A) Nothing

ch1 B) Adjusting the divisor

C) Adjusting the numerator
1 Derivative securities can be issued based on D) None of the above
__________. 3 A10-year annual coupon bond issued by the State of
A) precious metals New York has a yield to maturity of 7%. If you are in the
B) stock market index 25% tax bracket this bond would provide you with an
C) treasury bonds equivalent taxable yield of __________
D) All of the above A) 7.00%
2 A __________ represents an ownership share in a B) 9.33%
corporation. C) 8.75%
A) preferred stock D) None of the above
B) bond 4 The asked discount yield on a treasury bill is 3%. The
C) common stock ask price of the bill is ________ if it matures in 90 days
D) All of the above and has a face value of $1,000.
3 In securities markets, there should be a risk-return A) $992.50
trade-off with assets with lower expected returns B) $994.67
having__________ risk than assets with higher expected C) $952.38
returns. D) indeterminable
A) higher 5 The price which the owner of a put option will receive
B) lower from selling the stock named in the option contract is
C) the same called the __________
D) None of the above A) put price
4 Allocation of the investment portfolio across broad B) exercise price
asset classes refers to the __________. C) expiration price
A) security analysis D) None of the above
B) top-down portfolio construction 6 A bond that has no collateral is called __________.
C) asset allocation A) a straight bond
D) None of the above B) a mortgage bond
5 Analysis of the value of securities refers to the C) a debenture
__________. D) None of the above
A) top-down portfolio construction 7 The Nikkei reflects market performance on which of
B) security analysis the following major stock markets?
C) asset allocation A) Japan
D) None of the above B) Singapore
6 Money Market securities are characterized by C) Taiwan
_________. D) New Zealand
A) longer than 10 years to maturity 8 In the event of the company's bankruptcy, __________.
B) 5 to 10 years to maturity A) the firm's bondholders are personally liable for the
C) a very short term to maturity firm's obligations
D) a variable term to maturity B) the most shareholders can lose is their original
7 A futures contract of orange juice is an example of a investment in the firm's stock plus any legal costs
__________. C) common shareholders are the last in line to receive
A) financial asset their claims on the firm's assets
B) real asset D) bondholders have claim to what is left from the
C) mutual fund liquidation of the firm's assets after paying shareholders
D) None of the above 9 Ownership of a put option entitles the owner to the
8 Firms that specialize in helping companies raise capital __________ to __________ a specific stock, on or before a
by selling securities are called __________. specific date, at a specific price.
A) industrial banks A) obligation, buy
B) commercial banks B) obligation, sell
C) investment banks C) right, sell
D) None of the above D) right, buy
9 __________ are real assets. 10 The effective annual yield of a treasury bill that has a
A) Options face value of $10,000, a current selling price of $9,900,
B) Factories and a maturity of 75 days is __________.
C) Mortgage bonds A) 5.01%
D) None of the above B) 4.67%
C) 5.42%
ch2 D) 6.96%
1 Which of the following is(are) characteristic of common
stock ownership? ch3
A) voting rights 1 Assume you purchased 500 shares of ABC common
B) double taxation stock on margin at $40 per share from your broker. If the
C) residual claimant initial margin is 70%, the amount you borrowed from the
D) All of the above are characteristics of stock broker is __________.
ownership A) $4,000
2 Which of the following method is used to adjust for a B) $6,400
stock split in calculating the standard and Poor's 500 C) $9,600
Index? D) $6,000

1
 2 Purchases of newly issued stock take place 2 What is the rate of return on a mutual fund that has
__________. $500 million in assets at the start of the year, 20 million
A) in the primary market shares outstanding, a gross return on assets of 12%, and a
B) in the open market total expense ratio of 1%?
C) in the secondary market A) 12%
D) in the over the counter market B) 11%
3 The _________ price is the price at which an investor C) 13%
pays to a dealer to purchase a security. D) There is not sufficient information to answer this
A) market question
B) ask 3 Mutual funds are ______________________.
C) bid A) specialty investment companies
D) None of the above B) open-end investment companies
4 The Nasdaq Stock Market is an example of C) international investment companies
A) a primary market D) closed-end investment companies
B) a secondary market 4 A mutual fund reports $150 million in assets, $25
C) the third market million in liabilities, and has 12.5 million shares
D) All of the above outstanding. What is the Net Asset Value (NAV) of these
5 shares?
__________ determines the initial margin requirements A) $20
on stocks. B) $25
A) The Securities and Exchange Commission C) $15
B) Stock broker D) $10
C) The Federal Reserve 5 Real estate investment trusts are exempt from
D) The Federal Deposit Insurance Corporation __________ as long as they distribute 95% of their
6 You purchased 400 shares of XYZ common stock on taxable income to shareholders.
margin at $20 per share. Assume the initial margin is A) taxes
60% and the maintenance margin is 30%. You would get B) regulations
a margin call if the stock price is below __________. C) auditing
Assume the stock pays no dividend and ignore interest on D) All of the above
margin. 6 Investors who wish to buy some shares of a closed-end
A) $15.71 fund may ______.
B) $11.43 A) buy the shares at a premium
C) $13.57 B) buy the shares from the company
D) $10.14 C) buy the shares the at net asset value from other
7 You purchased 200 shares of AAA common stock on investors
margin for $40 per share. The initial margin is 60% and D) None of the above
the stock pays no dividend. Your rate of return would be 7 Mutual funds that hold both stocks and bonds in
__________ if you sell the stock at $35 per share. relatively stable proportions are called
A) 21% ____________________.
