博迪投资学第七版答案chap003-7thed

Multiple Choice Questions1. The term structure of interest rates is:A) The relationship between the rates of interest on all securities.B) The relationship between the interest rate on a security and its time to maturity.C) The relationship between the yield on a bond and its default rate.D) All of the above.E) None of the above.Answer: B Difficulty: EasyRationale: The term structure of interest rates is the relationship between two variables, years and yield to maturity (holding all else constant).2. The yield curve shows at any point in time:A) The relationship between the yield on a bond and the duration of the bond.B) The relationship between the coupon rate on a bond and time to maturity of thebond.C) The relationship between yield on a bond and the time to maturity on the bond.D) All of the above.E) None of the above.Answer: C Difficulty: Easy3. An inverted yield curve implies that:A) Long-term interest rates are lower than short-term interest rates.B) Long-term interest rates are higher than short-term interest rates.C) Long-term interest rates are the same as short-term interest rates.D) Intermediate term interest rates are higher than either short- or long-term interestrates.E) none of the above.Answer: A Difficulty: EasyRationale: The inverted, or downward sloping, yield curve is one in which short-term rates are higher than long-term rates. The inverted yield curve has been observedfrequently, although not as frequently as the upward sloping, or normal, yield curve.4. An upward sloping yield curve is a(n) _______ yield curve.A) normal.B) humped.C) inverted.D) flat.E) none of the above.Answer: A Difficulty: EasyRationale: The upward sloping yield curve is referred to as the normal yield curve, probably because, historically, the upward sloping yield curve is the shape that has been observed most frequently.5. According to the expectations hypothesis, a normal yield curve implies thatA) interest rates are expected to remain stable in the future.B) interest rates are expected to decline in the future.C) interest rates are expected to increase in the future.D) interest rates are expected to decline first, then increase.E) interest rates are expected to increase first, then decrease.Answer: C Difficulty: EasyRationale: An upward sloping yield curve is based on the expectation that short-term interest rates will increase.6. Which of the following is not proposed as an explanation for the term structure ofinterest rates?A) The expectations theory.B) The liquidity preference theory.C) The market segmentation theory.D) Modern portfolio theory.E) A, B, and C.Answer: D Difficulty: EasyRationale: A, B, and C are all theories that have been proposed to explain the term structure.7. The expectations theory of the term structure of interest rates states thatA) forward rates are determined by investors' expectations of future interest rates.B) forward rates exceed the expected future interest rates.C) yields on long- and short-maturity bonds are determined by the supply and demandfor the securities.D) all of the above.E) none of the above.Answer: A Difficulty: EasyRationale: The forward rate equals the market consensus expectation of future short interest rates.8. Which of the following theories state that the shape of the yield curve is essentiallydetermined by the supply and demands for long-and short-maturity bonds?A) Liquidity preference theory.B) Expectations theory.C) Market segmentation theory.D) All of the above.E) None of the above.Answer: C Difficulty: EasyRationale: Market segmentation theory states that the markets for different maturities are separate markets, and that interest rates at the different maturities are determined by the intersection of the respective supply and demand curves.9. According to the "liquidity preference" theory of the term structure of interest rates, theyield curve usually should be:A) inverted.B) normal.C) upward slopingD) A and B.E) B and C.Answer: E Difficulty: EasyRationale: According to the liquidity preference theory, investors would prefer to be liquid rather than illiquid. In order to accept a more illiquid investment, investors require a liquidity premium and the normal, or upward sloping, yield curve results.Use the following to answer questions 10-13:Suppose that all investors expect that interest rates for the 4 years will be as follows:10. What is the price of 3-year zero coupon bond with a par value of $1,000?A) $863.83B) $816.58C) $772.18D) $765.55E) none of the aboveAnswer: B Difficulty: ModerateRationale: $1,000 / (1.05)(1.07)(1.09) = $816.5811. If you have just purchased a 4-year zero coupon bond, what would be the expected rateof return on your investment in the first year if the implied forward rates stay the same?(Par value of the bond = $1,000)A) 5%B) 7%C) 9%D) 10%E) none of the aboveAnswer: A Difficulty: ModerateRationale: The forward interest rate given for the first year of the investment is given as 5% (see table above).12. What is the price of a 2-year maturity bond with a 10% coupon rate paid annually? (Parvalue = $1,000)A) $1,092B) $1,054C) $1,000D) $1,073E) none of the aboveAnswer: D Difficulty: ModerateRationale: [(1.05)(1.07)]1/2 - 1 = 6%; FV = 1000, n = 2, PMT = 100, i = 6, PV =$1,073.3413. What is the yield to maturity of a 3-year zero coupon bond?A) 7.00%B) 9.00%C) 6.99%D) 7.49%E) none of the aboveAnswer: C Difficulty: ModerateRationale: [(1.05)(1.07)(1.09)]1/3 - 1 = 6.99.Use the following to answer questions 14-16:The following is a list of prices for zero coupon bonds with different maturities and par value of $1,000.14. What is, according to the expectations theory, the expected forward rate in the thirdyear?A) 7.00%B) 7.33%C) 9.00%D) 11.19%E) none of the aboveAnswer: C Difficulty: ModerateRationale: 881.68 / 808.88 - 1 = 9%15. What is the yield to maturity on a 3-year zero coupon bond?A) 6.37%B) 9.00%C) 7.33%D) 10.00%E) none of the aboveAnswer: C Difficulty: ModerateRationale: (1000 / 808.81)1/3 -1 = 7.33%16. What is the price of a 4-year maturity bond with a 12% coupon rate paid annually? (Parvalue = $1,000)A) $742.09B) $1,222.09C) $1,000.00D) $1,141.92E) none of the aboveAnswer: D Difficulty: DifficultRationale: (1000 / 742.09)1/4 -1 = 7.74%; FV = 1000, PMT = 120, n = 4, i = 7.74, PV = $1,141.9217. The market segmentation theory of the term structure of interest ratesA) theoretically can explain all shapes of yield curves.B) definitely holds in the "real world".C) assumes that markets for different maturities are separate markets.D) A and B.E) A and C.Answer: E Difficulty: EasyRationale: Although this theory is quite tidy theoretically, both investors and borrows will depart from their "preferred maturity habitats" if yields on alternative maturities are attractive enough.18. An upward sloping yield curveA) may be an indication that interest rates are expected to increase.B) may incorporate a liquidity premium.C) may reflect the confounding of the liquidity premium with interest rateexpectations.D) all of the above.E) none of the above.Answer: D Difficulty: EasyRationale: One of the problems of the most commonly used explanation of termstructure, the expectations hypothesis, is that it is difficult to separate out the liquidity premium from interest rate expectations.19. The "break-even" interest rate for year n that equates the return on an n-periodzero-coupon bond to that of an n-1-period zero-coupon bond rolled over into a one-year bond in year n is defined asA) the forward rate.B) the short rate.C) the yield to maturity.D) the discount rate.E) None of the above.Answer: A Difficulty: EasyRationale: The forward rate for year n, fn, is the "break-even" interest rate for year n that equates the return on an n-period zero- coupon bond to that of an n-1-periodzero-coupon bond rolled over into a one-year bond in year n.20. When computing yield to maturity, the implicit reinvestment assumption is that theinterest payments are reinvested at the:A) Coupon rate.B) Current yield.C) Yield to maturity at the time of the investment.D) Prevailing yield to maturity at the time interest payments are received.E) The average yield to maturity throughout the investment period.Answer: C Difficulty: ModerateRationale: In order to earn the yield to maturity quoted at the time of the investment, coupons must be reinvested at that rate.21. Which one of the following statements is true?A) The expectations hypothesis indicates a flat yield curve if anticipated futureshort-term rates exceed the current short-term rate.B) The basic conclusion of the expectations hypothesis is that the long-term rate isequal to the anticipated long-term rate.C) The liquidity preference hypothesis indicates that, all other things being equal,longer maturities will have lower yields.D) The segmentation hypothesis contends that borrows and lenders are constrained toparticular segments of the yield curve.E) None of the above.Answer: D Difficulty: ModerateRationale: A flat yield curve indicates expectations of existing rates. Expectations hypothesis states that the forward rate equals the market consensus of expectations of future short interest rates. The reverse of C is true.22. The concepts of spot and forward rates are most closely associated with which one ofthe following explanations of the term structure of interest rates.A) Segmented Market theoryB) Expectations HypothesisC) Preferred Habitat HypothesisD) Liquidity Premium theoryE) None of the aboveAnswer: B Difficulty: ModerateRationale: Only the expectations hypothesis is based on spot and forward rates. A andC assume separate markets for different maturities; liquidity premium assumes higheryields for longer maturities.Use the following to answer question 23:23. Given the bond described above, if interest were paid semi-annually (rather thanannually), and the bond continued to be priced at $850, the resulting effective annual yield to maturity would be:A) Less than 12%B) More than 12%C) 12%D) Cannot be determinedE) None of the aboveAnswer: B Difficulty: ModerateRationale: FV = 1000, PV = -850, PMT = 50, n = 40, i = 5.9964 (semi-annual);(1.059964)2 - 1 = 12.35%.24. Interest rates might declineA) because real interest rates are expected to decline.B) because the inflation rate is expected to decline.C) because nominal interest rates are expected to increase.D) A and B.E) B and C.Answer: D Difficulty: EasyRationale: The nominal rate is comprised of the real interest rate plus the expectedinflation rate.25. Forward rates ____________ future short rates because ____________.A) are equal to; they are both extracted from yields to maturity.B) are equal to; they are perfect forecasts.C) differ from; they are imperfect forecasts.D) differ from; forward rates are estimated from dealer quotes while future short ratesare extracted from yields to maturity.E) are equal to; although they are estimated from different sources they both are usedby traders to make purchase decisions.Answer: C Difficulty: EasyRationale: Forward rates are the estimates of future short rates extracted from yields to maturity but they are not perfect forecasts because the future cannot be predicted with certainty; therefore they will usually differ.26. The pure yield curve can be estimatedA) by using zero-coupon bonds.B) by using coupon bonds if each coupon is treated as a separate "zero."C) by using corporate bonds with different risk ratings.D) by estimating liquidity premiums for different maturities.E) A and B.Answer: E Difficulty: ModerateRationale: The pure yield curve is calculated using zero coupon bonds, but coupon bonds may be used if each coupon is treated as a separate "zero."27. The on the run yield curve isA) a plot of yield as a function of maturity for zero-coupon bonds.B) a plot of yield as a function of maturity for recently issued coupon bonds trading ator near par.C) a plot of yield as a function of maturity for corporate bonds with different riskratings.D) a plot of liquidity premiums for different maturities.E) A and B.Answer: B Difficulty: Moderate28. The market segmentation and preferred habitat theories of term structureA) are identical.B) vary in that market segmentation is rarely accepted today.C) vary in that market segmentation maintains that borrowers and lenders will notdepart from their preferred maturities and preferred habitat maintains that marketparticipants will depart from preferred maturities if yields on other maturities areattractive enough.D) A and B.E) B and C.Answer: E Difficulty: ModerateRationale: Borrowers and lenders will depart from their preferred maturity habitats if yields are attractive enough; thus, the market segmentation hypothesis is no longerreadily accepted.29. The yield curveA) is a graphical depiction of term structure of interest rates.B) is usually depicted for U. S. Treasuries in order to hold risk constant acrossmaturities and yields.C) is usually depicted for corporate bonds of different ratings.D) A and B.E) A and C.Answer: D Difficulty: EasyRationale: The yield curve (yields vs. maturities, all else equal) is depicted for U. S.Treasuries more frequently than for corporate bonds, as the risk is constant acrossmaturities for Treasuries.Use the following to answer questions 30-32:30. What should the purchase price of a 2-year zero coupon bond be if it is purchased at thebeginning of year 2 and has face value of $1,000?A) $877.54B) $888.33C) $883.32D) $893.36E) $871.80Answer: A Difficulty: DifficultRationale: $1,000 / [(1.064)(1.071)] = $877.5431. What would the yield to maturity be on a four-year zero coupon bond purchased today?A) 5.80%B) 7.30%C) 6.65%D) 7.25%E) none of the above.Answer: C Difficulty: ModerateRationale: [(1.058) (1.064) (1.071) (1.073)]1/4 - 1 = 6.65%32. Calculate the price at the beginning of year 1 of a 10% annual coupon bond with facevalue $1,000 and 5 years to maturity.A) $1,105B) $1,132C) $1,179D) $1,150E) $1,119Answer: B Difficulty: DifficultRationale: i = [(1.058) (1.064) (1.071) (1.073) (1.074)]1/5 - 1 = 6.8%; FV = 1000, PMT = 100, n = 5, i = 6.8, PV = $1,131.9133. Given the yield on a 3 year zero-coupon bond is 7.2% and forward rates of 6.1% in year1 and 6.9% in year 2, what must be the forward rate in year 3?A) 8.4%B) 8.6%C) 8.1%D) 8.9%E) none of the above.Answer: B Difficulty: ModerateRationale: f3 = (1.072)3 / [(1.061) (1.069)] - 1 = 8.6%34. An inverted yield curve is oneA) with a hump in the middle.B) constructed by using convertible bonds.C) that is relatively flat.D) that plots the inverse relationship between bond prices and bond yields.E) that slopes downward.Answer: E Difficulty: EasyRationale: An inverted yield curve occurs when short-term rates are higher thanlong-term rates.35. Investors can use publicly available financial date to determine which of the following?I)the shape of the yield curveII)future short-term ratesIII)the direction the Dow indexes are headingIV)the actions to be taken by the Federal ReserveA) I and IIB) I and IIIC) I, II, and IIID) I, III, and IVE) I, II, III, and IVAnswer: A Difficulty: ModerateRationale: Only the shape of the yield curve and future inferred rates can be determined.The movement of the Dow Indexes and Federal Reserve policy are influenced by term structure but are determined by many other variables also.36. Which of the following combinations will result in a sharply increasing yield curve?A) increasing expected short rates and increasing liquidity premiumsB) decreasing expected short rates and increasing liquidity premiumsC) increasing expected short rates and decreasing liquidity premiumsD) increasing expected short rates and constant liquidity premiumsE) constant expected short rates and increasing liquidity premiumsAnswer: A Difficulty: ModerateRationale: Both of the forces will act to increase the slope of the yield curve.37. The yield curve is a component ofA) the Dow Jones Industrial Average.B) the consumer price index.C) the index of leading economic indicators.D) the producer price index.E) the inflation index.Answer: C Difficulty: EasyRationale: Since the yield curve is often used to forecast the business cycle, it is used as one of the leading economic indicators.38. The most recently issued Treasury securities are calledA) on the run.B) off the run.C) on the market.D) off the market.E) none of the above.Answer: A Difficulty: EasyUse the following to answer questions 39-42:Suppose that all investors expect that interest rates for the 4 years will be as follows:39. What is the price of 3-year zero coupon bond with a par value of $1,000?A) $889.08B) $816.58C) $772.18D) $765.55E) none of the aboveAnswer: A Difficulty: ModerateRationale: $1,000 / (1.03)(1.04)(1.05) = $889.0840. If you have just purchased a 4-year zero coupon bond, what would be the expected rateof return on your investment in the first year if the implied forward rates stay the same?(Par value of the bond = $1,000)A) 5%B) 3%C) 9%D) 10%E) none of the aboveAnswer: B Difficulty: ModerateRationale: The forward interest rate given for the first year of the investment is given as 3% (see table above).41. What is the price of a 2-year maturity bond with a 5% coupon rate paid annually? (Parvalue = $1,000)A) $1,092.97B) $1,054.24C) $1,028.51D) $1,073.34E) none of the aboveAnswer: C Difficulty: ModerateRationale: [(1.03)(1.04)]1/2 - 1 = 3.5%; FV = 1000, n = 2, PMT = 50, i = 3.5, PV =$1,028.5142. What is the yield to maturity of a 3-year zero coupon bond?A) 7.00%B) 9.00%C) 6.99%D) 4%E) none of the aboveAnswer: D Difficulty: ModerateRationale: [(1.03)(1.04)(1.05)]1/3 - 1 = 4%.Use the following to answer questions 43-46:The following is a list of prices for zero coupon bonds with different maturities and par value of $1,000.43. What is, according to the expectations theory, the expected forward rate in the thirdyear?A) 7.23B) 9.37%C) 9.00%D) 10.9%E) none of the aboveAnswer: B Difficulty: ModerateRationale: 862.57 / 788.66 - 1 = 9.37%44. What is the yield to maturity on a 3-year zero coupon bond?A) 6.37%B) 9.00%C) 7.33%D) 8.24%E) none of the aboveAnswer: D Difficulty: ModerateRationale: (1000 / 788.66)1/3 -1 = 8.24%45. What is the price of a 4-year maturity bond with a 10% coupon rate paid annually? (Parvalue = $1,000)A) $742.09B) $1,222.09C) $1,035.66D) $1,141.84E) none of the aboveAnswer: C Difficulty: DifficultRationale: (1000 / 711.00)1/4 -1 = 8.9%; FV = 1000, PMT = 100, n = 4, i = 8.9, PV =$1,035.6646. You have purchased a 4-year maturity bond with a 9% coupon rate paid annually. Thebond has a par value of $1,000. What would the price of the bond be one year from now if the implied forward rates stay the same?A) $995.63B) $1,108.88C) $1,000.00D) $1,042.78E) none of the aboveAnswer: A Difficulty: DifficultRationale: (925.16 / 711.00)]1/3 - 1.0 = 9.17%; FV = 1000, PMT = 90, n = 3, i = 9.17, PV = $995.63Use the following to answer question 47:47. Given the bond described above, if interest were paid semi-annually (rather thanannually), and the bond continued to be priced at $917.99, the resulting effective annual yield to maturity would be:A) Less than 10%B) More than 10%C) 10%D) Cannot be determinedE) None of the aboveAnswer: B Difficulty: ModerateRationale: FV = 1000, PV = -917.99, PMT = 45, n = 36, i = 4.995325 (semi-annual);(1.4995325)2 - 1 = 10.24%.Use the following to answer questions 48-50:48. What should the purchase price of a 2-year zero coupon bond be if it is purchased at thebeginning of year 2 and has face value of $1,000?A) $877.54B) $888.33C) $883.32D) $894.21E) $871.80Answer: D Difficulty: DifficultRationale: $1,000 / [(1.055)(1.06)] = $894.2149. What would the yield to maturity be on a four-year zero coupon bond purchased today?A) 5.75%B) 6.30%C) 5.65%D) 5.25%E) none of the above.Answer: A Difficulty: ModerateRationale: [(1.05) (1.055) (1.06) (1.065)]1/4 - 1 = 5.75%50. Calculate the price at the beginning of year 1 of an 8% annual coupon bond with facevalue $1,000 and 5 years to maturity.A) $1,105.47B) $1,131.91C) $1,084.25D) $1,150.01E) $719.75Answer: C Difficulty: DifficultRationale: i = [(1.05) (1.055) (1.06) (1.065) (1.07)]1/5 - 1 = 6%; FV = 1000, PMT = 80, n = 5, i = 6, PV = $1084.2551. Given the yield on a 3 year zero-coupon bond is 7% and forward rates of 6% in year 1and 6.5% in year 2, what must be the forward rate in year 3?A) 7.2%B) 8.6%C) 8.5%D) 6.9%E) none of the above.Answer: C Difficulty: ModerateRationale: f3 = (1.07)3 / [(1.06) (1.065)] - 1 = 8.5%Use the following to answer questions 52-61:52. What should the purchase price of a 1-year zero coupon bond be if it is purchased todayand has face value of $1,000?A) $966.37B) $912.87C) $950.21D) $956.02E) $945.51Answer: D Difficulty: DifficultRationale: $1,000 / (1.046) = $956.0253. What should the purchase price of a 2-year zero coupon bond be if it is purchased todayand has face value of $1,000?A) $966.87B) $911.37C) $950.21D) $956.02E) $945.51Answer: B Difficulty: DifficultRationale: $1,000 / [(1.046)(1.049)] = $911.3754. What should the purchase price of a 3-year zero coupon bond be if it is purchased todayand has face value of $1,000?A) $887.42B) $871.12C) $879.54D) $856.02E) $866.32Answer: E Difficulty: DifficultRationale: $1,000 / [(1.046)(1.049)(1.052)] = $866.3255. What should the purchase price of a 4-year zero coupon bond be if it is purchased todayand has face value of $1,000?A) $887.42B) $821.15C) $879.54D) $856.02E) $866.32Answer: B Difficulty: DifficultRationale: $1,000 / [(1.046)(1.049)(1.052)(1.055)] = $821.1556. What should the purchase price of a 5-year zero coupon bond be if it is purchased todayand has face value of $1,000?A) $776.14B) $721.15C) $779.54D) $756.02E) $766.32Answer: A Difficulty: DifficultRationale: $1,000 / [(1.046)(1.049)(1.052)(1.055)(1.058)] = $776.1457. What is the yield to maturity of a 1-year bond?A) 4.6%B) 4.9%C) 5.2%D) 5.5%E) 5.8%Answer: A Difficulty: ModerateRationale: 4.6% (given in table)58. What is the yield to maturity of a 5-year bond?A) 4.6%B) 4.9%C) 5.2%D) 5.5%E) 5.8%Answer: C Difficulty: ModerateRationale: [(1.046)(1.049)(1.052)(1.055)(1.058)]1/5 -1 = 5.2%59. What is the yield to maturity of a 4-year bond?A) 4.69%B) 4.95%C) 5.02%D) 5.05%E) 5.08%Answer: C Difficulty: ModerateRationale: [(1.046)(1.049)(1.052)(1.055)]1/4 -1 = 5.05%60. What is the yield to maturity of a 3-year bond?A) 4.6%B) 4.9%C) 5.2%D) 5.5%E) 5.8%Answer: B Difficulty: ModerateRationale: [(1.046)(1.049)(1.052)]1/3 -1 = 4.9%61. What is the yield to maturity of a 2-year bond?A) 4.6%B) 4.9%C) 5.2%D) 4.7%E) 5.8%Answer: D Difficulty: ModerateRationale: [(1.046)(1.049)]1/2 -1 = 4.7%Essay Questions62. Discuss the three theories of the term structure of interest rates. Include in yourdiscussion the differences in the theories, and the advantages/disadvantages of each.Difficulty: ModerateAnswer:The expectations hypothesis is the most commonly accepted theory of term structure.The theory states that the forward rate equals the market consensus expectation of future short-term rates. Thus, yield to maturity is determined solely by current and expected future one-period interest rates. An upward sloping, or normal, yield curve wouldindicate that investors anticipate an increase in interest rates. An inverted, or downward sloping, yield curve would indicate an expectation of decreased interest rates. Ahorizontal yield curve would indicate an expectation of no interest rate changes.The liquidity preference theory of term structure maintains that short-term investorsdominate the market; thus, in general, the forward rate exceeds the expected short-term rate. In other words, investors prefer to be liquid to illiquid, all else equal, and willdemand a liquidity premium in order to go long term. Thus, liquidity preference readily explains the upward sloping, or normal, yield curve. However, liquidity preferencedoes not readily explain other yield curve shapes.Market segmentation and preferred habitat theories indicate that the markets fordifferent maturity debt instruments are segmented. Market segmentation maintains that the rates for the different maturities are determined by the intersection of the supply and demand curves for the different maturity instruments. Market segmentation readilyexplains all shapes of yield curves. However, market segmentation is not observed in the real world. Investors and issuers will leave their preferred maturity habitats if yields are attractive enough on other maturities.The purpose of this question is to ascertain that students understand the variousexplanations (and deficiencies of these explanations) of term structure.63. Term structure of interest rates is the relationship between what variables? What isassumed about other variables? How is term structure of interest rates depictedgraphically?Difficulty: ModerateAnswer:Term structure of interest rates is the relationship between yield to maturity and term to maturity, all else equal. The "all else equal" refers to risk class. Term structure ofinterest rates is depicted graphically by the yield curve, which is usually a graph of U.S.governments of different yields and different terms to maturity. The use of U.S.governments allows one to examine the relationship between yield and maturity,holding risk constant. The yield curve depicts this relationship at one point in time only.This question is designed to ascertain that students understand the relationshipsinvolved in term structure, the restrictions on the relationships, and how therelationships are depicted graphically.64. Although the expectations of increases in future interest rates can result in an upwardsloping yield curve; an upward sloping yield curve does not in and of itself imply the expectations of higher future interest rates. Explain.Difficulty: ModerateAnswer:The effects of possible liquidity premiums confound any simple attempt to extractexpectation from the term structure. That is, the upward sloping yield curve may be due to expectations of interest rate increases, or due to the requirement of a liquiditypremium, or both. The liquidity premium could more than offset expectations ofdecreased interest rates, and an upward sloping yield would result.The purpose of this question is to assure that the student understands the confounding of the liquidity premium with the expectations hypothesis, and that the interpretations of term structure are not clear-cut.。

收益百分比=2 000美元/15 000美元=0.133 3=13.33%
(ii)价格不变，净价值不变。
收益百分比= 0。
(iii)净价值下跌至7 2美元×2 5 0-5 000美元=13 000美元。
收益百分比=2 000美元/15 000美元=-0.133 3=-1 3 . 3 3%
股票价格的百分比变化和投资者收益百分比关系由下式给定：
第五章利率史与风险溢价
1.根据表5-1，分析以下情况对真实利率的影响？
a.企业对其产品的未来需求日趋悲观，并决定减少其资本支出。
b.居民因为其未来社会福利保险的不确定性增加而倾向于更多地储蓄。
c.联邦储蓄委员会从公开市场上购买美国国债以增加货币供给。
a.如果企业降低资本支出，它们就很可能会减少对资金的需求。这将使得图5 - 1中的需求曲线向左上方移动，从而降低均衡实际利率。
a. Lanni公司向银行贷款。它共获得50000美元的现金，并且签发了一张票据保证3年内还款。
b. Lanni公司使用这笔现金和它自有的20000美元为其一新的财务计划软件开发提供融资。
c. Lanni公司将此软件产品卖给微软公司（Microsoft）,微软以它的品牌供应给公众，Lanni公司获得微软的股票1500股作为报酬。
10.67%; -2.67%; -16%
e.假设一年后，Intel股票价格降至多少时，投资者将受到追缴保证金的通知？p=28.8
购买成本是8 0美元×250=20 000美元。你从经纪人处借得5 000美元，并从自有资金中取出
15 000美元进行投资。你的保证金账户初始净价值为15 000美元。
a. (i)净价值增加了2 000美元，从15 000美元增加到：8 8美元×2 5 0-5 000美元=17 000美元。

