Exam 1 FINA 5323

(d) 1

An individual investors utility curves specify the tradeoffs he or she is willing to make between a) high risk and low risk assets. b) high return and low return assets. c) covariance and correlation. d) return and risk.

(d) 2

A portfolio manager is considering adding another security to his portfolio. The correlations of the 5 alternatives available are listed below. Which security would enable the highest level of risk diversification? a) 0.0 b) 0.25 c) -0.25 d) -0.75 A positive covariance between two variables indicates that a) the two variables move in different directions. b) the two variables move in the same direction. c) the two variables are low risk. d) the two variables are high risk.

(b) 3

(d) 4

The market portfolio consists of all a) New York Stock Exchange stocks. b) High grade stocks and bonds. c) Stocks and bonds. d) Risky assets.

(d) 5

When identifying undervalued and overvalued assets, which of the following statements is false? a) An asset is properly valued if its estimated rate of return is equal to its required rate of return. b) An asset is considered overvalued if its estimated rate of return is below its required rate of return. c) An asset is considered undervalued if its estimated rate of return is above its required rate of return. d) An asset is considered overvalued if its required rate of return is below its estimated rate of return.

Exam 1 FINA 5323 (c) 6 The line of best fit for a scatter diagram showing the rates of return of an individual risky asset and the market portfolio of risky assets over time is called the a) Security market line. b) Capital asset pricing model. c) Characteristic line. d) Line of least resistance. As the number of securities in a portfolio increases, the amount of systematic risk a) Remains constant. b) Decreases. c) Increases. d) Changes.

(a) 7

(d) 8

A common-size income statement expresses all income statement items a) As a percentage of Current Assets. b) As a percentage of Fixed Assets. c) As a percentage of Total Assets. d) As a percentage of Sales

(a) 9

An order that specifies the highest buy or lowest sell price is a a) Limit order. b) Short sale. c) Market order. d) Margin call. When an investor borrows part of the investment cost it is known as a) A short sale. b) A fill or kill order. c) A margin transaction. d) A limit order.

(c) 10

(a) 11

Secondary markets are important because a) The prevailing market price of securities is determined in the secondary market b) It has an impact on price stability c) It has an impact on price continuity d) New securities are being issued

Exam 1 FINA 5323 (a) 12 In a price weighted average stock market indicator series, the following type of stock has the greatest influence a) The stock with the highest price b) The stock with the lowest price c) The stock with the highest market capitalization d) The stock with the lowest market capitalization

(b) 13

Which of the following is not a value-weighted series? a) NASDAQ Industrial Index b) Dow Jones Industrial Average c) Wilshire 5000 Equity Index d) American Stock Exchange Series

(c) 14

In a value weighted index a) Exchange rate fluctuations have a large impact. b) Exchange rate fluctuations have a small impact. c) Large companies have a disproportionate influence on the index. d) Small companies have an exaggerated effect on the index. Of the following indices, which includes the most comprehensive list of stocks? a) New York Exchange Index b) Standard and Poors Index c) American Stock Exchange Index d) Wilshire Equity Index Which of the following would be inconsistent with an efficient market? a) Information arrives randomly and independently. b) Stock prices adjust rapidly to new information. c) Price changes are independent. d) Price adjustments are biased

(d) 15

(d) 16

(a) 17

The basic trade-off in the investment process is a) between the anticipated rate of return for a given investment instrument and its degree of risk. b) between understanding the nature of a particular investment and having the opportunity to purchase it. c) between high returns available on single instruments and the diversification of instruments into a portfolio. d) between the desired level of investment and possessing the resources necessary to carry it out.

Exam 1 FINA 5323 (b) 18 The ability to sell an asset quickly at a fair price is associated with a) Business risk. b) Liquidity risk. c) Exchange rate risk. d) Financial risk.

(c) 19

If statistical tests of stock returns over time support the efficient market hypothesis the resulting correlations should be a) Positive. b) Negative. c) Zero. d) Lagged.

(d) 20

A trading rule which signals purchase of a stock if it rises X percent and sale of a stock if it falls X percent is known as a a) Breakout. b) Short sale. c) Sieve. d) Filter.

(b) 21

Unsystematic risk refers to risk that is a) Undiversifiable b) Diversifiable c) Due to fundamental risk factors d) Due to market risk

(c) 22

The security market line (SML) graphs the expected relationship between a) Business risk and financial risk b) Systematic risk and unsystematic risk c) Risk and return d) Systematic risk and unsystematic return

(d) 23

Examples of anomalies providing contrary evidence to the semi-strong efficient market hypothesis include studies of all of the following except a) Quarterly earnings reports. b) Price earnings ratios. c) Total market value. d) Stocks ranked by Standard & Poor's.

Exam 1 FINA 5323 (d) 24 The implication of efficient capital markets and a lack of superior analysts have led to the introduction of a) Balanced funds. b) Naive funds. c) January funds. d) Index funds.

