投资学第7版TestBank答案08

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.。

Multiple Choice Questions1. In the context of the Capital Asset Pricing Model (CAPM) the relevantmeasure of risk isA) unique risk.B) beta.C) standard deviation of returns.D) variance of returns.E) none of the above.Answer: B Difficulty: EasyRationale: Once, a portfolio is diversified, the only risk remaining is systematic risk, which is measured by beta.2. According to the Capital Asset Pricing Model (CAPM) a well diversifiedportfolio's rate of return is a function ofA) market riskB) unsystematic riskC) unique risk.D) reinvestment risk.E) none of the above.Answer: A Difficulty: EasyRationale: With a diversified portfolio, the only risk remaining is market, or systematic, risk. This is the only risk that influences returnaccording to the CAPM.3. The market portfolio has a beta ofA) 0.B) 1.C) -1.D) .E) none of the aboveAnswer: B Difficulty: EasyRationale: By definition, the beta of the market portfolio is 1.4. The risk-free rate and the expected market rate of return are and ,respectively. According to the capital asset pricing model (CAPM), the expected rate of return on security X with a beta of is equal toA) .B) .C) .D)E)Answer: D Difficulty: EasyRationale: E(R) = 6% + (12 - 6) = %.5. The risk-free rate and the expected market rate of return are and ,respectively. According to the capital asset pricing model (CAPM), the expected rate of return on a security with a beta of is equal toA)B) .C) .D)E)Answer: A Difficulty: EasyRationale: E(R) = % + - = %.6. Which statement is not true regarding the market portfolioA) It includes all publicly traded financial assets.B) It lies on the efficient frontier.C) All securities in the market portfolio are held in proportion to theirmarket values.D) It is the tangency point between the capital market line and theindifference curve.E) All of the above are true.Answer: D Difficulty: ModerateRationale: The tangency point between the capital market line and the indifference curve is the optimal portfolio for a particular investor.7. Which statement is not true regarding the Capital Market Line (CML)A) The CML is the line from the risk-free rate through the marketportfolio.B) The CML is the best attainable capital allocation line.C) The CML is also called the security market line.D) The CML always has a positive slope.E) The risk measure for the CML is standard deviation.Answer: C Difficulty: ModerateRationale: Both the Capital Market Line and the Security Market Line depict risk/return relationships. However, the risk measure for the CML is standard deviation and the risk measure for the SML is beta (thus C is not true; the other statements are true).8. The market risk, beta, of a security is equal toA) the covariance between the security's return and the market returndivided by the variance of the market's returns.B) the covariance between the security and market returns divided by thestandard deviation of the market's returns.C) the variance of the security's returns divided by the covariancebetween the security and market returns.D) the variance of the security's returns divided by the variance of themarket's returns.E) none of the above.Answer: A Difficulty: ModerateRationale: Beta is a measure of how a security's return covaries with the market returns, normalized by the market variance.9. According to the Capital Asset Pricing Model (CAPM), the expected rateof return on any security is equal toA) R f+ β [E(R M)].B) R f + β [E(R M) - R f].C) β [E(R M) - R f].D) E(R M) + R f.E) none of the above.Answer: B Difficulty: ModerateRationale: The expected rate of return on any security is equal to the risk free rate plus the systematic risk of the security (beta) times themarket risk premium, E(RM - Rf).10. The Security Market Line (SML) isA) the line that describes the expected return-beta relationship forwell-diversified portfolios only.B) also called the Capital Allocation Line.C) the line that is tangent to the efficient frontier of all risky assets.D) the line that represents the expected return-beta relationship.E) the line that represents the relationship between an individualsecurity's return and the market's return.Answer: D Difficulty: ModerateRationale: The SML is a measure of expected return per unit of risk, where risk is defined as beta (systematic risk).11. According to the Capital Asset Pricing Model (CAPM), fairly pricedsecuritiesA) have positive betas.B) have zero alphas.C) have negative betas.D) have positive alphas.E) none of the above.Answer: B Difficulty: ModerateRationale: A zero alpha results when the security is in equilibrium (fairly priced for the level of risk).12. According to the Capital Asset Pricing Model (CAPM), under pricedsecuritiesA) have positive betas.B) have zero alphas.C) have negative betas.D) have positive alphas.E) none of the above.Answer: D Difficulty: Moderate13. According to the Capital Asset Pricing Model (CAPM), over pricedsecuritiesA) have positive betas.B) have zero alphas.C) have negative betas.D) have positive alphas.E) none of the above.Answer: C Difficulty: ModerateRationale: A zero alpha results when the security is in equilibrium (fairly priced for the level of risk).14. According to the Capital Asset Pricing Model (CAPM),A) a security with a positive alpha is considered overpriced.B) a security with a zero alpha is considered to be a good buy.C) a security with a negative alpha is considered to be a good buy.D) a security with a positive alpha is considered to be underpriced.E) none of the above.Answer: D Difficulty: ModerateRationale: A security with a positive alpha is one that is expected to yield an abnormal positive rate of return, based on the perceived risk of the security, and thus is underpriced.15. According to the Capital Asset Pricing Model (CAPM), which one of thefollowing statements is falseA) The expected rate of return on a security decreases in directproportion to a decrease in the risk-free rate.B) The expected rate of return on a security increases as its betaincreases.C) A fairly priced security has an alpha of zero.D) In equilibrium, all securities lie on the security market line.E) All of the above statements are true.Answer: A Difficulty: ModerateRationale: Statements B, C, and D are true, but statement A is false.16. In a well diversified portfolioA) market risk is negligible.B) systematic risk is negligible.C) unsystematic risk is negligible.D) nondiversifiable risk is negligible.E) none of the above.Answer: C Difficulty: ModerateRationale: Market, or systematic, or nondiversifiable, risk is present in a diversified portfolio; the unsystematic risk has been eliminated.17. Empirical results regarding betas estimated from historical data indicatethatA) betas are constant over time.B) betas of all securities are always greater than one.C) betas are always near zero.D) betas appear to regress toward one over time.E) betas are always positive.Answer: D Difficulty: ModerateRationale: Betas vary over time, betas may be negative or less than one, betas are not always near zero; however, betas do appear to regress toward one over time.18. Your personal opinion is that a security has an expected rate of returnof . It has a beta of . The risk-free rate is and the market expected rate of return is . According to the Capital Asset Pricing Model, this security isA) underpriced.B) overpriced.C) fairly priced.D) cannot be determined from data provided.E) none of the above.Answer: C Difficulty: ModerateRationale: 11% = 5% + (9% - 5%) = %; therefore, the security is fairly priced.19. The risk-free rate is 7 percent. The expected market rate of return is15 percent. If you expect a stock with a beta of to offer a rate of returnof 12 percent, you shouldA) buy the stock because it is overpriced.B) sell short the stock because it is overpriced.C) sell the stock short because it is underpriced.D) buy the stock because it is underpriced.E) none of the above, as the stock is fairly priced.Answer: B Difficulty: ModerateRationale: 12% < 7% + (15% - 7%) = %; therefore, stock is overpriced and should be shorted.20. You invest $600 in a security with a beta of and $400 in another securitywith a beta of . The beta of the resulting portfolio isA)B)C)D)E)Answer: D Difficulty: ModerateRationale: + = .21. A security has an expected rate of return of and a beta of . The marketexpected rate of return is and the risk-free rate is . The alpha of the stock isA) %.B) %.C) %.D) %.E) none of the above.Answer: A Difficulty: ModerateRationale: 10% - [5% +(8% - 5%)] = %.22. Your opinion is that CSCO has an expected rate of return of . It has abeta of . The risk-free rate is and the market expected rate of return is . According to the Capital Asset Pricing Model, this security isA) underpriced.B) overpriced.C) fairly priced.D) cannot be determined from data provided.E) none of the above.Answer: B Difficulty: ModerateRationale: % - 4% + % - 4%) = %; therefore, the security is overpriced.23. Your opinion is that CSCO has an expected rate of return of . It has abeta of . The risk-free rate is and the market expected rate of return is . According to the Capital Asset Pricing Model, this security isA) underpriced.B) overpriced.C) fairly priced.D) cannot be determined from data provided.E) none of the above.Answer: C Difficulty: ModerateRationale: % - 4% + % - 4%) = %; therefore, the security is fairly priced.24. Your opinion is that CSCO has an expected rate of return of . It has abeta of . The risk-free rate is and the market expected rate of return is . According to the Capital Asset Pricing Model, this security isA) underpriced.B) overpriced.C) fairly priced.D) cannot be determined from data provided.E) none of the above.Answer: A Difficulty: ModerateRationale: 15% - 4% + % - 4%) = %; therefore, the security is under priced.25. Your opinion is that Boeing has an expected rate of return of . It hasa beta of . The risk-free rate is and the market expected rate of returnis . According to the Capital Asset Pricing Model, this security isA) underpriced.B) overpriced.C) fairly priced.D) cannot be determined from data provided.E) none of the above.Answer: A Difficulty: ModerateRationale: % - 4% + (10% - 4%) = %; therefore, the security is under priced.26. Your opinion is that Boeing has an expected rate of return of . It hasa beta of . The risk-free rate is and the market expected rate of returnis . According to the Capital Asset Pricing Model, this security isA) underpriced.B) overpriced.C) fairly priced.D) cannot be determined from data provided.E) none of the above.Answer: C Difficulty: ModerateRationale: % - 4% + (10% - 4%) = %; therefore, the security is fairly priced.27. Your opinion is that Boeing has an expected rate of return of . It hasa beta of . The risk-free rate is and the market expected rate of returnis . According to the Capital Asset Pricing Model, this security isA) underpriced.B) overpriced.C) fairly priced.D) cannot be determined from data provided.E) none of the above.Answer: C Difficulty: ModerateRationale: % - 4% + (10% - 4%) = %; therefore, the security is overpriced.28. The risk-free rate is 4 percent. The expected market rate of return is11 percent. If you expect CAT with a beta of to offer a rate of returnof 10 percent, you shouldA) buy stock X because it is overpriced.B) sell short stock X because it is overpriced.C) sell stock short X because it is underpriced.D) buy stock X because it is underpriced.E) none of the above, as the stock is fairly priced.Answer: B Difficulty: ModerateRationale: 10% < 4% + (11% - 4%) = %; therefore, stock is overpriced and should be shorted.29. The risk-free rate is 4 percent. The expected market rate of return is11 percent. If you expect CAT with a beta of to offer a rate of returnof 11 percent, you shouldA) buy stock X because it is overpriced.B) sell short stock X because it is overpriced.C) sell stock short X because it is underpriced.D) buy stock X because it is underpriced.E) none of the above, as the stock is fairly priced.Answer: E Difficulty: ModerateRationale: 11% = 4% + (11% - 4%) = %; therefore, stock is fairly priced.30. The risk-free rate is 4 percent. The expected market rate of return is11 percent. If you expect CAT with a beta of to offer a rate of returnof 13 percent, you shouldA) buy stock X because it is overpriced.B) sell short stock X because it is overpriced.C) sell stock short X because it is underpriced.D) buy stock X because it is underpriced.E) none of the above, as the stock is fairly priced.Answer: D Difficulty: ModerateRationale: 13% > 4% + (11% - 4%) = %; therefore, stock is under priced.31. You invest 55% of your money in security A with a beta of and the restof your money in security B with a beta of . The beta of the resultingportfolio isA)B)C)D)E)Answer: E Difficulty: Moderate Rationale: + = .32. Given the following two stocks A and BIf the expected market rate of return is and the risk-free rate is , which security would be considered the better buy and whyA) A because it offers an expected excess return of %.B) B because it offers an expected excess return of %.C) A because it offers an expected excess return of %.D) B because it offers an expected return of 14%.E) B because it has a higher beta.Answer: C Difficulty: ModerateRationale: A's excess return is expected to be 12% - [5% + (9% - 5%)] = %.B's excess return is expected to be 14% - [5% + (9% - 5%)] = %.33. Capital Asset Pricing Theory asserts that portfolio returns are bestexplained by:A) economic factors.B) specific risk.C) systematic risk.D) diversification.E) none of the above.Answer: C Difficulty: EasyRationale: The risk remaining in diversified portfolios is systematic risk;thus, portfolio returns are commensurate with systematic risk.34. According to the CAPM, the risk premium an investor expects to receiveon any stock or portfolio increases:A) directly with alpha.B) inversely with alpha.C) directly with beta.D) inversely with beta.E) in proportion to its standard deviation.Answer: C Difficulty: EasyRationale: The market rewards systematic risk, which is measured by beta, and thus, the risk premium on a stock or portfolio varies directly with beta.35. What is the expected return of a zero-beta securityA) The market rate of return.B) Zero rate of return.C) A negative rate of return.D) The risk-free rate.E) None of the above.Answer: D Difficulty: ModerateRationale: E(RS ) = rf+ 0(RM- rf) = rf.36. Standard deviation and beta both measure risk, but they are different inthatA) beta measures both systematic and unsystematic risk.B) beta measures only systematic risk while standard deviation is ameasure of total risk.C) beta measures only unsystematic risk while standard deviation is ameasure of total risk.D) beta measures both systematic and unsystematic risk while standarddeviation measures only systematic risk.E) beta measures total risk while standard deviation measures onlynonsystematic risk.Answer: B Difficulty: EasyRationale: B is the only true statement.37. The expected