25

58) Assume the risk-free interest rate is 10% and is equal to the fund's benchmark, the portfolio's net asset value is $100, and the fund's standard deviation is 20%. Also assume a time horizon of 1 year. Assuming a 2% management fee and a 20% incentive bonus, what is the expected management compensation per share if the fund's net asset value exceeds the stated benchmark? A) $4.24 B) $4.94 C) $3.84 D) $2.20

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59) You manage a hedge fund with $400 million in assets. Your fee structure provides for a 1% annual management fee (from beginning of year assets) with a 20% incentive on returns over an 8% benchmark. If the fund value is $445 million at the end of the year, what is your fee? A) $2,600,000 B) $4,000,000 C) $6,600,000 D) $8,400,000

60) You manage a hedge fund with $300 million in assets. Your fee structure provides for a 1% annual management fee with a 20% incentive on returns over a 12% benchmark. If the fund value, before fees, is $345 million at the end of the year, what is the net return to the investors? A) 13.33% B) 13.40% C) 14.00% D) 14.42%

61) If a long-short hedge fund were banned by government regulation from short selling, which statement would no longer be true? A) they are not market neutral. B) they may establish a concentrated focus on economic regions. C) they are equity oriented. D) derivatives may be used.

62)

A market neutral hedge fund is likely to have __________. A) various derivative strategies designed to create stability B) a low beta compared to other equity only investments C) a beta well above 1.0 compared to other equity investments D) a beta near 1.0

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63) What strategy might a hedge fund use to take advantage of positive alpha in a long equity position? A) short sell the security with positive alpha B) leverage and use the proceeds to go long in the alpha security C) create a neutral position and gain from the alpha value increase D) reduce reliance on margin

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Answer Key Test name: Chap 20_12e_Bodie 1) D 2) A 3) D 4) A 5) A 6) C 7) B 8) A 9) B 10) D 11) D 12) A 13) B 14) A 15) C 16) C 17) B 18) B 19) C 20) A 21) C 22) D 23) B 24) D 25) A 26) A Version 1

27) D 28) C 29) B 30) B 31) B 32) C 33) A 34) A 35) C 36) B 37) B 38) B 39) C 40) C 41) B 42) A 43) C 44) A 45) B 46) B 47) D 48) C 49) B 50) C 51) B 52) C 53) A 54) B 55) D 56) C Version 1

57) B 58) C 59) C 60) B 61) A 62) B 63) B

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CHAPTER 21 1) Using the exact formula, what is the real rate of return on an investment that earns 12% nominally if there is 3% inflation that year (ignore taxes)? A) 9.00% B) 9.27% C) 8.74% D) 12.00%

2) Inflation has an adverse effect on your savings because: 1.It erodes the purchasing power of the dollars you have saved. 2.It increases the real rate of return on the dollars you save. 3.Unless sheltered, it increases the taxes owed on investment income.

A) 1 only B) 2 and 3 only C) 1 and 3 only D) 1, 2, and 3

3) If you want to tilt your savings toward later years, you might be well advised to purchase which of the following types of readily available insurance? A) Career failure insurance B) Disability insurance C) Unemployment insurance D) Moral hazard insurance

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4) Which one of the following represents local consumption smoothing? 1.Saving during your working years for retirement 2.Borrowing money to buy a car 3.Putting off a vacation for a year until you can afford it

A) 1 only B) 2 and 3 only C) 1 and 2 only D) 1, 2, and 3

5) In a private defined benefit pension plan the __________ bears the investment risk, and in a private defined contribution plan the __________ bears the investment risk. A) plan sponsor; employee B) employee; plan sponsor C) U.S. government; plan sponsor D) plan sponsor; U.S. government

6) A decrease of 1% in both your tax exemption and your income tax rate would, on net, __________. A) make you better off B) make you worse off C) make you neither better off nor worse off D) make you either better or worse off depending on your age

Tax shelters __________.

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A) postpone payment of tax liabilities B) decrease investment risk C) increase the pretax rate of return earned D) benefit the government more than the investor

The tax effect of a traditional retirement plan is to __________ taxes. A) evade B) postpone C) erase D) avoid

The U.S. income tax code is __________. A) regressive B) progressive C) flat D) peaked

10)

Contributions to a __________ are not tax deductible. A) traditional retirement plan B) Roth retirement plan C) 401k plan D) 403b plan

11)

No taxes are paid on withdrawals made during retirement from a __________.

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A) traditional retirement plan B) Roth retirement plan C) 401k D) 403b plan

12) You earn 6% on your corporate bond portfolio this year, and you are in a 24% federal tax bracket and an 9% state tax bracket. Your after-tax return is __________. (Assume that federal taxes are not deductible against state taxes and vice versa). A) 4.10% B) 3.84% C) 4.02% D) 3.12%

13)

Social Security is __________. A) a pension plan only B) an insurance plan only C) a combination of a pension and insurance plan D) an involuntary intergenerational transfer

14)

The Social Security system __________. A) is financed in a regressive way B) is regressive in the way it allocates benefits C) is progressive in the way it is financed D) is fully funded for the foreseeable future

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15)

The use of a Roth IRA versus a traditional IRA will allow you to __________. A) retire with less money in your savings account B) select more sophisticated investments C) avoid relying as much upon social security D) protect your spouse from a decline in income upon death

16) A person in poor health trying to buy supplemental health insurance is an example of __________. A) moral hazard B) adverse selection C) a Texas hedge D) actuarial error

17) A person in excellent health with a long life expectancy chooses a lifetime annuity. This is an example of __________. A) moral hazard B) adverse selection C) a Texas hedge D) actuarial error

18)

It would be costly to provide wage insurance because of the __________ problem.

