Fin4502_R1

Student: ___________________________________________________________________________
1. _____ is an example of an agency problem
A. Managers engage in empire building
B. Managers protect their jobs by avoiding risky projects
C. Managers over consume luxuries such as corporate jets
. All of the ans!ers provide examples of agency problems

". __________ portfolio management calls for holding diversified portfolios !ithout spending effort or
resources attempting to improve investment performance through security analysis.
A. Active
B. #diotic
C. $assive
. Market timing

%. &he most actively traded money market security is
A. &reasury bills
B. Bankers' Acceptances
C. Certificates of eposit
. Common stock

(. &he bid price of a treasury bill is __________.
A. &he price at !hich the dealer in treasury bills is !illing to sell the bill
B. &he price at !hich the dealer in treasury bills is !illing to buy the bill
C. )reater than the ask price of the treasury bill expressed in dollar terms
. &he price at !hich the investor can buy the treasury bill

*. +hich of the follo!ing is not a characteristic of a money market instrument,
A. -i.uidity
B. Marketability
C. -o! risk
. Maturity greater than one year

/. A &0bill .uote sheet has 12 day &0bill .uotes !ith a (.1" bid and a (.3/ ask. #f the bill has a 4125222 face
value an investor could buy this bill for
A. 4125222.22
B. 415363.*2
C. 415366.22
. 415332.1/

6. An investor buys a 132 day &0bill at a bank discount .uote of *."*. &he investor's actual annual rate of return
on this investment !as ______.
A. *."*7
B. *.%17
C. *.(67
. *.*"7

3. &he price .uotations of treasury bonds in the +all 8treet 9ournal sho! a bid price of 12":1" and an ask price
of 12":1(. #f you sold the bond you expect to receive __________.
A. 4152"(.6*
B. 4152"(.%3
C. 4152"%.6*
. 4152"".*2

1. &hree stocks have share prices of 41"5 46*5 and 4%2 !ith total market values of 4(22 million5 4%*2 million
and 41*2 million respectively. #f you !ere to construct a price0!eighted index of the three stocks !hat !ould
be the index value,
A. %22
B. %1
C. (%
. %2

12. +hat is the tax exempt e.uivalent yield on a 17 bond yield given a marginal tax rate of "37,
A. /.(37
B. 6."*7
C. 3.2"7
. 1.227

11. A benchmark index has three stocks priced at 4"%5 4(%5 and 4*/. &he number of outstanding shares for each
is %*25222 shares5 (2*5222 shares5 and **%5222 shares5 respectively. #f the market value !eighted index !as 162
yesterday and the prices changed to 4"%5 4(15 and 4*35 !hat is the ne! index value,
A. 1/2
B. 162
C. 16*
. 13*

1". Consider the follo!ing limit order book of a specialist. &he last trade in the stock occurred at a price of 4(2.
#f a market buy order for 122 shares comes in5 at !hat price !ill it be filled,

A. 4%1.6*
B. 4(2."*
C. 4(2.%6*
. 4(2."* or less

1%. Assume you purchased *22 shares of ;<= common stock on margin at 4(2 per share from your broker. #f
the initial margin is /275 the amount you borro!ed from the broker is __________.
A. 4"25222
B. 41"5222
C. 4 35222
. 41*5222

1(. <ou short0sell "22 shares of &uckerton &rading Co.5 no! selling for 4*2 per share. +hat is your maximum
possible loss,
A. 4*2
B. 41*2
C. 4125222
. >nlimited

1*. <ou short0sell "22 shares of ?ock Creek @ly @ishing Co.5 no! selling for 4*2 per share. #f you !ish to limit
your loss to 4"5*225 you should place a stop0buy order at _____.
A. 4%6.*2
B. 4/".*2
C. 4*/."*
. 4*1.6*

1/. <ou purchased "*2 shares of common stock on margin for 4"* per share. &he initial margin is /*7 and the
stock pays no dividend. <our rate of return !ould be __________ if you sell the stock at 4%" per share. #gnore
interest on margin.
A. %*7
B. %17
C. (%7
. "37

