1) Two well-diversified portfolios A and B (all idiosyncratic risk has been diversified away) have 1) expeccted returns of 12% and 9% respectively. The Beta for Portfolio A is 1.2 while the Beta for Portfolio B is 0.8. Assuming CAPM is true, what is the Expected return on the Market (E(Rm))?

A) 10.5% B) 9.5% C) 11% D) 13.5%

2) As an investor, you apply CAPM to the stock of Marsh Inc. Your investment value is $35. The 2) current market price is $33. Which of the following is a possible explanantion

A) The market has fundmentally mispriced the stock B) CAPM is not a good pricing tool; we could/should do better C) The market knows that $35 is the appropriate price, but this $33 is a temporary fluctuation

due to issues such as liquidity, dealer inventory, etc.. The price will jump back to $35 soon. D) All of the Above

E) Only B and C

3) An equity researcher builds her own model for estimating the required rate of return for stocks. Her 3) model is shown below: Expected return from Stock i = Riskfree rate + Gamma*(Size of company), where Gamma is a stock characteristic constant (like the Beta of a stock) and the Size of the

company refers to the Fixed Assets of the company. Before the researcher estimates Gamma, she has a feeling that Gamma is negative (i.e. less than zero) Assuming that Risk-return tradeoff holds, which of the following statements support the idea that Gamma may have a negative sign?

A) The larger a company gets, the more the stockholders expect to get as returns. B) The operations/activities of Small firms are generally perceived to be riskier than larger firms. C) Large firms can take more collateral based loans than small firms, hence, large firms

constantly face default risk. D) Large firms can pay large dividends, hence, their required rate of return must be larger

4) As a bond researcher, you build a new model for estimating %change in Bond Price for small 4) changes in interest rates. Your model is as follows %change in Bond Price = (-1*Modified Duration * change in interest rate) + (0.5*Convexity*(change

in interest rate)2), According to your model, what is the %change in Bond Price if the interest rates went up by 2%, the modified duration is 11.26 years and the Convexity is 212.4

A) -18.27% B) +18.27%

C) -22.52% D) +22.52%

A-1

5) As a gift to your parents on their anniversary, which is three months from now, you plan to buy 5) them tickets to the popular broadway show "The Book of Mormon". The tickets are priced at 150$ per ticket, which means you need 300$ to buy these tickets (The price of the tickets is not expected to change over the next three months). To fund your gift, you plan to sell a stock in your portfolio.

You currently own a stock of Team America Inc., whose current market price is 350$. This stock has an underlying risk ('sigma') of 25% and the risk free rate is 5%. You don't want to sell the stock right now and collect the cash, since the stock might go up in the three months period. But if the price goes down then you won't be able to fund your gift. After a brief discussion with your FIN3000 instructor, you decide to buy a European Put Option with a strike price of $300. What do you think is a fair price for such a Put Option?

A) $1.70 B) $1.50 C) $1.90 D) $0.50

6) The governmental agency that oversees the capital markets is the A) Fair Trade and Banking Agency. B) Securities and Exchange Commission. C) Federal Reserve. D) Federal Trade Commission.

6)

7) Investment bankers who join together to share the financial risk associated with buying an entire 7) issue of new securities and reselling them to the public is called a(n)

A) underwriting syndicate. B) tombstone group. C) primary market group. D) selling group.

8) A market where securities are are bought from or sold to a market maker is known as a 8) A) exchange floor. B) broker market. C) dealer market. D) board of exchange.

9)

D) buy a put 11)

12) 13)

9) The Sarbanes-Oxley Act of 2002 focuses on A) accounting and other public disclosures of information.

B) insider trading. C) IPOs. D) regulation of the OTC markets.

10) Kyle believes the price of Tweak Coffee's stock is about to decrease. If he wants to profit from the 10)

decline in price, he should ________ on this stock. A) buy a call B) write a put C) sell a put

11) A butterfly spread is an appropriate strategy when A) You expect the price of the stock to increase a lot

B) You expect the price of the stock to decrease a lot C) You expect the price of the stock to deviate significantly, in either direction D) You expect the stock price to stay within narrow limits

12) When the market interest rate exceeds the coupon rate, a bond will sell at A) face value. B) par. C) a premium.

D) a discount.

13) Which one of the following variables has the greatest effect on bond prices?

A) interest rates C) economic growth

B) stock market returns D) inflation

A-2

14) Bonds issued by stable sovereign governments such as the U.S. and the nations of Western Europe 14) A) are allowed to issue their own ratings. B) are rated AAA by definition. C) are exempt from rating requirements. D) can be and have been downgraded.

15) Which one of the following is the most junior in terms of its claim on earnings and assets? 15) A) collateral trust bond B) mortgage bond C) equipment trust certificate D) subordinated debenture

16) You are considering investing in Ford Motor Company. Which of the following is an example of 16) diversifiable risk?

A) Risk resulting from an expected recession B) Risk resulting from interest rates decreasing C) Risk resulting from the possibility of a stock market crash

D) Risk resulting from uncertainty regarding a possible strike against Ford

17) A round lot consists of A) 1 share. B) 1,000 shares. C) 100 shares.

D) 10 shares.

17)

18) Which one of the following will provide the greatest international diversification? 18) A) purchasing shares of an international mutual fund

B) purchasing stock of a U.S. multinational firm C) purchasing an ADS D) directly purchasing a foreign stock

19) The statement "A portfolio is less than the sum of its parts." means: 19) A) a diversified group of assets will be less volatile than the individual assets within the group.

B) portfolio returns will always be lower than the returns on individual stocks. C) it is less expensive to buy a group of assets than to buy those assets individually. D) for reasons that are not well understood, the value of a portfolio is less than the sum of the

values of its components.

20) In an efficient market, prices appear to move randomly because 20) A) the number of investors who can forecast prices correctly is too small to have any effect.

B) onlynewinformationaffectsstockprices. C) investors do not process new information correctly. D) insider trading has an unpredictable effect on stock prices.

21) The anomaly known as post-earnings announcement drift or momentum describes the tendency of 21) stock prices to rise or fall for several ________ after unexpectedly good or bad earnings announcements.

A) hours B) months C) weeks D) days

22) Which one of the following statements is correct concerning moving averages? A) A simple moving average is computed as the arithmetic mode.

22)

B) The shorter the time period under consideration, the easier it is to spot long-term price trends.

C) A moving average helps remove short-term fluctuations from the analysis. D) The longer the time period under consideration, the more sensitive the moving average is to

daily price fluctuations.