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A) moral hazard B) adverse selection C) Texas hedge D) actuarial error

19) You earned 8% on your corporate bond portfolio this year, and you are in a 15% federal tax bracket. If over your holding period inflation was 3%, your real after-tax rate of return was __________. A) 6.87% B) 3.69% C) 4.91% D) 4.25%

20) As you get older, you decide to reduce the risk level of your retirement portfolio because your portfolio is nearing your minimum acceptable level. As the portfolio does better, you reallocate funds into higher-risk categories. You are practicing a form of __________. A) manipulating tax shelters B) involuntary intergenerational transfers C) excessive savings D) dynamic hedging

21) Tilting your retirement savings plan toward your later years should only be done by investors __________.

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A) who are sufficiently risk averse B) who are more tolerant of risk C) who are unsure if their income growth will keep up with inflation D) who want to retire early

22) Employers commonly match at least some portion of employee contributions to: 1.401k plans 2.403b plans 3.Self-directed retirement plans

A) 1 only B) 1 and 2 only C) 2 only D) 1, 2, and 3

23) A saver who expects to have a higher tax rate after retirement would prefer a __________. A) Roth retirement plan B) traditional retirement plan C) 401k plan D) 403b plan

24) A retirement plan that offers a tax shelter will defer __________ taxes on contributions and investment earnings.

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A) income B) sales C) property D) estate

25) The practice of trying to buy life insurance upon diagnosis of a terminal illness is an example of __________. A) estate planning B) profit maximization C) adverse selection D) insurance fraud

26)

Taxes are applied to the __________. A) real value of sheltered investment income B) nominal value of unsheltered investment income C) nominal value of sheltered investment income D) real value of unsheltered investment income

27)

One feasible way to hedge labor income is to __________. A) diversify your investment portfolio away from the industry in which you work B) save for retirement only from investment income C) change careers every 7 years D) invest heavily in the stock options provided by your firm

28)

Which one of the following is not likely to be subject to adverse selection?

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A) Health insurance providers B) Lifetime annuity providers C) Life insurance providers D) social security

29) An investor will deposit $2,000 into a traditional or Roth IRA. After 30 years, given a 9% annual return and a 20% tax rate, how much more or less money will the investor have if all investments are liquidated after 30 years? A) Roth value is $5,307 higher B) Roth value is $4,907 higher C) traditional value is $4,907 higher D) traditional value is $5,307 higher

30) An investor wants to retire when she has $3,000,000 in savings, after-taxes. Given a 20% tax rate at retirement, how much money, per year, must she save in order to retire in 30 years, given an 11% annual return? Assume she uses a traditional IRA and liquidates the entire portfolio at retirement. A) $12,827 B) $13,903 C) $15,074 D) $18,842

31) Contributions to a traditional retirement plan are __________, and contributions to a Roth retirement plan are __________.

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A) not tax deductible; not tax deductible B) tax deductible; tax deductible C) tax deductible; not tax deductible D) not tax deductible; tax deductible

32)

How many years of Social Security contributions count for determination of benefits? A) 25 B) 35 C) 45 D) All yearly contributions count.

33) Under current rules most workers will have __________ of their salary deducted to pay for Social Security retirement benefits and __________ toward Medicare. A) 1.45%; 6.20% B) 6.20%; 1.45% C) 7.65%; 1.45% D) 15.3%; 4.95%

34) In 2018, the income cap on Social Security taxes was set at __________ with an exemption of __________. A) $200,000; $10,000 B) $128,400; $0 C) $137,700; $0 D) $96,500; $10,000

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35) In planning for retirement, an investor decides she will save $15,000 every year for 45 years. At a 10% return on her investment, how much money will she have at the end of 45 years (to the nearest hundred thousand dollars)? A) $1,400,000 B) $2,800,000 C) $4,900,000 D) $10,800,000

36) A tax shelter that allows for tax-exempt saving for higher education is called a __________. A) Roth savings plan B) 403b C) 401k D) 529 plan

37) Withdrawals from a traditional retirement plan prior to age __________ are taxable and must pay a __________ tax penalty. A) 59½; 10% B) 62½; 5% C) 65½; 10% D) 70½; 5%

38) In planning for retirement, an investor decides she will save $2,000 every year for 25 years. At a 7% return on her investment, how much money will she have at the end of 25 years?