return-beta relationshipA) is the most familiar expression of the CAPM to practitioners.B) refers to the way in which the covariance between the returns on a stockand returns on the market measures the contribution of the stock to the variance of the market portfolio, which is beta.C) assumes that investors hold well-diversified portfolios.D) all of the above are true.E) none of the above is true.Answer: D Difficulty: ModerateRationale: Statements A, B and C all describe the expected return-beta relationship.38. The security market line (SML)A) can be portrayed graphically as the expected return-beta relationship.B) can be portrayed graphically as the expected return-standard deviationof market returns relationship.C) provides a benchmark for evaluation of investment performance.D) A and C.E) B and C.Answer: D Difficulty: ModerateRationale: The SML is a measure of expected return-beta (the CML is a measure of expected return-standard deviation of market returns). The SML provides the expected return-beta relationship for "fairly priced"securities; thus if a portfolio manager selects securities that are underpriced and produces a portfolio with a positive alpha, this portfolio manager would receive a positive evaluation.39. Research by Jeremy Stein of MIT resolves the dispute over whether betais a sufficient pricing factor by suggesting that managers should use beta to estimateA) long-term returns but not short-term returns.B) short-term returns but not long-term returns.C) both long- and short-term returns.D) book-to-market ratios.E) None of the above was suggested by Stein.Answer: A Difficulty: Difficult40. Studies of liquidity spreads in security markets have shown thatA) liquid stocks earn higher returns than illiquid stocks.B) illiquid stocks earn higher returns than liquid stocks.C) both liquid and illiquid stocks earn the same returns.D) illiquid stocks are good investments for frequent, short-term traders.E) None of the above is true.Answer: B Difficulty: Difficult41. An underpriced security will plotA) on the Security Market Line.B) below the Security Market Line.C) above the Security Market Line.D) either above or below the Security Market Line depending on itscovariance with the market.E) either above or below the Security Market Line depending on itsstandard deviation.Answer: C Difficulty: EasyRationale: An underpriced security will have a higher expected return than the SML would predict; therefore it will plot above the SML.42. The risk premium on the market portfolio will be proportional toA) the average degree of risk aversion of the investor population.B) the risk of the market portfolio as measured by its variance.C) the risk of the market portfolio as measured by its beta.D) both A and B are true.E) both A and C are true.Answer: D Difficulty: ModerateRationale: The risk premium on the market portfolio is proportional to the average degree of risk aversion of the investor population and the risk of the market portfolio measured by its variance.43. In equilibrium, the marginal price of risk for a risky security must beA) equal to the marginal price of risk for the market portfolio.B) greater than the marginal price of risk for the market portfolio.C) less than the marginal price of risk for the market portfolio.D) adjusted by its degree of nonsystematic risk.E) none of the above is true.Answer: A Difficulty: ModerateRationale: In equilibrium, the marginal price of risk for a risky security must be equal to the marginal price of risk for the market. If not, investors will buy or sell the security until they are equal.44. The capital asset pricing model assumesA) all investors are price takers.B) all investors have the same holding period.C) investors pay taxes on capital gains.D) both A and B are true.E) A, B and C are all true.Answer: D Difficulty: EasyRationale: The CAPM assumes that investors are price-takers with the same single holding period and that there are no taxes or transaction costs.45. If investors do not know their investment horizons for certainA) the CAPM is no longer valid.B) the CAPM underlying assumptions are not violated.C) the implications of the CAPM are not violated as long as investors'liquidity needs are not priced.D) the implications of the CAPM are no longer useful.E) none of the above is true.Answer: C Difficulty: ModerateRationale: This is discussed in the chapter's section about extensions to the CAPM. It examines what the consequences are when the assumptions are removed.46. The value of the market portfolio equalsA) the sum of the values of all equity securities.B) the sum of the values of all equity and fixed income securities.C) the sum the values of all equity, fixed income, and derivativesecurities.D) the sum of the values of all equity, fixed income, and derivativesecurities plus the value of all mutual funds.E) the entire wealth of the economy.Answer: E Difficulty: ModerateRationale: The market portfolio includes all assets in existence.47. The amount that an investor allocates to the market portfolio is negativelyrelated toI)the expected return on the market portfolio.II)the investor's risk aversion coefficient.III)the risk-free rate of return.IV)the variance of the market portfolioA) I and IIB) II and IIIC) II and IVD) II, III, and IVE) I, III, and IVAnswer: D Difficulty: ModerateRationale: The optimal proportion is given by y = (E(RM )-rf)/(.01xAσ2M).This amount will decrease as rf , A, and σ2Mdecrease.48. One of the assumptions of the CAPM is that investors exhibit myopicbehavior. What does this meanA) They plan for one identical holding period.B) They are price-takers who can't affect market prices through theirtrades.C) They are mean-variance optimizers.D) They have the same economic view of the world.E) They pay no taxes or transactions costs.Answer: A Difficulty: ModerateRationale: Myopic behavior is shortsighted, with no concern formedium-term or long-term implications.49. The CAPM applies toA) portfolios of securities only.B) individual securities only.C) efficient portfolios of securities only.D) efficient portfolios and efficient individual securities only.E) all portfolios and individual securities.Answer: E Difficulty: ModerateRationale: The CAPM is an equilibrium model for all assets. Each asset's risk premium is a function of its beta coefficient and the risk premium on the market portfolio.50. Which of the following statements about the mutual fund theorem is trueI)It is similar to the separation property.II)It implies that a passive investment strategy can be efficient.III)It implies that efficient portfolios can be formed only through active strategies.IV)It means that professional managers have superior security selection strategies.A) I and IVB) I, II, and IVC) I and IID) III and IVE) II and IVAnswer: C Difficulty: ModerateRationale: The mutual fund theorem is similar to the separation property.The technical task of creating mutual funds can be delegated toprofessional managers; then individuals combine the mutual funds with risk-free assets according to their preferences. The passive strategy of investing in a market index fund is efficient.51. The expected return -- beta relationship of the CAPM is graphicallyrepresented byA) the security market line.B) the capital market line.C) the capital allocation line.D) the efficient frontier with a risk-free asset.E) the efficient frontier without a risk-free asset.Answer: A Difficulty: EasyRationale: The security market line shows expected return on the verticalaxis and beta on the horizontal axis. It has an intercept of rfand a slopeof E(RM ) - rf.52. A “fairly priced” asset liesA) above the security market line.B) on the security market line.C) on the capital market line.D) above the capital market line.E) below the security market line.Answer: B Difficulty: EasyRationale: Securities that lie on the SML earn exactly the expected return generated by the CAPM. Their prices are proportional to their beta coefficients and they have alphas equal to zero.53. For the CAPM that examines illiquidity premiums, if there is correlationamong assets due to common systematic risk factors, the illiquidity premium on asset i is a function ofA) the market's volatility.B) asset i's volatility.C) the trading costs of security i.D) the risk-free rate.E) the money supply.Answer: C Difficulty: ModerateRationale: The formula for this extension to the CAPM relaxes theassumption that trading is costless.54. Your opinion is that security A has an expected rate of return of . Ithas a beta of . The risk-free rate is and the market expected rate of return is . According to the Capital Asset Pricing Model, this security isA) underpriced.B) overpriced.C) fairly priced.D) cannot be determined from data provided.E) none of the above.Answer: C Difficulty: ModerateRationale: % = 4% + (11% - 4%) = %; therefore, the security is fairly priced.55. Your opinion is that security C has an expected rate of return of . Ithas a beta of . The risk-free rate is and the market expected rate of return is . According to the Capital Asset Pricing Model, this security isA) underpriced.B) overpriced.C) fairly priced.D) cannot be determined from data provided.E) none of the above.Answer: A Difficulty: ModerateRationale: 4% + (10% - 4%) = %; therefore, the security is fairly priced.56. The risk-free rate is 4 percent. The expected market rate of return is12 percent. If you expect stock X with a beta of to offer a rate of returnof 10 percent, you shouldA) buy stock X because it is overpriced.B) sell short stock X because it is overpriced.C) sell stock short X because it is underpriced.D) buy stock X because it is underpriced.E) none of the above, as the stock is fairly priced.Answer: B Difficulty: ModerateRationale: 10% < 4% + (12% - 4%) = %; therefore, stock is overpriced and should be shorted.57. The risk-free rate is 5 percent. The expected market rate of return is11 percent. If you expect stock X with a beta of to offer a rate of returnof 15 percent, you shouldA) buy stock X because it is overpriced.B) sell short stock X because it is overpriced.C) sell stock short X because it is underpriced.D) buy stock X because it is underpriced.E) none of the above, as the stock is fairly priced.Answer: B Difficulty: ModerateRationale: 15% < 5% + (11% - 5%) = %; therefore, stock is overpriced and should be shorted.58. You invest 50% of your money in security A with a beta of and the restof your money in security B with a beta of . The beta of the resulting portfolio isA)B)C)D)E)Answer: B Difficulty: ModerateRationale: + = .59. You invest $200 in security A with a beta of and $800 in security B witha beta of . The beta of the resulting portfolio is A.A)B)C)D)Answer: C Difficulty: ModerateRationale: + = .60. Security A has an expected rate of return of and a beta of . The marketexpected rate of return is and the risk-free rate is . The alpha of the stock isA) %.B) %.C) %.D) %.E) none of the above.Answer: B Difficulty: ModerateRationale: 10% - [4% +(10% - 4%)] = %.61. A security has an expected rate of return of and a beta of . The marketexpected rate of return is and the risk-free rate is . The alpha of the stock isA) %.。

Multiple Choice Questions1. Which of the following statements regarding risk-averse investors is true?A) They only care about the rate of return.B) They accept investments that are fair games.C) They only accept risky investments that offer risk premiums over the risk-free rate.D) They are willing to accept lower returns and high risk.E) A and B.Answer: C Difficulty: Moderate2. Which of the following statements is (are) true?I)Risk-averse investors reject investments that are fair games.II)Risk-neutral investors judge risky investments only by the expected returns.III)Risk-averse investors judge investments only by their riskiness.IV)Risk-loving investors will not engage in fair games.A) I onlyB) II onlyC) I and II onlyD) II and III onlyE) II, III, and IV onlyAnswer: C Difficulty: ModerateRationale: Risk-averse investors consider a risky investment only if the investmentoffers a risk premium. Risk-neutral investors look only at expected returns whenmaking an investment decision.3. In the mean-standard deviation graph an indifference curve has a ________ slope.A) negativeB) zeroC) positiveD) northeastE) cannot be determinedAnswer: C Difficulty: EasyRationale: The risk-return trade-off is one in which greater risk is taken if greater returns can be expected, resulting in a positive slope.4. In the mean-standard deviation graph, which one of the following statements is trueregarding the indifference curve of a risk-averse investor?A) It is the locus of portfolios that have the same expected rates of return and differentstandard deviations.B) It is the locus of portfolios that have the same standard deviations and different ratesof return.C) It is the locus of portfolios that offer the same utility according to returns andstandard deviations.D) It connects portfolios that offer increasing utilities according to returns and standarddeviations.E) none of the above.Answer: C Difficulty: ModerateRationale: Indifference curves plot trade-off alternatives that provide equal utility to the individual (in this case, the trade-offs are the risk-return characteristics of theportfolios).5. In a return-standard deviation space, which of the following statements is (are) true forrisk-averse investors? (The vertical and horizontal lines are referred to as the expected return-axis and the standard deviation-axis, respectively.)I)An investor's own indifference curves might intersect.II)Indifference curves have negative slopes.III)In a set of indifference curves, the highest offers the greatest utility.IV)Indifference curves of two investors might intersect.A) I and II onlyB) II and III onlyC) I and IV onlyD) III and IV onlyE) none of the aboveAnswer: D Difficulty: ModerateRationale: An investor's indifference curves are parallel, and thus cannot intersect and have positive slopes. The highest indifference curve (the one in the most northwestern position) offers the greatest utility. Indifference curves of investors with similarrisk-return trade-offs might intersect.6. Elias is a risk-averse investor. David is a less risk-averse investor than Elias.Therefore,A) for the same risk, David requires a higher rate of return than Elias.B) for the same return, Elias tolerates higher risk than David.C) for the same risk, Elias requires a lower rate of return than David.D) for the same return, David tolerates higher risk than Elias.E) cannot be determined.Answer: D Difficulty: ModerateRationale: The more risk averse the investor, the less risk that is tolerated, given a rate of return.7. When an investment advisor attempts to determine an investor's risk tolerance, whichfactor would they be least likely to assess?A) the investor's prior investing experienceB) the investor's degree of financial securityC) the investor's tendency to make risky or conservative choicesD) the level of return the investor prefersE) the