Investments & Securities

Q: financial investments are made in efficient markets. the existence of these markets suggests that a. investors cannot earn superior returns b. investors cannot expect to outperform the market consistently c. security prices are random d. bearing additional risk will not increase return

Q: risk a. depends solely on price fluctuations b. should be maximized to increase returns c. is reduced through specialization d. refers to the uncertainty of returns

Q: many investments such as stock have common characteristics including 1> existence of secondary markets 2> risk 3> potential for capital gains a. 1 and 2 b. 1 and 3 c. 2 and 3 d. all of the above

Q: which of the following is not an investment in the layperson's general use of the term? a. equipment b. land c. stock d. savings account

Q: which of the following is an investment as defined by an economist? a. equipment b. land c. stock d. savings account

Q: reasons for saving and investing include 1> need for funds to meet emergencies 2> retirement income 3> desire to leave an estate for children a. 1 and 2 b. 1 and 3 c. 2 and 3 d. all of the above

Q: portfolio assessment should include measures of both risk and return.

Q: cfa is a professional designation for individuals seeking positions as portfolio managers.

Q: an informed investor can expect to consistently outperform the market.

Q: efficient markets suggests that few investors will outperform the market consistently.

Q: liquidity refers to the existence of secondary markets.

Q: stocks are initially sold in the primary market and subsequently traded in the secondary market.

Q: risk is the uncertainty that the anticipated return will not be realized.

Q: capital gains and income are the sources of the return on an investment.

Q: the anticipated return and the realized return often differ.

Q: investments are made in anticipation of a return.

Q: the term "investment" in economics generally refers to the purchase of stock and bonds.

Q: the investor should specify the goals of investing.

Q: Shawn decides to put $5,000 into his retirement plan at the age of 22. He will continue to invest the same amount for a total of 16 years and then stop contributing. Assume 10% annual return. How much money will Shawn who will be 38 years old at that point, have in his retirement plan when he is ready to retire at age 62? Assume the same 10% annual return. A) $554,856 B) $623,245 C) $1,770,476 D) $1,311,805

Q: Sharon decides to put $6,500 into her retirement plan at the age of 26. She will continue to invest the same amount for a total of 6 years and then stop contributing. Assume 10.8% annual return. How much money will Sharon have in her retirement plan when she is ready to retire at age 63? A) $554,856 B) $623,245 C) $1,229,675 D) $1,311,805

Q: Sharon decides to put $6,500 into her retirement plan at the age of 26. She will continue to invest the same amount for a total of 6 years and then stop contributing. Assume 10.8% annual return. How much money will Sharon have in her retirement plan after 6 years? A) $30,000 B) $35,575 C) $38,175 D) $61,451

Q: An insurance company plans to sell annuities to investors. Based on actuarial calculations, an investor has a 15-year life span, and he wants a $30,000-per-year annuity, payable at the end of each year. If the insurance company uses a 4% assumed investment rate, how much should the annuity cost? A) $296,928 B) $312,236 C) $333,552 D) $353.982

Q: In planning for retirement, an investor decides she will save $2,000 every year for 25 years. At a 7% return on her investment, how much money will she have at the end of 25 years? A) $119,015 B) $125,316 C) $126,498 D) $128,420

Q: In planning for retirement, an investor decides she will save $15,000 every year for 45 years. At a 10% return on her investment, how much money will she have at the end of 45 years (to the nearest hundred thousand dollars)? A) $1,400,000 B) $2,800,000 C) $4,900,000 D) $10,800,000

Q: Assume the risk-free interest rate is 10% and is equal to the fund's benchmark, the portfolio's net asset value is $100, and the fund's standard deviation is 20%. Also assume a time horizon of 1 year. Assuming a 2% management fee and a 20% incentive bonus, what is the expected management compensation per share if the fund's net asset value exceeds the stated benchmark? A) $4.24 B) $4 C) $3.84 D) $2.20

Q: Assume the risk-free interest rate is 10% and is equal to the fund's benchmark, the portfolio's net asset value is $100, and the fund's standard deviation is 20%. Also assume a time horizon of 1 year. What is the Black-Scholes value of the call option on the management incentive fee? A) $6.67 B) $8.18 C) $9.74 D) $10.22

