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Q:
A statistical index of the sensitivity of an asset's price change to changes in the value of the overall market or of assets in general is the:a. Variance.b. Standard deviation.c. Correlation coefficient.d. Beta.e. None of the above.
Q:
In graphically depicting the model for security returns usually referred to as the market model, the slope of the line can be thought of as the:a. Beta factor.b. Error term.c. Residual term.d. Alpha factor.e. None of the above.
Q:
A security's return can be decomposed into the following two parts:a. Systematic return.b. Unsystematic return.c. Historical return.d. a and b only.e. b and c only.
Q:
Since diversification reduces unsystematic risk, the relevant measure of risk for an investor who holds a well-diversified portfolio is:a. Market risk.b. Company-specific risk.c. Total risk.d. Residual risk.e. None of the above.
Q:
The portfolio, which consists of all assets, is called:a. The efficient portfolio.b. The optimal portfolio.c. The market portfolio.d. The efficient frontier.e. None of the above.
Q:
The capital market line represents:a. A combination of a various risky assets.b. A combination of a riskfree asset and the market portfolio.c. A combination of riskless assets.d. A combination common stock and corporate bonds.e. None of the above.
Q:
Capital market theory makes assumptions about:a. Investor behavior.b. Capital markets.c. Historical returns.d. a and b only.e. All of the above.
Q:
Assumptions about capital markets include:a. Perfectly competitive capital markets.b. The absence of frictions.c. Investors can borrow and lend at some riskfree rate.d. All of the above.e. a and b only.
Q:
Capital market theory assumes that:a. Investors have homogeneous expectations.b. Investors make decisions over a multiple-period investment horizon.c. Investors are risk averse.d. a and c only.e. All of the above.
Q:
Explain what is meant by an optimal portfolio and how an optimal portfolio is selected from all the portfolios available on the Markowitz efficient frontier.
Q:
Explain the differences and similarities between the portfolio theory and capital market theory.
Q:
Discuss the impact of diversification on total risk.
Q:
Graphically, all the Markowitz efficient portfolios lie:a. On the boundary of the set of feasible portfolios.b. Below the efficient frontier.c. Above the efficient frontier.d. None of the above.e. All of the above.
Q:
The lower the correlation between assets:a. The lower the portfolio variance.b. The higher the expected return for a given level of risk.c. The greater the diversification benefits.d. a and b only.e. All of the above.
Q:
The highest expected return for all feasible portfolios with the same risk is called:a. Feasible portfolios.b. Markowitz efficient portfolios.c. Mean-variance efficient portfolios.d. b and c only.e. All of the above.
Q:
In constructing Markowitz efficient portfolios it is assumed that:a. An investor's decision is affected by the expected return and risk.b. Investors are risk averse.c. Investors seek to achieve the highest expected return for a given level of risk.d. a and b only.e. All of the above.
Q:
Market risk is:a. The risk that remains in a well-diversified portfolio.b. Also called systematic risk.c. Nondiversifiable.d. The risk that affects all securities.e. All of the above.
Q:
Studies of common stock returns have shown that total portfolio risk declines:a. As the number of security holdings increases.b. Security returns are less than perfectly correlated.c. As diversification increases.d. All of the above.e. None of the above.
Q:
The standard deviation of portfolio return is a measure of:a. Systematic risk.b. Unsystematic risk. c. Total risk.d. Statistical risk.e. None of the above.
Q:
Diversification reduces the variability of returns if the correlation among security returns is:a. High.b. Low.c. The same.d. Indifferent.e. None of the above.
Q:
The total risk of a portfolio consists of:a. Diversifiable risk.b. Nondiversifiable risk.c. Statistical risk.d. a and b only.e. All of the above.
Q:
Systematic risk is:a. The risk that can be eliminated through diversification.b. The risk that affects all securities.c. The total risk of a well-diversified portfolio.d. The risk that cannot be diversified by portfolio combination.e. b and d only.
Q:
Historical return distributions for a portfolio of a large number of securities have shown that the distribution is:a. Perfect.b. Symmetric.c. Asymmetric.d. Skewed.e. None of the above.
Q:
The risk of a portfolio can be quantified by:a. Specifying the probability associated with each possible future outcome.b. The dispersion of the possible returns below the expected value.c. The variance of the portfolio returns.d. The standard deviation of portfolio returns. e. All of the above.
Q:
Even securities issued by the U.S. government are risky assets, because:a. The return will depend on the price of the U.S. government bond if it is held to maturity.b. The return is unknown if the bond is held for only one year.c. Changes in interest rates will affect the price of the bond.d. All of the above.e. None of the above.
Q:
When the return to be realized in the future is known with certainty today, the asset is said to be:a. Risky. b. Riskfree.c. Neutral.d. b and c only.e. None of the above.
Q:
In constructing a portfolio of assets, investors seek to maximize the expected return from their investment given some level of risk they are willing to accept. Portfolios that satisfy this requirement are called:a. Efficient portfolios.b. Optimal portfolios.c. Markowitz efficient portfolios.d. a and c.e. All of the above.
