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Chapter Two Test Bank

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1. An ordinary annuity is a _____ series of _____ cash. a. finite, constant 2. The winner of a state lottery usually receives a(n) a. annuity due 3. Using a discount rate of 8% per year, what is the present value of an ordinary annuity of $100 per year for 10 years? a. $671 4. Using a discount rate of 8% per year, what is the present value of an annuity due of $100 per year with 10 payments? a. $725 5. Using a discount rate of 8% per year (compounded quarterly), what is the present value of an ordinary annuity of $100 per year for 10 years? a. $684 6. A perpetual cash flow stream makes its first payment of $500 in one year. Using a 7% annual discount rate and a 3% growth rate in the value of subsequent payments, what is the present value of this growing perpetuity? a. $12,500 7. A perpetuity makes annual payments of $250. The perpetuity is valued using a 10% discount rate. What is the value of the perpetuity if the first payment is made immediately? a. $2,750 8. The fact that most investors are risk averse means they will a. only take risks for which they are properly rewarded 9. Which of the following statements is true? a. Some people are more risk averse than others 10. Risk must involve a. a chance of loss 11. Overall variability of returns is called a. total risk 12. Risk is often measured as a. dispersion of returns 13. Riskier securities have _____ returns. a. higher expected 14. The market rewards investors for bearing _____risk. a. undiversifiable 15. The diminishing marginal utility of money explains why a. most people will not take a fair bet 16. The text described an example of the diminishing marginal utility of money with a statement made by a _____ player. a. tennis 17. Individual investment behavior is more a function of _____ than _____. a. utility, expected return
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18. The St. Petersburg paradox explains why a. most people will not take a fair bet 19. In economic theory, if money is not saved, it is a. consumed 20. Wearing a Rolex watch is an example of someone getting a. psychic return b. utility c. satisfaction d. all of the above 21. Two large classes of risk are a. price and convenience 22. Individual consumption decisions are a major factor in determining a. market interest rates 23. If a stock has a higher than average expected return, you would logically expect it is b. riskier than average 24. What is the present value of a growing perpetuity with an initial cash flow of 1000 (C0), a growth rate of 3% per year (g), and a required rate of return of 8% (R)? d. $20,600 25. Most investors would not be interested in a fair bet because c. losing a given amount of money would reduce utility more than winning the same amount would increase utility 26. The holding period return is calculated as b. P1-P0+income / p0 27. You bought 100 shares of stock at $35, received $3 per share in dividends, and sold the shares for $50. Your holding period return is a. 51.4% 28. Which of the following is true of the holding period return? a. It is independent of the passage of time 29. A holding period return should only be compared with returns calculated a. over periods of the same length 30. A stock's return is 15.5%. The return relative is a. 1.155 31. Return relatives are calculated primarily to deal with the potential problem of a. negative returns 32. A stock has monthly returns of 4%, 5%, 2%, and -3%. Its arithmetic average return is a. 2% 33. A stock has monthly returns of 4%, 5%, 2%, and -3%. Its geometric average return is a. 1.9%
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34. You buy a stock for $50 per share. Over the next four months, it has monthly returns of 4%, 5%, 2%, and -3%. The value of a share at the end of the fourth month is a. $54.02 35. Suppose a stock pays no dividends. Another method of calculating the return relative is a. p1/p0 36. The arithmetic mean is always _______ the geometric mean. a. greater than or equal to 37. The _____ the dispersion in a series of numbers, the ____ the gap between the arithmetic and geometric mean. a. greater, greater 38. Technically, _____ refers to the past; _____ refers to the future. a. return, expected return 39. According to the book, which of the following terms can mean different things to different people? a. Return on investment 40. The use of _____ can dramatically affect an investor's return. a. leverage 41. Total risk can be measured by all of the following EXCEPT a. arithmetic mean 42. The variance of x is 25. What is the variance of 2x? a. 100 43. Semi-variance only considers a. adverse variation 44. Discrete random variables are _____; continuous random variables are ______. a. counted, measured 45. A variable whose value is based on the value of other variables is a(n) a. dependent variable 46. Random variables reside in a population a. sample 47. A jar contains a mixture of coins; you need a quarter. From your perspective, the distribution of coins in the jar is univariate a. bivariate 48. If a distribution shows more possible outcomes on one side of the mean than the other, the distribution shows a. skewness 49. A coin-flipping experiment in which you measure heads or tails takes observations from a _____ distribution.
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a. binomial 50. Which of the following is a measure of central tendency? a. Mean 51. The expected value of a random variable is also called the a. mean 52. A jar contains 100 quarters, 50 dimes, and 50 nickels. What is the expected value of a single observation from this coin population? a. $0.163 53. Which of the following can help reduce the effect of outliers? a. Logarithms 54. The expected value of x is 5%. What is E(6x)? a. 30% 55. The correlation coefficient is equal to a. cov(a,b)/oaob 56. The minimum value of the correlation coefficient is a. -1 57. The minimum value of covariance is a. there is no minimum value 58. R squared is a measure of a. goodness of fit 59. A sample of 100 observations has a standard deviation of 25. What is the standard error? a. 2.5 60. A sample of 100 observations has a standard deviation of 25 and a mean of 75. What is the 95% confidence interval? a. 70<=x<=80 61. The expected return on A is 12%; the expected return on B is 15%. What is the expected return of a portfolio that contains one-third A and the remainder B? a. 14% 62. A tilde (~) over a symbol indicates it is a a. random variable 63. If two securities are negatively correlated, their covariance is a. negative 64. The covariance between a random variable and a constant is a. zero 65. Return is the a. benefit associated with an investment 66. Assume the risk-free rate is constant over time. The correlation between the return on security x and the return on the risk-free asset is a. zero

