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FINAL EXAM - FIN/402 Instructions: Please select the best answer by highlighting the answer for multiple choice questions and true/false questions.

FINAL EXAM – FIN/402

Instructions: Please select the best answer by highlighting the answer for multiple choice questions and true/false questions. Insert your written answers for the discussion questions. Post your finished exam to your assignments section. The exam must be completed by the last day of class. Good Luck.

MULTIPLE CHOICE AND TRUE FALSE

1-2: A _______________ represents an ownership share in a corporation.
a. bond
b. preferred stock
c. common stock
d. All of the above.

1-3: In securities markets, the risk-return trade-off implies that assets with higher risk will offer investors _______________ expected returns.
a. higher
b. lower
c. the same
d. None of the above.

1-8: Firms that specialize in helping companies raise capital by selling securities are called _______________.
a. industrial banks
b. commercial banks
c. investment banks
d. None of the above.

2-10: Which of the following is(are) characteristic of common stock ownership?
a. voting rights
b. double taxation
c. residual claimant
d. All of the above are characteristics of stock ownership.

2-11: Money Market securities are characterized by _______________.
a. long maturity and high liquidity
b. long maturity and low liquidity
c. short maturity and low liquidity
d. short maturity and high liquidity

2-13: Investors purchase Treasury bills at a _______________ and will receive the _______________ at maturity.
a. discount; face value
b. premium; face value and interest
c. discount; face value and interest
d. premium; face value


3-1: Market orders are buy or sell order that will be executed immediately at _______________ prices
a. the best
b. current market
c. the highest
d. the lowest

3-4: You purchased 100 shares of AAA common stock on margin for $40 per share. The initial margin is 60% and the stock pays no dividend. Your rate of return would be _______________ if you sell the stock at $43 per share.
a. -12.5%
b. -7.5%
c. 7.5%
d. 12.5%

3-6: You purchased ABC stock at $50 per share. The stock is currently selling at $49. Your potential loss could be reduced by placing a _______________.
a. limit-buy order
b. limit-sell order
c. market order
d. stop-loss order

3-10: You sold short 200 shares of XYZ common stock at $40 per share with an initial margin of 60%. Your initial investment was _______________.
a. $3,200
b. $4,800
c. $6,000
d. $8,000

3-12: Electronic Communication Networks are private computer networks that link _______________.
a. buyers and sellers
b. different stock exchanges
c. different stock brokers
d. global stock exchanges


5-1: Historically, which security had the lowest standard deviation?
a. U.S. large stocks
b. World bond portfolio
c. U.S. long-term Treasury bonds
d. U.S. Treasury bills

5-2: Arithmetic average returns are generally _______________ geometric average returns.
a. the same as
b. lower than
c. higher than
d. None of the above.

5-4: What is the risk premium of a stock that has an expected return of 20%, assuming the rate of return on Treasury bills is 3%?
a. 20%
b. 23%
c. 17%
d. Cannot be determined.

5-6: You purchased 100 shares of ABC stock for $20 per share. One year later you received $1 cash dividend and sold the shares for $22 each. Your holding-period return was _______________.
a. 5%
b. 10%
c. 15%
d. 20%

6-5: The maximum benefit of diversification can be achieved by combining securities in a portfolio where the correlation coefficient between the securities is ______________.
a. between 0 and -1
b. 0
c. -1
d. +1

6-10: Careful selection of different stocks from different industries can eliminate the ______________ risk of a portfolio.
a. nonsystematic
b. market
c. total
d. All of the above.

7-5: The expected return on a stock with a beta of 1.5 is 15%. If the expected risk-free rate of return is 3%, what should be the market risk premium?
a. 5%
b. 8%
c. 12%
d. 15%

7-15: The real world data always support the CAPM.
a. True
b. False

7-1i: When individuals evaluate their portfolios they should evaluate
a) All the U.S. and non-U.S. stocks.
b) All marketable securities.
c) All marketable securities and other liquid assets.
d) All assets.
e) All assets and liabilities.

7-2i: The probability of an adverse outcome is a definition of
a) Statistics.
b) Variance.
c) Random.
d) Risk.
e) Semi-variance above the mean.

7-6i: The purpose of calculating the covariance between two stocks is to provide a(n) ________ measure of their movement together.
a) Absolute
b) Relative
c) Indexed
d) Loglinear
e) Squared

7-7i: In a two stock portfolio, if the correlation coefficient between two stocks were to decrease over time every thing else remaining constant the portfolio's risk would
a) Decrease.
b) Remain constant.
c) Increase.
d) Fluctuate positively and negatively.
e) Be a negative value.

7-10i 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.
e) Capital asset pricing model.


7-16i: 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
e) 1.0

8-1: The book-market effect refers to the findings that firms with high ratios of book value to market value tend to ______________ firms with lower ratios.
a. outperform
b. underperform
c. perform similarly to
d. None of the above.