Q:
To construct an efficient portfolio of risky assets, it is assumed that investors are:a. Risk lovers.b. Risk neutral.c. Risk averse.d. Riskless.e. None of the above.
Q:
The investment return can be measured in terms of:a. An arithmetic average rate of return.b. A time-weighted rate of return.c. A dollar-weighted rate of return.d. All of the above.e. None of the above.
Q:
The ratio of the gain on an investment, which arises either from a change in the investment's value or a cash distribution, to the initial value of the investment is known as the:a. Return.b. Risk.c. Expected return.d. Dispersion.e. None of the above.
Q:
Together, portfolio and capital market theories provide a framework to:a. Specify and measure the investment risk.b. Quantify the expected return on a portfolio.c. Develop relationships between risk and expected return.d. Quantify the cost of capital. e. All of the above.
Q:
Portfolio theory deals with:a. The selection of portfolios that maximize expected returns consistent with individually acceptable levels of risk.b. The relationship that should exist between security returns and risk.c. The effects of investor decisions on security prices.d. a and b only.e. All of the above.
Q:
The secondary market is the market for the trading of:a. Newly issued securities.b. Previously issued securities.c. Seasoned securities.d. b and c only.e. None of the above.
Q:
Financial markets dealing with financial claims that are newly issued are called:a. Initial public offering market.b. Primary market.c. Secondary market.d. Seasoned market.e. None of the above.
Q:
Differentiate between operational efficiency and pricing efficiency.
Q:
Discuss the frictions that cause actual financial markets to differ from a perfect market.
Q:
Explain the differences and similarities between brokers and dealers.
Q:
Discuss the reasons why a corporation may seek to raise funds outside of its domestic market.
Q:
Explain what a preemptive rights offering is and why a standby underwriting arrangement may be needed.
Q:
What is SEC Rule 144A and its potential impact on the private placement market?
Q:
The difference between the execution price of a security and the price that would have existed in the absence of the trade is referred to as:a. The bid-ask spread.b. The execution cost.c. The market timing costs.d. Income spread.e. None of the above.
Q:
If the price of a security reflects all information, whether or not it is publicly available, the market is said to be:a. Weak form efficient.b. Semi-strong form efficient.c. Strong form efficient.d. Operationally efficient.e. None of the above.
Q:
If investors can obtain transaction services as cheaply as possible, the market is said to be:a. Price efficient.b. Operationally efficient.c. Weak form efficient.d. Strong form efficient.e. None of the above.
Q:
A market is price efficient if:a. It is riskless.b. It offers investors reasonably priced services related to buying and sellingc. At all times prices fully reflect all available information that is relevant to the valuation of securities.d. There are no transactions costs and taxes.e. None of the above.
Q:
The major difference between the broker and the dealer is that:a. The broker receives a commission for receiving, transmitting, and executing investors' orders.b. The broker does not buy and hold in inventory or sells from inventory the financial asset that is subject of a trade.c. The broker acts as an auctioneer in some market structures.d. a and b only.e. All of the above.
Q:
An investor receives a margin call from the broker when:a. The investor's margin account falls below the initial margin but is still above the maintenance margin..b. The investor's margin account falls below the minimum maintenance margin.c. The investor's margin account reaches zero.d. b and c.e. All of the above.
Q:
The interest rate that banks charge brokers for margin transactions is called:a. The prime rate.b. The call money rate.c. The federal funds rate.d. The discount rate.e. None of the above.
Q:
A transaction in which an investor borrows to buy additional securities using the securities themselves as collateral is called:a. Leveraged buyout. b. Buying on margin.c. Short selling.d. All of the above.e. None of the above.
Q:
A short sale involves:a. Selling securities that are owned at the time of sale.b. Selling securities that are not owned at the time of sale.c. Buying the securities, which are subsequently sold.d. All of the above.e. None of the above.
Q:
For common stock, an order of 100 shares is called:a. A round lot.b. An odd lot.c. A block trade.d. An open order.e. None of the above.
Q:
A stop order that designates a price limit is a:a. Stop order.b. Limit order. c. Stop-limit order.d. Market-if-touched order.e. None of the above.
Q:
Conditional orders include:a. Market orders.b. Limit orders.c. Stop orders.d. b and c only.e. All of the above.
Q:
Financial markets are not frictionless because of:a. Commissions charged by brokers.b. Bid-ask spreads charged by dealers.c. Trading restrictions.d. Costs of acquiring information about financial assets. e. All of the above.
Q:
A perfect market results when:a. The number of buyers and seller is sufficiently large.b. All buyers and sellers are price takers.c. No transactions costs.d. No taxes. e. All of the above.
Q:
When orders are batched or grouped together for simultaneous execution at the same price, the marked is known as:a. A call market.b. A continuous market.c. An auction market.d. A clearinghouse.e. None of the above.
Q:
When prices of securities are determined continuously throughout the trading day as buyers and sellers submit orders, the market is called:a. A call market.b. A bid market. c. A continuous market.d. An auction market.e. None of the above.
Q:
Secondary markets outside the U.S. are located in:a. London.b. Paris.c. Frankfurt.d. Osaka.e. All of the above.