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67. The correct method for measuring the average return over several periods in the past is with a(n) a. geometric mean 68. Using semivariance to measure risk is appropriate if the return distribution is a. not symmetrical 69. The median of a distribution is the a. point where half of the observations lie on either side 70. If the variance of x is 0.10, what is the variance of 2x? a. 0.40 71. If the standard deviations of Stock A and B are 0.20 and 0.30 respectively and the COV(A,B) equals 0.012, what is the correlation coefficient? a. 0.20 1. The work of Harry Markowitz is based on the search for a. efficient portfolios 2. Securities A and B have expected returns of 12% and 15%, respectively. If you put 30% of your money in Security A and the remainder in B, what is the portfolio expected return? a. 14.1% 3. Securities A and B have expected returns of 12% and 15%, respectively. If you put 40% of your money in Security A and the remainder in B, what is the portfolio expected return? a. 13.8% 4. The variance of a two-security portfolio decreases as the return correlation of the two securities a. decreases 5. A security has a return variance of 25%. The standard deviation of returns is a. 50% 6. A security has a return variance of 16%. The standard deviation of returns is a. 40% 7. Covariance is the product of two securities' a. expected deviations from their means 8. The covariance of a random variable with itself is a. its variance 9. Covariance is _____ correlation is ______. a. positive or negative, positive or negative 10. For a six-security portfolio, it is necessary to calculate ___ covariances plus ___ variances. a. 15, 6 11. COV (A,B) = .335. What is COV (B,A)? a. 0.335 12. One of the first proponents of the single index model was a. William Sharpe