Q: Consider a hedge fund with $400 million in assets, $60 million in debt, and 16 million shares at the start of the year and with $500 million in assets, $40 million in debt, and 20 million shares at the end of the year. During the year, investors have received an income dividend of $.75 per share. Assuming that the total expense ratio is 2.75%, what is the rate of return on the fund? A) 6.45% B) 8.52% C) 8.95% D) 9.46%

Q: Consider a hedge fund with $250 million in assets at the start of the year. If the gross return on assets is 18% and the total expense ratio is 2.5% of the year-end value, what is the rate of return on the fund? A) 15.05% B) 15.5% C) 17.25% D) 18%

Q: On Monday morning you sell one June T-bond futures contract at $97,843.75. The contract's face value is $100,000. The initial margin requirement is $2,700, and the maintenance margin requirement is $2,000 per contract. Use the following price data to answer the following questions. Day Settle Monday $ 97,406.25 Tuesday $ 98,000.00 Wednesday $ 100,000.00 The cumulative rate of return on your investment after Wednesday is a ________. A) 79.9% loss B) 2.6% loss C) 33% gain D) 53.9% loss

Q: On Monday morning you sell one June T-bond futures contract at $97,843.75. The contract's face value is $100,000. The initial margin requirement is $2,700, and the maintenance margin requirement is $2,000 per contract. Use the following price data to answer the following questions. Day Settle Monday $ 97,406.25 Tuesday $ 98,000.00 Wednesday $ 100,000.00 At the close of day on Tuesday your cumulative rate of return on your investment is ________. A) 16.2% B) −5.8% C) −0.16% D) −2.2%

Q: The current stock price of KMW is $27, the risk-free rate of return is 4%, and the standard deviation is 30%. What is the price of a 63-day call option with an exercise price of $25? A) $2.50 B) $2.65 C) $2.89 D) $3.12

Q: A stock priced at $65 has a standard deviation of 30%. Three-month calls and puts with an exercise price of $60 are available. The calls have a premium of $7.27, and the puts cost $1.10. The risk-free rate is 5%. Since the theoretical value of the put is $1.525, you believe the puts are undervalued. If you construct a riskless arbitrage to exploit the mispriced puts, your arbitrage profit will be ________. A) $5.75 B) $6.17 C) $0.96 D) $0.42

Q: Calculate the price of a call option using the Black Scholes model and the following data: stock price = $47.30, exercise price = $50, time to expiration = 85 days, risk-free rate = 3%, standard deviation = 35%. A) $1.11 B) $2.22 C) $3.33 D) $4.44

Q: You would like to hold a protective put position on the stock of Avalon Corporation to lock in a guaranteed minimum value of $50 at year-end. Avalon currently sells for $50. Over the next year, the stock price will increase by 10% or decrease by 10%. The T-bill rate is 5%. Unfortunately, no put options are traded on Avalon Co. Suppose the desired put options with X = 50 were traded. What would be the hedge ratio for the option? A) −1 B) −0.5 C) 0.5 D) 1

Q: The stock price of Bravo Corp. is currently $100. The stock price a year from now will be either $160 or $60 with equal probabilities. The interest rate at which investors invest in riskless assets is 6%. Using the binomial OPM, the value of a put option with an exercise price of $135 and an expiration date 1 year from now should be worth ________ today. A) $34.09 B) $37.50 C) $38.21 D) $45.45

Q: The stock price of Apax Inc. is currently $105. The stock price a year from now will be either $130 or $90 with equal probabilities. The interest rate at which investors can borrow is 10%. Using the binomial OPM, the value of a call option with an exercise price of $110 and an expiration date 1 year from now should be worth ________ today. A) $11.59 B) $15 C) $20 D) $40

Q: The current stock price of Howard & Howard is $64, and the stock does not pay dividends. The instantaneous risk-free rate of return is 5%. The instantaneous standard deviation of H&H's stock is 20%. You want to purchase a put option on this stock with an exercise price of $55 and an expiration date 73 days from now. Using Black-Scholes, the put option should be worth ________ today. A) $0.01 B) $0.07 C) $9.26 D) $9.62

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