Which of the following is accurate regarding the capital market line (CML)?

• a. The CML consists of combinations of the risk-free return and the market portfolio with the slope equal to the Sharpe ratio.
• b. The CML is a line that begins at the risk-free rate of return and crosses the efficient frontier at the market portfolio.
• c. The CML represents the most efficient portfolios, consisting of various percentages of risky assets.
• d. The CML consists of combinations of the risk-free return and the market portfolio with the slope equal to standard deviation.

Which of the following are correct?

• a. The expected return based on the CAPM varies in proportion to the beta and the market risk premium.
• b. Portfolios below the SML are ideal because they are undervalued.
• c. A borrowing portfolio will be less volatile than a lending portfolio.
• d. The CAPM assumptions accurately reflect the reality of capital markets.

Hiral is considering buying a 10-year puttable bond or a 10-year callable bond. Each of the bonds has the same default risk and coupon rate. Which of the following is not correct?

• a. The semi-annual coupon payments will be exactly the same.
• b. The par value of the bonds is exactly the same.
• c. The YTM based on price and calculated to maturity for the puttable bond will be greater than the callable bond.
• d. Both bonds can be priced based on the combination of the cash flows of the bond plus the value of the embedded option.

A new breed of deep purple roses, which are twice as expensive as other types of roses, are currently very popular among wealthy individuals for landscaping their estates. The price of these rose bushes has risen by 25% over the last year and are expected to rise even more in the coming months, even as farmers plant more bushes to try to meet demand. Which of the following is least likely to result in a mania?

• a. The government restricts market access to the new bushes.
• b. The middle class demonstrates almost zero interest in the new breed.
• c. Interest rates in the economy fall to historic lows.
• d. The government imposes an import tariff on the new breed of roses.

Which of the following statements is correct about STRIPS?

• a. STRIPS let investors hold and trade the individual interest and principal components of eligible Treasury notes and bonds as separate securities.
• b. STRIPS can be purchased and held only through financial institutions and government securities brokers and dealers.
• c. Interest earned on STRIPS must be reported in the year in which it is earned.
• d. All of the above are true.

Which of the following types of municipal bonds have the greatest risk of default?

• a. A general obligation bond from a state.
• b. A revenue bond.
• c. A dedicated bond.
• d. A general obligation bond of a city.

Which of the following best describes the clean price of a $1000 Treasury bond quoted at an ask price of 98.03?

• a. $98.03.
• b. $98.09.
• c. $980.30.
• d. $980.94.

Treasury bills may have a maturity equal to which of the following when they are issued?

• a. Four weeks.
• b. Thirteen weeks.
• c. 52 weeks.
• d. All of the above.