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13. Without knowing beta, determining portfolio variance with a sixty-security portfolio requires ___ statistics per security. a. 60 14. Securities A, B, and C have betas of 1.2, 1.3, and 1.7, respectively. What is the beta of an equally weighted portfolio of all three? a. 1.40 15. Securities A, B, and C have betas of 1.2, 1.3, and 1.7, respectively. What is the beta of a portfolio composed of 1/2 A and 1/4 each of B and C? a. 1.35 16. A diversified portfolio has a beta of 1.2; the market variance is 0.25. What is the diversified portfolios variance? a. 0.36 17. Security A has a beta of 1.2; security B has a beta of 0.8. If the market variance is 0.30, what is COV (A,B)? a. .288 18. As portfolio size increases, the variance of the error term generally a. decreases 19. The least risk portfolio is called the a. minimum variance portfolio 20. Industry effects are associated with a. the multi-index model 21. COV (A,B) is equal to a. the product of their standard deviations and their correlation 22. The covariance between a constant and a random variable is a. zero 23. The covariance between a security's returns and those of the market index is 0.03. If the security beta is 1.15, what is the market variance? a. 0.026 24. COV(A,B) = 0.50; the variance of the market is 0.25, and the beta of Security A is 1.00. What is the beta of security B? a. 2.00 25. There are 1,700 stocks in the Value Line index. How many covariances would have to be calculated in order to use the Markowitz full covariance model? a. 1,444,150 26. There are 1,700 stocks in the Value Line index. How many betas would have to be calculated in order to find the portfolio variance? a. 1,700 27. Knowing beta, determining the portfolio with a sixty-security fully diversified portfolio requires ______ statistic(s) per security. a. 1 28. Suppose Stock A has an expected return of 15%, a standard deviation of 20%, and a Beta of 0.4 while Stock B has an expected return of 25%, a standard deviation of 30% and a beta of 1.25, and the correlation between the two stocks is
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0.25. What is the expected return for a portfolio with 80% invested in Stock A and 20% invested in Stock B? a. 17% 29. Suppose Stock A has an expected return of 15%, a standard deviation of 20%, and a Beta of 0.4 while Stock B has an expected return of 25%, a standard deviation of 30% and a beta of 1.25, and the correlation between the two stocks is 0.25. What is the standard deviation for a portfolio with 80% invested in Stock A and 20% invested in Stock B? b. 18.4% 30. Suppose Stock A has an expected return of 15%, a standard deviation of 20%, and a Beta of 0.4 while Stock B has an expected return of 25%, a standard deviation of 30% and a beta of 1.25, and the correlation between the two stocks is 0.25. What is the beta for a portfolio with 80% invested in Stock A and 20% invested in Stock B? a. 0.57 31. Suppose Stock A has an expected return of 15%, a standard deviation of 20%, and a Beta of 0.4 while Stock B has an expected return of 25%, a standard deviation of 30% and a beta of 1.25, and the correlation between the two stocks is 0.25. What is the covariance between Stock A and Stock B? a. 0.015 32. Suppose Stock A has an expected return of 15%, a standard deviation of 20%, and a Beta of 0.4 while Stock B has an expected return of 25%, a standard deviation of 30% and a beta of 1.25, and the correlation between the two stocks is 0.25. What is the percent invested in Stock A to yield the minimum standard deviation portfolio containing Stock A and Stock B? a. 75% 33. Suppose Stock A has an expected return of 15%, a standard deviation of 20%, and a Beta of 0.4 while Stock B has an expected return of 25%, a standard deviation of 30% and a beta of 1.25, and the correlation between the two stocks is 0.25. What is the expected return for a portfolio with 50% invested in Stock A and 50% invested in Stock B? c. 20% 34. Suppose Stock A has an expected return of 15%, a standard deviation of 20%, and a Beta of 0.4 while Stock B has an expected return of 25%, a standard deviation of 30% and a beta of 1.25, and the correlation between the two stocks is 0.25. What is the standard deviation for a portfolio with 50% invested in Stock A and 50% invested in Stock B? b. 20% 35. Suppose Stock A has an expected return of 15%, a standard deviation of 20%, and a Beta of 0.4 while Stock B has an expected return of 25%, a standard deviation of 30% and a beta of 1.25, and the correlation between the two stocks is 0.25. What is the beta for a portfolio with 50% invested in Stock A and 50% invested in Stock B?
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c. 0.825 B 36. Suppose Stock M has an expected return of 10%, a standard deviation of 15%, and a Beta of 0.6 while Stock N has an expected return of 20%, a standard deviation of 25% and a beta of 1.04, and the correlation between the two stocks is 0.50. What is the expected return for a portfolio with 70% invested in Stock M and 30% invested in Stock N? a. 13% C 37. Suppose Stock M has an expected return of 10%, a standard deviation of 15%, and a Beta of 0.6 while Stock N has an expected return of 20%, a standard deviation of 25% and a beta of 1.04, and the correlation between the two stocks is 0.50. What is the standard deviation for a portfolio with 70% invested in Stock M and 30% invested in Stock N? a. 15.7% B 38. Suppose Stock M has an expected return of 10%, a standard deviation of 15%, and a Beta of 0.6 while Stock N has an expected return of 20%, a standard deviation of 25% and a beta of 1.04, and the correlation between the two stocks is 0.50. What is the covariance between Stock M and Stock N? a. 0.01875 D 39. Suppose Stock M has an expected return of 10%, a standard deviation of 15%, and a Beta of 0.6 while Stock N has an expected return of 20%, a standard deviation of 25% and a beta of 1.04, and the correlation between the two stocks is 0.50. What is the percent invested in Stock M to yield the minimum standard deviation portfolio containing Stock M and Stock N? a. 92% A 40. Suppose Stock M has an expected return of 10%, a standard deviation of 15%, and a Beta of 0.6 while Stock N has an expected return of 20%, a standard deviation of 25% and a beta of 1.04, and the correlation between the two stocks is 0.50. What is the expected return for a portfolio with 80% invested in Stock M and 20% invested in Stock N? a. 12% B 41. Suppose Stock M has an expected return of 10%, a standard deviation of 15%, and a Beta of 0.6 while Stock N has an expected return of 20%, a standard deviation of 25% and a beta of 1.04, and the correlation between the two stocks is 0.50. What is the standard deviation for a portfolio with 80% invested in Stock M and 20% invested in Stock N? a. 15.1% A 42. Suppose Stock M has an expected return of 10%, a standard deviation of 15%, and a Beta of 0.6 while Stock N has an expected return of 20%, a standard deviation of 25% and a beta of 1.04, and the correlation between the two stocks is 0.50. What is the beta for a portfolio with 80% invested in Stock M and 20% invested in Stock N? a. 0.688 The next 8 questions relate to the following table of information:
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Stock X Expected Return 14% Standard Deviation 40% Beta 1.20 Correlation (X,Y) = 0.25 C

