question

True or False: A rational investor will require a higher return on treasury bonds than stocks. A) True B) False

answer

B) False

question

The ________ helps us to predict the expected return of a risky asset. A) Weighted Average Cost of Capital B) Rational Investor Risk Model C) Capital Asset Pricing Model D) Capital Structure Model E) Risk/Return Model

answer

D) Capital Structure Model

question

Calculate the rate of return on an investment that you bought for $50, received a $3 dividend, and sold one year later for $55? A) 14.5% B) 10% C) 9% D) 16% E) 5.5%

answer

D) 16%

question

If the market returns 8%, PennCo's stock returns 12%, if the market returns -8%, PennCo's stock returns -12%. What is PennCo's Beta? A) 1.4 B) 0.4 C) 0.33 D) 0.66 E) 1.5

answer

E) 1.5

question

Which of the following asset classes would you expect to have the highest expected return and standard deviation? A) Large company stocks B) Treasury bills C) Corporate bonds D) Government bonds E) Small company stocks

answer

E) Small company stocks

question

Calculate the standard deviation of stock PSU over the last three years. Year 1: 10%, Year 2: -3%, Year 3: 5% A) 3.54% B) 0.58% C) 7.64% D) 0.70% E) 1.17%

answer

C) 7.64%

question

Given the following information, calculate the Fund's alpha: T-Bill Return: 2% S&P 500 Return: 10% Beta: 1.25 Fund's Return: 15% A) 5% B) 2% C) -3% D) 3% E) -5%

answer

D) 3%

question

There is an indirect relationship between risk and return. A) True B) False

answer

B) False

question

Calculate security ABC's expected return using the capital asset pricing model. Risk Free Rate: 5%, Market Return: 15%, Beta: 1.5 A) 10% B) 20% C) 15% D) 25% E) 17%

answer

B) 20%

question

Calculate the compound annual return on an investment that was purchased at $20 and sold 5 years later for $40. A) 4.6% B) 100% C) 16.8% D) 14.9% E) 20%

answer

D) 14.9%

question

What is the calculation for the market risk premium? A) Beta minus Risk Free Rate B) Market Return times Beta C) Beta times Risk Free Rate D) Market Return minus Beta E) Market Return minus Risk Free Rate

answer

E) Market Return minus Risk Free Rate

question

True or False: Systemic risk can be diversified away with a proper diversification strategy. A) True B) False

answer

B) False

question

What is the expected return of an investment if the market return is 12%, the risk free rate is 5%, and the investment's Beta is 1.2? A) 13.4% B) 14.4% C) 8.4% D) 6.0% E) 12.0%

answer

A) 13.4%

question

True or False: An investment that is above the Capital Asset Pricing Model Line is considered overvalued. A) True B) False

answer

B) False

question

Based on the theory of efficient capital markets, what would you expect to happen to the price of an investment if good news was released to the market? A) The price would gradually increase B) The investment would move below the CAPM line C) Beta would decrease to below 1.0 D) Nothing, because technical analysts had already uncovered the pattern E) The price would increase immediately

answer

E) The price would increase immediately

question

Calculate the alpha of an investment that returned 10% if the market return is 10%, the risk free rate is 2%, and the investment's Beta is 1.1? A) 0.0% B) 0.8% C) 8.8% D) -0.8% E) -1.2%

answer

B) 0.8%

question

Given the following Betas for three similar investments, rank the expected return from highest to lowest. Investment A - 1.2 Investment B - 1.5 Investment C - 0.8 A) Investment A, Investment B, Investment C B) Investment B, Investment A, Investment C C) Investment C, Investment B, Investment A D) Investment A, Investment C, Investment B E) Investment B, Investment C, Investment A

answer

B) Investment B, Investment A, Investment C

question

True or False: Using net returns, a diversified mutual fund with a Beta of zero will have an expected negative alpha that is equal to its expense ratio. A) True B) False

answer

A) True

question

A fund that invested based on the strategies put forth in the Fama and French study would typically invest in: A) Assets with high Beta's B) Assets with low P/E ratios C) International stocks D) It doesn't matter because all information is taken into consideration E) Large cap stocks

