1. According to the Flow of Funds Accounts of the United States, the largest liability of U.S.households is ________.A. mortgagesB. consumer creditC. bank loansD. gambling debts2. Asset allocation refers to the _________.A. allocation of the investment portfolio across broad asset classesB. analysis of the value of securitiesC. choice of specific assets within each asset classD. none of the answers define asset allocation3. Which one of the following best describes the purpose of derivatives markets?A. Transferring risk from one party to anotherB. Investing for a short time period to earn a small rate of returnC. Investing for retirementD. Earning interest income4. In a capitalist system capital resources are primarily allocated by ____________.A. governmentsB. the SECC. financial marketsD. investment bankers5. __________ are an indirect way U.S. investors can invest in foreign companies.A. ADRsB. IRAsC. SDRsD. CPCs6. The historical average rate of return on the large company stocks since 1926 has beenA. 5%B. 8%C. 12%D. 20%7. Which of the following is not a financial intermediary?A. a mutual fundB. an insurance companyC. a real estate brokerage firmD. a savings and loan company8. The efficient markets hypothesis suggests that _______.A. active portfolio management strategies are the most appropriate investment strategiesB. passive portfolio management strategies are the most appropriate investment strategiesC. either active or passive strategies may be appropriate, depending on the expected direction ofthe marketD. a bottom up approach is the most appropriate investment strategy9. Surf City Software Company develops new surf forecasting software. It sells the software toMicrosoft in exchange for 1000 shares of Microsoft common stock. Surf City Software hasexchanged a _____ asset for a _____ asset in this transaction.A. real, realB. financial, financialC. real, financialD. financial, real10. A major cause of mortgage market meltdown in 2007 and 2008 was linked to ________.A. globalizationB. securitizationC. negative analyst recommendationsD. online trading11. When computing the bank discount yield you would use ____ days in the year.A. 260B. 360C. 365D. 36612. Which one of the following is a true statement?A. Dividends on preferred stocks are tax-deductible to individual investors but not to corporateinvestorsB. Common dividends cannot be paid if preferred dividends are in arrears on cumulativepreferred stockC. Preferred stockholders have voting powerD. Investors can sue managers for nonpayment of preferred dividends13. A T-bill quote sheet has 90 day T-bill quotes with a 4.92 bid and a 4.86 ask. If the bill has a$10,000 face value an investor could buy this bill forA. $10,000.00B. $9,878.50C. $9,877.00D. $9,880.1614. A __________ gives its holder the right to buy an asset for a specified exercise price on orbefore a specified expiration date.A. call optionB. futures contractC. put optionD. interest rate swap15. An investor purchases one municipal and one corporate bond that pay rates of return of5.00% and 6.40% respectively. If the investor is in the 15% tax bracket, his after tax rates ofreturn on the municipal and corporate bonds would be respectivelyA. 5.00% and 6.40%B. 5.00% and 5.44%C. 4.25% and 6.40%D. 5.75% and 5.44%16. An investor in a 28% tax bracket is trying to decide whether to invest in a municipal bond ora corporate bond. She looks up municipal bond yields (rm) but wishes to calculate the taxableequivalent 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%)17. A firm that fails to pay dividends on its preferred stock is said to be _________.A. insolventB. in arrearsC. insufferableD. delinquent18. Which of the following is most like a short-term collateralized loan?A. Certificate of depositB. Repurchase agreementC. Banker’s acceptanceD. Commercial paper19. A stock quote indicates a stock price of $60 and a dividend yield of 3%. The latest quarterlydividend received by stock investors must have been ______ per share.A. $0.55B. $1.80C. $0.45D. $1.2520. 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 $54, $23, and $44. What is the price weighted indexvalue of the Chompers Index?A. 23.43B. 35.36C. 40.33D. 49.5821. In a defined benefit pension plan, the _____ bears all of the fund’s investment performancerisk.A. employerB. employeeC. fund managerD. government22. Which one of the following would be considered to be a “cash equivalent” investment?A. Treasury billsB. Common stockC. Corporate bondsD. Real estate23. The two most important factors in describing an individual or organization’s investmentobjectives are ________________.A. income level and ageB. income level and risk toleranceC. age and risk toleranceD. return requirement and risk tolerance24. An employee has an average wage of $60,000 and they have worked for the firm for 25years. The defined benefit pension plan pays retirees 2.5% of the average wage times the years