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A) $119,015 B) $125,316 C) $126,498 D) $128,420

39) In planning for retirement, an investor decides he will save $15,000 every year for 40 years. At 12% nominal return on his investment and 3% annual inflation, how much real purchasing power will he have at the end of 38 years (to the nearest hundred thousand dollars)? A) $3,700,000 B) $4,700,000 C) $7,900,000 D) $11,500,000

40) An investor plans to retire at age 62 with total savings of $1,000,000 in today’s dollars. If she is currently 37 years old, has $15,0000 currently invested, and expects to earn 9% per year on her investments, how much money must she set aside every year?Assume 3% annual inflation. A) $15,546 B) $17,526 C) $18,680 D) $28,324

41) An insurance company plans to sell annuities to investors. Based on actuarial calculations, an investor has a 15-year life span, and he wants a $30,000-per-year annuity, payable at the end of each year. If the insurance company uses a 4% assumed investment rate, how much should the annuity cost?

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A) $296,928 B) $312,236 C) $333,552 D) $353.982

42) A safe driver who drives faster as a result of purchasing collision car insurance would be an example of the __________ problem. A) moral hazard B) adverse selection C) Texas hedge D) actuarial error

43) A worker plans to retire in 22 years. He needs $27,000 per year in retirement income in today's dollars. If inflation is forecast at 3.1% per year, what annual income should he plan to receive in the first year of retirement to maintain the purchasing power on $27,000? A) $30,353 B) $54,159 C) $37,398 D) $52,851

44) An insurance company plans to sell annuities to investors. Based on actuarial calculations, an investor has a 30-year life span, and she wants a $70,000-per-year annuity, payable at the end of each year. If the insurance company uses a 3.3% assumed investment rate, how much should the annuity cost?

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A) $696,928 B) $743,874 C) $833,552 D) $1,320,319

45) A worker plans to retire in 40 years. He hopes to have $1,000,000 in today’s purchasing power in the bank. He starts putting away $6,000 per year towards that goal. If inflation is forecast at 3.0% per year, what nominal rate of return must his securities earn in order to meet his goals. A) 3.00% B) 6.29% C) 9.29% D) 9.48%

46) An investor must decide between putting a one-time contribution of $2000 into a regular retirement plan or putting $1,440 into a Roth retirement plan. If the investor's tax rate is 28% now and in retirement, and she expects to earn 12% per year over the next 20 years, which will produce more cash in the end? A) the investment in the regular retirement plan B) the investment in the Roth retirement plan C) both investments will have the same future value after-taxes D) the answer cannot be determined from the information given

47) A regular retirement plan requires that taxes be paid at the time the money is removed from the plan. What is the after-tax value of a $6000 deposit into a retirement plan today that generates an 7% return for 20 years if the investor is taxed at the 24% level?

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A) $17,646 B) $20,135 C) $21,685 D) $23,305

48) What is the value of a $3,500 deposit into a retirement plan if the investment earns 10.5% per year for 20 years? A) $12,174 B) $25,782 C) $14,652 D) $15,523

49) The employees of a firm complain that they cannot afford to contribute $9,000 per year to a 401k because of the loss of $9,000 of take-home pay. In fact, how much will the take-home pay be reduced if all taxes combined total 33%? A) $6,030 B) $6,340 C) $7,637 D) $8,000

50) An employee uses her firm's 401k plan. If she decides to contribute $12,000 per year and pays an effective tax rate for all items of 24%, how much will she actually take home after the reduction?

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A) $3,080 B) $4,210 C) $9,120 D) $11,000

51) An investor has an effective tax rate on all items of 33%, and he decides to put $9,000 into a 401k. The future value of this investment that results from the deferral of taxes over 30 years at an 8% return equals __________. A) $2,400 B) $8,000 C) $10,400 D) $29,886

52) Withdrawals after retirement from a traditional retirement plan are __________, and withdrawals after retirement from a Roth retirement plan are __________. A) taxable; not taxable B) not taxable; taxable C) tax deductible; not tax deductible D) not tax deductible; tax deductible

53) If you start saving for retirement only in your later years and your income growth from that point is rapid, then __________. A) a traditional retirement plan is probably a better choice than a Roth retirement plan B) a Roth retirement plan is probably a better choice than a traditional retirement plan C) a SEP is probably a better choice than Medicare D) a 401k is probably a better choice than a 403b

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54)

Which one of the following statements about 401k plans is not correct? A) The employer will typically match some portion of an employee's contributions to a

401k. B) A 401k plan is a defined contribution plan. C) Allowable contributions to 401k plans are limited. D) Withdrawals from 401k plans are not taxed upon retirement.

55) Suppose you have maxed out your allowable contributions to your tax-sheltered retirement plans and you still want to shelter income. The best choice of investment for you to minimize the tax bill is to invest in __________. A) a bond portfolio B) stocks with high dividend yields C) a blended stock and bond portfolio containing zero-coupon bonds D) stocks with low or zero dividend yields

56) A bond portfolio and a stock portfolio both provided an unrealized pretax return of 8% to a taxable investor. If the stocks paid no dividends, we know that the __________. A) after-tax return of the stock portfolio was higher than the after-tax return of the bond portfolio B) after-tax return of the bond portfolio was higher than the after-tax return of the stock portfolio C) after-tax income of the stock portfolio was equal to the after-tax income of the bond portfolio D) after-tax income of the stock portfolio could have been higher or lower than the after-tax income of the bond portfolio, depending on the marginal tax rate of the investor

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57) In planning for retirement, an investor decides she will save $3,000 every year for 25 years. At a 5.7% return on her investment, how much money will she have at the end of 25 years? A) $119,015 B) $125,316 C) $157,805 D) $128,420