Q:
In the U.S., secondary trading of common stock occurs on:a. Major national stock exchanges.b. Regional stock exchanges.c. The OTC market.d. All of the above.e. a and b only.
Q:
Investors in financial assets receive several benefits from a secondary market including:a. Liquidity of their assets.b. Information about the assets' fair values.c. Lower search and transactions costs.d. a and b only.e. All of the above.
Q:
The key distinction between a primary market and a secondary market is that:a. In the secondary market the issuer receives funds from the buyer.b. In the secondary market the issuer of the asset does not receive funds from the buyer.c. In the secondary market the existing issue changes hands.d. b and c only.e. None of the above.
Q:
Non-U.S. companies, which publicly offer a security in the U.S., must file financial statements based on:a. Their home country's GAAP.b. U.S. GAAP.c. International accounting standards.d. Foreign accounting rules.e. None of the above.
Q:
Any company that publicly offers a security in the U.S. becomes a reporting company and, as such, is subject to:a. The Securities Act of 1933.b. The Securities Exchange Act of 1934.c. The SEC.d. The NASD.e. None of the above.
Q:
When the issuer of a security files a registration statement with the SEC, part I of the registration is:a. The prospectus.b. Supplemental information.c. A letter of comments.d. A deficiency letter.e. None of the above.
Q:
In a completely integrated capital market:a. There are no restrictions to prevent investors from investing in securities issued in any capital market throughout the world.b. The required return on securities of comparable risk will be the same in all capital markets before adjusting for risk.c. The required return on securities of comparable risk will be the same in all capital markets after adjusting for taxes and foreign exchange rates.d. a and c only.e. All of the above.
Q:
A firm may seek to raise funds outside its domestic capital market for one or more of the following reasons:a. The amount of capital sought cannot be raised in its local market.b. There is an opportunity to raise funds at a lower cost.c. Funds denominated in another currency are sought.d. The firm seeks to diversify funding costs. e. All of the above.
Q:
When world capital markets are mildly segmented, there are opportunities to:a. Raise funds at a lower cost in capital markets of another country.b. Reduce the risks of doing business in foreign markets.c. Earn the same required rate of return on securities of comparable risk.d. All of the above.e. None of the above.
Q:
A corporation can issue new common stock directly to existing stockholders through a:a. Warrant.b. Preemptive rights offering.c. Initial public offering.d. Leveraged buyout.e. None of the above.
Q:
An underwriting arrangement in which the underwriter buys the firm's unsubscribed shares is known as:a. Firm commitment underwriting.b. Preemptive rights offering. c. Standby underwriting arrangement.d. Bought deal.e. None of the above.
Q:
When all bidders pay the highest winning yield bid in a competitive bidding underwriting, this type of auction is referred to as:a. Single price auction.b. Dutch auction.c. Multiple price auction.d. a and b only.e. None of the above.
Q:
Competitive bidding underwriting is mandated for certain securities of:a. Regulated public utilities.b. Industrials.c. Municipal debt obligations.d. a and c only.e. All of the above.
Q:
When the issuer announces the terms of the issue and interested parties submit bids for the entire issue, the arrangement is referred to as:a. Bought deal.b. Auction process.c. Firm commitment underwriting.d. Underwriting.e. None of the above.
Q:
Some underwriting firms have found the bought deal to be attractive because it:a. Offers timing flexibility.b. Reduces the risk of capital loss.c. Requires greater amounts of funds.d. a and b only.e. All of the above.
Q:
An underwriting arrangement whereby an investment banking firm or group of firms offers a potential issuer of debt securities a firm bid to purchase a specified amount of the securities with a certain coupon rate and maturity is known as:a. Firm commitment underwriting.b. Bought deal.c. Dutch auction.d. Underwriting process.e. None of the above.
Q:
Rule 144A will contribute to the growth of the private placement market by:a. Improving the liquidity of securities issued.b. Reducing the cost of raising funds.c. Attracting new large institutional investors into the market.d. a and b only.e. All of the above.
Q:
SEC regulation, which exempts some issues from registration, is the:a. Regulation Q.b. Regulation M.c. Regulation D.d. Regulation A.e. None of the above.
Q:
Rule 415, which permits certain issuers to file a single registration document indicating that it intends to sell a certain amount of a certain class of securities at one or more times within the next two years, is popularly referred to as:a. Private placement. b. Shelf registration.c. Red herring.d. Security liquidity.e. None of the above.
Q:
The preliminary prospectus, which may be distributed to the public during the waiting period for the registration of the security to become effective, is referred to as:a. Red warning. b. Red herring.c. Initial prospectus.d. Interim offering.e. None of the above.
Q:
The activities of underwriters are regulated by:a. The Securities Act of 1933.b. The Securities and Exchange Commission.c. The Securities Exchange Act of 1934.d. The Investment Bankers Association.e. None of the above.
Q:
Discuss the various roles investment banking firms play in mergers and acquisitions.
Q:
Explain the differences and similarities between riskless arbitrage and risk arbitrage. How does it differ from speculation?