investor's feeling about lossAnswer: D Difficulty: ModerateUse the following to answer questions 8-9:Assume an investor with the following utility function: U = E(r) - 3/2(s2).8. To maximize her expected utility, she would choose the asset with an expected rate ofreturn of _______ and a standard deviation of ________, respectively.A) 12%; 20%B) 10%; 15%C) 10%; 10%D) 8%; 10%E) none of the aboveAnswer: C Difficulty: ModerateRationale: U = 0.10 - 3/2(0.10)2 = 8.5%; highest utility of choices.9. To maximize her expected utility, which one of the following investment alternativeswould she choose?A) A portfolio that pays 10 percent with a 60 percent probability or 5 percent with 40percent probability.B) A portfolio that pays 10 percent with 40 percent probability or 5 percent with a 60percent probability.C) A portfolio that pays 12 percent with 60 percent probability or 5 percent with 40percent probability.D) A portfolio that pays 12 percent with 40 percent probability or 5 percent with 60percent probability.E) none of the above.Answer: C Difficulty: DifficultRationale: U(c) = 9.02%; highest utility of possibilities.10. A portfolio has an expected rate of return of 0.15 and a standard deviation of 0.15. Therisk-free rate is 6 percent. An investor has the following utility function: U = E(r) - (A/2)s2. Which value of A makes this investor indifferent between the risky portfolio and the risk-free asset?A) 5B) 6C) 7D) 8E) none of the aboveAnswer: D Difficulty: DifficultRationale: 0.06 = 0.15 - A/2(0.15)2; 0.06 - 0.15 = -A/2(0.0225); -0.09 = -0.01125A; A = 8; U = 0.15 - 8/2(0.15)2 = 6%; U(R f) = 6%.11. According to the mean-variance criterion, which one of the following investmentsdominates all others?A) E(r) = 0.15; Variance = 0.20B) E(r) = 0.10; Variance = 0.20C) E(r) = 0.10; Variance = 0.25D) E(r) = 0.15; Variance = 0.25E) none of these dominates the other alternatives.Answer: A Difficulty: DifficultRationale: A gives the highest return with the least risk; return per unit of risk is .75, which dominates the reward-risk ratio for the other choices.12. Consider a risky portfolio, A, with an expected rate of return of 0.15 and a standarddeviation of 0.15, that lies on a given indifference curve. Which one of the following portfolios might lie on the same indifference curve?A) E(r) = 0.15; Standard deviation = 0.20B) E(r) = 0.15; Standard deviation = 0.10C) E(r) = 0.10; Standard deviation = 0.10D) E(r) = 0.20; Standard deviation = 0.15E) E(r) = 0.10; Standard deviation = 0.20Answer: C Difficulty: DifficultRationale: Portfolio A has a reward to risk ratio of 1.0; portfolio C is the only choice with the same risk-return tradeoff.Use the following to answer questions 13-15:13. Based on the utility function above, which investment would you select?A) 1B) 2C) 3D) 4E) cannot tell from the information givenAnswer: C Difficulty: DifficultRationale: U(c) = 0.21 - 4/2(0.16)2 = 15.88 (highest utility of choices).14. Which investment would you select if you were risk neutral?A) 1B) 2C) 3D) 4E) cannot tell from the information givenAnswer: D Difficulty: DifficultRationale: If you are risk neutral, your only concern is with return, not risk.15. The variable (A) in the utility function represents the:A) investor's return requirement.B) investor's aversion to risk.C) certainty-equivalent rate of the portfolio.D) minimum required utility of the portfolio.E) none of the above.Answer: B Difficulty: ModerateRationale: A is an arbitrary scale factor used to measure investor risk tolerance. The higher the value of A, the more risk averse the investor.16. The exact indifference curves of different investorsA) cannot be known with perfect certainty.B) can be calculated precisely with the use of advanced calculus.C) although not known with perfect certainty, do allow the advisor to create moresuitable portfolios for the client.D) A and C.E) none of the above.Answer: D Difficulty: EasyRationale: Indifference curves cannot be calculated precisely, but the theory does allow for the creation of more suitable portfolios for investors of differing levels of risktolerance.17. The riskiness of individual assetsA) should be considered for the asset in isolation.B) should be considered in the context of the effect on overall portfolio volatility.C) combined with the riskiness of other individual assets (in the proportions theseassets constitute of the entire portfolio) should be the relevant risk measure.D) B and C.E) none of the above.Answer: D Difficulty: EasyRationale: The relevant risk is portfolio risk; thus, the riskiness of an individual security should be considered in the context of the portfolio as a whole.18. A fair gameA) will not be undertaken by a risk-averse investor.B) is a risky investment with a zero risk premium.C) is a riskless investment.D) Both A and B are true.E) Both A and C are true.Answer: D Difficulty: ModerateRationale: A fair game is a risky investment with a payoff exactly equal to its expected value. Since it offers no risk premium, it will not be acceptable to a risk-averse investor.19. The presence of risk means thatA) investors will lose money.B) more than one outcome is possible.C) the standard deviation of the payoff is larger than its expected value.D) final wealth will be greater than initial wealth.E) terminal wealth will be less than initial wealth.Answer: B Difficulty: EasyRationale: The presence of risk means that more than one outcome is possible.20. The utility score an investor assigns to a particular portfolio, other things equal,A) will decrease as the rate of return increases.B) will decrease as the standard deviation increases.C) will decrease as the variance increases.D) will increase as the variance increases.E) will increase as the rate of return increases.Answer: E Difficulty: EasyRationale: Utility is enhanced by higher expected returns and diminished by higher risk.21. The certainty equivalent rate of a portfolio isA) the rate that a risk-free investment would need to offer with certainty to beconsidered equally attractive as the risky portfolio.B) the rate that the investor must earn for certain to give up the use of his money.C) the minimum rate guaranteed by institutions such as banks.D) the rate that equates “A” in the utility fun ction with the average risk aversioncoefficient for all risk-averse investors.E) represented by the scaling factor “-.005” in the utility function.Answer: A Difficulty: Moderate22. According to the mean-variance criterion, which of the statements below is correct?A) Investment B dominates Investment A.B) Investment B dominates Investment C.C) Investment D dominates all of the other investments.D) Investment D dominates only Investment B.E) Investment C dominates investment A.Answer: B Difficulty: ModerateRationale: This question tests the student's understanding of how to apply themean-variance criterion.23. Steve is more risk-averse than Edie. On a graph that shows Steve and Edie'sindifference curves, which of the following is true? Assume that the graph showsexpected return on the vertical axis and standard deviation on the horizontal axis.I)Steve and Edie's indifference curves might intersect.II)Steve's indifference curves will have flatter slopes than Edie's.III)Steve's indifference curves will have steeper slopes than Edie's.IV)Steve and Edie's indifference curves will not intersect.V)Steve's indifference curves will be downward sloping and Edie's will be upward sloping.A) I and VB) I and IIIC) III and IVD) I and IIE) II and IVAnswer: B Difficulty: ModerateRationale: This question tests whether the student understands the graphical properties of indifference curves and how they relate to the degree of risk tolerance.24. The Capital Allocation Line can be described as theA) investment opportunity set formed with a risky asset and a risk-free asset.B) investment opportunity set formed with two risky assets.C) line on which lie all portfolios that offer the same utility to a particular investor.D) line on which lie all portfolios with the same expected rate of return and differentstandard deviations.E) none of the above.Answer: A Difficulty: ModerateRationale: The CAL has an intercept equal to the risk-free rate. It is a straight linethrough the point representing the risk-free asset and the risky portfolio, inexpected-return/standard deviation space.25. Which of the following statements regarding the Capital Allocation Line (CAL) isfalse?A) The CAL shows risk-return combinations.B) The slope of the CAL equals the increase in the expected return of a risky portfolioper unit of additional standard deviation.C) The slope of the CAL is also called the reward-to-variability ratio.D) The CAL is also called the efficient frontier of risky assets in the absence of arisk-free asset.E) Both A and D are true.Answer: D Difficulty: ModerateRationale: The CAL consists of combinations of a risky asset and a risk-free assetwhose slope is the reward-to-variability ratio; thus, all statements except d are true.26. Given the capital allocation line, an investor's optimal portfolio is the portfolio thatA) maximizes her expected profit.B) maximizes her risk.C) minimizes both her risk and return.D) maximizes her expected utility.E) none of the above.Answer: D Difficulty: ModerateRationale: By maximizing expected utility, the investor is obtaining the best risk-return relationships possible and acceptable for her.27. An investor invests 30 percent of his wealth in a risky asset with an expected rate ofreturn of 0.15 and a variance of 0.04 and 70 percent in a T-bill that pays 6 percent. His portfolio's expected return and standard deviation are __________ and __________,respectively.A) 0.114; 0.12B) 0.087;0.06C) 0.295; 0.12D) 0.087; 0.12E) none of the aboveAnswer: B Difficulty: ModerateRationale: E(r P) = 0.3(15%) + 0.7(6%) = 8.7%; s P = 0.3(0.04)1/2 = 6%.Use the following to answer questions 28-31:You invest $100 in a risky asset with an expected rate of return of 0.12 and a standard deviation of 0.15 and a T-bill with a rate of return of 0.05.28. What percentages of your money must be invested in the risky asset and the risk-freeasset, respectively, to form a portfolio with an expected return of 0.09?A) 85% and 15%B) 75% and 25%C) 67% and 33%D) 57% and 43%E) cannot be determinedAnswer: D Difficulty: ModerateRationale: 9% = w1(12%) + (1 - w1)(5%); 9% = 12%w1 + 5% - 5%w1; 4% = 7%w1; w1 =0.57; 1 - w1 = 0.43; 0.57(12%) + 0.43(5%) = 8.99%.29. What percentages of your money must be invested in the risk-free asset and the riskyasset, respectively, to form a portfolio with a standard deviation of 0.06?A) 30% and 70%B) 50% and 50%C) 60% and 40%D) 40% and 60%E) cannot be determinedAnswer: C Difficulty: ModerateRationale: 0.06 = x(0.15); x = 40% in risky asset.30. A portfolio that has an expected outcome of $115 is formed byA) investing $100 in the risky asset.B) investing $80 in the risky asset and $20 in the risk-free asset.C) borrowing $43 at the risk-free rate and investing the total amount ($143) in the riskyasset.D) investing $43 in the risky asset and $57 in the riskless asset.E) Such a portfolio cannot be formed.Answer: C Difficulty: DifficultRationale: For $100, (115-100)/100=15%; .15 = w1(.12) + (1 - w1)(.05); .15 = .12w1 + .05 - .05w1; 0.10 = 0.07w1; w1 = 1.43($100) = $143; (1 - w1)$100 = -$43.31. The slope of the Capital Allocation Line formed with the risky asset and the risk-freeasset is equal toA) 0.4667.B) 0.8000.C) 2.14.D) 0.41667.E) Cannot be determined.Answer: A Difficulty: ModerateRationale: (0.12 - 0.05)/0.15 = 0.4667.32. Consider a T-bill with a rate of return of 5 percent and the following risky securities:Security A: E(r) = 0.15; Variance = 0.04Security B: E(r) = 0.10; Variance = 0.0225Security C: E(r) = 0.12; Variance = 0.01Security D: E(r) = 0.13; Variance = 0.0625From which set of portfolios, formed with the T-bill and any one of the 4 risky securities, would a risk-averse investor always choose his portfolio?A) The set of portfolios formed with the T-bill and security A.B) The set of portfolios formed with the T-bill and security B.C) The set of portfolios formed with the T-bill and security C.D) The set of portfolios formed with the T-bill and security D.E) Cannot be determined.Answer: C Difficulty: DifficultRationale: Security C has the highest reward-to-volatility ratio.Use the following to answer questions 33-36:You are considering investing $1,000 in a T-bill that pays 0.05 and a risky portfolio, P, constructed with 2 risky securities, X and Y. The weights of X and Y in P are 0.60 and 0.40, respectively. X has an expected rate of return of 0.14 and variance of 0.01, and Y has an expected rate of return of 0.10 and a variance of 0.0081.33. If you want to form a portfolio with an expected rate of return of 0.11, what percentagesof your money must you invest in the T-bill and P, respectively?A) 0.25; 0.75B) 0.19; 0.81C) 0.65; 0.35D) 0.50; 0.50E) cannot be determinedAnswer: B Difficulty: ModerateRationale: E(r p) = 0.6(14%) + 0.4(10%) = 12.4%; 11% = 5x + 12.4(1 - x); x = 0.189(T-bills) (1-x) =0.811 (risky asset).34. If you want to form a portfolio with an expected rate of return of 0.10, what percentagesof your money must you invest in the T-bill, X, and Y, respectively if you keep X and Y in the same proportions to each other as in portfolio P?A) 0.25; 0.45; 0.30B) 0.19; 0.49; 0.32C) 0.32; 0.41; 0.27D) 0.50; 0.30; 0.20E) cannot be determinedAnswer: C Difficulty: DifficultRationale: E(r p) = .100.10 = 5w + 12.4(1 - w); x = 0.32 (weight of T-bills); Ascomposition of X and Y are .6 and .4 of P, respectively, then for 0.68 weight in P, the respective weights must be 0.41 and 0.27; .6(.68) = 41%; .4(.68) = 27%35. What would be the dollar values of your positions in X and Y, respectively, if youdecide to hold 40% percent of your money in the risky portfolio and 60% in T-bills?A) $240; $360B) $360; $240C) $100; $240D) $240; $160E) Cannot be determinedAnswer: D Difficulty: ModerateRationale: $400(0.6) = $240 in X; $400(0.4) = $160 in Y.36. What would be the dollar value of your positions in X, Y, and the T-bills, respectively,if you decide to hold a portfolio that has an expected outcome of $1,200?A) Cannot be determinedB) $54; $568; $378C) $568; $54; $378D) $378; $54; $568E) $108; $514; $378Answer: B Difficulty: DifficultRationale: ($1,200 - $1,000)/$1,000 = 12%; (0.6)14% + (0.4)10% = 12.4%; 12% = w5% + 12.4%(1 - w);w=.054; 1-w=.946; w = 0.054($1,000) = $54 (T-bills); 1 - w = 1 -0.054 = 0.946($1,000) = $946; $946 x 0.6 = $568 in X; $946 x 0.4 = $378 in Y.37. A reward-to-volatility ratio is useful in:A) measuring the standard deviation of returns.B) understanding how returns increase relative to risk increases.C) analyzing returns on variable rate bonds.D) assessing the effects of inflation.E) none of the above.Answer: B Difficulty: ModerateRationale: B is the only choice relevant to the reward-to-volatility ratio (risk and return).38. The change from a straight to a kinked capital allocation line is a result