Stock Y 18% 54% 1.50

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43. What is the expected return for a portfolio with 60% invested in X and 40% invested in Y? a. 15.6% 44. What is the standard deviation for a portfolio with 60% invested in X and 40% invested in Y? a. 36.1% 45. What is the beta for a portfolio with 60% invested in X and 40% invested in Y? a. 1.32 46. What is the covariance between Stock X and Stock Y? a. 0.054 47. What is the percent invested in Stock X to yield the minimum variance portfolio with Stock X and Stock Y? a. 0.69 48. What is the expected return for a portfolio with 20% invested in X and 80% invested in Y? a. 17.2% 49. What is the standard deviation for a portfolio with 20% invested in X and 80% invested in Y? a. 45.8% 50. What is the beta for a portfolio with 20% invested in X and 80% invested in Y? a. 1.44 1. Risk averse people only take risks when a. they believe they will be rewarded for doing so 2. The collection of eligible investments is called the a. security universe 3. A security dominates another if a. it offers the same expected return with less risk b. it offers higher expected return for the same risk c. both a and b 4. In the absence of a riskfree rate, the minimum variance portfolio a. is always efficient 5. Portfolios that are not dominated a. lie on the efficient frontier
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6. With the availability of a riskfree rate, the efficient frontier becomes a. linear 7. Portfolios _____ do not exist. a. above the efficient frontier 8. The line passing through the risk free rate and the market portfolio is called the a. market line 9. According to the separation theorem, all investors should hold a. only the risk-free rate and the market portfolio 10. Efficient portfolios to the left of the market portfolio are called a. lending portfolios 11. Most computer output of efficient portfolios lists only the a. corner portfolios 12. The Markowitz algorithm is an application of a. quadratic programming 13. What is the beta of the risk-free asset? a. 0 14. The value of a negative beta asset is a. the risk reducing properties when added to a portfolio 15. The Security Market Line relates expected return to a. beta 16. The Security Market Line is a a. straight line which passes through the risk-free rate and the Market portfolio 17. Beta is usually calculated using the a. market model 1. Bonds are identified by all of the following EXCEPT a. rating 2. How much interest does an XYZ 7s09 bond pay each year? a. 7% of par 3. The details of a bond issue are contained in the a. indenture 4. U. S. treasury bonds are ______ issues. a. full faith and credit 5. Which of the following is the correct order of increasing maturity? a. Bills, notes, bonds 6. Which of the following are most similar? a. Notes and bonds 7. A debenture is like a _____ loan. a. signature 8. Which of the following is most likely to be financed by a revenue bond? a. Bridge 9. Treasury bonds have an initial life of more than ___ years. a. ten
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10. Debt that uses land and buildings as collateral is a _____ loan. a. mortgage 11. A cash reserve for the ultimate repayment of bond principal is a a. sinking fund 12. A fleet of trucks might logically be financed with a. equipment trust certificates 13. A loan with a large final payment is a _____ loan. a. balloon 14. A bond on which the interest is payable only if it is earned is a(n) ____ bond. a. income 15. An income bond is most likely to be associated with financing which of the following? a. A toll bridge 16. Typical bond cash flows include all of the following EXCEPT a. growing annuity plus lump sum 17. An example of a variable rate security is a a. U. S. savings bond 18. A ____ company issued a famous commodity-backed convertible bond. a. silver mining 19. New debt may no longer be issued in _____ form. a. bearer 20. If you hold a bond certificate with your name on it, it is a _____ bond. a. registered 21. Newly issued bonds issued by the U. S. Treasury are in _____ form only. a. book entry 22. An individual who wishes to buy a U. S. Treasury bond must open an account through the a. Treasury Direct System 23. The clipping of coupons is associated with _____ bonds. a. bearer 24. To solve for a bond's yield to maturity with semi-annual interest payments a. divide the discount rate by two and double the number of periods 25. You own $5,000 par of the XYZ 8s of 09. The bond paid interest six months ago, and pays again tomorrow. How much is the next interest check? a. $200 26. You own $5,000 par of the XYZ 8s of 09; they sell for 94% of par. The bond paid interest six months ago, and pays again tomorrow. How much is the next interest check? a. $200 27. A consol is valued as a a. perpetuity 28. The quantity