第1章投资环境一、单选题1. B2.B3.A4.C5.B6. B7.D8.B9.D 10.B二、多选题1. CD2.ABCD3.ABCD4.ACD5.BCD6. ABC7.ABD8.ABCD9.BCD 10.ABC三、判断题1.非2.是3.非4.是5.是6.非7.是8.非9.非 10.是四、简答题：1、从三方面来区分：（1）实物资产是能够为社会经济提供产品与服务能力的资产，包括土地、建筑物、知识、用于生产的机器设备等；金融资产不能直接对社会生产产生作用，只能简介推动社会生产，比如带来公司所有权和经营权的分离，金融资产包括股票、债券。

（2）实物资产是创造收入的资产，而金融资产只能定义为收入或财富在投资者之间的分配。

（3）实物资产和金融资产可以在资产负债表中区分开来。

实物资产一般只能在资产负债表一边的资产方出现，而金融资产可以在资产负债表的两栏出现。

2、证券化要求拥有大量的潜在投资者。

要吸引他们，资本市场需要：（1）一个安全的行业法规体系、较低的税赋和可能的严格管制；（2）相当发达的投资银行业；（3）高度发达的经纪行和金融交易体系；（4）高度发达的信息系统，尤其是在财务披露方面。

这些都是一个高度发达的金融市场的必备(实际也是构成)条件。

3、证券化导致非中介化；也就是说，它提供给市场参与者一种无须经过中介机构的方法。

例如，抵押支撑的证券将资金融通到房地产市场而无须银行或储蓄机构从它们的自有资产中提供贷款。

随着证券化的进程，金融中介必须增加它在其他方面的业务能力，例如提供金融服务或向消费者和小企业提供短期资金的融通。

4、资产在初级市场被初次销售，发行公司收到销售净收入。

同一资产的每一次后续销售都发生在次级市场，从二次销售中得到的收入由卖主获得而不是由原始发行者获得。

投资银行家通常使在初级市场上销售的操作便利化，各种有组织的兑换和场外交易市场是次级市场的例子。

5、经纪人市场是指中间人不持有资产，只是将买主和卖主聚集到一起，以佣金为收入的市场，有组织的交换主要指经纪人市场。

Chapter 03How Securities Are Traded Multiple Choice Questions1.The trading of stock that was previously issued takes placeA. i n the secondary market.B. i n the primary market.C. u sually with the assistance of an investment banker.D. i n the secondary and primary markets.2. A purchase of a new issue of stock takes placeA. i n the secondary market.B. i n the primary market.C. u sually with the assistance of an investment banker.D. i n the secondary and primary markets.E. i n the primary market and usually with the assistance of an investment banker.3.Firms raise capital by issuing stockA. i n the secondary market.B. i n the primary market.C. t o unwary investors.D. o nly on days when the market is up.4.Which of the following statements regarding the specialist are true?A. S pecialists maintain a book listing outstanding unexecuted limit orders.B. S pecialists earn income from commissions and spreads in stock prices.C. S pecialists stand ready to trade at quoted bid and ask prices.D. S pecialists cannot trade in their own accounts.E. S pecialists maintain a book listing outstanding unexecuted limit orders, earn income fromcommissions and spreads in stock prices, and stand ready to trade at quoted bid and askprices.5.Investment bankersA. a ct as intermediaries between issuers of stocks and investors.B. a ct as advisors to companies in helping them analyze their financial needs and find buyers fornewly issued securities.C. a ccept deposits from savers and lend them out to companies.D. a ct as intermediaries between issuers of stocks and investors and act as advisors tocompanies in helping them analyze their financial needs and find buyers for newly issuedsecurities.6.In a "firm commitment," the investment bankerA. b uys the stock from the company and resells the issue to the public.B. a grees to help the firm sell the stock at a favorable price.C. f inds the best marketing arrangement for the investment banking firm.D. a grees to help the firm sell the stock at a favorable price and finds the best marketingarrangement for the investment banking firm.7.The secondary market consists ofA. t ransactions on the AMEX.B. t ransactions in the OTC market.C. t ransactions through the investment banker.D. t ransactions on the AMEX and in the OTC market.E. t ransactions on the AMEX, through the investment banker, and in the OTC market.8.Initial margin requirements are determined byA. t he Securities and Exchange Commission.B. t he Federal Reserve System.C. t he New York Stock Exchange.D. t he Federal Reserve System and the New York Stock Exchange.9.You purchased JNJ stock at $50 per share. The stock is currently selling at $65. Your gains maybe protected by placing aA. s top-buy order.B. l imit-buy order.C. m arket order.D. l imit-sell order.E. N one of the options10.You sold JCP stock short at $80 per share. Your losses could be minimized by placing aA. l imit-sell order.B. l imit-buy order.C. s top-buy order.D. d ay-order.E. N one of the options11.Which one of the following statements regarding orders is false?A. A market order is simply an order to buy or sell a stock immediately at the prevailing marketprice.B. A limit-sell order is where investors specify prices at which they are willing to sell a security.C. I f stock ABC is selling at $50, a limit-buy order may instruct the broker to buy the stock if andwhen the share price falls below $45.D. A market order is an order to buy or sell a stock on a specific exchange (market).12.Restrictions on trading involving insider information apply to the following exceptA. c orporate officers.B. c orporate directors.C. m ajor stockholders.D. A ll of the options are subject to insider trading restrictions.E. N one of the options is subject to insider trading restrictions.13.The cost of buying and selling a stock consists ofA. b roker's commissions.B. d ealer's bid-asked spread.C. a price concession an investor may be forced to make.D. b roker's commissions and dealer's bid-asked spread.E. b roker's commissions, dealer's bid-asked spread, and a price concession an investor may beforced to make.14.Assume you purchased 200 shares of GE common stock on margin at $70 per share from yourbroker. If the initial margin is 55%, how much did you borrow from the broker?A. $6,000B. $4,000C. $7,700D. $7,000E. $6,30015.You sold short 200 shares of common stock at $60 per share. The initial margin is 60%. Yourinitial investment wasA. $4,800.B. $12,000.C. $5,600.D. $7,200.16.You purchased 100 shares of IBM common stock on margin at $70 per share. Assume the initialmargin is 50% and the maintenance margin is 30%. Below what stock price level would you get a margin call? Assume the stock pays no dividend; ignore interest on margin.A. $21B. $50C. $49D. $8017.You purchased 100 shares of common stock on margin at $45 per share. Assume the initialmargin is 50% and the stock pays no dividend. What would the maintenance margin be if a margin call is made at a stock price of $30? Ignore interest on margin.A. 0.33B. 0.55C. 0.43D. 0.23E. 0.2518.You purchased 300 shares of common stock on margin for $60 per share. The initial margin is60% and the stock pays no dividend. What would your rate of return be if you sell the stock at $45 per share? Ignore interest on margin.A. 25.00%B. -33.33%C. 44.31%D. -41.67%E. -54.22%19.Assume you sell short 100 shares of common stock at $45 per share, with initial margin at 50%.What would be your rate of return if you repurchase the stock at $40 per share? The stock paid no dividends during the period, and you did not remove any money from the account before making the offsetting transaction.A. 20.03%B. 25.67%C. 22.22%D. 77.46%20.You sold short 300 shares of common stock at $55 per share. The initial margin is 60%. At whatstock price would you receive a margin call if the maintenance margin is 35%?A. $51.00B. $65.18C. $35.22D. $40.3621.Assume you sold short 100 shares of common stock at $50 per share. The initial margin is 60%.What would be the maintenance margin if a margin call is made at a stock price of $60?A. 40%B. 33%C. 35%D. 25%22.Specialists on stock exchanges perform which of the following functions?A. A ct as dealers in their own accounts.B. A nalyze the securities in which they specialize.C. P rovide liquidity to the market.D. A ct as dealers in their own accounts and analyze the securities in which they specialize.E. A ct as dealers in their own accounts and provide liquidity to the market.23.Shares for short transactionsA. a re usually borrowed from other brokers.B. a re typically shares held by the short seller's broker in street name.C. a re borrowed from commercial banks.D. a re typically shares held by the short seller's broker in street name and are borrowed fromcommercial banks.24.Which of the following orders is most useful to short sellers who want to limit their potentiallosses?A. L imit orderB. D iscretionary orderC. L imit-loss orderD. S top-buy order25.Which of the following orders instructs the broker to buy at the current market price?A. L imit orderB. D iscretionary orderC. L imit-loss orderD. S top-buy orderE. M arket order26.Which of the following orders instructs the broker to buy at or below a specified price?A. L imit-loss orderB. D iscretionary orderC. L imit-buy orderD. S top-buy orderE. M arket order27.Which of the following orders instructs the broker to sell at or below a specified price?A. L imit-sell orderB. S top-lossC. L imit-buy orderD. S top-buy orderE. M arket order28.Which of the following orders instructs the broker to sell at or above a specified price?A. L imit-buy orderB. D iscretionary orderC. L imit-sell orderD. S top-buy orderE. M arket order29.Which of the following orders instructs the broker to buy at or above a specified price?A. L imit-buy orderB. D iscretionary orderC. L imit-sell orderD. S top-buy orderE. M arket order30.Shelf registrationA. i s a way of placing issues in the primary market.B. a llows firms to register securities for sale over a two-year period.C. i ncreases transaction costs to the issuing firm.D. i s a way of placing issues in the primary market and allows firms to register securities for saleover a two-year period.E. i s a way of placing issues in the primary market and increases transaction costs to the issuingfirm.31.Block transactions are transactions for more than _______ shares and they account for about_____ percent of all trading on the NYSE.A. 1,000; 5B. 500; 10C. 100,000; 50D. 10,000; 30E. 5,000; 2332.A program trade isA. a trade of 10,000 (or more) shares of a stock.B. a trade of many shares of one stock for one other stock.C. a trade of analytic programs between financial analysts.D. a coordinated purchase or sale of an entire portfolio of stocks.E. n ot feasible with current technology but is expected to be popular in the near future.33.When stocks are held in street nameA. t he investor receives a stock certificate with the owner's street address.B. t he investor receives a stock certificate without the owner's street address.C. t he investor does not receive a stock certificate.D. t he broker holds the stock in the brokerage firm's name on behalf of the client.E. t he investor does not receive a stock certificate and the broker holds the stock in the brokeragefirm's name on behalf of the client.34.NASDAQ subscriber levelsA. p ermit those with the highest level, 3, to "make a market" in the security.B. p ermit those with a level 2 subscription to receive all bid and ask quotes, but not to enter theirown quotes.C. p ermit level 1 subscribers to receive general information about prices.D. i nclude all OTC stocks.E. p ermit those with the highest level, 3, to "make a market" in the security; permit those with alevel 2 subscription to receive all bid and ask quotes, but not to enter their own quotes; andpermit level 1 subscribers to receive general information about prices.35.You want to buy 100 shares of Hotstock Inc. at the best possible price as quickly as possible. Youwould most likely place aA. s top-loss order.B. s top-buy order.C. m arket order.D. l imit-sell order.E. l imit-buy order.36.You want to purchase XON stock at $60 from your broker using as little of your own money aspossible. If initial margin is 50% and you have $3,000 to invest, how many shares can you buy?A. 100 sharesB. 200 sharesC. 50 sharesD. 500 sharesE. 25 shares37.A sale by IBM of new stock to the public would be a(n)A. s hort sale.B. s easoned equity offering.C. p rivate placement.D. s econdary market transaction.E. i nitial public offering.38.The finalized registration statement for new securities approved by the SEC is calledA. a red herring.B. t he preliminary statement.C. t he prospectus.D. a best-efforts agreement.E. a firm commitment.39.One outcome from the SEC investigation of the "Flash Crash of 2010" wasA. a prohibition of short selling.B. h igher margin requirements.C. a pproval of new circuit breakers.D. e stablishment of electronic communications networks (ECNs).E. p assage of the Sarbanes-Oxley Act.40.All of the following are considered new trading strategies exceptA. h igh frequency trading.B. a lgorithmic trading.C. d ark pools.D. s hort selling.41.You sell short 100 shares of Loser Co. at a market price of $45 per share. Your maximum possibleloss isA. $4,500.B. u nlimited.C. z ero.D. $9,000.E. C annot tell from the information given42.You buy 300 shares of Qualitycorp for $30 per share and deposit initial margin of 50%. The nextday, Qualitycorp's price drops to $25 per share. What is your actual margin?A. 50%B. 40%C. 33%D. 60%E. 25%43.When a firm markets new securities, a preliminary registration statement must be filed withA. t he exchange on which the security will be listed.B. t he Securities and Exchange Commission.C. t he Federal Reserve.D. a ll other companies in the same line of business.E. t he Federal Deposit Insurance Corporation.44.In a typical underwriting arrangement the investment banking firmI) sells shares to the public via an underwriting syndicate.II) purchases the securities from the issuing company.III) assumes the full risk that the shares may not be sold at the offering price.IV) agrees to help the firm sell the issue to the public, but does not actually purchase the securities.A. I, II, and IIIB. I, III, and IVC. I and IVD. I I and IIIE. I and II45.Which of the following is true regarding private placements of primary security offerings?A. E xtensive and costly registration statements are required by the SEC.B. F or very large issues, they are better suited than public offerings.C. T hey trade in secondary markets.D. T he shares are sold directly to a small group of institutional or wealthy investors.E. T hey have greater liquidity than public offerings.46.A specialist on the AMEX Stock Exchange is offering to buy a security for $37.50. A broker inOklahoma City wants to sell the security for his client. The Intermarket Trading System shows a bid price of $37.375 on the NYSE. What should the broker do?A. R oute the order to the AMEX Stock Exchange.B. R oute the order to the NYSE.C. C all the client to see if she has a preference.D. R oute half of the order to AMEX and the other half to the NYSE.E. I t doesn't matter—he should flip a coin and go with it.47.You sold short 100 shares of common stock at $45 per share. The initial margin is 50%. Yourinitial investment wasA. $4,800.B. $12,000.C. $2,250.D. $7,200.48.You sold short 150 shares of common stock at $27 per share. The initial margin is 45%. Yourinitial investment wasA. $4,800.60.B. $12,000.25.C. $2,250.75.D. $1,822.50.49.You purchased 100 shares of XON common stock on margin at $60 per share. Assume the initialmargin is 50% and the maintenance margin is 30%. Below what stock price level would you get a margin call? Assume the stock pays no dividend; ignore interest on margin.A. $42.86B. $50.75C. $49.67D. $80.3450.You purchased 1000 shares of CSCO common stock on margin at $19 per share. Assume theinitial margin is 50% and the maintenance margin is 30%. Below what stock price level would you get a margin call? Assume the stock pays no dividend; ignore interest on margin.A. $12.86B. $15.75C. $19.67D. $13.5751.You purchased 100 shares of common stock on margin at $40 per share. Assume the initialmargin is 50% and the stock pays no dividend. What would the maintenance margin be if a margin call is made at a stock price of $25? Ignore interest on margin.A. 0.33B. 0.55C. 0.20D. 0.23E. 0.25margin is 50% and the stock pays no dividend. What would the maintenance margin be if a margin call is made at a stock price of $24? Ignore interest on margin.A. 0.33B. 0.375C. 0.20D. 0.23E. 0.2553.You purchased 100 shares of common stock on margin for $50 per share. The initial margin is50% and the stock pays no dividend. What would your rate of return be if you sell the stock at $56 per share? Ignore interest on margin.A. 28%B. 33%C. 14%D. 42%E. 24%50% and the stock pays no dividend. What would your rate of return be if you sell the stock at $42 per share? Ignore interest on margin.A. 28%B. 33%C. 14%D. 40%E. 24%55.Assume you sell short 1,000 shares of common stock at $35 per share, with initial margin at 50%.What would be your rate of return if you repurchase the stock at $25 per share? The stock paid no dividends during the period, and you did not remove any money from the account before making the offsetting transaction.A. 20.47%B. 25.63%C. 57.14%D. 77.23%What would be your rate of return if you repurchase the stock at $35 per share? The stock paid no dividends during the period, and you did not remove any money from the account before making the offsetting transaction.A. -33.33%B. -25.63%C. -57.14%D. -77.23%57.You want to purchase GM stock at $40 from your broker using as little of your own money aspossible. If initial margin is 50% and you have $4,000 to invest, how many shares can you buy?A. 100 sharesB. 200 sharesC. 50 sharesD. 500 sharesE. 25 shares58.You want to purchase IBM stock at $80 from your broker using as little of your own money aspossible. If initial margin is 50% and you have $2,000 to invest, how many shares can you buy?A. 100 sharesB. 200 sharesC. 50 sharesD. 500 sharesE. 25 sharesWhat would be the maintenance margin if a margin call is made at a stock price of $50?A. 40%B. 20%C. 35%D. 25%60.Assume you sold short 100 shares of common stock at $70 per share. The initial margin is 50%.What would be the maintenance margin if a margin call is made at a stock price of $85?A. 40.5%B. 20.5%C. 35.5%D. 23.5%61.You sold short 100 shares of common stock at $45 per share. The initial margin is 50%. At whatstock price would you receive a margin call if the maintenance margin is 35%?A. $50B. $65C. $35D. $40stock price would you receive a margin call if the maintenance margin is 30%?A. $90.23B. $88.52C. $86.54D. $87.1263.The preliminary prospectus is referred to as aA. r ed herring.B. i ndenture.C. g reenmail.D. t ombstone.E. h eadstone.64.The securities act of 1933I) requires full disclosure of relevant information relating to the issue of new securities.II) requires registration of new securities.III) requires issuance of a prospectus detailing financial prospects of the firm.IV) established the SEC.V) requires periodic disclosure of relevant financial information.VI) empowers SEC to regulate exchanges, OTC trading, brokers, and dealers.A. I, II, and IIIB. I, II, III, IV, V, and VIC. I, II, and VD. I, II, and IVE. I V only65.The Securities Act of 1934I) requires full disclosure of relevant information relating to the issue of new securities.II) requires registration of new securities.III) requires issuance of a prospectus detailing financial prospects of the firm.IV) established the SEC.V) requires periodic disclosure of relevant financial information.VI) empowers SEC to regulate exchanges, OTC trading, brokers, and dealers.A. I, II, and IIIB. I, II, III, IV, V, and VIC. I, II, and VD. I, II, and IVE. I V, V, and VI66.Which of the following is not required under the CFA Institute Standards of Professional Conduct?A. K nowledge of all applicable laws, rules and regulationsB. D isclosure of all personal investments, whether or not they may conflict with a client'sinvestmentsC. D isclosure of all conflicts to clients and prospectsD. R easonable inquiry into a client's financial situationE. A ll of the options are required under the CFA Institute standards.67.According to the CFA Institute Standards of Professional Conduct, CFA Institute members haveresponsibilities to all of the following exceptA. t he government.B. t he profession.C. t he public.D. t he employer.E. c lients and prospective clients.Short Answer Questions68.Discuss margin buying of common stocks. Include in your discussion the advantages anddisadvantages, the types of margin requirements, how these requirements are met, and who determines these requirements.69.List three factors that are listing requirements for the New York Stock Exchange. Why does theexchange have such requirements?Chapter 03 How Securities Are Traded KeyMultiple Choice Questions1.The trading of stock that was previously issued takes placeA.in the secondary market.B.in the primary market.ually with the assistance of an investment banker.D.in the secondary and primary markets.Secondary market transactions consist of trades between investors.AACSB: AnalyticBlooms: ApplyDifficulty: Basic2. A purchase of a new issue of stock takes placeA.in the secondary market.B.in the primary market.ually with the assistance of an investment banker.D.in the secondary and primary markets.E.in the primary market and usually with the assistance of an investment banker.Funds from the sale of new issues flow to the issuing corporation, making this a primary market transaction. Investment bankers usually assist by pricing the issue and finding buyers.AACSB: AnalyticBlooms: ApplyDifficulty: Basic3.Firms raise capital by issuing stockA.in the secondary market.B.in the primary market.C.to unwary investors.D.only on days when the market is up.Funds from the sale of new issues flow to the issuing corporation, making this a primary market transaction.AACSB: AnalyticBlooms: ApplyDifficulty: Basic4.Which of the following statements regarding the specialist are true?A.Specialists maintain a book listing outstanding unexecuted limit orders.B.Specialists earn income from commissions and spreads in stock prices.C.Specialists stand ready to trade at quoted bid and ask prices.D.Specialists cannot trade in their own accounts.E.Specialists maintain a book listing outstanding unexecuted limit orders, earn income fromcommissions and spreads in stock prices, and stand ready to trade at quoted bid and askprices.The specialists' functions are all of the items listed. In addition, specialists trade in their ownaccounts.AACSB: AnalyticBlooms: ApplyDifficulty: Intermediate5.Investment bankersA.act as intermediaries between issuers of stocks and investors.B.act as advisors to companies in helping them analyze their financial needs and find buyersfor newly issued securities.C.accept deposits from savers and lend them out to companies.D.act as intermediaries between issuers of stocks and investors and act as advisors tocompanies in helping them analyze their financial needs and find buyers for newly issuedsecurities.The role of the investment banker is to assist the firm in issuing new securities, both in advisory and marketing capacities. The investment banker does not have a role comparable to acommercial bank, as indicated in accept deposits from savers and lend them out to companies.AACSB: AnalyticBlooms: ApplyDifficulty: Intermediate6.In a "firm commitment," the investment bankerA.buys the stock from the company and resells the issue to the public.B.agrees to help the firm sell the stock at a favorable price.C.finds the best marketing arrangement for the investment banking firm.D.agrees to help the firm sell the stock at a favorable price and finds the best marketingarrangement for the investment banking firm.In a "firm commitment," the investment banker buys the stock from the company and resells the issue to the public.AACSB: AnalyticDifficulty: Intermediate7.The secondary market consists ofA.transactions on the AMEX.B.transactions in the OTC market.C.transactions through the investment banker.D.transactions on the AMEX and in the OTC market.E.transactions on the AMEX, through the investment banker, and in the OTC market.The secondary market consists of transactions on the organized exchanges and in the OTCmarket. The investment banker is involved in the placement of new issues in the primarymarket.AACSB: AnalyticBlooms: ApplyDifficulty: Intermediate8.Initial margin requirements are determined byA.the Securities and Exchange Commission.B.the Federal Reserve System.C.the New York Stock Exchange.D.the Federal Reserve System and the New York Stock Exchange.The Board of Governors of the Federal Reserve System determines initial marginrequirements.AACSB: AnalyticDifficulty: Intermediate9.You purchased JNJ stock at $50 per share. The stock is currently selling at $65. Your gainsmay be protected by placing aA.stop-buy order.B.limit-buy order.C.market order.D.limit-sell order.E.None of the optionsWith a limit-sell order, your stock will be sold only at a specified price, or better. Thus, such an order would protect your gains. None of the other orders are applicable to this situation.AACSB: AnalyticBlooms: ApplyDifficulty: Intermediate10.You sold JCP stock short at $80 per share. Your losses could be minimized by placing aA.limit-sell order.B.limit-buy order.C.stop-buy order.D.day-order.E.None of the optionsWith a stop-buy order, the stock would be purchased if the price increased to a specified level, thus limiting your loss.AACSB: AnalyticBlooms: ApplyDifficulty: Intermediate11.Which one of the following statements regarding orders is false?A. A market order is simply an order to buy or sell a stock immediately at the prevailing marketprice.B. A limit-sell order is where investors specify prices at which they are willing to sell a security.C.If stock ABC is selling at $50, a limit-buy order may instruct the broker to buy the stock ifand when the share price falls below $45.D. A market order is an order to buy or sell a stock on a specific exchange (market).All of the order descriptions above are correct except a market order is an order to buy or sell a stock on a specific exchange (market).AACSB: AnalyticBlooms: ApplyDifficulty: Intermediate12.Restrictions on trading involving insider information apply to the following exceptA.corporate officers.B.corporate directors.C.major stockholders.D.All of the options are subject to insider trading restrictions.E.None of the options is subject to insider trading restrictions.Corporate officers, corporate directors, and major stockholders are corporate insiders and are subject to restrictions on trading on inside information. Further, the Supreme Court held thattraders may not trade on nonpublic information even if they are not insiders.AACSB: AnalyticBlooms: ApplyDifficulty: Intermediate13.The cost of buying and selling a stock consists ofA.broker's commissions.B.dealer's bid-asked spread.C. a price concession an investor may be forced to make.D.broker's commissions and dealer's bid-asked spread.E.broker's commissions, dealer's bid-asked spread, and a price concession an investor maybe forced to make.All of the options are possible costs of buying and selling a stock.AACSB: AnalyticBlooms: ApplyDifficulty: Intermediate14.Assume you purchased 200 shares of GE common stock on margin at $70 per share from yourbroker. If the initial margin is 55%, how much did you borrow from the broker?A.$6,000B.$4,000C.$7,700D.$7,000E.$6,300200 shares × $70/share × (1 - 0.55) = $14,000 × (0.45) = $6,300.AACSB: AnalyticBlooms: ApplyDifficulty: Intermediate15.You sold short 200 shares of common stock at $60 per share. The initial margin is 60%. Yourinitial investment wasA.$4,800.B.$12,000.C.$5,600.D.$7,200.200 shares × $60/share × 0.60 = $12,000 × 0.60 = $7,200.AACSB: AnalyticBlooms: ApplyDifficulty: Intermediate。

Multiple Choice Questions1。

Market risk is also referred to asA）systematic risk， diversifiable risk.B）systematic risk， nondiversifiable risk.C) unique risk， nondiversifiable risk.D) unique risk, diversifiable risk.E) none of the above.Answer： B Difficulty： EasyRationale： Market, systematic, and nondiversifiable risk are synonyms referring to the risk that cannot be eliminated from the portfolio。

Diversifiable， unique, nonsystematic, and firm-specific risks are synonyms referring to the risk that can be eliminated from the portfolio by diversification.2. The risk that can be diversified away isA）firm specific risk。

B) beta。

C) systematic risk.D）market risk.E) none of the above。

Answer: A Difficulty： EasyRationale: See explanations for 1 and 2 above.3. The variance of a portfolio of risky securitiesA）is a weighted sum of the securities’ variances。