58) An insurance company plans to sell annuities to investors. Based on actuarial calculations, an investor has a 18-year life span, and he wants a $40,000-per-year annuity, payable at the end of each yearas well as a $50,000 payout at the end of the annuity. If the insurance company uses a 3.78% assumed investment rate, how much should the annuity cost? A) $466,928 B) $541,188 C) $515,548 D) $770,000

59) An investor can earn a 6.7% nominal rate of return, but inflation is expected to be 3%. If the individual invests $3,000 per year for 25 years, the real future value of this investment is __________. (All investments occur at year-end). A) $75,000 B) $106,334 C) $118,294 D) $290,640

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60) An individual wants to have $57,000 per year to live on when she retires in 27 years. The individual is planning on living for 23 years after retirement. If the investor can earn 6.2% during her retirement years and 9.10% during her working years, how much should she be saving during her working life? (Hint: Treat all calculations as annuities.) A) $6,597 B) $18,234 C) $27,908 D) $26,317

61) If you plan for a bequest for your children, your grandchildren, their children, and so on, your planning horizon becomes __________. A) equal to the life span of your children B) 100 years, or your lifetime, whichever ends first C) infinite D) double what it would have been without the bequest

62) You want to minimize your current tax bill by maximizing your contributions to your __________. A) taxable bond portfolio B) Roth retirement plan C) 401k or 403b plan D) taxable savings account

63) Sharon decides to put $6,500 into her retirement plan at the age of 26. She will continue to invest the same amount for a total of 6 years and then stop contributing. Assume 10.8% annual return. How much money will Sharon have in her retirement plan after 6 years?

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A) $30,000 B) $35,575 C) $51,175 D) $61,451

64) Sharon decides to put $6,500 into her retirement plan at the age of 26. She will continue to invest the same amount for a total of 6 years and then stop contributing. Assume 10.8% annual return. How much money will Sharon have in her retirement plan when she is ready to retire at age 63? A) $554,856 B) $623,245 C) $1,229,675 D) $1,311,805

65) A nonprofit organization offers a 5.5% salary contribution to John's 403b plan regardless of his own contributions, plus a matching 5.5% when John contributes 5.5% of his salary. John makes $66,000 a year. What is the amount of the total contribution to his 403b if John contributes 5.5% of his own money? A) $7,260 B) $10,890 C) $11,200 D) $12,500

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66) A nonprofit organization offers a 5.5% salary contribution to John's 403b plan regardless of his own contributions, plus a matching 5.5% when John contributes 5.5% of his salary. John makes $66,000 a year. What is John's effective salary reduction if he is in the 24% tax bracket? A) $2,758 B) $2,800 C) $3,630 D) $8,276

67) The fact that the U.S. government provides deposit insurance to banks creates a form of __________, which is at least partially offset by requiring banks to hold more capital if they are riskier. A) moral hazard B) adverse selection C) risk aversion D) interest rate risk

68) An investor in a 34% tax bracket would be indifferent between a corporate bond with a before-tax yield of 8% and a municipal bond with a yield of __________. A) 3.91% B) 6.15% C) 5.28% D) 10.72%

69) An investor who is in a 35% federal tax bracket and a 5% state bracket buys a 6.5% yield corporate bond. What is his after-tax yield? (Assume that federal taxes are not deductible against state taxes and vice versa).

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A) 3.90% B) 4.75% C) 6.50% D) 9.95%

70) Shawn decides to put $5,000 into his retirement plan at the age of 22. He will continue to invest the same amount for a total of 16 years and then stop contributing. Assume 10% annual return. How much money will Shawn who will be 38 years old at that point, have in his retirement plan when he is ready to retire at age 62? Assume the same 10% annual return. A) $554,856 B) $623,245 C) $1,770,476 D) $1,311,805

71) You can tax-shelter only one-half of your retirement savings. You want to invest one-half of your savings in bonds and one-half in stocks. How much of the bonds and how much of the stocks should you allocate to the tax-sheltered investment? A) Stock and bond investments should be equally invested in both tax-sheltered and non-sheltered accounts. B) You should place all the stocks in tax-sheltered accounts and all the bonds in nonsheltered accounts. C) You should place all the bonds in tax-sheltered accounts and all the stocks in nonsheltered accounts. D) It makes no difference how you allocate your stock and bond investments among tax sheltered and non-sheltered accounts.

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Answer Key Test name: Chap 21_12e_Bodie 1) C 2) C 3) B 4) B 5) A 6) A 7) A 8) B 9) B 10) B 11) B 12) C 13) C 14) A 15) A 16) B 17) B 18) A 19) B 20) D 21) B 22) B 23) A 24) A 25) C 26) B Version 1

27) A 28) D 29) B 30) D 31) C 32) B 33) B 34) C 35) D 36) D 37) A 38) C 39) A 40) B 41) C 42) A 43) D 44) D 45) D 46) C 47) A 48) B 49) A 50) C 51) D 52) A 53) B 54) D 55) D 56) A Version 1

57) C 58) B 59) C 60) A 61) C 62) C 63) C 64) C 65) B 66) A 67) A 68) C 69) A 70) C 71) C

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CHAPTER 22 1)

To __________ means to mitigate a financial risk. A) invest B) speculate C) hedge D) renege

2) In a defined benefit pension plan, the __________ bears all of the fund's investment performance risk, while in a defined contribution pension plan, the __________ bears all of the fund's investment performance risk. A) employer, employee B) employee, employer C) fund manager, employee D) government, employer

3) 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

A __________ insurance policy provides death benefits, with no buildup of cash value.

