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#### Finance

**Q:**Which of the following arguments supporting passive investment strategies is (are) correct? I. Active trading strategies may not guarantee higher returns but guarantee higher costs. II. Passive investors can free-ride on the activity of knowledge investors whose trades force prices to reflect currently available information. III. Passive investors are guaranteed to earn higher rates of return than active investors over sufficiently long time horizons. A. I only B. I and II only C. II and III only D. I, II, and III

**Q:**The CAL provided by combinations of 1-month T-bills and a broad index of common stocks is called the ______. A. SML B. CAPM C. CML D. total return line

**Q:**(p. $$pageTag$$) A loan for a new car costs the borrower .8% per month. What is the EAR? A. .80% B. 6.87% C. 9.6% D. 10.03%

**Q:**The buyer of a new home is quoted a mortgage rate of .5% per month. What is the APR on the loan? A. .50% B. 5% C. 6% D. 6.5%

**Q:**According to historical data, over the long run which of the following assets has the best chance to provide the best after-inflation, after-tax rate of return? A. long-term Treasury bonds B. corporate bonds C. common stocks D. preferred stocks

**Q:**If the nominal rate of return on investment is 6% and inflation is 2% over a holding period, what is the real rate of return on this investment? A. 3.92% B. 4% C. 4.12% D. 6%

**Q:**What is the geometric average return over 1 year if the quarterly returns are 8%, 9%, 5%, and 12%? A. 8% B. 8.33 % C. 8.47% D. 8.5 %

**Q:**What is the geometric average return of the following quarterly returns: 3%, 5%, 4%, and 7%? A. 3.72% B. 4.23% C. 4.74% D. 4.90%

**Q:**Which one of the following would be considered a risk-free asset in real terms as opposed to nominal?A. money market fundB. U.S. T-billC. short-term corporate bondsD. U.S. T-bill whose return was indexed to inflation

**Q:**You invest all of your money in 1-year T-bills. Which of the following statements is (are) correct? I. Your nominal return on the T-bills is riskless. II. Your real return on the T-bills is riskless. III. Your nominal Sharpe ratio is zero. A. I only B. I and III only C. II only D. I, II, and III

**Q:**The price of a stock is $38 at the beginning of the year and $41 at the end of the year. If the stock paid a $2.50 dividend, what is the holding-period return for the year? A. 6.58% B. 8.86% C. 14.47% D. 18.66%

**Q:**From 1926 to 2013 the world stock portfolio offered _____ return and _____ volatility than the portfolio of large U.S. stocks. A. lower; higher B. lower; lower C. higher; lower D. higher; higher

**Q:**The Manhawkin Fund has an expected return of 16% and a standard deviation of 20%. The risk-free rate is 4%. What is the reward-to-volatility ratio for the Manhawkin Fund? A. .8 B. .6 C. 9 D. 1

**Q:**A security with normally distributed returns has an annual expected return of 18% and standard deviation of 23%. The probability of getting a return between -28% and 64% in any one year is _____. A. 68.26% B. 95.44% C. 99.74% D. 100%

**Q:**You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40%, respectively. X has an expected rate of return of 14%, and Y has an expected rate of return of 10%. The dollar values of your positions in X, Y, and Treasury bills would be _________, __________, and __________, respectively, if you decide to hold a complete portfolio that has an expected return of 8%. A. $162; $595; $243 B. $243; $162; $595 C. $595; $162; $243 D. $595; $243; $162

**Q:**The return on the risky portfolio is 15%. The risk-free rate, as well as the investor's borrowing rate, is 10%. The standard deviation of return on the risky portfolio is 20%. If the standard deviation on the complete portfolio is 25%, the expected return on the complete portfolio is _________. A. 6% B. 8.75 % C. 10% D. 16.25%

**Q:**You have $500,000 available to invest. The risk-free rate, as well as your borrowing rate, is 8%. The return on the risky portfolio is 16%. If you wish to earn a 22% return, you should _________. A. invest $125,000 in the risk-free asset B. invest $375,000 in the risk-free asset C. borrow $125,000 D. borrow $375,000

**Q:**You invest $1,000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 16% and a standard deviation of 20% and a Treasury bill with a rate of return of 6%. The slope of the capital allocation line formed with the risky asset and the risk-free asset is approximately _________.A. 1.040 B. .80 C. .50D. .25

**Q:**Consider the following two investment alternatives: First, a risky portfolio that pays a 20% rate of return with a probability of 60% or a 5% rate of return with a probability of 40%. Second, a Treasury bill that pays 6%. If you invest $50,000 in the risky portfolio, your expected profit would be _________. A. $3,000 B. $7,000 C. $7,500 D. $10,000

