1. You have determined Stock A has a beta of 1.56, and the market is expected to decline 10% over the next year. Using security market line analysis, how much would you expect the return of Stock A to rue or fall over the next year!
A. Fall by 1.56%
B. Fan by 15.696
C. Rise by 1.56%
D. Rise by 15.6%
2. Consider the (okaying information regatding 2 possible investments, Stocks J and K.
Stock j:
Expected return: 11.5% Standard deviation: 8% Stock K:
Expected tenn: 8.2% Standard deviation: 6%
Which of these investments would you pre(er and whyt
A. Stook K, because it has the least risk
B. Stock J, because it has the highest expected return
C. Stock J. because it has the lowest coefficient of variation
D. Stock K, because it has the highest coefficient of variation
3. A call option with an exemise price of $405 h selling in the open market for 34.25 when the market price of the underlying stock is $102. What is the intrinsic value of this call option?
A. -53.00
B. 50
C. $3.03
D. $4.25
4. Angela purchased a corporate bond currently selling for 5925 in the secondary marker The bond has a coupon rate 0E7.75% and manors in 12 years. 'What ts the yield to maturity on this bend?
A. 4.39%
B. 8.49% C 8.77% D. 1550%
5. You own a 51,003 bend with a coupon rate of 7% manning in 15 yean. What should be the market price of the bond If the current market yield for bonds with slunk, risk is 9%?
A. $591.08
B. $837.11
C. $1,030.03
D. $1.183.92
6. two yes. „„o, Sheila invested $1,000 in MNO mutual fund. At the end of the first year, her account was worth $1,200, and she invested another al,000. At the end of the second year, MNO's shares were priced at $50 a share. MNO paid no dividends during the 2-year period. [(Sheila originally purchased 22 shares, what was MNO's annualized rate of serum over the 2-year period?
A. 0.53%
B. 4.88%
C. 10%
D. 20%
7. The duration of a bond is inversely related to its
A. par value
B. coupon rate
C term to maturity
D. rating by independent evaluation services
8. You own a 10-year bond with a current yield to maturity of 8% and duration of 6 years. If interest rates are expected to increase by .75%, what will be the estimated price change of your bond?
A. -4.17%
B. -3.50%
C. 3.50%
D. 4.17%
9. In the use of the Black-Scholes option valuation model to determine the value of a European call option, which one of the following relationships is NOT correct?
A. An increase in the risk-free rate increases the value of the European call option.
B. An increase in the exercise price of the European call option increases the value of the option.
C. An increase in the price of the underlying stock increases the value of the European call option.
D. An increase in the risk associated with the underlying stock increases the value of the European call option.
10. Technicians believe that if an industry or stock is outperforming the market on a risk-adjusted basis, what will happen?
A. This trend will continue until a major event triggers a reversal.
B. Fundamental analysis can assist in determining the duration of this trend.
C The trend will be reversed quickly because of the law of supply and demand.
D. The industry or stock cannot outperform the market without additional risk exposure.
11. In which type of hedge would a wheat farmer be interested?
A. A long hedge-buy wheat futures contracts as a hedge against a decline in the price of wheat
B. A short hedge-sell wheat futures contracts as a hedge against a decline in the price of wheat
C. A short hedge-sell wheat futures contracts as a hedge against an increase in the price of wheat
D. A long hedge-buy wheat futures contracts as a hedge against an increase in the price of wheat
12. Which ache (allowing statements regarding bonds is(are) CORRECT?
I. A convertible bond is a bond with a feature to convert the bond into equity securities at a later rime. U. A rerocoupon bond is Issued at a discount and provides annual interest payments.
A. I only
B. II only
C. Both I and II
D. Neithet I nor 11
13. Due to an extensive investment in research and development. Banana Inc., recently developed a new wireless common:cation system that should greatly increase the stock's dividend. One analyst Mice= the current dividend of $l will increase by 20% for each of the next 3 years and then 6% for the foreseeable future. What is the intrinsic value per sham of the company's stock assuming an investor's required rare of recum of 8%?
A. $7ff 35
B. $91.50
C. 595.91
D. $78.49
14. Your client's federal marginal income tax rate is 35%, and his Ride marginal income tax tare is 5%. He is considering Investing in a municipal bond issued by his local municipality that will yield Men 6%. Whin is the taxable equivalent yield of this bond?
A. 3.60%
B. 8.40% C 9.23% D. 10.00%
15. Which of the following statements accurately describe derivatives?
L. They help shift risk from risk averse investors to those investors who wish to assume more risk.
2. They assist in istablishing prices foe the underlying investment assets.
3. They permit leas ouvof.poelret Investment than direct ownership of the underlying semuitim.
4. They allow (or greater participation in Initial public offering.
A. Iard2
B. I, 2, and 3
C. 2, 3, end 4
D. 3 and 4
16. Which of the following would an investor do to immunise a bond portfolio over a specific investment time horison?
1. Match the maturity of each bond in the portfolio to the investment time horizon
2. Attempt to eliminate the interest rate risk of the portfolio over the investment tune horizon
3. Increase dm coupon rate of each bond in the portfolio over the investment time horizon
4. Match the average weighted duration of the portfolio to the investment time horizon
A. 1 and 2
B. 1 find 3
C. 2.3. end 4
D. 2 end 4
17. George, wants to maximize his return on an intermediate-term bond that he plans to hold until have gathered informatoin on the following 2 bonds, both of which have a $1,000 par Bond A fated; coupon rate of 6%; matures in 6 years and pays interest semiannually-, currently selling (or $850; duration is 5.16 years.
Bond 2: A Fated; coupon rate of 10%; matures in 8 years and pays interest semiannually; currently selling for $1,100; duration is 7.15 years.
Which of these bonds would you recommend to George and why?
I. Bond 1, because it is less susceptible to price fluctuations due to interest rate changes
2. Bond 1, because it has a higher yield to mustily than Bond 2
3. Bond 2. because its higher coupon tate gives it a superior total return to Bond I
4. Bond 2, because It has a higher duration than Bond I
A. 1 only
B. 2 only
C. 3 only
D. 3 and 4
Use the following facts for questions 29-31.
Co' it:no has a margin account with a balance of $50.090 with a national btoker.dealer. The initial margin requirement on this account is 50%. Cosmo is interested in purchasing shares of Ardvark, Inc., which currently selling at 340 per share.
18. Given the above information, how many shares of Ardvark can Cosmo purchase on margin?
A. 625
B. 1,250
C. 2,000
D. 2,503
19.1f Cosmo purchases 1,0)3 shares of Anlv-ark on margin and the price subsequently increases to $50 per sham, what is his prodt?
A. $5,CCO
B. 510,000
C. $20,CCO
D. $50,000
20. If the maintenance margin is 40%, to what price can shines of Ardvalk fall before Cosmo receives a margin call?
A. $16.00
B. $24.00
C. $33.33
D. $37.50