Questions

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SET 1 PRACTICE QUESTIONS Background Chapters 1-5
CHAPTER 1:
1. Risk is best thought of as

a. the chance that the actual return will be zero or negative
b. the chance that the actual return will differ from the expected return
c. the chance that the expected return will be lower than what investors demand
d. the chance that the expected return will be incorrectly estimated
2. Which of the following is INCORRECT about risk-averse investors?

a. They always try to minimize their risk regardless of return.
b. They will not seek risk for its own sake.
c. They can buy very risky securities.
d. They seek to earn a rate of return that is proportional to the risk taken.
3. In describing the investing tradeoff that investors face, which of the following
statements is CORRECT?
a. on an expected basis for the next year, the tradeoff can be upward or downward
sloping
b. over long periods of financial market history, such as 50 or more years, the
tradeoff is downward sloping
c. over recent historical periods of one or two years, the tradeoff can be upward
sloping or downward sloping
d. on an expected basis for the next 10 or 15 years, the tradeoff could be either
upward sloping or downward sloping
4. Which of the following factual statements is INCORRECT?

a. portfolio management is the first step in the investment decision process
b. a passive investment strategy is designed to make few changes over time
c. the Efficient Market Hypothesis states that the prices of securities reflect their
economic value
d. an active investment strategy seeks to change investment proportions and/or
assets in the belief that profits can be made
5. Given the expected return--risk tradeoff that exists for investment decisions, which of
the following financial assets would be expected to be highest on the tradeoff?
a. AAA corporate bonds
b. Treasury bonds
c. blue-chip common stocks
d. preferred stock
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6. Ex post, the return-risk tradeoff available to investors

a. can only be a flat line in return-risk space.
b. can only be upward sloping in return-risk space.
c. can only be downward sloping in return-risk space.
d. could be downward sloping in return-risk space.
7. Intelligent investment decisions for any future period are based on

a. the relation between realized return and risk
b. the relation between expected return and risk
c. expected return only
d. a tradeoff between return and risk that is downward sloping
8. A Chartered Financial Analyst designation is

a. A professional designation awarded by AIMR to candidates passing three levels
of examinations involving important investments topics.
b. a certification of a successful investing record used by professionals to attract
business.
c. a professional designation awarded by employers to employees meeting
recognized standards of competency and conduct.
d. a professional designation awarded by colleges upon successful completion of the
proper exams.
CHAPTER 2:
9. With regard to direct and indirect investing, choose the INCORRECT statement.
a. Direct investing refers to the purchase of securities directly in one’s brokerage
account
b. Indirect investing refers to the purchase of investment companies, thereby letting
the intermediary do the investing on behalf of the investment company
owners
c. Direct investing must be done by every investor since it is not possible to invest
only indirectly
d. Many investors do both direct and indirect investing
10. An example of a nonmarketable security is

a. a Treasury bill
b. a government savings bond
c. a banker's acceptance
d. commercial paper
11. Which of the following is not a money-market security?

a. a Treasury bill
b. money market deposit account
c. a banker's acceptance
d. commercial paper
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12. Which of the following characteristics applies to the Treasury bill?

a. sold at face value on a regular basis
b. pays interest every six months
c. has a face value of $1,000,000
d. sold at a discount on an auction basis weekly
13. The best definition of debt securities, based on the text, is that the term includes
a. All bonds and preferred stocks
b. Treasuries, agencies, municipals, and corporates
c. Treasuries, agencies and corporates
d. Corporate bonds and Treasury bonds only
14. Choose the INCORRECT statement with regard to Federal Agency Securities:
a. they are not exempt from federal tax
b. they typically trade less frequently than comparable Treasury bonds
c. they have slightly less default risk than Treasuries because both the government
and the agency guarantees them
d. they typically have higher yields than Treasury securities of comparable maturity
15. With regard to bond ratings, which of the following statements is INCORRECT?
a. The first four categories represent investment grade securities.
b. A triple-A rated bond is guaranteed not to default
c. Both corporates and municipals are rated
d. Ratings are current opinions on the relative quality of bonds.
16. With regard to bond ratings, which of the following statements is INCORRECT?
a. the first three categories are considered investment grade
b. ratings reflect the quality of the bonds relative to each other
c. corporates and municipals are rated
d. ratings reflect the relative probability of default
17. Using S&P bond ratings, you are trying to put together a list of 4 different corporate
bonds, all with the same maturity, with their current rates. One bond is rated AAA, one
is rated AA, one is rated A, and one is rated BBB. Which of the following rates would be
associated with the AA-rated bonds?
a. 6%
b. 6.5%
c. 7.9%
d. 7.1%
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18. With regard to Vanguard’s Tax Exempt Bond Funds, choose the CORRECT
statement.
a. The long-term bond fund over a long period of years should return less than the
short-term bond fund because it has larger capital losses
b. The money market fund’s Total Return is comprised of the capital return and the
income return
c. The long-term portfolio should show capital returns that have a wider variance
than the capital returns for the short-term portfolio, and because of this the
average return over time should be expected to be less
d. The short-term portfolio over a period of years can show both positive and
negative capital returns
19. Calculate TEY for an investor in the 35% marginal tax bracket holding a 5.5% municipal
bond
a. 10.76%
b. 15.15%
c. 9.11%
d. none of the above
20. Consider a 30-year bond with a tax-exempt yield of 3.7% while 30-year Treasury bonds
are yielding 5.6%. For an investor in the 35% tax bracket, the TEY for this bond
a. is less than the comparable Treasury bond yield.
b. is greater than the comparable Treasury bond yield.
c. would be less attractive if the tax rate were higher.
d. such that an investor would be indifferent between these two alternatives.
21. With regard to securization, choose the INCORRECT statement..

a. It refers to the transformation of illiquid loans into less risky securities.
b. The less risky securities resulting from securitization are referred to as asset-
backed securities.
c. Securitization works best when packaged loans are heterogeneous, so that returns
are more variable.
d. Ginnie Mae issues are one example of securitization
22. Which of the following is CORRECT about preferred stock?

a. It has a specified life.
b. It has a price that does not fluctuate.
c. It is technically a debt security.
d. It occupies a middle position between bonds and common stock both in terms of
priority of payment of income and in case of liquidation.
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23. The common stockholder

a. is not guaranteed a specified return
b. is senior to (that is, ranks above) debt holders in terms of payment
c. takes relatively small risk in any given year
d. has priority in being paid off in case of bankruptcy
24. The common stockholder

a. is a creditor of the company
b. as the owner, takes relatively little risk
c. is senior to the bondholders in terms of payment
d. takes greater risk than the other claimants of the company in the hope of greater
returns
25. Which of the following statements about common stock is CORRECT?

a. it has a specified return in the form of dividends that must be paid annually
b. stockholders have specific promises to receive cash from the corporation because
of the dividends
c. common stock has no specified return that must be paid
d. common stockholders are paid ahead of the preferred stockholders.
26. A warrant is:

a. a very short-term option on the underlying stock
b. created by investors as a play on a common stock
c. a long-term option on its underlying common, issued by firms
d. the right to sell shares of stock at a stated price within a stated time
27. Which of the following is not a corporate-created equity-derivative security?

a. puts and calls
b. rights
c. convertible bonds
d. warrants
28. Which of the following is an investor-created equity-derivative security?

a. convertible bonds
b. warrants
c. commercial paper
d. puts and calls
29. A call is
a. a short-term option to buy at a specified price within a specified time
b. a short-term option to sell at a specified price within a specified time
c. a long-term option to buy issued by a corporation
d. a short-term option to buy stock issued by a corporation
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30. Which of the following statements about puts and calls is INCORRECT?
a. the writer of a call believes the price of the stock will remain flat or decline
b. the writer of a put believes the price of the stock will remain flat or decline
c, the buyer of a put believes that the price of the stock will decline
d. the buyer of a call believes that the price of the stock will rise
31. A futures contract

a. is always exercised by the buyer.
b. is typically closed out by offset.
c. is solely a vehicle for speculative purposes.
d. requires an initial margin of 20% or more to be paid.
32. The riskiest type of security to investors is?

a. corporate bond
b. common stock
c. long-term warrant
d. call option
CHAPTER 3:
33. Which of the following statements is CORRECT about investment companies?

a. they are regulated by states exclusively, and not the SEC
b. investment companies include unit investment trusts, open-end funds and closed-
end funds
c. total investment company assets are less than $1 trillion
d. the dominant form of investment company is the closed-end fund
34. With regard to mutual funds, choose the CORRECT statement

a. money market funds are a form of mutual funds
b. all mutual funds typically charge a load fee
c. mutual funds can be bought and sold anytime the markets are open
d. some mutual funds trade on exchanges
35. All open-end investment companies

a. typically charge a management fee and may or may not charge a load fee
b. charge a load fee of some type
c. have shares that are valued at the NAV but are priced on the basis of whatever
investors are willing to pay for them
d. generally charge a management fee, a load fee, a maintenance fee, and a
redemption fee
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36. All open-end investment companies

a. charge a load fee
b. charge a management fee and a load fee
c. have shares that are valued at the NAV but are priced on the basis of whatever
investors are willing to pay for them
d. redeem their shares on demand
37. With regard to mutual funds , we can conclude

a. closed-end funds have more assets than do mutual funds
b. subsequent performance is often not predictable on the basis of recent
performance
c. the average expense ratio for equity mutual funds is approximately 1 percent
d. a mutual fund with 3 classes of shares has 3 different portfolios
38. Mutual funds include

a. only bond and stock funds
b. money market funds, stock funds, and bond and income funds
c. only taxable bond funds, stock funds, and money market funds
d. only stock funds and bond and income funds
39. With regard to mutual funds , we can conclude

a. assets grew sevenfold in the 1990s, from a base of about $1 trillion
b. the average expense ratio for equity mutual funds is approximately 1 percent
c. a mutual fund with 3 classes of shares has 3 different portfolios
d. money market funds have a sales (load) charge but not a redemption charge.
40. Which of the following mutual funds has a constant share price?
a. a bond fund
b. an index fund
c. a money market fund
d. a hybrid fund
41. Which of the following statements is CORRECT about classes of mutual fund shares?
a. The A shares of a particular load mutual fund charge a redemption fee
b. The B shares of this fund charge an upfront sales charge
c. The C shares charge a higher annual operating expense than does the A shares
d. The B shares charge a higher annual operating expense plus an upfront sales
charge
42. The average expense ratio for bond mutual funds is approximately:
a. 1.79%
b. 1.41%
c. 0.69%
d. 1.00%
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43. Fidelity’s Equity-Income Fund is

a. an example of a mutual fund classified as an aggressive growth fund.
b. closed-end fund.
c. an open-end investment company.
d. an index fund.
44. Money market funds

a. Have a sales (load) charge but not a redemption charge.
b. Are closed-end investment companies.
c. By law can hold only taxable securities.
d. Charge their investors a management fee
45. With regard to the net asset value (per share), NAV, of a mutual fund, choose the
CORRECT statement.
a. it is computed several times daily for all mutual funds

b. it is computed by calculating the total market value of the securities in the
portfolio
c. it seldom changes for the typical mutual fund
d. it is the per share value of the portfolio of securities held by the mutual fund
46. The NAV for the Zany Fund at the beginning of the year is $55.46. During the year the
fund earns net investment income of $0.92 and net realized and unrealized gains of $0.73.
It also pays out $0.72 from net investment income and $2.12 from net realized gains
during the year. The NAV at the end of the year for the Zany fund is
a. $54.27
b. $57.11
c. $52.62
d. $56.39
47. Which of the following ETFs is a portfolio representing the Dow Jones Industrial Index?
a. Qubes
b. Diamonds
c. VIPERS
d. Spiders
48. ETFs
a. mostly trade on the Amex
b. mostly trade on the NYSE
c. have higher expense ratios than index mutual funds
d. cannot be sold short but can be bought on margin
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49. The average expense ratio for equity mutual funds has been approximately:
a. 1.79%
b. 1.5%
c. 0.69%
d. 1.19%
50. With regard to mutual funds, choose the INCORRECT statement

a. there are currently thousands of mutual funds
b. mutual funds are regulated under the Investment Company Act of 1940
c. mutual fund assets currently amount to several trillion dollars
d. some mutual funds trade on exchanges
51. Which of the following statement is CORRECT about closed-end investment

companies?
a. they can be referred to as ETFs
b. the NAV is typically unequal to the market price of the closed-end shares
c. investors buy and redeem shares through the company
d. there are more closed-end companies than open-end companies
Assume that the Do Good mutual fund annual returns for 4 consecutive years are 10.3% for
1999, - 13.2% for 2000, +14.3% for 2001, and -1.9% for 2002. Answer the next 3 questions.
52. Given an initial investment of $10,000 at the beginning of 1999, calculate terminal
wealth at the end of 2001. Use three decimal places to do the calculations
a. $8,000
b. $9,755.20
c. $10,943.13
53. Assume an investment of $10,000 at the beginning of 2001. Calculate terminal wealth
at the end of 2002.
a. $7,680
b. $7,807.27
c. $11,212.83
54. Given a starting amount of $10,000, the terminal wealth for an investor who was in this
fund for all 4 years would be determined as:
a. $10,000 plus gains of $103 and $143 less losses of $132 and $19.
b. The product of $10,943.13 and .981
c. $10,000 plus the gains and losses netted together algebraically
d $10,735.21
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e. both b and d are correct
Assume that the HighTech mutual fund has an Average Annual Total Return over a 5-year
period of 11.5%. For Year 1 of this five-year period, the Cumulative Total Return was 10.2%
Answer the next 2 questions.
55. Calculate the Cumulative Total Return for HighTech.