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A) whole-life B) universal life C) variable life D) term life

5) If the maturity of a bank's assets is much longer than the maturity of its liabilities and it wants to limit its interest rate risk, the bank may __________. A) prefer to invest in long-term bonds in its asset portfolio B) prefer to invest in equities in its asset portfolio C) prefer to invest in variable-rate assets D) decide to increase its fixed-rate mortgage holdings

6) 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

7) SoHo International Investment Management has an asset allocation strategy of 57% U.S. investments and 43% global investments. Within the United States, Go Global has allocated 55% of its portfolio to equities and 45% to bonds. SoHo International now holds 4.4% of its U.S. equity portfolio in the stock of Bright Force. Internationally, SoHo International has allocated 72% to equities and 28% to bonds. About what percentage of SoHo International's total portfolio is invested in Bright Force?

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A) 1.00% B) 1.26% C) 1.56% D) 1.81%

Which one of the following would be considered a "cash equivalent" investment? A) Treasury bills B) common stock C) corporate bonds D) real estate

9) For a bank, the difference between the interest rate charged to borrowers and the interest rate paid on liabilities is called the __________. A) insurance premium B) interest rate spread C) risk premium D) term premium

10)

Price volatility is greatest on which one of the following investments? A) commercial paper B) 20-year zero-coupon bonds C) Treasury notes D) Treasury bills

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11) A portfolio manager indexes part of a portfolio and actively manages the rest of the portfolio. This is called a __________ strategy. A) passive-aggressive B) passive core C) passively active D) balanced fund

12)

The major asset most people have during their early working years is their __________. A) home B) stock portfolio C) earning power derived from their skills D) bond portfolio

13) At the early stage of an individual's working career, his or her retirement portfolio should probably consist mostly of __________. A) annuities B) stocks C) bonds D) commodities

14) If an investor wants to invest 100% of her portfolio in safe assets but does not want to manage her portfolio, she should invest in __________.

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A) a money market fund B) a growth stock fund C) several different money market instruments D) several different stocks

15) Just 2 months after you put money into an investment, its price falls 25%. Assuming that none of the investment fundamentals have changed, which of the following actions would evidence the greatest risk tolerance? A) You sell to avoid further worry and buy something else. B) You do nothing and wait for the investment to come back. C) You buy more, thinking that if it was a good investment before, it is now cheap too. D) You sue your financial adviser.

16)

To become a CFA, you must do all of the following except which one?

A) Pass three exams designed to ensure that you have sufficient knowledge of investments. B) Obtain 3 years of work experience in money management. C) Become a member of a local Society of the Financial Analysts Federation. D) Divest all your own stock holdings to eliminate any potential conflicts of interest with client recommendations.

17) Which of the following is not one of the main areas covered in the examinations that must be taken in order to achieve the designation of Chartered Financial Analyst?

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A) investment management ethics B) securities analysis C) securities marketing techniques D) portfolio management

18) As the typical investor ages, the composition of his wealth usually switches from primarily __________ to primarily __________. A) human capital; financial capital B) financial capital; human capital C) intellectual capital; physical capital D) investable capital; noninvestable capital

19) The two most important factors in describing an individual's or organization's investment objectives are __________. A) income level and age B) income level and risk tolerance C) age and risk tolerance D) return requirement and risk tolerance

20)

The term hedge refers to an investment that is used __________. A) primarily for tax-loss selling purposes B) to mitigate specific financial risks C) to conceal one's true investment strategy from other market participants D) primarily to defer capital losses

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21) The price of your investment increases 20% one month after you buy it. You do not believe that the stock's prospects have changed. Which one of the following actions would indicate the lowest amount of risk aversion? A) You hang on to the stock, anticipating that it will go higher. B) You buy more stock, anticipating that it will go higher. C) You sell all of your stock holdings immediately. D) You sell half of your stock holdings and invest the proceeds in other areas of your portfolio.

22) An individual is on the game show Squeal or No Squeal, and she has a choice between receiving a certain gain of $100,000 and receiving a 50% chance of winning $200,000 or zero. If she takes the gamble instead of the certain $100,000, she is acting __________. A) like a person who is risk-neutral B) like a person who is risk averse C) like a person who is a risk lover D) irrationally

23) Which of the following typically strives to earn a return on their investments that exceeds the actuarially determined rate of return? A) banks B) thrifts C) mutual funds D) pension funds

24) If an individual confers legal title to property to another person or institution to manage the property on their behalf, the individual has created __________. Version 1

A) a personal trust B) a charitable trust C) an endowment fund D) a mutual fund

25) Personal trusts are typically allowed to engage in which of the following investment activities? 1. Buying and selling futures contracts. 2. Short-selling securities. 3. Purchasing and writing options. 4. Buying stock on margin. A) 1 only B) 2 and 3 only C) 2 and 4 only D) None of the given activities are allowed.