**Q:**The holding-period return on a stock was 32%. Its beginning price was $25, and its cash dividend was $1.50. Its ending price must have been _________. A. $28.50 B. $33.20 C. $31.50 D. $29.75

**Q:**An investor invests 70% of her wealth in a risky asset with an expected rate of return of 15% and a variance of 5%, and she puts 30% in a Treasury bill that pays 5%. Her portfolio's expected rate of return and standard deviation are __________ and __________ respectively. A. 10%; 6.7% B. 12%; 22.4% C. 12%; 15.7% D. 10%; 35%

**Q:**The holding-period return on a stock was 25%. Its ending price was $18, and its beginning price was $16. Its cash dividend must have been _________. A. $.25 B. $1 C. $2 D. $4

**Q:**Security A has a higher standard deviation of returns than security B. We would expect that: I. Security A would have a higher risk premium than security B. II. The likely range of returns for security A in any given year would be higher than the likely range of returns for security B. III. The Sharpe ratio of A will be higher than the Sharpe ratio of B. A. I only B. I and II only C. II and III only D. I, II, and III

**Q:**You purchased a share of stock for $29. One year later you received $2.25 as dividend and sold the share for $28. Your holding-period return was _________. A. -3.57% B. -3.45% C. 4.31% D. 8.03%

**Q:**Consider a Treasury bill with a rate of return of 5% and the following risky securities: Security A: E(r) = .15; variance = .0400 Security B: E(r) = .10; variance = .0225 Security C: E(r) = .12; variance = .1000 Security D: E(r) = .13; variance = .0625 The investor must develop a complete portfolio by combining the risk-free asset with one of the securities mentioned above. The security the investor should choose as part of her complete portfolio to achieve the best CAL would be _________. A. security A B. security B C. security C D. security D

**Q:**A portfolio with a 25% standard deviation generated a return of 15% last year when T-bills were paying 4.5%. This portfolio had a Sharpe ratio of ____. A. .22 B. .60 C. 42 D. .25

**Q:**The formula is used to calculate the _____________.A. Sharpe ratioB. Treynor measureC. coefficient of variationD. real rate of return

**Q:**Historically, the best asset for the long-term investor wanting to fend off the threats of inflation and taxes while making his money grow has been____.A. stocksB. bondsC. money market fundsD. Treasury bills

**Q:**Two assets have the following expected returns and standard deviations when the risk-free rate is 5%: Asset A E(rA) = 10% ÏƒA = 20% Asset B E(rB) = 15% ÏƒB = 27% An investor with a risk aversion of A = 3 would find that _________________ on a risk-return basis. A. only asset A is acceptable B. only asset B is acceptable C. neither asset A nor asset B is acceptable D. both asset A and asset B are acceptable

**Q:**Most studies indicate that investors' risk aversion is in the range _____. A. 1-3 B. 1.5-4 C. 3-5.2 D. 4-6

**Q:**In the mean standard deviation graph, the line that connects the risk-free rate and the optimal risky portfolio, P, is called the _________. A. capital allocation line B. indifference curve C. investor's utility line D. security market line

**Q:**Treasury bills are paying a 4% rate of return. A risk-averse investor with a risk aversion of A = 3 should invest entirely in a risky portfolio with a standard deviation of 24% only if the risky portfolio's expected return is at least ______. A. 8.67% B. 9.84% C. 21.28% D. 14.68%

**Q:**One method of forecasting the risk premium is to use the _______. A. coefficient of variation of analysts' earnings forecasts B. variations in the risk-free rate over time C. average historical excess returns for the asset under consideration D. average abnormal return on the index portfolio

**Q:**If you require a real growth in the purchasing power of your investment of 8%, and you expect the rate of inflation over the next year to be 3%, what is the lowest nominal return that you would be satisfied with? A. 3% B. 8% C. 11% D. 11.24%

**Q:**If you are promised a nominal return of 12% on a 1-year investment, and you expect the rate of inflation to be 3%, what real rate do you expect to earn? A. 5.48% B. 8.74% C. 9% D. 12%

**Q:**In calculating the variance of a portfolio's returns, squaring the deviations from the mean results in: I. Preventing the sum of the deviations from always equaling zero II. Exaggerating the effects of large positive and negative deviations III. A number for which the unit is percentage of returns A. I only B. I and II only C. I and III only D. I, II, and III

**Q:**Historically, small-firm stocks have earned higher returns than large-firm stocks. When viewed in the context of an efficient market, this suggests that ___________. A. small firms are better run than large firms B. government subsidies available to small firms produce effects that are discernible in stock market statistics C. small firms are riskier than large firms D. small firms are not being accurately represented in the data

**Q:**Historical returns have generally been __________ for stocks of small firms as (than) for stocks of large firms. A. the same B. lower C. higher D. none of these options (There is no evidence of a systematic relationship between returns on small-firm stocks and returns on large-firm stocks.)