of:A) reward-to-volatility ratio increasing.B) borrowing rate exceeding lending rate.C) an investor's risk tolerance decreasing.D) increase in the portfolio proportion of the risk-free asset.E) none of the above.Answer: B Difficulty: DifficultRationale: The linear capital allocation line assumes that the investor may borrow and lend at the same rate (the risk-free rate), which obviously is not true. Relaxing this assumption and incorporating the higher borrowing rates into the model results in the kinked capital allocation line.39. The first major step in asset allocation is:A) assessing risk tolerance.B) analyzing financial statements.C) estimating security betas.D) identifying market anomalies.E) none of the above.Answer: A Difficulty: ModerateRationale: A should be the first consideration in asset allocation. B, C, and D refer to security selection.40. Based on their relative degrees of risk toleranceA) investors will hold varying amounts of the risky asset in their portfolios.B) all investors will have the same portfolio asset allocations.C) investors will hold varying amounts of the risk-free asset in their portfolios.D) A and C.E) none of the above.Answer: D Difficulty: EasyRationale: By determining levels of risk tolerance, investors can select the optimum portfolio for their own needs; these asset allocations will vary between amounts of risk-free and risky assets based on risk tolerance.41. Asset allocationA) may involve the decision as to the allocation between a risk-free asset and a riskyasset.B) may involve the decision as to the allocation among different risky assets.C) may involve considerable security analysis.D) A and B.E) A and C.Answer: D Difficulty: EasyRationale: A and B are possible steps in asset allocation. C is related to securityselection.42. In the mean-standard deviation graph, the line that connects the risk-free rate and theoptimal risky portfolio, P, is called ______________.A) the Security Market LineB) the Capital Allocation LineC) the Indifference CurveD) the investor's utility lineE) none of the aboveAnswer: B Difficulty: ModerateRationale: The Capital Allocation Line (CAL) illustrates the possible combinations of a risk-free asset and a risky asset available to the investor.43. Treasury bills are commonly viewed as risk-free assets becauseA) their short-term nature makes their values insensitive to interest rate fluctuations.B) the inflation uncertainty over their time to maturity is negligible.C) their term to maturity is identical to most investors' desired holding periods.D) Both A and B are true.E) Both B and C are true.Answer: D Difficulty: EasyRationale: Treasury bills do not exactly match most investor's desired holding periods, but because they mature in only a few weeks or months they are relatively free ofinterest rate sensitivity and inflation uncertainty.Use the following to answer questions 44-47:Your client, Bo Regard, holds a complete portfolio that consists of a portfolio of risky assets (P) and T-Bills. The information below refers to these assets.44. What is the expected return on Bo's complete portfolio?A) 10.32%B) 5.28%C) 9.62%D) 8.44%E) 7.58%Answer: A Difficulty: EasyRationale: E(r C) = .8*12.00% + .2*3.6% = 10.32%45. What is the standard deviation of Bo's complete portfolio?A) 7.20%B) 5.40%C) 6.92%D) 4.98%E) 5.76%Answer: E Difficulty: EasyRationale: Std. Dev. of C = .8*7.20% = 5.76%46. What is the equation of Bo's Capital Allocation Line?A) E(r C) = 7.2 + 3.6 * Standard Deviation of CB) E(r C) = 3.6 + 1.167 * Standard Deviation of CC) E(r C) = 3.6 + 12.0 * Standard Deviation of CD) E(r C) = 0.2 + 1.167 * Standard Deviation of CE) E(r C) = 3.6 + 0.857 * Standard Deviation of CAnswer: B Difficulty: ModerateRationale: The intercept is the risk-free rate (3.60%) and the slope is(12.00%-3.60%)/7.20% = 1.167.47. What are the proportions of Stocks A, B, and C, respectively in Bo's complete portfolio?A) 40%, 25%, 35%B) 8%, 5%, 7%C) 32%, 20%, 28%D) 16%, 10%, 14%E) 20%, 12.5%, 17.5%Answer: C Difficulty: ModerateRationale: Proportion in A = .8 * 40% = 32%; proportion in B = .8 * 25% = 20%;proportion in C = .8 * 35% = 28%.48. To build an indifference curve we can first find the utility of a portfolio with 100% inthe risk-free asset, thenA) find the utility of a portfolio with 0% in the risk-free asset.B) change the expected return of the portfolio and equate the utility to the standarddeviation.C) find another utility level with 0% risk.D) change the standard deviation of the portfolio and find the expected return theinvestor would require to maintain the same utility level.E) change the risk-free rate and find the utility level that results in the same standarddeviation.Answer: D Difficulty: DifficultRationale: This references the procedure described on page 207-208 of the text. The authors describe how to trace out indifference curves using a spreadsheet.49. The Capital Market LineI)is a special case of the Capital Allocation Line.II)represents the opportunity set of a passive investment strategy.III)has the one-month T-Bill rate as its intercept.IV)uses a broad index of common stocks as its risky portfolio.A) I, III, and IVB) II, III, and IVC) III and IVD) I, II, and IIIE) I, II, III, and IVAnswer: E Difficulty: ModerateRationale: 'The Capital Market Line is the Capital Allocation Line based on theone-month T-Bill rate and a broad index of common stocks. It applies to an investor pursuing a passive management strategy.50. An investor invests 40 percent of his wealth in a risky asset with an expected rate ofreturn of 0.18 and a variance of 0.10 and 60 percent in a T-bill that pays 4 percent. His portfolio's expected return and standard deviation are __________ and __________,respectively.A) 0.114; 0.112B) 0.087; 0.063C) 0.096; 0.126D) 0.087; 0.144E) none of the aboveAnswer: C Difficulty: ModerateRationale: E(r P) = 0.4(18%) + 0.6(4%) = 9.6%; s P = 0.4(0.10)1/2 = 12.6%.51. An investor invests 70 percent of his wealth in a risky asset with an expected rate ofreturn of 0.11 and a variance of 0.12 and 30 percent in a T-bill that pays 3 percent. His portfolio's expected return and standard deviation are __________ and __________,respectively.A) 0.086; 0.242B) 0.087; 0.267C) 0.295; 0.123D) 0.087; 0.182E) none of the aboveAnswer: A Difficulty: ModerateRationale: E(r P) = 0.7(11%) + 0.3(3%) = 8.6%; s P = 0.7(0.12)1/2 = 24.2%.Use the following to answer questions 52-54:You invest $100 in a risky asset with an expected rate of return of 0.11 and a standard deviation of 0.20 and a T-bill with a rate of return of 0.03.52. What percentages of your money must be invested in the risky asset and the risk-freeasset, respectively, to form a portfolio with an expected return of 0.08?A) 85% and 15%B) 75% and 25%C) 62.5% and 37.5%D) 57% and 43%E) cannot be determinedAnswer: C Difficulty: ModerateRationale: 8% = w1(11%) + (1 - w1)(3%); 8% = 11%w1 + 3% - 3%w1; 5% = 8%w1; w1 =0.625; 1 - w1 = 0.375; 0.625(11%) + 0.375(3%) = 8.0%.。

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。

完整版投资学第7版TestBank答案08Chapter 8 Index ModelsMultiple Choice Questions1. As diversification increases, the total variance of a portfolio approaches____________.A) 0B) 1C) the variance of the market portfolioD) infinityE) none of the aboveAnswer: C Difficulty: EasyRationale: As more and more securities are added to the portfolio, unsystematic risk decreases and most of the remaining risk is systematic, as measured by the variance of the market portfolio.2. The index model was first suggested by ____________.A) GrahamB) MarkowitzC) MillerD) SharpeE) none of the aboveAnswer: D Difficulty: EasyRationale: William Sharpe, building on the work of Harry Markowitz, developed theindex model.3. A single-index model uses __________ as a proxy for the systematic risk factor.A) a market index, such as the S&P 500B) the current account deficitC) the growth rate in GNPD) the unemployment rateE) none of the aboveAnswer: A Difficulty: EasyRationale: The single-index model uses a market index, such as the S&P 500, as a proxyfor the market, and thus for systematic risk.163Chapter 8 Index Models4. The Security Risk Evaluation book published by Merrill Lynch relies on the__________ most recent monthly observations to calculate regression parameters.A) 12B) 36C) 60D) 120E) none of the aboveAnswer: C Difficulty: EasyRationale: Most published betas and other regression parameters, including those published by Merrill Lynch, are based on five years of monthly return data.5. The Security Risk Evaluation book published by Merrill Lynch uses the__________ asa proxy for the market portfolio.A) Dow Jones Industrial AverageB) Dow Jones Transportation AverageC) S&P 500 IndexD) Wilshire 5000E) none of the aboveAnswer: C Difficulty: EasyRationale: The Merrill Lynch data (and much of the other published data sets) are basedon the S&P 500 index as a market proxy.6. According to the index model, covariances among security pairs areA) due to the influence of a single common factor represented by the market index returnB) extremely difficult to calculateC) related to industry-specific eventsD) usually positiveE) A and DAnswer: E Difficulty: EasyRationale: Most securities move together most of the time, and move with a market index, or market proxy.164Chapter 8 Index Models7. The intercept calculated by Merrill Lynch in the regression equations is equal toA) αin the CAPM(1 + β) α+ rB) fC) α+ r (1 -β) fD) 1 -αE) none of the aboveAnswer: C Difficulty: ModerateRationale: The intercept that Merrill Lynch calls alpha is really, using the parameters ofthe CAPM, an estimate of a + rf (1 - b). The apparent justification for this procedure isthat, on a monthly basis, rf(1 - b) is small and is apt to beswamped by the volatility of actual stock returns.8. Analysts may use regression analysis to estimate the index model for a stock. Whendoing so, the slope of the regression line is an estimate of ______________.of the asset A) the αthe βof the asset B)C) the σof the assetD) the of the asset δnone of the above E)Answer: B Difficulty: ModerateRationale: The slope of the regression line, b, measures the volatility of the stock versusthe volatility of the market.9. In a factor model, the return on a stock in a particular period will be related to_________.A) firm-specific eventsB) macroeconomic eventsC) the error termboth A and B D)E) neither A nor BAnswer: D Difficulty: ModerateRationale: The return on a stock is related to both firm-specific and macroeconomic events.165Chapter 8 Index Models10. Rosenberg and Guy found that __________ helped to predict a firm's beta.A) the firm's financial characteristicsB) the firm's industry groupC) firm sizeD) both A and BE) A, B and C all helped to predict betas.Answer: E Difficulty: ModerateRationale: Rosenberg and Guy found that after controlling for the firm's financial characteristics, the firm's industry group was a significant predictor of the firm's beta.11. If the index model is valid, _________ would be helpful in determining the covariancebetween assets K and L.A) βkB) βLC) σMD) all of the aboveE) none of the aboveAnswer: D Difficulty: ModerateRationale: If the index model is valid A, B, and C are determinants of the covariancebetween K and L.12. Rosenberg and Guy found that ___________ helped to predict firms' betas.A) debt/asset ratiosB) market capitalizationC) variance of earningsD) all of the aboveE) none of the aboveAnswer: D Difficulty: ModerateRationale: Rosenberg and Guy found that A, B, and C were determinants of firms' betas.166Chapter 8 Index Models13. If a firm's beta was calculated as 0.6 in a regression equation, Merrill Lynch would statethe adjusted beta at a numberA) less than 0.6 but greater than zero.B) between 0.6 and 1.0.C) between 1.0 and 1.6.D) greater than 1.6.E) zero or less.Answer: B Difficulty: ModerateRationale: Betas, on average, equal one; thus, betas over time regress toward the mean,or 1. Therefore, if historic betas are less than 1, adjusted betas are between 1 and the calculated beta.14. The beta of Exxon stock has been estimated as 1.2 by Merrill Lynch using regressionanalysis on a sample of historical returns. The Merrill Lynch adjusted beta of Exxon stock would be ___________.A) 1.20B) 1.32C) 1.13D) 1.0E) none of the aboveAnswer: C Difficulty: ModerateRationale: Adjusted beta = 2/3 sample beta + 1/3(1); = 2/3(1.2) + 1/3 = 1.13.15. Assume that stock market returns do not resemble a single-index structure. An investment fund analyzes 100 stocks in order to construct a mean-variance efficient portfolio constrained by 100 investments. They will need to calculate _____________expected returns and ___________ variances of returns.A) 100, 100B) 100, 4950C) 4950, 100D) 4950, 4950E) none of the aboveAnswer: A Difficulty: ModerateRationale: The expected returns of each of the 100 securities must be calculated.Inaddition, the 100 variances around these returns must be calculated.167Chapter 8 Index Models16. Assume that stock market returns do not resemble a single-index structure. An investment fund analyzes 100 stocks in order to construct a mean-variance efficient portfolio constrained by 100 investments. They will need to calculate ____________covariances.A) 45B) 100C) 4,950D) 10,000E) none of the aboveAnswer: C Difficulty: ModerateRationale: (n2 - n)/2 = (10,000 - 100)/2 = 4,950 covariances must be calculated. 17. Assume that stock market returns do follow a single-index structure. An investmentfund analyzes 200 stocks in order to construct a mean-variance efficient portfolio constrained by 200 investments. They will need to calculate ________ estimates of expected returns and ________ estimates of sensitivity coefficients to the macroeconomic factor.A) 200; 19,900B) 200; 200C) 19,900; 200D) 19,900; 19.900E) none of the aboveAnswer: B Difficulty: ModerateRationale: For a single-index model, n(200), expected returns and n(200) sensitivity coefficients to the macroeconomic factor must be estimated.18. Assume that stock market returns do follow a single-index structure. An investmentfund analyzes 500 stocks in order to construct a mean-variance efficient portfolio constrained by 500 investments. They will need to calculate ________ estimates of firm-specific variances and ________ estimates for the variance of the macroeconomic factor.A) 500; 1B) 500; 500C) 124,750; 1D) 124,750; 500E) 250,000; 500Answer: A Difficulty: ModerateRationale: For the single-index model, n(500) estimates of firm-specific variances mustbe calculated and 1 estimate for the variance of the common macroeconomic factor. 168Chapter 8 Index Models19. Consider the single-index model. The alpha of a stock is 0%. The return on the marketindex is 16%. The risk-free rate of return is 5%. The stock earns a return that exceedsthe risk-free rate by 11% and there are no firm-specific events affecting the stock performance. The βof the stock is _______.A) 0.67B) 0.75C) 1.0D) 1.33E) 1.50Answer: C Difficulty: ModerateRationale: 11% = 0% + b(11%); b = 1.0.20. Suppose you held a well-diversified portfolio with a very large number of securities,and that the single index model holds. If the óof your portfolio was 0.20 and ówas M0.16, the βof the p ortfolio would be approximately ________.A) 0.64B) 0.80C) 1.25D) 1.56E) none of the aboveAnswer: C Difficulty: Difficult 22222 = 1.56; b = 1.25. m = b Rationale: s; (0.2)p / s/(0.16)21. Suppose the following equation best describes the evolution of βover time: β= 0.25 + 0.75βt-1t If a stock had a βof 0.6 last year, you would forecast the βto be _______ in the comingyear.A) 0.45B) 0.60。