(1 R)
t 1

equals

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a. C R 29. What is the value of a consol that pays $100 per year if the required rate of return is 8%? a. $1250 30. The yield to maturity calculation assumes that _____ are reinvested at the yield to maturity. a. coupon proceeds 31. A specific yield to maturity can only be locked in with which of the following bonds? a. zero coupon 32. The effective annual rate is also called the a. realized compound yield 33. If a bond sells for par a. current yield equals yield to maturity 34. If a bond sells at a premium a. current yield exceeds the yield to maturity 35. If a bond sells at a discount a. current yield is less than the yield to maturity 36. If a bond sells at a premium, its price a. must decline over time 37. Someone who relies on investment income for living expenses is most concerned with a. current yield 38. The yield curve is normally a. upward sloping 39. The yield curve normally has a ____ first derivative and a _____ second derivative. a. positive, negative 40. If all interest rates rise by a similar amount, this is a _____ in the yield curve. a. parallel shift 41. Corporate bonds rated BBB will show a _____ of yield curve than U. S. Treasury bonds. a. higher level 42. Forward interest rates are mostly associated with the _____ theory of interest rate structure. a. expectations 43. Two-year certificates of deposit yield 5.00%; a one-year CD has a 4.66% rate. What is the one-year forward rate? a. 5.34% 44. If the expectations theory of interest rates is accurate, the only explanation for an upward sloping yield curve is a. an expectation that interest rates will continually increase 45. According to the liquidity premium theory of interest rates
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a. forward rates are actually higher than the expected interest rate 46. A $1000 par bond has a conversion price of $33.50. Its conversion ratio is a. 29.85 shares 47. A $1000 par bond sells for $900 and has a conversion ratio of 25 shares. If the underlying stock price is $35, the conversion value is a. $875 48. A convertible bond's ____ should never be _____ than its _____. a. conversion value, more, market value 49. For a convertible bond, an arbitrage profit would be available if the conversion value is c. greater than the market value 50. For a convertible bond, the difference between the bond price and the conversion value is know as the d. premium over conversion value 51. The maximum level of accrued interest with most bonds occurs _____ times a year. a. two 52. The amount a bond buyer pays is a. bond price + accrued interest + brokerage fees 53. How much interest has accrued on an 8%, $1000 par bond seven days after the last interest payment date? a. $1.53 54. Credit risk is also called a. default risk 55. Standard & Poor's bond ratings measure a. default risk 56. The demarcation between investment grade bonds and junk bonds is the S&P _____ rating. a. BBB 57. _____ is a leading bond rating service. a. Moody's Investors Service 58. The fact that bond prices change as market interest rates change is a result of a. interest rate risk 59. Which of the following has no interest rate risk? a. Non-negotiable certificate of deposit 60. Call risk is a type of _____ risk. a. convenience 61. If a bond is called, the bondholder often receives a. the par value plus a call premium 62. The _____ the _____ on a bond, the higher its reinvestment rate risk. a. higher, coupon 63. Marketability risk refers to a. the difficulty in selling a bond
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64. Bond prices move _____ with market yields. a. inversely 65. A famous set of bond pricing relationships is a. Malkiel's theorems 66. _____ term bonds have more _____ risk. a. Longer, interest rate 67. _____ coupon bonds have more _____ risk. a. Higher, reinvestment rate 68. If interest rates fall, t is the price change in a bond with t years until maturity. Suppose there are four bonds: 2 , 4 , 22 , 24 . If the bonds are identical in every respect except for their maturity, which of the following statements is true? a. ( 2 - 4 ) - ( 22 - 24 ) < 0 69. Malkiel's theorem five deals with a. bond capital gains and losses 70. The principal value of duration is the fact that a. it incorporates Malkiel's theorems in a single expression 71. A definition of duration is a. the weighted average time until cash flows occur 72. In calculating duration via the traditional method, the weights reflect the a. time value of money 73. If a $1,000 par value bond has a coupon rate of 6% with interest paid semiannually, a maturity of 12 years, and a yield-to-maturity of 7%, what is the current price of this bond? a. $919.71 74. If a $1,000 face value bond has a coupon rate of 5.5% with interest paid semiannually, a maturity of 15 years, and a yield to maturity of 4.5%, what is the current price of this bond? b. $1108.23 75. If a $1,000 face value bond has a coupon rate of 6.5% with interest paid semiannually, a maturity of 11 years, and a current price of 1090.34, what is the annual yield-to-maturity of this bond? a. 5.4% 76. If a $1,000 par value bond has a coupon rate of 7% with interest paid semiannually, a maturity of 18 years, and a current price of $1,235, what is the annual yield-to-maturity of this bond? c. 5.0% 77. If a $1,000 face value zero coupon bond has a maturity of 15 years and a yield-to-maturity of 6%, what is the current price of this bond? a. $417.27 78. If a $1,000 face value zero coupon bond has a maturity of 22 years and is currently priced at $521.89, what is the annual yield-to-maturity?

