1) Which of the following are financial assets? A) Bonds B) Machines C) Stocks D) Bonds and stocks E) Bonds, machines, and stocks
2) Which of the following is true of 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) The divisor must be adjusted for stock splits. D) It is a value-weighted average of 30 large industrial stocks and the divisor must be adjusted for stock splits. E) It is a price-weighted average of 30 large industrial stocks and the divisor must be adjusted for stock splits.
3) An investor purchases one municipal and one corporate bond that pay rates of return of 7.5% and 10.3%, respectively. If the investor is in the 25% marginal tax bracket, his or her after-tax rates of return on the municipal and corporate bonds would be ________ and ________, respectively. A) 7.5% and 10.3% B) 7.5% and 7.73% C) 5.63% and 7.73% D) 5.63% and 10.3% E) 10% and 10%
4) Assume you purchased 200 shares of GE common stock on margin at $70 per share 4) from your broker. If the initial margin is 55%, how much did you borrow from the broker? A) $6,000 B) $4,000 C) $7,700 D) $7,000 E) $6,300
5) Which of the following orders instructs the broker to buy at or below a specified price? A) Limit-loss order B) Discretionary order C) Limit-buy order D) Stop-buy order E) Market order
6) Growth Fund had year-end assets of $862,000,000 and liabilities of $12,000,000. There were 32,675,254 shares in the fund at year-end. What was Growth Fund's net asset value? A) $28.17 B) $25.24 C) $19.62 D) $26.01 E) $21.56
7) You purchased a share of stock for $68. One year later you received $3.00 as a dividend and sold the share for $74.50. What was your holding-period return? A) 12.5% B) 14.0% C) 13.6% D) 11.8% E) 9.2%
8) Elias is a risk-averse investor. David is a less risk-averse investor than Elias. Therefore, A) for the same risk, David requires a higher rate of return than Elias. B) for the same return, Elias tolerates higher risk than David. C) for the same risk, Elias requires a lower rate of return than David. D) for the same return, David tolerates higher risk than Elias. E) Cannot be determined
9) The utility score an investor assigns to a particular portfolio, other things equal, A) will decrease as the rate of return increases. B) will decrease as the standard deviation decreases. C) will decrease as the variance decreases. D) will increase as the variance increases. E) will increase as the rate of return increases.
10) Systematic risk is also referred to as A) market risk, nondiversifiable risk. B) market risk, diversifiable risk. C) unique risk, nondiversifiable risk. D) unique risk, diversifiable risk. E) None of the options
11) The risk that can be diversified away is A) firm specific risk. B) beta. C) systematic risk. D) market risk.
12) Consider the following probability distribution for stocks A and B: The expected rates of return of stocks A and B are ________ and ________, respectively. A) 13.2%; 9% B) 14%; 10% C) 13.2%; 7.7% D) 7.7%; 13.2%
13) Which one of the following portfolios cannot lie on the efficient frontier as described by Markowitz? A) Only portfolio A cannot lie on the efficient frontier. B) Only portfolio B cannot lie on the efficient frontier. C) Only portfolio C cannot lie on the efficient frontier. D) Only portfolio D cannot lie on the efficient frontier. E) Cannot tell from the information given.
14) Portfolio theory as described by Markowitz is most concerned with: A) the elimination of systematic risk. B) the effect of diversification on portfolio risk. C) the identification of unsystematic risk. D) active portfolio management to enhance returns.
15) The risk-free rate and the expected market rate of return are 0.056 and 0.125, respectively. According to the capital asset pricing model (CAPM), the expected rate of return on a security with a beta of 1.25 is equal to A) 0.142. B) 0.144. C) 0.153. D) 0.134. E) 0.117.
Bonus Question 16) The risk-free rate is 7%. The expected market rate of return is 15%. If you expect a stock with a beta of 1.3 to offer a rate of return of 12%, you should A) buy the stock because it is overpriced. B) sell short the stock because it is overpriced. C) sell the stock short because it is underpriced. D) buy the stock because it is underpriced. E) None of the options, as the stock is fairly priced