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. Over the past year you earned a nominal rate of interest of 10 percent on your money.The inflation rate was 5 percent over the same period. The exact actual growth rate of your purchasing power wasA) 15.5%.B) 10.0%.C) 5.0%.D) 4.8%.E) 15.0%Answer: D Difficulty: ModerateRationale: r = (1+R) / (1+I) - 1; 1.10% / 1.5% - 1 = 4.8%.2. A year ago, you invested $1,000 in a savings account that pays an annual interest rate of7%. What is your approximate annual real rate of return if the rate of inflation was 3% over the year?A) 4%.B) 10%.C) 7%.D) 3%.E) none of the above.Answer: A Difficulty: EasyRationale: 7% - 3% = 4%.3. If the annual real rate of interest is 5% and the expected inflation rate is 4%, the nominalrate of interest would be approximatelyA) 1%.B) 9%.C) 20%.D) 15%.E) none of the above.Answer: B Difficulty: EasyRationale: 5% + 4% = 9%.4. You purchased a share of stock for $20. One year later you received $1 as dividend andsold the share for $29. What was your holding period return?A) 45%B) 50%C) 5%D) 40%E) none of the aboveAnswer: B Difficulty: ModerateRationale: ($1 + $29 - $20)/$20 = 0.5000, or 50%.5. Which of the following determine(s) the level of real interest rates?I)the supply of savings by households and business firmsII)the demand for investment fundsIII)the government's net supply and/or demand for fundsA) I onlyB) II onlyC) I and II onlyD) I, II, and IIIE) none of the aboveAnswer: D Difficulty: ModerateRationale: The value of savings by households is the major supply of funds; the demand for investment funds is a portion of the total demand for funds; the government'sposition can be one of either net supplier, or net demander of funds. The above factors constitute the total supply and demand for funds, which determine real interest rates.6. Which of the following statement(s) is (are) true?I)The real rate of interest is determined by the supply and demand for funds.II)The real rate of interest is determined by the expected rate of inflation.III)The real rate of interest can be affected by actions of the Fed.IV)The real rate of interest is equal to the nominal interest rate plus the expected rate of inflation.A) I and II only.B) I and III only.C) III and IV only.D) II and III only.E) I, II, III, and IV onlyAnswer: B Difficulty: ModerateRationale: The expected rate of inflation is a determinant of nominal, not real, interest rates. Real rates are determined by the supply and demand for funds, which can be affected by the Fed.7. Which of the following statements is true?A) Inflation has no effect on the nominal rate of interest.B) The realized nominal rate of interest is always greater than the real rate of interest.C) Certificates of deposit offer a guaranteed real rate of interest.D) None of the above is true.E) A, B and CAnswer: D Difficulty: ModerateRationale: Expected inflation rates are a determinant of nominal interest rates. The realized nominal rate of interest would be negative if the difference between actual and anticipated inflation rates exceeded the real rate. The realized nominal rate of interest would be less than the real rate if the unexpected inflation were greater than the real rate of interest. Certificates of deposit contain a real rate based on an estimate of inflation that is not guaranteed.8. Other things equal, an increase in the government budget deficitA) drives the interest rate down.B) drives the interest rate up.C) might not have any effect on interest rates.D) increases business prospects.E) none of the above.Answer: B Difficulty: ModerateRationale: An increase in the government budget deficit, other things equal, causes the government to increase its borrowing, which increases the demand for funds and drives interest rates up.9. Ceteris paribus, a decrease in the demand for loanable fundsA) drives the interest rate down.B) drives the interest rate up.C) might not have any effect on interest rate.D) results from an increase in business prospects and a decrease in the level of savings.E) none of the above.Answer: A Difficulty: ModerateRationale: A decrease in demand, ceteris paribus, always drives interest rates down. An increase in business prospects would increase the demand for funds. The savings level affects the supply of, not the demand for, funds.10. The holding period return (HPR) on a share of stock is equal toA) the capital gain yield during the period, plus the inflation rate.B) the capital gain yield during the period, plus the dividend yield.C) the current yield, plus the dividend yield.D) the dividend yield, plus the risk premium.E) the change in stock price.Answer: B Difficulty: ModerateRationale: The HPR of any investment is the sum of the capital gain and the cash flow over the period, which for common stock is B.11. Historical records regarding return on stocks, Treasury bonds, and Treasury billsbetween 1926 and 2005 show thatA) stocks offered investors greater rates of return than bonds and bills.B) stock returns were less volatile than those of bonds and bills.C) bonds offered investors greater rates of return than stocks and bills.D) bills outperformed stocks and bonds.E) treasury bills always offered a rate of return greater than inflation.Answer: A Difficulty: ModerateRationale: The historical data show that, as expected, stocks offer a greater return and greater volatility than the other investment alternatives. Inflation sometimes exceeded the T-bill return.12. If the interest rate paid by borrowers and the interest rate received by savers accuratelyreflects the realized rate of inflation:A) borrowers gain and savers lose.B) savers gain and borrowers lose.C) both borrowers and savers lose.D) neither borrowers nor savers gain or lose.E) both borrowers and savers gain.Answer: D Difficulty: ModerateRationale: If the described interest rate accurately reflects the rate of inflation, bothborrowers and lenders are paying and receiving, respectively, the real rate of interest;thus, neither group gains.Use the following to answer questions 13-15:You have been given this probability distribution for the holding period return for KMP stock:13. What is the expected holding period return for KMP stock?A) 10.40%B) 9.32%C) 11.63%D) 11.54%E) 10.88%Answer: A Difficulty: ModerateRationale: HPR = .30 (18%) + .50 (12%) + .20 (-5%) = 10.4%14. What is the expected standard deviation for KMP stock?A) 6.91%B) 8.13%C) 7.79%D) 7.25%E) 8.85%Answer: B Difficulty: DifficultRationale: s = [.30 (18 - 10.4)2 + .50 (12 - 10.4)2 + .20 (-5 - 10.4)2]1/2 = 8.13%15. What is the expected variance for KMP stock?A) 66.04%B) 69.96%C) 77.04%D) 63.72%E) 78.45%Answer: A Difficulty: DifficultRationale: s = [.30 (18 - 10.4)2 + .50 (12 - 10.4)2 + .20 (-5 - 10.4)2] = 66.04%16. If the nominal return is constant, the after-tax real rate of returnA) declines as the inflation rate increases.B) increases as the inflation rate increases.C) declines as the inflation rate declines.D) increases as the inflation rate decreases.E) A and D.Answer: E Difficulty: ModerateRationale: Inflation rates have an inverse effect on after-tax real rates of return.17. The risk premium for common stocksA) cannot be zero, for investors would be unwilling to invest in common stocks.B) must always be positive, in theory.C) is negative, as common stocks are risky.D) A and B.E) A and C.Answer: D Difficulty: ModerateRationale: If the risk premium for common stocks were zero or negative, investorswould be unwilling to accept the lower returns for the increased risk.18. A risk-free intermediate or long-term investmentA) is free of all types of risk.B) does not guarantee the future purchasing power of its cash flows.C) does guarantee the future purchasing power of its cash flows as it is insured by the U.S. Treasury.D) A and B.E) B and C.Answer: B Difficulty: ModerateRationale: A risk-free U. S. Treasury bond is a fixed income instrument, and thus does not guarantee the future purchasing power of its cash flows. As a result, purchasing power risk is present.19. You purchase a share of Boeing stock for $90. One year later, after receiving a dividendof $3, you sell the stock for $92. What was your holding period return?A) 4.44%B) 2.22%C) 3.33%D) 5.56%E) none of the aboveAnswer: D Difficulty: ModerateRationale: HPR = (92 - 90 + 3) / 90 = 5.56%20. Toyota stock has the following probability distribution of expected prices one year fromnow:If you buy Toyota today for $55 and it will pay a dividend during the year of $4 per share, what is your expected holding period return on Toyota?A) 17.72%B) 18.89%C) 17.91%D) 18.18%E) None of the aboveAnswer: D Difficulty: DifficultRationale: E(P1) = .25 (54/55 - 1) + .40 (64/55 - 1) + .35 (74/55 - 1) = 18.18%.21. Which of the following factors would not be expected to affect the nominal interestrate?A) the supply of loanable fundsB) the demand for loanable fundsC) the coupon rate on previously issued government bondsD) the expected rate of inflationE) government spending and borrowingAnswer: C Difficulty: EasyRationale: The nominal interest rate is affected by supply, demand, government actions and inflation. Coupon rates on previously issued government bonds reflect historical interest rates but should not affect the current level of interest rates.22. Your Certificate of Deposit will mature in one week and you are considering how toinvest the proceeds. If you invest in a 30-day CD the bank will pay you 4%. If you invest in a 2-year CD the bank will pay you 6% interest. Which option would youchoose?A) the 30-day CD, no matter what you expect interest rates to do in the futureB) the 2-year CD, no matter what you expect interest rates to do in the futureC) the 30-day CD if you expect that interest rates will fall in the futureD) the 2-year CD if you expect that interest rates will fall in the futureE) You would be indifferent between the 30-day and the 2-year CDs.Answer: D Difficulty: ModerateRationale: You would prefer to lock in the higher rate on the 2-year CD rather than subject yourself to reinvestment rate risk. If you expected interest rates to rise in the future the opposite choice would be better.23. In words, the real rate of interest is approximately equal toA) the nominal rate minus the inflation rate.B) the inflation rate minus the nominal rate.C) the nominal rate times the inflation rate.D) the inflation rate divided by the nominal rate.E) the nominal rate plus the inflation rate.Answer: A Difficulty: EasyRationale: The actual relationship is (1 + real rate) = (1 + nominal rate) / (1 + inflation rate). This can be approximated by the equation: real rate = nominal rate - inflation rate.24. If the Federal Reserve lowers the discount rate, ceteris paribus, the equilibrium levels offunds lent will __________ and the equilibrium level of real interest rates will___________A) increase; increaseB) increase; decreaseC) decrease; increaseD) decrease; decreaseE) reverse direction from their previous trendsAnswer: B Difficulty: ModerateRationale: A lower discount rate would encourage banks to make more loans, which would increase the money supply. The supply curve would shift to the right and the equilibrium level of funds would increase while the equilibrium interest rate would fall.25. What has been the relationship between T-Bill rates and inflation rates since the 1980s?A) The T-Bill rate was sometimes higher than and sometimes lower than the inflationrate.B) The T-Bill rate has equaled the inflation rate plus a constant percentage.C) The inflation rate has equaled the T-Bill rate plus a constant percentage.D) The T-Bill rate has been higher than the inflation rate almost the entire period.E) The T-Bill rate has been lower than the inflation rate almost the entire period.Answer: D Difficulty: ModerateRationale: The T-Bill rate was higher than the inflation rate for over two decades.26. “Bracket Creep” happens whenA) tax liabilities are based on real income and there is a negative inflation rate.B) tax liabilities are based on real income and there is a positive inflation rate.C) tax liabilities are based on nominal income and there is a negative inflation rate.D) tax liabilities are based on nominal income and there is a positive inflation rate.E) too many peculiar people make their way into the highest tax bracket.Answer: D Difficulty: ModerateRationale: A positive inflation rate typically leads to higher nominal income. Higher nominal income means people will have higher tax liabilities and in some cases will put them in higher tax brackets. This can happen even when real income has declined.27. The holding-period return (HPR) for a stock is equal toA) the real yield minus the inflation rate.B) the nominal yield minus the real yield.C) the capital gains yield minus the tax rate.D) the capital gains yield minus the dividend yield.E) the dividend yield plus the capital gains yield.Answer: E Difficulty: EasyRationale: HPR consists of an income component and a price change component. The income component on a stock is the dividend yield. The price change component is the capital gains yield.28. The historical arithmetic rate of return on small stocks over the 1926-2005 period hasbeen _______. The standard deviation of small stocks' returns has been ________ than the standard deviation of large stocks' returns.A) 12.43%, lowerB) 13.11%, lowerC) 16.24%, higherD) 17.95%, higherE) 21.53%, higherAnswer: D Difficulty: ModerateRationale: See Table 5-5.Use the following to answer question 29:You have been given this probability distribution for the holding period return for Cheese, Inc stock:29. Assuming that the expected return on Cheese's stock is 14.35%, what is the standarddeviation of these returns?A) 4.72%B) 6.30%C) 4.38%D) 5.74%E) None of the aboveAnswer: D Difficulty: ModerateRationale: Variance = .20*(24-14.35)2 + .45*(15-14.35)2 + .35*(8-14.35)2 = 32.9275.Standard deviation = 32.9275.1/2 = 5.74.30. An investor purchased a bond 45 days ago for $985. He received $15 in interest andsold the bond for $980. What is the holding period return on his investment?A) 1.52%B) 0.50%C) 1.92%D) 0.01%E) None of the aboveAnswer: E Difficulty: EasyRationale: HPR = ($15+980-985)/$985 = .010152284 = approximately 1.02%.31. Over the past year you earned a nominal rate of interest of 8 percent on your money.The inflation rate was 3.5 percent over the same period. The exact actual growth rate of your purchasing power wasA) 15.55%.B) 4.35%.C) 5.02%.D) 4.81%.E) 