ofservice. The employee can expect to receive _______ per year upon retirement.A. $18,000B. $37,500C. $45,325D. $55,25025. _______ is a life insurance policy that provides a death benefit and a fixed rate tax deferredsavings plan.A. Term lifeB. Whole lifeC. Variable lifeD. Universal life26. Earnings on variable life and universal life insurance policies are ___________.A. never taxedB. taxed only at the capital gains tax rateC. not taxed until the money is withdrawnD. not taxed at the federal level but are taxed at the state level27. The objectives of personal trusts normally are __________ in scope than those of individualinvestors and personal trust managers typically are __________ than individual investors.A. broader; more risk averseB. broader; less risk averseC. more limited; more risk averseD. more limited; less risk averse28. Conservative investors are likely to want to invest in __________ mutual funds while risktolerant investors are likely to want to invest in __________.A. income, high growthB. income, moderate growthC. moderate income, high growthD. moderate income, moderate growth29. An investor is looking at different retirement investment choices and he is willing to acceptone with upside potential even if that means sacrificing certainty. Which of the following will hemost likely select?A. Fixed annuityB. Defined benefit planC. Defined contribution planD. Bonds invested in an IRA30. The asset universe is the _____________________.A. set of investments an investment company can legally invest inB. existing set of assets the investment company currently owns in one or more of its portfoliosC. list of assets approved by the investment committee that may be placed in the investmentcompany’s portfoliosD. market portfolio of all available risky assets31. Barnegat Light sold 200,000 shares in an initial public offering. The underwriter’s explicitfees were $90,000. The offering price for the shares was $35, but immediately upon issue, theshare price jumped to $43. What is the best estimate of the total cost to Barnegat Light of theequity issue?A. $90,000B. $1,290,000C. $2,390,000D. $1,690,00032. Circuit breakers will be imposed if the Dow Jones Industrial Average drops by a minimum of______ by 2.30 pm.A. 10%B. 20%C. 30%D. 40%33. The __________ was established to protect investors from losses if their brokerage firmsfail.A. CFTCB. SECC. SIPCD. AIMR34. According to Loughran and Ritter, initial public offerings tend to exhibit __________performance initially, and __________ performance over the long term.A. bad; goodB. bad; badC. good; goodD. good; bad35. The bid-ask spread exists because of _______________.A. market inefficienciesB. discontinuities in the marketsC. the need for dealers to cover expenses and make a profitD. lack of trading in thin markets36. You find that the bid and ask prices for a stock are $10.25 and $10.30 respectively. If youpurchase or sell the stock you must pay a flat commission of $25. If you buy 100 shares of thestock and immediately sell them, what is your total implied and actual transaction cost indollars?A. $50B. $25C. $30D. $5537. You short-sell 200 shares of Rock Creek Fly Fishing Co., now selling for $50 per share. Ifyou wish to limit your loss to $2,500, you should place a stop-buy order at ____.A. $37.50B. $62.50C. $56.25D. $59.7538. Which Congressional action directed the SEC to implement a national competitive securitiesmarket?A. Securities Act of 1933B. SEC Act of 1934C. Securities Act Amendments of 1975D. Financial Services Modernization Act of 199939. Brokerage firms can change margin-loan practices ____.A. without noticeB. only after 72 hours noticeC. only on new ordersD. only with permission from the SEC40. The commission structure on a stock purchase is $20 plus $0.02 per share. If you purchase 4round lots of a stock selling for $56, what is your commission?A. $20B. $22C. $26D. $2841. The two principal types of REITs are equity trusts which _______________ and mortgagetrusts which _______________.A. invest directly in real estate; invest in mortgage and construction loansB. invest in mortgage and construction loans; invest directly in real estateC. use extensive leverage; distribute less than 95% of income to shareholdersD. distribute less than 95% of income to shareholders; use extensive leverage42. The type of mutual fund that primarily engages in market timing is called a/an _______.A. sector fundB. index fundC. ETFD. asset allocation fund43. Assume that you have recently purchased 100 shares in an investment company. Uponexamining the balance sheet, you note the firm is reporting $225 million in assets, $30 million inliabilities, and 10 million shares outstanding. What is the Net Asset Value (NAV) of theseshares?A. $25.50B. $22.50C. $19.50D. $1.9544. Investors who wish to liquidate their holdings in a unit investment trust may___________________.A. sell their shares back to the trustee at a discountB. sell their shares back to the trustee at net asset valueC. sell their shares on the open marketD. sell their shares at a premium to net asset value45. Low load mutual funds have front-end loads of no more than _____.A. 2%B. 3%C. 4%D. 5%46. If a mutual fund has multiple class shares, which class typically has a front end load?A. Class AB. Class BC. Class CD. Class D47. Consider a no-load mutual fund with $200 million in assets and 10 million shares at the startof the year, and $250 million in assets and 11 million shares at the end of the year. During theyear investors have received income distributions of $2 per share, and capital gains distributionsof $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. 