博迪投资学答案chap005-7thedCHAPTER 5: LEARNING ABOUT RETURN AND RISKFROM THE HISTORICAL RECORD1. a. The “Inflation-Plus” CD is the safer investment because it guarantees thepurchasing power of the investment. Using the approximation that the realrate equals the nominal rate minus the inflation rate, the CD provides a realrate of 3.5% regardless of the inflation rate.b. The expected return depends on the expected rate of inflation over the nextyear. If the expected rate of inflation is less than 3.5% then the conventionalCD offers a higher real return than the Inflation-Plus CD; if the expected rateof inflation is greater than 3.5%, then the opposite is true.c. If you expect the rate of inflation to be 3% over the next year, then theconventional CD offers you an expected real rate of return of 4%, which is0.5% higher than the real rate on the inflation-protected CD. But unless youknow that inflation will be 3% with certainty, the conventional CD is alsoriskier. The question of which is the better investment then depends on yourattitude towards risk versus return. You might choose to diversify and investpart of your funds in each.d. No. We cannot assume that the entire difference between the risk-freenominal rate (on conventional CDs) of 7% and the real risk-free rate (oninflation-protected CDs) of 3.5% is the expected rate of inflation. Part of thedifference is probably a risk premium associated with the uncertaintysurrounding the real rate of return on the conventional CDs. This implies thatthe expected rate of inflation is less than 3.5% per year.2.From Table 5.3, the average risk premium for large-capitalization U.S. stocks forthe period 1926-2005 was: (12.15% - 3.75%) = 8.40% per yearAdding 8.40% to the 6% risk-free interest rate, the expected annual HPR for theS&P 500 stock portfolio is: 6.00% + 8.40% = 14.40%3. Probability distribution of price and one-year holding period return for a 30-yearGerman Government bond (which will have 29 years to maturity at year’s end):Economy Probability YTM Price CapitalGainCouponInterestHPRBoom 0.20 11.0% $ 74.05 -$25.95 $8.00 -17.95% Normal Growth 0.50 8.0% $100.00 $ 0.00 $8.00 8.00% Recession 0.30 7.0%$112.28 $12.28 $8.00 20.28%5-14. E(r) = [0.35 ? 44.5%] + [0.30 ? 14.0%] + [0.35 ? (–16.5%)] = 14%σ2 = [0.35 ? (44.5 – 14)2] + [0.30 ? (14 – 14)2] + [0.35 ? (–16.5 –14)2] = 651.175 σ = 25.52%The mean is unchanged, but the standard deviation has increased, as theprobabilities of the high and low returns have increased.5. For the money market fund, your holding period return for the next year depends onthe level of 30-day interest rates each month when the fund rolls over maturingsecurities. The one-year savings deposit offers a 7.5% holding period return for the year. If you forecast that the rate on money market instruments will increasesignificantly above the current 6% yield, then the money market fund might result ina higher HPR than the savings deposit. The 20-year U.K Government bond offers ayield to maturity of 9% per year, which is 150 basis points higher than the rate on the one-year savings deposit; however, you could earn a one-year HPR much less than 7.5% on the bond if long-term interest rates increase during the year. If U.K Government bond yields rise above 9%, then the price of the bond will fall, and the resulting capital loss will wipe out some or all of the 9% return you would haveearned if bond yields had remained unchanged over the course of the year.6. a. If businesses reduce their capital spending, then they arelikely to decreasetheir demand for funds. This will shift the demand curve in Figure 5.1 tothe left and reduce the equilibrium real rate of interest.b. Increased household saving will shift the supply of funds curve to the rightand cause real interest rates to fall.c. Open market purchases of U.S. Treasury securities by the Federal ReserveBoard is equivalent to an increase in the supply of funds (a shift of thesupply curve to the right). The equilibrium real rate of interest will fall.5-25-37.The average rates of return and standard deviations are quite different in the sub periods: STOCKS Mean Deviation Skewness Kurtosis1926 –2005 12.15% 20.26% -0.3605 -0.0673 1976 –2005 13.85% 15.68% -0.4575 -0.6489 1926 –1941 6.39% 30.33% -0.0022 -1.0716BONDSMean DeviationSkewness Kurtosis1926 – 2005 5.68% 8.09% 0.9903 1.6314 1976 – 2005 9.57% 10.32% 0.3772 -0.0329 1926 – 19414.42%4.32% -0.5036 0.5034The most relevant statistics to use for projecting into thefuture would seem to be the statistics estimated over the period 1976-2005, because this later period seems to have been a different economic regime. After 1955, the U.S. economy entered the Keynesian era, when the Federal government actively attempted to stabilize the economy and to prevent extremes in boom and bust cycles. Note that the standard deviation of stock returns has decreased substantially in the later period while the standard deviation of bond returns has increased.8. Real interest rates are expected to rise. The investment activity will shift the demand for funds curve (in Figure 5.1) to the right. Therefore the equilibrium real interest rate will increase.9. a %88.50588.070.170.080.0i 1i R 1i 1R 1r ==-=+-=-++=b.r ≈ R - i = 80% - 70% = 10%Clearly, the approximation gives a real HPR that is too high.10. From Table 5.2, the average real rate on T-bills has been:0.72% a. T-bills: 0.72% real rate + 3% inflation = 3.72%b.Expected return on large stocks:3.72% T-bill rate + 8.40% historical risk premium = 12.12%c.The risk premium on stocks remains unchanged. A premium, the difference between two rates, is a real value, unaffected by inflation.11. E(r) = (0.1 × 15%) + (0.6 × 13%) + (0.3 × 7%) = 11.4%12. The expected dollar return on the investment in equities is $18,000 compared to the$5,000 expected return for T-bills. Therefore, the expectedrisk premium is $13,000.13. E(r X) = [0.2 × (?20%)] + [0.5 × 18%] + [0.3 × 50%] =20%E(r Y)= [0.2 × (?15%)] + [0.5 × 20%] + [0.3 × 10%] =10%14. σX 2 = [0.2 ? (– 20 – 20)2] + [0.5 ? (18 – 20)2] + [0.3 ? (50 – 20)2] = 592σX = 24.33%σY 2 = [0.2 ? (– 15 – 10)2] + [0.5 ? (20 – 10)2] + [0.3 ? (10 –10)2] = 175σX = 13.23%15. E(r) = (0.9 × 20%) + (0.1 × 10%) =19%16. E(r) = [0.2 × (?25%)] + [0.3 × 10%] + [0.5 × 24%] =10%17. The probability that the economy will be neutral is 0.50, or 50%. Given a neutraleconomy, the stock will experience poor performance 30% of the time. Theprobability of both poor stock performance and a neutral economy is therefore:0.30 ? 0.50 = 0.15 = 15%18. a. Probability Distribution of the HPR on the Stock Market and Put:STOCK PUTState of the Economy ProbabilityEnding Price +DividendHPR Ending Value HPRBoom 0.30 $134 34% $ 0.00 -100% Normal Growth 0.50 $114 14% $ 0.00 -100% Recession 0.20 $ 84 -16% $ 29.50 146% Remember that the cost of the index fund is $100 per share, and the cost of the put option is $12.5-4b. The cost of one share of the index fund plus a put option is $112. Theprobability distribution of the HPR on the portfolio is:State of the Economy ProbabilityEnding Price +Put +DividendHPR= (134 - 112)/112Normal Growth 0.50 $114.00 1.8% = (114 - 112)/112 Recession 0.20 $113.50 1.3% = (113.50 - 112)/112c. Buying the put option guarantees the investor a minimum HPR of 1.3%regardless of what happens to the stock's price. Thus, it offers insuranceagainst a price decline.19. The probability distribution of the dollar return on CD plus call option is:State of the Economy ProbabilityEnding Valueof CDEnding Valueof CallCombinedValueBoom 0.30 $114.00 $19.50 $133.50 Normal Growth 0.50 $114.00 $ 0.00 $114.00 Recession 0.20 $114.00 $ 0.00 $114.00 5-5。

Howfar can the stock price f a l l before a margin call? (100P - $4,000)* / 100P = 30% P = $57.14 * 100P - Amt Borrowed = Equity
3 - 30
Table 3.4 I l l u s t r a t i o n of Buying Stock on Margin
• Spread: cost of trading with dealer – Bid: price dealer w i l l buy from you – Ask: price dealer w i l l s e l l t o you – Spread: ask - bid
• Combination: on some t ra d e s both are paid
futures
3 - 26
Stock Margin Trading
• Margin i s currently 50%; you can borrow up to 50% of the stock value – Set by the Fed
• Maintenance margin: minimum amount equity i n trading can be before additional funds must be put into the account
How Firms Issue Securities
• Primary – New issue – Key f a c t o r : i s s u e r receives the proceeds from the s a le
• Secondary – Existing owner s e l l s t o another party – Issuing firm doesn’t receive proceeds and i s not d irectly involved

投资学第7版TestBank答案Multiple Choice Questions1. Shares of several foreign firms are traded in the . markets in the formofA) ADRsB) ECUsC) single-country fundsD) all of the aboveE) none of the aboveAnswer: A Difficulty: EasyRationale: American Depository Receipts (ADRs) allow U. S. investors to invest in foreign stocks via transactions on the . stock exchanges.2. __________ refers to the possibility of expropriation of assets, changesin tax policy, and the possibility of restrictions on foreign exchange transactions.A) default riskB) foreign exchange riskC) market riskD) political riskE) none of the aboveAnswer: D Difficulty: EasyRationale: All of the above factors are political in nature, and thus are examples of political risk.3. __________ are mutual funds that invest in one country only.A) ADRsB) ECUsC) single-country fundsD) all of the aboveE) none of the aboveAnswer: C Difficulty: EasyRationale: Mutual funds that invest in the stocks of one country only are called single-country funds.4. The performance of an internationally diversified portfolio may beaffected byA) country selectionB) currency selectionC) stock selectionD) all of the aboveE) none of the aboveAnswer: D Difficulty: EasyRationale: All of the above factors may affect the performance of an international portfolio.5. Over the period 2001-2005, most correlations between the . stock indexand stock-index portfolios of other countries wereA) negativeB) positive but less than .9C) approximately zeroD) .9 or aboveE) none of the aboveAnswer: B Difficulty: ModerateRationale: Correlation coefficients were typically below .9, while correlations between well-diversified U. S. market portfolios were typically above .9. See Table .6. The __________ index is a widely used index of . stocks.A) CBOEB) Dow JonesC) EAFED) all of the aboveE) none of the aboveAnswer: C Difficulty: EasyRationale: The Europe, Australia, Far East (EAFE) index computed by Morgan Stanley is a widely used index of . stocks.7. The __________ equity market had the highest average local currency returnbetween 2001 and 2005.A) RussianB) NorwegianC) .D) .E) none of the aboveAnswer: A Difficulty: ModerateRationale: See Table .8. The __________ equity market had the highest average . dollar returnbetween 2001 and 2005.A) RussianB) FinnishC) ColumbianD) .E) none of the aboveAnswer: C Difficulty: ModerateRationale: See Table .9. The __________ equity market had the highest average . dollar standarddeviation between 2001 and 2005.A) TurkishB) FinnishC) IndonesianD) .E) none of the aboveAnswer: A Difficulty: ModerateRationale: See Table .10. The __________ equity market had the highest average local currencystandard deviation between 2001 and 2005.A) TurkishB) FinnishC) IndonesianD) .E) none of the aboveAnswer: A Difficulty: ModerateRationale: See Table .11. In 2005, the . equity market represented __________ of the world equitymarket.A) 19%B) 60%C) 43%D) 39%E) none of the aboveAnswer: D Difficulty: ModerateRationale: See Table .12. The straightforward generalization of the simple CAPM to internationalstocks is problematic because __________.A) inflation risk perceptions by different investors in differentcountries will differ as consumption baskets differB) investors in different countries view exchange rate risk from theperspective of different domestic currenciesC) taxes, transaction costs and capital barriers across countries makeit difficult for investor to hold a world index portfolioD) all of the aboveE) none of the above.Answer: D Difficulty: ModerateRationale: All of the above factors make a broad generalization of the CAPM to international stocks problematic.13. The yield on a 1-year bill in the . is 8% and the present exchange rateis 1 pound = U. S. $. If you expect the exchange rate to be 1 pound - U. S. $ a year from now, the return a U. S. investor can expect to earn by investing in . bills isA) %B) 0%C) 8%D) %E) none of the aboveAnswer: D Difficulty: ModerateRationale: r(US) = [1 + r(UK)]F0/E0 - 1; [][] - 1 = %.14. Suppose the 1-year risk-free rate of return in the U. S. is 5%. The currentexchange rate is 1 pound = U. S. $. The 1-year forward rate is 1 pound = $. What is the minimum yield on a 1-year risk-freesecurity in Britain that would induce a U. S. investor to invest in the British security?A) %B) %C) %D) %E) none of the aboveAnswer: C Difficulty: ModerateRationale: = (1 + r) X [] - 1; r = %.15. The interest rate on a 1-year Canadian security is 8%. The current exchangerate is C$ = US $. The 1-year forward rate is C$ = US $. The return (denominated in . $) that a . investor can earn by investing in the Canadian security is __________.A) %B) %C) %D) %E) none of the aboveAnswer: C Difficulty: ModerateRationale: [] = x - 1; x = %.16. Suppose the 1-year risk-free rate of return in the . is 4% and the 1-yearrisk-free rate of return in Britain is 7%. The current exchange rate is1 pound = . $. A 1-year future exchange rate of __________ for the poundwould make a U. S. investor indifferent between investing in the U. S.security and investing the British security.A)B)C)D)E) none of the aboveAnswer: A Difficulty: ModerateRationale: = x/; x = .17. The present exchange rate is C$ = U. S. $. The one year future rate isC$ = U. S. $. The yield on a 1-year . bill is 4%. A yield of __________ on a 1-year __________ Canadian bill will make investor indifferentbetween investing in the . bill and the Canadian bill.A) %B) %C) %D) %E) none of the aboveAnswer: D Difficulty: ModerateRationale: = [($$(1 + r)] - 1; r = %.Use the following to answer questions 18-19:Assume there is a fixed exchange rate between the Canadian and . dollar. The expected return and standard deviation of return on the . stock market are 18% and 15%, respectively. The expected return and standard deviation on the Canadian stock market are 13% and 20%, respectively. The covariance of returns between the . and Canadian stock markets is %.18. If you invested 50% of your money in the Canadian stock market and 50%in the . stock market, the expected return on your portfoliowould be __________.A) %B) %C) %D) %E) none of the aboveAnswer: D Difficulty: ModerateRationale: 18% + 13% = %.19. If you invested 50% of your money in the Canadian stock market and 50%in the . stock market, the standard deviation of return of your portfolio would be __________.A) %B) %C) %D) %E) none of the aboveAnswer: A Difficulty: Difficult= [2(15%)2 + 2(20%)2 + 2]1/2 = %.Rationale: sP20. The major concern that has been raised with respect to the weighting ofcountries within the EAFE index isA) currency volatilities are not considered in the weighting.B) cross-correlations are not considered in the weighting.C) inflation is not represented in the weighting.D) the weights are not proportional to the asset bases of the respectivecountries.Answer: D Difficulty: ModerateRationale: Some argue that countries should be weighted in proportion to their GDP to properly adjust for the true size of their corporate sectors, since many firms are not publicly traded.21. You are a U. S. investor who purchased British securities for 2,000 poundsone year ago when the British pound cost $. No dividends were paid on the British securities in the past year. Your total return based on U. S.dollars was __________ if the value of the securities is now 2,400 pounds and the pound is worth $.A) %B) %C) %D) %E) none of the aboveAnswer: C Difficulty: ModerateRationale: ($3,840 - $3,000)/$3,000 = , or %.22. . investorsA) can trade derivative securities based on prices in foreign securitymarkets.B) cannot trade foreign derivative securities.C) can trade options and futures on the Nikkei stock index of 225 stockstraded on the Tokyo stock exchange and on FTSE (Financial Times ShareExchange) indexes of . and European stocks.D) A and C.Answer: D Difficulty: ModerateRationale: U. S. investors can invest as indicated in A, examples of which are given in C.23. Exchange rate riskA) results from changes in the exchange rates in the currencies of theinvestor and the country in which the investment is made.B) can be hedged by using a forward or futures contract in foreignexchange.C) cannot be eliminated.D) A and C.E) A and B.Answer: E Difficulty: ModerateRationale: Although international investing involves risk resulting from the changing exchange rates between currencies, this risk can be hedged by using a forward or futures contract in foreign exchange.24. International investingA) cannot be measured against a passive benchmark, such as the S&P 500.B) can be measured against a widely used index of non-U. S. stocks, theEAFE index (Europe, Australia, Far East).C) can be measured against international indexes computed by MorganStanley, Salomon Brothers, First Boston and Goldman, Sachs, amongothers.D) B and C.E) none of the above.Answer: D Difficulty: ModerateRationale: International investments can be evaluated against aninternational index, such as EAFE, created by Morgan Stanley, and others that have become available in recent years.25. Investors looking for effective international diversification shouldA) invest about 60% of their money in foreign stocks.B) invest the same percentage of their money in foreign stocks thatforeign equities represent in the world equity market.C) frequently hedge currency exposure.D) both A and B.E) none of the above.Answer: E Difficulty: ModerateUse the following to answer questions 26-28:The manager of Quantitative International Fund uses EAFE as a benchmark. Last year's performance for the fund and the benchmark were as follows:26. Calculate Quantitative's currency selection return contribution.A) +20%B) -5%C) +15%D) +5%E) -10%Answer: B Difficulty: DifficultRationale: EAFE: (.30)(10%) + (.10)(-10%) + (.60)(30%) = 20%appreciation;Diversified: (.25)(10%) + (.25)(-10%) + (.50)(30%) = 15% appreciation;Loss of 5% relative to EAFE.27. Calculate Quantitative's country selection return contribution.A) %B) %C) %D) %E) %Answer: D Difficulty: DifficultRationale: EAFE: (.30)(10%) + (.10)(5%) + (.60)(15%) = %; Diversified: (.25)(10%) + (.25)(5%) + (.50)(15%) = %; Loss of % relative to EAFE.28. Calculate Quantitative's stock selection return contribution.A) %B) %C) %D) %E) none of the above.Answer: A Difficulty: ModerateRationale: (9% - 10%).25 + (8% - 5%).25 + (16% - 15%).50 = %29. Using the S&P500 portfolio as a proxy of the market portfolioA) is appropriate because . securities represent more than 60% of worldequities.B) is appropriate because most . investors are primarilyinterested in .securities.C) is appropriate because most . and . investors are primarily interestedin . securities.D) is inappropriate because . securities make up less than 40% of worldequities.E) is inappropriate because the average . investor has less than 20% ofher portfolio in . equities.Answer: D Difficulty: EasyRationale: It is important to take a global perspective when making investment decisions. The S&P500 is increasingly inappropriate.30. The average country equity market share isA) less than 2%B) between 3% and 4%C) between 5% and 7%D) between 7% and 8%E) greater than 8%Answer: A Difficulty: ModerateRationale: This is stated in the text and confirmed by Table .31. When an investor adds international stocks to her portfolioA) it will raise her risk relative to the risk she would face just holding .stocks.B) she can reduce its risk relative to the risk she would face just holding .stocks.C) she will increase her expected return, but must also take on more risk.D) it will have no significant impact on either the risk or the returnof her portfolio.E) she needs to seek professional management because she doesn't haveaccess to international stocks on her own.Answer: B Difficulty: EasyRationale: See Figure .32. Which of the following countries has an equity index that lies on theefficient frontier generated by allowing international diversification?A) the United StatesB) the United KingdomC) JapanD) NorwayE) none of the above--each of these countries' indexes fall inside theefficient frontier.Answer: E Difficulty: ModerateRationale: See Figure . To get to the efficient frontier you would need to combine the countries' indexes.33. “ADRs” stands for ___________ and “WEBS” stands for ____________.A) Additional Dollar Returns; Weekly Equity and Bond SurveyB) Additional Daily Returns; World Equity and Bond SurveyC) American Dollar Returns; World Equity and Bond StatisticsD) American Depository Receipts; World Equity Benchmark SharesE) Adjusted Dollar Returns; Weighted Equity Benchmark SharesAnswer: D Difficulty: EasyRationale: The student should be familiar with these basic terms that relate to international investing.34. WEBS portfoliosA) are passively managed.B) are shares that can be sold by investors.C) are free from brokerage commissions.D) A and BE) A, B, and CAnswer: D Difficulty: ModerateRationale: They are passively managed and when holders want to divest their shares they sell them rather than redeeming them with the company that issued them. There are brokerage commissions, however.35. The EAFE isA) the East Asia Foreign Equity index.B) the Economic Advisor's Foreign Estimator index.C) the European and Asian Foreign Equity index.D) The European, Asian, French Equity index.E) the European, Australian, Far East index.Answer: E Difficulty: EasyRationale: The index is one of several world equity indices that exist.It is computed by Morgan Stanley.36. Home bias refers toA) the tendency to vacation in your home country instead oftravelingabroad.B) the tendency to believe that your home country is better than othercountries.C) the tendency to give preferential treatment to people from your homecountry.D) the tendency to overweight investments in your home country.E) none of the above.Answer: DEssay Questions37. Discuss performance evaluation of international portfolio managers interms of potential sources of abnormal returns.Difficulty: ModerateAnswer:The following factors may be measured to determine the performance of an international portfolio manager.(A)C urrency selection: a benchmark might be the weighted average of thecurrency appreciation of the currencies represented in the EAFEportfolio.(B)C ountry selection measures the contribution to performanceattributable to investing in the better-performing stock markets ofthe world. Country selection can be measured as theweighted averageof the equity index returns of each country using as weights the shareof the manager's portfolio in each country.(C)S tock selection ability may be measured as the weighted average ofequity returns in excess of the equity index in each country.(D)C ash/bond selection may be measured as the excess return derived fromweighting bonds and bills differently from some benchmark weights.The rationale for this question is to determine the student's understanding of evaluating the various components of potential abnormal returns resulting from actively managing an international portfolio. 38. Discuss some of the factors that might be included in a multifactor modelof security returns in an international application of arbitrage pricing theory (APT).Difficulty: ModerateAnswer:Some of the factors that might be considered in a multifactor international APT model are:(A)A world stock index(B)A national (domestic) stock index(C)Industrial/sector indexes(D)Currency movements.Studies have indicated that domestic factors appear to be the dominant influence on stock returns. However, there is clear evidence of a world market factor during the market crash of October 1987.The rationale for this question is to determine the student's understanding of the possible effects of various factors on aninternational portfolio.39. Marla holds her portfolio 100% in . securities. She tells you that shebelieves foreign investing can be extremely hazardous to her portfolio.She's not sure abou t the details, but has “heard some things”. Discuss this idea with Marla by listing three objections you have heard from your clients who have similar fears. Explain each of the objections is subject to faulty reasoning.Difficulty: ModerateAnswer:A few of the factors students may mention areClient: “The . markets have done extremely well in the past few years,so I should stay 100% invested in them.” Your Reply: You can explainthat there are other times when foreign markets have beat the .substantially in performance. You can't tell easily beforehand whatmarkets will do the best. It is important to consider that there aremany times when countries' markets move in different directions andyou can buffer your risk to some extent by investing globally.Client: “You should keep your money at home.” Your Reply: Don'tconfuse familiarity with good portfolio management. Even though thereis a lot of information available on . companies, it can be difficultto use the information to make good forecasts. Most professionalmanagers aren't even good at this.Client: “There's too much currency risk.” Your Reply: It is truethat there may be times when both a security's value in its own currencyand the currency exchange rate may lead to poor returns. But theopposite is also true. And there are cases when security price movements and currency movements will have opposite impacts on yourportfolio's return. This may have a smoothing effect on your portfolio.Client: “Invest with the best.” Your Reply: Even if . mark ets havebeen the best performers in recent periods there is no guarantee thatthings will stay that way. If you diversify internationally you will benefit when other markets take the lead.40. You are managing a portfolio that consists of . equities. You have prepareda presentation to use when you discuss the possibility of addinginternational stocks to your client's portfolio.Draw a graph that shows the risk of the portfolio relative tothe number of stocks held in the portfolio.When your client arrives, he is surprised at your suggestion that he add international stocks, but is willing to listen to your statements to justify your recommendations. State two reasons why he shouldconsider the international stocks and briefly explain each.Difficulty: ModerateAnswer:The graph should look like the one that is shown in figure .Two important reasons for adding international securities are thefavorable diversification effects due to the less than perfect positive correlations among countries' returns and the possible benefit from currency risk.This question tests the student's knowledge of the basic ideas behind investing in international stocks and other classes of equities.。