16. &he geometric average of 01"75 "27 and "*7 is __________.
A. 3.("7
B. 11.227
C. 1.627
. 13.337

13. An investment earns 127 the first year5 1*7 the second year and loses 1"7 the third year. <our total
compound return over the three years !as _______.
A. (1./37
B. 11.%"7
C. %./(7
. 1%.227

11. 8uppose you pay 415622 for a 4125222 par &reasury bill maturing in three months. +hat is the holding
period return for this investment,
A. %.217
B. %.217
C. 1".("7
. 1/.617

"2. <our investment has a (27 chance of earning a 1*7 rate of return5 a *27 chance of earning a 127 rate of
return and a 127 chance of losing %7. +hat is the standard deviation of this investment,
A. *.1(7
B. 6.*17
C. 1."17
. 3.(%7
A. 12."17

"1. #f you are promised a nominal return of 1"7 on a one year investment5 and you expect the rate of inflation
to be %75 !hat real rate do you expect to earn,
A. *.(37
B. 3.6(7
C. 1.227
. 1".227

"". An investor invests 627 of her !ealth in a risky asset !ith an expected rate of return of 1*7 and a variance
of *7 and she puts %27 in a &reasury bill that pays *7. Ber portfolio's expected rate of return and standard
deviation are __________ and __________ respectively.
A. 12.275 /.67
B. 1".275 "".(7
C. 1".275 1*.67
. 12.275 %*.27

"%. Consider the follo!ing t!o investment alternatives. @irst5 a risky portfolio that pays 1*7 rate of return !ith
a probability of /27 or *7 !ith a probability of (27. 8econd5 a treasury bill that pays /7. &he risk premium
on the risky investment is __________.
A. 17
B. *7
C. 17
. 117

"(. <ou have 4*225222 available to invest. &he risk0free rate as !ell as your borro!ing rate is 37. &he return
on the risky portfolio is 1/7. #f you !ish to earn a ""7 return5 you should __________.
A. invest 41"*5222 in the risk0free asset
B. invest 4%6*5222 in the risk0free asset
C. borro! 41"*5222
. borro! 4%6*5222

"*. A security !ith normally distributed returns has an annual expected return of 137 and standard deviation of
"%7. &he probability of getting a return bet!een 0"37 and /(7 in any one year is
A. /3."/7
B. 1*.((7
C. 11.6(7
. 122.227

"/. Asset A has an expected return of "27 and a standard deviation of "*7. &he risk free rate is 127. +hat is
the re!ard0to0variability ratio,
A. .(2
B. .*2
C. .6*
. .32

"6. A portfolio is composed of t!o stocks5 A and B. 8tock A has a standard deviation of return of %*7 !hile
stock B has a standard deviation of return of 1*7. &he correlation coefficient bet!een the returns on A and B is
2.(*. 8tock A comprises (27 of the portfolio !hile stock B comprises /27 of the portfolio. &he standard
deviation of the return on this portfolio is __________.
A. "%.227
B. 11.6/7
C. 13.(*7
. 16./67

"3. Consider t!o perfectly negatively correlated risky securities5 A and B. 8ecurity A has an expected rate of
return of 1/7 and a standard deviation of return of "27. B has an expected rate of return 127 and a standard
deviation of return of %27. &he !eight of security B in the global minimum variance is __________.
A. 127
B. "27
C. (27
. /27

Use the following to answer questions 33-35:
An investor can design a risky portfolio based on t!o stocks5 A and B. 8tock A has an expected return of 137
and a standard deviation of return of "27. 8tock B has an expected return of 1(7 and a standard deviation of
return of *7. &he correlation coefficient bet!een the returns of A and B is 2.*2. &he risk0free rate of return is
127.

"1. &he expected return on the optimal risky portfolio is __________.
A. 1(.27
B. 1*./7
C. 1/.(7
. 13.27

Use the following to answer questions 36-38:
An investor can design a risky portfolio based on t!o stocks5 A and B. 8tock A has an expected return of "17
and a standard deviation of return of %17. 8tock B has an expected return of 1(7 and a standard deviation of
return of "27. &he correlation coefficient bet!een the returns of A and B is 2.(. &he risk0free rate of return is
*7.