answer

B) Assets with low P/E ratios

question

Which of the following examples best describes efficient capital markets? A) There are many opportunities to find mispriced stocks B) It is easy to determine good vs. bad investments C) All investments are accurately priced D) Investments do not always offer its expected risk adjusted return E) An asset with a high beta will not necessarily offer a high return

answer

C) All investments are accurately priced

question

Which best describes an investment with positive alpha? A) An investment that returns above the capital asset pricing model line B) An investment that outperforms the S&P500 C) An investment that is overvalued D) An investment that outperforms the risk free rate but underperforms the S&P500 E) An investment that has a return equal to its systematic risk

answer

A) An investment that returns above the capital asset pricing model line

question

In an efficient capital market, stock prices react to news ______ and _________. A) Gradually; randomly B) Immediately; based on historical trends C) Immediately; randomly D) Gradually; with changes in earnings E) Gradually; based on historical trends

answer

C) Immediately; randomly

question

Which of the following forms of efficient markets is characterized by stock prices reflecting all publically available information? A) Weak Form B) Semi-strong Form C) Strong Form D) Random Form E) Independent Form

answer

B) Semi-strong Form

question

Which of the following analysts do not agree with weak form market efficiency? A) Fundamental analysts B) Investment bankers C) Mutual fund managers D) Technical analysts E) Hedge fund analysts

answer

D) Technical analysts

question

In the CAPM equation, what does a beta measure? A) Risk that you are not paid to take B) Risk that you are paid to take C) Firm specific risk D) Riskless rate of return E) Market risk premium

answer

B) Risk that you are paid to take

question

Which of the following type of risk cannot be diversified away? A) Market risk B) Systematic risk C) Unsystematic risk D) Market premium risk E) Systemic risk

answer

B) Systematic risk

question

Calculate the firm's expected return: S 500: 15%, T-Bills: 4%, Beta: 1.5 A) 10.5% B) 13.5% C) 16.5% D) 20.5% E) 22.5%

answer

D) 20.5%

question

If a firm's observed return was 10%, calculate the firm's alpha given the following information: S 500: 13%, T-Bills: 3%, Beta: 0.5 A) 1% B) 2% C) 5% D) 8% E) 10%

answer

B) 2%

question

A fund's positive net investment performance versus its benchmark index is a good indicator of positive future performance. A) True B) False

answer

B) False

question

If a market is efficient, the price of the investment will equal the value of an investment. A) True B) False

answer

A) True

question

Which of the following is NOT one of the types of risk associated with fixed-rate debt obligations? A) Reinvestment risk B) Default risk C) Prepayment risk D) Coupon risk E) Interest risk

answer

D) Coupon risk

question

The difference between the yield on a non-callable US Treasury bond and the yield on a non-callable corporate bond with identical maturities is known as ______. A) Coupon premium B) Interest premium C) Market premium D) Spread to treasuries E) Interest spread

answer

D) Spread to treasuries

question

Which of the following bonds would require the greatest yield? Bond 1: AAA rating, Bond 2: BBB Rating, Bond 3: B Rating A) Bond 1 B) Bond 2 C) Bond 3 D) There is no difference in the bonds' yields E) Cannot be determined

answer

C) Bond 3

question

A callable bond will have a higher interest rate than its otherwise identical, non-callable bond. A) True B) False

answer

A) True

question

Which of the following types of risk is most difficult to evaluate? A) Reinvestment risk B) Interest rate risk C) Prepayment risk D) Coupon risk E) Default risk

answer

B) Interest rate risk

question

If interest rates are 7%, a bond with a 6% coupon and maturity of six years will be riskier than a bond with a coupon rate of 6% and a maturity of 3 years. A) True B) False

answer

A) True

question

The _______ the maturity of a bond and the _______ the coupon of a bond, the greater the risk. A) Shorter, higher B) Longer, higher C) Shorter, lower D) Longer, lower