Multiple Choice Questions1. ________ is equal to the total market value of the firm's common stockdivided by (the replacement cost of the firm's assets less liabilities).A) Book value per shareB) Liquidation value per shareC) Market value per shareD) Tobin's QE) None of the above.Answer: D Difficulty: EasyRationale: Book value per share is assets minus liabilities divided by number of shares. Liquidation value per share is the amount a shareholder would receive in the event of bankruptcy. Market value per share is the market price of the stock.2. High P/E ratios tend to indicate that a company will _______, ceterisparibus.A) grow quicklyB) grow at the same speed as the average companyC) grow slowlyD) not growE) none of the aboveAnswer: A Difficulty: EasyRationale: Investors pay for growth; hence the high P/E ratio for growth firms; however, the investor should be sure that he or she is paying for expected, not historic, growth.3. _________ is equal to (common shareholders' equity/common sharesoutstanding).A) Book value per shareB) Liquidation value per shareC) Market value per shareD) Tobin's QE) none of the aboveAnswer: A Difficulty: EasyRationale: See rationale for test bank question 18.14. ________ are analysts who use information concerning current andprospective profitability of a firms to assess the firm's fair market value.A) Credit analystsB) Fundamental analystsC) Systems analystsD) Technical analystsE) SpecialistsAnswer: B Difficulty: EasyRationale: Fundamentalists use all public information in an attempt to value stock (while hoping to identify undervalued securities).5. The _______ is defined as the present value of all cash proceeds to theinvestor in the stock.A) dividend payout ratioB) intrinsic valueC) market capitalization rateD) plowback ratioE) none of the aboveAnswer: B Difficulty: EasyRationale: The cash flows from the stock discounted at the appropriate rate, based on the perceived riskiness of the stock, the market risk premium and the risk free rate, determine the intrinsic value of the stock.6. _______ is the amount of money per common share that could be realizedby breaking up the firm, selling the assets, repaying the debt, and distributing the remainder to shareholders.A) Book value per shareB) Liquidation value per shareC) Market value per shareD) Tobin's QE) None of the aboveAnswer: B Difficulty: EasyRationale: See explanation for test bank question 18.1.7. Since 1955, Treasury bond yields and earnings yields on stockswere_______.A) identicalB) negatively correlatedC) positively correlatedD) uncorrelatedAnswer: C Difficulty: EasyRationale: The earnings yield on stocks equals the expected real rate of return on the stock market, which should be equal to the yield to maturity on Treasury bonds plus a risk premium, which may change slowly over time.The yields are plotted in Figure 18.8.8. Historically, P/E ratios have tended to be _________.A) higher when inflation has been highB) lower when inflation has been highC) uncorrelated with inflation rates but correlated with othermacroeconomic variablesD) uncorrelated with any macroeconomic variables including inflationratesE) none of the aboveAnswer: B Difficulty: EasyRationale: P/E ratios have tended to be lower when inflation has been high, reflecting the market's assessment that earnings in these periods are of "lower quality", i.e., artificially distorted by inflation, andwarranting lower P/E ratios.9. The ______ is a common term for the market consensus value of the requiredreturn on a stock.A) dividend payout ratioB) intrinsic valueC) market capitalization rateD) plowback rateE) none of the aboveAnswer: C Difficulty: EasyRationale: The market capitalization rate, which consists of the risk-free rate, the systematic risk of the stock and the market risk premium, is the rate at which a stock's cash flows are discounted in order to determineintrinsic value.10. The _________ is the fraction of earnings reinvested in the firm.A) dividend payout ratioB) retention rateC) plowback ratioD) A and CE) B and CAnswer: E Difficulty: EasyRationale: Retention rate, or plowback ratio, represents the earnings reinvested in the firm. The retention rate, or (1 - plowback) = dividend payout.11. The Gordon modelA) is a generalization of the perpetuity formula to cover the case of agrowing perpetuity.B) is valid only when g is less than k.C) is valid only when k is less than g.D) A and B.E) A and C.Answer: D Difficulty: EasyRationale: The Gordon model assumes constant growth indefinitely.Mathematically, g must be less than k; otherwise, the intrinsic value is undefined.12. You wish to earn a return of 13% on each of two stocks, X and Y. StockX is expected to pay a dividend of $3 in the upcoming year while Stock Y is expected to pay a dividend of $4 in the upcoming year. The expected growth rate of dividends for both stocks is 7%. The intrinsic value of stock X ______.A) cannot be calculated without knowing the market rate of returnB) will be greater than the intrinsic value of stock YC) will be the same as the intrinsic value of stock YD) will be less than the intrinsic value of stock YE) none of the above is a correct answer.Answer: D Difficulty: EasyRationale: PV0 = D1/(k-g); given k and g are equal, the stock with the larger dividend will have the higher value.13. You wish to earn a return of 11% on each of two stocks, C and D. StockC is expected to pay a dividend of $3 in the upcoming year while StockD is expected to pay a dividend of $4 in the upcoming year. The expectedgrowth rate of dividends for both stocks is 7%. The intrinsic value of stock C ______.A) will be greater than the intrinsic value of stock DB) will be the same as the intrinsic value of stock DC) will be less than the intrinsic value of stock DD) cannot be calculated without knowing the market rate of returnE) none of the above is a correct answer.Answer: C Difficulty: EasyRationale: PV0 = D1/(k-g); given k and g are equal, the stock with the larger dividend will have the higher value.14. You wish to earn a return of 12% on each of two stocks, A and B. Eachof the stocks is expected to pay a dividend of $2 in the upcoming year.The expected growth rate of dividends is 9% for stock A and 10% for stockB. The intrinsic value of stock A _____.A) will be greater than the intrinsic value of stock BB) will be the same as the intrinsic value of stock BC) will be less than the intrinsic value of stock BD) cannot be calculated without knowing the rate of return on the marketportfolio.E) none of the above is a correct statement.Answer: C Difficulty: EasyRationale: PV0 = D1/(k-g); given that dividends are equal, the stock with the higher growth rate will have the higher value.15. You wish to earn a return of 10% on each of two stocks, C and D. Eachof the stocks is expected to pay a dividend of $2 in the upcoming year.The expected growth rate of dividends is 9% for stock C and 10% for stockD. The intrinsic value of stock C _____.A) will be greater than the intrinsic value of stock DB) will be the same as the intrinsic value of stock DC) will be less than the intrinsic value of stock DD) cannot be calculated without knowing the rate of return on the marketportfolio.E) none of the above is a correct statement.Answer: C Difficulty: EasyRationale: PV0 = D1/(k-g); given that dividends are equal, the stock with the higher growth rate will have the higher value.16. Each of two stocks, A and B, are expected to pay a dividend of $5 in theupcoming year. The expected growth rate of dividends is 10% for both stocks.You require a rate of return of 11% on stock A and a return of 20% on stockB. The intrinsic value of stock A _____.A) will be greater than the intrinsic value of stock BB) will be the same as the intrinsic value of stock BC) will be less than the intrinsic value of stock BD) cannot be calculated without knowing the market rate of return.E) none of the above is true.Answer: A Difficulty: EasyRationale: PV0 = D1/(k-g); given that dividends are equal, the stock with the larger required return will have the lower value.17. Each of two stocks, C and D, are expected to pay a dividend of $3 in theupcoming year. The expected growth rate of dividends is 9% for both stocks.You require a rate of return of 10% on stock C and a return of 13% on stockD. The intrinsic value of stock C _____.A) will be greater than the intrinsic value of stock DB) will be the same as the intrinsic value of stock DC) will be less than the intrinsic value of stock DD) cannot be calculated without knowing the market rate of return.E) none of the above is true.Answer: A Difficulty: EasyRationale: PV0 = D1/(k-g); given that dividends are equal, the stock with the larger required return will have the lower value.18. If the expected ROE on reinvested earnings is equal to k, the multistageDDM reduces toA) V0 = (Expected Dividend Per Share in Year 1)/kB) V0 = (Expected EPS in Year 1)/kC) V0 = (Treasury Bond Yield in Year 1)/kD) V0 = (Market return in Year 1)/kE) none of the aboveAnswer: B Difficulty: ModerateRationale: If ROE = k, no growth is occurring; b = 0; EPS = DPS19. Low Tech Company has an expected ROE of 10%. The dividend growth ratewill be ________ if the firm follows a policy of paying 40% of earnings in the form of dividends.A) 6.0%B) 4.8%C) 7.2%D) 3.0%E) none of the aboveAnswer: A Difficulty: EasyRationale: 10% X 0.60 = 6.0%.20. Music Doctors Company has an expected ROE of 14%. The dividend growthrate will be ________ if the firm follows a policy of paying 60% of earnings in the form of dividends.A) 4.8%B) 5.6%C) 7.2%D) 6.0%E) none of the aboveAnswer: B Difficulty: EasyRationale: 14% X 0.40 = 5.6%.21. Medtronic Company has an expected ROE of 16%. The dividend growth ratewill be ________ if the firm follows a policy of paying 70% of earnings in the form of dividends.A) 3.0%B) 6.0%C) 7.2%D) 4.8%E) none of the aboveAnswer: D Difficulty: EasyRationale: 16% X 0.30 = 4.8%.22. High Speed Company has an expected ROE of 15%. The dividend growth ratewill be ________ if the firm follows a policy of paying 50% of earnings in the form of dividends.A) 3.0%B) 4.8%C) 7.5%D) 6.0%E) none of the aboveAnswer: C Difficulty: EasyRationale: 15% X 0.50 = 7.5%.23. Light Construction Machinery Company has an expected ROE of 11%. Thedividend growth rate will be _______ if the firm follows a policy of paying 25% of earnings in the form of dividends.A) 3.0%B) 4.8%C) 8.25%D) 9.0%E) none of the aboveAnswer: C Difficulty: EasyRationale: 11% X 0.75 = 8.25%.24. Xlink Company has an expected ROE of 15%. The dividend growth rate willbe _______ if the firm follows a policy of plowing back 75% of earnings.A) 3.75%B) 11.25%C) 8.25%D) 15.0%E) none of the aboveAnswer: B Difficulty: EasyRationale: 15% X 0.75 = 11.25%.25. Think Tank Company has an expected ROE of 26%. The dividend growth ratewill be _______ if the firm follows a policy of plowing back 90% of earnings.A) 2.6%B) 10%C) 23.4%D) 90%E) none of the aboveAnswer: C Difficulty: EasyRationale: 26% X 0.90 = 23.4%.26. Bubba Gumm Company has an expected ROE of 9%. The dividend growth ratewill be _______ if the firm follows a policy of plowing back 10% of earnings.A) 90%B) 10%C) 9%D) 0.9%E) none of the aboveAnswer: D Difficulty: EasyRationale: 9% X 0.10 = 0.9%.27. A preferred stock will pay a dividend of $2.75 in the upcoming year, andevery year thereafter, i.e., dividends are not expected to grow. You require a return of 10% on this stock. Use the constant growth DDM to calculate the intrinsic value of this preferred stock.A) $0.275B) $27.50C) $31.82D) $56.25E) none of the aboveAnswer: B Difficulty: ModerateRationale: 2.75 / .10 = 27.5028. A preferred stock will pay a dividend of $3.00in the upcoming year, andevery year thereafter, i.e., dividends are not expected to grow. You require a return of 9% on this stock. Use the constant growth DDM to calculate the intrinsic value of this preferred stock.A) $33.33B) $0..27C) $31.82D) $56.25E) none of the aboveAnswer: A Difficulty: ModerateRationale: 3.00 / .09 = 33.3329. A preferred stock will pay a dividend of $1.25 in the upcoming year, andevery year thereafter, i.e., dividends are not expected to grow. You require a return of 12% on this stock. Use the constant growth DDM to calculate the intrinsic value of this preferred stock.A) $11.56B) $9.65C) $11.82D) $10.42E) none of the aboveAnswer: D Difficulty: ModerateRationale: 1.25 / .12 = 10.4230. A preferred stock will pay a dividend of $3.50 in the upcoming year, andevery year thereafter, i.e., dividends are not expected to grow. You require a return of 11% on this stock. Use the constant growth DDM to calculate the intrinsic value of this preferred stock.A) $0.39B) $0.56C) $31.82D) $56.25E) none of the aboveAnswer: C Difficulty: ModerateRationale: 3.50 / .11 = 31.8231. A preferred stock will pay a dividend of $7.50 in the upcoming year, andevery year thereafter, i.e., dividends are not expected to grow. You require a return of 10% on this stock. Use the constant growth DDM to calculate the intrinsic value of this preferred stock.A) $0.75B) $7.50C) $64.12D) $56.25E) none of the aboveAnswer: E Difficulty: ModerateRationale: 7.50 / .10 = 75.0032. A preferred stock will pay a dividend of $6.00 in the upcoming year, andevery year thereafter, i.e., dividends are not expected to grow. You require a return of 10% on this stock. Use the constant growth DDM to calculate the intrinsic value of this preferred stock.A) $0.60B) $6.00C) $600D) $5.40E) none of the aboveAnswer: E Difficulty: ModerateRationale: 6.00 / .10 = 60.0033. You are considering acquiring a common stock that you would like to holdfor one year. You expect to receive both $1.25 in dividends and $32 from the sale of the stock at the end of the year. The maximum price you would pay for the stock today is _____ if you wanted to earn a 10% return.A) $30.23B) $24.11C) $26.52D) $27.50E) none of the aboveAnswer: A Difficulty: ModerateRationale: .10 = (32 - P + 1.25) / P; .10P = 32 - P + 1.25; 1.10P = 33.25;P = 30.23.34. You are considering acquiring a common stock that you would like to holdfor one year. You expect to receive both $0.75 in dividends and $16 from the sale of the stock at the end of the year. The maximum price you would pay for the stock today is _____ if you wanted to earn a 12% return.A) $23.91B) $14.96C) $26.52D) $27.50E) none of the aboveAnswer: B Difficulty: ModerateRationale: .12 = (16 - P + 0.75) / P; .12P = 16 - P + 0.75; 1.12P = 16.75;P = 14.96.35. You are considering acquiring a common stock that you would like to holdfor one year. You expect to receive both $2.50 in dividends and $28 from the sale of the stock at the end of the year. The maximum price you would pay for the stock today is _____ if you wanted to earn a 15% return.A) $23.91B) $24.11C) $26.52D) $27.50E) none of the aboveAnswer: C Difficulty: ModerateRationale: .15 = (28 - P + 2.50) / P; .15P = 28 - P + 2.50; 1.15P = 30.50;P = 26.52.36. You are considering acquiring a common stock that you would like to holdfor one year. You expect to receive both $3.50 in dividends and $42 from the sale of the stock at the end of the year. The maximum price you would pay for the stock today is _____ if you wanted to earn a 10% return.A) $23.91B) $24.11C) $26.52D) $27.50E) none of the aboveAnswer: E Difficulty: ModerateRationale: .10 = (42 - P + 3.50) / P; .10P = 42 - P + 3.50; 1.1P = 45.50;P = 41.36.Use the following to answer questions 37-40:Paper Express Company has a balance sheet which lists $85 million in assets, $40 million in liabilities and $45 million in common shareholders' equity. It has 1,400,000 common shares outstanding. The replacement cost of the assets is $115 million. The market share price is $90.37. What is Paper Express's book value per share?A) $1.68B) $2.60C) $32.14D) $60.71E) none of the aboveAnswer: C Difficulty: ModerateRationale: $45M/1.4M = $32.14.38. What is Paper Express's market value per share?A) $1.68B) $2.60C) $32.14D) $60.71E) none of the aboveAnswer: E Difficulty: Easy39. What is Paper Express's replacement cost per share?A) $1.68B) $2.60C) $53.57D) $60.71E) none of the aboveAnswer: C Difficulty: ModerateRationale: $115M - 40M/1.4M = $53.57.40. What is Paper Express's Tobin's q?A) 1.68B) 2.60C) 53.57D) 60.71E) none of the aboveAnswer: A Difficulty: ModerateRationale: $90/ 53.57 = 1.6841. One of the problems with attempting to forecast stock market values isthatA) there are no variables that seem to predict market return.B) the earnings multiplier approach can only be used at the firm level.C) the level of uncertainty surrounding the forecast will always be quitehigh.D) dividend payout ratios are highly variable.E) none of the above.Answer: C Difficulty: EasyRationale: Although some variables such as market dividend yield appear to be strongly related to market return, the market has great variability and so the level of uncertainty in any forecast will be high.42. The most popular approach to forecasting the overall stock market is touseA) the dividend multiplier.B) the aggregate return on assets.C) the historical ratio of book value to market value.D) the aggregate earnings multiplier.E) Tobin's Q.Answer: D Difficulty: EasyRationale: The earnings multiplier approach is the most popular approach to forecasting the overall stock market.Use the following to answer questions 43-44:Sure Tool Company is expected to pay a dividend of $2 in the upcoming year. The risk-free rate of return is 4% and the expected return on the market portfolio is 14%. Analysts expect the price of Sure Tool Company shares to be $22 a yearfrom now. The beta of Sure Tool Company's stock is 1.25.43. The market's required rate of return on Sure's stock is _____.A) 14.0%B) 17.5%C) 16.5%D) 15.25%E) none of the aboveAnswer: C Difficulty: ModerateRationale: 4% + 1.25(14% - 4%) = 16.5%.44. What is the intrinsic value of Sure's stock today?A) $20.60B) $20.00C) $12.12D) $22.00E) none of the aboveAnswer: A Difficulty: DifficultRationale: k = .04 + 1.25 (.14 - .04); k = .165; .165 = (22 - P + 2) / P; .165P = 24 - P; 1.165P = 24 ; P = 20.60.45. If Sure's intrinsic value is $21.00 today, what must be its growth rate?A) 0.0%B) 10%C) 4%D) 6%E) 7%Answer: E Difficulty: DifficultRationale: k = .04 + 1.25 (.14 - .04); k = .165; .165 = 2/21 + g; g = .07Use the following to answer questions 46-47:Torque Corporation is expected to pay a dividend of $1.00 in the upcoming year. Dividends are expected to grow at the rate of 6% per year. The risk-free rate of return is 5% and the expected return on the market portfolio is 13%. The stock of Torque Corporation has a beta of 1.2.46. What is the return you should require on Torque's stock?A) 12.0%B) 14.6%C) 15.6%D) 20%E) none of the aboveAnswer: B Difficulty: ModerateRationale: 5% + 1.2(13% - 5%) = 14.6%.47. What is the intrinsic value of Torque's stock?A) $14.29B) $14.60C) $12.33D) $11.62E) none of the aboveAnswer: D Difficulty: DifficultRationale: k = 5% + 1.2(13% - 5%) = 14.6%; P = 1 / (.146 - .06) = $11.62.48. Midwest Airline is expected to pay a dividend of $7 in the coming year.Dividends are expected to grow at the rate of 15% per year. The risk-free rate of return is 6% and the expected return on the market portfolio is 14%. The stock of Midwest Airline has a beta of 3.00. The return you should require on the stock is ________.A) 10%B) 18%C) 30%D) 42%E) none of the aboveAnswer: C Difficulty: ModerateRationale: 6% + 3(14% - 6%) = 30%.49. Fools Gold Mining Company is expected to pay a dividend of $8 in theupcoming year. Dividends are expected to decline at the rate of 2% per year. The risk-free rate of return is 6% and the expected return on the market portfolio is 14%. The stock of Fools Gold Mining Company has a beta of -0.25. The return you should require on the stock is ________.A) 2%B) 4%C) 6%D) 8%E) none of the aboveAnswer: B Difficulty: ModerateRationale: 6% + [-0.25(14% - 6%)] = 4%.50. High Tech Chip Company is expected to have EPS in the coming year of $2.50.The expected ROE is 12.5%. An appropriate required return on the stock is 11%. If the firm has a plowback ratio of 70%, the growth rate of dividends should beA) 5.00%B) 6.25%C) 6.60%D) 7.50%E) 8.75%Answer: E Difficulty: EasyRationale: 12.5% X 0.7 = 8.75%.51. A company paid a dividend last year of $1.75. The expected ROE for nextyear is 14.5%. An appropriate required return on the stock is 10%. If the firm has a plowback ratio of 75%, the dividend in the coming year should beA) $1.80B) $2.12C) $1.77D) $1.94E) none of the aboveAnswer: D Difficulty: ModerateRationale: g = .155 X .75 = 10.875%; $1.75(1.10875) = $1.9452. High Tech Chip Company paid a dividend last year of $2.50. The expectedROE for next year is 12.5%. An appropriate required return on the stock is 11%. If the firm has a plowback ratio of 60%, the dividend in the coming year should beA) $1.00B) $2.50C) $2.69D) $2.81E) none of the aboveAnswer: C Difficulty: ModerateRationale: g = .125 X .6 = 7.5%; $2.50(1.075) = $2.6953. Suppose that the average P/E multiple in the oil industry is 20. DominionOil is expected to have an EPS of $3.00 in the coming year. The intrinsic value of Dominion Oil stock should be _____.A) $28.12B) $35.55C) $60.00D) $72.00E) none of the aboveAnswer: C Difficulty: EasyRationale: 20 X $3.00 = $60.00.54. Suppose that the average P/E multiple in the oil industry is 22. ExxonOil is expected to have an EPS of $1.50 in the coming year. The intrinsic value of Exxon Oil stock should be _____.A) $33.00B) $35.55C) $63.00D) $72.00E) none of the aboveAnswer: A Difficulty: EasyRationale: 22 X $1.50 = $33.00.55. Suppose that the average P/E multiple in the oil industry is 16. MobilOil is expected to have an EPS of $4.50 in the coming year. The intrinsic value of Mobil Oil stock should be _____.A) $28.12B) $35.55C) $63.00D) $72.00E) none of the aboveAnswer: D Difficulty: EasyRationale: 16 X $4.50 = $72.00.56. Suppose that the average P/E multiple in the gas industry is 17. KMP isexpected to have an EPS of $5.50 in the coming year. The intrinsic value of KMP stock should be _____.A) $28.12B) $93.50C) $63.00D) $72.00E) none of the aboveAnswer: B Difficulty: EasyRationale: 17 X $5.50 = $93.50.57. An analyst has determined that the intrinsic value of HPQ stock is $20per share using the capitalized earnings model. If the typical P/E ratio in the computer industry is 25, then it would be reasonable to assume the expected EPS of HPQ in the coming year is ______.A) $3.63B) $4.44C) $0.80D) $22.50E) none of the aboveAnswer: C Difficulty: EasyRationale: $20(1/25) = $0.80.58. An analyst has determined that the intrinsic value of Dell stock is $34per share using the capitalized earnings model. If the typical P/E ratio in the computer industry is 27, then it would be reasonable to assume the expected EPS of Dell in the coming year is ______.A) $3.63B) $4.44C) $14.40D) $1.26E) none of the aboveAnswer: D Difficulty: EasyRationale: $34(1/27) = $1.26.59. An analyst has determined that the intrinsic value of IBM stock is $80per share using the capitalized earnings model. If the typical P/E ratio in the computer industry is 22, then it would be reasonable to assume the expected EPS of IBM in the coming year is ______.A) $3.64B) $4.44C) $14.40D) $22.50E) none of the aboveAnswer: A Difficulty: EasyRationale: $80(1/22) = $3.64.60. Old Quartz Gold Mining Company is expected to pay a dividend of $8 in thecoming year. Dividends are expected to decline at the rate of 2% per year.The risk-free rate of return is 6% and the expected return on the market portfolio is 14%. The stock of Old Quartz Gold Mining Company has a beta of -0.25. The intrinsic value of the stock is ______.A) $80.00B) 133.33C) $200.00D) $400.00E) none of the aboveAnswer: B Difficulty: DifficultRationale: k = 6% + [-0.25(14% - 6%)] = 4%; P = 8 / [.04 - (-.02)] = $133.33.61. Low Fly Airline is expected to pay a dividend of $7 in the coming year.Dividends are expected to grow at the rate of 15% per year. The risk-free rate of return is 6% and the expected return on the market portfolio is 14%. The stock of low Fly Airline has a beta of 3.00. The intrinsic value of the stock is ______.A) $46.67B) $50.00C) $56.00D) $62.50E) none of the aboveAnswer: A Difficulty: ModerateRationale: 6% + 3(14% - 6%) = 30%; P = 7 / (.30 - .15) = $46.67.62. Sunshine Corporation is expected to pay a dividend of $1.50 in the upcomingyear. Dividends are expected to grow at the rate of 6% per year. The risk-free rate of return is 6% and the expected return on the market portfolio is 14%. The stock of Sunshine Corporation has a beta of 0.75.The intrinsic value of the stock is _______.A) $10.71B) $15.00C) $17.75D) $25.00E) none of the aboveAnswer: D Difficulty: ModerateRationale: 6% + 0.75(14% - 6%) = 12%; P = 1.50 / (.12 - .06) = $25.63. Low Tech Chip Company is expected to have EPS in the coming year of $2.50.The expected ROE is 14%. An appropriate required return on the stock is 11%. If the firm has a dividend payout ratio of 40%, the intrinsic value of the stock should beA) $22.73B) $27.50C) $28.57D) $38.46E) none of the aboveAnswer: D Difficulty: DifficultRationale: g = 14% X 0.6 = 8.4%; Expected DPS = $2.50(0.4) = $1.00; P =1 / (.11 - .084) = $38.46.Use the following to answer questions 64-65:Risk Metrics Company is expected to pay a dividend of $3.50 in the coming year. Dividends are expected to grow at a rate of 10% per year. The risk-free rate of return is 5% and the expected return on the market portfolio is 13%. The stock is trading in the market today at a price of $90.00.64. What is the market capitalization rate for Risk Metrics?A) 13.6%B) 13.9%C) 15.6%D) 16.9%E) none of the aboveAnswer: B Difficulty: ModerateRationale: k = 3.50 / 90 + .10; k = 13.9%65. What is the approximate beta of Risk Metrics's stock?A) 0.8B) 1.0C) 1.1D) 1.4E) none of the aboveAnswer: C Difficulty: DifficultRationale: k = 13.9% from 18.64; 13.9 = 5% + b(13% - 5%) = 1.11.66. The market capitalization rate on the stock of Flexsteel Company is 12%.The expected ROE is 13% and the expected EPS are $3.60. If the firm's plowback ratio is 50%, the P/E ratio will be _________.A) 7.69B) 8.33C) 9.09D) 11.11E) none of the aboveAnswer: C Difficulty: DifficultRationale: g = 13% X 0.5 = 6.5%; .5/(.12-.065) = 9.09。