B) 13% A) growth and income funds
C) -13% B) safe funds
D) -21% C) asset allocation funds
8 You purchased ABC stock at $50 per share. The stock D) balanced funds
is currently selling at $49. Your potential loss could be 8 The most common benchmark for comparing the
reduced by placing a __________. performance of equity mutual funds is the __________.
A) limit-buy order A) Standard & Poor's 500 Index
B) limit-sell order B) New York Composite Index
C) market order C) Dow Jones Industrial Index
D) stop-loss order D) NASDAQ Composite Index
9 Short selling a stock is profitable when the stock price 9 Sector mutual funds concentrate their investments in
__________. _________________.
A) does not change A) different geographical regions of the US
B) goes down B) geographical segments of the real estate market
C) goes up C) securities issued by firms in a particular segment of
D) None of the above the economy
10 You sold short 200 shares of XYZ common stock at D) government securities
$40 per share. The initial margin is 70%. Your initial 10 Mutual funds perform the function of __________ for
investment was __________. their shareholders.
A) $4,000 A) investment insurance
B) $2,400 B) tax preparation
C) $8,000 C) record keeping and administration
D) $5,600 D) All of the above

ch4 ch5
1 Money market fund's NAV is fixed at _____ per share. 1 What was the beginning price of a stock if its ending
A) $1 price was $23, its cash dividend was $1, and the holding
B) $2 period return on a stock was 20%?
C) $3 A) $20
D) None of the above B) $24
C) $21

2
 D) $18 A) 1
2 You purchased 100 shares of stock for $25. One year B) less than or equal to 0
later you received $2 cash dividend and sold the shares C) between 0 and 1
for $22 each. Your holding-period return was ____. D) less than 1
A) 4% 2 Which of the following is correct concerning efficient
B) 8.33% portfolios?
C) 8% A) They have zero risk.
D) -4% B) They have the lowest risk.
3 The geometric average of 10%, -20% and 10% is C) They have the highest risk/return tradeoff.
__________. D) They have the highest expected return.
A) 0% 3 The standard deviation of return on stock A is 0.25
B) 1.08% while the standard deviation of return on stock B is 0.30.
C) -1.08% If the covariance of returns on A and B is 0.06, the
D) -2% correlation coefficient between the returns on A and B is
4 An investor invests 80% of her funds in a risky asset __________.
with an expected rate of return of 12% and a standard A) 0.2
deviation of 20% and 20% in a treasury bill that pays B) 0.6
3%. Her portfolio's expected rate of return and standard C) 0.7
deviation are __________ and __________ respectively. D) 0.8
A) 12%, 20% 4 reward-to-variability ratio of a high-risk stock is
B) 7.5%, 10% _______ that of a low-risk stock.
C) 9.6%, 10% A) the same as
D) 10.2%, 16% B) higher than
5 The sample standard deviation of returns of 12%, 15%, C) lower than
-10% and 20% is ______. D) none of the above
A) 9.25% 5 According to the systematic risk principle, which one
B) 13.25% of the following risks is rewarded?
C) 11.482% A) Unsystematic risk.
D) 20% B) Total risk.
6 Suppose stock ABC has an average return of 12% and C) Systematic risk.
a standard deviation of 20%. Determine the range of D) Industry risk.
returns that ABC's actual returns will fall within 95% of 6 Which one of the following statements is correct
the time. concerning a two-stock portfolio?
A) Between -28% and 52% A) Portfolio return is a weighted average of the two
B) Between -8% and 32% stocks’ returns if the stocks have a positive correlation
C) Between 12% and 20% coefficient.
D) None of the above B) Portfolio standard deviation can be a weighted
7 What is the expected real rate of return on an average of the two stocks’ standard deviations in theory.
investment that has expected nominal return of 20%, C) Portfolio standard deviation is zero if the two stocks
assuming the expected rate of inflation to be 6%? have a correlation coefficient of 0.
A) 14% D) None of the above is correct.
B) 13.2% 7 The standard deviation of return on investment A is
C) 20% 0.2 while the standard deviation of return on investment
D) 18.4% B is 0.3. If the correlation coefficient between the returns
8 What is the ending price of a stock if its beginning on A and B is -0.8, the covariance of returns on A and B is
price was $30, its cash dividend was $2, and the holding ________.
period return on a stock was 20%? A) -0.048
A) $32 B) -0.06
B) $34 C) 0.06
C) $36 D) 0.048
D) $28 8 A portfolio is composed of two stocks, A and B. Stock A
9 Historical returns have generally been __________ for has a standard deviation of return of 20% while stock B
stocks than for bonds. has a standard deviation of return of 30%. Stock A
A) the same comprises 40% of the portfolio while stock B comprises
B) lower 60% of the portfolio. What is the standard deviation of
C) higher return on the portfolio if the correlation coefficient
D) none of the above between the returns on A and B is 0.5?
10 Geometric average returns are generally __________ A) 23.1%
arithmetic average returns. B) 25%
A) the same as C) 26%
B) lower than D) 24.7%
C) higher than 9 A portfolio is composed of two stocks, A and B. Stock A
D) none of the above has an expected return of 10% while stock B has an
expected return of 18%. What is the proportion of stock
A in the portfolio so that the expected return of the
ch6 portfolio is 16.4%?