26) If a defined benefit pension fund's actual rate of return is __________ than the actuarial assumed rate, then the __________. A) greater; employees will benefit B) greater; firm's shareholders will benefit C) lower; employees will benefit D) lower; firm's shareholders will benefit

27) An employee has an average wage of $60,000 and has worked for the firm for 28 years. The defined benefit pension plan pays retirees 2.3% of the average wage times the years of service. The employee can expect to receive __________ per year upon retirement.

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A) $18,000 B) $38,640 C) $45,325 D) $55,250

28) Life insurance companies try to hedge the risks inherent in whole-life insurance policies by investing in __________. A) long-term bonds B) money market mutual funds C) savings accounts D) short-term commercial paper

29) A pension fund will owe $15 million to retirees in 8 years. An actuary assumes an 7% rate of return on the funds invested in the pension plan. If the pension plan receives annual contributions from the company sponsor, how much must the company pay each year to fully fund the pension liability? A) $1,212,587 B) $1,462,016 C) $1,533,333 D) $1,666,667

30) The risk that a downturn in the market may substantially reduce your investment principal is called __________.

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A) purchasing power risk B) interest rate risk C) market risk D) liquidity risk

31) The possibility that you are too conservative and your money does not grow fast enough to keep pace with inflation is called __________. A) purchasing power risk B) liquidity risk C) timing risk D) market risk

32) A pension fund will owe $20 million to retirees in 25 years. An actuary assumes a 5.6% rate of return on the funds invested in the pension plan, but the fund actually earns 7.1%. The pension plan receives annual contributions from the company sponsor. If the 7.1% rate of return is expected to continue, by how much can the company reduce its pension payments per year? A) $65,437 B) $73,871 C) $89,462 D) $95,320

33) Many defined benefit pension plans have a target rate of return on investment that is equal to the __________.

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A) firm's return on equity B) plan's assumed actuarial rate of return C) economic inflation rate because wages often increase with inflation D) estimated stock market return

34) __________ is a life insurance policy that provides a death benefit and a fixed-rate taxdeferred savings plan. A) Term life B) Whole life C) Variable life D) Universal life

35) Empirical evidence confirms that investors become __________ as they approach retirement. A) greedier B) less interested in investments C) more risk averse D) more risk tolerant

36)

Of the following, the investment time horizon is typically the shortest for __________. A) banks B) endowment funds C) life insurance companies D) pension funds

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37)

A passive asset allocation strategy involves _________.

A) investing in a small number of companies that are price takers B) maintaining approximately the same proportions of a portfolio in each asset class over time C) varying the proportions of a portfolio in each asset class in response to changing market conditions D) selecting individual securities in different sectors that are believed to be undervalued

38)

An active asset allocation strategy involves __________.

A) investing in the stock of companies that are price takers B) maintaining approximately the same proportions of a portfolio in each asset class over time C) varying the proportions of a portfolio in each asset class in response to changing market conditions D) selecting individual securities in different sectors that are believed to be undervalued

39)

Endowment funds are held by __________. A) financial intermediaries B) individuals C) profit-oriented firms D) nonprofit institutions

40) Which one of the following is a life insurance policy that will provide a fixed death benefit and allows the policyholder to choose where to invest the policy's cash value?

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A) term life B) whole life C) variable life D) industrial life

41) Of the following, the most flexible type of life insurance policy from the policyholder's perspective is probably a __________ policy. A) term life B) whole life C) variable life D) universal life

42) The amount of risk an individual should take depends on her: 1. Return requirements 2. Risk tolerance 3. Time horizon A) 1 only B) 1 and 2 only C) 2 and 3 only D) 1, 2, and 3

43)

Earnings on variable life and universal life insurance policies are ___________. A) never taxed B) taxed only at the capital gains tax rate C) not taxed until the money is withdrawn D) not taxed at the federal level but are taxed at the state level

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44) When a company sets up a defined contribution pension plan, the __________ bears all the risk and the __________ receives all the return from the plan's assets. A) employee; employee B) employee; employer C) employer; employee D) employer; employer

45) 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.

46) The objectives of personal trusts normally are __________ in scope than those of individual investors, and personal trust managers typically are __________ than individual investors. A) broader; more risk averse B) broader; less risk averse C) more limited; more risk averse D) more limited; less risk averse

47)

The prudent investor rule requires __________.

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A) executives of companies to avoid investing in options of companies they work for B) executives of companies to disclose their transactions in stocks of companies they work for C) professional investors who manage money for others to avoid all risky investments D) professional investors who manage money for others to constrain their investments to those that would be approved by a prudent investor

48) The prudent investor rule is an example of a regulation designed to ensure appropriate __________ by money managers. A) fiduciary responsibility B) fiscal responsibility C) monetary responsibility D) marketing procedures

49) An investor has a long time horizon and desires to earn the market rate of return. However, the investor will need to withdraw funds each year from his investment portfolio. The biggest constraint a planner would face with this client is a ___________ constraint. A) tax B) risk-tolerance C) liquidity D) social

50) When used in the context of investment decision making, the term liquidity refers to __________.