**Q:**Both investors and gamblers take on risk. The difference between an investor and a gambler is that an investor _______. A. is normally risk neutral B. requires a risk premium to take on the risk C. knows he or she will not lose money D. knows the outcomes at the beginning of the holding period

**Q:**During the 1926-2013 period which one of the following asset classes provided the lowest real return? A. Small U.S. stocks B. Large U.S. stocks C. Long-term U.S. Treasury bonds D. Equity world portfolio in U.S. dollars

**Q:**During the 1986-2013 period, the Sharpe ratio was lowest for which of the following asset classes? A. small U.S. stocks B. large U.S. stocks C. long-term U.S. Treasury bonds D. equity world portfolio in U.S. dollars

**Q:**During the 1926-2013 period the Sharpe ratio was greatest for which of the following asset classes? A. small U.S. stocks B. large U.S. stocks C. long-term U.S. Treasury bonds D. bond world portfolio return in U.S. dollars

**Q:**During the 1926-2013 period the geometric mean return on Treasury bonds was _________. A. 5.07% B. 5.56% C. 9.34% D. 11.43%

**Q:**During the 1926-2013 period the geometric mean return on small-firm stocks was ______. A. 5.31% B. 5.56% C. 9.34% D. 11.82%

**Q:**Your investment has a 40% chance of earning a 15% rate of return, a 50% chance of earning a 10% rate of return, and a 10% chance of losing 3%. What is the standard deviation of this investment? A. 5.14% B. 7.59% C. 9.29% D. 8.43%

**Q:**The reward-to-volatility ratio is given by _________. A. the slope of the capital allocation line B. the second derivative of the capital allocation line C. the point at which the second derivative of the investor's indifference curve reaches zero D. the portfolio's excess return

**Q:**The rate of return on _____ is known at the beginning of the holding period, while the rate of return on ____ is not known until the end of the holding period. A. risky assets; Treasury bills B. Treasury bills; risky assets C. excess returns; risky assets D. index assets; bonds

**Q:**The excess return is the _________. A. rate of return that can be earned with certainty B. rate of return in excess of the Treasury-bill rate C. rate of return to risk aversion D. index return

**Q:**The market risk premium is defined as __________.A. the difference between the return on an index fund and the return on Treasury billsB. the difference between the return on a small-firm mutual fund and the return on the Standard & Poor's 500 IndexC. the difference between the return on the risky asset with the lowest returns and the return on Treasury billsD. the difference between the return on the highest-yielding asset and the return on the lowest-yielding asset

**Q:**You have an EAR of 9%. The equivalent APR with continuous compounding is _____. A. 8.47% B. 8.62% C. 8.88% D. 9.42%

**Q:**You have an APR of 7.5% with continuous compounding. The EAR is _____. A. 7.5% B. 7.65% C. 7.79 % D. 8.25%

**Q:**Suppose you pay $9,400 for a $10,000 par Treasury bill maturing in 6 months. What is the effective annual rate of return for this investment? A. 6.38% B. 12.77% C. 3.17% D. 14.25%

**Q:**Annual percentage rates can be converted to effective annual rates by means of the following formula: A. [1 + (APR/n)]n - 1 B. (APR)(n) C. (APR/n) D. (periodic rate)(n)

**Q:**An investment earns 10% the first year, earns 15% the second year, and loses 12% the third year. The total compound return over the 3 years was ______. A. 41.68% B. 11.32% C. 3.64% D. 13%

**Q:**The dollar-weighted return is the _________. A. difference between cash inflows and cash outflows B. arithmetic average return C. geometric average return D. internal rate of return

**Q:**The geometric average of -12%, 20%, and 25% is _________. A. 8.42% B. 11% C. 9.7% D. 18.88%

**Q:**The arithmetic average of -11%, 15%, and 20% is ________. A. 15.67% B. 8% C. 11.22% D. 6.45%

**Q:**Published data on past returns earned by mutual funds are required to be ______. A. dollar-weighted returns B. geometric returns C. excess returns D. index returns

**Q:**Your timing was good last year. You invested more in your portfolio right before prices went up, and you sold right before prices went down. In calculating historical performance measures, which one of the following will be the largest? A. dollar-weighted return B. geometric average return C. arithmetic average return D. mean holding-period return