36.25%B. 24.90%C. 23.85%D. There is not sufficient information to answer this question48. A/an _____ is an example of an exchange-traded fund.A. SPDR or spiderB. samuraiC. VanguardD. open-end fund49. A mutual fund has total assets outstanding of $69 million. During the year the fund boughtand 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%50. The assets of a mutual fund are $25 million. The liabilities are $4 million. If the fund has700,000 shares outstanding and pays a $3 dividend, what is the dividend yield?A. 5%B. 10%C. 15%D. 20%51. You put up $50 at the beginning of the year for an investment. The value of the investmentgrows 4% and you earn a dividend of $3.50. Your HPR was ____.A. 4.00%B. 3.50%C. 7.00%D. 11.00%52. The geometric average of -12%, 20% and 25% is _________.A. 8.42%B. 11.00%C. 9.70%D. 18.88%53. Suppose you pay $9,800 for a $10,000 par Treasury bill maturing in two months. What is theannual percentage rate of return for this investment?A. 2.04%B. 12.00 %C. 12.24%D. 12.89%54. Historically small firm stocks have earned higher returns than large firm stocks. Whenviewed in the context of an efficient market, this suggests that ___________.A. small firms are better run than large firmsB. government subsidies available to small firms produce effects that are discernible in stockmarket statisticsC. small firms are riskier than large firmsD. small firms are not being accurately represented in the data55. If you are promised a nominal return of 12% on a one year investment, and you expect therate of inflation to be 3%, what real rate do you expect to earn?A. 5.48%B. 8.74%C. 9.00%D. 12.00%56. The holding period return on a stock was 25%. Its ending price was $18 and its beginningprice was $16. Its cash dividend must have been _________.A. $0.25B. $1.00C. $2.00D. $4.0057. Consider the following two investment alternatives. First, a risky portfolio that pays 20% rateof return with a probability of 60% or 5% with a probability of 40%. Second, a treasury bill thatpays 6%. If you invest $50,000 in the risky portfolio, your expected profit would be _________.A. $3,000B. $7,000C. $7,500D. $10,00058. A security with normally distributed returns has an annual expected return of 18% andstandard deviation of 23%. The probability of getting a return between -28% and 64% in any oneyear isA. 68.26%B. 95.44%C. 99.74%D. 100.00%59. Which one of the following would be considered a risk-free asset in real terms as opposed tonominal?A. Money market fundB. U.S. T-billC. Short term corporate bondsD. U.S. T-bill whose return was indexed to inflation60. Which of the following are correct arguments supporting passive investment strategies?I. Active trading strategies may not guarantee higher returns but guarantee higher costsII. Passive investors can free ride on the activity of knowledge investors whose trades forceprices to reflect currently available informationIII. Passive investors are guaranteed to earn higher rates of return than active investors oversufficiently long time horizonsA. I onlyB. I and II onlyC. II and III onlyD. I, II and III61. Adding additional risky assets to the investment opportunity set will generally move theefficient frontier _____ and to the ______.A. up, rightB. up, leftC. down, rightD. down, left62. The correlation coefficient between two assets equals to _________.A. their covariance divided by the product of their variancesB. the product of their variances divided by their covarianceC. the sum of their expected returns divided by their covarianceD. their covariance divided by the product of their standard deviations63. Market risk is also called __________ and _________.A. systematic risk, diversifiable riskB. systematic risk, nondiversifiable riskC. unique risk, nondiversifiable riskD. unique risk, diversifiable risk64. The standard deviation of return on investment A is .10 while the standard deviation of returnon investment B is .04. If the correlation coefficient between the returns on A and B is -.50, thecovariance of returns on A and B is _________.A. -.0447B. -.0020C. .0020D. .044765. A measure of the riskiness of an asset held in isolation is ____________.A. betaB. standard deviationC. covarianceD. semi-variance66. According