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A) the ease and speed with which an asset can be sold at any value possible B) the ease and speed with which an asset can be sold without having to discount the value C) an aspect of monetary policy D) the proportion of short-term to long-term investments held in an investor's portfolio

51)

The term investment horizon refers to __________. A) the proportion of short-term to long-term investments held in an investor's portfolio B) the planned liquidation date of an investment C) the average maturity date of investments held in a portfolio D) the maturity date of the longest investment in the portfolio

52) The choice of an active portfolio management strategy rather than a passive strategy assumes ___________. A) the ability to continuously adjust the portfolio to provide superior returns B) asset allocation involving only domestic securities C) stable economic conditions over the short term D) the ability to minimize trading costs

53) Conservative investors are likely to want to invest in __________ mutual funds, while risk-tolerant investors are likely to want to invest in __________. A) income; high growth B) income; moderate growth C) moderate-growth; high growth D) high-growth; moderate growth

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54)

The first step any investor should take before beginning to invest is to __________. A) establish investment objectives B) develop a list of investment managers with superior records to interview C) establish asset allocation guidelines D) decide between active management and passive management

55) Which of the following is the least likely to be included in the portfolio management process? A) monitoring market conditions and relative values B) monitoring investor circumstances C) identifying investor constraints and preferences D) organizing the investment management process itself

56) A clearly understood investment policy statement is not critical for which one of the following? 1. Mutual funds 2. Individuals 3. Defined benefit pension funds A) 2 only B) 3 only C) 1 only D) None—A policy statement is necessary for all three.

57) An investor refuses to invest in any firm that produces alcohol or tobacco. This is an example of a __________ constraint.

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A) return requirement B) risk-tolerance C) liquidity D) social

58) Under the provisions of a typical defined benefit pension plan, the employer is responsible for __________. A) investing in conservative fixed-income assets B) paying benefits to retired employees C) counseling employees in the selection of asset classes D) paying employees the market rate of return on employee contributions

59) A life insurance firm wants to minimize its interest rate risk, and it is planning on paying out $250,000 in 5 years. Which one of the following investments best matches its goal? A) high-yield utility stocks B) 5-year zero-coupon bonds C) 10-year coupon bonds D) money market investments rolled over as needed

60) An institutional investor will have to pay off a maturing bond issue in 3 years. The institution has 10,000 bonds outstanding, each with a $1,000 par value. The institutional money manager is reevaluating the fund's total portfolio of $100 million at this time. She is bullish on stocks and wants to put the most she can into the stock market, but she cannot risk being unable to pay off the bonds. Three-year zero-coupon bonds are available paying 6% interest. What percentage of the total $100 million portfolio can she put in stocks and still ensure meeting the bond payments?

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A) 87.45% B) 88.55% C) 90.00% D) 91.60%

61) An investor with high risk aversion will likely prefer which of the following risk and return combinations? A) expected return = 12%, historical standard deviation = 17% B) expected return = 14%, historical standard deviation = 19% C) expected return = 16%, historical standard deviation = 21% D) expected return = 18%, historical standard deviation = 23%

62) An investor with low risk aversion will likely prefer which of the following risk and return combinations? A) expected return = 11%, historical standard deviation = 12% B) expected return = 12%, historical standard deviation = 14% C) expected return = 14%, historical standard deviation = 18% D) expected return = 17%, historical standard deviation = 21%

63) Medfield College's $10 million endowment fund is not allowed to spend any contributed capital or any capital gains. The fund may spend only investment earnings. The fund is expected to need between $500,000 and $1,000,000 to pay for new lab equipment for the science building. Which of the following is (are) true? 1. The fund should have a target rate of return of at least 10%. 2. The limitations on spending require that the fund limit its considerations to growth stocks. 3. The requirement to spend money out of the fund this year provides a liquidity constraint that may reduce the fund's rate of return.

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A) 1 only B) 2 only C) 1 and 3 only D) 1, 2, and 3

64) An investor is looking at different retirement investment choices, and he is willing to accept one with upside potential even if that means sacrificing certainty. Which of the following will he most likely select? A) fixed annuity B) defined benefit plan C) defined contribution plan D) bonds invested in a retirement plan

65) Both a wife and husband work in the airline industry. They are in their 40s, and they have a high tax bracket and are concerned about their after-tax rate of return. A meeting with their financial planner reveals that they are primarily focused on long-term capital gains and will need at least a 9% to 11% average rate of return to meet their retirement goals. They desire a diversified portfolio, and liquidity is not currently a major concern. Which of the following asset allocations seems to best fit their situation? A) 10% money market; 40% long-term bonds; 10% commodities; 40% high-dividendpaying stocks B) 0% money market; 60% long-term bonds; 40% stocks C) 10% money market; 30% long-term bonds; 10% commodities; 50% high-dividendpaying stocks D) 5% money market; 30% long-term bonds; 5% commodities; 60% stocks, most with low dividends and high growth prospects