a. 66.1%
b. 72.3%
c. 52%
56. Determine the actual Total Return for HighTech for Year 1 of this 5-year period.
a. 10.2%
b. 11.5%
c. 14.5%
57. Assume that HighTech earns exactly 10% a year for the first three years of this 5-year
period. For an investor starting with $10,000 at the beginning of the first year, the
terminal wealth for this investor at the end of the third year would be.
a. $10,000 plus gains of $300 each year for a total of $10,900
b. $10,000 (1.10)3
c. $10,000 (1.10) (1.10) (1.10)
d. both b and c are correct
CHAPTER 4:
58. With regard to markets, choose the CORRECT statement:

a. Secondary markets exist for the trading of new securities
b. Investment bankers often underwrite new issues by purchasing the securities
c. If the issuer is selling securities for the first time, these are referred to as seasoned
issues
d. All secondary equity markets are auction markets
59. Which of the following statements is CORRECT concerning the equity markets?
a. during the 1990s, the markets suffered a number of bad years
b. the markets rose for 5 consecutive years through 1999, and then declined for 3
consecutive years
c the markets rose for 4 consecutive years, and then declined two years in a row
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d. the markets declined for four consecutive years during 1999-2002

60. With regard to the size of equity markets, which statement is CORRECT?
a. Nasdaq has less companies listed on it than does the NYSE
b. The Amex has only approximately 1,000 stocks listed
c. The NYSE has more than 4000 stocks listed
d. The total market value of all NYSE stocks exceeds the total market value of all
Nasdaq stocks
61. The NYSE is best described as

a. an agency auction market
b. the premier primary market in the world
c. a negotiated market where blue chip stocks trade
d. an auction market based on the dealer system as opposed to the specialist system
62. Nasdaq is best described as

a. an agency auction market
b. a primary market for smaller securities
c. a negotiated market consisting of a network of dealers
d. an organized exchange with a physical location
63. Which of the following statements is INCORRECT in contrasting Nasdaq vs. the
NYSE?
a. Nasdaq is a negotiated market while the NYSE is an agency auction market
b. Nasdaq is an example of an agency auction market
c. The NYSE is an agency auction market while Nasdaq is a computerized network
of dealers
d. The Nasdaq Stock Market is one of three major marketplaces in the United States
64. Which of the following statements about the three major financial markets ais
CORRECT?
a. Nasdaq stocks are unlisted stocks
b. Listed stocks cannot trade on the regional exchanges
c. Over-the-counter stocks can trade on the OTC Bulletin Board or on the Pink
Sheets
d. NYSE and Amex stocks are listed but Nasdaq stocks are not
65. NASDAQ National Market System is

a. a self-regulating body of brokers and dealers that oversees Nasdaq and OTC
practices.
b. a combination of specialists in the auction markets and market makers in Nasdaq
stocks, combined with the up-to-the-minute reporting of trades.
c. a combination of specialists in Nasdaq stocks and the up-to-minute reporting of
trades.
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d. a combination of the competing market makers in Nasdaq stocks and a reporting

of trades similar to that which occurs on the NYSE.
66. SuperDOT is an electronic order routing system used
a. on Nasdaq
b. on Instinet
c. in the third market
d. on the NYSE
67. ECNs
a. have extended evening trading hours for many investors so that they can now
trade after hours
b. have links to all discount brokers now doing business
c pose no real threat to either the NYSE or to Nasdaq
d. are not likely to have much of an impact on financial markets because the NYSE
and Nasdaq have entrenched positions
68. One of the big advantages of Instinet for institutional investors is

a. the help of brokers who act to bring two institutions together
b. low commissions of about 6 or 7 cents a share
c. being identified as the party buying or selling, which helps the institution to make
favorable trades
d. a combination of low costs and anonymous trading
69. Which of the following statements concerning the current status of the markets is
INCORRECT?
a. The Dow Jones Industrial Index has reached highs in the past of more than 11,000
b. The S&P 500 Index is currently around 600
c. The American Stock Exchange accounts for roughly 3-4% of total volume traded
among all markets
d. Dow Jones points are not equal to dollars
70. When it comes to trading bonds

a. most bonds are traded on exchanges although some are traded over the counter
b. most bonds are traded over the counter although a few are traded on exchanges
c. the secondary market for agency securities will be quite poor relative to
corporates and municipals
d. no federal government bonds are traded over the counter
71. With regard to a national market system (NMS) for the trading of securities,
a. The Act of 1975 provided a detailed blueprint of its final form
b. We have reached the final form of a NMS, and little change is expected
c. We are evolving towards some type of NMS, but we do not know what the final
form will look like
d. The Intermarket Trading System will be the major component of a NMS in the
future
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72. Which of the following statements is CORRECT?

a. The Nasdaq stock market has continued to grow as a marketplace, and now does
even more business than in 2000
b. Being as entrenched and successful as it is, the NYSE is unlikely to make any
major changes at this point
c. ECNs have had a tremendous impact on Nasdaq
d. NYSE and Amex stocks are listed but Nasdaq stocks are not
73. The DJIA

a. has a divisor of 30
b. is a capitalization-weighted index
c. has a base number set to 10
d. is biased against growth stocks
74. The Dow-Jones Industrial Average

a. is an index-number concept
b. is a price-weighted series
c. is a broad-based measure of the stock market as a whole
d. is a market value weighted series
75. With regard to the S&P 500 Index, choose the CORRECT statement.
a. It is less frequently used than the DJIA by institutional investors
b. A current value of 10000 for this index would indicate that the average price of
the 500 stocks in the index is 100 times the base number
c. It is a price-weighted index of 500 large stocks
d. Stock splits and dividends are automatically accounted for in its calculation
76. The Russell 1000 Index is a

a. price-weighted market index used to measure small cap stocks
b. value-weighted market index used to measure large cap stocks
c. value-weighted index used to measure small cap stocks
d. price-weighted index used to measure mid-cap stocks
77. The Russell 2000 is a

a. price-weighted market index used to measure small cap stocks
b. value-weighted market index used to measure large and small cap stocks
c. value-weighted index used to measure small cap stocks
d. price-weighted index used to measure mid-cap stocks
78. With regard to market indexes, choose the INCORRECT statement

a. The Dow Jones World Stock Index is a price-weighted index
b. The Dow Jones Equity Market Index is capitalization-weighted
c. The Russell indexes are capitalization-weighted
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d. The S&P indexes are capitalization-weighted
79. On one day the Dow Jones Industrial Average rose about 225 points. The divisor for
this index was .10 at this time. GM went up about $7.50 on that day. Based on this
information, choose the CORRECT statement.
a. Investors holding a diversified portfolio of stocks gained about $150 that day.
b. GM accounted for about 7.50/225 of the rise.
c. GM had only a very small effect on the index that day
d. GM alone accounted for about one-third of the rise in the Dow for that day
CHAPTER 5:
80. With regard to types of orders, select the INCORRECT statement

a. a market order ensures that a transaction will be carried out
b. stop orders specify a specific price that the investor is assured of receiving
c. market orders are the most common type of order on the NYSE
d. a limit order removes all doubt about the price to be received in a transaction
81. With regard to types of orders, select the CORRECT statement

a. a limit order ensures that a transaction will be carried out
b. stop orders specify a certain price that the investor is assured of receiving
c. market orders are the most common type of order on the NYSE
d. a market order removes all doubt about the price to be received in a transaction
82. Types of brokerage accounts include:

a. accounts from full-service brokers and discount brokers
b. wrap accounts and asset management accounts
c. accounts from full-service brokers and discount brokers, and asset management
accounts
d. a and b
Assume that Intel is trading around $92. The bid price is 91 7/8, and the asked price is
$92. You own some Intel shares and are considering various trades of Intel at this time.
Use this information to answer the next two questions regarding types of orders:
83. Assume you are unwilling to pay more than 91 1/2 for Intel but would like to buy some
more at that price. In order to attempt to purchase at this price you should place which
type of order?
a. a market order because it assures you of buying at this price
b. a market order when the stock trades at 91 1/2 because that will assure you of
getting Intel at that price when your order goes in and is executed
c. a stop order at 91 1/2
d. a limit order to buy at 91 ½
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84. You instruct your broker to sell your existing shares at a price that will assure you of
receiving at least 93. This is which type of order?
a. a market order
b. a limit order to sell
c. a stop order to buy
d. a stop order to sell
85. The NASD is

a. a major government agency regulating the over-the-counter market
b. a branch of the SEC that licenses brokers
c. a self-regulating body that oversees the daily operations of the NYSE and Nasdaq
d. a self-regulating body that oversees brokers and the Nasdaq market
86. The Securities and Exchange Commission (SEC)

a. is an independent, quasi-judicial agency of the U. S. government
b. was created by the Securities Act of 1933
c. has the power to disapprove securities for lack of merit
d. has no jurisdiction over the self-imposed rules and regulations of the NYSE
87. The Securities Act of 1933

a. ensures full disclosure of information with respect to new security issues
b. requires the issuer of a new security to obtain the approval of the SEC
c. ensures the fair trading of securities on the secondary market
d. provides some assurance to investors as to the quality of the new issue
88. The Securities Exchange Act of 1934

a. extended the disclosure requirements to the secondary market
b. established the SEC
c. required an issuer to register an issue with full disclosure
d. a and b
89. With regard to margin trading:

a. The NYSE establishes the initial margin
b. The maintenance margin is set by the Board of Governors of the Federal Reserve
System
c. The initial margin is set by the Federal Reserve and the maintenance margin is set
by brokers and the exchanges
d. The maintenance margin requirement has been 50% for many years
90. If the initial margin requirement is 60%, and the maintenance margin is 30%, an investor
buying on margin 200 shares of a stock selling at $100 must put up, to buy the stock
a. $12,000
b. $ 8,000
c. $10,000
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91. An investor buys 100 shares of a stock at $200 per share on 60% margin. The stock
goes to $220. Ignoring all costs of transacting, the percentage return on investment is
a. 16.67%
b. 25%
c. 10%
92. If the initial margin requirement is 45% and the maintenance margin requirement is
30%, what is the most that could be borrowed in order to buy the stock by an investor
who wishes to purchase 100 shares of the stock which has a current price of $16.75?
a. $117.25
b. $837.50
c. $921.25
d. $753.75
93. If the initial margin requirement is 60 percent, and a stock sells for $50, an investor with
$3000 of his own who wants to use the full $3000 in a margin transaction
a. can purchase 125 shares.

b. can purchase a maximum of 100 shares by borrowing $2000 from the broker.
c. can purchase 80 shares.
d. can purchase 200 shares by borrowing $3000 from the broker.
94. If the initial margin requirement is 40 percent, and a stock sells for $40, an investor with
$2000 of his own who wants to use the full $2000 in a margin transaction
a. can purchase 125 shares.