%2. &he standard deviation of the returns on the optimal risky portfolio is __________.
A. "*.*7
B. "".%7
C. "1.(7
. "2.67

%1. Consider the CA$M. &he risk0free rate is /7 and the expected return on the market is 137. +hat is the
expected return on a stock !ith a beta of 1.%,
A. /7
B. 1*./7
C. 137
. "1./7

%". Consider the CA$M. &he expected return on the market is 137. &he expected return on a stock !ith a beta
of 1." is "27. +hat is the risk0free rate,
A. "7
B. /7
C. 37
. 1"7

%%. Consider the multi0factor A$& !ith t!o factors. $ortfolio A has a beta of 2. * on factor 1 and a beta of 1."*
on factor ". &he risk premiums on the factors 1 and " portfolios are 17 and 67 respectively. &he risk0free rate
of return is 67. &he expected return on portfolio A is __________ if no arbitrage opportunities exist.
A. 1%.*7
B. 1*.27
C. 1/."*7
. "%.27

%(. Consider the capital asset pricing model. &he market degree of risk aversion5 A5 is %. &he variance of return
on the market portfolio is .2""*. #f the risk0free rate of return is (75 the expected return on the market portfolio
is __________.
A. /.6*7
B. 1.27
C. 12.6*7
. 1".27

%*. Consider the one0factor A$&. &he standard deviation of return on a !ell0diversified portfolio is "27. &he
standard deviation on the factor portfolio is 1"7. &he beta of the !ell0diversified portfolio is approximately
__________.
A. 2./2
B. 1.22
C. 1./6
. %."2

%/. Consider the follo!ing t!o stocks5 A and B. 8tock A has an expected return of 127 and a beta of 1."2.
8tock B has an expected return of 1(7 and a beta of 1.32. &he expected market rate of return is 17 and the
risk0free rate is *7. 8ecurity __________ !ould be considered a good buy because __________.
A. A5 it offers an expected excess return of 2.37
B. A5 it offers an expected excess return of "."7
C. B5 it offers an expected excess return of 1.37
. B5 it offers an expected return of ".(7

%6. <ou consider buying a share of stock at a price of 4"*. &he stock is expected to pay a dividend of 41.*2 next
year and your advisory service tells you that you can expect to sell the stock in one year for 4"3. &he stock's
beta is 1.15 ?f is /7 and ACrmD E 1/7. +hat is the stock's abnormal return,
A. 17
B. "7
C. 017
. 0"7

%3. According to the CA$M5 !hat is the market risk premium given an expected return on a security of 1%./75
a stock beta of 1."5 and a risk free interest rate of (.27,
A. (.27
B. (.37
C. /./7
. 3.27

@in(*2"_?1 Fey

1. _____ is an example of an agency problem
A. Managers engage in empire building
B. Managers protect their jobs by avoiding risky projects
C. Managers over consume luxuries such as corporate jets
D All of the ans!ers provide examples of agency problems

Bodie - Chapter 01 #18
Difficulty: Easy

". __________ portfolio management calls for holding diversified portfolios !ithout spending effort or
resources attempting to improve investment performance through security analysis.
A. Active
B. #diotic
! $assive
. Market timing

Bodie - Chapter 01 #26
Difficulty: Easy

%. &he most actively traded money market security is
" &reasury bills
B. Bankers' Acceptances
C. Certificates of eposit
. Common stock

Bodie - Chapter 02 #6
Difficulty: ediu!

(. &he bid price of a treasury bill is __________.
A. &he price at !hich the dealer in treasury bills is !illing to sell the bill
# &he price at !hich the dealer in treasury bills is !illing to buy the bill
C. )reater than the ask price of the treasury bill expressed in dollar terms
. &he price at !hich the investor can buy the treasury bill

Bodie - Chapter 02 #12
Difficulty: Easy

*. +hich of the follo!ing is not a characteristic of a money market instrument,
A. -i.uidity
B. Marketability
C. -o! risk
D Maturity greater than one year