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66) A family will retire in a few years. They have a high tax bracket and are concerned about their after-tax rate of return. A meeting with their financial planner reveals that they are primarily focused on safety of principal and will need a 6% to 8% average rate of return on their portfolio. They desire a diversified portfolio, and liquidity is likely to be a concern due to health reasons. Which of the following asset allocations seems to best fit this family's situation? A) 10% money market; 50% intermediate-term bonds; 40% blue chip stocks, many with high dividend yields B) 0% money market; 60% intermediate-term bonds; 40% stocks C) 10% money market; 30% intermediate-term bonds; 60% high-dividend-paying stocks D) 5% money market; 35% intermediate-term bonds; 60% stocks, most with low dividends

67) Your sister, works in the airline industry, and she has come to you (the financial guru) for investment advice. She is looking into purchasing stocks she knows something about. She is considering purchasing stock in Boeing, Lockheed Martin, United Technologies (maker of aircraft engines), and Cabela's Sporting Goods. Based only on the information given, which stock should you recommend for her? A) Boeing, Lockheed Martin, and United Technologies in equal portions B) Lockheed Martin and Boeing only C) United Technologies D) Cabela's

68) In 1937 the Eli Lilly family donated millions of dollars in stock to fund a not-for-profit charitable organization. Such organizations are typically called __________. A) annuities B) endowments C) mutual funds D) personal trusts

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69)

Which one of the following institutions typically has the longest investment horizon? A) mutual funds B) pension funds C) property and casualty insurers D) banks

70)

For which one of the following institutions is liquidity usually the most important? A) mutual funds B) pension funds C) life insurers D) banks

71)

One of the major functions of the investment committee is to __________.

A) determine security selection of each portfolio operated by the investment company B) translate the objectives and constraints of the investment company into an asset universe C) determine the percentages of each security in the total investment company portfolio D) calculate and report the overall rate of return to investment company constituents

72) For an investor concerned with maximizing liquidity, which of the following investments should be avoided?

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A) real estate B) bonds C) domestic stocks D) international stocks

73)

The asset universe is the __________.

A) set of investments in which an investment company can legally invest B) existing set of assets the investment company currently owns in one or more of its portfolios C) list of assets approved by the investment committee that may be placed into the investment company's portfolio D) market portfolio of all available risky assets

74) Go Global Investment Management has an asset allocation strategy of 70% U.S. investments and 30% global investments. Within the United States, Go Global has allocated 65% of its portfolio to equities and 35% to bonds. Go Global now holds 4% of its U.S. equity portfolio in the stock of Wally World, a U.S. based company. Internationally, Go Global has allocated 62% to equities and 38% to bonds. About what percentage of Go Global's total portfolio is invested in Wally World? A) 1.00% B) 1.26% C) 1.55% D) 1.82%

75)

Major functions of the investment committee include all but which one of the following?

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A) Engage in security selection for each portfolio managed. B) Broadly determine the overall asset allocation of the investment company. C) Determine the asset-class weights for each portfolio. D) Determine the asset universe.

76) A portfolio consists of three index funds: an equity index, a bond index, and an international index. The portfolio manager changes the weights periodically according to forecasts for each sector. This is an example of __________. A) a passively managed core with an actively managed component B) a totally passively managed fund C) passive asset allocation with active security selection D) active asset allocation with passive security selection

77) A portfolio consists of three index funds: an equity index accounting for 40% of the total portfolio, a bond index accounting for 30% of the total portfolio, and an international index accounting for 30% of the total portfolio. After each quarter the portfolio manager buys and sells some of each sector to preserve the original weights for each sector. This is an example of __________. A) a passively managed core with an actively managed component B) a totally passively managed fund C) passive asset allocation with active security selection D) active asset allocation with passive security selection

78) One way that life insurance firms can hedge the risk created by offering whole-life insurance policies is by __________.

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A) holding long-term bonds B) holding equities C) holding short-term bonds D) exercising its right to terminate the policy

79) A pension fund manager who decided to move money out of an index fund and into a socially responsible fund is __________. A) violating the prudent investor rule B) conducting best practices of investing C) conforming to CFA ethics requirements D) planning for the future

80) When life insurance companies seek long term investments, they are focusing on __________. A) maximizing returns B) smoothing out long-term returns C) tax considerations D) the investment horizon

81) Which of the following is typically concerned with their investment assets having relatively fixed returns and their liabilities having relative variable returns? A) banks B) insurance companies C) mutual funds D) pension funds

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82) Which type of insurance product allows policyholders to adjust their death benefit according to their needs? A) term B) variable life C) universal life D) whole life

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Answer Key Test name: Chap 22_12e_Bodie 1) C 2) A 3) A 4) D 5) C 6) C 7) D 8) A 9) B 10) B 11) B 12) C 13) B 14) A 15) C 16) D 17) C 18) A 19) D 20) B 21) B 22) C 23) D 24) A 25) D 26) B Version 1

27) B 28) A 29) B 30) C 31) A 32) B 33) B 34) B 35) C 36) A 37) B 38) C 39) D 40) C 41) D 42) D 43) C 44) A 45) C 46) C 47) D 48) A 49) C 50) B 51) B 52) A 53) A 54) A 55) D 56) D Version 1

57) D 58) B 59) B 60) D 61) A 62) D 63) C 64) C 65) D 66) A 67) D 68) B 69) B 70) D 71) B 72) A 73) C 74) D 75) A 76) D 77) B 78) A 79) A 80) D 81) A 82) C

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