b. can purchase a maximum of 100 shares by borrowing $2000 from the broker.
c. can purchase 100 shares by borrowing $3000 from the broker
d. can purchase 200 shares by borrowing $3000 from the broker.
95. Which of the following statements about short sales is CORRECT?
a. short sales have a specified time limit

b. short sales on the NYSE are permitted only on an uptick
c. short sellers need only a cash account to sell short
d. the short seller incurs no costs other than brokerage costs on the typical dividend-
paying NYSE stock
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96. You sell short 100 shares of stock at $150 per share. If the stock moves to $180, you
have
a. a loss of $2000
b. a gain of $3000
c. a loss of $3000
97. Which of the following statements about short selling is CORRECT

a. short position results from selling first and buying back later.
b. Dividends on stock sold short can be ignored by the short seller.
c. Short sales on the NYSE are permitted on upticks or downticks.
d. Buying calls is a substitute for selling short.
98. You sell short 100 shares of stock at $150 per share. Which of the following courses of
action is possible in this situation?
a. the price of the stock could decline, and you would have a paper gain until you
closed out the transaction, at which time you would have a realized gain
b. the price of the stock could rise, and you would have a paper loss; if you bought
the stock back at the higher price and covered the short sale, you would
have a realized loss
c. as long as your broker allows you to keep the short position open, no matter how
long, you may experience a series of paper gains and losses
d. a, b, and c are all correct
99. You buy 100 shares of Polyglot on 50% margin at $40 per share. The broker charges an
annual 10% interest rate on margin loans, and commissions are 1% of the total stock
value on both the purchase and the sale. At year end you receive a $1.00 per share
dividend and sell the stock for 42. What is your rate of return on investment (as
calculated on your actual total cash outlay to make the investment)?
a. –35.02%
b. –25.02%
c. 14.74%
d. 2.84%
e. none of the above
100. Assume you sell 100 shares of X Corp short at $40 in March. When you open your
brokerage account statement in April, having taken no actions in your account for the
month, you see that the price of X Corp is reported at $65. Analyzing gains and losses
in your portfolio, at this point, ignoring brokerage costs and margin costs,
a. you have an actual loss of $2500
b. you have a gain of $2500
c. you have a realized loss of $2500
d. you have a paper loss of $2500
18
SET 2 PRACTICE QUESTIONS Returns and Bonds Chapters 6-9
CHAPTER 6:
1. Total return is defined as

a. a percentage return, calculated by dividing the sum of all price changes by the
amount invested
b. the reciprocal of a return relative
c. the difference between the sale price and purchase price of an investment
d. a percentage return, calculated by dividing all cash flows received from an
investment by its purchase price
2. The total return for a 12% bond purchased at 1005, held for six months and sold for
1050 is
a. 3.3%.
b. 16.42%.
c. 5.7%.
3. The total return on a bond purchased for $1000 that pays interest of $90 during the year
and is sold for $910 at the end of one year is
a. 0%
b. 10%
c. -10%
d. 1%
4. The relationship between the Total Return (TR) and the Return Relative (RR) is
a. RR = TR – 1
b. RR = 1/TR
c. RR = TR + 1
d. TR = RR + 1
5. The return relative for a stock bought at $34, sold at $46, and which pays a $1 dividend
is
a. .761
b. .886
c. .841
d. 1.38
6. The return relative for a stock bought at $40, sold at $38, and paying a $1 dividend is
a. .975
b. -.0732
c. .927
d. 1.0789
19
7. With regard to Total Return and Return Relative,

a. a -10% Total Return translates into a Return Relative of .90
b. a Total Return of -50% would translate into a Return Relative of 1.5
c. a Return Relative of 1.75 indicates a 0.75% Total Return
d. the income component of Total Return can be + or –
8. Assume the CWI for the period 1920-2002 was $3150. The cumulative income
component was $30.41. The cumulative price component, in dollars, could be
calculated as:
a. 3150 – 30.41
b. 3150 – (1.042)83
c. 3150 / (1.042) 83
d. none of the above are correct
9. The arithmetic mean return

a. represents the typical or likely performance of an asset for a single period.
b. can be lower than the geometric mean if the returns are highly variable.
c. represents the true average return over multiple periods.
d. is used in measuring the wealth index.
10. The standard deviation of the annual rate of return on common stocks over the period
1920-2000 has been approximately
a. 60%
b. 35%
c. 20%
d. 12%
11 The geometric mean is

a. The better measure of expected return for the next period.
b. Always less than or equal to the arithmetic mean.
c. A measurement of the arithmetic average rate of return over multiple periods.
d. Sometimes larger than the arithmetic mean for stocks.
12. The relationship between the geometric mean and the arithmetic mean is such that
a. as the standard deviation of returns increases, holding the arithmetic mean
constant, the geometric mean decreases
b. the geometric mean can sometimes be larger that the arithmetic mean
c. (1 + A. M.)2 = (1 + G)2 - (S.D.)2
d. the variability of a series has no effect on the difference between these two means
20
13. Assume that the returns for two consecutive years for a stock are 16.76%and -2.0%.
Which of the following statements regarding these two returns is CORRECT?
a. the geometric mean is 7.38%
b. $1 invested at the beginning of period 1 would have grown to $1.1530 by the end
of period 2
c. the best estimate of the rate at which $1 would have grown over these two periods
is 7.38%
d. $1 invested at the beginning of period 1 would have grown to $1.1442 by the end
of period 2
14. Choose the CORRECT statement concerning the Cumulative Wealth Index
a. it is based on a multiplicative relationship
b. it can only be presented on a nominal basis
c. the CWI for corporate bonds is smaller than that for government bonds
d. it is similar to, but smaller than, the cumulative total return index
15. The CWI for common stocks for 1926-1997 was $1828.33. The geometric mean average
annual return for common stocks was 11%, and for the price change component was
6.20%. The cumulative price change component was $76.07. The cumulative Dividend
Yield Index, in dollars, for common stocks for this period, based on this information,
was:
a. $1828.33 - $76.07
b. $1828.33/$76.07
c. 11% - 6.20%
d. $1828.33 – [(6.20%)72]
16. With regard to the components of cumulative wealth, choose the INCORRECT
statement:
a. CPC = CWI/CYI
b. CYI = CWI/CPC
c. CPC/CYI = CWI
d. (CYI)1/n – 1.0 = the geometric mean for the yield component
17. Assume that for the period 1920-2002 the geometric mean for the S&P 500 index was
9.9%, and that the geometric mean for the income component was 4.2%. When
calculating the capital gains component for this index for this period, which of the
following statements is CORRECT?
a. 9.9% - 4.2%
b. .099/.042
c. 1.099/1.042 – 1.0
d. none of the above are correct
21
18. For a U. S. investor purchasing a foreign stock, beginning price is 50, income is 2, and
ending stock price is 46. The foreign currency depreciates 4% against the dollar. The
return to the U. S. investor after currency risk is accounted for is
a. -4%
b. -7.84%
c. -.0016%
d. +2%
A U. S. investor buys a French stock when the value of the franc stated in dollars is $0.20. The
cost of the stock is 250 francs. One year later the stock is at 300 francs, and the stock paid a
dividend of 10 francs. The franc is now at $0.19. Answer the next two questions.
19. Which of the following statements is CORRECT about exchange rates?

a. the dollar appreciated against the franc
b. the dollar depreciated against the franc
c. the francs from the investment buy more dollars when the investment proceeds
are converted back from francs
d. this investment will experience a gain from the currency movement
20. Which statement is correct about the total return on this foreign investment:
a. the total return for a French investor in the stock is 24%
b. the total return for a U. S. investor after converting back to dollars was 24%
c. the total return for a U. S. investor after converting back to dollars was 30.5%
d. the total return for a U. S. investor before conversion back to dollars was 20%
CHAPTER 7:
21. Calculate the expected value of a security with possible outcomes of

10%, with a probability of .2
20%, with a probability of .5
-25%, with a probability of .3
a. 4.5%
b. 17.5%
c. 19.5%
d. 7.5%
22. Under the Markowitz formulation, how many factors determine the expected return on
a portfolio?
a. 4
b. 2
c. 3
d. 1
22
23. A change in the correlation coefficient between the returns of two securities in a
portfolio causes a change in
a. both the expected return and the risk of the portfolio.
b. only the expected return of the portfolio.
c. only the risk level of the portfolio.
d. neither the expected return nor the risk level of the portfolio.
24. According to Markowitz’s mean-variance model, the variance of the portfolio is equal
to
a. the weighted average of the individual variances.
b. the weighted covariances between all unique pairs of securities.
c. the weighted variances plus the weighted covariances of all pairs of securities.
d. the weighted covariances plus the weighted betas of the securities.
Stock X has an expected return of 10% and a standard deviation of 14%. Stock Y has an
expected return of 18% and a standard deviation of 20%. Use the above information to
answer the following two questions.
25. If the correlation coefficient between X and Y’s return is 0.30, the expected return of an
equally-weighted portfolio consisting of X and Y would be (round to no decimal place)
a. 19%
b. 16%
c. 14%
d. 17%
26. Assume now that the correlation coefficient between stocks X and Y is +1.0. Choose the
investment below that represents the minimum risk portfolio.
a. 100% investment in stock Y.
b. 100% investment in stock X.
c. 50% investment in stock X and 50% investment in stock Y.
d. 80% investment in stock Y and 20% investment in stock X.
27. Regarding the variance-covariance matrix:

a. for a portfolio of 30 securities, there would be 900 covariances
b. for a portfolio of 30 securities, there would be 900 variances
c. for a portfolio of 30 securities, there would be 30 unique covariances
d. A portfolio of 30 securities would have 900 total terms in the variance-covariance
matrix
23
28. Given the following information about two stocks:

standard deviation for stock x = 12%
standard deviation for stock y = 20%
expected return for stock x = 16%
expected return for stock y = 22%
correlation coefficient between x and y = 0.30
Calculate the covariance between these two stocks:

a. .00125
b. 72
c. 240
d. 39.6
29. Select the CORRECT statement about variances and covariaces :

a. for a portfolio of 20 securities, there would be 400 covariances
b. for a portfolio of 20 securities, there would be 400 variances
c. for a portfolio of 20 securities, there would be 190 unique covariances
d. for a portfolio of 20 securities, there would be 380 total terms in the variance-
covariance matrix
30. Concerning the riskiness of a portfolio of two securities, using the Markowitz model,
select the INCORRECT statement:
a. The riskiness depends on the variability of the securities in the portfolio.
b. The riskiness depends on the percentage of portfolio assets invested in each
security.
c. The riskiness depends on the expected return of each security.
d. The riskiness depends on the amount of correlation among the security returns
31. Select the INCORRECT statement about the Markowitz model from among the
following:
a. combining two securities with perfect negative correlation will always eliminate
risk altogether
b. the risk of a portfolio of five securities, using the Markowitz analysis, would
consist of 20 covariances and 5 variances
c. the expected return on a portfolio is always a weighted average of the expected
returns of the individual assets in the portfolio
d. COVAB = AB A B
32. Which input does not have to be provided by the investor to perform the Markowitz
analysis?
a. Covariations between the rates of return on securities
b. Expected returns for every security
c. Standard deviations for every security
d. Exact percentages of investable funds to be invested in each security
24
CHAPTER 8:
33. Investors who wish to generate efficient portfolios using the Markowitz analysis must
supply which inputs?
a. an expected return for each security being considered
b. the standard deviation for each security being considered
c. the weights for each security
d. a and b, along with at least one other variable
e. a, b, and c
34. According to the Markowitz analysis, an efficient portfolio is one that

a. Has the largest expected return for the smallest level of risk
b. Has the smallest level of risk
c. has the minimum risk for a specified level of return
d. has the largest expected return and zero risk
35. Select the INCORRECT statement concerning the Markowitz model:

a. In a large portfolio, the covariance term will be the more important of the two
terms for calculating portfolio variance
b. In a large portfolio, portfolio risk will consist primarily of securities' covariances
with other securities
c. As the number of securities held in a portfolio increases, the importance of each
individual security's risk decreases
d. As the number of securities held in a portfolio increases, the importance of the
covariance relationships decrease
36. Select the CORRECT statement about Markowitz portfolio theory from among the
following:
a. When adding a security to a portfolio, the covariance between it and the other
securities in the portfolio is less important than the security's own risk
b. Having established the portfolio weights, the calculation of the expected return on
the portfolio is independent of the calculation of portfolio risk
c. The risk of a portfolio is a weighted average of individual security risks
d. Combining two securities with perfect negative correlation will always eliminate
all risk
37. Choose the statement below most closely associated with the work of Markowtiz.
a. Diversifying properly depends only upon the number of securities chosen.
b. Systematic risk can be identified and assessed.
c. The efficient frontier is an arc and not a straight line.
d. The Markowitz technique designates the one portfolio in the efficient set that is
optimal for all investors
25
38. Portfolios on the upper right portion of the efficient frontier are likely to be chosen by:
a. aggressive investors
b. conservative investors
c. highly risk-averse investors
d. defensive investors
39. For an investor who holds a one-stock portfolio, which statement is CORRECT?
a. the important measure of risk for this investor is beta
b. although the expected return doesn’t matter, the standard deviation would be
important
c. only the return matters—the risk measure does not
d. the expected return matters, and the investor should use the standard deviation as
the measure of risk
40. Choose the portfolio from the following set that is NOT on the efficient frontier.
a. Portfolio A: expected return of 10% and standard deviation of 8%.
b. Portfolio B: expected return of 18% and standard deviation of 13%.
c. Portfolio C: expected return of 38% and standard deviation of 30%.
d. Portfolio D: expected return of 19% and standard deviation of 12%.
41. The key assumption of the Single Index Model is

a. The market index is unrelated to the residual error
b. There are industry effects in the market
c. Securities are related only in their common response to the market index
d. Residual errors for securities are correlated with each other
42. For 300 securities, the Sharpe model requires ________ total pieces of data.
a. 900
b. 302
c. 902
d. 300
43. Multi-index models

a. are used less than single index models because they don’t perform better ex ante
b. are used more than single index models because they perform better ex ante
c. are used less than single index models because they do not perform as well ex
post
d. perform better than single index models either ex post or ex ante
44. With regard to indifference curves, choose the INCORRECT statement:

a. indifference curves can sometimes intersect
b. investors have an infinite number of indifference curves
c. the shapes of the curves can vary depending on risk preferences
d. the greater the slope of the indifference curve, the greater the risk aversion of
investors
26
45. With regard to global investing, choose the INCORRECT statement:

a. in recent years financial markets became more and more integrated
b. cross-border mergers and acquisitions have increased significantly
c. correlations among country returns increased significantly starting in the mid-
1990s
d. investors should now ignore international diversification
46. With regard to the asset allocation decision, choose the INCORRECT statement:
a. it refers to the allocation of portfolio assets to broad asset markets
b. many observers agree it is the second most important decision made by an
investor, after security selection
c. it has been shown to account for 90% of the variance in quarterly returns for large
pension funds
d. it is an alternative way to use the Markowitz model
47. For a 50 stock portfolio assumed to be well-diversified, market risk will account for
approximately
a. 0-15% of total risk
b. 25-35% of total risk
c. 55-65% of total risk
d. 80-95% of total risk
48. In a 60-stock portfolio assumed to be well-diversified, nonmarket (nonsystematic) risk