8-1CHAPTER 8: INDEX MODELS1.a.The two figures depict the stocks’ security characteristic lines (SCL). Stock A has higher firm-specific risk because the deviations of the observations from the SCL are larger for Stock A than for Stock B. Deviations are measured by the vertical distance of each observation from the SCL.b. Beta is the slope of the SCL, which is the measure of systematic risk. The SCL for Stock B is steeper; hence Stock B’s systematic risk is greater.c.The R 2 (or squared correlation coefficient) of the SCL is the ratio of the explained variance of the stock’s return to total variance, and the totalvariance is the sum of the explained variance plus the unexplained variance (the stock’s residual variance):)(e σσβσβR i 22M 2i 2M 2i 2+=Since the explained variance for Stock B is greater than for Stock A (theexplained variance is 2M 2B σβ, which is greater since its beta is higher), and its residual variance σ 2(e B ) is smaller, its R 2 is higher than Stock A’s.d.Alpha is the intercept of the SCL with the expected return axis. Stock A has a small positive alpha whereas Stock B has a negative alpha; hence, Stock A’s alpha is larger.e.The correlation coefficient is simply the square root of R 2, so Stock B’s correlation with the market is higher.2.The R 2 of the regression is: 0.702 = 0.49Therefore, 51% of total variance is unexplained by the market; this is nonsystematic risk. 3. d. 4. b.8-25. a. Firm-specific risk is measured by the residual standard deviation. Thus, stock A has more firm-specific risk: 10.3% > 9.1%b. Market risk is measured by beta, the slope coefficient of the regression. A has a larger beta coefficient: 1.2 > 0.8c. R 2 measures the fraction of total variance of return explained by the market return. A’s R 2 is larger than B’s: 0.576 > 0.436d.Rewriting the SCL equation in terms of total return (r) rather than excess return (R):r A – r f = α + β(r M – r f ) ⇒ r A = α + r f (1 - β) + βr M The intercept is now equal to:α + r f (1 - β) = 1 + r f (l – 1.2)Since r f = 6%, the intercept would be: 1 – 1.2 = –0.2%6.a. To optimize this portfolio one would need:n = 60 estimates of means n = 60 estimates of variances770,12nn 2=-estimates of covariances Therefore, in total:890,12n3n 2=+estimatesb.In a single index model: r i - r f = α i + β i (r M – r f ) + e i Equivalently, using excess returns: R i = α i + β i R M + e iThe variance of the rate of return on each stock can be decomposed into the components: (l)The variance due to the common market factor: 2M 2i σβ(2) The variance due to firm specific unanticipated events: )e (i 2σ In this model: σββ=j i j i )r ,r (Cov8-3The number of parameter estimates is:n = 60 estimates of the mean E(r i )n = 60 estimates of the sensitivity coefficient βi n = 60 estimates of the firm-specific variance σ2(e i ) 1 estimate of the market mean E(r M ) 1 estimate of the market variance 2M σ Therefore, in total, 182 estimates.Thus, the single index model reduces the total number of required parameter estimates from 1,890 to 182. In general, the number of parameter estimates is reduced from:)2n 3( to 2n 3n 2+⎪⎪⎭⎫ ⎝⎛+7.a. The standard deviation of each individual stock is given by:2/1i 22M 2i i )]e ([σ+σβ=σ Since βA = 0.8, βB = 1.2, σ(e A ) = 30%, σ(e B ) = 40%, and σM = 22%, we get:σA = (0.82 ⨯ 222 + 302 )1/2 = 34.78%σB = (1.22 ⨯ 222 + 402 )1/2 = 47.93%b.The expected rate of return on a portfolio is the weighted average of the expected returns of the individual securities:E(r P ) = w A E(r A ) + w B E(r B ) + w f r fwhere w A , w B , and w f are the portfolio weights for Stock A, Stock B, and T-bills, respectively.Substituting in the formula we get:E(r P ) = (0.30 ⨯ 13) + (0.45 ⨯ 18) + (0.25 ⨯ 8) = 14%The beta of a portfolio is similarly a weighted average of the betas of the individual securities:βP = w A βA + w B βB + w f β fThe beta for T-bills (β f ) is zero. The beta for the portfolio is therefore:βP = (0.30 ⨯ 0.8) + (0.45 ⨯ 1.2) + 0 = 0.788-4The variance of this portfolio is:)e (P 22M 2P 2P σ+σβ=σwhere 2M 2P σβ is the systematic component and )e (P 2σis the nonsystematic component. Since the residuals (e i ) are uncorrelated, the non-systematic variance is:)e (w )e (w )e (w )e (f 22f B 22B A 22A P 2σ+σ+σ=σ= (0.302 ⨯ 302 ) + (0.452 ⨯ 402 ) + (0.252 ⨯ 0) = 405where σ 2(e A ) and σ 2(e B ) are the firm-specific (nonsystematic) variances of Stocks A and B, and σ 2(e f ), the nonsystematic variance of T-bills, is zero. The residual standard deviation of the portfolio is thus:σ(e P ) = (405)1/2 = 20.12% The total variance of the portfolio is then:47.699405)2278.0(222P =+⨯=σThe standard deviation is 26.45%.8.For Stock A:αA = r A - [r f + βA (r M -r f )] = 11 - [6 +0.8(12 - 6)] = 0.2% For stock B:αB = 14 - [6 + 1.5(12 -6)] = -1%Stock A would be a good addition to a well-diversified portfolio. A short position in Stock B may be desirable. 9.The standard deviation of each stock can be derived from the following equation for R 2:=σσβ=2i2M2i 2iR Explained variance Total variance Therefore:%30.3198020.0207.0R A 222A 2M2A 2A=σ=⨯=σβ=σ8-5For stock B:%28.69800,412.0202.1B 222B=σ=⨯=σ10. The systematic risk for A is:1962070.0222M 2A =⨯=σβThe firm-specific risk of A (the residual variance) is the difference between A’s total risk an d its systematic risk:980 – 196 = 784 The systematic risk for B is:5762020.1222M 2B =⨯=σβB’s firm -specific risk (residual variance) is:4800 – 576 = 422411. The covariance between the returns of A and B is (since the residuals are assumedto be uncorrelated):33640020.170.0)r ,r (Cov 2M B A B A =⨯⨯=σββ=The correlation coefficient between the returns of A and B is:155.028.6930.31336)r ,r (Cov B A B A AB =⨯=σσ=ρ12. Note that the correlation is the square root of R 2:2R =ρCov(r A ,r M ) = ρσA σM = 0.201/2 ⨯ 31.30 ⨯ 20 = 280Cov(r B ,r M ) = ρσB σM = 0.121/2 ⨯ 69.28 ⨯ 20 = 4808-613. For portfolio P we can compute:σ P = [(0.62 ⨯ 980) + (0.42 ⨯ 4800) + (2 ⨯ 0.4 ⨯ 0.6 ⨯ 336]1/2 = [1282.08]1/2 = 35.81% β P = (0.6 ⨯ 0.7) + (0.4 ⨯ 1.2) = 0.90958.08400)(0.901282.08σβσ)(e σ22M2P 2P P 2=⨯-=-= Cov(r P ,r M ) = β P 2M σ=0.90 ×400=360 This same result can also be attained using the covariances of the individual stocks with the market:Cov(r P ,r M ) = Cov(0.6r A + 0.4r B , r M ) = 0.6Cov(r A , r M ) + 0.4Cov(r B ,r M )= (0.6 ⨯ 280) + (0.4 ⨯ 480) = 36014. Note that the variance of T-bills is zero, and the covariance of T-bills with any assetis zero. Therefore, for portfolio Q:[][]%55.21)3603.05.02()4003.0()08.282,15.0()r ,r (Cov w w 2w w 2/1222/1M P M P 2M 2M 2P 2P Q =⨯⨯⨯+⨯+⨯=⨯⨯⨯+σ+σ=σ75.00)13.0()90.05.0(w w M M P P Q =+⨯+⨯=β+β=β52.239)40075.0(52.464)e (22M 2Q 2Q Q 2=⨯-=σβ-σ=σ30040075.0)r ,r (Cov 2M Q M Q =⨯=σβ=15. a.Alpha (α)Expected excess returnα i = r i – [r f + βi (r M – r f ) ]E(r i ) – r f αA = 20% – [8% + 1.3(16% – 8%)] = 1.6% 20% – 8% = 12% αB = 18% – [8% + 1.8(16% – 8%)] = – 4.4% 18% – 8% = 10% αC = 17% – [8% + 0.7(16% – 8%)] = 3.4% 17% – 8% = 9% αD = 12% – [8% + 1.0(16% – 8%)] = – 4.0%12% – 8% = 4%Stocks A and C have positive alphas, whereas stocks B and D have negative alphas.The residual variances are:σ2(e A ) = 582 = 3,364σ2(e B) = 712 = 5,041σ2(e C) = 602 = 3,600σ2(e D) = 552 = 3,025b. To construct the optimal risky portfolio, we first determine the optimal activeportfolio. Using the Treynor-Black technique, we construct the active portfolio:0.000476 –0.6142Do not be concerned that the positive alpha stocks have negative weights andvice versa. We will see that the entire position in the active portfolio will benegative, returning everything to good order.With these weights, the forecast for the active portfolio is:α = [–0.6142 ⨯ 1.6] + [1.1265 ⨯ (– 4.4)] – [1.2181 ⨯ 3.4] + [1.7058 ⨯ (– 4.0)]= –16.90%β = [–0.6142 ⨯ 1.3] + [1.1265 ⨯ 1.8] – [1.2181 ⨯ 0.70] + [1.7058 ⨯ 1] = 2.08The high beta (higher than any individual beta) results from the short positionsin the relatively low beta stocks and the long positions in the relatively highbeta stocks.σ2(e) = [(–0.6142)2⨯ 3364] + [1.12652⨯ 5041] + [(–1.2181)2⨯ 3600] + [1.70582⨯ 3025] = 21,809.6σ(e) = 147.68%Here, again, the levered position in stock B [with high σ2(e)] overcomes thediversification effect, and results in a high residual standard deviation.8-78-8The optimal risky portfolio has a proportion w * in the active portfolio, computed as follows:05124.023/86.809,21/90.16/]r )r (E [)e (/w 22M f M 20-=-=σ-σα= The negative position is justified for the reason stated earlier. The adjustment for beta is:0486.0)05124.0)(08.21(105124.0w )1(1w *w 00-=--+-=β-+=Since w* is negative, the result is a positive position in stocks with positive alphas and a negative position in stocks with negative alphas. The position in the index portfolio is:1 – (–0.0486) = 1.0486c.To calculate Sharpe’s measure for the optimal risky portfolio, we compute the information ratio for the active portfolio and Sharpe’s measure for the market portfolio. The information ratio for the active portfolio is computed as follows:A = α /σ(e)= –16.90/147.68 = –0.1144 A 2 = 0.0131Hence, the square of Sharpe’s measure (S) of the optimized risky portfolio is:1341.00131.0238A S S 222M2=+⎪⎭⎫ ⎝⎛=+= S = 0.3662Compare this to the market’s Sharpe measure:S M = 8/23 = 0.3478 The difference is: 0.0184Note that the only-moderate improvement in performance results from the fact that only a small position is taken in the active portfolio A because of its large residual variance.8-9d.To calculate the exact makeup of the complete portfolio, we first compute the mean excess return of the optimal risky portfolio and its variance. The risky portfolio beta is given by:βP = w M + (w A ⨯ βA ) = 1.0486 + [(–0.0486) ⨯ 2.08] = 0.95E(R P ) = α P + βP E(R M ) = [(–0.0486) ⨯ (–16.90%)] + (0.95 ⨯ 8%) = 8.42%()94.5286.809,21)0486.0()2395.0()e (22P 22M 2P 2P =⨯-+⨯=σ+σβ=σ%00.23P =σSince A = 2.8, the optimal position in this portfolio is:5685.094.5288.201.042.8y =⨯⨯=In contrast, with a passive strategy:5401.0238.201.08y 2=⨯⨯=This is a difference of: 0.0284The final positions of the complete portfolio are: Bills 1 – 0.5685 = 43.15% M 0.5685 ⨯ l.0486 = 59.61%A 0.5685 ⨯ (–0.0486) ⨯ (–0.6142) = 1.70%B 0.5685 ⨯ (–0.0486) ⨯ 1.1265 = – 3.11%C 0.5685 ⨯ (–0.0486) ⨯ (–1.2181) = 3.37%D 0.5685 ⨯ (–0.0486) ⨯ 1.7058 = – 4.71%100.00%[sum is subject to rounding error]Note that M may include positive proportions of stocks A through D.16. a.If a manager is not allowed to sell short he will not include stocks with negative alphas in his portfolio, so he will consider only A and C:8-10The forecast for the active portfolio is:α = (0.3352 ⨯ 1.6) + (0.6648 ⨯ 3.4) = 2.80% β = (0.3352 ⨯ 1.3) + (0.6648 ⨯ 0.7) = 0.90σ2(e) = (0.33522 ⨯ 3,364) + (0.66482 ⨯ 3,600) = 1,969.03 σ(e ) = 44.37%The weight in the active portfolio is:0940.023/803.969,1/80.2/)R (E )e (/w 22M M 20==σσα= Adjusting for beta:0931.0]094.0)90.01[(1094.0w )1(1w *w 00=⨯-+=β-+=The information ratio of the active portfolio is:A = α /σ(e) =2.80/44.37 = 0.0631 Hence, the square of Sharpe’s measure is:S 2 = (8/23)2 + 0.06312 = 0.1250 Therefore: S = 0.3535The market’s Sharpe measure is: S M = 0.3478When short sales are allowed (Problem 18), the manager’s Sharpe measure is higher (0.3662). The reduction in the Sharpe measure is the cost of the short sale restriction.The characteristics of the optimal risky portfolio are:βP = w M + w A ⨯ βA = (1 – 0.0931) + (0.0931 ⨯ 0.9) = 0.99 E(R P ) = αP + βP E(R M ) = (0.0931 ⨯ 2.8%) + (0.99 ⨯ 8%) = 8.18%54.535)03.969,10931.0()2399.0()e (22P 22M 2P 2P =⨯+⨯=σ+σβ=σ%14.23P =σWith A = 2.8, the optimal position in this portfolio is:5455.054.5358.201.018.8y =⨯⨯=8-11The final positions in each asset are:Bills1 – 0.5455 = 45.45% M0.5455 ⨯ (1 - 0.0931) = 49.47% A0.5455 ⨯ 0.0931 ⨯ 0.3352 = 1.70% C0.5455 ⨯ 0.0931 ⨯ 0.6648 = 3.38%100.00%b. The mean and variance of the optimized complete portfolios in theunconstrained and short-sales constrained cases, and for the passive strategy are:E(R C ) 2C σ Unconstrained0.5685 ⨯ 8.42 = 4.79 0.5685 ⨯ 528.94 = 170.95 Constrained0.5455 ⨯ 8.18 = 4.46 0.54552 ⨯ 535.54 = 159.36 Passive 0.5401 ⨯ 8.00 = 4.32 0.54012 ⨯ 529.00 = 154.31The utility levels below are computed using the formula: 2C C A 005.0)r (E σ-Unconstrained8 + 4.79 – (0.005 ⨯ 2.8 ⨯ 170.95) = 10.40 Constrained8 + 4.46 – (0.005 ⨯ 2.8 ⨯ 159.36) = 10.23 Passive 8 + 4.32 – (0.005 ⨯ 2.8 ⨯ 154.31) = 10.1617. All alphas are reduced to 0.3 times their values in the original case. Therefore, therelative weights of each security in the active portfolio are unchanged, but the alpha of the active portfolio is only 0.3 times its previous value: 0.3 ⨯ -16.90% = -5.07% The investor will take a smaller position in the active portfolio. The optimal risky portfolio has a proportion w * in the active portfolio as follows:01537.023/86.809,21/07.5/)r r (E )e (/w 22Mf M 20-=-=σ-σα= The negative position is justified for the reason given earlier. The adjustment for beta is:0151.0)]01537.0()08.21[(101537.0w )1(1w *w 00-=-⨯-+-=β-+= Since w* is negative, the result is a positive position in stocks with positive alphas and a negative position in stocks with negative alphas. The position in the index portfolio is:1 – (–0.0151) = 1.0151To calculate Sharpe’s measure for the optimal risky portfolio we compute theinformation ratio for the active portfolio and Sharpe’s measure for the marketportfolio. The information ratio of the active portfolio is 0.3 times its previousvalue:A = α /σ(e)= –5.07/147.68 = –0.0343 and A2 =0.00118Hence, the square of Sharpe’s measure of the optimized risky portfolio is: S2 = S2M + A2 = (8/23)2 + 0.00118 = 0.1222S = 0.3495Compare this to the market’s Sharpe measure: S M = 8/23 = 0.3478The difference is: 0.0017Note that the reduction of the forecast alphas by a factor of 0.3 reduced the squared information ratio and the improvement in the squared Sharpe ratio by a factor of:0.32 = 0.0918. The regression results provide quantitative measures of return and risk based onmonthly returns over the five-year period.βfor ABC was 0.60, considerably less than the average stock’s β of 1.0. Thisindicates that, when the S&P 500 rose or fell by 1 percentage point, ABC’s return on average rose or fell by only 0.60 percentage point. Therefore, ABC’s systematic risk (or market risk) was low relative to the typical value for stocks. ABC’s alpha (the intercept of the regression) was –3.2%, indicating that when the market return was 0%, the average return on ABC was –3.2%. ABC’s unsystematic risk (orresidual risk), as measured by σ(e), was 13.02%. For ABC, R2 was 0.35, indicating closeness of fit to the linear regression greater than the value for a typical stock.β for XYZ was s omewhat higher, at 0.97, indicating XYZ’s return pattern was very similar to the β for the market index. Therefore, XYZ stock had average systematic risk for the period examined. Alpha for XYZ was positive and quite large,indicating a return of almost 7.3%, on average, for XYZ independent of marketreturn. Residual risk was 21.45%, half again as much as ABC’s, indicating a wider scatter of observations around the regression line for XYZ. Correspondingly, the fit of the regression model was considerably less than that of ABC, consistent with an R2 of only 0.17.8-12The effects of including one or the other of these stocks in a diversified portfoliomay be quite different. If it can be assumed that both stocks’ betas will remainstable over time, then there is a large difference in systematic risk level. The betas obtained from the two brokerage houses may help the analyst draw inferences forthe future. The three estimates of ABC’s β are similar, regardless of the sampleperiod of the underlying data. The range of these estimates is 0.60 to 0.71, wellbelow the market average βof 1.0. The three estimates of XYZ’s β varysignificantly among the three sources, ranging as high as 1.45 for the weekly dataover the most recent two years. One could infer tha t XYZ’s β for the future mightbe well above 1.0, meaning it might have somewhat greater systematic risk thanwas implied by the monthly regression for the five-year period.These stocks appear to have significantly different systematic risk characteristics. If these stocks are added to a diversified portfolio, XYZ will add more to total volatility.19. 9 = 3 + β (11 - 3) ⇒β = 0.7520. a. Merrill Lynch adjusts beta by taking the sample estimate of beta and averagingit with 1.0, using the weights of 2/3 and 1/3, as follows:adjusted beta = [(2/3) ⨯ 1.24] + [(1/3) ⨯ 1.0] = 1.16b.If you use your current estimate of beta to be βt–1 = 1.24, thenβt = 0.3 + (0.7 ⨯ 1.24) = 1.1688-13。

– βiM = 对宏观因素敏感度 – βiTB = 对国债的因素敏感度 – ei = 公司特有的扰动项
Rit i iM RMt iTB RTBt eit
INVESTMENTS | BODIE, KANE, MARCUS
7.5 套利定价理论
• 当不需要投资就可以赚取无风险利润时， 就存在套利机会。 • 由于没有投资，投资者可以建立大量头寸 ，以获取巨额利润。 • 在一个无风险套利投资组合中，不管其风 险厌恶程度和财富水平如何，投资者都愿 意持有一个无限的头寸。 • 在有效市场中，可以获利的套利机会会很 快消失。
INVESTMENTS | BODIE, KANE, MARCUS
7.5.1套利定价理论和高度分散的投资 组合
• 套利定价理论：从资本市场无套利分析产 生的关于风险—收益关系的理论。 • APT构造一个单因素 Ri i i RM ei • 对一个充分分散的投资组合, ei
– 随着组合中资产数量的增加，ei接近于0。
• 单个证券的风险溢价取决于单个资产风险 iM 2 对市场投资组合风险 M 的贡献程度。
iM i 2 M
• 风险溢价用来补偿系统性风险，所以风险溢价 与β值成正比。
E rM rf 1

E rD rf
D
INVESTMENTS | BODIE, KANE, MARCUS
2 E (rM ) rf A M 2 where M is the variance of the market portolio and β系数成 • 单个证券的风险溢价与市场组合风险溢价及证券的 正比。 A is the average degree of risk aversion across investors

博迪投资学答案chap009-7thed9-2CHAPTER 9: THE CAPITAL ASSET PRICING MODEL1. c.2. d. From CAPM, the fair expected return = 8 + 1.25(15 - 8) = 16.75%Actually expected return = 17%α = 17 - 16.75 = 0.25%3. Since the stock’s beta is equal to 1.2, its expected rate of return is:6 + [1.2 ⨯ (16 – 6)] = 18%011P P P D )r (E -+= 53$P 5050P 618.011=⇒+=-4. The series of $1,000 payments is a perpetuity. If beta is 0.5, the cash flowshould be discounted at the rate:6 + [0.5 ⨯ (16 – 6)] = 11%PV = $1,000/0.11 = $9,090.91If, however, beta is equal to 1, then the investment should yield 16%, and the price paid for the firm should be:PV = $1,000/0.16 = $6,250The difference, $2,840.91, is the amount you will overpay if you erroneouslyassume that beta is 0.5 rather than 1.5. Using the SML: 4 = 6 + β(16 – 6) ⇒ β = –2/10 = –0.26. a.7.E(r P ) = r f + β P [E(r M ) – r f ]18 = 6 + β P (14 – 6) ⇒ β P = 12/8 = 1.59-38.a. False. β = 0 implies E(r) = r f , not zero.b. False. Investors require a risk premium only for bearing systematic(undiversifiable or market) risk. Total volatility includes diversifiablerisk.c. False. Your portfolio should be invested 75% in the market portfolioand 25% in T-bills. Then:βP = (0.75 ⨯ 1) + (0.25 ⨯ 0) = 0.759. Not possible. Portfolio A has a higher beta than Portfolio B, but the expectedreturn for Portfolio A is lower than the expected return for Portfolio B. Thus, these two portfolios cannot exist in equilibrium.10. Possible. If the CAPM is valid, the expected rate of return compensates onlyfor systematic (market) risk, represented by beta, rather than for the standard deviation, which includes nonsystematic risk. Thus, Portfolio A’s lower rate of return can be paired with a higher standard deviation, as long as A’s bet a is less than B’s.11. Not possible. The reward-to-variability ratio for Portfolio A is better than thatof the market. This scenario is impossible according to the CAPM because the CAPM predicts that the market is the most efficient portfolio. Using the numbers supplied:5.0121016S A =-= 33.0241018S M =-= Portfolio A provides a better risk-reward tradeoff than the market portfolio.12. Not possible. Portfolio A clearly dominates the market portfolio. Portfolio Ahas both a lower standard deviation and a higher expected return.13. Not possible. The SML for this scenario is: E(r) = 10 + β(18 – 10)Portfolios with beta equal to 1.5 have an expected return equal to:E(r) = 10 + [1.5 ⨯ (18 – 10)] = 22%The expected return for Portfolio A is 16%; that is, Portfolio A plots belowthe SML ( A = –6%), and hence, is an overpriced portfolio. This is inconsistent with the CAPM.9-414. Not possible. The SML is the same as in Problem 13. Here, Portfolio A’srequired return is: 10 + (0.9 ⨯8) = 17.2%This is greater than 16%. Portfolio A is overpriced with a negative alpha:α A = –1.2%15. Possible. The CML is the same as in Problem 11. Portfolio A plots below theCML, as any asset is expected to. This scenario is not inconsistent with theCAPM.16. If the security’s correlation coefficient with the market portfolio doubles (withall other variables such as variances unchanged), then beta, and therefore the risk premium, will also double. The current risk premium is: 14 – 6 = 8%The new risk premium would be 16%, and the new discount rate for thesecurity would be: 16 + 6 = 22%If the stock pays a constant perpetual dividend, then we know from the original data that the dividend (D) must satisfy the equation for the present value of a perpetuity:Price = Dividend/Discount rate50 = D/0.14 ⇒ D = 50 ⨯ 0.14 = $7.00At the new discount rate of 22%, the stock would be worth: $7/0.22 = $31.82 The increase in stock risk has lowered its value by 36.36%.17. d.18. a. Since the market portfolio, by definition, has a beta of 1, its expected rateof return is 12%.b.β = 0 means no systematic risk. Hence, the stock’s expected rate of return inmarket equilibrium is the risk-free rate, 5%.ing the SML, the fair expected rate of return for a stock with β = –0.5 is:E(r) = 5 + [(–0.5)(12 – 5)] = 1.5%The actually expected rate of return, using the expected price and dividendfor next year is:E(r) = [($41 + $1)/40] – 1 = 0.10 = 10%Because the actually expected return exceeds the fair return, the stock isunderpriced.9-519. a. E(r P) = r f + β P [E(r M ) – r f ] = 5% + 0.8 (15% − 5%) = 13%α = 14% - 13% = 1%You should invest in this fund because alpha is positive.b. The passive portfolio with the same beta as the fund should be invested80% in the market-index portfolio and 20% in the money market account.For this portfolio:E(r P) = (0.8 × 15%) + (0.2 × 5%) = 13%14% − 13% = 1% = α20. d. [You need to know the risk-free rate]21. d. [You need to know the risk-free rate]22. a.Expected Return AlphaStock X 5% + 0.8(14% - 5%) =12.2% 14.0% - 12.2% = 1.8%Stock Y 5% + 1.5(14% - 5%) =18.5%17.0% - 18.5% = -1.5%b.i. Kay should recommend Stock X because of its positive alpha, compared toStock Y, which has a negative alpha. In graphical terms, the expectedreturn/risk profile for Stock X plots above the security market line (SML), while the profile for Stock Y plots below the SML. Also, depending onthe individual risk preferences of Kay’s clients, the lower beta for Stock X may have a beneficial effect on overall portfolio risk.ii. Kay should recommend Stock Y because it has higher forecasted return and lower standard deviation than Stock X. The respective Sharpe ratios for Stocks X and Y and the market index are:Stock X: (14% - 5%)/36% = 0.25Stock Y: (17% - 5%)/25% = 0.48Market index: (14% - 5%)/15% = 0.60The market index has an even more attractive Sharpe ratio than either of the individual stocks, but, given the choice between Stock X and Stock Y, Stock Y is the superior alternative.When a stock is held as a single stock portfolio, standard deviation is therelevant risk measure. For such a portfolio, beta as a risk measure isirrelevant. Although holding a single asset is not a typically recommended investment strategy, some investors may hold what is essentially asingle-asset portfolio when they hold the stock of their employer company.For such investors, the relevance of standard deviation versus beta is an9-6important issue.9-79-823. The appropriate discount rate for the project is:r f + β[E(r M ) – r f ] = 8 + [1.8 ⨯ (16 – 8)] = 22.4% Using this discount rate:∑=+-=101t t 1.224150400NPV = −400 pesos + [150 pesos × Annuity factor (22.4%, 10 years) = 180.92 pesos The internal rate of return (IRR) for the project is 35.73%. Recall from your introductory finance class that NPV is positive if IRR > discount rate (or,equivalently, hurdle rate). The highest value that beta can take before the hurdle rate exceeds the IRR is determined by:35.73 = 8 + β(16 – 8) ⇒ β = 27.73/8 = 3.4724. a. McKay should borrow funds and invest those funds proportionately inMurray’s existing portfolio (i.e., buy more risky assets on margin). Inaddition to increased expected return, the alternative portfolio on thecapital market line will also have increased risk, which is caused by thehigher proportion of risky assets in the total portfolio.b. McKay should substitute low beta stocks for high beta stocks in order toreduce the overall beta of York’s portfolio. By reducing the overallportfolio beta, McKay will reduce the systematic risk of the portfolio, andtherefore reduce its volatility relative to the market. The security marketline (SML) suggests such action (i.e., moving down the SML), even thoughreducing beta may result in a slight loss of portfolio efficiency unless fulldiversification is maintained. York’s primary objective, however, is notto maintain efficiency, but to reduce risk exposure; reducing portfolio betameets that objective. Because York does not want to engage in borrowingor lending, McKay cannot reduce risk by selling equities and using theproceeds to buy risk-free assets (i.e., lending part of the portfolio). 25. d.26. r 1 = 19%; r 2 = 16%; β1 = 1.5; β2 = 1a. To determine which investor was a better selector of individual stocks welook at abnormal return, which is the ex-post alpha; that is, the abnormalreturn is the difference between the actual return and that predicted bythe SML. Without information about the parameters of this equation(risk-free rate and market rate of return) we cannot determine whichinvestor was more accurate.9-9b. If r f = 6% and r M = 14%, then (using the notation alpha for the abnormalreturn):α 1 = 19 – [6 + 1.5(14 – 6)] = 19 – 18 = 1%α 2 = 16 – [6 + 1(14 – 6)] =16 – 14 = 2%Here, the second investor has the larger abnormal return and thusappears to be the superior stock selector. By making better predictions,the second investor appears to have tilted his portfolio towardunderpriced stocks.c. If r f = 3% and r M = 15%, then:α 1 =19 – [3 + 1.5(15 – 3)] = 19 – 21 = –2%α 2 = 16 – [3+ 1(15 – 3)] = 16 – 15 = 1%Here, not only does the second investor appear to be the superior stockselector, but the first investor’s predictions appear valueless (or worse).27. In the zero-beta CAPM the zero-beta portfolio replaces the risk-free rate, andthus:E(r) = 8 + 0.6(17 – 8) = 13.4%28. a. Call the aggressive stock A and the defensive stock D. Beta is thesensitivity of the stock’s return to the market return, i.e., the change in thestock return per unit change in the market return. Therefore, wecompute each stock’s beta by calculating the difference in its return across the two scenarios divided by the difference in the market return:00.2255382A =---=β 30.0255126D =--=βb. With the two scenarios equally likely, the expected return is an average ofthe two possible outcomes:E(r A ) = 0.5 ⨯ (–2 + 38) = 18%E(r D ) = 0.5 ⨯ (6 + 12) = 9%c. The SML is determined by the market expected return of [0.5(25 + 5)] =15%, with a beta of 1, and the T-bill return of 6% with a beta of zero. Seethe following graph.The equation for the security market line is:E(r) = 6 + β(15 – 6)d.Based on its risk, the aggressive stock has a required expected return of:E(r A ) = 6 + 2.0(15 – 6) = 24%The analyst’s forecast of expected return is only 18%. Thus the stock’s alpha is:α A = actually expected return – required return (given risk)= 18% – 24% = –6%Similarly, the required return for the defensive stock is:E(r D) = 6 + 0.3(15 – 6) = 8.7%The analyst’s forecast of expected return for D is 9%, and hence, the stock has a positive alpha:α D = actually expected return – required return (given risk)= 9 – 8.7 = +0.3%The points for each stock plot on the graph as indicated above.e. The hurd le rate is determined by the project beta (0.3), not the firm’s beta.The correct discount rate is 8.7%, the fair rate of return for stock D.9-1029. a. Agree; Regan’s conclusion is correct. By definition, the market portfolio lieson the capital market line (CML). Under the assumptions of capital markettheory, all portfolios on the CML dominate, in a risk-return sense, portfoliosthat lie on the Markowitz efficient frontier because, given that leverage isallowed, the CML creates a portfolio possibility line that is higher than allpoints on the efficient frontier except for the market portfolio, which isRainbow’s portfolio. Because Eagle’s portfolio lies on the Markowitzefficient frontier at a point other than the market portfolio, Rainbow’sportfoli o dominates Eagle’s portfolio.b. Unsystematic risk is the unique risk of individual stocks in a portfolio that isdiversified away by holding a well-diversified portfolio. Total risk iscomposed of systematic (market) risk and unsystematic (firm-specific) risk.Disagree; Wilson’s remark is incorrect. Because both portfolios lie on theMarkowitz efficient frontier, neither Eagle nor Rainbow has any unsystematicrisk. Therefore, unsystematic risk does not explain the different expectedreturns. The determining factor is that Rainbow lies on the (straight) line(the CML) connecting the risk-free asset and the market portfolio (Rainbow),at the point of tangency to the Markowitz efficient frontier having the highestreturn per unit of risk. Wilson’s remar k is also countered by the fact that,since unsystematic risk can be eliminated by diversification, the expectedreturn for bearing unsystematic is zero. This is a result of the fact thatwell-diversified investors bid up the price of every asset to the point whereonly systematic risk earns a positive return (unsystematic risk earns noreturn).30. E(r) = r f+ β × [E(r M) − r f]Fuhrman Labs: E(r) = 5 + 1.5 × [11.5 − 5.0] = 14.75%Garten Testing: E(r) = 5 + 0.8 × [11.5 − 5.0] = 10.20%If the forecast rate of return is less than (greater than) the required rate ofreturn, then the security is overvalued (undervalued).Fuhrman Labs: Forecast return –Required return = 13.25% − 14.75% =−1.50%Garten Testing: Forecast return –Required return = 11.25% − 10.20% =1.05%Therefore, Fuhrman Labs is overvalued and Garten Testing is undervalued.31. Under the CAPM, the only risk that investors are compensated for bearing isthe risk that cannot be diversified away (systematic risk). Because systematicrisk (measured by beta) is equal to 1.0 for both portfolios, an investor wouldexpect the same rate of return from both portfolios A and B. Moreover, sinceboth portfolios are well diversified, it doesn’t matter if the specific risk of the individual securities is high or low. The firm-specific risk has been diversified away for both portfolios.。