15.04%Answer: B Difficulty: ModerateRationale: r = (1+R) / (1+I) - 1; 1.08 / 1.035 - 1 = 4.35%.32. Over the past year you earned a nominal rate of interest of 14 percent on your money.The inflation rate was 2 percent over the same period. The exact actual growth rate of your purchasing power wasA) 11.76%.B) 16.00%.C) 15.02%.D) 14.32%.E) none of the above.Answer: A Difficulty: ModerateRationale: r = (1+R) / (1+I) - 1; 1.14 / 1.02 - 1 = 11.76%.33. Over the past year you earned a nominal rate of interest of 12.5 percent on your money.The inflation rate was 2.6 percent over the same period. The exact actual growth rate of your purchasing power wasA) 9.15%.B) 9.90%.C) 9.65%.D) 10.52%.E) none of the above.Answer: C Difficulty: ModerateRationale: r = (1+R) / (1+I) - 1; 1.125 / 1.026 - 1 = 9.65%.34. A year ago, you invested $1,000 in a savings account that pays an annual interest rate of4%. What is your approximate annual real rate of return if the rate of inflation was 2% over the year?A) 4%.B) 2%.C) 6%.D) 3%.E) none of the above.Answer: B Difficulty: EasyRationale: 4% - 2% = 2%.35. A year ago, you invested $2,500 in a savings account that pays an annual interest rate of2.5%. What is your approximate annual real rate of return if the rate of inflation was1.6% over the year?A) 4.1%.B) 2.5%.C) 2.9%.D) 1.6%.E) none of the above.Answer: E Difficulty: EasyRationale: 2.5% - 1.6% = 0.9%.36. A year ago, you invested $12,000 in an investment that produced a return of 16%. Whatis your approximate annual real rate of return if the rate of inflation was 2% over the year?A) 18%.B) 2%.C) 16%.D) 15%.E) none of the above.Answer: E Difficulty: EasyRationale: 16% - 2% = 14%.37. If the annual real rate of interest is 3.5% and the expected inflation rate is 2.5%, thenominal rate of interest would be approximatelyA) 3.5%.B) 2.5%.C) 1%.D) 6.8%.E) none of the above.Answer: E Difficulty: EasyRationale: 3.5% + 2.5% = 6%.38. If the annual real rate of interest is 2.5% and the expected inflation rate is 3.4%, thenominal rate of interest would be approximatelyA) 4.9%.B) 0.9%.C) -0.9%.D) 7%.E) none of the above.Answer: E Difficulty: EasyRationale: 2.5% + 3.4% = 5.9%.39. If the annual real rate of interest is 4% and the expected inflation rate is 3%, the nominalrate of interest would be approximatelyA) 4%.B) 3%.C) 1%.D) 5%.E) none of the above.Answer: E Difficulty: EasyRationale: 4% + 3% = 7%.40. You purchased a share of stock for $12. One year later you received $0.25 as dividendand sold the share for $12.92. What was your holding period return?A) 9.75%B) 10.65%C) 11.75%D) 11.25%E) none of the aboveAnswer: A Difficulty: ModerateRationale: ($0.25 + $12.92 - $12)/$12 = 0.975, or 9.75%.41. You purchased a share of stock for $120. One year later you received $1.82 as dividendand sold the share for $136. What was your holding period return?A) 15.67%B) 22.12%C) 15.67%D) 13.24%E) none of the aboveAnswer: E Difficulty: ModerateRationale: ($1.82 + $136 - $120)/$120 = 0.1485, or 14.85%.42. You purchased a share of stock for $65. One year later you received $2.37 as dividendand sold the share for $63. What was your holding period return?A) 0.57%B) -0.2550%C) -0.89%D) 1.63%E) none of the aboveAnswer: A Difficulty: ModerateRationale: ($2.37 + $63 - $65)/$65 = 0.0056, or 0.57%.Use the following to answer questions 43-45:You have been given this probability distribution for the holding period return for a stock:43. What is the expected holding period return for the stock?A) 11.67%B) 8.33%C) 9.56%D) 12.4%E) None of the aboveAnswer: E Difficulty: ModerateRationale: HPR = .40 (22%) + .35 (11%) + .25 (-9%) = 10.4%44. What is the expected standard deviation for the stock?A) 2.07%B) 9.96%C) 7.04%D) 1.44%E) None of the aboveAnswer: E Difficulty: DifficultRationale: s = [.40 (22 - 10.4)2 + .35 (11 - 10.4)2 + .25 (-9 - 10.4)2]1/2 = 12.167%45. What is the expected variance for the stock?A) 142.07%B) 189.96%C) 177.04%D) 128.17%E) None of the aboveAnswer: E Difficulty: DifficultRationale: s = [ .40 (22 - 10.4)2 + .35 (11 - 10.4)2 + .25 (-9 - 10.4)2] = 148.04%46. Which of the following measures of risk best highlights the potential loss from extremenegative returns?A) Standard deviationB) VarianceC) Upper partial standard deviationD) Value at Risk (VaR)E) None of the aboveAnswer: D Difficulty: Moderate47. Over the past year you earned a nominal rate of interest of 3.6 percent on your money.The inflation rate was 3.1 percent over the same period. The exact actual growth rate of your purchasing power wasA) 3.6%.B) 3.1%.C) 0.5%.D) 6.7%.E) none of the aboveAnswer: E Difficulty: ModerateRationale: r = (1+R) / (1+I) - 1; 1.036/ 1.031% - 1 = 0.328%.48. A year ago, you invested $1,000 in a savings account that pays an annual interest rate of4.3%. What is your approximate annual real rate of return if the rate of inflation was 3%over the year?A) 4.3%.B) -1.3%.C) 7.3%.D) 3%.E) none of the above.Answer: E Difficulty: EasyRationale: 4.3% - 3% = 1.3%.49. If the annual real rate of interest is 3.5% and the expected inflation rate is 3.5%, thenominal rate of interest would be approximatelyA) 0%.B) 3.5%.C) 12.25%.D) 7%.E) none of the above.Answer: D Difficulty: EasyRationale: 3.5% + 3.5% = 7%.50. You purchased a share of CSCO stock for $20. One year later you received $2 asdividend and sold the share for $31. What was your holding period return?A) 45%B) 50%C) 60%D) 40%E) none of the aboveAnswer: E Difficulty: ModerateRationale: ($2 + $31 - $20)/$20 = 0.65, or 65%.Use the following to answer questions 51-53:You have been given this probability distribution for the holding period return for GM stock:51. What is the expected holding period return for GM stock?A) 10.4%B) 11.4%C) 12.4%D) 13.4%E) 14.4%Answer: E Difficulty: ModerateRationale: HPR = .40 (30%) + .40 (11%) + .20 (-10%) = 14.4%52. What is the expected standard deviation for GM stock?A) 16.91%B) 16.13%C) 13.79%D) 15.25%E) 14.87%Answer: E Difficulty: DifficultRationale: s = [.40 (30 - 14.4)2 + .40 (11 - 14.4)2 + .20 (-10 - 14.4)2]1/2 = 14.87%53. What is the expected variance for GM stock?A) 200.00%B) 221.04%C) 246.37%D) 14.87%E) 16.13%Answer: B Difficulty: DifficultRationale: s = [.40 (30 - 14.4)2 + .40 (11 - 14.4)2 + .20 (-10 - 14.4)2] = 221.04%54. You purchase a share of CAT stock for $90. One year later, after receiving a dividendof $4, you sell the stock for $97. What was your holding period return?A) 14.44%B) 12.22%C) 13.33%D) 5.56%E) none of the aboveAnswer: B Difficulty: ModerateRationale: HPR = ([97 - 90] + 4) / 90 = 12.22%55. When comparing investments with different horizons the ____________ provides themore accurate comparison.A) arithmetic averageB) effective annual rateC) average annual returnD) historical annual averageE) none of the aboveAnswer: B Difficulty: Easy56. Annual Percentage Rates (APRs) are computed usingA) simple interest.B) compound interest.C) either A or B can be used.D) best estimates of expected real costs.E) none of the above.Answer: A Difficulty: Easy57. An investment provides a 2% return semi-annually, its effective annual rate isA) 2%.B) 4%.C) 4.02%D) 4.04%E) none of the aboveAnswer: D Difficulty: ModerateRationale: (1.02)2 -1 = 4.04%58. An investment provides a 3% return semi-annually, its effective annual rate isA) 3%.B) 6%.C) 6.06%D) 6.09%E) none of the aboveAnswer: D Difficulty: ModerateRationale: (1.03)2 -1 = 6.09%59. An investment provides a 2.1% return quarterly, its effective annual rate isA) 2.1%.B) 8.4%.C) 8.56%D) 8.67%E) none of the aboveAnswer: D Difficulty: ModerateRationale: (1.021)4 -1 = 8.67%60. Skewnes is a measure of ____________.A) how fat the tails of a distribution areB) the downside risk of a distributionC) the normality of a distributionD) the dividend yield of the distributionE) None of the aboveAnswer: C Difficulty: Moderate61. Kurtosis is a measure of ____________.A) how fat the tails of a distribution areB) the downside risk of a distributionC) the normality of a distributionD) the dividend yield of the distributionE) A and CAnswer: C Difficulty: Moderate62. When a distribution is positively skewed, ____________.A) standard deviation overestimates riskB) standard deviation correctly estimates riskC) standard deviation underestimates riskD) the tails are fatter than in a normal distributionE) none of the aboveAnswer: A Difficulty: Moderate63. When a distribution is negatively skewed, ____________.A) standard deviation overestimates riskB) standard deviation correctly estimates riskC) standard deviation underestimates riskD) the tails are fatter than in a normal distributionE) none of the aboveAnswer: C Difficulty: Moderate64. If a distribution has “fat tails” it exhibitsA) positive skewnessB) negative skewnessC) a kurtosis of zeroD) positive kutrosisE) A and DAnswer: D Difficulty: ModerateEssay Questions65. Discuss the relationships between interest rates (both real and nominal), expectedinflation rates, and tax rates on investment returns.Difficulty: ModerateAnswer:The nominal interest rate is the quoted interest rate; however this rate is approximately equal to the real rate of interest plus the expected rate of inflation. Thus, an investor is expecting to earn the real rate in terms of the increased purchasing power resulting from the investment. In addition, the investor should consider the after-tax returns on theinvestment. The higher the inflation rate, the lower the real after-tax rate of return.Investors suffer an inflation penalty equal to the tax rate times the inflation rate.The rationale for this question is to ascertain that the student understands therelationships among these basic determinants of the after-tax real rate of return.66. Discuss why common stocks must earn a risk premium.Difficulty: EasyAnswer:Most investors are risk averse; that is, in order to accept the risk involved in investing in common stocks, the investors expect a return from the stocks over and above the return the investors could earn from a risk-free investment, such as U. S. Treasury issues. This excess return (the return in excess of the risk-free rate) is the risk premium required by the investors to invest in common stocks.The purpose of this question is to ascertain that the students understanding the basicrisk-return relationship, as the relationship applies to investing in common stocks vs. a risk-free asset (i.e., why would investors be willing to assume the risk of common stock as investment vehicles)?67. Discuss the law of one price and how this concept relates to the possibility of earningarbitrage profits?Difficulty: ModerateAnswer:The law of one price states that equivalent securities are equally (or almost equally) priced when sold on different markets. As a result, risk-free arbitrage profits should not be possible.The purpose of this question to introduce the student to arbitrage profits and market efficiency.68. Discuss the historical distributions of each of the following in terms of their averagereturn and the dispersion of their returns: U. S. small company stocks, U. S. largecompany stocks, U. S. long-term government bonds, and U.S. T-bills. Would any of these investments cause a loss in purchasing power during a 1926-2005 holding period?Difficulty: DifficultAnswer:The data given in Tables 5.3 & 5.5Whether the averages are measured on a geometric basis or an arithmetic basis, theranking is always the same, with small company average>large companyaverage>government bond average>T-bill average. With regard to risk, therelationships among the standard deviations are small company>largecompany>government bonds>T-bills. These ranks indicate that the ex-post dataconfirm what would be expected - higher returns are earned to compensate for theincreased risk. None of these investments would have caused a loss in purchasingpower during the 1926-2002 period, because all had average returns higher than the average inflation rate.The goal of this question is to see if students have a general idea of the historicalrelationships among the returns and risk levels of various categories of investmentsrelative to each other and to the level of inflation.。

（完整版）投资学第7版TestBank答案11Multiple Choice Questions1. If you believe in the ________ form of the EMH, you believe that stock prices reflect allrelevant information including historical stock prices and current public informationabout the firm, but not information that is available only to insiders.A) semistrongB) strongC) weakD) A, B, and CE) none of the aboveAnswer: A Difficulty: EasyRationale: The semistrong form of EMH maintains that stock prices immediately reflect all historical and current public information, but not inside information.2. Proponents of the EMH typically advocateA) an active trading strategy.B) investing in an index fund.C) a passive investment strategy.D) A and BE) B and CAnswer: E Difficulty: EasyRationale: Believers of market efficiency advocate passive investment strategies, andan investment in an index fund is one of the most practical passive investment strategies, especially for small investors.3. If you believe in the _______ form of the EMH, you believethat stock prices reflect allinformation that can be derived by examining market trading data such as the history of past stock prices, trading volume or short interest.A) semistrongB) strongC) weakD) all of the aboveE) none of the aboveAnswer: C Difficulty: EasyRationale: The information described above is market data, which is the data set for the weak form of market efficiency. The semistrong form includes the above plus all other public information. The strong form includes all public and private information.4. If you believe in the _________ form of the EMH, you believe that stock prices reflectall available information, including information that is available only to insiders.A) semistrongB) strongC) weakD) all of the aboveE) none of the aboveAnswer: B Difficulty: EasyRationale: The strong form includes all public and private information.5. If you believe in the reversal effect, you shouldA) buy bonds in this period if you held stocks in the last period.B) buy stocks in this period if you held bonds in the last period.C) buy stocks this period that performed poorly last period.D) go short.E) C and DAnswer: C Difficulty: EasyRationale: The reversal effect states that stocks that do well in one period tend toperform poorly in the subsequent period, and vice versa.6. __________ focus more on past price movements of a firm's stock than on theunderlying determinants of future profitability.A) Credit analystsB) Fundamental analystsC) Systems analystsD) Technical analystsE) All of the aboveAnswer: D Difficulty: EasyRationale: Technicians attempt to predict future stock prices based on historical stock prices.7. _________ above which it is difficult for the market to rise.A) Book value is a valueB) Resistance level is a valueC) Support level is a valueD) A and BE) A and CAnswer: B Difficulty: EasyRationale: When stock prices have remained stable for a long period, these prices are termed resistance