answer

D) Longer, lower

question

What is the primary advantage of investing in a municipal bond? A) Municipal bonds have no interest rate risk B) Municipal bonds have very high yields C) Municipal bonds are exempt from federal taxes D) Municipal bonds usually have very short maturities E) Municipal bonds have very high coupon rates

answer

C) Municipal bonds are exempt from federal taxe

question

. A bond ($1,000 face) pays an 8% coupon, semi-annually, with a maturity of 10 years. Interest rates are 8%. What is the present value of this bond? A) $856 B) $966 C) $1,000 D) $1,256 E) $1,466

answer

C) $1,000

question

A bond with a $1,000 face value pays a 7% coupon, semi-annually, with a maturity of 12 years. If interest rates are 5%, what is the present value of this bond? A) $789 B) $899 C) $1,000 D) $1,179 E) $1,312

answer

D) $1,179

question

Prepayment risk on bonds is usually associated with? A) Interest Rates Rising B) Interest Rates Falling C) The firm defaulting and not being able to prepay D) The maturity date E) Call Options

answer

E) Call Options

question

True or False: Fixed rate bonds typically have a lower yield than floating rate bonds because the the investor in the bond has no interest rate risk. A) True B) False

answer

B) False

question

Which bond rating would you expect to have the highest spread to treasury? A) AA B) AAA C) BB D) B E) A

answer

D) B

question

What is true about bonds? A) Floating rate bonds have significant interest rate risk B) Higher default risk leads to a lower spread to treasury C) If a bond has a call option, it will have a lower spread than a similar bond with no call option D) Interest payments received on Corporate Debt is tax-free E) Corporate debt is considered risk free

answer

C) If a bond has a call option, it will have a lower spread than a similar bond with no call option

question

True or False: In the event of default, subordinated debt takes priority over senior debt with regards to payment. A) True B) False

answer

B) False

question

Which of the following is best describes interest rate risk? A) Interest payments received on a floating rate bond fall as rates fall B) Interest received may need to be reinvested at lower yields if rates fall C) As rates rise, the value of a fixed rate bond falls D) As rates fall, the value of a fixed rate bond falls E) A bond that is callable can be refinanced with a lower rate bond

answer

C) As rates rise, the value of a fixed rate bond falls

question

If the yield on a bond is above its coupon rate, it is called a: A) Subordinated Note B) Par Bond C) Call Premium D) Discount Bond E) Premium Bond

answer

D) Discount Bond

question

Who is responsible for overseeing interest rate policy in the United States? A) U.S. Treasury B) Senate C) House of Representatives D) Federal Reserve E) Investment Banks

answer

D) Federal Reserve

question

True or False: Yields are based on a spread over the comparable maturity Municipal Bond Index. A) True B) False

answer

B) False

question

Which of the following is true about bonds? A) Interest is typically paid annually B) Yields on Treasury Bonds are the basis for all other yields C) The longer the maturity on a bond, the lower the yield D) A bond with a yield below its coupon rate is called a discount bond E) Bond investors are typically risk takers seeking large returns.

answer

B) Yields on Treasury Bonds are the basis for all other yields

question

What is the value of a $1,000 30-year bond that pays coupon rate of 10% if interest rates in the market for similar bonds are at 8%? A) $1,226.23 B) $628.70 C) $2,037.52 D) $2,357.41 E) $1,172.92

answer

A) $1,226.23

question

True or False: The higher the duration of a bond, the lower the risk of the bond. A) True B) False

answer

B) False

question

With all else being constant, which of the following is true? A) Callable bonds will have lower yields than non-callable bonds B) As interest rates rise, the value of bonds increase C) A convertible bond will have a lower yield than a non-convertible bond D) Longer term bonds will have lower yields than shorter term bonds E) Lower coupon rate bonds will be less risky than higher coupon bonds

answer

C) A convertible bond will have a lower yield than a non-convertible bond

question

What is the primary advantage of investing in Municipal Bonds? A) Muni Bonds are primarily floating rate bonds and have no interest rate risk B) Muni Bonds are essentially risk free C) Muni Bond Interest is exempt from federal taxes D) Muni Bonds typically have very short term maturities E) There is no advantage to investing in Muni Bonds

