Q&A Hero

Q: Duration is affected primarily by: A.the maturity of the bond. B.the market rate of interest. C.the coupon rate. D.All of the above

Q: Factors which influence the relationship between duration and maturity include all of the following EXCEPT: A.the face value of the bond. B.the coupon rate of the bond. C.the number of years to maturity. D.All of the above are factors

Q: Duration equals maturity if: A.all cash flows are paid at the end of the year. B.the coupon rate equals the market rate. C.the bond is a zero-coupon bond. D.More than one of the above

Q: The only difference between the simple weighted average life of a bond and duration of a bond is: A.the timing of interest payments. B.that duration involves the present value of individual cash flows. C.that duration involves the using of the stated value of individual cash flows. D.None of the above

Q: Duration is: A.always longer than maturity. B.always the same as maturity. C.normally shorter than maturity. D.always shorter than maturity.

Q: The duration of a bond is determined by a combination of the maturity date and value, and: A.the pattern of coupon payments. B.the call premium. C.the put premium. D.None of the above

Q: The value of a bond may be expressed as the sum of: A.the interest payments and the maturity value. B.the present value of the par value and the present value of the sum of the interest payments. C.the present value of the maturity value and the sum of the present values of the interest payments. D.None of the above

Q: In general, duration is the number of years, on a future-value basis, that it takes to recover an initial investment in a bond.

Q: One of the benefits of zero-coupon bonds is that they lock in a compound rate of return (or reinvestment rate) for the life of the bond, if held to maturity.

Q: Weighted average life refers to the time period over which the coupon payments and maturity payment on a bond are recovered.

Q: It is possible that a bond with a shorter maturity than another bond may actually have a longer duration and be more sensitive to interest rate changes.

Q: One of the problems with duration is that it often assumes a parallel shift in yield curves.

Q: The actual yield to maturity an investor receives becomes more of a function of the reinvestment rate the shorter the maturity of the bond.

Q: Terminal wealth analysis for a zero-coupon bond is irrelevant.

Q: For two bonds with equal coupons, duration would be higher for the bond with the shortest maturity.

Q: High coupon bonds will usually have higher durations than low coupon bonds of the same maturity.

Q: Terminal wealth analysis is one way of analyzing the effect of the reinvestment rate risk.

Q: Duration is a useful number because it combines the effects of maturity, coupon, and market rates to indicate how the price of the bond will change with a change in interest rates.

Q: Duration times the reinvestment rate will give the approximate change in bond price for a 1% change in interest rates.

Q: A zero-coupon bond has a duration equal to its maturity.

Q: Terminal wealth analysis is the process of measuring the effects of shifting market rates on bond prices.

Q: Duration analysis is subject to the assumption that all interest income can be reinvested at the market rate of interest.

Q: Immunization protects the portfolio value against upward movement in interest rates but not downward movement in interest rates.

Q: Immunization is the process of measuring bond price sensitivity to interest rate changes.

Q: The duration of a 20-year zero-coupon bond is equal to the maturity, regardless of the market rate.

Q: The duration of a ten-year, 10%, $1,000 bond at a market rate of 6% is exactly equal to the duration of the same bond at a 14% market rate.

Q: As the yield to maturity on a bond increases, the duration also increases because of the effect of present value on duration.

Q: As the maturity or duration of a bond increases, the impact on price of any changes in interest rates increases at a decreasing rate.

Q: Duration will not help international bond managers choose bonds for their portfolios because of the foreign exchange risk.

Q: Macaulay duration is a bond's weighted average life based on present value of cash flows.

Q: Weighted average life is the most representative value for effective bond life.

Q: There is an inverse relationship between interest rates and bond values, and between the amount of coupon payments and weighted average life.