will account for approximately
a. 0-10% of total risk.
b. 25-35% of total risk.
c. 55-65% of total risk.
d. 80-95% of total risk.
49. Choose the correct statement about Markowitz portfolio theory as he derived it.
a. the efficient frontier starts as an arc and becomes a straight line
b. diversification is determined by the number of securities in the portfolio
c. systematic risk is the measure of risk to use
d. there are many efficient portfolios on the efficient frontier, which is an arc
50. With regard to the number of securities needed to diversify adequately:

a. a new study shows that the volatility of individual stocks has sharply decreased
b. in today’s world, 20 stocks diversified by sector can usually eliminate the
company-specific risk
c. investors need more stocks in today’s environment to adequately diversify
d. in a portfolio, total risk declines rapidly as the systematic risk is eliminated
27
CHAPTER 9:
51. Choose the statement below most closely associated with the work of Markowtiz.
a. Risk-free borrowing and lending can change the efficient frontier.
b. Systematic risk can be identified and assessed.
c. The efficient frontier can be changed from an arc to a straight line.
d. Standard deviation is used as the measure of risk.
52. Choose the statement below that is INCORRECT concerning borrowing and lending:
a. With the introduction of risk-free borrowing and lending, the old Markowitz
efficient frontier is dominated by a new efficient frontier.
b. With the introduction of risk-free borrowing and lending, the new efficient
frontier will be a straight line.
c. With the introduction of risk-free borrowing and lending, the new efficient
frontier will be an arc that is higher than the old Markowitz arc representing the
efficient frontier.
d. Markowitz’s original work on portfolio theory did not consider the possibility of
borrowing and lending.
53. With the introduction of the risk-free asset to the Markowitz efficient frontier,
a. the new efficient frontier remains a curve.
b. a large number of portfolios of risky assets are efficient.
c. all investors will choose to do some lending.
d. only one risky portfolio is optimal for every investor regardless of that investor’s
utility function.
54. The separation theorem states that

a. systematic risk is separate from unsystematic risk.
b. the investment decision is separate from the financing decision.
c. the individual security risk is separate from portfolio risk.
d. borrowing portfolios are separate from lending portfolios.
55. Select the INCORRECT statement regarding the CML:

a. the CML is an equilibrium relationship for efficient portfolios only
b. the CML represents the risk-return tradeoff in equilibrium for efficient portfolios
c. the intercept of the CML is the reward per unit of time available to investors for
deferring consumption
d. beta is the measure of risk which determines a portfolio’s equilibrium return.
56. What does the slope of the CML represent?

a. The amount of return expected for bearing the risk of an individual portfolio.
b. The market price of risk for efficient portfolios.
c. The market price of risk for any given security.
d. The expected return on the market portfolio.
28
Consider an equity mutual fund with an expected return of 15% and an expected standard
deviation of 18%. The risk-free rate is 5%. The expected return on the market index is 16%, and
its standard deviation is 20%. An investor wishes to place 60% of her funds in the mutual fund
and the remainder in riskless assets. Using this information, answer the next two questions.
57. The expected portfolio return for this investor would be:
a. 10%
b. 13.1%
c. 15.0%
d. 11%
58. The expected standard deviation of return for this investor’s portfolio would be:
a. 10.8%
b. 15.0%
c. 20.5%
d. 10.0%
59. Select the INCORRECT statement about beta and the SML.
a. The SML uses standard deviation as the measure of risk.
b. The SML is a relationship between expected return and risk for efficient
portfolios, inefficient portfolios and individual stocks.
c. The beta for a stock measures its contribution to the risk of the market portfolio.
d. The larger the beta for a security, the larger its equilibrium expected return
because of the increased risk.
60. Under the security market line approach, an investor who owns a stock with a beta of
– 1.5 would expect the stock’s return to __________ in a market that was expected to
decline 10 percent, everything else remaining constant.
a. rise by 15 percent.
b. fall by 15 percent.
c. rise by 1.5 percent.
d. fall by 1.5 percent.
61. The SML can be used to analyze the relationship between risk and required return for
a. all assets.
b. inefficient portfolios.
c. only efficient portfolios.
d. only individual securities.
29
62. Select the INCORRECT statement concerning SML and beta.

a. The SML uses beta as the measure of risk.
b. The SML is a relationship between expected return and risk for efficient
portfolios, inefficient portfolios and individual stocks.
c. The beta for a stock measures its contribution to the risk of the market portfolio.
d. The larger the beta for a security, the smaller its equilibrium expected return
because of the increased risk.
63. The required rate of return is

a. a return guaranteed to investors for assuming risk
b. a minimum realized return
c. the maximum return an investor expects to receive for investing in a stock with a
particular amount of risk
d. a minimum expected rate of return
64. The expected return on the market for next period is 16%. The risk free rate is 7%, and
IBM has a beta of 1.1. Its required rate of return is
a. 17.6
b. 16%
c. 16.9%
65. The expected return on the market for next period is 15%. The risk free rate of return is
6%, and Johnson Products Company has a beta that is 80% of the beta for the market as a
whole. The required rate of return for this company is
a. 9%
b. 14%
c. 13.2%
d. 9.9%
7%, and Johnson Products Company has a beta of 1.0. Johnson’s risk premium is
a. 7%
b. 9.9%
c. 9%
7%, and Alpha Corp has a beta of 1.1. In using this information to estimate the required
rate of return for Alpha, the market risk premium is
a. 9.9%
b. 7%
c. 16%
d. none of these.
30
68. Under the CAPM, the relationship between the required rate of return and risk is
assumed to be _______ and _______.
a. linear and downward sloping.
b. non-linear and downward sloping.
c. linear and upward sloping
d. non-linear and upward sloping.
69. If a certain stock has a beta less than 1.0, it means

a. that the stock’s return is more volatile than that of the market portfolio.
b. that an investor can eliminate the risk by combining it with another stock that has
a negative beta.
c. that an investor will earn a higher return on his stock than that on the market
portfolio.
d. That the stock’s return is less volatile than that of the market portfolio
70. The CAPM leads to all of the following conclusions except:

a. beta is the most important measure of stock risk.
b. investors are compensated for taking total risk, which consists of systematic risk
plus unsystematic risk.
c. a well-diversified portfolio has mostly systematic risk.
d. there is an upward-sloping tradeoff between required return and beta.
71. Raptor Corporation has a relative systematic risk level that is 40% greater than the market
as a whole. The expected return on the market is 16%, and the risk-free rate is 7%.
Based on the CAPM, the required rate of return for Raptor is
a. 22.4%
b. 19.6%
c. 23%
d. 16%
72. Which one of the following securities is undervalued? Rm = 15%; RF = 5%
ai bi Expected return
Security 1 5 1.0 20%
Security 2 7 1.2 15.5%
Security 3 8 0.8 12%
Security 4 4 0.7 11.5%
a. Security 1.
b. Security 2.
c. Security 3.
d. Security 4.
31
73. Which of the following statements best summarizes the conclusions reached regarding
the stability of betas?
a. Betas for individual securities and large portfolios are unstable.
b. Betas for individual securities are unstable.
c. Betas for individual securities and large portfolios are stable.
d. Betas for large portfolios are unstable.
74. Choose the INCORRECT statement regarding APT.

a. It is based on the law of one price.
b. It has more restrictive assumptions than does the CAPM
c. APT assumes that asset prices are linearly related to a set of indexes
d. The problem with APT is that the factors are not well specified.
75 With regard to APT, choose the INCORRECT statement:

a. the factors are not identified.
b. the bit terms determine how each asset reacts to each common factor.
c. APT requires more assumptions than does the CAPM.
d. some of the tests of the model have generated mixed results.
32
SET 3 PRACTICE QUESTIONS Chapters 10-15: Common Stocks (Valuation and

Management), Efficient Markets, Market/Economy, Industry, Company Analysis
CHAPTER 10:
1. A stock’s intrinsic value is

a. The estimated present value of the future stream of cash flows for the stock
b. The same as its market price
c. The sum of all dividends expected to be paid from now to infinity
d. Based on the accounting value of the assets
2. The basic premise of the DDM is that

a. the present value of all future dividends, properly discounted, is the intrinsic value
of the stock
b. the present value of all future earnings, properly discounted, is the intrinsic value
of the stock
c. the price of a stock is the sum of all dividends to be paid from now to infinity
d. investors can accurately access the future levels of dividends, and therefore can
determine what a stock is worth
3. Which of the following statements is CORRECT concerning the DDM?

a. earnings are the foundation of valuation for common stocks
b. the DDM states that the value of a stock is the discounted value of all future
dividends
c. the DDM is operationalized by estimating the expected future earnings to be paid
by a company, estimating the required rate of return, and discounting
d. earnings are the only cash flow stream to be received directly by investors
4. Choose the INCORRECT statement concerning the DDM:

a. It is based on the position that the price of a stock is the discounted value of all
future dividends
b. Not all of its three growth rate cases involve a present value process
c. The no growth rate case is the least likely case to be encountered
d. The multiple growth rate case involves at least two different growth rates
5. Using the constant growth version of the DDM to determine the intrinsic value of a
stock
a. the formula calls for the dividend to be paid this period
b. the required rate of return is expected to be larger than the growth rate in
dividends
c. there is no present value process involved in the simple equation used in this case
d. the answer obtained from this equation is the definitive value for the stock for all
investors
33
6. Which of the following statements is INCORRECT about dividends?

a. dividends are the foundation of valuation for common stocks
earnings
c. the DDM is operationalized by estimating the expected future dividends to be
paid by a company and estimating the required rate of return
d. dividends are the only cash flow stream to be received directly by investors
7. Sardi Company currently earns $3.00 per share and currently pays $1.20 per share in
dividends. It is expected to have a constant growth rate of 7% per year. The required
rate of return is 14%. The stock price is
a. $42.86
b. $18.34
c. $17.14
d. $40.05
8. Johnson stock is currently selling for $40. The expected dividend is $2. This is a constant
growth firm. If investors require a return of 15% on this stock, what do they think the
growth rate will be?
a. 6%
b. 7%
c. 8%
d. 11%
9. Calculate the estimated price of the following stock. Required rate of return: 15%;
Expected dividend next year: $20
Expected constant growth rate of dividends: 10%
a. 4
b. 400
c. 440
10. BLC Industries is expected to pay a dividend of $1.50, and the dividend is expected to
grow at a constant rate of 7%. This stock is 15% less risky than the market as a whole.
The risk-free rate is 6%, and the equity risk premium for the market is 8%. The
estimated price of the stock is
a. $18.75
b. $21.43
c. $27.76
d. $25.86
34
11. Your required rate of return is 15%. Z Corp. is currently selling for $40 and the most
recent dividend paid was $2.55. The expected constant growth rate is 8%. What is the
maximum you should pay for this stock?
a. $39.29
b. $40
c. $36.43
12. Percy Pondscum & Company currently earns $3.00 per share and currently pays $1.20
per share in dividends. It is expected to have a constant growth rate of 7% per year. The
risk free rate of return is 6%, the market risk premium is 8%, and the beta for this
company is 1.0. The stock price is
a. $42.86
b. $18.34
c. $17.14
d. $40.05
13. Xila expects to earn $4.00 per share next year, with an expected payout of 30%.
Investors expect the dividend to grow at a constant rate of 8% for the foreseeable future.
The risk-free rate is 5%, and the beta that is 10% more volatile than the market as a
whole, and the expected return on the market is 14%. What is the estimated price of the
stock?
a. $12.12
b. $50
c. $13.33
14. Johnsey Industries' current dividend is $2. The average growth rate for the past many
years has been steady at 8%, but the consensus of analysts is that the expected growth
rate is 6% . k = 16%. The intrinsic value of this stock is:
a. $20
b. $18.80
c. $9.09
d. $21.20
15. Jack buys Wealth Enterprises for $40. He expects the firm's earnings and dividends to
grow at an annual rate of 7%. The firm expects to pay a dividend of $2.00 next year.
The market risk premium is 8%. Jack's expected rate of return is
a. 10%
b. 12%
c. 12.35%
d. 15%
35
16. Walter Company currently earns $3.00 per share and pays $1.00 in dividends. The
dividend is expected to double in 9 years and also to grow at that rate beyond that time.
The required rate of return is 15%. The estimated stock price is
a. $15.42
b. $6.66
c. $14.29
17. Your required rate of return is 15.1%. Davis Drives is currently selling for $38 per share
and is expected to pay a dividend of $3 next period. The expected constant growth rate is
7%. Which of the following statements is true in making a stock decision?
a. you can justify buying this stock because: expected return > the required return
b. you cannot justify buying this stock because: the required return > the expected
return
c. you cannot justify buying this stock because: the required return < the expected
return
d. you can justify buying this stock because: the required return > than the expected
return
18. Investor A and investor B both have required rates of return of 12%. They are
considering the purchase of XTRA stock, which each views as a constant growth case.
Both have estimated the dividend for the next period at $1.00, and both agree that the
expected growth rate in dividends will be 6% a year. However, investor A plans to buy
the stock and hold it for 10 years, while investor B plans to buy the stock and hold it for
ONLY 1 year. Which of the following statements is CORRECT about stock valuation?
a. Investor A should be willing to pay more for this stock than B.
b. Investor B should be willing to pay more for this stock than A.
c. Both investors should be willing to pay the same price for the stock.
d. None of these.
19. Using the constant growth model, an increase in the required rate of return from 15 to
16%, combined with an increase in the growth rate from 7 to 8%, would cause the price
of a constant growth stock, to: (assume the next dividend is $2.00)
a. increase in price
b. decrease in price
c. stay the same
d. not enough information to answer the question
20. Low Labs. last dividend was $1.50. Its current equilibrium stock price is $15.75, and g
is a constant 5 percent. If the stockholders' required rate of return is 15
percent, what is the expected dividend yield and expected capital gains yield for the
coming year?
a. 0%; 15%
b. 5%; 10%
c. 10%; 5%
36
d. 15%; 0%
21. The Smith Reclamation Company has been hit hard due to increased competition. The
company’s analysts predict that earnings (and dividends) will decline at a rate of 5
percent annually from now on. k = 14% and D0 = $2.00. What will be the estimated
price of the company’s stock four years from now (this will be the price at the
beginning of year 5)? Round all calculations to two places.
a. $27.17
b. $11.11
c. $28.50
d. $10.18
e. $8.16
22. A firm expects to pay dividends at the end of each of the next four years of $2.00, $1.50,
$2.00, and $3.50. If growth is then expected to level off at 8 percent, and if you require a
14 percent rate of return, what is the estimated price of this stock? Round calculations
to two places.
a. $67.81
b. $22.49
c. $58.15
d. $31.00
23. Find the estimated price of Robot Communications if the expected growth rate in
dividends is 14% for the next three years, after which the dividend is expected to slow
down and grow at a rate of 6%. The current dividend is $2.00 per share, and the required
rate of return is 18%. Round calculations to two decimal places.
a. $31.77
b. $26.17
c. $21.52
d. $15.94
24. ABC Company has been growing at a 10% rate, and it just paid a dividend of D0 = $3.00.
Due to a new product, ABC expects to achieve a dramatic increase in its short-run growth
rate, to 20% annually for the next 2 years, after which growth is expected to return to the
long-run constant rate of 10 percent. The company’s beta is 2.0, the required return on an
average stock is 11 percent, and the risk-free rate is 7 percent. Calculate the expected
dividend yield, D1/P0. Round calculations to two places.
a. 3.93%
b. 4.58%
c. 10.00%
d. 7.54%
37
25. Which of the following statements about stock valuation is INCORRECT?