8-3: According to the strong form market efficiency, stock prices should fully reflect ______________ information.
a. all public and private
b. all public
c. all public and political
d. all political and financial

8-5: Empirical findings generally show that a typical mutual fund has a ______________.
a. positive alpha
b. negative alpha
c. zero alpha
d. return higher than the S&P 500 index

8-11: Stock prices follow a random walk because ______________.
a. investors are irrational
b. information arrives at an unpredictable manner
c. information is not efficient
d. the stock market is random

8-15: Behavioral finance attempts to explain the anomalies with ______________.
a. tax-induced behavior by investors
b. government regulation ineffectiveness
c. institutional investor mismanagement
d. irrational behavior by investors





10-2: The balance sheet shows what assets the firm controls at a point in time and how it financed the assets.
a. True
b. False

10-3: The income statement indicates the flow of sales, expenses, and earnings during a period of time.
a. True
b. False

10-18: Financial ratios can be used to identify firms that might default on a loan or declare bankruptcy.
a. True
b. False


10-1i: The comparisons with which ratios should be made include the following, except
a) The firm's own past performance.
b) The firm's major competitor within the industry.
c) The firm's suppliers and customers.
d) The firm's industry or industries.
e) The aggregate economy.

10-2i: The five major classes of ratios include the following, except
a) Internal liquidity.
b) Risk analysis.
c) Growth analysis.
d) Market performance.
e) Operating performance.

10-5i: Operating performance is divided into which two subcategories of ratios?
a) Efficiency and profitability
b) Efficiency and debt
c) Profitability and growth
d) Debt and equity
e) Liquidity and leverage

10-13i: 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 Net Income.
e) As a percentage of Sales.

11-2: ______________ is an example of a defensive industry.
a. Food producers
b. Auto manufacturers
c. Both A and B are examples.
d. Neither A nor B is an example.

11-10: When the Federal Reserve ______________ the discount rate, the money supply of the economy will increase.
a. raises
b. lowers
c. does not change
d. None of the above.

14-1: Which of the following is an advantage of option investments when compared to stock investments?
a. Options provide more leverage.
b. Options will Expire.
c. Options returns are guaranteed by the OCC.
d. All of the above are advantages.

14-3: The current stock price of ABC is $22 and there is an ABC put option with a strike price of $20. The put option is ______________.
a. out of the money
b. in the money
c. at the money
d. None of the above.

14-5: A protective put position is equivalent to a ______________.
a. write put
b. write call
c. buy put
d. buy call

14-8: You just purchased one ABC call option contract (exercise price $30) and one ABC put option contract (exercise price $30). The call premium is $3 and the put premium is $2. Your maximum potential loss from this position is ______________.
a. $200
b. $300
c. $500
d. unlimited





15-10: Which one of the following would tend to result in a lower value of a put option?
a. Interest rates are low.
b. The volatility of the underlying stock is high.
c. There is more time remaining until the option expires.
d. The strike price is low relative to the stock price.

16-8: ______________ refers to the daily settlement of obligations on future positions.
a. The open interest
b. The settle price
c. Marking to market
d. Hedging

16-10: Margin requirements in futures trading are required for ______________.
a. long positions only
b. short positions only
c. both long and short positions
d. There are no margin requirements in futures trading.

16-12: An investor with a short position in Treasury Bonds Futures will profit if ______________.
a. interest rates decrease
b. interest rates increase
c. Both A and B.
d. Neither A nor B.

17-1: Which one of the following is a more appropriate measure for portfolio performance if you have only one mutual fund in your investment?
a. Jensen approach.
b. Sharpe measure.
c. Treynor measure.
d. Either A or C.

17-3: The Sharpe measure evaluates the reward for the ______________ risk of the portfolio.
a. market
b. nondiversifiable
c. business
d. total

17-13: Empirical evidence generally supports the usefulness of market timing.
a. True.
b. False.



18-5: Recent data shows that the benefits of passive international diversification are ______________.
a. significant
b. small
c. greater than expected
d. None of the above.

18-6: The correlation coefficients of various country stock indexes with U.S. stock index have ______________ during the period of 1999 to 2003 as compared to early periods.
a. increased
b. decreased
c. not changes
d. None of the above.

18-7: Emerging markets typically have higher total volatilities and betas of returns than developed markets.
a. True.
b. False.

18-15: Correlations between stock markets in different countries has been increasing over time because ______________.
a. more countries are in the United Nations
b. more U.S. Treasury securities are purchased by other countries
c. there are more world trade treaties
d. there are more global economic links


DISCUSSION QUESTIONS
7-1: What does beta represent?
7-3: What does the equity risk premium (ERP) represent?
8-1: Does a balance sheet that is dated year-end 2004 reflect only transactions for that year?
8-7: In computing return on assets, how does the age of the assets influence the interpretation of the values?
21-1: Define risk.
21-5: What does the correlation coefficient measure? What are the two most extreme values it can take, and what do they indicate? In the real world, are more variables positively or negatively correlated?
21-10: In examining the capital market line as part of the capital asset pricing model, to increase portfolio return (KP) what other variable must you increase?
22-1f: What is a risk-adjusted return?

22-5f: What is the Sharpe approach to measuring portfolio risk? If a portfolio has a higher Sharpe measure than the market in general under the Sharpe approach, what is the implication?

22-8f: Explain alpha as a measure of performance.

22-10f: If investment companies do not offer returns that are, on average, any better than the market in general, why would someone invest in them?

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