Bodie - Chapter 02 #16
Difficulty: Easy

/. A &0bill .uote sheet has 12 day &0bill .uotes !ith a (.1" bid and a (.3/ ask. #f the bill has a 4125222 face
value an investor could buy this bill for
A. 4125222.22
# 415363.*2
C. 415366.22
. 415332.1/

Bodie - Chapter 02 #26
Difficulty: "ard

6. An investor buys a 132 day &0bill at a bank discount .uote of *."*. &he investor's actual annual rate of return
on this investment !as ______.
A. *."*7
B. *.%17
! *.(67
. *.*"7

Bodie - Chapter 02 ##0
Difficulty: "ard

3. &he price .uotations of treasury bonds in the +all 8treet 9ournal sho! a bid price of 12":1" and an ask price
of 12":1(. #f you sold the bond you expect to receive __________.
A. 4152"(.6*
B. 4152"(.%3
! 4152"%.6*
. 4152"".*2

Bodie - Chapter 02 #$1
Difficulty: ediu!

1. &hree stocks have share prices of 41"5 46*5 and 4%2 !ith total market values of 4(22 million5 4%*2 million
and 41*2 million respectively. #f you !ere to construct a price0!eighted index of the three stocks !hat !ould
be the index value,
A. %22
# %1
C. (%
. %2

Bodie - Chapter 02 #%0
Difficulty: ediu!

12. +hat is the tax exempt e.uivalent yield on a 17 bond yield given a marginal tax rate of "37,
" /.(37
B. 6."*7
C. 3.2"7
. 1.227

Bodie - Chapter 02 #%8
Difficulty: ediu!

11. A benchmark index has three stocks priced at 4"%5 4(%5 and 4*/. &he number of outstanding shares for each
is %*25222 shares5 (2*5222 shares5 and **%5222 shares5 respectively. #f the market value !eighted index !as 162
yesterday and the prices changed to 4"%5 4(15 and 4*35 !hat is the ne! index value,
A. 1/2
B. 162
! 16*
. 13*

Bodie - Chapter 02 #8$
Difficulty: "ard

1". Consider the follo!ing limit order book of a specialist. &he last trade in the stock occurred at a price of 4(2.
#f a market buy order for 122 shares comes in5 at !hat price !ill it be filled,

A. 4%1.6*
B. 4(2."*
C. 4(2.%6*
D 4(2."* or less

Bodie - Chapter 0# #$8
Difficulty: "ard

1%. Assume you purchased *22 shares of ;<= common stock on margin at 4(2 per share from your broker. #f
the initial margin is /275 the amount you borro!ed from the broker is __________.
A. 4"25222
B. 41"5222
! 4 35222
. 41*5222

Bodie - Chapter 0# #&2
Difficulty: ediu!

1(. <ou short0sell "22 shares of &uckerton &rading Co.5 no! selling for 4*2 per share. +hat is your maximum
possible loss,
A. 4*2
B. 41*2
C. 4125222
D >nlimited

Bodie - Chapter 0# #&$
Difficulty: Easy

1*. <ou short0sell "22 shares of ?ock Creek @ly @ishing Co.5 no! selling for 4*2 per share. #f you !ish to limit
your loss to 4"5*225 you should place a stop0buy order at _____.
A. 4%6.*2
# 4/".*2
C. 4*/."*
. 4*1.6*

Bodie - Chapter 0# #&6
Difficulty: ediu!

1/. <ou purchased "*2 shares of common stock on margin for 4"* per share. &he initial margin is /*7 and the
stock pays no dividend. <our rate of return !ould be __________ if you sell the stock at 4%" per share. #gnore
interest on margin.
A. %*7
B. %17
! (%7
. "37

Bodie - Chapter 0# #&8
Difficulty: "ard

16. &he geometric average of 01"75 "27 and "*7 is __________.
A. 3.("7
B. 11.227
! 1.627
. 13.337

Bodie - Chapter 0& #1$
Difficulty: ediu!

13. An investment earns 127 the first year5 1*7 the second year and loses 1"7 the third year. <our total
compound return over the three years !as _______.
A. (1./37
# 11.%"7
C. %./(7
. 1%.227

Bodie - Chapter 0& #16
Difficulty: ediu!