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b. 3% 79. What is the duration of a $1,000 par value bond with a coupon rate of 8%, a yield-to-maturity of 6%, and 4 years left to maturity? (Assume annual coupon payments) b. 3.59 years 80. What is the duration of a $1,000 par value bond with a coupon rate of 6%, a yield-to-maturity of 5%, and 2 years left to maturity? (Interest payments are made semi-annually.) b. 1.9 years 1. In an active management strategy, the composition of the portfolio is a. dynamic 2. A strategy of passive management is one in which, once established, the portfolio is a. largely left alone 3. Naive strategies a. are not necessarily bad ones 4. Which of the following is a naive strategy? a. Buy and hold 5. Common methods of stock portfolio rebalancing include all of the following EXCEPT a. maintaining a constant price earnings ratio 6. Many investors try to avoid a. odd lots 7. The purchase of odd lots sometimes involves a. a slightly higher commission cost 8. Round lots are especially important to the a. option user 9. A portfolio revision strategy that makes use of a multiplier is a. constant proportion portfolio insurance 10. A portfolio has a floor value of $4 million, a market value of $7 million, and a multiplier of 1.5. The investment in stock should be a. $4.5 million 11. A portfolio has a floor value of $4 million, a market value of $7 million, and a multiplier of 1.5. The portfolio will be 100% invested in stock when the portfolio value is a. $12 million 12. Which of the following statements is most accurate? a. Market volatility does not help a CPPI strategy 13. A portfolio has a floor value of $4 million, a market value of $7 million, and a multiplier of 1.5. The portfolio will be 100% invested in bonds when the portfolio value is a. $4 million 14. A constant mix strategy does best in a _____ market.
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a. volatile 15. When stocks outperform bonds, rebalancing a portfolio with a constant mix strategy containing stocks and bonds requires b. buying bonds and selling stocks 16. Comparing a constant mix strategy and a CPPI strategy, in a rising market c. the constant mix strategy sells stock while the CPPI strategy buys stock 17. A constant mix strategy for portfolio rebalancing means a. maintaining the same relative weighting of asset categories 18. Suppose you are managing a $1,000,000 portfolio of stocks and bonds with a constant mix strategy of 50% stocks and 50% bonds. If the stock market increases 20% and the bond market increases 10%, rebalancing would require a. selling $25,000 in stocks and buying $25,000 in bonds 19. A CPPI portfolio has a floor value of $4 million in stocks, a market value of $7 million, and a multiplier of 1.5. If the value of the portfolio increases 20%, the investment in stocks should be d. $6.6 million 20. A CPPI portfolio has a floor value of $4 million in stocks, a market value of $7 million, and a multiplier of 1.5. If stocks increase by 20% and bonds increase by 12%, rebalancing requires buying $900,000 in stocks and selling $900,000 in bonds a. buying $900,000 in bonds and selling $900,000 in stocks 21. A stock portfolio designed to mimic a market index but with fewer stocks will likely have less tracking error if it has a a. beta of 1 and a high R2 22. Which of the following would increase the portfolio beta? a. Selling Treasury Bills in the portfolio and buying stocks with low systematic risk 23. Successful implementation of which of the following is inconsistent with the efficient market hypothesis? a. Tactical asset allocation 24. The hardest part of a tactical asset allocation strategy is a. asset class appraisal 25. Investment strategies are commonly grouped into all of the following categories EXCEPT a. variable 26. The ideal investment strategy is a. anticipatory 27. The key element of tactical asset allocation is a. properly investing the swing component 28. Dollar cost averaging involves _____ investments over time. a. constant 29. Largely cosmetic changes that are made to a portfolio near the end of a reporting period are called
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d. window dressing 1. Passive bond strategies include a. buy & hold, indexing 2. Which of the following is usually least appropriate for a bond portfolio? a. Buy and hold 3. The Handbook of Fixed Income Securities lists about _____ different bond indexes. a. 229 4. A well-known bond index is one published by a. Lehman Kuhn Loeb 5. Which of the following is the principal characteristic of a laddered bond portfolio? a. Equal proportions across the yield curve 6. Annual revision of a laddered bond portfolio requires a. buying a long-term bond 7. The principal way in which a barbell portfolio differs from a laddered portfolio is the barbell has a. less investment in the middle maturities 8. Which of the following is arbitrary in a barbell bond portfolio? a. All of the above 9. If you pay commissions to buy or sell bonds, annual revision of a barbell portfolio requires the payment of ____ commissions. a. 3 10. If you hold yield to maturity constant and plot bond duration as a function of years until maturity, the curve has a _____ first derivative and a _____ second derivative. a. positive, negative 11. Yield curve inversion occurs when a. short-term rates are rising faster than long-term rates 12. Which of the following types of swaps is inconsistent with the efficient market hypothesis? a. Substitution 13. Convexity is the difference between a. actual price change and duration-predicted price change 14. The importance of convexity increases as a. the magnitude of the rate change increases 15. Convexity is related to the ____ derivative of the bond pricing relationship. a. second 16. Modified duration is ______ Macaulay duration. a. less than 17. Which of the following is false? a. The higher the duration, the lower the convexity, everything else being equal
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18. Everything else being equal, bond investors prefer a. high convexity 19. An appropriate comparison between the performance of a managed bond portfolio and an index requires finding an index with the same b. default risk and duration 20. Assuming average coupon rates and a normal yield curve, the ladder portfolio generally has ________ reinvestment rate risk and _______ interest rate risk than a barbell portfolio. a. less, more 21. When comparing the performance of ladder and barbell portfolios, if interest rates decrease, _______ portfolios are favored in terms of reinvestment rate risk and _______ portfolios are favored in terms of interest rate risk. a. ladder, ladder 22. Suppose a bond has 20 years left to maturity, an 8% coupon rate, pays interest semi-annually, and has a 6% yield to maturity. If this bond has a Macaulay duration of 11.23 years and a convexity of 170.26, and the yield to maturity increases 1%, an estimate of the percent price change in the bond due only to duration would be b. 10.90% 23. Suppose a bond has 20 years left to maturity, an 8% coupon rate, pays interest semi-annually, and has a 6% yield to maturity. If this bond has a Macaulay duration of 11.23 years and a convexity of 170.26, and the yield to maturity increases 1%, an estimate of the percent price change in the bond due only to convexity would be c. +0.85% 24. Suppose a bond has 20 years left to maturity, an 8% coupon rate, pays interest semi-annually, and has a 6% yield to maturity. If this bond has a Macaulay duration of 11.23 years and a convexity of 170.26, and the yield to maturity increases 1%, an estimate of the percent price change in the bond due to both duration and convexity would be c. 10.05% 25. Suppose a bond has 20 years left to maturity, an 8% coupon rate, pays interest semi-annually, and has a 6% yield to maturity. If this bond has a Macaulay duration of 11.23 years and a convexity of 170.26, and the yield to maturity decreases 1%, an estimate of the percent price change in the bond due only to duration would be b. 10.90% 26. Suppose a bond has 20 years left to maturity, an 8% coupon rate, pays interest semi-annually, and has a 6% yield to maturity. If this bond has a Macaulay duration of 11.23 years and a convexity of 170.26, and the yield to maturity decreases 1%, an estimate of the percent price change in the bond due only to convexity would be c. 0.85%
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27. Suppose a bond has 20 years left to maturity, an 8% coupon rate, pays interest semi-annually, and has a 6% yield to maturity. If this bond has a Macaulay duration of 11.23 years and a convexity of 170.26, and the yield to maturity decreases 1%, an estimate of the percent price change in the bond due to both duration and convexity would be b. 11.75% 28. Suppose a bond has 25 years left to maturity, a 5% coupon rate, pays interest semi-annually, and has a 7% yield to maturity. If this bond has a Macaulay duration of 13 years and a convexity of 237.15, and the yield to maturity increases 1/2%, an estimate of the percent price change in the bond due only to duration would be b. 6.28% 29. Suppose a bond has 25 years left to maturity, a 5% coupon rate, pays interest semi-annually, and has a 7% yield to maturity. If this bond has a Macaulay duration of 13 years and a convexity of 237.15, and the yield to maturity increases 1/2%, an estimate of the percent price change in the bond due only to convexity would be c. +0.30% 30. Suppose a bond has 25 years left to maturity, a 5% coupon rate, pays interest semi-annually, and has a 7% yield to maturity. If this bond has a Macaulay duration of 13 years and a convexity of 237.15, and the yield to maturity increases 1/2%, an estimate of the percent price change in the bond due to both duration and convexity would be c. 5.98% 31. Suppose a bond has 25 years left to maturity, a 5% coupon rate, pays interest semi-annually, and has a 7% yield to maturity. If this bond has a Macaulay duration of 13 years and a convexity of 237.15, and the yield to maturity decreases 1/2%, an estimate of the percent price change in the bond due only to duration would be c. 6.28% 32. Suppose a bond has 25 years left to maturity, a 5% coupon rate, pays interest semi-annually, and has a 7% yield to maturity. If this bond has a Macaulay duration of 13 years and a convexity of 237.15, and the yield to maturity decreases 1/2%, an estimate of the percent price change in the bond due only to convexity would be c. +0.30% 33. Suppose a bond has 25 years left to maturity, a 5% coupon rate, pays interest semi-annually, and has a 7% yield to maturity. If this bond has a Macaulay duration of 13 years and a convexity of 237.15, and the yield to maturity decreases 1/2%, an estimate of the percent price change in the bond due to both duration and convexity would be c. 6.58% 1. The essence of performance evaluation is
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B D A C B B A A A