Q: An investment has the following range of outcomes and probabilities.Calculate the expected value and the standard deviation (round to two places after the decimal point where necessary).Expected value = 7.75Standard deviation = 2.59

Q: Using the formula for the security market line (Formula 21-7), if the risk-free rate (RF) is 6%, the market rate of return (KM) is 12%, and the beta (bi) is 1.2, compute the anticipated return for stock i (Ki).A.20.4%B.16.33%C.13.64%D.13.4%E.13.2%

Q: Using the formula for the capital market line (Formula 21-5), if the risk-free rate (RF) is 6%, the market rate of return (KM) is 12%, the market standard deviation (M) is 11%, and the standard deviation of the portfolio (P) is 14%, compute the anticipated return of the portfolio (KP).A.20.4%B.16.33%C.13.64%D.13.4%E.13.2%

Q: A stock with a beta of 1.9 would be most likely to be found in what industry? (Use your best judgment.)A.AirlinesB.Grocery storesC.Public utilitiesD.Insurance

Q: The risk that is assumed to be rewarded for an individual stock under the capital asset pricing model is measured by the:A.portfolio standard deviation.B.portfolio beta.C.individual stock's standard deviation.D.individual stock's beta.

Q: If you took all the possible investments that investors could acquire and determined the optimum basket of investments, you would come up with point _________ on the capital market line.A.RFB.KC.MD.Z

Q: One way to express the trade-off between risk and return for an individual security is through:A.the security market line.B.the beta coefficient.C.the correlation coefficient.D.arbitrage pricing theory.

Q: The capital asset pricing model (CAPM) takes off where the _________ concluded.A.Security market lineB.Capital market lineC.Efficient frontier and Markowitz portfolio theoryD.Arbitrage pricing theory

Q: A good way to minimize risk and receive an optimum return on your portfolio is:A.through diversification.B.to buy only risk-free securities.C.through blue-chip stock purchases only.D.through junk-bonds.

Q: The standard deviation of a risk-free asset is:A.1.B.0.C.-1.D.any number between -1 and 1.

Q: The correlation coefficient:A.measures the amount of risk associated with a given security at a given moment in time.B.measures the joint movement between two variables.C.measures the expected value of a security at a specified moment in time.D.All of the above

Q: The investor wants to achieve the __________ risk-return indifference curve.A.lowestB.highestC.medianD.mean

Q: For two investments with a correlation coefficient (rij) less than +1, the portfolio standard deviation will be __________ the weighted average of the individual investments' standard deviation.A.more thanB.less thanC.equal toD.zero compared to

Q: Countercyclical investments are more likely to have:A.high positive correlation with a normal portfolio.B.slight positive correlation with a normal portfolio.C.no correlation with a normal portfolio.D.high negative correlation with a normal portfolio.

Q: Which of the following is NOT a problem associated with proving the validity of the security market line?A.The appropriate risk-free and market ratesB.The additional return required for each additional increment of risk in the market placeC.The stability of beta on an individual security over timeD.All of the above are associated problems

Q: Which of the following are assumptions of the capital asset pricing model?A.Funds can be borrowed or lent in unlimited quantities at risk-free rateB.The objective of all investors is to maximize their expected utility over the same one-period time frame using the same basis for evaluating investmentsC.There are no taxes or transaction costs associated with any investmentD.All of the above are correct assumptions

Q: If the market rate of return is 10% and the beta on a particular stock is .78, the return on the stock will be:A.greater than 10%.B.greater or less than 10%, depending on the risk-free rate of return.C.less than 10%.D.dependent on some other factor.

Q: If the _____ of any individual stock is known, an investor can use the _____ to determine the expected rate of return on that stock.A.Beta; capital market lineB.Beta; security market lineC.Standard deviation; capital market lineD.None of the above

Q: Systematic risk is rewarded with a premium in the marketplace because:A.risk is particular to the stock or industry.B.it represents a random occurrence which could not have been foreseen.C.it is associated with market movements which cannot be eliminated through diversification.D.None of the above

Q: The beta coefficient is a measure of:A.the relationship between the return of an individual stock and the return on the market.B.the relationship between the return on a stock and the return on the portfolio.C.the relationship between the portfolio risk and the market risk.D.None of the above

Q: The capital market line can be used to determine the expected return on any portfolio based on:A.unsystematic risk.B.the degree of risk on that portfolio.C.the market rate of return.D.None of the above