投资学第7版TestBank答案完整Multiple Choice Questions1. ___________ a relationship between expected return and risk.A) APT stipulatesB) CAPM stipulatesC) Both CAPM and APT stipulateD) Neither CAPM nor APT stipulateE) No pricing model has foundAnswer: C Difficulty: EasyRationale: Both models attempt to explain asset pricing based on risk/returnrelationships.2. Which pricing model provides no guidance concerning the determination of the riskpremium on factor portfolios?A) The CAPMB) The multifactor APTC) Both the CAPM and the multifactor APTD) Neither the CAPM nor the multifactor APTE) None of the above is a true statement.Answer: B Difficulty: ModerateRationale: The multifactor APT provides no guidance as to the determination of the risk premium on the various factors. The CAPM assumes that the excess market return over the risk-free rate is the market premium in the single factor CAPM.3. An arbitrage opportunity exists if an investor can constructa __________ investmentportfolio that will yield a sure profit.A) positiveB) negativeC) zeroD) all of the aboveE) none of the aboveAnswer: C Difficulty: EasyRationale: If the investor can construct a portfolio without the use of the investor's own funds and the portfolio yields a positive profit, arbitrage opportunities exist.4. The APT was developed in 1976 by ____________.A) LintnerB) Modigliani and MillerC) RossD) SharpeE) none of the aboveAnswer: C Difficulty: EasyRationale: Ross developed this model in 1976.5. A _________ portfolio is a well-diversified portfolio constructed to have a beta of 1 onone of the factors and a beta of 0 on any other factor.A) factorB) marketC) indexD) A and BE) A, B, and CAnswer: A Difficulty: EasyRationale: A factor model portfolio has a beta of 1 one factor, with zero betas on other factors.6. The exploitation of security mispricing in such a way that risk-free economic profitsmay be earned is called ___________.A) arbitrageB) capital asset pricingC) factoringD) fundamental analysisE) none of the aboveAnswer: A Difficulty: EasyRationale: Arbitrage is earning of positive profits with a zero (risk-free) investment.7. In developing the APT, Ross assumed that uncertainty in asset returns was a result ofA) a common macroeconomic factorB) firm-specific factorsC) pricing errorD) neither A nor BE) both A and BAnswer: E Difficulty: ModerateRationale: Total risk (uncertainty) is assumed to be composed of both macroeconomic and firm-specific factors.8. The ____________ provides an unequivocal statement on the expected return-betarelationship for all assets, whereas the _____________ implies that this relationship holds for all but perhaps a small number of securities.A) APT, CAPMB) APT, OPMC) CAPM, APTD) CAPM, OPME) none of the aboveAnswer: C Difficulty: ModerateRationale: The CAPM is an asset-pricing model based on therisk/return relationship of all assets. The APT implies that this relationship holds for all well-diversified portfolios, and for all but perhaps a few individual securities.9. Consider a single factor APT. Portfolio A has a beta of 1.0 and an expected return of16%. Portfolio B has a beta of 0.8 and an expected return of 12%. The risk-free rate of return is 6%. If you wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio __________ and a long position in portfolio _______.A) A, AB) A, BC) B, AD) B, BE) A, the riskless assetAnswer: C Difficulty: ModerateRationale: A: 16% = 1.0F + 6%; F = 10%; B: 12% = 0.8F + 6%:F = 7.5%; thus, short B and take a long position in A.10. Consider the single factor APT. Portfolio A has a beta of 0.2 and an expected return of13%. Portfolio B has a beta of 0.4 and an expected return of 15%. The risk-free rate of return is 10%. If you wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio _________ and a long position in portfolio _________.A) A, AB) A, BC) B, AD) B, BE) none of the aboveAnswer: C Difficulty: ModerateRationale: A: 13% = 10% + 0.2F; F = 15%; B: 15% = 10% + 0.4F; F = 12.5%; therefore, short B and take a long position in A.11. Consider the one-factor APT. The variance of returns on the factor portfolio is 6%. Thebeta of a well-diversified portfolio on the factor is 1.1. The variance of returns on the well-diversified portfolio is approximately __________.A) 3.6%B) 6.0%C) 7.3%D) 10.1%E) none of the aboveAnswer: C Difficulty: ModerateRationale: s2P = (1.1)2(6%) = 7.26%.12. Consider the one-factor APT. The standard deviation of returns on a well-diversifiedportfolio is 18%. The standard deviation on the factor portfolio is 16%. The beta of the well-diversified portfolio is approximately __________.A) 0.80B) 1.13C) 1.25D) 1.56E) none of the aboveAnswer: B Difficulty: ModerateRationale: (18%)2 = (16%)2 b2; b = 1.125.13. Consider the single-factor APT. Stocks A and B have expected returns of 15% and 18%,respectively. The risk-free rate of return is 6%. Stock B has abeta of 1.0. If arbitrage opportunities are ruled out, stock A has a beta of __________.A) 0.67B) 1.00C) 1.30D) 1.69E) none of the aboveAnswer: E Difficulty: ModerateRationale: A: 15% = 6% + bF; B: 8% = 6% + 1.0F; F = 12%; thus, beta of A = 9/12 =0.75.14. Consider the multifactor APT with two factors. Stock A has an expected return of16.4%, a beta of 1.4 on factor 1 and a beta of .8 on factor 2. The risk premium on thefactor 1 portfolio is 3%. The risk-free rate of return is 6%. What is the risk-premium on factor 2 if no arbitrage opportunities exit?A) 2%B) 3%C) 4%D) 7.75%E) none of the aboveAnswer: D Difficulty: DifficultRationale: 16.4% = 1.4(3%) + .8x + 6%; x = 7.75.15. Consider the multifactor model APT with two factors. Portfolio A has a beta of 0.75 onfactor 1 and a beta of 1.25 on factor 2. The risk premiums on the factor 1 and factor 2 portfolios are 1% and 7%, respectively. The risk-free rate of return is 7%. The expected return on portfolioA is __________if no arbitrage opportunities exist.A) 13.5%B) 15.0%C) 16.5%D) 23.0%E) none of the aboveAnswer: C Difficulty: ModerateRationale: 7% + 0.75(1%) + 1.25(7%) = 16.5%.16. Consider the multifactor APT with two factors. The risk premiums on the factor 1 andfactor 2 portfolios are 5% and 6%, respectively. Stock A has a beta of 1.2 on factor 1, and a beta of 0.7 on factor 2. The expected return on stock A is 17%. If no arbitrage opportunities exist, the risk-free rate of return is ___________.A) 6.0%B) 6.5%C) 6.8%D) 7.4%E) none of the aboveAnswer: C Difficulty: ModerateRationale: 17% = x% + 1.2(5%) + 0.7(6%); x = 6.8%.17. Consider a one-factor economy. Portfolio A has a beta of1.0 on the factor and portfolioB has a beta of 2.0 on the factor. The expected returns on portfolios A and B are 11%and 17%, respectively. Assume that the risk-free rate is 6% and that arbitrageopportunities exist. Suppose you invested $100,000 in the risk-free asset, $100,000 in portfolio B, and sold short $200,000 of portfolio A. Your expected profit from this strategy would be______________.A) -$1,000B) $0C) $1,000D) $2,000E) none of the aboveAnswer: C Difficulty: ModerateRationale: $100,000(0.06) = $6,000 (risk-free position); $100,000(0.17) = $17,000(portfolio B); -$200,000(0.11) = -$22,000 (short position, portfolio A); 1,000 profit. 18. Consider the one-factor APT. Assume that two portfolios, A and B, are well diversified.The betas of portfolios A and B are 1.0 and 1.5, respectively. The expected returns on portfolios A and B are 19% and 24%, respectively. Assuming no arbitrageopportunities exist, the risk-free rate of return must be ____________.A) 4.0%B) 9.0%C) 14.0%D) 16.5%E) none of the aboveAnswer: B Difficulty: ModerateRationale: A: 19% = r f + 1(F); B:24% = r f + 1.5(F); 5% = .5(F);F = 10%; 24% = r f +1.5(10); ff = 9%.。

10-1CHAPTER 10: ARBITRAGE PRICING THEORY AND MULTIFACTOR MODELS OF RISK AND RETURN1 a. )e (22M 22σ+σβ=σ88125)208.0(2222A =+⨯=σ 50010)200.1(2222B =+⨯=σ97620)202.1(2222C =+⨯=σb. If there are an infinite number of assets with identical characteristics, then awell-diversified portfolio of each type will have only systematic risk since the non-systematic risk will approach zero with large n. The mean will equal that of the individual (identical) stocks.c.There is no arbitrage opportunity because the well-diversified portfolios allplot on the security market line (SML). Because they are fairly priced, there is no arbitrage.2. The expected return for Portfolio F equals the risk-free rate since its beta equals 0.For Portfolio A, the ratio of risk premium to beta is: (12 - 6)/1.2 = 5For Portfolio E, the ratio is lower at: (8 – 6)/0.6 = 3.33This implies that an arbitrage opportunity exists. For instance, you can create a Portfolio G with beta equal to 0.6 (the same as E’s) by combining Portfolio A and Portfolio F in equal weights. The expected return and beta for Portfolio G are then:E(r G ) = (0.5 ⨯ 12%) + (0.5 ⨯ 6%) = 9%βG = (0.5 ⨯ 1.2) + (0.5 ⨯ 0) = 0.6Comparing Portfolio G to Portfolio E, G has the same beta and higher return. Therefore, an arbitrage opportunity exists by buying Portfolio G and selling an equal amount of Portfolio E. The profit for this arbitrage will be:r G – r E =[9% + (0.6 ⨯ F)] - [8% + (0.6 ⨯ F)] = 1%That is, 1% of the funds (long or short) in each portfolio.3. Substituting the portfolio returns and betas in the expected return-beta relationship,we obtain two equations with two unknowns, the risk-free rate (r f ) and the factorrisk premium (RP):12 = r f + (1.2 ⨯ RP)9 = r f + (0.8 ⨯ RP)Solving these equations, we obtain:r f = 3% and RP = 7.5%4. Equation 10.9 applies here:E(r p ) = r f + βP1 [E(r1 ) - r f ] + βP2 [E(r2 ) – r f ]We need to find the risk premium (RP) for each of the two factors:RP1 = [E(r1 ) - r f ] and RP2 = [E(r2 ) - r f ]In order to do so, we solve the following system of two equations with two unknowns:31 = 6 + (1.5 ⨯ RP1 ) + (2.0 ⨯ RP2 )27 = 6 + (2.2 ⨯ RP1 ) + [(–0.2) ⨯ RP2 ]The solution to this set of equations is:RP1 = 10% and RP2 = 5%Thus, the expected return-beta relationship is:E(r P ) = 6% + (βP1⨯ 10%) + (βP2⨯ 5%)5. a. A long position in a portfolio (P) comprised of Portfolios A and B will offeran expected return-beta tradeoff lying on a straight line between points A andB. Therefore, we can choose weights such that βP = βC but with expectedreturn higher than that of Portfolio C. Hence, combining P with a shortposition in C will create an arbitrage portfolio with zero investment, zero beta,and positive rate of return.b. The argument in part (a) leads to the proposition that the coefficient of β2must be zero in order to preclude arbitrage opportunities.6. The revised estimate of the expected rate of return on the stock would be the oldestimate plus the sum of the products of the unexpected change in each factor times the respective sensitivity coefficient:revised estimate = 12% + [(1 ⨯ 2%) + (0.5 ⨯ 3%)] = 15.5%10-27. a. Shorting an equally-weighted portfolio of the ten negative-alpha stocks andinvesting the proceeds in an equally-weighted portfolio of the ten positive-alpha stocks eliminates the market exposure and creates a zero-investmentportfolio. Denoting the systematic market factor as R M , the expected dollarreturn is (noting that the expectation of non-systematic risk, e, is zero):$1,000,000 ⨯ [0.02 + (1.0 ⨯ R M )] - $1,000,000 ⨯ [(–0.02) + (1.0 ⨯ R M )]= $1,000,000 ⨯ 0.04 = $40,000The sensitivity of the payoff of this portfolio to the market factor is zerobecause the exposures of the positive alpha and negative alpha stocks cancelout. (Notice that the terms involving R M sum to zero.) Thus, the systematiccomponent of tota l risk is also zero. The variance of the analyst’s profit is notzero, however, since this portfolio is not well diversified.For n = 20 stocks (i.e., long 10 stocks and short 10 stocks) the investor willhave a $100,000 position (either long or short) in each stock. Net marketexposure is zero, but firm-specific risk has not been fully diversified. Thevariance of dollar returns from the positions in the 20 stocks is:20 ⨯ [(100,000 ⨯ 0.30)2 ] = 18,000,000,000The standard deviation of dollar returns is $134,164.b. If n = 50 stocks (25 stocks long and 25 stocks short), the investor will have a$40,000 position in each stock, and the variance of dollar returns is:50 ⨯ [(40,000 ⨯ 0.30)2 ] = 7,200,000,000The standard deviation of dollar returns is $84,853.Similarly, if n = 100 stocks (50 stocks long and 50 stocks short), the investorwill have a $20,000 position in each stock, and the variance of dollar returns is: 100 ⨯ [(20,000 ⨯ 0.30)2 ] = 3,600,000,000The standard deviation of dollar returns is $60,000.Notice that, when the number of stocks increases by a factor of 5 (i.e., from 20to 100), standard deviation decreases by a factor of 5= 2.23607 (from$134,164 to $60,000).8. a. This statement is incorrect. The CAPM requires a mean-variance efficientmarket portfolio, but APT does not.b.This statement is incorrect. The CAPM assumes normally distributed securityreturns, but APT does not.c. This statement is correct.10-39. b. Since Portfolio X has β = 1.0, then X is the market portfolio and E(R M) =16%.Using E(R M ) = 16% and r f = 8%, the expected return for portfolio Y is notconsistent.10. a. E(r) = 6 + (1.2 ⨯ 6) + (0.5 ⨯ 8) + (0.3 ⨯ 3) = 18.1%b.Surprises in the macroeconomic factors will result in surprises in the return ofthe stock:Unexpected return from macro factors =[1.2(4 – 5)] + [0.5(6 – 3)] + [0.3(0 – 2)] = –0.3%E(r) =18.1% − 0.3% = 17.8%11. d.12. The APT factors must correlate with major sources of uncertainty, i.e., sources ofuncertainty that are of concern to many investors. Researchers should investigatefactors that correlate with uncertainty in consumption and investment opportunities.GDP, the inflation rate, and interest rates are among the factors that can be expected to determine risk premiums. In particular, industrial production (IP) is a goodindicator of changes in the business cycle. Thus, IP is a candidate for a factor that is highly correlated with uncertainties that have to do with investment andconsumption opportunities in the economy.13. The first two factors seem promising with respect to the likely impact on the firm’scost of capital. Both are macro factors that would elicit hedging demands acrossbroad sectors of investors. The third factor, while important to Pork Products, is apoor choice for a multifactor SML because the price of hogs is of minor importance to most investors and is therefore highly unlikely to be a priced risk factor. Betterchoices would focus on variables that investors in aggregate might find moreimportant to their welfare. Examples include: inflation uncertainty, short-terminterest-rate risk, energy price risk, or exchange rate risk. The important point here is that, in specifying a multifactor SML, we not confuse risk factors that are important toa particular investor with factors that are important to investors in general; only thelatter are likely to command a risk premium in the capital markets.14. c. Investors will take on as large a position as possible only if the mispricingopportunity is an arbitrage. Otherwise, considerations of risk anddiversification will limit the position they attempt to take in the mispricedsecurity.10-415. d.16. d.17. The APT required (i.e., equilibrium) rate of return on the stock based on r f and thefactor betas is:required E(r) = 6 + (1 ⨯ 6) + (0.5 ⨯ 2) + (0.75 ⨯ 4) = 16%According to the equation for the return on the stock, the actually expected return on the stock is 15% (because the expected surprises on all factors are zero bydefinition). Because the actually expected return based on risk is less than theequilibrium return, we conclude that the stock is overpriced.18. Any pattern of returns can be “explained” if we are free to choose an indefinitelylarge number of explanatory factors. If a theory of asset pricing is to have value, it must explain returns using a reasonably limited number of explanatory variables(i.e., systematic factors).19. d.20. c.10-5。