1 Some diversification benefits can be achieved by A) 0.2
combining securities in a portfolio as long as the B) 0.8
correlation coefficient between the securities is C) 0.4
________________. D) 0.6

3
 10 Which of the following portfolios cannot lie on the B) 6%
efficient frontier? C) 8%
Portfolio Expected Return Standard Deviation D) 5%
X 10% 15% 9 According to the CAPM, a stock with a high standard
Y 12% 20% deviation must have a beta ________ that of a stock with
Z 15% 20% a low standard deviation.
A) Portfolio Z A) higher than
B) Portfolio X B) lower than
C) Portfolio Y C) the same as
D) All portfolios should lie on the efficient frontier D) There is not sufficient information to determine.
10 The expected risk-free rate of return is 4%. The
ch7 expected return on a stock with a beta of 1.2 is 16%.
1 Stock A has an estimated rate of return of 12% and a What is the expected return on the market according to
beta of 1.2. The market expected rate of return is 12% the CAPM?
and the risk-free rate is 2%. The alpha of the stock is A) 12%
__________. B) 14%
A) 0% C) 18%
B) -2% D) 15%
C) 2%
D) -4% ch8
2 You invest $8,000 in stock A with a beta of 1.4 and 1 When the market risk premium declines, stock prices
$12,000 in security B with a beta of 0.8. The beta of this will ________.
formed portfolio is __________. A) rise
A) 1.10 B) fall
B) 1.20 C) recover
C) 1.04 D) have excess volatility
D) 2.20 2 According to the efficient market hypothesis,
3 Which of the following is(are) correct according to the __________.
CAPM: A) positive alphas on stocks will disappear quickly
A) There is a linear and positive relationship between a B) low beta stocks are consistently underpriced
stock's beta and its required return. C) high beta stocks are consistently overpriced
B) The expected return of a stock will be doubled if its D) None of the above answers is correct
beta increases from 1 to 2. 3 Research on the strong form of market efficiency
C) There is a linear and positive relationship between a shows that ________ are generally able to achieve
portfolio's standard deviation and its required return. superior returns.
D) All of the above are correct. A) members of the SEC
4 Which one of the following stocks is relatively more B) the majority of professional mutual fund managers
risky when held in a well-diversified portfolio? C) corporate insiders
Stock Standard Deviation Beta D) stock brokers
ABC 35% 1.2 4 The ______________ of the efficient market hypothesis
XYZ 30% 1.6 suggests that there is little or nothing to be gained from
A) ABC because its beta is lower. studying past stock price trends.
B) XYZ because its beta is higher. A) weak form
C) ABC because its standard deviation is higher. B) semi-weak form
D) XYZ because its standard deviation is lower. C) semi-strong form
5 The expected market rate of return is 14% while the D) strong form
risk-free rate expected return is 4%. If you expect stock A 5 Which one of the following forms of market efficiency
with a beta of 1.2 to offer a rate of return of 20%, then is violated if you can earn excess return by buying stocks
you should __________. of firms which make merger announcements?
A) buy stock A because it is overpriced A) Weak form.
B) buy stock A because it is underpriced B) Semi-weak form.
C) sell short stock A because it is overpriced C) Semi-strong form.
D) sell short stock A because it is underpriced D) Strong form.
6 Stock A has an expected rate of return of 14%. The 6 The efficient market hypothesis suggests that
market expected rate of return is 12% and the risk-free ___________.
rate is 2%. The beta of the stock is __________. A) no investors can earn a positive return at any point in
A) 1.2 time.
B) 1.0 B) no investors can earn a positive return persistently
C) 0.8 over time.
D) 1.4 C) no investors can earn an excess return at any point in
7 The slope of the Security Market Line is ____________. time.
A) the beta D) no investors can earn an excess return persistently
B) the risk-free rate of return over time.
C) the market return 7 The January effect of small firms is greatest ________.
D) the market risk premium A) in leap years
8 The expected return on the market is 12%. The B) in presidential election years
expected return on a stock with a beta of 1.5 is 17%. C) late in the month
What is the risk-free rate of return according to the D) early in the month
CAPM? 8 Which of the following has(have) been considered
A) 2% market anomalies?

4
 A) the reversal effect A) market risk is negligible.
B) the book-to-market effect B) unsystematic risk is negligible.
C) the small-firm January effect C) systematic risk is negligible.
D) All of the above have been considered market D) nondiversifiable risk is negligible.
anomalies E) none of the above.
9 Empirical evidence supporting the semi-strong form 8 What is the expected return of a zero-beta security?
market efficiency suggests that investors should follow A) The risk-free rate.
____________ investment strategy. B) Zero rate of return.
A) a passive C) A negative rate of return.
B) an active D) The market rate of return.
C) a conservative E) None of the above.
D) an aggressive 9 The market price of risk
10 If stock returns exhibit negative serial correlation, this A) is the market risk premium divided by the standard
means that __________ returns tend to follow deviation of the market returns.
___________ returns. B) has a reward-to-risk ratio of [E(rM ) - rf]/?2M.
A) positive; positive C) is the price of a U. S. T-bill.
B) positive ; negative D) a and b.
C) negative; negative E) b and c.
D) None of the above 10 In equilibrium, the marginal price of risk for a risky
security must be
ch9 A) less than the marginal price of risk for the market
1 According to the Capital Asset Pricing Model (CAPM), portfolio.
a well-diversified portfolio's rate of return is a function of B) greater than the marginal price of risk for the market
A) unique risk portfolio.
