SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT

1. Which of the following portfolio construction methods starts with asset allocation? A) Top-down B) Bottom-up C) Middle-out D) Buy and hold 2. Which of the following portfolio construction methods starts with security analysis? A) Top-down B) Bottom-up C) Middle-out D) Buy and hold 3. Asset allocation refers to ____________. A) choosing which securities to hold based on their valuation B) investing only in safe securities C) the allocation of assets into broad asset classes D) All of the above 4. Financial assets permit all of the following except ____________. A) consumption timing B) allocation of risk C) elimination of risk D) All of the above 5. Money market securities ____________. A) pay a fixed income B) are highly marketable C) generally very low risk D) all of the above 6. Which of the following is not a characteristic of a money market instrument? A) marketability B) long maturity C) liquidity premium D) B and C Use the following to answer questions 7-9: Consider the following three stocks:

7. The price-weighted index constructed with the three stocks is A) 30 B) 40 C) 50 D) 60

8. The value-weighted index constructed with the three stocks using a divisor of 100 is A) 1.2 B) 1200 C) 490 D) 4900 9. Assume at these prices the value-weighted index constructed with the three stocks is 490. What would the index be if stock B is split 2 for 1 and stock C 4 for 1? A) 265 B) 430 C) 355 D) 490 10. A bond that can be retired prior to maturity by the issuer is a ____________ bond. A) secured B) unsecured C) callable D) Yankee 11. 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. 12. 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. 13. 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. 14. The first major step in asset allocation is: A) assessing risk tolerance. B) analyzing financial statements. C) estimating security betas. D) identifying market anomalies.

15. As diversification increases, the total variance of a portfolio approaches ____________. A) 0 B) 1 C) the variance of the market portfolio D) infinity 16. Rosenberg and Guy found that __________ helped to predict a firm's beta. A) the firm's financial characteristics B) the firm's industry group C) firm size D) All of the above 17. In the context of the Capital Asset Pricing Model (CAPM) the relevant measure of risk is A) unique risk. B) beta. C) standard deviation of returns. D) variance of returns 18. According to the Capital Asset Pricing Model (CAPM) a well diversified portfolio's rate of return is a function of A) market risk B) unsystematic risk C) unique risk. D) reinvestment risk 19. The risk-free rate and the expected market rate of return are 0.06 and 0.12, respectively. According to the capital asset pricing model (CAPM), the expected rate of return on security X with a beta of 1.2 is equal to A) 0.06. B) 0.144. C) 0.12. D) 0.132 20. Which statement is not true regarding the Capital Market Line (CML)? A) The CML is the line from the risk-free rate through the market portfolio. 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. 21. According to the Capital Asset Pricing Model (CAPM), the expected rate of return on any security is equal to A) Rf + [E(RM)]. B) Rf + [E(RM) - Rf]. C) [E(RM) - Rf]. D) E(RM) + Rf. 22. An arbitrage opportunity exists if an investor can construct a __________ investment portfolio that will yield a sure profit. A) positive B) negative C) zero D) all of the above

23. The exploitation of security mispricing in such a way that risk-free economic profits may be earned is called ___________. A) arbitrage B) capital asset pricing C) factoring D) fundamental analysis 24. Consider a single factor APT. Portfolio A has a beta of 1.0 and an expected return of 16%. Portfolio B has a beta of 0.8 and an expected return of 12%. The risk-free rate of return is 6%. If you wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio __________ and a long position in portfolio _______. A) A, A B) A, B C) B, A D) B, B 25. A long-term movement of prices, lasting from several months to years is called _________. A) a minor trend B) a primary trend C) an intermediate trend D) trend analysis 26. A liquid asset may A) be converted into cash B) be converted into cash with little chance of loss C) not be converted into cash D) not be converted without loss 27. A negatively-sloped yield curve suggests that A) short-term rates exceed long-term rates, and the Federal Reserve is following a tight monetary policy B) short-term rates exceed long-term rates, and the Federal Reserve is following an easy monetary policy C) long-term rates exceed short-term rates, and the Federal Reserve is following a tight monetary policy D) long-term rates exceed short-term rates, and the Federal Reserve is following an easy monetary policy 28. What does the market price of a bond depend on? A) The coupon rate and terms of the indenture B) The coupon rate and maturity date C) The terms of the indenture, and maturity date D) The coupon rate, terms of the indenture, and maturity date 29. While bond prices fluctuate, A) yields are constant B) coupons are constant C) the spread between yields is constant D) short-term bond prices fluctuate even more

30. If interest rates rise, the price of preferred stock A) is not affected B) rises C) falls D) may rise or fall 31. Which of the following is true of municipal government debt? A) It pays more interest than corporate debt. B) It is often purchased by individuals with high incomes. C) It is exempt from estate taxation. D) It is not subject to interest rate risk. 32. The use of financial leverage by a firm may be measured by the A) ratio of debt to total assets B) firms beta coefficient C) firms retention of earnings D) ratio of the price of the firms stock price to its earnings 33. Which of the following is an example of a depreciable asset? A) Land B) Cash C) Accounts receivable D) Equipment 34. As the debt ratio increases, A) fewer assets are debt-financed, and the ratio of debt-to-equity increases B) fewer assets are debt-financed, and the ratio of debt-to-equity decreases C) more assets are debt-financed, and the ratio of debt-to-equity increases D) more assets are debt-financed, and the ratio of debt-to-equity decreases 35. The net asset value of a mutual fund investing in stock rises with A) higher stock prices B) lower equity values C) an increased number of shares D) increased liabilities 36. What do activity ratios measure? A) How rapidly assets flow through the firm B) How frequently the firms stock is traded C) The employee turnover rate D) The profitableness of accounts receivable 37. What is a call? A) An option to sell stock at a specified price B) An option to buy stock at a specified price C) An option to sell stock on a specified date D) An option to buy stock on a specified date 38. Which of the following is on the horizontal axis of the Security Market Line? A) Standard deviation B) Beta C) Expected return D) Required return

39. You own a large orange grove and will be harvesting from November through April. To hedge against price risks you should A) sell orange juice contracts with a November delivery B) buy orange juice contracts with a November delivery C) sell orange juice contracts with delivery dates between November and April D) buy orange juice contracts with delivery dates between November and April 40. Financial leverage may increase a corporations risk because A) operating income may stabilize B) the firm has fixed obligations to meet C) more common stock is outstanding D) dividends must be paid