answer

C) Muni Bond Interest is exempt from federal taxes

question

True or False: If the coupon rate of a bond is lower than the market yields for similar securities, it's price will be higher than the par value. A) True B) False

answer

B) False

question

If the risk free rate is 2% and the yield on a bond is 7%, what is the spread to treasury assuming the bond is not callable or convertible? A) 2% B) 7% C) 3% D) 3.5% E) 5%

answer

E) 5%

question

Calculate the taxable equivalent yield of a Muni Bond that yields 6% if the tax rate is 30%. A) 20% B) 8.6% C) 10.2% D) 4.2% E) 7.8%

answer

B) 8.6%

question

Value a 10 year, $1,000 bond with a coupon rate of 8% if market yields rise to 9%. A) $1,445.28 B) $960.44 C) $534.57 D) $934.96 E) $1,276.95

answer

D) $934.96

question

Value a 20 year, $1,000 bond with a coupon rate of 6% that is callable after 10 years at a 101% of par. Assume market yields are 5%. A) $1,125.51 B) $1,084.05 C) $1,077.95 D) $1,306.32 E) $1,051.57

answer

B) $1,084.05

question

Which of the following is true of the yield curve? A) It is a chart of implied forward rates over time B) The pure expectations hypothesis is that the shape is a function of supply and demand C) The liquidity preference hypothesis assumes investors are risk neutral D) The yields included are adjusted with expectations of future inflation E) It can be upward or downward sloping

answer

E) It can be upward or downward sloping

question

Which of the following is true about the spread to treasuries of a bond? A) The higher the credit rating, the higher a bond's spread to treasuries B) The spread to treasuries is the difference in yield between a bond and a U.S. treasury of the same maturity C) The lower the credit rating, the lower a bond's spread to treasuries D) A bond's spread to treasuries is not dependent on credit ratings E) A bond with a low spread to treasuries is more risky than a bond with a high spread to treasuries

answer

B) The spread to treasuries is the difference in yield between a bond and a U.S. treasury of the same maturity

question

A callable bond: A) would usually have a lower yield than a similar non-callable bond. B) is attractive to the buyer because the immediate receipt of principal and premium usually produces a higher return. C) is more apt to be called when interest rates are high because the interest savings will be greater. D) generally has a higher credit rating than a similar non-callable bond. E) is attractive to the issuer because it allows the issuer to prepay outstanding debt if new debt can be issued at lower rates.

answer

E) is attractive to the issuer because it allows the issuer to prepay outstanding debt if new debt can be issued at lower rates.

question

Which of the following statements regarding the yield curve is true? A) Bonds with longer maturities usually have a lower yield. B) The yield curve usually is upward sloping which means that investors require higher returns for longer maturity Treasury securities. C) The yield curve displays the relationship between the yield to maturity of corporate bonds and default risk. D) The yield curve displays the relationship between the risk and return of a stock. E) The yield curve is the relationship between the risks and the maturities on municipal bonds.

answer

B) The yield curve usually is upward sloping which means that investors require higher returns for longer maturity Treasury securities.

question

Under which scenario is an issuer MOST likely to call their bonds? A) Bond prices go down B) Interest rates go down C) Interest rates go up D) Interest rates remain the same E) The company faces a liquidity crisis

answer

B) Interest rates go down

question

According to _________________, the yield curve represents a series of expected future short-term interest rates. A) pure expectations hypothesis B) the liquidity preference theory C) the market segmentation hypothesis D) the random walk hypothesis E) the efficient markets theory

answer

A) pure expectations hypothesis

question

The market for U.S. Treasury securities is the largest and most liquid of any financial markets. A) True B) False

answer

A) True

question

Which of the following type of bond has a coupon rate on the bond that is higher than the market yield? A) Fixed-rate par bond with call option B) Fixed-rate par bond C) Fixed-rate discount bond D) Zero coupon bond E) Fixed-rate premium bond