B) reinvestment risk C) equal to the marginal price of risk for the market
C) market risk. portfolio.
D) unsystematic risk. D) adjusted by its degree of nonsystematic risk.
E) none of the above. E) all of the above are true.
2 The market portfolio has a beta of
A) 0.25 ch11
B) -1. 1 Which pricing model provides no guidance concerning
C) 1. the determination of the risk premium on factor
D) 0.5. portfolios?
E) none of the above A) The multifactor APT
3 Which statement is not true regarding the market B) The CAPM
portfolio? C) Both the CAPM and the multifactor APT
A) It includes all publicly traded financial assets. D) Neither the CAPM nor the multifactor APT
B) It is the tangency point between the capital market E) None of the above is a true statement.
line and the indifference curve. 2 The exploitation of security mispricing in such a way
C) All securities in the market portfolio are held in that risk-free economic profits may be earned is called
proportion to their market values. A) factoring
D) It lies on the efficient frontier. B) capital asset pricing
E) none of the above are true. C) arbitrage
4 The market risk, beta, of a security is equal to D) fundamental analysis
A) the covariance between the security's return and the E) none of the above
market return divided by the variance of the market's 3 A zero-investment portfolio with a positive expected
returns. return arises when
B) the covariance between the security and market A) an investor has downside risk only
returns divided by the standard deviation of the market's B) the opportunity set is not tangent to the capital
returns. allocation line
C) the variance of the security's returns divided by the C) a risk-free arbitrage opportunity exists
covariance between the security and market returns. D) the law of prices is not violated
D) the variance of the security's returns divided by the E) none of the above
variance of the market's returns. 4 The APT differs from the CAPM because the APT
E) none of the above. _________.
5 According to the Capital Asset Pricing Model (CAPM), A) places more emphasis on market risk
the expected rate of return on any security is equal to B) recognizes multiple systematic risk factors
A) Rf + ?[E(RM)]. C) recognizes multiple unsystematic risk factors
B) Rf + ?[E(RM - Rf]. D) minimizes the importance of diversification
C) Rf + ?[E(RM) - Rf]. E) all of the above
D) E(RM) + Rf. 5 The following factors might affect stock returns:
E) none of the above. A) interest rate fluctuations.
6 According to the Capital Asset Pricing Model (CAPM), B) the business cycle.
fairly priced securities C) inflation rates.
A) have positive betas. D) a and b.
B) have positive alphas. E) all of the above.
C) have negative betas. 6 Portfolio X has expected return of 10% and standard
D) have zero alphas. deviation of 19%. Portfolio Y has expected return of 12%
E) none of the above. and standard deviation of 17%. Rational investors will
7 In a well diversified portfolio A) Borrow at the risk free rate and buy X.

5
 B) Sell Y short and buy X. A) a market trend
C) Sell X short and buy Y. B) a primary trend
D) Borrow at the risk free rate and buy Y. C) an intermediate trend
E) Lend at the risk free rate and buy Y. D) a minor trend
7 A professional who searches for mispriced securities in E) none of the above
specific areas such as merger-target stocks, rather than 4 The debate over whether markets are efficient will
one who seeks strict (risk-free) arbitrage opportunities is probably never be resolved because of
engaged in A) the selection bias issue
A) risk arbitrage. B) the magnitude issue
B) option arbitrage. C) the lucky event issue
C) pure arbitrage. D) none of the above
D) equilibrium arbitrage. E) all of the above
E) none of the above. 5 A common strategy for passive management is
8 Imposing the no-arbitrage condition on a single-factor ____________.
security market implies which of the following A) creating an investment club
statements? B) creating a small firm fund
I) the expected return-beta relationship is maintained for C) creating an index fund
all individual securities. D) a and b
II) the expected return-beta relationship is maintained for E) b and c
all well-diversified portfolios. 6 Researchers have found that most of the small firm
III) the expected return-beta relationship is maintained effect occurs
for all but a small number of well-diversified portfolios. A) during the summer months
IV) the expected return-beta relationship is maintained B) during the spring months
for all but a small number of individual securities. C) in January
A) I and III are correct. D) in December
B) I and IV are correct. E) randomly
C) II and III are correct. 7 A study by Ball, Kothari and Shanken (1995) examines
D) II and IV are correct. the reversal effect and finds
E) Only IV is correct. A) the reversal effect is substantially diminished when
9 To take advantage of an arbitrage opportunity, an portfolios are formed based on mid-year performance
investor would rather than December results.
I) short sell the asset in the low-priced market and buy it B) the reversal effect seems to be concentrated in low-
in the high-priced market. priced shares.
II) construct a zero investment portfolio that will yield a C) the risk-adjusted return from trying to exploit the
sure profit. reversal effect is effectively zero.
III) make simultaneous trades in two markets without D) none of the above are true.
any net investment. E) all of the above.
IV) construct a zero beta investment portfolio that will 8 Proponents of the EMH think technical analysts
yield a sure profit. A) are wasting their time
A) I and IV B) should focus on resistance levels
B) I and III C) should focus on support levels
C) II and III D) should focus on financial statements
D) I, III, and IV E) should focus on relative strength
E) II, III, and IV 9 Fama and French (1988) found that the return on the
10 The factor F in the APT model represents aggregate stock market
A) the deviation from its expected value of a factor that A) is higher when bank failures are high
affects all security returns. B) is lower when the dividend yield is high
B) firm-specific risk. C) is unrelated to the dividend yield
C) a factor that affects all security returns. D) is higher when the dividend yield is high
D) the sensitivity of the firm to that factor. E) is unrelated to the economy
E) a random amount of return attributable to firm 10 In an efficient market the correlation coefficient
events. between stock returns for two non-overlapping time
periods should be
ch12 A) positive and large.