to Tobin’s separation property, portfolio choice can be separated into twoindependent tasks consisting of __________ and __________.A. identifying all investor imposed constraints; identifying the set of securities that conform tothe investor’s constraints and offer the best risk-return tradeoffsB. identifying the investor’s degree of risk aversion; choosing securities from industry groupsthat are consistent with the investor’s risk profileC. identifying the optimal risky portfolio; constructing a complete portfolio from T-bills and theoptimal risky portfolio based on the investor’s degree of risk aversionD. choosing which risky assets an investor prefers according to their risk aversion level;minimizing the CAL by lending at the risk-free rate67. A stock has a correlation with the market of 0.45. The standard deviation of the market is21% and the standard deviation of the stock is 35%. What is the stock’s beta?A. 1.00B. 0.75C. 0.60D. 0.5568. Decreasing the number of stocks in a portfolio from 50 to 10 would likely_________________________.A. increase the systematic risk of the portfolioB. increase the unsystematic risk of the portfolioC. increase the return of the portfolioD. decrease the variation in returns the investor faces in any one year69. What is the standard deviation of a portfolio of two stocks given the following data? Stock Ahas a standard deviation of 30%. Stock B has a standard deviation of 18%. The portfolio contains60% of stock A and the correlation coefficient between the two stocks is -1.0.A. 0.0%B. 10.8%C. 18.0%D. 24.0%70. A project has a 50% chance of doubling your investment in one year and a 50% chance oflosing half your money. What is the expected return on this investment project?A. 0%B. 25%C. 50%D. 75%71. Fama and French claim that after controlling for firm size and the ratio of firm’s book valueto market value, beta is ______________.I. highly significant in predicting future stock returnsII. relatively useless in predicting future stock returnsIII. a good predictor of firm’s specific riskA. I onlyB. II onlyC. I and III onlyD. I, II and III72. In a well diversified portfolio, __________ risk is negligible.A. nondiversifiableB. marketC. systematicD. unsystematic73. You have a $50,000 portfolio consisting of Intel, GE and Con Edison. You put $20,000 inIntel, $12,000 in GE and the rest in Con Edison. Intel, GE and Con Edison have betas of 1.3, 1.0and 0.8 respectively. What is your portfolio beta?A. 1.048B. 1.033C. 1.000D. 1.03774. Consider the one-factor APT. The variance of the return on the factor portfolio is .08. Thebeta of a well-diversified portfolio on the factor is 1.2. The variance of the return on the welldiversified portfolio is approximately _________.A. .1152B. .1270C. .1521D. .134275. The possibility of arbitrage arises when ____________.A. there is no consensus among investors regarding the future direction of the market, and thustrades are made arbitrarilyB. mis-pricing among securities creates opportunities for riskless profitsC. two identically risky securities carry the same expected returnsD. investors do not diversify76. The risk-free rate is 4%. The expected market rate of return is 11%. If you expect stock Xwith a beta of .8 to offer a rate of return of 12 percent, then you should _________.A. buy stock X because it is overpricedB. buy stock X because it is underpricedC. sell short stock X because it is overpricedD. sell short stock X because it is underpriced77. Beta is a measure of ______________.A. total riskB. relative systematic riskC. relative non-systematic riskD. relative business risk78. Standard deviation of portfolio returns is a measure of ___________.A. total riskB. relative systematic riskC. relative non-systematic riskD. relative business risk79. The expected return on the market is the risk free rate plus the _____________.A. diversified returnsB. equilibrium risk premiumC. historical market returnD. unsystematic return80. Using the index model, the alpha of a stock is 3.0%, the beta if 1.1 and the market return is10%. What is the residual given an actual return of 15%?A. 0.0%B. 1.0%C. 2.0%D. 3.0%81. The strong form of the EMH states that ________ must be reflected in the current stockprice.A. all security price and volume dataB. all publicly available informationC. all information including inside informationD. all costless information82. If you believe in the __________ form of the EMH, you believe that stock prices reflect allpublicly available information but not information that is available only to insiders.A. semi-strongB. strongC. weakD. perfect83. You are an investment manager who is currently managing assets worth $6 billion. Youbelieve that active management of your fund could generate between an additional one tenth of1% return on the portfolio. If you want to make sure your active strategy adds value, how muchcan you spend on security