a. dividends are the foundation of valuation for common stocks
earnings
c. the DDM is based on a present value process
d. dividends are the only cash flow stream to be received directly by investors
26. Common stocks are difficult to value because

a. The price change component of total return, unlike the income component,
cannot be known with certainty
b. The DDM equation involves an infinity sign
c. Inflation affects stock returns more than bond returns
d. Both the cash flows and the required rate of return must be estimated
27. ABC corp. expects to earn $4.00 per share next year, and pay $3.00 per share in
dividends. Expected growth rate in dividends is 6%, required rate of return is 16%. The
P/E ratio is
a. 6
b. 10
c. 7.5
d. 5
28. X Corp. retains 70% of its earnings in the business. The long-run earnings growth is
expected to be 10%. The risk-free rate is 8%, the expected return on the market is 12%,
the beta is 2.0, and the most recent dividend was $1.50. What are the most likely market
price and P/E for this stock today?
a. $27.50, 5x
b. $33, 6x
c. $25, 5x
d. $22.50, 4.5x
e. $45, 4.5x
29. Price to book value is

a. the ratio of book value to stockholder's equity
b. most useful when book value and market value differs sharply
c. sometimes used to value companies
d. useful because it avoids any accounting problems
38
CHAPTER 11:
30. Which statement about the required rate of return is INCORRECT?

a. There are many required rates of return.
b. The average required rate of return on bonds is different from that generally
required in common stocks.
c. Investor optimism leads to an increase in the required return for a particular stock.
d. The level of the required rates of return changes over time.
31. The INCORRECT statement involving the required rate of return for a stock is:
a. it equals the risk-free rate plus the market risk premium
b. ex ante, it must slope upward
c. the overall level of required rates of return changes as the risk premiums change
d. it is the minimum expected rate of return needed to induce an investor to purchase
a security
32. Select the INCORRECT statement concerning a buy-and-hold strategy

a. it is applicable to the investor's portfolio, whatever its composition
b. it emphasizes the avoidance of transaction costs
c. investors must still perform several functions while the strategy is in existence
d. it avoids the decision of having to make an initial selection
33. Sector rotation is

a. one form of passive investing
b. an active strategy similar to stock selection
c. an attempt to earn excess returns by varying the percentage of portfolio assets in
equity securities
d. not dependent on an accurate assessment of current economic conditions
34. With regard to security analysts,

a. there are more sell side analysts than buy side analysts
b. security analyst have become more and more respected over the years
c. analysts’ estimates have become more and more accurate
d. investors can use analysts reports and information intelligently
35. Fundamental analysts assume that the market price and intrinsic value of a stock
a. are always identical
b. can differ from time to time
c. bear no relationship to each other
d. none of these
39
36. Which of the following statements about valuation is CORRECT?

a. valuation is an art and not a science
b. required rates of return for an asset remain unchanged over time
c. earnings per share for next year can be estimated with little error
d. an investor’s holding period is relevant for valuation
37. With regard to active and passive strategies for stocks,

a. market timing is to be preferred over stock selection
b. sector rotation is a passive strategy
c. 3 possible active strategies were discussed in the text
d. indexing is a passive strategy while buy-and-hold is an active strategy
38. The recommended framework for fundamental analysis

a. puts heavy emphasis on value versus growth stocks
b. concerns the relationship between active and passive strategies
c. is, in order, economy/market, industry and then company
d. uses the concept of efficient markets to make decisions
39. Which of the following statements concerning stock investing is INCORRECT?

a. Technical analysis refers to the methodology of forecasting fluctuations in
securities prices
b. momentum investing involves buying companies whose earnings or stock prices
are falling, with heavy emphasis on price momentum
c. fundamental analysis is based on the premise that any security has an intrinsic
value
d. behavioral finance recognized that investors can, and do, behave irrationally
CHAPTER 12:
40. An efficient market does not require that

a. stock prices incorporate all information
b. all known information be reflected in prices
c. the adjustments occur very quickly
d. each adjustment be perfect
41. A "Random Walk" occurs when:

a. stock price changes are random but predictable.
b. stock prices respond slowly to both new and old information.
c. future price changes are uncorrelated with past price changes.
d. past information is useful in predicting future prices.
40
42. The semi-strong form of the efficient market hypothesis asserts that stock prices:
a. fully reflect all historical price information.
b. fully reflect all publicly available information.
c. fully reflect all relevant information including insider information.
d. may be predictable.
43. Testing investor reactions to announcements and news is

a. a weak-form statistical test
b. a weak-form test of technical trading rules
c. a semi-strong form test
d. a strong-form test
44. An efficient market can be shown to exist if

a. a large number of profit-seeking participants are present
b. information is widely available and is generated in a random fashion
c. both a and b occur
d. an efficient market cannot be shown to exist with any conditions present
45. Weak form market efficiency

a. is identical to the random walk hypothesis
b. involves only price and volume information
c. incorporates semi-strong form efficiency
d. is compatible with technical analysis
46. Statistically testing the independence of stock price changes is a test of

a. weak form efficiency
b. semi-strong form efficiency
c. strong form efficiency
d. the seasonal effect
47. Which of the following is not a test of semi-strong form efficiency?

a. insider transactions
b. stock splits
c. accounting changes
d. dividend announcements
48. With regard to the efficient market hypothesis, choose the INCORRECT statement.
a. The strong form of the EMH incorporates the other two forms
b. Technical analysis and the weak form of the EMH are direct opposites
c. The anomalies were apparent exceptions to market efficiency, and all have now
been refuted
d. Stock prices can have some degree of statistical dependence while being
economically independent
41
49. Which of the following portfolio management tasks do not have to be performed if the
market is efficient?
a. minimization of transaction costs
b. ensuring the proper amount of diversification
c. adjusting the asset allocation percentages based on perceived changes in
economic conditions
d. achieving a level of risk appropriate for the portfolio
50. If the anomalies work, investors should prefer

a. low SUE, high P/E, small cap stocks
b. low SUE, low P/E, large cap stocks
c. high SUE, low P/E, small cap stocks
d. high SUE, high P/E, small cap stocks
51. Which of the following is not a market anomaly?
a. higher risk-adjusted returns for small firms than for large firms
b. high returns for stocks in January
c. lag in adjustment of stock prices to earnings announcements
d. the relationship between accounting changes and stock prices
CHAPTER 13:
52. Relative to the business cycle, stock prices tend to

a. move up following a spurt in economic growth.
b. move in tandem with economic growth.
c. turn down a few months prior to a general down turn in the economy.
d. move in a random fashion.
53. Which of the following relationships are INVERSE, other things equal?
a. interest rates and stock prices
b. GDP and corporate profits
c. interest rates and P/E ratios
d. both a and c
54. Based on the last 10 economic slumps, the market P/E ratio
a. usually falls just before the end of a slump
b. usually falls just before the end of a slump and then rises strongly
c. usually rises just before the end of a slump and then falls sharply
d. usually rises just before the end of a slump and then remains roughly unchanged
over the next year
42
55. The dividend payout ratio on the S&P 100 is 40% when RF = 9%. Investors demand an
equity risk premium of 8 percent. If the growth rate of dividends is expected to be 10
percent, what is the estimated price of the market index if the earnings expectation is
$30?
a. $384.00
b. $213.44
c. $266.56
d. $171.43
56. Stock prices have almost always risen as the business cycle
a. approaches a peak
b. approaches a trough
c. coincides with a peak
d. hits a peak
57. With regard to market P/E ratios, choose the INCORRECT statement
a. the multiplier is more volatile than the earnings component in determining the
market’s level
b. P/E ratios tend to be high when inflation and interest rates are low
c. when analyzing the market, P/E ratios are always calculated using historical data
d. by historical standards, P/E ratios were unusually high in the late 1990s
58. In using the business cycle to make market forecasts, which of the following statements
is INCORRECT?
a. it is particularly important to switch into stocks before business cycle troughs
b. as the economy recovers, stock prices may level off or even decline
c. based on the last 10 economic slumps, the market P/E usually falls just before the
end of the slump
d. if the investor can recognize the bottoming out of the economy before it occurs, a
market rise can be predicted, at least based on past experience, before the
bottom is hit
59. With regard to yield curves and the economy,

a. every recession since WW II has been preceded by a downward sloping yield
curve
b. a flat yield curve suggests that the economy is accelerating in terms of activity
c. several studies suggest that the yield curve is not useful in making economic
forecasts
d. a steepening yield curve suggests the economy is slowing down because interest
rates are increasing.
43
60. Which of the following statements is INCORRECT about the market and the
economy?
a. Stock prices generally lead the economy
b. The market has given false signals, particularly with regard to recessions.
c. The market almost always rises before a recession’s trough
d. Typically, as investors recognize what the economy is doing, the stock market
also recognizes the event and reacts to it
61. Which of the following statements about market/economy analysis is INCORRECT?