11. 8uppose you pay 415622 for a 4125222 par &reasury bill maturing in three months. +hat is the holding
period return for this investment,
A. %.217
# %.217
C. 1".("7
. 1/.617

Bodie - Chapter 0& #18
Difficulty: ediu!

"2. <our investment has a (27 chance of earning a 1*7 rate of return5 a *27 chance of earning a 127 rate of
return and a 127 chance of losing %7. +hat is the standard deviation of this investment,
" *.1(7
B. 6.*17
C. 1."17
. 3.(%7
A. 12."17

Bodie - Chapter 0& #28
Difficulty: "ard

"1. #f you are promised a nominal return of 1"7 on a one year investment5 and you expect the rate of inflation
to be %75 !hat real rate do you expect to earn,
A. *.(37
# 3.6(7
C. 1.227
. 1".227

Bodie - Chapter 0& ##8
Difficulty: ediu!

"". An investor invests 627 of her !ealth in a risky asset !ith an expected rate of return of 1*7 and a variance
of *7 and she puts %27 in a &reasury bill that pays *7. Ber portfolio's expected rate of return and standard
deviation are __________ and __________ respectively.
A. 12.275 /.67
B. 1".275 "".(7
! 1".275 1*.67
. 12.275 %*.27

Bodie - Chapter 0& #&2
Difficulty: ediu!

"%. Consider the follo!ing t!o investment alternatives. @irst5 a risky portfolio that pays 1*7 rate of return !ith
a probability of /27 or *7 !ith a probability of (27. 8econd5 a treasury bill that pays /7. &he risk premium
on the risky investment is __________.
A. 17
# *7
C. 17
. 117

Bodie - Chapter 0& #&$
Difficulty: ediu!

"(. <ou have 4*225222 available to invest. &he risk0free rate as !ell as your borro!ing rate is 37. &he return
on the risky portfolio is 1/7. #f you !ish to earn a ""7 return5 you should __________.
A. invest 41"*5222 in the risk0free asset
B. invest 4%6*5222 in the risk0free asset
C. borro! 41"*5222
D borro! 4%6*5222

Bodie - Chapter 0& #60
Difficulty: "ard

"*. A security !ith normally distributed returns has an annual expected return of 137 and standard deviation of
"%7. &he probability of getting a return bet!een 0"37 and /(7 in any one year is
A. /3."/7
B. 1*.((7
! 11.6(7
. 122.227

Bodie - Chapter 0& #68
Difficulty: "ard

"/. Asset A has an expected return of "27 and a standard deviation of "*7. &he risk free rate is 127. +hat is
the re!ard0to0variability ratio,
" .(2
B. .*2
C. .6*
. .32

Bodie - Chapter 06 #10
Difficulty: ediu!

"6. A portfolio is composed of t!o stocks5 A and B. 8tock A has a standard deviation of return of %*7 !hile
stock B has a standard deviation of return of 1*7. &he correlation coefficient bet!een the returns on A and B is
2.(*. 8tock A comprises (27 of the portfolio !hile stock B comprises /27 of the portfolio. &he standard
deviation of the return on this portfolio is __________.
A. "%.227
# 11.6/7
C. 13.(*7
. 16./67

Bodie - Chapter 06 ##0
Difficulty: ediu!

"3. Consider t!o perfectly negatively correlated risky securities5 A and B. 8ecurity A has an expected rate of
return of 1/7 and a standard deviation of return of "27. B has an expected rate of return 127 and a standard
deviation of return of %27. &he !eight of security B in the global minimum variance is __________.
A. 127
B. "27
! (27
. /27

Bodie - Chapter 06 ##2
Difficulty: "ard

Use the following to answer questions 33-35:
An investor can design a risky portfolio based on t!o stocks5 A and B. 8tock A has an expected return of 137
and a standard deviation of return of "27. 8tock B has an expected return of 1(7 and a standard deviation of
return of *7. &he correlation coefficient bet!een the returns of A and B is 2.*2. &he risk0free rate of return is
127.

