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Flashcards in Finance 307-Exam2 Deck (87):
1

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% B. 3.5%
C. 7% D. 11%

D. 11%

2

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

C. dollar-weighted return

3

5. Rank the following from highest average historical return to lowest average historical return from 1926 to 2013.
I. Small stocks
II. Long-term bonds III. Large stocks IV. T-bills
A.I, II, III, IV
B.III, IV, II, I
C. I, III, II, IV
D. III, I, II, IV

C. I, III, II, IV

4

13. The arithmetic average of -11%, 15%, and 20% is ________.
A.15.67%
B. 8%
C. 11.22%
D. 6.45%

B. 8%

5

14. The geometric average of -12%, 20%, and 25% is _________.
A.8.42% B.11%
C. 9.7% D. 18.88%

C. 9.7%

6

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%

C. 3.64

7

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%

B. 3.09%

8

23. The market risk premium is defined as __________.
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

A. the difference between the return on an index fund and the return on Treasury bills

9

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 to risk aversion
D. index return

B.rate of return in excess of the Treasury-bill rate

10

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

B.Treasury bills; risky assets

11

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

A.the slope of the capital allocation line

12

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.12.8% B.11%
C. 8.9% D. 9.2%

D. 9.2%

13

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?
A.5.14% B. 7.59% C. 9.29% D. 8.43%

A.5.14%

14

31. During the 1926-2013 period the Sharpe ratio was greatest 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. bond world portfolio return in U.S. dollars

B. large U.S. stocks

15

33. During the 1926-2013 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

C. Long-term U.S. Treasury bonds

16

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

B.requires a risk premium to take on the risk

17

35. Historical returns have generally been __________ for stocks of small firms as (than) for stocks of large firms.
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.)

C. higher

18

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?
A.5.48% B. 8.74%
C. 9% D. 12%

B. 8.74%

19

47. A portfolio with a 25% standard deviation generated a return of 15% last year when T-bills were paying 4.5%. This portfolio had a Sharpe ratio of
____.
A. .22 B. .60
C. .42 D. .25

C. .42

20

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%

C. 4.31%

21

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%; 6.7% B.12%; 22.4%
C. 12%; 15.7%
D. 10%; 35%

C. 12%; 15.7%

22

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 _.
A.1% B. 3%
C. 6% D. 9%

B. 3%

23

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

A.$6,000

24

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%.
A.100% B. 90%
C. 45% D. 10%

C. 45%

25

66. You have the following rates of return for a risky portfolio for several recent years: 2011 35.23% 2012 18.67% 2013 −9.87% 2014 23.45%. If you invested $1,000 at the beginning of 2011, your investment at the end of 2014 would be worth ___________.
A.$2,176.60 B. $1,785.56 C. $1,645.53
D. $1,247.87

B. $1,785.56

26

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

B.I and III only

27

79. The buyer of a new home is quoted a mortgage rate of .5% per month. What is the APR on the loan?
A. .50% B. 5%
C. 6% D. 6.5%

C. 6%

28

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% B. 15%
C. 54.5% D. 114.5%

C. 54.5%

29

1. Risk that can be eliminated through diversification is called ______ risk.
A. unique
B. firm-specific
C. diversifiable
D. all of these options

D. all of these option

30

2. The _______ decision should take precedence over the _____ decision.
A. asset allocation; stock selection
B. bond selection; mutual fund selection C. stock selection; asset allocation
D. stock selection; mutual fund selection

A. asset allocation; stock selection

31

5. Asset A has an expected return of 15% and a reward-to-variability ratio of .4. Asset B has an expected return of 20% and a reward-to-variability ratio of .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.

A. asset A

32

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

B. up; left

33

7. An investor's degree of risk aversion will determine his or her ______.
A. optimal risky portfolio
B. risk-free rate
C. optimal mix of the risk-free asset and risky asset
D. capital allocation line

C. optimal mix of the risk-free asset and risky asset

34

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. .40 B. .50 C. .75 D. .80

A. .40

35

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

B. negatively correlated

36

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

C. market risk

37

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

B. the returns on the stock and bond portfolios tend to vary independently of each other

38

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 .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%

C. more than 12% but less than 18%

39

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

C. III and IV only

40

28. The _________ reward-to-variability ratio is found on the ________ capital market line.
A. lowest; steepest
B. highest; flattest
C. highest; steepest
D. lowest; flattest

C. highest; steepest

41

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
.0380, the correlation coefficient between the returns on A and B is _________.
A. .583
B. .225
C. .327
D. .128

A. .583

42

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. slightly more
C. 20% less
D. slightly less

A. 20% more

43

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 risk-aversion level; minimizing the CAL by lending at the risk-free rate

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

44

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

D. usually positive but are not restricted in any particular way

45

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

A. its returns are negatively correlated with market-index returns

46

55. The market value weighted-average beta of 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.)

C. 1

47

56. Diversification can reduce or eliminate __________ risk.
A. all
B. systematic
C. nonsystematic
D. only an insignificant
58.