1 Proponents of the EMH typically advocate B) positive and small.
A) a passive investment strategy C) negative and large.
B) investing in an index fund D) negative and small.
C) an active trading strategy E) zero
D) a and b
E) b and c ch14
2 If you believe in the reversal effect, you should 1 The current yield on a bond is equal to ________.
A) buy bonds in this period if you held stocks in the last A) the internal rate of return
period B) the yield to maturity
B) buy stocks this period that performed poorly last C) annual interest divided by the current market price
period D) annual interest divided by the par value
C) buy stocks in this period if you held bonds in the last E) none of the above
period 2 To earn a high rating from the bond rating agencies, a
D) go short firm should have
E) a and b A) a low times interest earned ratio
3 A daily fluctuation of little importance is called B) a low debt to equity ratio

6
 C) a high quick ratio
D) b and c
E) a and c
3 Ceteris paribus, the price and yield on a bond are
A) negatively related.
B) positively related.
C) sometimes positively and sometimes negatively
related.
D) not related.
E) indefinitely related.
4 A coupon bond is a bond that
A) does not pay interest on a regular basis but pays a
lump sum at maturity
B) pays interest on a regular basis (typically every six
months)
C) can always be converted into a specific number of
shares of common stock in the issuing company
D) always sells at par
E) none of the above
5 Consider two bonds, X and Y. Both bonds presently are
selling at their par value of $1,000. Each pays interest of
$150 annually. Bond A will mature in 6 years while bond
B will mature in 7 years. If the yields to maturity on the
two bonds change from 15% to 12%
A) both bonds will increase in value, but bond X will
increase more than bond Y
B) both bonds will decrease in value, but bond X will
decrease more than bond Y
C) both bonds will increase in value, but bond Y will
increase more than bond X
D) both bonds will decrease in value, but bond Y will
decrease more than bond X
E) none of the above
6 The yield to maturity on a bond is
A) the discount rate that will set the present value of the
payments equal to the bond price.
B) below the coupon rate when the bond sells at a
discount, and equal to the coupon rate when the bond
sells at a premium.
C) based on the assumption that any payments received
are reinvested at the coupon rate.
D) all of the above.
E) none of the above
7 Consider a 5-year bond with a 10% coupon that has a
present yield to maturity of 8%. If interest rates remain
constant, one year from now the price of this bond will be
A) $1,000
B) higher
C) lower
D) the same
E) cannot be determined
8 Which one of the following statements about
convertibles is true?
A) The longer the call protection on a convertible, the
less the security is worth.
B) Convertibles are not callable.
C) The smaller the spread between the dividend yield on
the stock and the yield-to-maturity on the bond, the more
the convertible is worth.
D) The collateral that is used to secure a convertible
bond is one reasons convertibles are more attractive than
the underlying stock.
E) The more volatile the underlying stock, the greater
the value of the conversion feature.
9 The bond indenture includes
A) the maturity date of the bond.
B) the par value of the bond.
C) the coupon rate of the bond.
D) all of the above.
E) none of the above.
10 Most corporate bonds are traded
A) over the counter by bond dealers linked by a
computer quotation system.
B) by the issuing corporation.
C) on a formal exchange operated by the New York
Stock Exchange.
D) on a formal exchange operated by the American
Stock Exchange.
E) on a formal exchange operated by the Philadelphia
Stock Exchange.
ch15
1 The yield curve shows at any point in time:
A) the relationship between yield on a bond and the time
to maturity on the bond.
B) the relationship between the coupon rate on a bond
and time to maturity of the bond.
C) the relationship between the yield on a bond and the
duration of the bond.
D) all of the above.
E) none of the above.
2 According to the expectations hypothesis, a normal
yield curve implies that
A) 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 first, then
decrease.
D) interest rates are expected to decline first, then
increase.
E) interest rates are expected to increase in the future.
3 The expectations theory of the term structure of
interest rates states that
A) yields on long- and short-maturity bonds are
determined by the supply and demand for the securities.
B) forward rates exceed the expected future interest
rates.
C) forward rates are determined by investors'
expectations of future interest rates.
D) all of the above.
E) none of the above.
4 The market segmentation theory of the term structure
of interest rates
A) theoretically can explain all shapes of yield curves.
B) assumes that markets for different maturities are
separate markets.
C) definitely holds in the "real world".
D) a and b.
E) a and c.
5 When computing yield to maturity, the implicit
reinvestment assumption is that the interest payments are
reinvested at the:
A) Coupon rate.
B) Yield to maturity at the time of the investment.
C) Current yield.
D) Prevailing yield to maturity at the time interest
payments are received.
E) The average yield to maturity throughout the
investment period.
6 The concepts of spot and forward rates are most closely
associated with which one of the following explanations of
the term structure of interest rates.
A) Expectations Hypothesis
B) Segmented Market theory
C) Preferred Habitat Hypothesis
D) Liquidity Premium theory
E) None of the above
7 The pure yield curve can be estimated
A) by using corporate bonds with different risk ratings.
B) by using zero-coupon bonds.