Multiple Choice Questions1. The term structure of interest rates is:A) The relationship between the rates of interest on all securities.B) The relationship between the interest rate on a security and its time to maturity.C) The relationship between the yield on a bond and its default rate.D) All of the above.E) None of the above.Answer: B Difficulty: EasyRationale: The term structure of interest rates is the relationship between two variables, years and yield to maturity (holding all else constant).2. The yield curve shows at any point in time:A) The relationship between the yield on a bond and the duration of the bond.B) The relationship between the coupon rate on a bond and time to maturity of thebond.C) The relationship between yield on a bond and the time to maturity on the bond.D) All of the above.E) None of the above.Answer: C Difficulty: Easy3. An inverted yield curve implies that:A) Long-term interest rates are lower than short-term interest rates.B) Long-term interest rates are higher than short-term interest rates.C) Long-term interest rates are the same as short-term interest rates.D) Intermediate term interest rates are higher than either short- or long-term interestrates.E) none of the above.Answer: A Difficulty: EasyRationale: The inverted, or downward sloping, yield curve is one in which short-term rates are higher than long-term rates. The inverted yield curve has been observedfrequently, although not as frequently as the upward sloping, or normal, yield curve.4. An upward sloping yield curve is a(n) _______ yield curve.A) normal.B) humped.C) inverted.D) flat.E) none of the above.Answer: A Difficulty: EasyRationale: The upward sloping yield curve is referred to as the normal yield curve, probably because, historically, the upward sloping yield curve is the shape that has been observed most frequently.5. According to the expectations hypothesis, a normal yield curve implies thatA) interest rates are expected to remain stable in the future.B) interest rates are expected to decline in the future.C) interest rates are expected to increase in the future.D) interest rates are expected to decline first, then increase.E) interest rates are expected to increase first, then decrease.Answer: C Difficulty: EasyRationale: An upward sloping yield curve is based on the expectation that short-term interest rates will increase.6. Which of the following is not proposed as an explanation for the term structure ofinterest ratesA) The expectations theory.B) The liquidity preference theory.C) The market segmentation theory.D) Modern portfolio theory.E) A, B, and C.Answer: D Difficulty: EasyRationale: A, B, and C are all theories that have been proposed to explain the term structure.7. The expectations theory of the term structure of interest rates states thatA) forward rates are determined by investors' expectations of future interest rates.B) forward rates exceed the expected future interest rates.C) yields on long- and short-maturity bonds are determined by the supply and demandfor the securities.D) all of the above.E) none of the above.Answer: A Difficulty: EasyRationale: The forward rate equals the market consensus expectation of future short interest rates.8. Which of the following theories state that the shape of the yield curve is essentiallydetermined by the supply and demands for long-and short-maturity bondsA) Liquidity preference theory.B) Expectations theory.C) Market segmentation theory.D) All of the above.E) None of the above.Answer: C Difficulty: EasyRationale: Market segmentation theory states that the markets for different maturities are separate markets, and that interest rates at the different maturities are determined by the intersection of the respective supply and demand curves.9. According to the "liquidity preference" theory of the term structure of interest rates, theyield curve usually should be:A) inverted.B) normal.C) upward slopingD) A and B.E) B and C.Answer: E Difficulty: EasyRationale: According to the liquidity preference theory, investors would prefer to be liquid rather than illiquid. In order to accept a more illiquid investment, investors require a liquidity premium and the normal, or upward sloping, yield curve results.Use the following to answer questions 10-13:Suppose that all investors expect that interest rates for the 4 years will be as follows:10. What is the price of 3-year zero coupon bond with a par value of $1,000A) $B) $C) $D) $E) none of the aboveAnswer: B Difficulty: ModerateRationale: $1,000 / = $11. If you have just purchased a 4-year zero coupon bond, what would be the expected rateof return on your investment in the first year if the implied forward rates stay the same (Par value of the bond = $1,000)A) 5%B) 7%C) 9%D) 10%E) none of the aboveAnswer: A Difficulty: ModerateRationale: The forward interest rate given for the first year of the investment is given as 5% (see table above).12. What is the price of a 2-year maturity bond with a 10% coupon rate paid annually (Parvalue = $1,000)A) $1,092B) $1,054C) $1,000D) $1,073E) none of the aboveAnswer: D Difficulty: ModerateRationale: []1/2 - 1 = 6%; FV = 1000, n = 2, PMT = 100, i = 6, PV = $1,13. What is the yield to maturity of a 3-year zero coupon bondA) %B) %C) %D) %E) none of the aboveAnswer: C Difficulty: ModerateRationale: []1/3 - 1 = .Use the following to answer questions 14-16:The following is a list of prices for zero coupon bonds with different maturities and par value of $1,000.14. What is, according to the expectations theory, the expected forward rate in the thirdyearA) %B) %C) %D) %E) none of the aboveAnswer: C Difficulty: ModerateRationale: / - 1 = 9%15. What is the yield to maturity on a 3-year zero coupon bondA) %B) %C) %D) %E) none of the aboveAnswer: C Difficulty: ModerateRationale: (1000 / 1/3 -1 = %16. What is the price of a 4-year maturity bond with a 12% coupon rate paid annually (Parvalue = $1,000)A) $B) $1,C) $1,D) $1,E) none of the aboveAnswer: D Difficulty: DifficultRationale: (1000 / 1/4 -1 = %; FV = 1000, PMT = 120, n = 4, i = , PV = $1,17. The market segmentation theory of the term structure of interest ratesA) theoretically can explain all shapes of yield curves.B) definitely holds in the "real world".C) assumes that markets for different maturities are separate markets.D) A and B.E) A and C.Answer: E Difficulty: EasyRationale: Although this theory is quite tidy theoretically, both investors and borrows will depart from their "preferred maturity habitats" if yields on alternative maturities are attractive enough.18. An upward sloping yield curveA) may be an indication that interest rates are expected to increase.B) may incorporate a liquidity premium.C) may reflect the confounding of the liquidity premium with interest rateexpectations.D) all of the above.E) none of the above.Answer: D Difficulty: EasyRationale: One of the problems of the most commonly used explanation of termstructure, the expectations hypothesis, is that it is difficult to separate out the liquidity premium from interest rate expectations.19. The "break-even" interest rate for year n that equates the return on an n-periodzero-coupon bond to that of an n-1-period zero-coupon bond rolled over into a one-year bond in year n is defined asA) the forward rate.B) the short rate.C) the yield to maturity.D) the discount rate.E) None of the above.Answer: A Difficulty: EasyRationale: The forward rate for year n, fn, is the "break-even" interest rate for year n that equates the return on an n-period zero- coupon bond to that of an n-1-periodzero-coupon bond rolled over into a one-year bond in year n.20. When computing yield to maturity, the implicit reinvestment assumption is that theinterest payments are reinvested at the:A) Coupon rate.B) Current yield.C) Yield to maturity at the time of the investment.D) Prevailing yield to maturity at the time interest payments are received.E) The average yield to maturity throughout the investment period.Answer: C Difficulty: ModerateRationale: In order to earn the yield to maturity quoted at the time of the investment, coupons must be reinvested at that rate.21. Which one of the following statements is trueA) The expectations hypothesis indicates a flat yield curve if anticipated futureshort-term rates exceed the current short-term rate.B) The basic conclusion of the expectations hypothesis is that the long-term rate isequal to the anticipated long-term rate.C) The liquidity preference hypothesis indicates that, all other things being equal,longer maturities will have lower yields.D) The segmentation hypothesis contends that borrows and lenders are constrained toparticular segments of the yield curve.E) None of the above.Answer: D Difficulty: ModerateRationale: A flat yield curve indicates expectations of existing rates. Expectations hypothesis states that the forward rate equals the market consensus of expectations of future short interest rates. The reverse of C is true.22. The concepts of spot and forward rates are most closely associated with which one ofthe following explanations of the term structure of interest rates.A) Segmented Market theoryB) Expectations HypothesisC) Preferred Habitat HypothesisD) Liquidity Premium theoryE) None of the aboveAnswer: B Difficulty: ModerateRationale: Only the expectations hypothesis is based on spot and forward rates. A andC assume separate markets for different maturities; liquidity premium assumes higheryields for longer maturities.Use the following to answer question 23:23. Given the bond described above, if interest were paid semi-annually (rather thanannually), and the bond continued to be priced at $850, the resulting effective annual yield to maturity would be:A) Less than 12%B) More than 12%C) 12%D) Cannot be determinedE) None of the aboveAnswer: B Difficulty: ModerateRationale: FV = 1000, PV = -850, PMT = 50, n = 40, i = (semi-annual); 2 - 1 = %.24. Interest rates might declineA) because real interest rates are expected to decline.B) because the inflation rate is expected to decline.C) because nominal interest rates are expected to increase.D) A and B.E) B and C.Answer: D Difficulty: EasyRationale: The nominal rate is comprised of the real interest rate plus the expectedinflation rate.25. Forward rates ____________ future short rates because ____________.A) are equal to; they are both extracted from yields to maturity.B) are equal to; they are perfect forecasts.C) differ from; they are imperfect forecasts.D) differ from; forward rates are estimated from dealer quotes while future short ratesare extracted from yields to maturity.E) are equal to; although they are estimated from different sources they both are usedby traders to make purchase decisions.Answer: C Difficulty: EasyRationale: Forward rates are the estimates of future short rates extracted from yields to maturity but they are not perfect forecasts because the future cannot be predicted with certainty; therefore they will usually differ.26. The pure yield curve can be estimatedA) by using zero-coupon bonds.B) by using coupon bonds if each coupon is treated as a separate "zero."C) by using corporate bonds with different risk ratings.D) by estimating liquidity premiums for different maturities.E) A and B.Answer: E Difficulty: ModerateRationale: The pure yield curve is calculated using zero coupon bonds, but coupon bonds may be used if each coupon is treated as a separate "zero."27. The on the run yield curve isA) a plot of yield as a function of maturity for zero-coupon bonds.B) a plot of yield as a function of maturity for recently issued coupon bonds trading ator near par.C) a plot of yield as a function of maturity for corporate bonds with different riskratings.D) a plot of liquidity premiums for different maturities.E) A and B.Answer: B Difficulty: Moderate28. The market segmentation and preferred habitat theories of term structureA) are identical.B) vary in that market segmentation is rarely accepted today.C) vary in that market segmentation maintains that borrowers and lenders will notdepart from their preferred maturities and preferred habitat maintains that marketparticipants will depart from preferred maturities if yields on other maturities areattractive enough.D) A and B.E) B and C.Answer: E Difficulty: ModerateRationale: Borrowers and lenders will depart from their preferred maturity habitats if yields are attractive enough; thus, the market segmentation hypothesis is no longerreadily accepted.29. The yield curveA) is a graphical depiction of term structure of interest rates.B) is usually depicted for U. S. Treasuries in order to hold risk constant acrossmaturities and yields.C) is usually depicted for corporate bonds of different ratings.D) A and B.E) A and C.Answer: D Difficulty: EasyRationale: The yield curve (yields vs. maturities, all else equal) is depicted for U. S.Treasuries more frequently than for corporate bonds, as the risk is constant acrossmaturities for Treasuries.Use the following to answer questions 30-32:30. What should the purchase price of a 2-year zero coupon bond be if it is purchased at thebeginning of year 2 and has face value of $1,000A) $B) $C) $D) $E) $Answer: A Difficulty: DifficultRationale: $1,000 / [] = $31. What would the yield to maturity be on a four-year zero coupon bond purchased todayA) %B) %C) %D) %E) none of the above.Answer: C Difficulty: ModerateRationale: [ ]1/4 - 1 = %32. Calculate the price at the beginning of year 1 of a 10% annual coupon bond with facevalue $1,000 and 5 years to maturity.A) $1,105B) $1,132C) $1,179D) $1,150E) $1,119Answer: B Difficulty: DifficultRationale: i = [ ]1/5 - 1 = %; FV = 1000, PMT = 100, n = 5, i = , PV = $1,33. Given the yield on a 3 year zero-coupon bond is % and forward rates of % in year 1and % in year 2, what must be the forward rate in year 3A) %B) %C) %D) %E) none of the above.Answer: B Difficulty: ModerateRationale: f3 = 3 / [ ] - 1 = %34. An inverted yield curve is oneA) with a hump in the middle.B) constructed by using convertible bonds.C) that is relatively flat.D) that plots the inverse relationship between bond prices and bond yields.E) that slopes downward.Answer: E Difficulty: EasyRationale: An inverted yield curve occurs when short-term rates are higher thanlong-term rates.35. Investors can use publicly available financial date to determine which of the followingI)the shape of the yield curveII)future short-term ratesIII)the direction the Dow indexes are headingIV)the actions to be taken by the Federal ReserveA) I and IIB) I and IIIC) I, II, and IIID) I, III, and IVE) I, II, III, and IVAnswer: A Difficulty: ModerateRationale: Only the shape of the yield curve and future inferred rates can be determined.The movement of the Dow Indexes and Federal Reserve policy are influenced by term structure but are determined by many other variables also.36. Which of the following combinations will result in a sharply increasing yield curveA) increasing expected short rates and increasing liquidity premiumsB) decreasing expected short rates and increasing liquidity premiumsC) increasing expected short rates and decreasing liquidity premiumsD) increasing expected short rates and constant liquidity premiumsE) constant expected short rates and increasing liquidity premiumsAnswer: A Difficulty: ModerateRationale: Both of the forces will act to increase the slope of the yield curve.37. The yield curve is a component ofA) the Dow Jones Industrial Average.B) the consumer price index.C) the index of leading economic indicators.D) the producer price index.E) the inflation index.Answer: C Difficulty: EasyRationale: Since the yield curve is often used to forecast the business cycle, it is used as one of the leading economic indicators.38. The most recently issued Treasury securities are calledA) on the run.B) off the run.C) on the market.D) off the market.E) none of the above.Answer: A Difficulty: EasyUse the following to answer questions 39-42:Suppose that all investors expect that interest rates for the 4 years will be as follows:39. What is the price of 3-year zero coupon bond with a par value of $1,000A) $B) $C) $D) $E) none of the aboveAnswer: A Difficulty: ModerateRationale: $1,000 / = $40. If you have just purchased a 4-year zero coupon bond, what would be the expected rateof return on your investment in the first year if the implied forward rates stay the same (Par value of the bond = $1,000)A) 5%B) 3%C) 9%D) 10%E) none of the aboveAnswer: B Difficulty: ModerateRationale: The forward interest rate given for the first year of the investment is given as 3% (see table above).41. What is the price of a 2-year maturity bond with a 5% coupon rate paid annually (Parvalue = $1,000)A) $1,B) $1,C) $1,D) $1,E) none of the aboveAnswer: C Difficulty: ModerateRationale: []1/2 - 1 = %; FV = 1000, n = 2, PMT = 50, i = , PV = $1,42. What is the yield to maturity of a 3-year zero coupon bondA) %B) %C) %D) 4%E) none of the aboveAnswer: D Difficulty: ModerateRationale: []1/3 - 1 = 4%.Use the following to answer questions 43-46:The following is a list of prices for zero coupon bonds with different maturities and par value of $1,000.43. What is, according to the expectations theory, the expected forward rate in the thirdyearA)B) %C) %D) %E) none of the aboveAnswer: B Difficulty: ModerateRationale: / - 1 = %44. What is the yield to maturity on a 3-year zero coupon bondA) %B) %C) %D) %E) none of the aboveAnswer: D Difficulty: ModerateRationale: (1000 / 1/3 -1 = %45. What is the price of a 4-year maturity bond with a 10% coupon rate paid annually (Parvalue = $1,000)A) $B) $1,C) $1,D) $1,E) none of the aboveAnswer: C Difficulty: DifficultRationale: (1000 / 1/4 -1 = %; FV = 1000, PMT = 100, n = 4, i = , PV = $1,46. You have purchased a 4-year maturity bond with a 9% coupon rate paid annually. Thebond has a par value of $1,000. What would the price of the bond be one year from now if the implied forward rates stay the sameA) $B) $1,C) $1,D) $1,E) none of the aboveAnswer: A Difficulty: DifficultRationale: / ]1/3 - = %; FV = 1000, PMT = 90, n = 3, i = , PV = $Use the following to answer question 47:47. Given the bond described above, if interest were paid semi-annually (rather thanannually), and the bond continued to be priced at $, the resulting effective annual yield to maturity would be:A) Less than 10%B) More than 10%C) 10%D) Cannot be determinedE) None of the aboveAnswer: B Difficulty: ModerateRationale: FV = 1000, PV = , PMT = 45, n = 36, i = (semi-annual); 2 - 1 = %.Use the following to answer questions 48-50:48. What should the purchase price of a 2-year zero coupon bond be if it is purchased at thebeginning of year 2 and has face value of $1,000A) $B) $C) $D) $E) $Answer: D Difficulty: DifficultRationale: $1,000 / [] = $49. What would the yield to maturity be on a four-year zero coupon bond purchased todayA) %B) %C) %D) %E) none of the above.Answer: A Difficulty: ModerateRationale: [ ]1/4 - 1 = %50. Calculate the price at the beginning of year 1 of an 8% annual coupon bond with facevalue $1,000 and 5 years to maturity.A) $1,B) $1,C) $1,D) $1,E) $Answer: C Difficulty: DifficultRationale: i = [ ]1/5 - 1 = 6%; FV = 1000, PMT = 80, n = 5, i = 6, PV = $51. Given the yield on a 3 year zero-coupon bond is 7% and forward rates of 6% in year 1and % in year 2, what must be the forward rate in year 3A) %B) %C) %D) %E) none of the above.Answer: C Difficulty: ModerateRationale: f3 = 3 / [ ] - 1 = %Use the following to answer questions 52-61:52. What should the purchase price of a 1-year zero coupon bond be if it is purchased todayand has face value of $1,000A) $B) $C) $D) $E) $Answer: D Difficulty: DifficultRationale: $1,000 / = $53. What should the purchase price of a 2-year zero coupon bond be if it is purchased todayand has face value of $1,000A) $B) $C) $D) $E) $Answer: B Difficulty: DifficultRationale: $1,000 / [] = $54. What should the purchase price of a 3-year zero coupon bond be if it is purchased todayand has face value of $1,000A) $B) $C) $D) $E) $Answer: E Difficulty: DifficultRationale: $1,000 / [] = $55. What should the purchase price of a 4-year zero coupon bond be if it is purchased todayand has face value of $1,000A) $B) $C) $D) $E) $Answer: B Difficulty: DifficultRationale: $1,000 / [] = $56. What should the purchase price of a 5-year zero coupon bond be if it is purchased todayand has face value of $1,000A) $B) $C) $D) $E) $Answer: A Difficulty: DifficultRationale: $1,000 / [] = $57. What is the yield to maturity of a 1-year bondA) %B) %C) %D) %E) %Answer: A Difficulty: ModerateRationale: % (given in table)58. What is the yield to maturity of a 5-year bondA) %B) %C) %D) %E) %Answer: C Difficulty: ModerateRationale: []1/5 -1 = %59. What is the yield to maturity of a 4-year bondA) %B) %C) %D) %E) %Answer: C Difficulty: ModerateRationale: []1/4 -1 = %60. What is the yield to maturity of a 3-year bondA) %B) %C) %D) %E) %Answer: B Difficulty: ModerateRationale: []1/3 -1 = %61. What is the yield to maturity of a 2-year bondA) %B) %C) %D) %E) %Answer: D Difficulty: ModerateRationale: []1/2 -1 = %Essay Questions62. Discuss the three theories of the term structure of interest rates. Include in yourdiscussion the differences in the theories, and the advantages/disadvantages of each.Difficulty: ModerateAnswer:The expectations hypothesis is the most commonly accepted theory of term structure.The theory states that the forward rate equals the market consensus expectation of future short-term rates. Thus, yield to maturity is determined solely by current and expected future one-period interest rates. An upward sloping, or normal, yield curve wouldindicate that investors anticipate an increase in interest rates. An inverted, or downward sloping, yield curve would indicate an expectation of decreased interest rates. Ahorizontal yield curve would indicate an expectation of no interest rate changes.The liquidity preference theory of term structure maintains that short-term investorsdominate the market; thus, in general, the forward rate exceeds the expected short-term rate. In other words, investors prefer to be liquid to illiquid, all else equal, and willdemand a liquidity premium in order to go long term. Thus, liquidity preference readily explains the upward sloping, or normal, yield curve. However, liquidity preferencedoes not readily explain other yield curve shapes.Market segmentation and preferred habitat theories indicate that the markets fordifferent maturity debt instruments are segmented. Market segmentation maintains that the rates for the different maturities are determined by the intersection of the supply and demand curves for the different maturity instruments. Market segmentation readilyexplains all shapes of yield curves. However, market segmentation is not observed in the real world. Investors and issuers will leave their preferred maturity habitats if yields are attractive enough on other maturities.The purpose of this question is to ascertain that students understand the variousexplanations (and deficiencies of these explanations) of term structure.63. Term structure of interest rates is the relationship between what variables What isassumed about other variables How is term structure of interest rates depictedgraphicallyDifficulty: ModerateAnswer:Term structure of interest rates is the relationship between yield to maturity and term to maturity, all else equal. The "all else equal" refers to risk class. Term structure ofinterest rates is depicted graphically by the yield curve, which is usually a graph of .governments of different yields and different terms to maturity. The use of .governments allows one to examine the relationship between yield and maturity,holding risk constant. The yield curve depicts this relationship at one point in time only.This question is designed to ascertain that students understand the relationshipsinvolved in term structure, the restrictions on the relationships, and how therelationships are depicted graphically.64. Although the expectations of increases in future interest rates can result in an upwardsloping yield curve; an upward sloping yield curve does not in and of itself imply the expectations of higher future interest rates. Explain.Difficulty: ModerateAnswer:The effects of possible liquidity premiums confound any simple attempt to extractexpectation from the term structure. That is, the upward sloping yield curve may be due to expectations of interest rate increases, or due to the requirement of a liquiditypremium, or both. The liquidity premium could more than offset expectations ofdecreased interest rates, and an upward sloping yield would result.The purpose of this question is to assure that the student understands the confounding of the liquidity premium with the expectations hypothesis, and that the interpretations of term structure are not clear-cut.65. Explain what the following terms mean: spot rate, short rate, and forward rate. Whichof these is (are) observable todayDifficulty: ModerateAnswer:From the answer to Concept Check 2, on page 516: “The n-period spot rate is the yield to maturity on a zero-coupon bond with a maturity of n periods. The short rate forperiod n is the one-period interest rate that will prevail in period n. The forward rate for period n is the short rate that would satisfy a “break-even condition” equating the total returns on two n-period investment strategies. The first strategy is an investment in an n-period zero-coupon bond. The second is an investment in an n-1 period zero-coupon bond “rolled over” into an investment in a one-period zero. Spot rates and forward rates are observable today, but because interest rates evolve with uncertainty, future short rates are not. In the special case in which there is no uncertainty in future interest rates, the forward rate calculated from the yield curve would equal the short rate that will prevail in that period.”This question checks whether the student understands the difference between each kind of rate.66. Answer the following questions that relate to bonds.• A 2-year zero-coupon bond is selling for $. What is the yield to maturity of this bond•The price of a 1-year zero coupon bond is $. What is the yield to maturity of this bond•Calculate the forward rate for the second year.•How can you construct a synthetic one-year forward loan (you are agreeing now to loan in one year) State the strategy and show the corresponding cash flows.Assume that you can purchase and sell fractional portions of bonds. Show allcalculations and discuss the meaning of the transactions.Difficulty: Difficult。

1. An internally efficient market is one where stocks trade at low prices.(1.0分)A.TureB.False2. As the level of risk decreases an investor can expect the expected return to rise.(1.0分)A.TureB.False3. People invest with one or more of the following three basic needs in mind: income, capital preservation, capital appreciation.(1.0分)A.TureB.False4. A manager with a passive asset allocation strategy will try to increase allocation of assets that he believes will outperform other classes in the next period(1.0分)A.TureB.False5. Risk is the uncertainty that an investment will earn its expected rate of return.A.TureB.False6. The three components of the required rate of return are the nominal interest rate, an inflation premium, and a risk premium(1.0分)A.TureB.False7. The rate of exchange between future consumption and current consumption is called the real risk-free rate of interest.A.TureB.False8. A dollar received today is worth less than the same dollar received in the future.A.TureB.False9. An investment is the current commitment of dollars over time to derive future payments to compensate the investor for the time funds are committed, the expected rate of inflation and the uncertainty of future payments.(1.0分)A.TureB.False10. The rate of exchange between certain future dollars and certain current dollars is known as the pure rate of interest.(1.0分)A.TureB.False11. A portfolio manager with an active asset allocation decision philosophy will manage a portfolio by(1.0分)A.a) Tracking a well known market indexB.b) Stock picking using a top-down or bottom-up approachC.c) Using market timingD.d) Maintaining predetermined allocation with periodic rebalancingE.e) None of the above12. An indirect investment occurs when an investor(1.0分)A.a) Buys shares of stocks or bonds.B.b) Buys shares of stocks or options and futures.C.c) Buys shares of stocks, bonds or mutual fundsD.d) Deposits funds in a bank or buys mutual fundsE.e) Deposits funds in a bank or buys derivatives.13. A direct investment occurs when an investor(1.0分)A.a) Buys shares of stocks or bonds.B.b) Buys shares of stocks or options and futures.C.c) Buys shares of stocks, bonds or mutual fundsD.d) Deposits funds in a bank or buys mutual fundsE.e) Deposits funds in a bank or buys derivatives.14. An investor can invest in financial assets by investing:(1.0分)A.a) In cash, stocks and bondsB.b) Indirectly, in real assets and financial assets.C.c) In options, futures and through derivatives.D.d) Directly, indirectly and through derivatives.E.e) In stocks, directly and through derivatives.15. An internally efficient market is one where(1.0分)A.a) Transaction costs of trading are low.B.b) Stocks of highly efficient companies trade.C.c) New information is quickly reflected into assets prices.D.d) There is no overreaction to news.E.e) Stock prices are low.16. An investor should diversify investment holdings across(1.0分)A.a) Different asset classes.B.b) Different industries.C.c) Different countries.D.d) All of the above.E.e) None of the above.17. An externally efficient market is one where(1.0分)A.a) Transaction costs of trading are low.B.a) Stocks of highly efficient companies trade.C.c) New information is quickly reflected into assets prices.D.d) There is no overreaction to news.E.e) None of the above.18. The nominal risk-free rate of interest is a function of(1.0分)A.a) The real risk-free rate plus the investment's variance.B.b) The prime rate and the rate of inflation.C.c) The T-bill rate plus the inflation rate.D.d) The T-bill rate minus the rate of inflation.E.e) The real risk-free rate and the expected rate of inflation.19. The basic trade-offs in the investment process are(1.0分)A.a) between the anticipated rate of return for a given investment instrumentand its degree of risk.B.b) between understanding the nature of a particular investment and having the opportunity to purchase it.C.c) between high returns available on single instruments and the diversifiction of the instruments into a portfolioD.d)between the desired level of instrument and possessing the resource necessary to carry it out.20. The statement –‘risk drives expected returns’ refers to the notion that(1.0分)A.a) an investor will require a higher rate of return the higher the perceivedriskiness of an asset.B.b) an investor will require a lower rate of return the higher the perceived riskiness of an asset.C.c) markets over-react to news.D.d) markets under-react to news.E.e) none of the above.21. The following is not a reason for investing(1.0分)A.a) to provide for retirement.B.b) to fund higher levels of current consumption.C.c) to fund higher levels of future consumption.D.d) to fund children’s education needs.E.e) to save up for a down payment on a house.22. An investment is the current commitment of resources for a period of time in the expectation that an investor will receive in the future a compensation for(1.0分)A.a) the time for which the resources are committedB.b) the expected rate of inflationC.c) the time for which the resources are committed and the expected rate of inflationD.d) the expected rate of inflation, the time for which the resources are committed, and the uncertainty of future payments.E.e) a) and b)23. A manager with an active security selection philosophy will try to identify securities that will do well over the coming period.(1.0分)A.TureB.False24. Participants in primary capital markets that gather funds and channel them to borrowers are called financial intermediaries.(1.0分)A.TureB.False25. The required rate of return is the minimum rate of return that will induce an investor to invest.(1.0分)A.TureB.False26. If you have calculated the rate of return on your investment to be 16.5%, and you assume that the rate of inflation during the year was 4%, what is the "real" rate of return on your investment?(1.0分)A.a)0.12%B.b)0.21%C.c)6.60%D.d)12.02E.e)12.50%27. Assume that during the past year the consumer price index increased by 3 percent and the securities listed below returned the following real rates of return.U.S. Government T-bills 3.50%U.S. Long-term bonds 3.75%If next year the nominal rates all rise by 20 percent while inflation climbs from 3 percent to 5 percent, what will be the real rate of return on each security?(1.0分)A.2.79% and 4.08%B.2.79% and 3.08%C.2.79% and 6.08%D.3.79% and 4.08%E.3.79% and 5.08%28. Assume that during the past year the consumer price index increased by 3 percent and the securities listed below returned the following real rates of return.U.S. Government T-bills 3.50%U.S. Long-term bonds 3.75%What are the nominal rates of return for each of these securities?(1.0分)A.6.81% and 6.86%B.6.81% and 8.86%C.6.61% and 6.86%D.6.61% and 9.86%E.6.61% and 8.86%29. The two basic types of investments are(1.0分)A.a)Stocks and bondsB.b)Real assets and financial assetsC.c)Options and futuresD.d)Direct and indirectE.e）Cash and mutual funds30.1.Consider an investment portfolio consisting of four asset classes. The allocations and returns for each asset class are as followsAsset Class Allocation Percentage Annual Return1 10% -10%2 25% 15%3 35% 10%4 30% 5%The annual portfolio return is(1.0分)A.a) 15.5%B.b)10.0%C.c)5.0%D.d)7.75%E.e) None of the above31.Consider an investment portfolio consisting of three asset classes. The allocations and returns for each asset class are as followsAsset Class Allocation Percentage Annual Return1 10% -10%2 35% 35%3 55% -5%The annual portfolio return isA.a) 15.5%B.b) -10.0%C.c) 8.5%D.d) -7.75%E.e) 7.75%32. A portfolio manager with an active security selection decision philosophy will manage a portfolio by(1.0分)A.a) Tracking a well known market indexB.b) Stock picking using a top-down or bottom-up approachC.c) Using market timingD.d) Maintaining predetermined allocation with periodic rebalancingE.e) None of the above33.Consider the following information. The average annual return on a tax-deferredaccount over a 10-year period is 9%. The average annual return on a taxable accountover the same 10-year period is 13%. The tax rate is 35%, and the amount invested atthe beginning of the 10-year period is $2500.The value of the taxable investment, assuming all savings are removed at the end of10 years is(1.0分)A.a) $8663.71B.b) $6943.42C.c) $3846.97D.d) $5918.41E.e) $5626.4634.Consider the following information. The average annual return on a tax-deferredaccount over a 10-year period is 9%. The average annual return on a taxable accountover the same 10-year period is 13%. The tax rate is 35%, and the amount invested atthe beginning of the 10-year period is $2500.The after tax value of the tax deferred investment, assuming all savings are removedat the end of 10 years is(1.0分)A.a) $4987.26B.b) $5918.41C.c) $3846.97D.d) $2943.42E.e) None of the above35.Consider the following information. The average annual return on a tax-deferred account over a 10-year period is 9%. The average annual return on a taxable account over the same 10-year period is 13%. The tax rate is 35%, and the amount invested at the beginning of the 10-year period is $2500.The before tax value of the tax deferred investment, assuming all savings are removed at the end of 10 years is(1.0分)A.a) $4414.17B.b) $5918.41C.c) $2943.42D.d) $8663.71E.e) $4987.2636. Assume that nominal risk free interest rate is 6%, the expected rate of inflation is 2%,the risk premium is 3% and the required rate of return is 9.18%. What would be the value at the end of 25 years of $100 invested today at the required rate of return?A.a) $898.62B.b) $343.51C.c) $1474.28D.d) $704.13E.e) $91837. If the real interest rate is 3% per year, the expected rate of inflation is 4.5%, and the risk premium is 5%, the required rate of return is(1.0分)A.a) 11.92%B.b) 1.1192%C.c) 0.1192%D.d)45%E.e) none of the above38. If the real interest rate is 3% per year, and the expected rate of inflation over the next year is 5% ,the amount an investor need to have one year from now to purchase the equivalent of $100 of goods today is (1.0分)A.a) $103B.b) $108.15C.c) $92.46D.d) $105E.e) $11539. A portfolio manager with a passive security selection decision philosophy will manage a portfolio by(1.0分)A.a) Tracking a well known market indexB.b) Stock picking using a top-down or bottom-up approachC.c) Using market timingD.d) Maintaining predetermined allocation with periodic rebalancingE.e) None of the above40. A portfolio manager with a passive asset allocation decision philosophy will manage a portfolio by(1.0分)A.a) Tracking a well known market indexB.b) Stock picking using a top-down or bottom-up approachC.c) Using market timingD.d) Maintaining predetermined allocation with periodic rebalancingE.e) None of the above。