answer

E) Fixed-rate premium bond

question

Which of the following types of investors would most likely favor a municipal bond? A) Wealthy individuals B) Risk averse investors C) Risk seeking investors D) Investors with low incomes E) Corporations

answer

A) Wealthy individuals

question

According to _________________, most investors prefer to hold short-term securities, which is why longer-term securities must pay higher yields. A) the pure expectations hypothesis B) the liquidity preference theory C) the market segmentation hypothesis D) the random walk hypothesis E) the efficient markets theory

answer

B) the liquidity preference theory

question

If a corporate bond has a coupon rate of 3% and the market interest rate is 5%, the bond is classified as a_______: A) Fixed-rate par bond B) Fixed-rate discount bond C) Fixed-rate premium bond D) Zero coupon bond E) Floating-rate premium bond

answer

B) Fixed-rate discount bond

question

If you buy a stock at the beginning of the year at a price of $60, the company pays two quarterly dividends to $2 and then raises their dividend to $3 for the last two quarters of the year, and you sell the stock at the end of the year for $63, what was your return? A) 16.7% B) 18.3% C) 20.6% D) 21.7% E) 25.0%

answer

D) 21.7%

question

True or False: A technical analyst will spend most of their time evaluating cash flows and relative valuation metrics. A) True B) False

answer

B) False

question

If a company pays 100% of its profits in dividends and is expected to pay a $0.70 per quarter dividend in perpetuity, what is the value of the company's stock if the cost of capital is 8%? A) $140.00 B) $2.80 C) $35.00 D) $11.43 E) $8.75

answer

C) $35.00

question

A believer in modern portfolio theory would spend the majority of their time looking at: A) Profits B) Discounted Cash Flows C) Short-term trends in price D) Beta E) Relative Valuation Metrics

answer

D) Beta

question

True or False: A fundamental analyst believes that the price of a stock is always equal to its value. A) True B) False

answer

B) False

question

Which is not required to value a stock using the discounted cash flow methodology? A) Estimating the weighted average cost of capital B) Forecasting expected cash flows C) Evaluate recent changes and patterns in stock price D) Calculate enterprise value E) Calculate intrinsic stock value

answer

C) Evaluate recent changes and patterns in stock price

question

True or False: A company that operates in a high-tech industry would typically have a longer excess return period than a company in a commoditized industry. A) True B) False

answer

A) True

question

What is value of a perpetuity that pays $6 quarterly with a cost of capital of 10%? A) $960 B) $24 C) $167 D) $240 E) $60

answer

D) $240

question

A fundamental analyst will typically use all of the following except: A) P/E ratios B) Discounted Cash Flow Techniques C) Price Targets D) Relative Valuation Metrics E) Trading Volume Data

answer

E) Trading Volume Data

question

True or False: A company that pays 100% of its profits in dividends will likely be valued higher in the future than a company that reinvests 100% of its profits because investors want the certainty of dividends. A) True B) False

answer

B) False

question

What is true about interest rates and stock prices? A) There is a direct relationship between interest rates and stock prices B) There is an inverse relationship between interest rates and stock prices C) Stock prices are only affected by interest rates over the long term D) Stock prices are not affected by interest rates E) Interest rates only affect stock prices in the short-term

answer

B) There is an inverse relationship between interest rates and stock prices

question

The price volatility of the average stock is ______. A) 10% B) 20% C) 27% D) 36% E) 49%

answer

E) 49%

question

The dividend policy of a company does not affect its current value of its stock. A) True B) False

answer

A) True

question

An asset that has a stream of even cash flows that continue to infinity is known as a _________. A) Perpetuity B) Dividend stock C) Bond D) Annuity E) Growth company

answer

A) Perpetuity

question

_________ believe that stock prices are influenced more by investor psychology and emotions of the crowd than by changes in the fundamentals of the company. A) Fundamental analysts B) Technical analysts C) Modern Portfolio Theory analysts D) Risk analysts E) Trend analysts

answer

B) Technical analysts

question

Which of the following stock valuation approaches would a fundamental analyst use? A) Comparing stock price movements on charts B) Discounted Cash Flow analysis C) Comparing changes in the volume of a stock D) Only focusing on an investor's desired level of risk E) Diversifying assets to an acceptable level of risk