levels; technicians believe it is difficult for the stock prices topenetrate these resistance levels.8. ___________ the return on a stock beyond what would be predicted from marketmovements alone.A) An excess economic return isB) An economic return isC) An abnormal return isD) A and BE) A and CAnswer: E Difficulty: EasyRationale: An economic return is the expected return, based on the perceived level of risk and market factors. When returns exceed these levels, the returns are calledabnormal or excess economic returns.9. The debate over whether markets are efficient will probably never be resolved becauseof ________.A) the lucky event issue.B) the magnitude issue.C) the selection bias issue.D) all of the above.E) none of the above.Answer: D Difficulty: EasyRationale: Factors A, B, and C all exist make rigid testing of market efficiency difficult or impossible.10. A common strategy for passive management is ____________.A) creating an index fundB) creating a small firm fundC) creating an investment clubD) A and CE) B and CAnswer: A Difficulty: EasyRationale: The index fund is, by definition, passively managed. The other investment alternatives may or may not be managed passively.11. Arbel (1985) found thatA) the January effect was highest for neglected firms.B) the book-to-market value ratio effect was highest in JanuaryC) the liquidity effect was highest for small firms.D) the neglected firm effect was independent of the small firm effect.E) small firms had higher book-to-market value ratios.Answer: A Difficulty: ModerateRationale: Arbel divided firms into highly researched, moderately researched, and neglected groups based on the number of institutions holding the stock.12. Researchers have found that most of the small firm effect occursA) during the spring months.B) during the summer months.C) in December.D) in January.E) randomly.Answer: D Difficulty: ModerateRationale: Much of the so-called small firm effect simply may be the tax-effect as investors sell stocks on which they have losses in December and reinvest the funds in January. As small firms are especially volatile, these actions affect small firms in amore dramatic fashion.13. Malkiel (1995) calculated that the average alphas, or abnormal returns, on a largesample of mutual funds between 1972 and 1991 wereA) significantly positive.B) significantly negative.C) statistically indistinguishable from zero.D) positive before 1981 and negative thereafter.E) negative before 1981 and positive thereafter.Answer: C Difficulty: ModerateRationale: Malkiel's study suggests that fund managers do not beat the market on arisk-adjusted basis.14. Basu (1977, 1983) found that firms with low P/E ratiosA) earned higher average returns than firms with high P/E ratios.B) earned the same average returns as firms with high P/E ratios.C) earned lower average returns than firms with high P/E ratios.D) had higher dividend yields than firms with high P/E ratios.E) none of the above.Answer: A Difficulty: ModerateRationale: Firms with high P/E ratios already have an inflated price relative to earnings and thus tend to have lower returns than low P/E ratio stocks. However, the P/E ratio may capture risk not fully impounded in market betas so this may represent an appropriate risk adjustment rather than a market anomaly.15. Jaffe (1974) found that stock prices _________ after insiders intensively bought shares.A) decreasedB) did not changeC) increasedD) became extremely volatileE) became much less volatileAnswer: C Difficulty: ModerateRationale: Insider trading may signal private information.16. Banz (1981) found that, on average, the risk-adjusted returns of small firmsA) were higher than the risk-adjusted returns of large firms.B) were the same as the risk-adjusted returns of large firms.C) were lower than the risk-adjusted returns of large firms.D) were unrelated to the risk-adjusted returns of large firms.E) were negative.Answer: A Difficulty: ModerateRationale: Banz found A to be true, although subsequent studies have attempted to explain the small firm effect as the January effect, the neglected firm effect, etc.17. Proponents of the EMH think technical analystsA) should focus on relative strength.B) should focus on resistance levels.C) should focus on support levels.D) should focus on financial statements.E) are wasting their time.Answer: E Difficulty: ModerateRationale: Technical analysts attempt to predict future stock prices from historic stock prices; proponents of EMH believe that stock price changes are random variables.18. Studies of positive earnings surprises have shown that there isA) a positive abnormal return on the day positive earnings surprises are announced.B) a positive drift in the stock price on the days following the earnings surpriseannouncement.C) a negative drift in the stock price on the days following the earnings surpriseannouncement.D) both A and B are true.E) both A and C are true.Answer: D Difficulty: ModerateRationale: The market appears to adjust to earnings information gradually, resulting in a sustained period of abnormal returns.19. On November 22, 2005 the stock price of Walmart was $39.50 and the retailer stockindex was 600.30. On November 25, 2005 the stock price of Walmart was $40.25 and the retailer stock index was 605.20. Consider the ratio of Walmart to the retailer index on November 22 and November 25. Walmart is _______ the retail industry andtechnical analysts who follow relative strength would advise _______ the stock.A) outperforming, buyingB) outperforming, sellingC) underperforming, buyingD) underperforming, sellingE) equally performing, neither buying nor sellingAnswer: A Difficulty: ModerateRationale: 11/22: $39.50/600.30 = 0.0658; 11/25: $40.25/605.20 = 0.0665; Thus,K-Mart's relative strength is improving and technicians using this technique would recommend buying.20. Work by Amihud and Mendelson (1986,1991)A) argues that investors will demand a rate of return premium to invest in less liquidstocks.B) may help explain the small firm effect.C) may be related to the neglected firm effect.D) B and C.E) A, B, and C.Answer: E Difficulty: ModerateRationale: Lack of liquidity may affect the returns of small and neglected firms;however the theory does not explain why the abnormal returns are concentrated inJanuary.21. Fama and French (1992) found that the stocks of firms within the highest decile ofmarket/book ratios had average monthly returns of _______ while the stocks of firms within the lowest decile of market/book ratios had average monthly returnsof________.A) greater than 1%, greater than 1%B) greater than 1%, less than 1%C) less than 1%, greater than 1%D) less than 1%, less than 1%E) less than 0.5%, greater than 0.5%Answer: C Difficulty: ModerateRationale: This finding suggests either that low market-to-book ratio firms arerelatively underpriced, or that the market-to-book ratio is serving as a proxy for a risk factor that affects expected equilibrium returns.22. A market decline of 23% on a day when there is no significant macroeconomic event______ consistent with the EMH because ________.A) would be, it was a clear response to macroeconomic news.B) would be, it was not a clear response to macroeconomic news.C) would not be, it was a clear response to macroeconomic news.D) would not be, it was not a clear response to macroeconomic news.E) none of the above.Answer: D Difficulty: ModerateRationale: This happened on October 19, 1987. Although this specific event is not mentioned in this edition of the book, it is an example of something that would beconsidered a violation of the EMH.23. In an efficient market, __________.A) security prices react quickly to new informationB) security prices are seldom far above or below their justified levelsC) security analysts will not enable investors to realize superior returns consistentlyD) one cannot make moneyE) A, B, and CAnswer: E Difficulty: EasyRationale: A, B, and C are true; however, even in an efficient market one should be able to earn the appropriate risk-adjustedrate of return.24. The weak form of the efficient market hypothesis asserts thatA) stock prices do not rapidly adjust to new information contained in past prices or pastdata.B) future changes in stock prices cannot be predicted from past prices.C) technicians cannot expect to outperform the market.D) A and BE) B and CAnswer: E Difficulty: EasyRationale: Stock prices do adjust rapidly to new information.25. A support level is the price range at which a technical analyst would expect theA) supply of a stock to increase dramatically.B) supply of a stock to decrease substantially.C) demand for a stock to increase substantially.D) demand for a stock to decrease substantially.E) price of a stock to fall.Answer: C Difficulty: EasyRationale: A support level is considered to be a level below that the price of the stock is unlikely to fall and is believed to be determined by market psychology.26. A finding that _________ would provide evidence against the semistrong form of theefficient market theory.A) low P/E stocks tend to have positive abnormal returnsB) trend analysis is worthless in determining stock pricesC) one can consistently outperform the market by adoptingthe contrarian approachexemplified by the reversals phenomenonD) A and BE) A and CAnswer: E Difficulty: ModerateRationale: Both A and C are inconsistent with the semistrong form of the EMH.27. The weak form of the efficient market hypothesis contradictsA) technical analysis, but supports fundamental analysis as valid.B) fundamental analysis, but supports technical analysis as valid.C) both fundamental analysis and technical analysis.D) technical analysis, but is silent on the possibility of successful fundamentalanalysis.E) none of the above.Answer: D Difficulty: ModerateRationale: The process of fundamental analysis makes the market more efficient, and thus the work of the fundamentalist more difficult. The data set for the weak form of the EMH is market data, which is the only data used exclusively by technicians.Fundamentalists use all public information.28. Two basic assumptions of technical analysis are that security prices adjustA) rapidly to new information and market prices are determined by the interaction ofsupply and demand.B) rapidly to new information and liquidity is provided by security dealers.C) gradually to new information and market prices are determined by the interaction ofsupply and demand.D) gradually to new information and liquidity is provided by security dealers.E) rapidly to information and to the actions of insiders.Answer: C Difficulty: ModerateRationale: Technicians follow market data--price changes and volume of trading (as indicator of supply and demand) believing that they can identify price trends as security prices adjust gradually.29. Cumulative abnormal returns (CAR)A) are used in event studies.B) are better measures of security returns due to firm-specific events than are abnormalreturns (AR).C) are cumulated over the period prior to the firm-specific event.D) A and B.E) A and C.Answer: D Difficulty: ModerateRationale: As leakage of information occurs, the accumulated abnormal returns that are abnormal returns summed over the period of interest (around the event date) are better measures of the effect of firm-specific events.30. Studies of mutual fund performanceA) indicate that one should not randomly select a mutual fund.B) indicate that historical performance is not necessarily indicative of futureperformance.C) indicate that the professional management of the fund insures above market returns.D) A and B.E) B and C.Answer: D Difficulty: EasyRationale: Studies show that all funds do not outperform the market and that historical performance is not necessarily an indicator of future performance.31. The likelihood of an investment newsletter's successfully predicting the direction of themarket for three consecutive years by chance should beA) between 50% and 70%.B) between 25% and 50%.C) between 10% and 25%.D) less than 10%.E) greater than 70%.Answer: C Difficulty: ModerateRationale: The probability of successful prediction for 3 consecutive years is 23, or12.5%.32. In an efficient market the correlation coefficient between stock returns for twonon-overlapping time periods should beA) positive and large.B) positive and small.C) zero.D) negative and small.E) negative and large.Answer: C Difficulty: ModerateRationale: In an efficient market there should be no serial correlation between returns from non-overlapping periods.33. The weather report says that a devastating and unexpected freeze is expected to hitFlorida tonight, during the peak of the citrus harvest. In an efficient market one would expect the price of Florida Orange's stock toA) drop immediately.B) remain unchanged.C) increase immediately.D) gradually decline for the next several weeks.E) gradually increase for the next several weeks.Answer: A Difficulty: ModerateRationale: In an efficient market the price of the stock should drop immediately when the bad news is announced. If later news changes the perceived impact to FloridaOrange, the price may once again adjust quickly to the new information. A gradual change is a violation of the EMH.34. Matthews Corporation has a beta of 1.2. The annualized market return yesterday was13%, and the risk-free rate is currently 5%. You observe that Matthews had anannualized return yesterday of 17%. Assuming that markets are efficient, this suggests thatA) bad news about Matthews was announced yesterday.B) good news about Matthews was announced yesterday.C) no news about Matthews was announced yesterday.D) interest rates rose yesterday.E) interest rates fell yesterday.Answer: B Difficulty: ModerateRationale: AR = 17% - (5% + 1.2 (8%)) = +2.4%. A positive abnormal return suggests that there was firm-specific good news.35. Nicholas Manufacturing just announced yesterday that its 4th quarter earnings will be10% higher than last year's 4th quarter. You observe that Nicholas had an abnormal return of -1.2% yesterday. This suggests thatA) the market is not efficient.B) Nicholas' stock will probably rise in value tomorrow.C) investors expected the earnings increase to be larger than what was actuallyannounced.D) investors expected the earnings increase to be smaller than what was actuallyannounced.E) earnings are expected to decrease next quarter.Answer: C Difficulty: ModerateRationale: Anticipated earnings changes are impounded into a security's price as soon as expectations are formed. Therefore a negative market response indicates that the earnings surprise was negative, that is, the increase was less than anticipated.36. When Maurice Kendall first examined stock price patterns in 1953, he found thatA) certain patterns tended to repeat within the business cycle.B) there were no predictable patterns in stock prices.C) stocks whose prices had increased consistently for one week tended to have a netdecrease the following week.D) stocks whose prices had increased consistently for one week tended