Multiple Choice Questions1. A purchase of a new issue of stock takes placeA) in the secondary market.B) in the primary market.C) usually with the assistance of an investment banker.D) A and B.E) B and C.Answer: E Difficulty: EasyRationale: Funds from the sale of new issues flow to the issuing corporation, making this aprimary market transaction. Investment bankers usually assist by pricing the issue and finding buyers.2. The following statements regarding the specialist are true:A) Specialists maintain a book listing outstanding unexecuted limit orders.B) Specialists earn income from commissions and spreads in stock prices.C) Specialists stand ready to trade at quoted bid and ask prices.D) Specialists cannot trade in their own accounts.E) A, B, and C are all true.Answer: E Difficulty: ModerateRationale: The specialists' functions are all of the items listed in A, B, and C. In addition,specialists trade in their own accounts.3. Investment bankersA) act as intermediaries between issuers of stocks and investors.B) act as advisors to companies in helping them analyze their financial needs and find buyersfor newly issued securities.C) accept deposits from savers and lend them out to companies.D) A and B.E) A, B, and C.Answer: D Difficulty: ModerateRationale: The role of the investment banker is to assist the firm in issuing new securities, both in advisory and marketing capacities. The investment banker does not have a role comparable to a commercial bank, as indicated in C.4. In a "firm commitment"A) the investment banker buys the stock from the company and resells the issue to the public.B) the investment banker agrees to help the firm sell the stock at a favorable price.C) the investment banker finds the best marketing arrangement for the investment bankingfirm.D) B and C.E) A and B.Answer: A Difficulty: Moderate5. The secondary market consists ofA) transactions on the AMEX.B) transactions in the OTC market.C) transactions through the investment banker.D) A and B.E) A, B, and C.Answer: D Difficulty: ModerateRationale: The secondary market consists of transactions on the organized exchanges and in the OTC market. The investment banker is involved in the placement of new issues in the primary market.6. The use of the Internet to trade and underwrite securitiesA) is illegal under SEC regulations.B) is regulated by the New York Stock Exchange.C) decreases underwriting costs for a new security issue.D) increases underwriting costs for a new security issue.E) is regulated by the National Association of Securities Dealers.Answer: C Difficulty: ModerateRationale: The SEC permits trading and underwriting of securities over the Internet, but has required firms participating in this activity to take steps to safeguard investment funds. This form of underwriting is expected to grow quickly due to its lower cost.7. Initial margin requirements are determined byA) the Securities and Exchange Commission.B) the Federal Reserve System.C) the New York Stock Exchange.D) B and C.E) A and BAnswer: B Difficulty: ModerateRationale: The Board of Governors of the Federal Reserve System determines initial margin requirements. The New York Stock Exchange determines maintenance margin requirements on NYSE-listed stocks; however, brokers usually set maintenance margin requirements above those established by the NYSE.8. You purchased XYZ stock at $50 per share. The stock is currently selling at $65. Your gainsmay be protected by placing a __________A) stop-buy orderB) limit-buy orderC) market orderD) limit-sell orderE) none of the above.Answer: D Difficulty: ModerateRationale: With a limit-sell order, your stock will be sold only at a specified price, or better.Thus, such an order would protect your gains. None of the other orders are applicable to this situation.9. You sold ABC stock short at $80 per share. Your losses could be minimized by placing a__________:A) limit-sell orderB) limit-buy orderC) stop-buy orderD) day-orderE) none of the above.Answer: C Difficulty: ModerateRationale: With a stop-buy order, the stock would be purchased if the price increased to a specified level, thus limiting your loss. None of the other orders are applicable to this situation.10. Which one of the following statements regarding orders is false?A) A market order is simply an order to buy or sell a stock immediately at the prevailing marketprice.B) A limit sell order is where investors specify prices at which they are willing to sell asecurity.C) If stock ABC is selling at $50, a limit-buy order may instruct the broker to buy the stock ifand when the share price falls below $45.D) A day order expires at the close of the trading day.E) None of the above.Answer: E Difficulty: ModerateRationale: All of the order descriptions above are correct.11. Restrictions on trading involving insider information apply to the following exceptA) corporate officers and directors.B) relatives of corporate directors and officers.C) major stockholders.D) All of the above are subject to insider trading restrictions.E) None of the above is subject to insider trading restrictions.Answer: D Difficulty: ModerateRationale: A, B, and C are corporate insiders and are subject to restrictions on trading on inside information. Further, the Supreme Court held that traders may not trade on nonpublicinformation even if they are not insiders.12. The cost of buying and selling a stock consists of __________.A) broker's commissionsB) dealer's bid-asked spreadC) a price concession an investor may be forced to make.D) A and B.E) A, B, and C.Answer: E Difficulty: ModerateRationale: All of the above are possible costs of buying and selling a stock.13. Assume you purchased 200 shares of XYZ common stock on margin at $70 per share from yourbroker. If the initial margin is 55%, how much did you borrow from the broker?A) $6,000B) $4,000C) $7,700D) $7,000E) $6,300Answer: E Difficulty: ModerateRationale: 200 shares * $70/share * (1-0.55) = $14,000 * (0.45) = $6,300.14. You sold short 200 shares of common stock at $60 per share. The initial margin is 60%. Yourinitial investment wasA) $4,800.B) $12,000.C) $5,600.D) $7,200.E) none of the above.Answer: D Difficulty: ModerateRationale: 200 shares * $60/share * 0.60 = $12,000 * 0.60 = $7,20015. You purchased 100 shares of ABC common stock on margin at $70 per share. Assume theinitial margin is 50% and the maintenance margin is 30%. Below what stock price level would you get a margin call? Assume the stock pays no dividend; ignore interest on margin.A) $21B) $50C) $49D) $80E) none of the aboveAnswer: B Difficulty: DifficultRationale: 100 shares * $70 * .5 = $7,000 * 0.5 = $3,500 (loan amount); 0.30 = (100P -$3,500)/100P; 30P = 100P - $3,500; -70P = -$3,500; P = $50.16. You purchased 100 shares of common stock on margin at $45 per share. Assume the initialmargin is 50% and the stock pays no dividend. What would the maintenance margin be if a margin call is made at a stock price of $30? Ignore interest on margin.A) 0.33B) 0.55C) 0.43D) 0.23E) 0.25Answer: E Difficulty: DifficultRationale: 100 shares * $45/share * 0.5 = $4,500 * 0.5 = $2,250 (loan amount); X = [100($30) - $2,250]/100($30); X = 0.25.17. You purchased 300 shares of common stock on margin for $60 per share. The initial margin is60% and the stock pays no dividend. What would your rate of return be if you sell the stock at $45 per share? Ignore interest on margin.A) 25%B) -33%C) 44%D) -42%E) –54%Answer: D Difficulty: DifficultRationale: 300($60)(0.60) = $10,800 investment; 300($60) = $18,000 X (0.40) = $7,200 loan;Proceeds after selling stock and repaying loan: $13,500 - $7,200 = $6,300; Return = ($6,300 - $10,800)/$10,800 = - 41.67%.18. Assume you sell short 100 shares of common stock at $45 per share, with initial margin at 50%.What would be your rate of return if you repurchase the stock at $40/share? The stock paid no dividends during the period, and you did not remove any money from the account beforemaking the offsetting transaction.A) 20%B) 25%C) 22%D) 77%E) none of the aboveAnswer: C Difficulty: ModerateRationale: Profit on stock = ($45 - $40) * 100 = $500, $500/$2,250 (initial investment) =22.22%.19. You sold short 300 shares of common stock at $55 per share. The initial margin is 60%. Atwhat stock price would you receive a margin call if the maintenance margin is 35%?A) $51B) $65C) $35D) $40E) none of the aboveAnswer: B Difficulty: DifficultRationale: Equity = 300($55) * 1.6 = $26,400; 0.35 = ($26,400 - 300P)/300P; 105P = 26,400 - 300P; 405P = 26,400; P = $65.1820. Assume you sold short 100 shares of common stock at $50 per share. The initial margin is 60%.What would be the maintenance margin if a margin call is made at a stock price of $60?A) 40%B) 33%C) 35%D) 25%E) none of the aboveAnswer: B Difficulty: DifficultRationale: $5,000 X 1.6 = $8,000; [$8,000 - 100($60)]/100($60) = 33%.21. Specialists on stock exchanges perform the following functionsA) Act as dealers in their own accounts.B) Analyze the securities in which they specialize.C) Provide liquidity to the market.D) A and B.E) A and C.Answer: E Difficulty: ModerateRationale: Specialists are both brokers and dealers and provide liquidity to the market; they are not analysts.22. Shares for short transactionsA) are usually borrowed from other brokers.B) are typically shares held by the short seller's broker in street name.C) are borrowed from commercial banks.D) B and C.E) none of the above.Answer: B Difficulty: ModerateRationale: Typically, the only source of shares for short transactions is those held by the short seller's broker in street name; often these are margined shares.23. Which of the following orders is most useful to short sellers who want to limit their potentiallosses?A) Limit orderB) Discretionary orderC) Limit-loss orderD) Stop-buy orderE) None of the aboveAnswer: D Difficulty: ModerateRationale: By issuing a stop-buy order, the short seller can limit potential losses by assuring that the stock will be purchased (and the short position closed) if the price increases to a certain level.24. Shelf registrationA) is a way of placing issues in the primary market.B) allows firms to register securities for sale over a two-year period.C) increases transaction costs to the issuing firm.D) A and B.E) A and C.Answer: D Difficulty: EasyRationale: Shelf registration lowers transactions costs to the firm as the firm may register issues for a longer period than in the past, and thus requires the services of the investment banker less frequently.25. NASDAQ subscriber levelsA) permit those with the highest level, 3, to "make a market" in the security.B) permit those with a level 2 subscription to receive all bid and ask quotes, but not to entertheir own quotes.C) permit level 1 subscribers to receive general information about prices.D) include all OTC stocks.E) A, B, and C.Answer: E Difficulty: EasyRationale: NASDAQ links dealers in a loosely organized network with different levels of access to meet different needs.26. You want to buy 100 shares of Hotstock Inc. at the best possible price as quickly as possible.You would most likely place aA) stop-loss orderB) stop-buy orderC) market orderD) limit-sell orderE) limit-buy orderAnswer: C Difficulty: EasyRationale: A market order is for immediate execution at the best possible price.27. You want to purchase XYZ stock at $60 from your broker using as little of your own money aspossible. If initial margin is 50% and you have $3000 to invest, how many shares can you buy?A) 100 sharesB) 200 sharesC) 50 sharesD) 500 sharesE) 25 sharesAnswer: A Difficulty: ModerateRationale: .5 = [(Q * $60)-$3,000] / (Q * $60); $30Q = $60Q-$3,000; $30Q = $3,000; Q=100.28. A sale by IBM of new stock to the public would be a(n)A) short sale.B) seasoned new issue offering.C) private placement.D) secondary market transaction.E) initial public offering.Answer: B Difficulty: EasyRationale: When a firm whose stock already trades in the secondary market issues new shares to the public this is referred to as a seasoned new issue.29. The finalized registration statement for new securities approved by the SEC is calledA) a red herringB) the preliminary statementC) the prospectusD) a best-efforts agreementE) a firm commitmentAnswer: C Difficulty: ModerateRationale: The prospectus is the finalized registration statement approved by the SEC.30. The minimum market value required for an initial listing on the New York Stock Exchange isA) $2,000,000B) $2,500,000C) $1,100,000D) $60,000,000E) 100,000,000Answer: E Difficulty: ModerateRationale: See Table 3.3.31. In 2005, the price of a seat on the NYSE reached a high ofA) $1,000,000B) $4,000,000C) $1,750,000D) $2,225,000E) $3,000,000Answer: B Difficulty: ModerateRationale: See Table 3.2.32. The floor broker is best described asA) an independent member of the exchange who owns a seat and handles overload work forcommission brokers.B) someone who makes a market in one or more securities.C) a representative of a brokerage firm who is on the floor of the exchange to execute trade.D) a frequent trader who performs no public function but executes trades for himself.E) any counter party to a trade executed on the floor of the exchange.Answer: A Difficulty: EasyRationale: The floor broker is an independent member of the exchange who handles work for commission brokers when they have too many orders to handle.33. You sell short 100 shares of Loser Co. at a market price of $45 per share. Your maximumpossible loss isA) $4500B) unlimitedC) zeroD) $9000E) cannot tell from the information givenAnswer: B Difficulty: ModerateRationale: A short seller loses money when the stock price rises. Since there is no upper limit on the stock price, the maximum theoretical loss is unlimited.34. You buy 300 shares of Qualitycorp for $30 per share and deposit initial margin of 50%. Thenext day Qualitycorp's price drops to $25 per share. What is your actual margin?A) 50%B) 40%C) 33%D) 60%E) 25%Answer: B Difficulty: ModerateRationale: AM = [300 ($25) - .5 (300) ($30) ] / [300 ($25)] = .4035. When a firm markets new securities, a preliminary registration statement must be filed withA) the exchange on which the security will be listed.B) the Securities and Exchange Commission.C) the Federal Reserve.D) all other companies in the same line of business.E) the Federal Deposit Insurance Corporation.Answer: B Difficulty: EasyRationale: The SEC requires the registration statement and must approve it before the issue can take place.36. In a typical underwriting arrangement the investment banking firmI)sells shares to the public via an underwriting syndicate.II)purchases the securities from the issuing company.III)assumes the full risk that the shares may not be sold at the offering price.IV)agrees to help the firm sell the issue to the public but does not actually purchase the securities.A) I, II, and IIIB) I, III, and IVC) I and IVD) II and IIIE) I and IIAnswer: A Difficulty: ModerateRationale: A typical underwriting arrangement is made on a firm commitment basis.37. Which of the following is true regarding private placements of primary security offerings?A) Extensive and costly registration statements are required by the SEC.B) For very large issues, they are better suited than public offerings.C) They trade in secondary markets.D) The shares are sold directly to a small group of institutional or wealthy investors.E) They have greater liquidity than public offerings.Answer: D Difficulty: ModerateRationale: Firms can save on registration costs, but the result is that the securities cannot trade in the secondary markets and therefore are less liquid. Public offerings are better suited for very large issues.38. A specialist on the AMEX Stock Exchange is offering to buy a security for $37.50. A broker inOklahoma City wants to sell the security for his client. The Intermarket Trading System showsa bid price of $37.375 on the NYSE. What should the broker do?A) Route the order to the AMEX Stock Exchange.B) Route the order to the NYSE.C) Call the client to see if she has a preference.D) Route half of the order to AMEX and the other half to the NYSE.E) It doesn't matter - he should flip a coin and go with it.Answer: A Difficulty: ModerateRationale: The broker should try to obtain the best price for his client. Since the client wants to sell shares and the bid price is higher on the AMEX, he should route the order there.39. You sold short 100 shares of common stock at $45 per share. The initial margin is 50%. Yourinitial investment wasA) $4,800.B) $12,000.C) $2,250.D) $7,200.E) none of the above.Answer: C Difficulty: ModerateRationale: 100 shares * $45/share * 0.50 = $4,500 * 0.50 = $2,25040. You sold short 150 shares of common stock at $27 per share. The initial margin is 45%. Yourinitial investment wasA) $4,800.60.B) $12,000.25.C) $2,250.75.D) $1,822.50.E) none of the above.Answer: D Difficulty: ModerateRationale: 150 shares * $27/share * 0.45 = $4,050 * 0.45 = $1,822.5041. You purchased 100 shares of XON common stock on margin at $60 per share. Assume theinitial margin is 50% and the maintenance margin is 30%. Below what stock price level would you get a margin call? Assume the stock pays no dividend; ignore interest on margin.A) $42.86B) $50.75C) $49.67D) $80.34E) none of the aboveAnswer: A Difficulty: DifficultRationale: 100 shares * $60 * .5 = $6,000 * 0.5 = $3,000 (loan amount); 0.30 = (100P -$3,000)/100P; 30P = 100P - $3,000; -70P = -$3,000; P = $42.8642. You purchased 1000 shares of CSCO common stock on margin at $19 per share. Assume theinitial margin is 50% and the maintenance margin is 30%. Below what stock price level would you get a margin call? Assume the stock pays no dividend; ignore interest on marginA) $12.86B) $15.75C) $19.67D) $13.57E) none of the aboveAnswer: D Difficulty: DifficultRationale: 1000 shares * $19 * .5 = $19,000 * 0.5 = $9,500 (loan amount); 0.30 = (1000P - $9,500)/1000P; 300P = 1000P - $9,500; -700P = -$9,500; P = $13.5743. You purchased 100 shares of common stock on margin at $40 per share. Assume the initialmargin is 50% and the stock pays no dividend. What would the maintenance margin be if a margin call is made at a stock price of $25? Ignore interest on margin.A) 0.33B) 0.55C) 0.20D) 0.23E) 0.25Answer: C Difficulty: DifficultRationale: 100 shares * $40/share * 0.5 = $4,000 * 0.5 = $2,000 (loan amount); X = [100($25) - $2,000]/100($25); X = 0.20.44. You purchased 1000 shares of common stock on margin at $30 per share. Assume the initialmargin is 50% and the stock pays no dividend. What would the maintenance margin be if a margin call is made at a stock price of $24? Ignore interest on margin.A) 0.33B) 0.375C) 0.20D) 0.23E) 0.25Answer: B Difficulty: DifficultRationale: 1000 shares * $30/share * 0.5 = $30,000 * 0.5 = $15,000 (loan amount); X =[1000($24) - $15,000]/1000($24); X = 0.375.45. You purchased 100 shares of common stock on margin for $50 per share. The initial margin is50% and the stock pays no dividend. What would your rate of return be if you sell the stock at $56 per share? Ignore interest on margin.A) 28%B) 33%C) 14%D) 42%E) 24%Answer: E Difficulty: DifficultRationale: 100($50)(0.50) = $2,500 investment; gain on stock sale = (56-50)(100) = $600;Return = ($600/$2,500) = 24%.46. You purchased 100 shares of common stock on margin for $35 per share. The initial margin is50% and the stock pays no dividend. What would your rate of return be if you sell the stock at $42 per share? Ignore interest on margin.A) 28%B) 33%C) 14%D) 40%E) 24%Answer: D Difficulty: DifficultRationale: 100($35)(0.50) = $1,750 investment; gain on stock sale = (42-35)(100) = $700;Return = ($700/$1,750) = 40%.47. Assume you sell short 1000 shares of common stock at $35 per share, with initial margin at 50%.What would be your rate of return if you repurchase the stock at $25/share? The stock paid no dividends during the period, and you did not remove any money from the account beforemaking the offsetting transaction.A) 20.47%B) 25.63%C) 57.14%D) 77.23%E) none of the aboveAnswer: C Difficulty: ModerateRationale: Profit on stock = ($35 - $25)(1,000) = $10,000; initial investment = ($35)(1,000)(.5) = $17,500; return =$10,000/$17,500 = 57.14%.48. Assume you sell short 100 shares of common stock at $30 per share, with initial margin at 50%.What would be your rate of return if you repurchase the stock at $35/share? The stock paid no dividends during the period, and you did not remove any money from the account beforemaking the offsetting transaction.A) -33.33%B) -25.63%C) -57.14%D) -77.23%E) none of the aboveAnswer: A Difficulty: ModerateRationale: Profit on stock = ($30 - $35)(100) = -500; initial investment = ($30)(100)(.5) =$1,500; return =$-500/$1,500 = -33.33%.49. You want to purchase GM stock at $40 from your broker using as little of your own money aspossible. If initial margin is 50% and you have $4000 to invest, how many shares can you buy?A) 100 sharesB) 200 sharesC) 50 sharesD) 500 sharesE) 25 sharesAnswer: B Difficulty: ModerateRationale: you can buy ($4000/$40) = 100 shares outright and you can borrow $4,000 to buy another 100 shares.50. You want to purchase IBM stock at $80 from your broker using as little of your own money aspossible. If initial margin is 50% and you have $2000 to invest, how many shares can you buy?A) 100 sharesB) 200 sharesC) 50 sharesD) 500 sharesE) 25 sharesAnswer: C Difficulty: ModerateRationale: You can buy ($2000/$80) = 25 shares outright and you can borrow $2,000 to buy another 25 shares.51. Assume you sold short 100 shares of common stock at $40 per share. The initial margin is 50%.What would be the maintenance margin if a margin call is made at a stock price of $50?A) 40%B) 20%C) 35%D) 25%E) none of the aboveAnswer: B Difficulty: DifficultRationale: $4,000 X 1.5 = $6,000; [$6,000 - 100($50)]/100($50) = 20%.52. Assume you sold short 100 shares of common stock at $70 per share. The initial margin is 50%.What would be the maintenance margin if a margin call is made at a stock price of $85?A) 40.5%B) 20.5%C) 35.5%D) 23.5%E) none of the aboveAnswer: D Difficulty: DifficultRationale: $7,000 X 1.5 = $10,500; [$10,500 - 100($85)]/100($85) = 23.5%.53. You sold short 100 shares of common stock at $45 per share. The initial margin is 50%. Atwhat stock price would you receive a margin call if the maintenance margin is 35%?A) $50B) $65C) $35D) $40E) none of the aboveAnswer: A Difficulty: DifficultRationale: Equity = 100($45) * 1.5 = $6,750; 0.35 = ($6,750 - 100P)/100P; 35P = 6,750 - 100P;135P = 6,750; P = $50.0054. You sold short 100 shares of common stock at $75 per share. The initial margin is 50%. Atwhat stock price would you receive a margin call if the maintenance margin is 30%?A) $90.23B) $88.52C) $86.54D) $87.12E) none of the aboveAnswer: C Difficulty: DifficultRationale: Equity = 100($75) * 1.5 = $11,250; 0.30 = ($11,250 - 100P)/100P; 30P = 11,250 - 100P; 130P = 11,250; P = $86.5455. IPO average first-day returns are largest in ____________.A) The United StatesB) DenmarkC) JapanD) ChinaE) FranceAnswer: D Difficulty: EasyRationale: See Figure 3.3.56. Despite large first-day IPO returns, average first-year returns in the US are approximately____________ percent.A) 6.7B) 18.2C) 26.4D) 4.8E) 9.1Answer: A Difficulty: EasyRationale: See Figure 3.4.57. Average second-year IPO returns in the US are approximately ____________ percent.A) 6.7B) 18.2C) 26.4D) 5.3E) 9.1Answer: D Difficulty: EasyRationale: See Figure 3.4.58. Average third-year IPO returns in the US are approximately ____________ percent.A) 6.7B) 18.2C) 26.4D) 5.3E) 10.3Answer: E Difficulty: EasyRationale: See Figure 3.4.59. The advertisement by the underwriting syndicate to announce an new security issue is referredto as the ____________.A) red herringB) preliminary prospectusC) prospectusD) tombstoneE) headstoneAnswer: D Difficulty: Easy60. The preliminary prospectus is referred to as a ____________.A) red herringB) indentureC) green mailD) tombstoneE) headstoneAnswer: A Difficulty: Easy61. The minimum revenue required for an initial listing on the New York Stock Exchange isA) $2,000,000B) $25,000,000C) $50,000,000D) $75,000,000E) 100,000,000Answer: D Difficulty: ModerateRationale: See Table 3.3.62. The annual dollar volume of trading on the NYSE in 2004 was approximately ____________dollars.A) 12 trillionB) 4 trillionC) 12 billionD) 4 billionE) none of the aboveAnswer: A Difficulty: EasyRationale: See Figure 3.7.63. The ____________ had the largest trading volume of securities in 2004.A) NASDAQB) NYSEC) LondonD) TokyoE) Hong KongAnswer: B Difficulty: EasyRationale: See Figure 3.7.64. The securities act of 1933 ____________.I)requires full disclosure of relevant information relating to the issue of new securitiesII)requires registration of new securitiesIII)requires issuance of a prospectus detailing financial prospects of the firmIV)established the SECV)requires periodic disclosure of relevant financial informationVI)empowers SEC to regulate exchanges, OTC trading, brokers, and dealersA) I, II and IIIB) I, II, III, IV, V, and VIC) I, II and VD) I, II and IVE) IV onlyAnswer: A Difficulty: Easy65. The securities act of 1934 ____________.I)requires full disclosure of relevant information relating to the issue of new securitiesII)requires registration of new securitiesIII)requires issuance of a prospectus detailing financial prospects of the firmIV)established the SECV)requires periodic disclosure of relevant financial informationVI)empowers SEC to regulate exchanges, OTC trading, brokers, and dealersA) I, II and IIIB) I, II, III, IV, V, and VIC) I, II and VD) I, II and IVE) IV, V, and VIAnswer: E Difficulty: Easy。