analysis?A. $12,000,000B. $6,000,000C. $3,000,000D. $084. Evidence supporting semi-strong form market efficiency suggests that investors should_________________________.A. rely on technical analysis to select securitiesB. rely on fundamental analysis to select securitiesC. use a passive trading strategy such as purchasing an index fund or an ETFD. select securities by throwing darts at the financial pages of the newspaper85. Fundamental analysis is likely to yield best results for _______.A. NYSE stocksB. neglected stocksC. stocks that are frequently in the newsD. fast growing companies86. J.M. Keyes put all his money in one stock and the stock doubled in value in a matter ofmonths. He did this three times in a row with three different stocks. J.M. got his picture on thefront page of the Wall Street Journal. However the paper never mentioned the thousands ofinvestors who made similar bets on other stocks and lost most of their money. This is an exampleof the ________ problem in deciding how efficient the markets are.A. magnitudeB. selection biasC. lucky eventD. small firm87. Stock market analysts have tended to be ___________ in their recommendations toinvestors.A. slightly overly optimisticB. overwhelmingly optimisticC. slightly overly pessimisticD. overwhelmingly pessimistic88. Fundamental indexing refers to ________.A. investing in index stocks in proportion to the stock’s fundamental valueB. investing in index stocks in proportion to the stock’s market valueC. investing an equal dollar amount in index stocksD. investing in an equal amount shares in each of the index stocks89. Someone who invests in the Vanguard Index 500 mutual fund could most accurately bedescribed as using what approach?A. Active managementB. ArbitrageC. Fundamental analysisD. Passive investment90. Most evidence indicates that U.S. stock markets are _______________________.A. reasonably weak form and semi-strong form efficientB. strong form efficientC. reasonably weak form but not semi- or strong form efficientD. neither weak form, semi- or strong form efficient91. Testing many different trading rules until you find one that would have worked in the past iscalled _______.A. data miningB. perceived patterningC. pattern searchingD. behavioral analysis92. According to market technicians it is time to sell stock in a head-and-shoulders formationwhen ___________.A. the price index pierces the left shoulderB. the price index pierces the right shoulderC. the price index pierces headD. none of the above takes place.93. According to Elliot wave theory, the stock market behavior can be explained as_________________.A. a series of medium-term wave cycles with no short-term trendB. a series of long-term wave cycles with no short-term trendC. a series of superimposed long-term and short-term wave cyclesD. sine and cosine functions94. An investor holds a very conservative portfolio invested for retirement but she takes someextra cash she earned from her year-end bonus and buys gold futures. She appears to be engagingin ___________.A. overconfidenceB. representativenessC. forecast errorsD. mental accounting95. Which one of the following statements on the Dow Theory is correct?A. The Elliot wave theory is the only recent variation of the Dow Theory.B. The theory of Kondratieff waves is the only recent variation of the Dow Theory.C. Both the Elliot wave theory and the theory of Kondratieff waves are recent variations of theDow Theory.D. Neither the Elliot wave theory nor the theory of Kondratieff waves are recent variations of theDow Theory.96. On a particular day, there were odd-lot sales of 830,000 on the NYSE and 746,000 odd-lotpurchases. The odd-lot trading index is __________.A. 0.43B. 0.90C. 0.77D. 1.1197. On a particular day, there were 890 stocks which advanced on the NYSE and 723 whichdeclined. The volume in advancing issues was 80,846,000 and the volume in declining issueswas 70,397,000. The common measure of market breadth is __________.A. -10,449,000B. -167C. 167D. 10,449,00098. The tendency of investors to hold on to losing investments is called the ________.A. overweighting effectB. head-in-the-sand effectC. disposition effectD. prospector effect99. Problems with behavioral finance include:I. the behavioralists tell us nothing about how to exploit any irrationalityII. the implications of behavioral patterns are inconsistent from case to case, sometimessuggesting overreaction, sometimes underreactionIII. like technical trading rules, behavioralists can always find some pattern in past data thatsupports a behavioralist traitA. I onlyB. II onlyC. I and III onlyD. I, II and III100. The price of a stock fluctuates over a period of 10 days. The movement of the stock pricebelow the 10 day minimum price of $25 triggers a rash of selling. The $25 price might now beconsidered the _______________.A. congestion areaB. penetration pointC. resistance levelD. support level
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