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 C) by using coupon bonds if each coupon is treated as a E) None of the above.
separate "zero." 5 Active bond portfolio management strategies include
D) by estimating liquidity premiums for different all of the following except
maturities. A) immunization.
E) b and c. B) rate anticipation swap.
8 An inverted yield curve is one C) intermarket spread.
A) constructed by using convertible bonds. D) substitution swap.
B) with a hump in the middle. E) none of the above.
C) that slopes downward. 6 The two components of interest-rate risk are
D) that plots the inverse relationship between bond A) price risk and default risk.
prices and bond yields. B) price risk and reinvestment risk.
E) that is relatively flat. C) call risk and price risk.
9 Investors can use publicly available financial date to D) reinvestment risk and systematic risk.
determine which of the following? E) none of the above.
I) future short-term rates 7 Indexing of bond portfolios is difficult because
II) the direction the Dow indexes are heading A) the number of bonds included in the major indexes is
III) the shape of the yield curve so large that it would be difficult to purchase them in the
IV) the actions to be taken by the Federal Reserve proper proportions.
A) I and II B) many bonds are thinly traded so it is difficult to
B) I and III purchase them at a fair market price.
C) I, II, and III C) the composition of bond indexes is constantly
D) I, III, and IV changing.
E) I, II, III, and IV D) all of the above are true.
10 The Liquidity Preference Theory states that E) both b and c are true.
A) Stocks are preferred to bonds because they are 8 Duration
generally more liquid. A) assesses the time element of bonds in terms of both
B) Treasury Bonds are preferred to corporate bonds coupon and term to maturity.
because they are more liquid. B) is a direct comparison between bond issues with
C) Liquidity premiums can be measured precisely. different levels of risk.
D) Bonds of large corporations are preferred because C) allows structuring a portfolio to avoid interest-rate
they have the highest liquidity. risk.
E) The liquidity premium is expected to be positive D) a and b.
because short-term investors dominate the market. E) a and c.
9 The duration of a bond normally increases with an
ch16 increase in
1 The duration of a bond is a function of the bond's A) yield to maturity.
A) coupon rate. B) term to maturity.
B) time to maturity. C) coupon rate.
C) yield to maturity. D) all of the above.
D) all of the above. E) none of the above.
E) none of the above. 10
2 The "modified duration" used by practitioners is equal Immunization is not a strictly passive strategy because
to the Macaulay duration A) it requires choosing an asset portfolio that matches an
A) times the change in interest rate. index.
B) times (one plus the bond's yield to maturity). B) there is likely to be a gap between the values of assets
C) divided by (one plus the bond's yield to maturity). and liabilities in most portfolios.
D) divided by (one minus the bond's yield to maturity). C) durations of assets and liabilities fall at the same rate.
E) none of the above. D) it requires frequent rebalancing as maturities and
3 Which of the following two bonds is more price interest rates change.
sensitive to changes in interest rates? E) none of the above.
1) A par value bond, X, with a 5-year-to-maturity and a
10% coupon rate. ch18
2) A zero-coupon bond, Y, with a 5-year-to-maturity and a 1 Since 1955, Treasury bond yields and earnings yields
10% yield-to-maturity. on stocks were
A) Bond Y because of the longer duration. A) identical
B) Bond X because of the longer time to maturity. B) positively correlated
C) Bond X because of the higher yield to maturity. C) negatively correlated
D) Both have the same sensitivity because both have the D) uncorrelated
same yield to maturity. 2 Historically, P/E ratios have tended to be
E) None of the above A) lower when inflation has been high
4 Which of the following is not true? B) higher when inflation has been high
A) Holding other things constant, the duration of a bond C) uncorrelated with inflation rates but correlated with
increases with time to maturity. other macroeconomic variables
B) Given time to maturity and yield to maturity, the D) uncorrelated with any macroeconomic variables
duration of a bond is higher when the coupon rate is including inflation rates
lower. E) none of the above
C) Given time to maturity, the duration of a zero-coupon 3 Recent empirical research indicates
decreases with yield to maturity. A) that real rates of return on stocks are negatively
D) Duration is a better measure of price sensitivity to correlated with inflation
interest rate changes than is time to maturity.

8
 B) that real rates of return on stocks are uncorrelated ch20
with inflation 1 An American put option allows the holder to
C) that real rates of return on stocks are positively A) potentially benefit from a stock price decrease with
correlated with inflation less risk than short selling the stock.
D) nothing about real rates of return on stocks B) sell the underlying asset at the striking price on or
E) the ratio of the real rate of return on stocks to before the expiration date.
inflation is 1.0. C) buy the underlying asset at the striking price on or
4 One of the problems with attempting to forecast stock before the expiration date.
market values is that D) b and c.
A) there are no variables that seem to predict market E) a and b.
return. 2 A European call option can be exercised
B) the earnings multiplier approach can only be used at A) only on the expiration date.
the firm level. B) any time in the future.
C) dividend payout ratios are highly variable. C) if the price of the underlying asset declines below the
D) the level of uncertainty surrounding the forecast will exercise price.
always be quite high. D) immediately after dividends are paid.
E) none of the above. E) none of the above.
5 A firm's earnings per share increased from $12 to $15, 3 The maximum loss a buyer of a stock call option can
dividends increased from $3.00 to $3.60, and the share suffer is equal to
price increased from $70 to $80. Given this information, it A) the striking price minus the stock price.
follows that B) the stock price minus the value of the call.
A) the firm increased the number of shares outstanding C) the stock price..