a. it is the first step in top-down fundamental security analysis
b. it is not the first step in bottom-up fundamental security analysis
c. what happened in the markets in 2000-2003 indicate that market analysis is less
important than it used to be
d. market timing is very difficult to do, if indeed it can be done successfully at all
CHAPTER 14:
62. In which stage of the industry life cycle do firms often offer stability in earnings and
dividend growth?
a. pioneering stage
b. expansion stage
c. stabilization stage
d. in all three stages equally
63. What stage of the industry life cycle is likely to be of most interest to the majority of
investors?
a. pioneering stage
b. expansion stage
c. maturity stage
d. declining stage
64. During the maturity stage of the industry life cycle, companies often tend to pay high
dividends because of
a. high capital gains
b. small risk
c. few growth opportunities
d. good stability
65. Based on the industry life cycle, investor risk is the highest during the
a. pioneering stage.
b. expansion stage.
c. stabilization stage.
d. declining stage.
44
66. Which of the following statements about the industry life cycle is INCORRECT?
a. All industries can be classified very accurately into a specific phase of the life
cycle.
b. Companies may not always fit into a particular stage of the life cycle.
c. Even the general framework may not apply to some industries.
d. It does not explicitly lead to stock price determination.
67. According to Michael Porter,

a. the issue of competitive strategy involves the search for a competitive position in
an industry
b. industry profitability determines the five competitive forces
c. industry structure is a function of industry profitability
d. investors must analyze industry profitability to assess the strength of the five
competitive forces
68. Which of the following in not one of the five competitive forces of Porter?
a. structural changes in the economy
b. bargaining power of buyers
c. threat of substitute products or services
d. threat of new entrants
69. The most important point of Michael Porter’s analysis is that industry profitability is a
function of the
a. economy.
b. interest-rate level.
c. industry structure.
d. industry beta.
70. With regard to the consistency of industry performance, choose the INCORRECT
statement.
a. industry analysis is clearly valuable over time
b. even over very short periods, such as one month, industries can perform very
differently.
c. industry rankings on a periodic basis such as yearly or quarterly are consistent
d. investors cannot choose those industries that have performed well recently and
reliably expect them to continue to do so for the next several periods
71. An industry which is least affected by recessions and economic adversity is a(n)
a. growth industry.
b. defensive industry.
c. cyclical industry.
d. aggressive industry.
45
72. In which source of industry information can you find a ranking of industries in terms of
timeliness?
a. Forbes
b. Value Line Investment Survey
c. Standard and Poor’s Industry Survey
d. Robert Morris Associates’ Annual Studies
73. Investors who are interested primarily in capital gains should avoid industries that are in
the __stage because they have ______.
a. stabilization stage; low dividend payouts
b. stabilization stage; high dividend payouts and low growth prospects
c. pioneering; low dividend payouts
d. expansion stage; high risk
CHAPTER 15:
74. Under fundamental analysis, a security is considered attractive for purchase if its
computed intrinsic value is
a. less than its current price.
b. greater than its current price.
c. less than its book value.
d. greater than its book value.
75. A stock’s intrinsic value is

a. The estimated present value of the future stream of cash flows for the stock
b. The same as its market price
c. The sum of all dividends expected to be paid from now to infinity
d. Based on the accounting value of the assets
76. The cash flow statement is designed to track the flow of cash through the firm and
consists of three parts. Which of the following is not one of the designated parts?
a. cash from operating activities
b. cash from spending activities
c. cash from financing activities
d. cash from investing activities
77. ROA
a. Is usually equal to or greater than ROE.
b. Is calculated using book value and turnover.
c. Is calculated using leverage and book value.
d. Is calculated using net income margin and turnover.
46
Given the following, answer the next two questions:

operating efficiency = 0.1
net income = $50,000,000; net income margin = 0.15
turnover = 2; leverage = 1.5; retention rate = 0.3
78. Find ROA

a. 0.30
b. 0.10
c. 0.15
d. 0.225
79. Find ROE

a. .225
b. .3375
c. .15
d. .45
80. If a firm’s ROA and ROE are equal, it can be concluded that the firm is
a. losing money.
b. liquid enough to pay some extra dividends.
c. financed by all equity.
d. financed by a high proportion of debt
81. The two components of EPS are

a. ROA and leverage
b. book value and leverage
c. ROE and book value
d. leverage and profit margin
82. Assume ROA is 18.45%, the leverage factor is 2.278, and the BV ps is $3.41. The EPS
will be
a. $.63
b. $1.43
c. $.42
83. Bilbro Co., has a book value of $10, pays a current dividend of $1, has an ROE of .10, an
ROA of .05, a leverage ratio of 2, and a profit margin of 15%. Its EPS are
a. $3
b. $2
c. $1.50
47
84. Calculate the expected growth rate, g, of a firm which has a current dividend of $1.50
and a ROE of 20%.
a. 20%
b. 10%
c. 40%
d. answer cannot be calculated from this information.
85. The internal growth rate of a firm, g, can be calculated as the product of
a. the retention rate and ROA.
b. the dividend payout ratio and leverage.
c. the retention rate and the return on equity.
d. the payout ratio and the return on equity.
86. Which of the following statements about company analysis is INCORRECT?

a. g = ROE x ( 1 – payout ratio)
b. what matters is the future expected growth rate, not the actual historical growth
rate
c. leverage = stockholders’ equity / total assets
d. EBIT / Sales is a measure of the pretax, preinterest profit margin
87. When estimating the internal growth rate for a company,

a. what matters is the future growth rate
b. g = b x ROA
c. it is best to estimate the internal growth rate on the basis of one year’s results
d. empirical evidence clearly indicates that earnings trends persist.
88. Which of the following statements is INCORRECT?

a. turnover is a measure of efficiency
b. leverage measures how the firm finances its assets
c. EPS is solely a function of ROE
d. ROA is a fundamental measure of firm profitability
89. You are considering a stock with a current market price of $20. The stock's last dividend
was $2.00, and earnings and dividends are expected to increase at a constant growth rate
of 10 percent. Your required return on this stock is 20 percent. From the standpoint of
making a valuation decision, you should:
a. Not buy the stock; it is overvalued by $3.00.
b. Buy the stock; it is undervalued by $3.00.
c. Buy the stock; it is undervalued by $2.00.
d. Not buy the stock; it is overvalued by $3.00.
48
90. With regard to the class discussion about earnings, we can conclude:
a. GAAP generally produces the highest EPS figure of the alternatives used
b. Each company can use its own rules in producing Operating Earnings numbers
c. Pro forma earnings numbers are typically less favorable to a company than the
earnings number produced under GAAP
d. Investors can have confidence in comparing pro forma EPS numbers among
companies
91. Stock prices tend to ___________ earnings surprises.

a. lead
b. lag behind
c. be coincident with
d. be independent of
92. Given the SUE's of 4 different stocks, which has the greatest unexpected earnings?
a. -3.5
b. -2.5
c. 2.0
d. 3.0
93. Other things equal, concerning k, the discount rate for stocks, we can say
a. as k rises, the P/E ratio rises
b. if the risk premium rises, k will fall
c. if the risk-free rate rises, k will rise
d. discount rates and P/E ratios move directly with each other
94. Select the INCORRECT statement involving the required rate of return
a. it equals the risk-free rate plus the risk premium
b. ex ante, it must slope upward
c. the overall level of required rates of return changes as the risk premiums change
d. it is the maximum expected rate of return needed to induce an investor to
purchase a security.
95. Other things equal, concerning the P/E ratio, we can say that if
a. required rate of return increases, the P/E ratio will rise.
b. risk premium increases, the P/E ratio will rise.
c. risk-free rate rises, the P/E ratio will fall.
d. dividend payout increases, the P/E ratio will fall.
96. How would you explain P/E ratio differences among companies? By investor
a. expectations about the future growth of the market.
b. estimates of the recent growth of earnings.
c. expectations about the future growth of earnings.
d. estimates about the recent growth of dividends.
49
97. High P/E stocks are generally associated with

a. mature companies.
b. cyclical companies.
c. young fast-growing companies.
d. defensive companies.
98. A P/E ratio

a. can only be calculated based on the prior 12-month earnings
b. can be calculated using prior earnings or estimated earnings
c. for the market as a whole is not likely to change much from one year to the next
d. can be calculated for every company every year
99. When considering the determinants of the P/E ratio,

a. the higher the expected payout ratio, the higher the P/E ratio, other things equal.
b. P/E and g are inversely related.
c. the relationship between k and the P/E ratio is direct.
d. as k declines, the P/E ratio declines.
100. Wibex is expected to earn $4.00 next year, and pay $2.00 per share in dividends. The
expected growth rate in dividends is 6% and required rate of return is 16%. Calculate
the P/E ratio.
a. 6
b. 10
c. 50
d. 5
50
SET 4 PRACTICE QUESTIONS Technical Analysis Chapter 16
1. A major assumption of technical analysis is that

a. prices adjust to new information very quickly
b. fundamental data are quite helpful and should be used
c. published market data are of little value
d. trends in stock prices occur and continue for considerable periods of time
2. Technical analysis is
a. applicable only to individual stocks
b. predicated on instant adjustment to a new equilibrium
c. closely related to fundamental analysis
d. primarily a timing technique
3. With regard to technicians, we can say

a. they are interested specifically in the price levels of stocks
b. they tend to concentrate on the long run
c. they do not believe that patterns repeat themselves but they are willing to take
advantage of this is it does occur
d. they believe that published market data are of significant value
4. Which of the following assumptions is made by technical analysts?

a. Changes in trend are caused by the shifts in demand and supply relationships.
b. Stock price changes are independent.
c. Security prices tend to move in trends which persist only for very short time
periods but can be exploited.
d. Supply of and demand for securities are governed by various factors, but at least
they are all rational.
5. Technicians
a. rely heavily on estimates of intrinsic value
b. are interested primarily in price levels
c. tend to concentrate on the long run
d. focus on price changes as an indication of the forces of supply and demand for a
stock or the market
6. Which of the following assumptions is NOT one made by technical analysts?

a. Changes in trend are caused by the shifts in demand and supply relationships.
b. Stock price changes are dependent.
c. Security prices tend to move in trends which persist for very short periods of time.
d. Supply of and demand for securities are governed by various factors, rational and
irrational.
51
7. Technical analysts advocate that stock prices ___________; while the efficient market
hypothesis holds that stock prices ______.
a. adjust gradually toward a new equilibrium; adjust rapidly toward a new
equilibrium
b. are the present value of expected future cash flows;result from short-term supply
and demand
c. follow a random walk with no trends;adjust gradually to economic news after a
lag
d. are of no predictive value; are good for projecting future prices
8. A support level
a. is a price range at which a technician expects a significant increase in the demand
for a stock
b. is a level below which the price cannot go
c. is a price range at which a technician expects a significant increase in the supply of
a stock
d. none of the above is true
9. Technicians are of the opinion that a stock that is outperforming the market index will
tend to
a. converge its equilibrium level shortly.
b. continue to outperform the market for a reasonable length of time.
c. soon reverse its trend.
d. reach a resistance level shortly.
10. With regard to the Dow theory,

a. one favorable aspect is that only one version is used by everyone.
b. confirmations arrive quickly, and are clear.
c. it is intended only to forecast the start of a primary movement.
d. the amount of price movement needed for a confirmation is universally agreed
upon.
11. The principal shortcoming of the Dow theory is

a. its use of Dow Jones averages instead of more broad-based indexes.
b. Its attention to general market movements instead of individual stocks.
c. That it is based only on primary trends and ignores secondary trends.
d. That it is interpreted in various ways by its users and may therefore be predicting
conflicting movements at the same time.
12. Technicians are interested in price movements and volume changes for certain stocks.
To them
a. a price decline accompanied by heavy volume would indicate a “buy” signal.
b. a price increase accompanied by heavy volume would indicate a “sell” signal.
c. a price decline with light volume would be considered a “buy” signal.
d. a price increase accompanied by heavy volume would indicate a “buy” signal.
52
13. Which of the following statements is INCORRECT regarding the advance-decline line
a. The advance-decline line and the market averages normally move in opposite
directions
b. It is often referred to as the breadth of the market
c. Is the difference between the number of stocks advancing in price and the number
declining in price for a group of stocks
d. The line can be based on daily or weekly figures
14. Which of the following is NOT classified as a contrary trading rule?

a. investment advisory opinions
b. relative strength ratio
c. mutual fund liquidity
d. put/call ratio
15. Conclusions about technical analysis suggest that

a. Because it is popular among many practitioners, investors can justify technical
analysis.
b. Not all of the techniques of technical analysis have been examined and therefore
technical analysis cannot be declared officially to be deficient.
c. it is obvious from analysis that stocks’ price movements should repeat
themselves, thereby justifying the pursuit of technical analysis.
d. there is unanimous agreement on the interpretation of major technical analysis
signals, such as those involving the Dow Theory
53
SET 5 PRACTICE QUESTIONS Bonds Chapters 17-18
CHAPTER 17:
1. Nominal interest rates

a. contain no adjustment for inflation
b. contain an adjustment for realized inflation
c. contain an adjustment for expected inflation
d. are also referred to as real rates
2. With regard to interest rates, if the real rate of interest is 2%, and the market interest rate
for short-term risk free securities is 5%, then the remaining 3% is
a. the actual inflation rate.
b. the expected liquidity premium.
c. the expected inflation rate.
d. the actual liquidity rate.
3. Select the CORRECT statement concerning bonds.

a. Bond prices are quoted as a percentage of par value.
b. Bonds do not trade on an accrued interest basis.
c. With bond price quotes, 1 point = $1.
d. Current yield is the ratio of the coupon to the par value of the bond.
4. On one recent day, the 30-year Treasury bond price moved 1 3/32 as yields rose. This
means that the bond price
a. Rose by $1.938
b. Declined by $10.938
c. Rose by $10.938
d. Declined by $1.938
5. Current yield
a. is equal to coupon divided by par value
b. is a measure of the promised rate of return on a bond
c. is always greater than the coupon rate for bonds selling at a discount
d. is a correct measure of the expected return on a bond
6. Select the INCORRECT statement concerning bonds.

a. Bond prices are quoted as a percentage of par value.
b. Bonds trade on an accrued interest basis.
c. Bonds sell at discounts when the stated coupons are less than the prevailing
interest rate on a comparable new issue.
d. The most common type of secured bond is the debenture.
54
7. Which of the following is CORRECT regarding zero-coupon securities?