C. nonsystematic

48

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
D. less than or equal to 0

B. less than 1

49

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

A. stock's standard deviation

50

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.

C. The Federal Reserve increases interest rates 50 basis points.

51

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

B. increase the unsystematic risk of the portfolio

52

70. Which of the following correlation coefficients will produce the least diversification benefit?
A. -.6
B. -.3
C. 0
D. .8

D. .8

53

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?
A.0
B. .45
C. .74
D. 1.35

B. .45

54

87. 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.

A. maximize expected return for a given level of risk.

55

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.Themarketisweak-formefficient. D. Stock prices follow recurring patterns.

D. Stock prices follow recurring patterns.

56

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

A. all past information, including security price and volume data

57

4. The semistrong 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

B. all publicly available information

58

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

C. all information, including inside information

59

6. 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.Themarketisweak-formefficient.
D. Stock prices follow recurring patterns.

D. Stock prices follow recurring patterns.

60

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

B. fall

61

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

A.January

62

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

C. a passive investment strategy

63

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

C. weak

64


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

B. index

65

23. Choosing stocks by searching for predictable patterns in stock prices is called ________.
A. fundamental analysis
B. technical analysis
C. indexmanagement
D. random-walk investing

B. technical analysis

66

29. Evidence supporting semistrong-form market efficiency suggests that investors should _________________________.
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. select securities by throwing darts at the financial pages of the newspaper

C. use a passive trading strategy such as purchasing an index fund or an ETF

67

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

A. trading rule

68

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. $4,000
B. $8,000
C. $12,000
D. $16,000

C. $12,000

69

41. Even if the markets are efficient, professional portfolio management is still important because it provides investors with:
I. Low-cost diversification
II. A portfolio with a specified risk level
III. Better risk-adjusted returns than an index
A. I only
B. I and II only
C. II and III only
D. I,II,andIII

B. I and II only

70

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

C. lucky event

71

48. The _________ effect may explain much of the small-firm anomaly.
I. January II. neglected III. liquidity
A. I only
B. II only
C. II and III only
D. I, II, and III

D. I, II, and III

72

54. According to the semistrong form of the efficient markets 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

B. future changes in stock prices cannot be predicted from any information that is publicly available

73

56. Among the important characteristics of market efficiency is (are) that:
I. There are no arbitrage opportunities.
II. Security prices react quickly to new information.
III. Active trading strategies will not consistently outperform passive strategies.
A. I only
B. II only
C. I and III only
D. I, II, and III

D. I, II, and III

74

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

B. overwhelmingly optimistic

75

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.

C. Every January, the stock market earns above-normal returns.

76

61. Which of the following would violate the efficient market hypothesis?
A. Intel has consistently generated large profits for years.
B. Prices for stocks before stock splits show, on average, consistently positive abnormal ret.
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.

C. Investors earn abnormal returns months after a firm announces surprise earnings.

77

62. Which of the following stock price observations would appear to contradict the weak form 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 forecastmethodology.

C. You could have consistently made superior returns by buying stock after a 10% rise in price and selling after a 10% fall

78

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

D. technical analysis cannot; fundamental analysis cannot

79

68. Value stocks usually exhibit ______ price-to-book ratios and ______ price-to-earnings ratios.
A. low; low
B. low; high
C. high;low
D. high;high

A. low; low

80

69. Growth stocks usually exhibit ______ price-to-book ratios and ______ price-to-earnings ratios.
A. low; low
B. low; high
C. high;low
D. high;high

D. high;high

81

71. 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

A. active management

82


74. 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

C. strong-form efficiency

83

78. 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

C. momentum effect

84

81. 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

B. neglected-firm effect

85

83. 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

B. strong-form efficient

86

84. 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.

D. If a market is strong-form efficient, it is also semistrong-and weak-form efficient

87

88. The portfolio with the lowest standard deviation for any risk premium is called the_______.
A. CAL portfolio
B. efficient frontier portfolio
C. global minimum variance portfolio
D. optimal risky portfolio

C. global minimum variance portfolio