answer

B) Discounted Cash Flow analysis

question

A company's residual value generally represents the majority of its stock value. A) True B) False

answer

A) True

question

Calculate the value of a perpetuity that has $2million in annual cash flows with a discount rate of 8%. A) $15 million B) $20 million C) $25 million D) $30 million E) $35 million

answer

C) $25 million

question

Calculate the return to shareholders for the following stock: Beginning Price: $55, Ending Price: $60, Dividends: $2 A) 6.3% B) 9% C) 10.5% D) 12.7% E) 15.9%

answer

D) 12.7%

question

Which of the following analysts believes that a stock's price will eventually equal its underlying value? A) Portfolio Theory B) Fundamental C) Technical D) Charting E) Risk assessment

answer

B) Fundamental

question

Which is definitely true regarding stock valuation? A) If interest rates decline and risk increases, the value of a stock will increase B) If expectations of future cash flows decline and risk decreases, the value of a stock will decrease C) If expectations of future cash flows increase and interest rates rise, the value of a stock will increase D) If risk increases and interest rates rise, the value of a stock will decrease E) If risk decreases and interest rates fall, the value of a stock will decrease

answer

D) If risk increases and interest rates rise, the value of a stock will decrease

question

True or False: If a company's earnings are in line with expectations, the stock price will increase significantly. A) True B) False

answer

B) False

question

Which of the following is NOT necessary to project free cash flow to the firm? A) Revenue Growth B) Operating Profit Margin C) Beta D) Working Capital Investment E) Tax Rate

answer

C) Beta

question

Which would stock would be the best buying opportunity? Stock A: intrinsic value - $40, price - $45 Stock B: intrinsic value - $60, price - $40 Stock C: intrinsic value - $100, price - $90 Stock D: intrinsic value - $40, price - $20 Stock E: intrinsic value - $40, price - $60 A) Stock A B) Stock B C) Stock C D) Stock D E) Stock E

answer

D) Stock D

question

Who would be most likely to value a stock based on the Discounted Cash Flow valuation technique? A) Technical Analyst B) Fundamental Analyst C) Day Trader D) All of the Above E) None of the Above

answer

B) Fundamental Analyst

question

Which of the following would NOT increase the intrinsic value of a Stock with all else constant? A) Higher working capital as a % of sales B) Higher Revenue Growth Rate C) Lower Beta D) Lower risk free interest rate E) Lower Tax Rate

answer

A) Higher working capital as a % of sales

question

True or False: With all fundamentals the same, a tech company will have a higher valuation than a non-tech company. A) True B) False

answer

B) False

question

Which of the following would cause a stock's price to increase? A) Company ABC losing $10 million in the quarter versus expectations of a $5 million loss B) Company ABC reporting a revenue growth rate of 10%, in line with expectations C) Company ABC reporting an operating profit margin of 15% versus expectations of 20% D) Company ABC losing $5 million in the quarter versus expectations of a $10 million loss E) Company ABC reporting an operating profit margin of 10%, in line with expectations

answer

D) Company ABC losing $5 million in the quarter versus expectations of a $10 million loss

question

Given the following, calculate the intrinsic value per share of Company XYZ's stock: Corp. Value - $20 million Bonds Outstanding - $7 million ST Liabilities - $250 thousand LT Growth Rate - 2.5% Beta - 0.8 Shares Outstanding - 1 million A) $13.07 B) $10.20 C) $8.75 D) $12.75 E) $20.00

answer

D) $12.75

question

With all else constant, which would result in a lower intrinsic value per share of a company's stock? A) Lower Market Risk Premium B) Lower Investment as % of Revenue C) Higher Revenue Growth D) Lower Profit Margins E) Lower Risk Free Rate

answer

D) Lower Profit Margins

question

An increase in _________ risk in the market place was a major factor is the latest financial crisis. A) Systematic B) Unsystematic C) Interest rate D) Reinvestment E) Inflation

