Q&A Hero

Q: commercial paper is a. a short-term unsecured debt of a corporation b. a short-term secured debt of a corporation c. a long-term unsecured debt of a corporation d. a long-term secured debt of a corporation

Q: money market mutual funds invest in 1> commercial paper 2> repurchase agreements 3> corporate bonds a. 1 and 2 b. 1 and 3 c. 2 and 3 d. all of the above

Q: which of the following is not a shortterm, liquid asset? a. negotiable certificate of deposit b. u.s. treasury bills c. corporate stock d. commercial paper

Q: an index fund limits its portfolio to a. high quality securities b. stocks that respond to changes in the consumer prices (i.e., consumer price index) c. stocks included in an aggregate measure of stock prices d. stocks of firms in a particular industry

Q: rates of return reported by mutual funds a. are reported after taxes b. consider the impact of loading fees c. are based on change in net asset value and the fund's distributions d. are adjusted for the funds systematic risk

Q: no load mutual funds may increase fees through 1> sales charges 2> commissions 3> 12b1 plans a. 1 and 2 b. 1 and 3 c. 2 and 3 d. only 3

Q: the cost of investing in a mutual fund includes 1> the loading charges 2> commissions when the fund buys and sells securities 3> management fees a. 1 and 2 b. 1 and 3 c. 2 and 3 d. all of the above

Q: the net asset value of a stock mutual fund rises with a. higher stock prices b. lower stock prices c. larger number of shares d. increased liabilities

Q: which of the following is not an investment company? a. a money market mutual fund b. an index fund c. a commercial bank d. a growth mutual fund

Q: mutual funds realized capital gains and income (e.g., dividends received) a. retain b. reinvest c. distribute d. distribute or reinvest

Q: openend investment companies a. have a fixed number of shares b. issue new stock whenever investors buy shares c. may sell for a discount from net asset value d. redeem shares at the investor's cost

Q: the advantages offered by investment companies include 1> professional management 2> avoidance of income taxes by the investor 3> portfolio diversification a. 1 and 2 b. 1 and 3 c. 2 and 3 d. all of the above

Q: if a mutual fund portfolio manager earns a return that exceeds the return on the s&p 500 stock index, that investor outperformed the market on a risk-adjusted basis.

Q: an index fund seeks to duplicate an aggregate measure of the market or a segment of the market.

Q: the s&p 500 stock index may be an inappropriate benchmark for a small-cap fund.

Q: funds that perform well in one year tend to earn consistently higher returns in subsequent years.

Q: high portfolio turnover is associated with high tax efficiency.

Q: high tax efficiency suggests that a funds after-tax return is comparable to its before-tax return.

Q: if mutual fund shares are purchased just prior to the fund's annual distribution, the investor becomes responsible for taxes on the distribution.

Q: acquiring shares in no load funds is one means to avoid 12b-1 fees.

Q: the treynor index standardizes performance by the portfolio's beta.

Q: the sharpe index assumes that portfolios are not well diversified.

Q: the jensen index compares actual performance to the risk-adjusted required performance.

Q: mutual funds reduce unsystematic risk but not systematic risk.

Q: a high beta coefficient for a mutual fund is desirable if the investor is seeking a conservative investment.

Q: beta coefficients may be computed for investment companies and used to compute riskadjusted rates of return.

Q: noload funds with 12b1 fees are able to charge their existing shareholders for marketing expenses.

Q: an exit fee (e.g., 3 percent) has the same impact on an investor's return as an equal load fee (e.g., 3 percent).

Q: mutual funds report their returns on a beforetax basis.

Q: empirical studies of returns earned by mutual funds suggest they consistently outperform the market.

Q: a eurodollar cd is a certificate of deposit issued in the united states by a foreign bank.

Q: treasury bills have no risk of default but risk of loss of interest payments.

Q: one of the major advantages associated with liquid money market securities is safety of principal.

Q: when a seller executes a repurchase agreement, the seller agrees to repurchase the asset at a lower price.

Q: money market mutual funds acquire short-term money market instruments such as commercial paper.

Q: the net asset value of a mutual fund rises when it distributes capital gains.

Q: in order to sell securities to the general public, a mutual fund must register its securities and prepare a prospectus detailing its objectives and costs to investors.

Q: the portfolio manager of a value fund uses analytical techniques such as a price to earnings ratio.

Q: a small cap fund has total assets of less than $100 million.

Q: an index fund seeks to duplicate the composition of an index such as the s&p 500.

Q: if a mutual fund specializes in the securities of one sector of the economy, unsystematic risk may not be reduced.

Q: investments in mutual funds permit the investor to avoid market risk.

Q: the shares of load mutual fund sell for a discount from their net asset value.

Q: the shares of noload mutual funds sell for their net asset value.

Q: the load fee charged by a mutual fund is paid when the shares are sold.

Q: a money market mutual fund is an illustration of a noload fund.

Q: the income earned by a mutual fund is taxed through the stockholders' income tax returns.

Q: dividends are the primary source of returns from an investment in a mutual fund.

Q: the only costs of investing in a mutual fund are the commissions to buy and sell the shares.

Q: the shares of a mutual often sell for discount from net asset value.

Q: a mutual fund has a fixed capital structure.

Q: if an investment company were liquidated, the investor should receive the net asset value.