Bodie - Chapter 06

"1. &he expected return on the optimal risky portfolio is __________.
" 1(.27
B. 1*./7
C. 1/.(7
. 13.27

Bodie - Chapter 06 ##$
Difficulty: "ard

Use the following to answer questions 36-38:
An investor can design a risky portfolio based on t!o stocks5 A and B. 8tock A has an expected return of "17
and a standard deviation of return of %17. 8tock B has an expected return of 1(7 and a standard deviation of
return of "27. &he correlation coefficient bet!een the returns of A and B is 2.(. &he risk0free rate of return is
*7.

Bodie - Chapter 06

%2. &he standard deviation of the returns on the optimal risky portfolio is __________.
A. "*.*7
B. "".%7
! "1.(7
. "2.67

Bodie - Chapter 06 ##8
Difficulty: "ard

%1. Consider the CA$M. &he risk0free rate is /7 and the expected return on the market is 137. +hat is the
expected return on a stock !ith a beta of 1.%,
A. /7
B. 1*./7
C. 137
D "1./7

Bodie - Chapter 0% #6
Difficulty: ediu!

%". Consider the CA$M. &he expected return on the market is 137. &he expected return on a stock !ith a beta
of 1." is "27. +hat is the risk0free rate,
A. "7
B. /7
! 37
. 1"7

Bodie - Chapter 0% #8
Difficulty: ediu!

%%. Consider the multi0factor A$& !ith t!o factors. $ortfolio A has a beta of 2. * on factor 1 and a beta of 1."*
on factor ". &he risk premiums on the factors 1 and " portfolios are 17 and 67 respectively. &he risk0free rate
of return is 67. &he expected return on portfolio A is __________ if no arbitrage opportunities exist.
A. 1%.*7
B. 1*.27
! 1/."*7
. "%.27

Bodie - Chapter 0% ##0
Difficulty: ediu!

%(. Consider the capital asset pricing model. &he market degree of risk aversion5 A5 is %. &he variance of return
on the market portfolio is .2""*. #f the risk0free rate of return is (75 the expected return on the market portfolio
is __________.
A. /.6*7
B. 1.27
! 12.6*7
. 1".27

Bodie - Chapter 0% ##6
Difficulty: ediu!

%*. Consider the one0factor A$&. &he standard deviation of return on a !ell0diversified portfolio is "27. &he
standard deviation on the factor portfolio is 1"7. &he beta of the !ell0diversified portfolio is approximately
__________.
A. 2./2
B. 1.22
! 1./6
. %."2

Bodie - Chapter 0% #$2
Difficulty: ediu!

%/. Consider the follo!ing t!o stocks5 A and B. 8tock A has an expected return of 127 and a beta of 1."2.
8tock B has an expected return of 1(7 and a beta of 1.32. &he expected market rate of return is 17 and the
risk0free rate is *7. 8ecurity __________ !ould be considered a good buy because __________.
A. A5 it offers an expected excess return of 2.37
B. A5 it offers an expected excess return of "."7
! B5 it offers an expected excess return of 1.37
. B5 it offers an expected return of ".(7

Bodie - Chapter 0% #$$
Difficulty: "ard

%6. <ou consider buying a share of stock at a price of 4"*. &he stock is expected to pay a dividend of 41.*2 next
year and your advisory service tells you that you can expect to sell the stock in one year for 4"3. &he stock's
beta is 1.15 ?f is /7 and ACrmD E 1/7. +hat is the stock's abnormal return,
" 17
B. "7
C. 017
. 0"7

Bodie - Chapter 0% #%2
Difficulty: "ard

%3. According to the CA$M5 !hat is the market risk premium given an expected return on a security of 1%./75
a stock beta of 1."5 and a risk free interest rate of (.27,
A. (.27
B. (.37
C. /./7
D 3.27

Bodie - Chapter 0% #%$
Difficulty: ediu!

@in(*2"_?1 8ummary
Cate'ory # of (uestions
Bodie 0 Chapter 21 "
Bodie 0 Chapter 2" 1
Bodie 0 Chapter 2% *
Bodie 0 Chapter 2* 1
Bodie 0 Chapter 2/ 6
Bodie 0 Chapter 26 3
ifficulty: Aasy *
ifficulty: Bard 1%
ifficulty: Medium "2