B) the firm had a decrease in dividend payout ratio D) the call premium
C) the stock experienced a drop in the P/E ratio E) none of the above.
D) the required rate of return decreased 4 The intrinsic value of an out-of-the-money call option is
E) none of the above equal to
6 A company whose stock is selling at a P/E ratio greater A) the call premium.
than the P/E ratio of a market index most likely has B) the stock price minus the exercise price.
A) an anticipated earnings growth rate which is less than C) zero
that of the average firm D) the striking price.
B) greater cyclicality of earnings growth than that of the E) none of the above.
average firm 5 The maximum loss the writer of a stock put option can
C) less predictable earnings growth than that of the suffer is equal to
average firm A) the striking price minus the put premium.
D) a dividend yield which is less than that of the average B) the striking price.
firm greater cyclicality of earnings growth than that of C) the stock price minus the put premium.
the average firm D) the put premium.
E) none of the above. E) none of the above.
7 If a firm has a required rate of return equal to the 6 According to the put-call parity theorem, the value of a
ROE European put option on a non-dividend paying stock is
A) the amount of earnings retained by the firm does not equal to:
affect market price or the P/E. A) the call value plus the present value of the exercise
B) the firm can increase market price and P/E by price plus the stock price.
increasing the growth rate. B) the present value of the stock price minus the exercise
C) the firm can increase market price and P/E by price minus the call price.
retaining more earnings. C) the call value plus the present value of the exercise
D) a and b. price minus the stock price.
E) none of the above. D) the present value of the stock price plus the exercise
8 The goal of fundamental analysts is to find securities price minus the call price.
A) with high market capitalization rates. E) none of the above.
B) with a positive present value of growth opportunities. 7 Before expiration, the time value of a call option is
C) whose intrinsic value exceeds market price. equal to
D) all of the above. A) zero.
E) none of the above. B) the actual call price plus the intrinsic value of the call.
9 Many stock analysts assume that a mispriced stock C) the intrinsic value of the call.
will D) the actual call price minus the intrinsic value of the
A) immediately return to its intrinsic value. call.
B) gradually approach its intrinsic value over several E) none of the above.
years. 8 The value of a stock put option is positively related to
C) never return to its intrinsic value. the following factors except
D) return to its intrinsic value within a few days. A) the time to expiration.
E) none of the above. B) the stock price.
10 Because the DDM requires multiple estimates, C) the striking price.
investors should D) all of the above.
A) carefully examine inputs to the model. E) none of the above.
B) not use this model without expert assistance. 9 The put-call parity theorem
C) perform sensitivity analysis on price estimates. A) allows for arbitrage opportunities if violated.
D) feel confident that DDM estimates are correct. B) represents the proper relationship between put and
E) both a and c. call prices.

9
 C) may be violated by small amounts, but not enough to B) are less valuable.
earn arbitrage profits, once transaction costs are C) are equal in value.
considered. D) will always be exercised earlier.
D) all of the above. E) none of the above.
E) none of the above. 9 If the company unexpectedly announces it will pay its
10 A callable bond should be priced the same as first-ever dividend 3 months from today, you would
A) a convertible bond. expect that
B) a straight bond plus a call option. A) the call price would increase.
C) a straight bond plus a put option. B) the call price would not change.
D) a straight bond plus warrants. C) the call price would not decrease.
E) a straight bond. D) the put price would decrease.
E) the put price would not change.
ch21 10 In volatile markets, dynamic hedging may be difficult
1 Before expiration the time value of an in the money to implement because
stock option is always A) as volatility increases, historical deltas are too low.
A) equal to zero. B) prices move too quickly for effective rebalancing.
B) negative. C) price quotes may be delayed so that correct hedge
C) positive. ratios cannot be computed.
D) equal to the stock price minus the exercise price. D) volatile markets may cause trading halts.
E) none of the above. E) all of the above.
2 Other things equal, the price of a stock call option is
positively correlated with the following factors except ch24
A) the exercise price. 1 Trading activity by mutual funds just prior to
B) the time to expiration. quarterly reporting dates is known as
C) the stock volatility. A) insider trading
D) the stock price. B) window dressing
E) none of the above. C) passive security selection
3 A hedge ratio of 0.60 implies that a hedged portfolio D) program trading
should consist of E) none of the above
A) long 0.60 shares for each short stock. 2 Most professionally managed equity funds generally
B) short 0.60 calls for each long stock. __________.
C) long 0.60 shares for each call written A) outperform the S&P 500 index on both raw and risk-
D) long 0.60 shares for each long call. adjusted return measures
E) none of the above. B) underperform the S&P 500 index on raw return
4 The dollar change in the value of a stock call option is measures and outperform the S&P 500 index on risk-
always adjusted return measures
A) higher than the dollar change in the value of the C) outperform the S&P 500 index on raw return
stock. measures and underperform the S&P 500 index on risk-
B) lower than the dollar change in the value of the stock. adjusted return measures
C) negatively correlated with the change in the value of D) underperform the S&P 500 index on both raw and
the stock. risk-adjusted return measures
D) b and c. E) match the performance of the S&P 500 index on both
E) a and b. raw and risk-adjusted return measures
5 The elasticity of a stock call option is always 3 Suppose two portfolios have the same average return,
A) smaller than one. the same standard deviation of returns, but portfolio X
B) greater than one. has a higher beta than portfolio Y. According to the
C) negative. Sharpe measure, the performance of portfolio X
D) infinite. __________.