**Q:**The holding period return on a stock is equal to _________. A. the capital gain yield over the period plus the inflation rate B. the capital gain yield over the period plus the dividend yield C. the current yield plus the dividend yield D. the dividend yield plus the risk premium

**Q:**You have calculated the historical dollar-weighted return, annual geometric average return, and annual arithmetic average return. You always reinvest your dividends and interest earned on the portfolio. Which method provides the best measure of the actual average historical performance of the investments you have chosen? A. dollar-weighted return B. geometric average return C. arithmetic average return D. index return

**Q:**The complete portfolio refers to the investment in _________. A. the risk-free asset B. the risky portfolio C. the risk-free asset and the risky portfolio combined D. the risky portfolio and the index

**Q:**Rank the following from highest average historical standard deviation to lowest average historical standard deviation from 1926 to 2013. I. Small stocks II. Long-term bonds III. Large stocks IV. T-bills A. I, II, III, IV B. III, IV, II, I C. I, III, II, IV D. III, I, II, IV

**Q:**Rank the following from highest average historical return to lowest average historical return from 1926 to 2013. I. Small stocks II. Long-term bonds III. Large stocks IV. T-bills A. I, II, III, IV B. III, IV, II, I C. I, III, II, IV D. III, I, II, IV

**Q:**Which one of the following measures time-weighted returns and allows for compounding? A. geometric average return B. arithmetic average return C. dollar-weighted return D. historical average return

**Q:**If you want to measure the performance of your investment in a fund, including the timing of your purchases and redemptions, you should calculate the __________. A. geometric average return B. arithmetic average return C. dollar-weighted return D. index return

**Q:**The ______ measure of returns ignores compounding. A. geometric average B. arithmetic average C. IRR D. dollar-weighted

**Q:**You put up $50 at the beginning of the year for an investment. The value of the investment grows 4% and you earn a dividend of $3.50. Your HPR was ____. A. 4% B. 3.5% C. 7% D. 11%

**Q:**Disadvantages of ETFs include all of the following exceptA. investors incur a bid-ask spread when purchasing.B. investors must pay a broker fee when purchasing.C. prices are only quoted once each day.D. prices can depart from NAV at times.

**Q:**Approximately what percentage of assets held in equity funds in 2014 was in index funds? A. 20% B. 33% C. 50% D. 60%

**Q:**Which type of fund generally has the lowest average expense ratio? A. actively managed bond funds B. hedge funds C. indexed funds D. actively managed international funds

**Q:**Which type of fund is often priced at a significant discount to net asset value? A. open-end fund B. closed-end fund C. hedge fund D. ETF

**Q:**The five-star Morningstar rating implies A. superior returns compared to risk. B. superior risk compared to return. C. lowest turnover compared to peers. D. lowest fees compared to peers.

**Q:**You are considering investing in a no-load mutual fund with an annual expense ratio of .6% and an annual 12b-1 fee of .75%. You could also invest in a bank CD paying 6.5% per year. What minimum annual rate of return must the fund earn to make you better off in the fund than in the CD? A. 7.1% B. 7.45% C. 7.25% D. 7.85%

**Q:**The top Morningstar mutual fund performance rating is ________. A. five stars B. four stars C. three stars D. two stars

**Q:**Which one of the following statements about returns reported by mutual funds is not correct? A. Reported returns are net of management expenses. B. Reported returns are net of 12b-1 fees. C. Reported returns are net of brokerage fees paid on the fund's trading activity. D. None of these options. (All of the items are included in reported returns.)

**Q:**You pay $21,600 to the Laramie Fund, which has a NAV of $18 per share at the beginning of the year. The fund deducted a front-end load of 4%. The securities in the fund increased in value by 10% during the year. The fund's expense ratio is 1.3% and is deducted from year-end asset values. What is your rate of return on the fund if you sell your shares at the end of the year? A. 4.35% B. 4.23% C. 6.45% D. 5.63%

**Q:**You invest in a mutual fund that charges a 3% front-end load, 1% total annual fees, and a 0% back-end load on Class A shares. The same fund charges a 0% front-end load, 1% total annual fees, and a 2% back-end load on Class B shares. What are the total fees in year 1 on a Class B investment of $20,000 if you redeem shares with no growth in value? A. $596 B. $794 C. $885 D. $902

**Q:**Which of the following funds are usually most tax-efficient?A. equity fundsB. bond FundsC. ETFsD. specialized-sector funds

**Q:**The assets of a mutual fund are $25 million. The liabilities are $4 million. If the fund has 700,000 shares outstanding and pays a $3 dividend, what is the dividend yield? A. 5% B. 10% C. 15% D. 20%

#### Subjects

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