D A

a. associating a measure of risk with realized return 2. Expected utility is a ____ function of return and a ______ function of risk. a. positive, negative 3. The two mutual funds used in the text example are a. 44 Wall Street and Mutual Shares 4. _____ are more important than _____. a. Dollars, percentages 5. Which measure calculates excess return per unit of total risk? a. Sharpe 6. Which measure calculates excess return per unit of systematic risk? a. Treynor 7. A single security should be evaluated using the _____ measure. a. Treynor 8. The best performance comes from a. highest return per unit of risk 9. Which of the following performance measures has statistical problems? a. Jensen 10. If a portfolio experiences cash withdrawals and deposits, the best performance measure is the a. internal rate of return 11. A common finance assumption that is violated when options are included in a stock portfolio is a. normality of returns 12. The incremental risk-adjusted return from options makes use of the _____ performance measure. a. Sharpe 13. The residual option spread makes use of the _____ performance measure. a. geometric mean 14. If a portfolio earned 10%, -20%, +40%, and +10% over the last four years, the arithmetic mean return per year is a. 5% 15. If a portfolio earned 10%, -20%, +40%, and +10% over the last four years, the geometric mean return per year is a. 2.6% 16. If a portfolio earned 5%, 45%, 20%, and 10% over the last four years, the arithmetic mean return per year is a. 20% 17. If a portfolio earned 5%, 45%, 20%, and 10% over the last four years, the geometric mean return per year is a. 19% 18. If the average realized return of a portfolio is 20% per year, the standard deviation of returns is 30%, the portfolio beta is 1.5, the average return of