E) none of the above. A) is the same as the performance of portfolio Y
6 A put option on the S&P 500 index will best protect B) is better than the performance of portfolio Y
A) a portfolio that corresponds to the S&P 500. C) is poorer than the performance of portfolio Y
B) a portfolio of 50 bonds. D) cannot be measured as there is no data on the alpha
C) a portfolio of 100 shares of IBM stock. of the portfolio
D) a portfolio of 50 shares of AT&T and 50 shares of E) none of the above is true.
Xerox stocks. 4 Suppose a particular investment earns an arithmetic
E) a portfolio that replicates the Dow. return of 10% in year 1, 20% in year 2 and 30% in year
7 Which one of the following variables influence the 3. The geometric average return for the year period will
value of options? be
I) Dividend yield of underlying stock. A) less than the arithmetic average return
II) Time to expiration of the option. B) equal to the arithmetic average return
III) Level of interest rates. C) greater than the arithmetic average return
IV) Stock price volatility. D) equal to the market return
A) I and IV only. E) cannot tell from the information given
B) II and III only. 5
C) I, II, and IV only. The __________ measures the reward to volatility trade-
D) I, II, III, and IV. off by dividing the average portfolio excess return by the
E) I, II and III only. standard deviation of returns.
8 Relative to European puts, otherwise identical A) Jensen measure
American put options B) Treynor measure
A) are more valuable. C) Sharpe measure

10
 D) appraisal ratio 4 Active portfolio managers try to construct a risky
E) none of the above portfolio with
6 Risk-adjusted mutual fund performance measures A) a lower Sharpe measure than a passive strategy
have decreased in popularity because B) a higher Sharpe measure than a passive strategy
A) in nearly efficient markets it is extremely difficult for C) the same Sharpe measure as a passive strategy
portfolio managers to outperform the market. D) very few securities
B) the high rates of return earned by the mutual funds E) none of the above
in recent years have made the measures useless. 5 There appears to be a role for a theory of active
C) the measures usually result in negative performance portfolio management because
results for the portfolio managers. A) some anomalies in realized returns have been
D) a and c. persistent enough to suggest that portfolio managers who
E) all of the above. identified these anomalies in a timely fashion could have
7 The Jensen portfolio evaluation measure outperformed a passive strategy over prolonged periods.
A) is an absolute measure of return over and above that B) the "noise" in the realized returns is enough to
predicted by the CAPM. prevent the rejection of the hypothesis that some money
B) is a measure of return per unit of risk, as measured managers have outperformed a passive strategy by a
by standard deviati statistically small, yet economic, margin.
C) is a measure of return per unit of risk, as measured C) some portfolio managers have produced sequences of
by beta. abnormal returns that are difficult to label as lucky
D) a and b. outcomes.
E) b and c. D) a and b.
8 The M-squared measure E) all of the above.
A) considers only the return when evaluating mutual 6 A purely passive strategy is defined as
funds. A) one that uses only index funds.
B) considers only the market risk when evaluating B) one that is mean-variance efficient.
mutual funds. C) one that allocates assets in fixed proportions that do
C) considers only the total risk when evaluating mutual not vary with market conditions.
funds. D) both a and c.
D) considers the risk-adjusted return when evaluating E) all of the above.
mutual funds. 7 One property of a risky portfolio that combines an
E) none of the above. active portfolio of mispriced securities with a market
9 The dollar-weighted return on a portfolio is equivalent portfolio is that, when optimized, its squared Sharpe
to measure increases by the square of the active portfolio's
A) the time-weighted return. A) Sharpe ratio.
B) the portfolio's internal rate of return. B) alpha
C) the arithmetic average return. C) appraisal ratio..
D) the geometric average return. D) Treynor measure.
E) none of the above. E) none of the above.
10 A portfolio manager's ranking within a comparison 8 When you are examining the record of a perfect market
universe may not provide a good measure of performance timer it is important to realize that
because A) the average rate of return is a misleading measure.
A) portfolio durations can vary across managers. B) the standard deviation is a misleading measure.
B) portfolio returns may not be calculated in the same C) the average excess return is a misleading measure.
way. D) the coefficient of skewness is a misleading measure.
C) if managers follow a particular style or subgroup, E) he has based most of his decisions on inside
portfolios may not be comparable. information.
D) both a and c. 9 The appropriate measure of forecasting ability is
E) none of the above. A) the proportion of bull markets correctly forecast plus
the proportion of bear markets correctly forecast minus
ch27 one.
1 If a portfolio manager consistently obtains a high B) the proportion of bull markets correctly forecast.
Sharpe measure, the manager's forecasting ability C) the proportion of bear markets correctly forecast.
A) is average D) the average of the above items.
B) is above average E) the proportion of correct forecasts.
C) is below average 10 An active portfolio manager faces a tradeoff between
D) does not exist. I) using the Sharpe measure.
E) cannot be determined based on the Sharpe measure II) holding too much of the risk-free asset.
2 Active portfolio management consists of III) exploiting perceived security mispricings.
A) market timing IV) using mean-variance analysis.
B) indexing V) letting a few stocks dominate the portfolio.
C) security analysis A) I and II
D) a and b B) II and V
E) a and c C) III and V
3 The critical variable in the determination of the D) III and IV
success of the active portfolio is E) II and III
A) alpha/nonsystematic risk
B) alpha/systematic risk
C) gamma/nonsystematic risk
D) gamma/systematic risk
E) none of the above

11