(d) 25

Measures of risk for an investment include a) Variance of returns and business risk b) Coefficient of variation of returns and financial risk c) Business risk and financial risk d) Variance of returns and coefficient of variation of returns

(b) 26

Capital market instruments include all of the following except a) U.S. Treasury notes and bonds. b) U.S Treasury bills. c) U.S. government agency securities. d) Municipal bonds.

(c) 27

In tests of the semistrong-form efficient market hypothesis, an adjustment for market effects is carried out by a) Calculating the historical return. b) Calculating the market rate of return. c) Calculating the abnormal rate of return. d) Calculating the cross-sectional return.

c) 28

According to the strong-form efficient market hypothesis, stock prices fully reflect a) All security market information only. b) All public information only. c) All public and private information only. d) All historical information. The legal document setting forth the obligations of a bond's issuer is called a) A debenture. b) A warrant. c) An indenture. d) The preemptive right.

(c) 29

Exam 1 FINA 5323 (c) 30 The best way to directly acquire the shares of a foreign company is through a) International mutual funds. b) Global mutual funds. c) American Depository Receipts. d) Investment in U.S. companies operating internationally.

(d) 31

The probability of an adverse outcome is a definition of a) Statistics. b) Variance. c) Random. d) Risk. Markowitz believes that any asset or portfolio of assets can be described by ________ parameter(s). a) One b) Two c) Three d) Four A statistic that that measures how two variables tend to move together is the a) Coefficient of variation b) Correlation coefficient c) Standard deviation d) Mean

(b) 32

(b) 33

(c) 34

Of the following provisions that might be found in a bond indenture, which would tend to reduce the coupon interest rate? a) A call provision b) No restrictive covenants c) A sinking fund provision d) Change in bond rating from Aaa to Aa

(d) 35

The annual interest paid on a bond relative to its prevailing market price is called its a) Promised yield. b) Yield to maturity. c) Coupon rate. d) Current yield.

Exam 1 FINA 5323 (a) 36 In a two stock portfolio, if the correlation coefficient between two stocks were to decrease over time everything else remaining constant the portfolio's risk would a) Decrease. b) Remain constant. c) Increase. d) Fluctuate positively and negatively. Given a portfolio of stocks, the envelope curve containing the set of best possible combinations is known as the a) Efficient portfolio. b) Utility curve. c) Efficient frontier. d) Last frontier.

(c) 37

(a) 38

The optimal portfolio is identified at the point of tangency between the efficient frontier and the a) highest possible utility curve. b) lowest possible utility curve. c) middle range utility curve. d) steepest utility curve.

(c) 39

The institutions which invest most heavily in corporate bond issues are a) Life insurance companies and commercial banks. b) Life insurance companies and property and liability insurance companies. c) Life insurance companies and pension funds. d) Commercial banks and property and liability insurance companies. Which of the following is not a major rating agency for bonds? a) Moody's b) Standard & Poor's c) Fitch Investor Services d) Value Line

(d) 40

(c) 41

When a fixed income security is being traded at the price above its face value it is trading a) At a discount. b) At par. c) At a premium. d) Flat.

Exam 1 FINA 5323 (b) 42 The _________ the number of stocks in a portfolio and the _________ the time period the ________ the portfolio beta. a) Larger, longer, less stable b) Larger, longer, more stable c) Larger, shorter, less stable d) Larger, shorter, more stable

(d) 43

The five major classes of ratios include the following, except a) Internal liquidity. b) Risk analysis. c) Growth analysis. d) Market performance. Which of the following is not a component of return on equity (ROE)? a) Net income/sales b) Total assets/equity c) Equity/sales d) Sales/total assets

(c) 44

(c) 45

A common-size balance sheet expresses all balance sheet items a) As a percentage of Current Assets. b) As a percentage of Fixed Assets. c) As a percentage of Total Assets. d) As a percentage of Net Income. A pure auction market is one in which a) Dealers provide liquidity by buying and selling shares of stock for themselves. b) Dealers compete against each other to provide the highest bid and lowest asking prices. c) Buyers submit bid prices to sellers. d) Buyers and sellers submit bid and ask prices to a central location to be matched.

(d) 46

(d) 47

With a best effort offering, the investment banker performs all of the following roles except: a) determines the fee paid to themselves for handling the issue. b) manages the selling group for the new issue. c) evaluates market conditions and determines the characteristics of the security. d) guarantees the selling price for the entire issue to the firm issuing the securities. 8

Exam 1 FINA 5323 (c) 48 The basic distinction between a primary and a secondary market is a) proceeds from sales in the primary market go to the current owner of a security; proceeds in secondary market go to the original owner. b) primary markets involve direct dealings within regional exchanges. c) only new securities are sold in the primary market; only outstanding securities are bought and sold in the secondary market. d) primary markets deal exclusively in bonds; secondary markets deal primarily in common stock. Studies of correlations among monthly equity price index returns have found: a) b) c) d) (d) 50 Low correlations between various U.S. equity indexes High correlations between various U.S. equity indexes High correlations between U.S. and non-U.S. equity indexes Negative correlations between various U.S. equity indexes

(b) 49

What is not an example of a Style Index? a) Small-cap growth b) Mid-cap value c) Small-cap value d) Emerging markets