Q: the per share net asset value of a mutual fund depends on the difference between the fund's assets and liabilities and the number of shares outstanding.

Q: investment companies pay no taxes on their earnings.

Q: given the following information: expected return on stock a .12 (12%) standard deviation of return .1 expected return on stock b .20 (20%) standard deviation of return .6 correlation coefficient of the returns on stock a and stock b .2 a. what are the expected returns and standard deviations of the following portfolios: 1> 100 percent of funds invested in stock a 2> 100 percent of funds invested in stock b 3> 50 percent of funds invested in each stock? b. what would be the impact if the correlation coefficient were 0.6 instead of 0.2?

Q: (this problem illustrates the computation of beta coefficients may be solved using the investment analysis calculator or excel.) the returns on the market and stock a and stock b are as follows: period market stock a stock b 1 10% 9% 12% 2 15 25 25 3 3 6 5 4 7 12 6 5 4 1 9 6 5 10 1 7 8 7 5 8 13 15 1 9 15 23 12 10 3 9 10 compute the beta coefficient for each stock and interpret the results of the computations.

Q: a portfolio consists of the following stocks: stock expected return a 15% b 10 c 22 d 14 a. what is the expected return on a portfolio consisting of an equal amount invested in each stock? b. what is the expected return on the portfolio if 50 percent of the funds are invested in stock c, 30 percent in stock a, and 20 percent in stock d?

Q: what is the expected return on a stock that pays a 4 percent annual dividend and whose price is expected to appreciate annually at 6 percent?

Q: according to the arbitrage pricing theory, the return on a stock a. is not related to the expected return on the stock b. depends on the stock's responsiveness to unexpected changes c. is reduced through the construction of diversified portfolios d. equals the market return if the expected rate of inflation is realized

Q: the security market line does not a. indicate the relationship between risk and return b. relate the market return and beta to a stock's return c. identify the optimal portfolio for the investor d. use beta coefficients as a measure of risk

Q: the efficient frontier in portfolio theory a. indicates the highest return for a given risk b. illustrates the optimal tradeoff between long and short-term capital gains c. quantifies systematic and unsystematic risk d. identifies the optimal portfolio for the investor

Q: an efficient portfolio 1> maximizes risk for a given return 2> minimizes risk for a given return 3> maximizes return for a given level of risk 4> minimizes return for a given level of risk a. 1 and 3 b. 1 and 4 c. 2 and 3 d. 2 and 4

Q: investors who want to bear less risk should acquire stocks whose beta coefficients are a. greater than 1.5 b. greater than 1.0 c. less than 1.0 d. less than 0.5

Q: beta coefficients of 1.3 indicate a. the stock has more unsystematic risk b. the stock has less unsystematic risk c. the stock is more volatile than the market d. the stock is less volatile than the market

Q: beta coefficients 1> are a measure of systematic risk 2> relate the return on an individual security to the return on the market 3> measure the variability of as asset's return a. 1 and 2 b. 1 and 3 c. 2 and 3 d. all of the above

Q: for diversification to reduce risk, a. the returns on the individual securities should be highly correlated b. the prices of the stocks should be stable c. the returns on the individual securities should be negatively correlated d. one firm should offer dividends and the other should offer capital gains

Q: if the dispersion around a security's return is larger a. the expected return is smaller b. the standard deviation is smaller c. the stock's price is higher d. the security's risk is higher

Q: portfolio risk encompasses 1> a firm's financing decisions 2> interest rate risk 3> loss of purchasing power a. 1 and 2 b. 1 and 3 c. 2 and 3 d. all of the above

Q: sources of unsystematic risk include 1> the firm's financing decisions 2> the firm's operations 3> fluctuating market prices a. 1 and 2 b. 1 and 3 c. 2 and 3 d. all of the above

Q: sources of risk include 1> fluctuating exchange rates 2> a firm's financing decisions 3> higher interest rates 4> loss of purchasing power a. 1 and 2 b. 2 and 3 c. 2 and 4 d. all four

Q: reinvestment rate risk refers to fluctuations in a. a stock's price b. a stock's dividend c. rates earned when funds are reinvested d. the cost of an investment

Q: exchange rate risk refers to fluctuations in a. the prices of stocks on the new york stock exchange b. the values of bonds and other debt instruments c. the price of one currency relative to other currencies d. the value of the investor's portfolio

Q: sources of risk to the investor include 1> loss of income when funds are reinvested 2> fluctuations in securities markets 3> the financing decisions of the firm a. 1 and 2 b. 1 and 3 c. 2 and 3 d. all of the above

Q: unsystematic risk a. is increased through diversification b. is reduced when markets fluctuate less c. is affected by the nature of how a firm finances its operations d. increases during periods of volatile interest rates

Q: diversification reduces a. systematic risk b. unsystematic risk c. market risk d. purchasing power risk

Q: the expected return on an investment in stock is a. the expected dividend payments b. the anticipated capital gains c. the sum of expected dividends and capital gains d. less than the realized return

Q: unsystematic risk is a. the risk associated with movements in stock prices b. reduced through diversification c. higher when interest rates rise d. the risk of loss of purchasing power

Q: arbitrage pricing theory is a multi-variable model used to explain securities returns.

Q: arbitrage is the act of buying a high priced asset in one market and simultaneously selling it in another market at a lower price.

Q: the beta of a portfolio is a weighted average of each asset's beta coefficient.