Q: The point of tangency between the efficient frontier and the capital market line:A.is the ideal portfolio of available investments.B.can be calculated by using the Markowitz portfolio theory and CAPM.C.represents the point at which the market is in equilibrium.D.All of the above

Q: The capital market line (CML) as defined by the capital asset pricing model is characterized by all of the following except:A.a straight line tangent to the efficient frontier.B.a straight line which includes the rate of return on a risk-free asset.C.a point on the efficient frontier above which higher returns can be generated by borrowing funds without assuming more risk.D.All of the above are characteristics of the capital market line

Q: Under Markowitz's theory, the ideal portfolio for an investor is represented by:A.the point of tangency between the efficient frontier and the investor's indifference curve.B.the highest possible indifference curve.C.the highest possible point on the efficient frontier.D.None of the above

Q: The efficient frontier:A.represents all possible portfolios for a given level of risk.B.separates unattainable portfolios from less than optimal portfolios.C.is different for every investor.D.More than one of the above

Q: Because of portfolio effect, the most significant factor related to the risk of any investment is:A.its standard deviation, or degree of uncertainty.B.its effect on the risk of the portfolio.C.systematic risk associated with the investment.D.None of the above

Q: Assume a portfolio has the possibility of returning 7%, 8%, 10%, or 12%, with a likelihood of 20%, 30%, 25%, and 25%, respectively. Considering the portfolio's standard deviation and expected value, would you say that this portfolio is of:A.average yield, low-risk.B.lower-than-average yield, low-risk.C.average yield, average risk.D.Not enough information to tell

Q: Assume a portfolio has the possibility of returning 7%, 8%, 10%, or 12%, with likelihood of 20%, 30%, 25%, and 25%, respectively. The standard deviation for the portfolio is:A.5.717%.B.3.510%.C.1.873%.D.6.480%.E.3.842%.

Q: Assume a portfolio has the possibility of returning 7%, 8%, 10%, or 12%, with likelihood of 20%, 30%, 25%, and 25%, respectively. The expected value of the portfolio is:A.10.0%.B.9.0%.C.9.3%.D.9.25%.E.None of the above

Q: According to the text, a risk-averse investor:A.demands a premium for assuming risk.B.will only participate in low-risk or risk-free investments.C.is one of a small minority in the United States.D.More than one of the above

Q: In an efficient market context, the ability to achieve high returns may be more directly related to absorption of additional risk than superior ability in selecting stocks.

Q: An underlying assumption to the CAPM model is that an individual can choose an investment combining the return on the risk-free asset with the market rate of return, and this will provide superior returns to the efficient frontier at all points except M, where they are equal.

Q: It can be assumed that the lower the expected value of an investment, the higher the standard deviation will be.

Q: Unsystematic risk cannot be diversified away.

Q: In general, the greater the dispersion of outcomes, the lower the risk.

Q: There is debate in regard to the capital asset pricing model about the appropriate RF, KM, and stability of beta.

Q: An assumption of the capital asset pricing model is that investors can borrow or lend an unlimited amount of funds at a given risk-free rate.

Q: The investor is only assumed to receive additional returns for unsystematic risk.

Q: The security market line shows the risk-return trade-off for an individual security.

Q: By picking stocks that are not perfectly correlated, unsystematic risk may be eliminated.

Q: Systematic risk measures risk that is related to the market.

Q: The beta coefficient indicates how volatile a stock is, relative to the market.

Q: In using the capital market line, the higher the portfolio standard deviation, the lower the anticipated return (Kp).

Q: Points along the capital market line represent a combination of a risk-free asset and M (the market portfolio) with the possibility of borrowing beyond point M.

Q: The capital asset pricing model (CAPM) takes off where the efficient frontier concludes, with the introduction of a new investment outlet, the risk-free asset (RF).

Q: The point of tangency between the efficient frontier and the Security Market Line is considered to represent an optimum portfolio.

Q: An investor is indifferent between points on a risk-return indifference curve, though not indifferent to achieving the highest curve possible.

Q: The steeper the slope on a risk-return indifference curve, the more anxious an investor is to take risks.