to have a netincrease the following week.E) the direction of change in stock prices was unpredictable, but the amount of changefollowed a distinct pattern.Answer: B Difficulty: EasyRationale: The first studies in this area were made possible by the development ofcomputer technology. Kendall's study was the first to indicate that markets wereefficient.37. If stock prices follow a random walkA) it implies that investors are irrational.B) it means that the market cannot be efficient.C) price levels are not random.D) price changes are random.E) price movements are predictable.Answer: D Difficulty: EasyRationale: A random walk means that the changes in prices are random andindependent.38. The main difference between the three forms of market efficiency is thatA) the definition of efficiency differs.B) the definition of excess return differs.C) the definition of prices differs.D) the definition of information differs.E) they were discovered by different people.Answer: D Difficulty: ModerateRationale: The main difference is that weak form encompasses historical data,semistrong form encompasses historical data and current public information, and strong form encompasses historical data, current public information, and inside information.All of the other definitions remain the same.39. Chartists practiceA) technical analysis.B) fundamental analysis.C) regression analysis.D) insider analysis.E) psychoanalysis.Answer: A Difficulty: EasyRationale: Chartist is another name for a technical analyst.40. Which of the following are used by fundamental analysts to determine proper stockprices?I)trendlinesII)earningsIII)dividend prospectsIV)expectations of future interest ratesV)resistance levelsA) I, IV, and VB) I, II, and IIIC) II, III, and IVD) II, IV, and VE) All of the items are used by fundamental analysts.Answer: C Difficulty: ModerateRationale: Analysts look at fundamental factors such as earnings, dividend prospects, expectation of future interest rates,and risk of the firm. The information is used to determine the present value of future cash flows to stockholders. Technical analysts use trendlines and resistance levels.41. According to proponents of the efficient market hypothesis, the best strategy for a smallinvestor with a portfolio worth $40,000 is probably toA) perform fundamental analysis.B) exploit market anomalies.C) invest in Treasury securities.D) invest in derivative securities.E) invest in mutual funds.Answer: E Difficulty: ModerateRationale: Individual investors tend to have relatively small portfolios and are usually unable to realize economies of size. The best strategy is to pool funds with other small investors and allow professional managers to invest the funds.42. Which of the following are investment superstars who have consistently shown superiorperformance?I)Warren BuffetII)Phoebe BuffetIII)Peter LynchIV)Merrill LynchV)Jimmy BuffetA) I, III, and IVB) II, III, and IVC) I and IIID) III and IVE) I, III, IV, and VAnswer: C Difficulty: ModerateRationale: Warren Buffet manages Berkshire Hathaway and Peter Lynch managedFidelity's Magellan Fund. Phoebe Buffet is a character on NBC's and Jimmy Buffet is Away in Margaritaville. Merrill Lynch isn't a person.43. Google has a beta of 1.0. The annualized market return yesterday was 11%, and therisk-free rate is currently 5%. You observe that Google had an annualized returnyesterday of 14%. Assuming that markets are efficient, this suggests thatA) bad news about Google was announced yesterday.B) good news about Google was announced yesterday.C) no news about Google was announced yesterday.D) interest rates rose yesterday.E) interest rates fell yesterday.Answer: B Difficulty: ModerateRationale: AR = 14% - (5% + 1.0 (6%)) = +3.0%. A positive abnormal return suggests that there was firm-specific good news.44. Music Doctors has a beta of 2.25. The annualized market return yesterday was 12%,and the risk-free rate is currently 4%. You observe that Music Doctors had anannualized return yesterday of 15%. Assuming that markets are efficient, this suggests thatA) bad news about Music Doctors was announced yesterday.B) good news about Music Doctors was announced yesterday.C) no news about Music Doctors was announced yesterday.D) interest rates rose yesterday.E) interest rates fell yesterday.Answer: A Difficulty: ModerateRationale: AR = 15% - (4% + 2.25 (8%)) = -7.0%. A negative abnormal return suggests that there was firm-specific bad news.45. QQAG has a beta of 1.7. The annualized market return yesterday was 13%, and therisk-free rate is currently 3%. You observe that QQAG had an annualized returnyesterday of 20%. Assuming that markets are efficient, this suggests thatA) bad news about QQAG was announced yesterday.B) good news about QQAG was announced yesterday.C) no significant news about QQAG was announced yesterday.D) interest rates rose yesterday.E) interest rates fell yesterday.Answer: C Difficulty: ModerateRationale: AR = 20% - (3% + 1.7 (10%)) = 0.0%. A positive abnormal return suggests that there was firm-specific good news and a negative abnormal return suggests that there was firm-specific bad news.46. QQAG just announced yesterday that its 4th quarter earnings will be 35% higher thanlast year's 4th quarter. You observe that QQAG had an abnormal return of -1.7%yesterday. This suggests thatA) the market is not efficient.B) QQAG stock will probably rise in value tomorrow.C) investors expected the earnings increase to be larger than what was actuallyannounced.D) investors expected the earnings increase to be smaller than what was actuallyannounced.E) earnings are expected to decrease next quarter.Answer: C Difficulty: ModerateRationale: Anticipated earnings changes are impounded into a security's price as soon as expectations are formed. Therefore a negative market response indicates that the earnings surprise was negative, that is, the increase was less than anticipated.47. LJP Corporation just announced yesterday that it would undertake an international jointventure. You observe that LJP had an abnormal return of 3% yesterday. This suggests thatA) the market is not efficient.B) LJP stock will probably rise in value again tomorrow.C) investors view the international joint venture as bad news.D) investors view the international joint venture as good news.E) earnings are expected to decrease next quarter.Answer: D Difficulty: Moderate48. Music Doctors just announced yesterday that its 1st quarter sales were 35% higher thanlast year's 1st quarter. You observe that Music Doctors had an abnormal return of -2% yesterday. This suggests thatA) the market is not efficient.B) Music Doctors stock will probably rise in value tomorrow.C) investors expected the sales increase to be larger than what was actually announced.D) investors expected the sales increase to be smaller thanwhat was actuallyannounced.E) earnings are expected to decrease next quarter.Answer: C Difficulty: Moderate49. The Food and Drug Administration (FDA) just announced yesterday that they wouldapprove a new cancer-fighting drug from King. You observe that King had an abnormal return of 0% yesterday. This suggests thatA) the market is not efficient.B) King stock will probably rise in value tomorrow.C) King stock will probably fall in value tomorrow.D) the approval was already anticipated by the marketE) none of the above.Answer: D Difficulty: Moderate50. Your professor finds a stock-trading rule that generates excess risk-adjusted returns.Instead of publishing the results, she keeps the trading rule to herself. This is mostclosely associated with ________.A) regret avoidanceB) selection biasC) framingD) insider tradingE) none of the aboveAnswer: B Difficulty: Moderate51. At freshman orientation, 1,500 students are asked to flipa coin 20 times. One student iscrowned the winner (tossed 20 heads). This is most closely associated with ________.A) regret avoidanceB) selection biasC) overconfidenceD) the lucky event issueE) none of the aboveAnswer: D Difficulty: Moderate52. Sehun (1986) finds that the practice of monitoring insider trade disclosures, and tradingon that information, would be ________.A) extremely profitable for long-term tradersB) extremely profitable for short-term tradersC) marginally profitable for long-term tradersD) marginally profitable for short-term tradersE) not sufficiently profitable to cover trading costsAnswer: E53. If you believe in the reversal effect, you shouldA) sell bonds in this period if you held stocks in the last period.B) sell stocks in this period if you held bonds in the last period.C) sell stocks this period that performed well last period.D) go long.E) C and DAnswer: C Difficulty: EasyRationale: The reversal effect states that stocks that do well in one period tend toperform poorly in the subsequent period, and vice versa.54. Patell and Woflson (1984) report that most of the stock price response to corporatedividend or earnings announcements occurs within。

Multiple Choice Questions1. ________ is equal to the total market value of the firm's common stock divided by (thereplacement 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 ofbankruptcy. Market value per share is the market price of the stock.2. High P/E ratios tend to indicate that a company will _______, ceteris paribus.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 shares outstanding).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 and prospectiveprofitability 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 the investor in thestock.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 realized by breakingup 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 stocks were_______.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 Figure18.8.8. 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 other macroeconomic variablesD) uncorrelated with any macroeconomic variables including inflation ratesE) 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, and warranting lower P/E ratios.9. The ______ is a common term for the market consensus value of the required return ona 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, thesystematic risk of the stock and the market risk premium, is the rate at which a stock's cash flows are discounted in order to determine intrinsic 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 a growingperpetuity.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. Stock X is expectedto pay a dividend of $3 in the upcoming year while Stock Y is expected to pay adividend 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. Stock C is expected topay a dividend of $3 in the upcoming year while Stock D 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 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. Each of the stocks isexpected to pay a dividend of $2 in the upcoming year. The expected growth rate of dividends is 9% for stock A and 10% for stock B. 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 market portfolio.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. Each of the stocks isexpected to pay a dividend of $2 in the upcoming year. The expected growth rate of dividends is 9% for stock C and 10% for stock D. 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 market portfolio.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 the upcoming 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 stock B. 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 the upcoming year.The expected growth rate of dividends is 9% for both stocks. You require a rate ofreturn of 10% on stock C and a return of 13% on stock D. 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 multistage DDM reducestoA) 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 rate will be________ if the firm follows a policy of paying 40% of earnings in the form ofdividends.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 growth rate willbe ________ if the firm follows a policy of paying 60% of earnings in the form ofdividends.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 rate will be________ if the firm follows a policy of paying 70% of earnings in the form ofdividends.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 rate will be________ if the firm follows a policy of paying 50% of earnings in the form ofdividends.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%. The dividendgrowth 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 will be_______ 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 rate will 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 rate will 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, and every yearthereafter, 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, and every yearthereafter, 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, and every yearthereafter, 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, and every yearthereafter, 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, and every yearthereafter, 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, and every yearthereafter, 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 hold for 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 hold for 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 hold for 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 hold for 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 is thatA) 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 quite high.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 to useA) 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 year from 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 areexpected 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 the upcoming 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. Theexpected 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 next year is14.5%. An appropriate required return on the stock is 10%. If the firm has a plowbackratio 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 expected ROE fornext year is 12.5%. An appropriate required return on the stock is 11%. If the firm hasa 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. Dominion Oil isexpected 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. Exxon Oil is expected tohave 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. Mobil Oil is expected tohave 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 is expected tohave 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 $20 per share usingthe 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 $34 per share usingthe 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 $80 per share usingthe 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 the comingyear. 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 areexpected 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 upcoming year.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. Theexpected 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 expectedROE 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。