answer

A) Systematic

question

The value of a company is equal to the present value of its expected future cash flows, discounted for timing and risk. A) True B) False

answer

A) True

question

Which of the following is NOT a step in discounted cash flow valuation? A) Forecast expected cash flows B) Estimate the discount rates C) Calculate the enterprise value of a company D) Calculate the per share price of a stock E) Estimate the current ratio

answer

E) Estimate the current ratio

question

_________ analysis tends to be more a short-term trading approach to buying and selling stocks. A) Modern portfolio theory B) Fundamental C) Technical D) Discounted cash flow E) Cost of capital

answer

C) Technical

question

Discounted cash flow is a type of ______ analysis. A) Modern portfolio theory B) Fundamental C) Technical D) Capital markets E) Interest rate

answer

B) Fundamental

question

In the long run, stock returns are influenced by growth in _________. A) Earnings B) Interest rates C) Inflation D) Risk E) Supply and demand

answer

A) Earnings

question

Using a higher risk-free rate in your WACC calculation will yield a lower value in a discounted cash flow analysis. A) True B) False

answer

A) True

question

In a WACC calculation, which of the following measures risk? A) Risk free rate B) Market return C) Beta D) CAPM E) Debt to equity ratio

answer

C) Beta

question

The value of a stock is equal to the present value of its earnings. A) True B) False

answer

B) False

question

Who determines the stock price of a company? A) Management B) Board of Directors C) Investment Banks D) The Market E) The Government

answer

D) The Market

question

Which of the following is an example of a systematic risk? A) Company XYZ being investigated by the SEC B) Company A losing a major contract to a competitor C) Demand for a Company's product declining D) A Company having to pay higher taxes because of a new corporate tax code E) Company ABC's CEO unexpectedly resigning

answer

D) A Company having to pay higher taxes because of a new corporate tax code

question

True or False: To best diversify non-systematic risk, portfolio managers typically buy assets that have high correlations. A) True B) False

answer

B) False

question

Which of the following is true regarding hedges? A) Futures contracts grant the right but not the obligation to buy or sell an asset B) A European option gives the owner the right to exercise at any point prior to expiration C) Forward contacts are similar to options but are traded on exchanges D) A put option gives the owner the right to buy an underlying asset at a given price E) Hedges are used to minimize downside risk by giving up any upside potential

answer

E) Hedges are used to minimize downside risk by giving up any upside potential

question

You have the right to buy 100 shares of Apple Stock at $90 / share. What is this hedge instrument called? A) Put option B) Call option C) Forward contract D) Future Contract E) Swap

answer

B) Call option

question

If a company purchases a futures contract to buy 100 barrels of oil at $80 / barrel, which of the following is true? A) The company will not exercise unless the market price is greater than $80 / barrel B) The company will not exercise unless the market price is less than $80 / barrel C) The strike price on the contract depends on oil market volatility D) The contract was negotiated between two parties and cannot be traded on an exchange E) The company is obligated to pay $80 / barrel regardless of the spot price of oil

answer

E) The company is obligated to pay $80 / barrel regardless of the spot price of oil

question

If GE's stock is trading at $25 per share, what is the intrinsic value of a put option with a strike price of $30 if the option is trading at $8? A) $3 B) $5 C) $13 D) $18 E) $22

answer

B) $5

question

True or False: Derivative markets are less liquid and less efficient that spot markets. A) True B) False

answer

B) False

question

If Apple's stock is trading at $120 per share, what is the time value of a call option with a strike price of $110 if the option is trading at $25? A) $10 B) $15 C) $25 D) $35 E) -$15

answer

B) $15

question

True or False: A call option is in the money if Strike Price is greater than the current market price. A) True B) False

answer

B) False

question

Which of the following is a common measure of risk of a stock? A) Average return B) Standard deviation of returns C) Market returns D) Rate of return of risk free rate E) Diversification

answer

B) Standard deviation of returns

question

Which of the following is NOT a way to manage risk? A) Diversification B) Hedging C) Insurance D) Investing in stocks that are highly correlated E) Selling off assets