a. They eliminate re-investment rate risk.
b. The yield to be earned on them cannot be determined until these securities are
held to maturity
c. They are only issued by corporations.
d. They offer minimum price volatility.
8. The YTM on a bond

a. Is an expected return in the probability distribution sense.
b. Is the true realized return an investor will earn
c. Is a promised return, and is subject to conditions being met
d. Is a measure of the true yield that a bond investor is assured of receiving barring
default
9. The yield to maturity on a bond

a. is a promised yield
b. is calculated by assuming that investors reinvest all coupons received from a bond
at a rate equal to the computed YTM on that bond
c. is a measure of the true yield that a bond investor is assured of receiving barring
default because it takes compounding into effect
d. is almost always equal to the realized compound yield
10. When calculated for a period of, say, two years, the Realized Compound Yield consists
of
a. The coupon income
b. The price change
c. The coupon income + the price change
d. The coupon income + the price change + the interest-on-interest
11. Choose the INCORRECT statement in the following set of statements about bond
measures.
a. The yield to call is a promised yield.
b. The current yield is equal to coupon divided by current market price.
c. The horizon return is an expected return.
d. The YTM is both a promised return and a realized return.
12. A bond's intrinsic value is

a. determined by compounding the coupon amounts at the market yield
b. harder to determine than that of common stocks
c. determined by discounting the coupon amounts and the face value back to the
present
d. the present value of all coupons to be received on the bond
55
13. An increase in reinvestment rate risk

a. is caused by an increase in interest rates.
b. leads to a decline in coupon rates.
c. results from a decline in interest rates.
d. results from an increase in inflation.
14. If bond investors do not reinvest the coupons received during the life of the bond, then
the
a. promised yield will be less than the realized yield.
b. promised yield will exceed the realized yield.
c. nominal yield will be greater than the promised yield.
d. current yield will equal the promised yield.
15. The approximate yield to maturity for a 10% coupon bond with a 10 year maturity and
selling for $1080 can easily be seen to be
a. less than 10%
b. more than 10%
c. almost exactly 10%
d. in excess of 10.5%
16. Given a 10%, 20 year bond selling at par. If the reinvestment rate is 10%, the realized
compound return will be
a. less than 8%
b. equal to 10%
c. greater than 10%
d. more than 9% but less than 10%
17. The interest-on-interest concept significantly affects the

a. realized return
b. promised return
c. expected return
d. coupon return
18. Which of the following statements is INCORRECT about bond maturities?

a. short maturities protect investors when interest rates rise better than long
maturities
b. longer maturities have greater price fluctuations
c. longer maturities are more liquid than Treasury bills
d. longer maturities have a chance for larger gains
56
19. With regard to bond price changes over time, chose the CORRECT statement:
a. holding maturity constant, a decrease in yields will raise bond prices on a
percentage basis the same amount as a corresponding increase in rates will
lower bond prices
b. bond price fluctuations and bond coupon rates are directly related
c. for a given change in market yields, changes in bond prices are inversely related
to time to maturity
d. as interest rates change, the prices of long-term bonds will change more than the
price of shorter term bonds, everything else being equal
20. Which of the following statements about bond prices is CORRECT?

a. Bond price volatility and time to maturity are inversely related.
b. A decrease in yields raises bond prices percentage-wise less than a
corresponding increase in yields lowers prices.
c. Bond price fluctuations and bond coupons are inversely related.
d. Short-term bond prices fluctuate more than do long-term bond prices
21. With regard to the various yield measures on bonds,

a. the yield to call is often a better measure than YTM for bonds selling at a
premium
b. the realized compound yield takes into account all intermediate cash flows and
reinvestment rates
c. the yield to maturity is the compound rate of return an investor will receive if the
bond is held to maturity
d. a and b are correct
e. a, b, and c are all correct
22. Calculate the YTM for a 20 year, 7% coupon currently selling for $810.
a. 4.704
b. 9.408
c. 8.344
d. 9.076
23. Calculate bond price of a 14 year, 6% coupon bond whose current YTM is 8%.
a. $887.42
b. $913.54
c. $914.40
d. $833.37
24. Calculate yield to maturity on a 12 year zero coupon bond purchased for $400
a. 3.53%
b. 7.18%
c. 7.05%
d. 7.79%
57
25. Calculate bond price for a zero coupon bond that matures in 15 years and has a
required yield of 9% a year, compounded semiannually.
a. $267
b. $274.5
c. $287.77
d. $75.41
26. Consider a 20 year 8% coupon, currently selling for $802.50. An investor who buys this
bond and holds it to maturity will receive how many different sources of return in terms
of the total dollar return on this bond?
a. 1
b. 2
c. 3
d. 4
27. Duration tells us

a. the maximum price volatility from a bond
b. the stated life of a bond
c. the economic life of a bond
d. the true risk of a bond
28. Which of the following statements about duration is INCORRECT?

a. Duration combines coupon and maturity.
b. Bond price changes are directly related to duration.
c. Modified duration is used to calculate the approximate price change for a bond
d. Duration is a complete measure of bond risk.
29. With regard to duration, choose the CORRECT statement:

a. Yield to maturity is inversely related to duration
b. Coupon is directly related to duration
c. Duration expands with time to maturity but at an increasing rate
d. Portfolio duration is a simple average of the durations of the individual bonds in
the portfolio
30. Which of the following statements about duration is INCORRECT?

a. Duration combines coupon and maturity.
b. A zero-coupon bond has no duration.
c. Modified duration is used in the calculation of approximate price change for a
bond
d. The duration of any coupon-paying bond is always less than its maturity.
58
31. Which of the following bond relationships is direct as opposed to inverse?

a. Coupon and duration.
b. Duration and yield to maturity.
c. Interest rate changes and bond prices.
d. Duration and maturity.
32. A corporate bond has a modified duration of 8. The approximate price change for this
bond, given a rise in interest rates of 75bp, is
a. An increase in the price of approximately 6.6%
b. A decrease in the price of approximately 6%
c. A decrease in the price of approximately 6.6%.
d. A decrease in the price of approximately 12.36%
33. Convexity is important in bond analysis because

a. the price-yield relationship is imprecise.
b. the relationship between bond maturity and interest rate changes is convex.
c. the relationship between bond price changes and modified duration is an
approximation.
d. The price-yield relationship is linear.
CHAPTER 18:
34. The normal pattern for yield curves in modern financial history is
a. inverted
b. upward-sloping
c. downward-sloping
d. inverted
35. The term structure of interest rates is

a. a static analysis of the relationship between bond prices and their yields
b. a dynamic analysis of the relationship between bond yields and their maturities
c. a static analysis of the relationship between bond yields and their maturities
d. an analysis of the relationship between the term to maturity and the current yield
36. Which theory of the term structure of interest rates states that for a specified period,
such as five years, any combination of securities will have the same expected return?
a. expectations theory
b. liquidity preference theory
c. market segmentation theory
d. preferred habitat theory
59
37. All of the following factors contribute to yield spreads except:

a. differences in tax treatments
b. differences in coupon rates
c. differences in maturity
d. differences in marketability
38. Forward rates are:

a. rates that will prevail in the future
b. observable, anticipated future rates
c. unobservable rates that are expected to prevail in the future
39. Yield spreads are primarily a function of

a. Variables connected with a particular issue
b. Length of time to maturity.
c. Changes in the yield curve.
d. Changes in inflation.
40. With regard to yield spreads,

a. they tend to narrow during recessions
b. they tend to widen during boom periods
c. they tend to narrow during boom periods
d. the size of the yield spread does not change over time
41. A passive management strategy for bonds means that

a. investors do not have to do anything
b. the strategy has a lower expected return and risk than does an active strategy
c. the investor attempts to identify mispricings among securities
d. investors seek out portfolio managers who attempt to trade in order to outperform
the market
42. With bonds, passive strategies include:

a. buy and hold, indexing, and immunization
b. buy and hold, indexing, and bond swaps
c. buy and hold and immunization
d. buy and hold and indexing
43. The two risks involved in immunization strategies are

a. interest rate risk and price risk
b. interest rate risk and reinvestment rate risk
c. price risk and reinvestment rate risk
d. price risk and default risk
60
44. Select the CORRECT strategy concerning a buy-and-hold strategy

a. It is not applicable to bond portfolios like it is to stock portfolios
b. It avoids the decision of having to make an initial selection
c. It is one strategy within the active family of portfolio strategies
d. Investors must still perform certain functions while the strategy is in existence
45. With regard to immunization

a. In many respects it is a hybrid strategy between passive and active strategies.
b. There is only one type of immunization strategy.
c. It is a strategy designed to protect against reinvestment rate risk.
d. Once the strategy is undertaken, an investor need not make any changes.
50. With regard to horizon analysis, select the INCORRECT statement.

a. it is one form of interest rate forecasting
b. it involves the projection of bond performance over an unspecified investment horizon
c. the investor must make assumptions about reinvestment rates
d. the investor must calculate the realized compound yields for the bonds being
considered
61
SET 6 PRACTICE QUESTIONS Derivative Securities Chapters 19 and 20
CHAPTER 19:
1. With regard to call options, choose the INCORRECT statement:

a. calls are created by sellers who write a particular contract
b. calls give the buyer the right to purchase 100 shares of a particular stock at a
specified price anytime prior to expiration
c. a call has a known fixed cost, which is the maximum the buyer can lose
d. a call option is both a right and an obligation
2. Choose the INCORRECT statement about the writers of options:

a. the call writer expects the price of the stock to remain roughly steady or perhaps
move down
b. the call buyer expects the price of the stock to move upward, and relatively soon
c. the put writer expects the price of the stock to move up, and relatively soon
d. the put buyer expects the price of the stock to move down, and relatively soon
3. Select the CORRECT statement(s) option buyers and writers:

a. the put buyer expects the price of the stock to go down
b. to write a put is to be short a put
c. a call writer expects the price of the stock to stay about the same or go up
d. a and b are correct
e. a, b and c are all correct
4. An American option
a. can only be exercised at expiration
b. can only be exercised up to the day before expiration
c. can be exercised anytime from issuance to the specified expiration time
d. can be sold in the secondary market, but cannot be exercised by the holder
5. Which of the following courses of action are possible with an American option?
a. the option may expire worthless
b. the option may be exercised
c. the option may be sold in the secondary market
d. a and c only
e. a, b, and c are possible
6. Select the INCORRECT statement with regard to facts about options:

a. options provide leverage
b. disregarding commissions, options are a zero-sum game
c. the option premium is the price paid by the option seller to the option buyer
d. puts and calls expand the opportunity set available to investors
62
7. Select the CORRECT statement(s) about facts about options.

a. an option is the right but not the obligation to act
b. options truncate the returns distributions available to investors
c. ignoring commissions, options is a zero sum game
d. b and c are correct
e. a, b, and c are correct
8. Which of the following statements is CORRECT about options exchanges?

a. the options exchanges constitute the primary market for options
b. the Options Clearing Corporation functions as an intermediary between the
brokers representing the buyers and the writers
c. the options exchanges have failed to make options a great success because they
have not standardized the terms of the contracts
d. once a writer has received an assignment notice, the writer can execute an
offsetting transaction to eliminate the obligation
9. Which of the following statements is INCORRECT about intrinsic values for options?
a. an option’s premium almost never declines below its intrinsic value
b. option prices almost always exceed intrinsic values
c. the time value of an option = intrinsic value – option price
d. option price = intrinsic value + time value
Assume the current date is November 1. Assume a Dec. call on WandCo has an exercise price of
$25. The stock closed at $27.63. A December put is available with a strike price of $30. The
price of the call is $3.50. The price of the put is $3. Using this information, answer the next 4
questions.
10. The intrinsic value of the call is:

a. 0
b. $2.63
c. $3.50
d. $0.50
11. The intrinsic value of the put is:

a. 0
b. $0.50
c. $2.37
d. $27
12. The time value of the call is:

a. $0.87
b. $2.63
c. 0
d. $2.37
63
13. Which of the following statements is CORRECT about WandCo options?

a. both the call and the put are out of the money
b. both the call and the put are in the money
c. the call is in the money while the put is out of the money
d. the put is in the money while the call is out of the money
CHAPTER 20
14. In the case of a futures contract, buyers can settle their position
a. only by taking delivery.
b. only by arranging an offsetting contract.
c. either by delivery or offset.
d. by a combination of delivery and offset.
15. Which of the following characteristics about futures trading is unique?

a. Short selling can be done only on an uptick.
b. Margin is not allowed.
c. Positions can remain open indefinitely.
d. There are no specialists on futures exchanges.
16. To protect the value of a bond portfolio against a rise in interest rates using interest rate
futures, the portfolio owner could execute a ____________ hedge.
a. long
b. duration
c. short
d. maturity
17. A futures contract is

a. a nonnegotiable, nonmarketable instrument.
b. a security, like stocks and bonds.
c. a standardized transferable agreement between two parties providing for the
deferred delivery of a specified graded quantity of a designated
commodity.
d. not a legal contract, and therefore its terms can be changed during the life of the
contract.
18. When trading futures, margin

a. is seldom used.
b. indicates that credit is being extended.
c. is a down payment.
d. in effect, is a performance bond.
64
19. Stock-index futures can be used to heldge against which of the following types of
risks?
a. Diversifiable risk
b. Market risk
c. Unsystematic risk
d. Company specific risk
20. The initial margin required for futures trading

a. is only put up by the seller.
b. is only put up by the buyer.
c. can be put up by either party, whoever initiates the transaction.
d. must be put up by both the buyer and the seller.
21. Of the following statements about futures trading, which one is INCORRECT?
a. There are no specialists on futures exchanges.
b. All futures contracts are eligible for margin trading.
c. Trading is halted for the day if the prices reach the daily limit.
d. The uptick rule applies to the shorting of futures contracts.
22. As a stock portfolio manager, who is expecting a big influx of investment capital, what
type of transaction could you do to protect against higher stock prices in the futures?
a. Enter into a long-hedge transaction
b. Enter into a short-hedge transaction
c. Enter into a speculation transaction
d. Buy some short-term bonds
23. An investor selling a treasury bond futures contract is expecting to profit from
a. an increase in the price of the treasury bond.
b. an increase in the underlying level of interest rates.
c. interest rates remaining unchanged.
d. a decrease in the underlying level of interest rates.
24. An investor purchased a futures contract at $25,000 on a margin deposit of $1500.