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Treasury bills over the same period is 5% per year, and the average return on the market is 15% per year, the Sharpe measure is a. 0.50 19. If the average realized return of a portfolio is 20% per year, the standard deviation of returns is 30%, the portfolio beta is 1.5, the average return of Treasury bills over the same period is 5% per year, and the average return on the market is 15% per year, the Treynor measure is a. 0.10 20. If the average realized return of a portfolio is 20% per year, the standard deviation of returns is 30%, the portfolio beta is 1.5, the average return of Treasury bills over the same period is 5% per year, and the average return on the market is 15% per year, the Jensen measure is a. 5% 21. If the average realized return of a portfolio is 27.5% per year, the standard deviation of returns is 50%, the portfolio beta is 1.25, the average return of Treasury bills over the same period is 2.5% per year, and the average return on the market is 12.5% per year, the Sharpe measure is a. 0.50 22. If the average realized return of a portfolio is 27.5% per year, the standard deviation of returns is 50%, the portfolio beta is 1.25, the average return of Treasury bills over the same period is 2.5% per year, and the average return on the market is 12.5% per year, the Treynor measure is a. 0.20 23. If the average realized return of a portfolio is 27.5% per year, the standard deviation of returns is 50%, the portfolio beta is 1.25, the average return of Treasury bills over the same period is 2.5% per year, and the average return on the market is 12.5% per year, the Jensen measure is a. 15% 24. Suppose a portfolio has a beginning balance of $1 million and has a return of 10% the first period and 20% the second period. Then $500,000 is added to the account. The subsequent return is 9% in the third period and 25% return in the fourth period. Using the daily valuation method, what is the holding period return over the four periods? a. 50% 25. Suppose a portfolio has a beginning balance of $200,000 and earns $25,000 in the first period and $15,000 in the second period. Then $60,000 in new funds are added to the account. After that, the portfolio earns $20,000 in the third period and $40,000 in the fourth period. Using the daily valuation method, what is the holding period return over the four periods? a. 44% 1. Delta enables the portfolio manager to determine the a. number of options necessary to mimic the returns of the underlying security
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B C B A B

C B

A C

B C

2. The simultaneous holding of a long stock position and a long put is called a a. protective put 3. For a call option, delta is always a. less than one and greater than zero 4. For a call option, delta _____ as the striking price _____. a. decreases, increases 5. For at-the-money puts and calls on the same stock a. the put delta is always less than the call delta 6. When calculating a protective put hedge ratio, all of the following pieces of information are necessary EXCEPT a. option striking price 7. A characteristic of stock index futures is, they a. are settled in cash 8. If the S&P500 index is 400.00, how many S&P500 futures contracts must you sell to hedge a $10 million stock portfolio with a beta of 1.10? a. 110 9. Which of the following statements is true regarding a stock index futures contract? a. The basis will converge on zero as time passes 10. Dynamic hedging strategies seek to a. replicate a put option 11. A portfolio contains 10,000 shares of XYZ stock; the portfolio manager writes 10 XYZ calls. If the call delta is 0.455, what is the position delta? a. 9,545 12. A portfolio contains 10,000 shares of XYZ stock; the portfolio manager buys 100 XYZ puts. If the put delta is -0.220, what is the position delta? a. 7,800 13. An ABC JUN 45 call has a delta of 0.445; what is the delta of an ABC JUN 45 put? a. -0.555 14. All of the following will lower position delta EXCEPT a. buying calls 15. When futures contracts are used in dynamic hedging, falling security prices will cause the manager to a. sell futures contracts 16. Assume the stock price is $50, a call option has a premium of $5, a put option on that stock has a premium of $3, and you presently hold no position in the three. Ignoring commissions, a protective put would require an investment of a. $53 per share 17. Suppose you hold a protective put position when the stock price is $52 and the put option has a strike price of $50. If the put option has a delta of 0.500 and the stock price falls to $44 at the expiration date, what would be the change in value of your protective put position from today to the expiration date?
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c. -$2 per share 18. Suppose the stock price is $48, a call option has a strike price of $50 and a premium of $5, and a put option has a strike price of $45 and a premium of $2. Assume you currently hold no position. If you create a protective put position, what is the maximum possible loss and maximum possible gain per share at the expiration date? b. Maximum Loss = $5, Maximum Gain = Unlimited 19. Suppose the stock price is $48, a call option has a strike price of $50 and a premium of $5, and a put option has a strike price of $45 and a premium of $2. Assume you currently hold no position. If you create a covered call position, what is the maximum possible loss and maximum possible gain per share at the expiration date? c. Maximum Loss = $43, Maximum Gain = $7 20. Suppose the stock price is $50, the call delta is 0.600 and the put delta is 0.400. A portfolio of 1,000 shares, writing calls on 500 shares, and buying puts on 500 shares has a position delta of a. 500 21. Suppose the stock price is $50, the call delta is 0.600 and the put delta is 0.400. A portfolio of 1,000 shares, writing calls on 700 shares, and buying puts on 300 shares has a position delta of a. 460 22. Suppose the S&P 100 index closed at 541.86 and that a May 500 put has a premium of $2.50 and a delta of 0.444. You have a $1 million stock portfolio with a beta of 1.20. How many index put options contracts must you buy to fully hedge this portfolio? a. 50 23. Suppose the June S&P 500 index futures contract settled at 1091.80. You have a $2.730 million stock portfolio with a beta of 1.20. How many index futures contracts must you enter into in order to have a 100% hedge? a. Short 12 contracts

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