answer

D) Investing in stocks that are highly correlated

question

The higher the correlation between assets in a portfolio, the greater the risk reduction. A) True B) False

answer

B) False

question

If two stocks have a correlation of -1, what would you expect Stock B to return if Stock A returned 5%? A) 5% B) 10% C) -10% D) -5% E) 0%

answer

D) -5%

question

Which of the following represents unsystematic risk? A) Market returns are poor B) Raising the corporate income tax C) A company loses an important patent D) The economy shows poor growth E) There is a worldwide recession

answer

C) A company loses an important patent

question

Achieving the highest return for certain level of risk is known as investing on the efficient frontier. A) True B) False

answer

A) True

question

Studies have shown about _____ stocks in a portfolio are sufficient to reduce risk. A) 5-10 B) 10-15 C) 15-20 D) 20-25 E) 25-30

answer

D) 20-25

question

Which of the following best characterizes an insurance instrument? A) Forwards B) Futures C) Interest rate swap D) Currency swap E) Options

answer

E) Options

question

Which of the following positions has the right to sell a stock at the strike price? A) Buyer of a call option B) Seller of a call option C) Buyer of a put option D) Seller of a put option E) Owner of a forward contract

answer

C) Buyer of a put option

question

Which of the following dictates that the futures price of an asset and the spot price of the asset must be the same on the day future contracts expire? A) Arbitrage law B) The law of one price C) The efficient frontier D) The Security market line E) The random walk hypothesis

answer

B) The law of one price

question

Which of the following is an example of Herding? A) You buy a stock that a fundamental analysis shows is undervalued B) You believe that because the market has done well, it will continue to do well C) You save money at a low rate for vacation rather than paying off a high interest credit card D) Fund managers are buying a company's stock that has no revenue so you buy it too E) A company's risk profile changes so you sell the stock

answer

D) Fund managers are buying a company's stock that has no revenue so you buy it too

question

True or False: Less than half of fund managers believe that their performance will be above average. A) True B) False

answer

B) False

question

At what point in the market cycle would overconfidence most likely be prevalent? A) Relief B) Fear C) Hope D) Capitulation E) Euphoria

answer

E) Euphoria

question

True or False: An example of the hot hand fallacy is falsely supposing that a coin flip will be heads because the previous flip was heads. A) True B) False

answer

A) True

question

Loss aversion means that: A) People will evaluate gains and losses the same B) The utility gained from a win will be greater than the utility lost from a loss of the same magnitude C) The utility function will flatten out faster for losses than gains D) The value function will be steeper for losses than for gains E) Most people will accept a $1,000 coin flip bet

answer

D) The value function will be steeper for losses than for gains

question

Which of the following is an example of anchoring in behavioral finance? A) Comparing a stock price to its 52-week high B) Comparing two different stocks before deciding which to buy C) Evaluating the risk of a portfolio of stocks D) Buying an index fund to ensure you receive market returns E) Refusing to put money in the market due to risk of loss

answer

A) Comparing a stock price to its 52-week high

question

Which of the following is an example of confirmation bias? A) An investor reading the business section B) An analyst researching the risks of a stock they wish to recommend C) A fund manager selling a stock after consecutive poor earnings report D) A gold investor reading only articles that support a gold buying strategy E) A fund manager comparing the fund's returns to the S 500

answer

D) A gold investor reading only articles that support a gold buying strategy

question

Regret Theory states that the fear of regret associated with losses leads to: A) Mental Accounting B) Loss Aversion C) Market Bubbles D) Anchoring E) Herding

answer

B) Loss Aversion

question

Which of the following, on average, is true regarding investment performance? A) The individual investor is able to outperform the S 500 B) The individual investor is able to outperform most equity funds C) Equity funds typically outperform the S 500 D) The individual stock investor underperforms the S 500 E) The individual stock investor outperforms Corporate Bond returns

answer

D) The individual stock investor underperforms the S 500

question

True or False: Income Gap Analysis and Duration Gap Analysis are tools used by financial institutions to manage credit risk. A) True B) False

answer

B) False

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