What is his rate of return if he sells it at $40,000?
a. 100 percent
b. 50 percent
c. 10 percent
d. 1000 percent
25. If an investor strongly believes that the stock market is going to have a sharp decline
shortly, he or she could maximize profit by taking action such as
a. short selling stock-index futures contracts.
b. hedging current short positions.
c. using stock-index futures to straddle the market.
65
d. buying stock-index futures contracts.

26. Assume that an investor sells a S&P 500 stock-index futures contract at 975 and buys this
contract after a few weeks for 985. The dollar return on this transaction will amount to
a. -$5000
b. -$1000
c. -$2500
d. -$10
27. One difference between a hedger and a speculator is that the hedger
a. may have either a profit or a loss.
b. may not close out his position by taking an opposite position.
c. does not have to put up margin.
d. faces a risk without the futures contract.
66
SET 7 PRACTICE QUESTIONS Portfolio Management, Performance Evaluation

Chapters 21 and 22
CHAPTER 21
1. In the portfolio management process, which of the following is step #1?

a. monitoring of market conditions
b. formulation of appropriate investment strategies
c. identify and evaluate an investor’s objectives, constraints, and preferences
d. adjust the portfolio as appropriate
2. Which of the following is not a characteristic associated with institutional investors?

a. institutions can be defined financially by their assets and goals
b. some institutions are free of tax considerations under normal circumstances
c. institutions use quantitative concepts to define risk
d. institutions are subject to numerous legal and regulatory constraints
3. Which of the following describes the process of forming expectations according to the
portfolio management process?
a. form micro or individual asset expectations
b. form micro expectations, and then macro or capital market expectations
c. form macro expectations first, and then micro expectations
d. none of the above describes the process as outlined
4. The life cycle approach for individual investors has four phases—which of the
following is not one of these phases?
a. The consolidation phase
b. the accumulation phase
c. The spending phase
d. The capital preservation phase.
5. The investment policy statement includes

a. Objectives only.
b. Objectives and constraints.
c. Return objectives, risk posture, and constraints.
d. Objectives, constraints and preferences.
6. Which of the following, in the investment policy statement, is not a constraint or

preference?
a. liquidity
b. risk
c. time horizon
d. unique circumstances
67
7. The investment policy statement includes

a. Objectives, constraints and preferences, and the asset allocation plan
b. Objectives and constraints.
c. Return expectations, risk posture, constraints, and preferences.
d. Strategies and asset allocation plans
8. With regard to the investment policy statement, there are:

a. two objectives, and four constraints/preferences
b. one objective, and five constraints/preferences
c. two objectives, and five more elements
d. one objective, return, and six more elements
9. When estimating expected returns for the next few years,

a. dividend yield is likely to average what it has in the past
b. dividend yield is now significantly lower, and is likely to remain so
c. based on GDP growth rates, the price appreciation component is likely to increase
enough to make up for a lower dividend yield
d. the dividend yield component has averaged between 4 and 5% for many years,
and is likely to continue to do so
10. With regard to asset allocation, choose the INCORRECT statement:

a. the asset allocation decision involves deciding the percentage of investable funds
to be placed in stocks, bonds, and cash equivalents
b. differences in asset allocation will be the key factor over time causing differences
in portfolio performance
c. it is the second most important decision made by investors in the portfolio
management process, security selection being the most important
d. how asset allocation decisions are made by investors remains a subject that is not
fully understood.
11. At least for large institutional portfolios, asset allocation is thought to account for about
what percentage of the portfolio’s results?
a. 40%.
b. 90% or more
c. 80%
d. 60%
12. A market timing approach to portfolio management that increases the proportion of
funds in stocks when the stock market is expected to be rising, and increases cash when
the stock market is expected to be falling, is an example of
a. strategic asset allocation.
b. portfolio optimization.
c. liquidity expectation timing.
d. tactical asset allocation
68
CHAPTER 22
13. You are asked to calculate a rate of return over a certain time horizon in order to
evaluate the portfolio manager. You should use a
a. dollar-weighted return.
b. time-weighted return.
c. client-weighted return.
d. internal rate of return.
14. AIMR’s presentation standards are

a. a set of guiding ethical principles.
b. the maximum standards for presenting performance.
c. a set of recommendations only.
d. a guarantee of complete comparability among investment managers.
15. With regard to the reward-to-variability ratio (RVAR):

a. RVAR is an absolute measure of performance.
b. RVAR measures the slope of the line from RF to the portfolio being evaluated.
c. The closer the RVAR to 0.0, the better is the performance.
d. RVAR does not take into account how well diversified a portfolio was.
16. Which one of the following statements is CORRECT concerning RVAR and RVOL?
a. RVOL is based on total risk while RVAR is based on systematic risk
b. RVAR is based on total risk while RVOL is based on systematic risk
c. RVAR is based on unsystematic risk while RVOL is based on systematic risk
d. RVOL is based on systematic risk while RVAR is based on unsystematic risk
17. Which is the better measure to estimate the performance of a portfolio: The Sharpe
Index or the Treynor Index?
a. The Sharpe Index
b. The Treynor Index.
c. Both are equally good.
d. Not enough information is provided to answer this question.
18. Using RVAR and RVOL, poorly diversified portfolios would be ranked
a. higher on the basis of the RVAR measure than by the RVOL measure.
b. higher on the basis of the RVOL measure than by the RVAR measure.
c. similarly by both the RVAR and RVOL measures.
d. higher by the RVAR measure than by the differential return (Jensen) measure.
69
19. With regard to the Sharpe and Treynor measures of performance, which is
CORRECT?
a. RVAR does not take into account how well diversified a portfolio was during the
measurement period.
b. RVAR implies that total risk is the proper measure to use.
c. If an investor thinks it is correct to use systematic risk, RVAR is appropriate.
d. Both measures will always provide the same rankings of portfolios.
20. Under Jensen’s differential return approach to portfolio evaluation, superior market
timing is exhibited by a
a. statistically significant positive alpha.
b. statistically significant negative alpha.
c. zero alpha.
d. low positive alpha.
21. According to Jensen’s differential return measure, what is alpha?

a. The intercept of the SML line.
b. The intercept of CML line.
c. A means of identifying superior or inferior portfolio performance.
d. The actual excess return on a portfolio during some period.
22. As calculated, the alpha for a particular fund for a particular period
a. can be either negative or positive but not zero.
b. can be either positive or zero but not negative, with or without significance.
c. Could be zero, negative, or positive, and may or may not be statistically
significant
d. Could be zero, negative or positive and has to be statistically significant
23. Determine the performance of a portfolio, according to Jensen's measure, when the
portfolio had an actual return of 13%, and the risk-free rate = 6%, the market return =
12%, and the portfolio had a beta of 1.2
a. inferior
b. superior
c. same as that of the market
d. not enough information is provided to answer this question
24. The Sharpe, Treynor, and Jensen measures will agree on portfolio rankings if
a. the portfolios are completely diversified.
b. Only ex post data are used.
c. Quarterly data are used in all three.
d. Each portfolio consists of only one security.
70
25. Regarding the composite measures of portfolio evaluation:

a. Jensen’s differential return measure is based on the CAPM.
b. Jensen’s alpha evaluates the ability of the portfolio manager to diversify.
c. In the case of non-diversified portfolios, all three measures will provide similar
results.
d. All three measures test for the significance of excess returns.
26. The degree of diversification of a portfolio is measured by

a. calculating the correlation coefficient between a stock’s returns with those of the
market.
b. calculating the association between a portfolio's return and the market's return
based on the square of the correlation coefficient.
c. computing the correlation coefficient between a portfolio's return and that of the
market.
d. dividing the average return of a portfolio by its beta.
27. This statistical measure indicates the percentage of the variance in the portfolio’s
returns that is explained by the market’s returns.
a. The standard deviation.
b. The coefficient of determination.
c. The beta.
d. The alpha.
28. Portfolio performance is measured relative to a market portfolio. If the measurement of

the market portfolio is in error, then the SML and the portfolio measurements will be in
error also. This problem is referred to as ______ error.
a. standard
b. benchmark
c. Roll
d. Anticipated
29. Performance attribution

a. seeks to determine before the fact why success or failure occurred.
b. is typically a bottom-up approach.
c. does not require the identification of a benchmark of performance.
d. often begins with the policy statement that guides the management of a portfolio.
71
30. Which of the following portfolios would rank best in terms of portfolio performance?
Portfolio 1 7%
Portfolio 2 18%
Portfolio 3 25%
Risk-free rate 9%
a. 3, 2, 1
b. 3, 2, risk-free rate, 1
c. 3, 2, portfolio 1 was not acceptable because return was below the risk-free rate
d. not enough information is provided to answer this question
Given the following information, answer the next 5 questions.
SD Beta  R2
Fund 1 1.97 1.0 1.3 .85
Fund 2 2.94 .8 .6* .80
Fund 3 1.82 1.2 -3.5 .90
Fund 4 4.70 1.1 4.2 .65
*significant at 5% level
31. Which of these four funds’ returns are best explained by the market’s returns?
a. Fund 1
b. Fund 2
c. Fund 3
d. Fund 4
32. Which of these four funds had the largest market risk?
a. Fund 1
b. Fund 2
c. Fund 3
d. Fund 4
33. Which of these four funds had the largest total risk?
a. Fund 4
b. Fund 3
c. Fund 1
d. More information is needed to answer this question.
34. Which of these funds had the highest performance as determined by Jensen’s
performance measure?
a. Fund 1
b. Fund 2
c. Fund 3
d. Fund 4
72
35. Which of these funds was least well diversified?

a. Fund 1
b. Fund 2
c. Fund 3
d. Fund 4

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1

SET 1 PRACTICE QUESTIONS Background Chapters 1-5

1. Risk is best thought of as

2. Which of the following is INCORRECT about risk-averse investors?

4. Which of the following factual statements is INCORRECT?

6. Ex post, the return-risk tradeoff available to investors

7. Intelligent investment decisions for any future period are based on

8. A Chartered Financial Analyst designation is

10. An example of a nonmarketable security is

11. Which of the following is not a money-market security?

12. Which of the following characteristics applies to the Treasury bill?

21. With regard to securization, choose the INCORRECT statement..

22. Which of the following is CORRECT about preferred stock?

23. The common stockholder

24. The common stockholder

25. Which of the following statements about common stock is CORRECT?

26. A warrant is:

27. Which of the following is not a corporate-created equity-derivative security?

28. Which of the following is an investor-created equity-derivative security?

31. A futures contract

32. The riskiest type of security to investors is?

33. Which of the following statements is CORRECT about investment companies?

34. With regard to mutual funds, choose the CORRECT statement

35. All open-end investment companies

36. All open-end investment companies

37. With regard to mutual funds , we can conclude

38. Mutual funds include

39. With regard to mutual funds , we can conclude

43. Fidelity’s Equity-Income Fund is

44. Money market funds

a. it is computed several times daily for all mutual funds

50. With regard to mutual funds, choose the INCORRECT statement

51. Which of the following statement is CORRECT about closed-end investment

e. both b and d are correct

55. Calculate the Cumulative Total Return for HighTech.

58. With regard to markets, choose the CORRECT statement:

d. the markets declined for four consecutive years during 1999-2002

61. The NYSE is best described as

62. Nasdaq is best described as

65. NASDAQ National Market System is

d. a combination of the competing market makers in Nasdaq stocks and a reporting

68. One of the big advantages of Instinet for institutional investors is

70. When it comes to trading bonds

72. Which of the following statements is CORRECT?

73. The DJIA

74. The Dow-Jones Industrial Average

76. The Russell 1000 Index is a

77. The Russell 2000 is a

78. With regard to market indexes, choose the INCORRECT statement

d. The S&P indexes are capitalization-weighted

80. With regard to types of orders, select the INCORRECT statement

81. With regard to types of orders, select the CORRECT statement

82. Types of brokerage accounts include:

85. The NASD is

86. The Securities and Exchange Commission (SEC)

87. The Securities Act of 1933

88. The Securities Exchange Act of 1934

89. With regard to margin trading:

d. none of the above