Q&A Hero

Q: Which of the following firms was not engaged in a major accounting scandal between 2000 and 2005? A) General Electric B) Parmalat C) Enron D) WorldCom

Q: Stone Harbor Products takes out a bank loan. It receives $100,000 and signs a promissory note to pay back the loan over 5 years. In this transaction, ________. A) a new financial asset was created B) a financial asset was traded for a real asset C) a financial asset was destroyed D) a real asset was created

Q: Surf City Software Company develops new surf forecasting software. It sells the software to Microsoft in exchange for 1,000 shares of Microsoft common stock. Surf City Software has exchanged a ________ asset for a ________ asset in this transaction. A) real; real B) financial; financial C) real; financial D) financial; real

Q: Individuals may find it more advantageous to purchase claims from a financial intermediary rather than directly purchasing claims in capital markets because: I. Intermediaries are better diversified than most individuals. II. Intermediaries can exploit economies of scale in investing that individual investors cannot. III. Intermediated investments usually offer higher rates of return than direct capital market claims. A) I only B) I and II only C) II and III only D) I, II, and III

Q: Venture capital is ________. A) frequently used to expand the businesses of well-established companies B) supplied by venture capital funds and individuals to start-up companies C) illegal under current U.S. laws D) most frequently issued with the help of investment bankers

Q: Which of the following is (are) true about hedge funds? I. They are open to institutional investors. II. They are open to wealthy individuals. III. They are more likely than mutual funds to pursue simple strategies. A) I and II only B) I and III only C) II and III only D) I, II, and III

Q: Market signals will help to allocate capital efficiently only if investors are acting ________. A) on the basis of their individual hunches B) as directed by financial experts C) as dominant forces in the economy D) on accurate information

Q: The efficient market hypothesis suggests that ________. A) active portfolio management strategies are the most appropriate investment strategies B) passive portfolio management strategies are the most appropriate investment strategies C) either active or passive strategies may be appropriate, depending on the expected direction of the market D) a bottom-up approach is the most appropriate investment strategy

Q: Suppose an investor is considering one of two investments that are identical in all respects except for risk. If the investor anticipates a fair return for the risk of the security he invests in, he can expect to ________. A) earn no more than the Treasury-bill rate on either security. B) pay less for the security that has higher risk. C) pay less for the security that has lower risk. D) earn more if interest rates are lower.

Q: After considering current market conditions, an investor decides to place 60% of her funds in equities and the rest in bonds. This is an example of ________. A) asset allocation B) security analysis C) top-down portfolio management D) passive management

Q: After much investigation, an investor finds that Intel stock is currently underpriced. This is an example of ________. A) asset allocation B) security analysis C) top-down portfolio management D) passive management

Q: Money market securities are characterized by: I. Maturity less than 1 year II. Safety of the principal investment III. Low rates of return A) I only B) I and II only C) I and III only D) I, II, and III

Q: Real assets represent about ________ of total assets for commercial banks. A) 1% B) 15% C) 25% D) 40%

Q: Which of the following is not an example of a financial intermediary? A) Goldman Sachs B) Allstate Insurance C) First Interstate Bank D) IBM

Q: Liabilities equal approximately ________ of total assets for nonfinancial U.S. businesses. A) 10% B) 25% C) 45% D) 75%

Q: In 2017 mortgages represented approximately ________ of total liabilities and net worth of American households. A) 10% B) 14% C) 28% D) 42%

Q: The combined liabilities of American households represent approximately ________ of combined assets. A) 11% B) 14% C) 25% D) 33%

Q: Which of the following is not a financial intermediary? A) a mutual fund B) an insurance company C) a real estate brokerage firm D) a credit union

Q: An example of a real asset is: I. A college education II. Customer goodwill III. A patent A) I only B) II only C) I and III only D) I, II, and III

Q: The average rate of return on U.S. Treasury bills since 1926 was ________. A) less than 1% B) less than 3% C) less than 4% D) less than 7%

Q: The success of common stock investments depends on the success of ________. A) derivative securities B) fixed-income securities C) the firm and its real assets D) government methods of allocating capital

Q: The Sarbanes-Oxley Act tightened corporate governance rules by requiring all but which one of the following? A) Required that corporations have more independent directors. B) Required that the CFO personally vouch for the corporation's financial statements. C) Required that firms could no longer employ investment bankers to sell securities to the public. D) Required the creation of a new board to oversee the auditing of public companies.

Q: Debt securities promise: I. A fixed stream of income. II. A stream of income that is determined according to a specific formula. III. A share in the profits of the issuing entity. A) I only B) I or II only C) I and III only D) II or III only

Q: ________ portfolio construction starts with asset allocation. A) Bottom-up B) Top-down C) Upside-down D) Side-to-side

Q: An example of a derivative security is ________. A) a common share of General Motors B) a call option on Intel stock C) a Ford bond D) a U.S. Treasury bond

Q: Security selection refers to ________. A) choosing specific securities within each asset class B) deciding how much to invest in each asset class C) deciding how much to invest in the market portfolio versus the riskless asset D) deciding how much to hedge

Q: When the market is more optimistic about a firm, its share price will ________; as a result, it will need to issue ________ shares to raise funds that are needed. A) rise; fewer B) fall; fewer C) rise; more D) fall; more

Q: In securities markets, there should be a risk-return trade-off with higher-risk assets having ________ expected returns than lower-risk assets. A) higher B) lower C) the same D) The answer cannot be determined from the information given.

Q: Firms that specialize in helping companies raise capital by selling securities to the public are called ________. A) pension funds B) investment banks C) savings banks D) REITs

Q: Methods of encouraging managers to act in shareholders' best interest include: I. Threat of takeover. II. Proxy fights for control of the board of directors. III. Tying managers' compensation to stock price performance. A) I only B) I and II only C) II and III only D) I, II, and III

Q: Financial intermediaries exist because small investors cannot efficiently ________. A) diversify their portfolios B) gather information C) assess and monitor the credit risk of borrowers D) all of the options

Q: Financial markets allow for all but which one of the following? A) shift consumption through time from higher-income periods to lower B) price securities according to their riskiness C) channel funds from lenders of funds to borrowers of funds D) allow most participants to routinely earn high returns with low risk

Q: ________ portfolio management calls for holding diversified portfolios without spending effort or resources attempting to improve investment performance through security analysis. A) Active B) Momentum C) Passive D) Market-timing

Q: Commodity and derivative markets allow firms to adjust their ________. A) management styles B) focus from their main line of business to their investment portfolios C) ways of doing business so that they'll always have positive returns D) exposure to various business risks

Q: The value of a derivative security ________. A) depends on the value of another related security B) affects the value of a related security C) is unrelated to the value of a related security D) can be integrated only by calculus professors

Q: ________ represents an ownership share in a corporation. A) A call option B) Common stock C) A fixed-income security D) Preferred stock

Q: In a market economy, capital resources are primarily allocated by ________. A) governments B) corporation CEOs C) financial markets D) investment bankers

Q: ________ portfolio construction starts with selecting attractively priced securities. A) Bottom-up B) Top-down C) Upside-down D) Side-to-side

Q: ________ is (are) real assets. A) Bonds B) Production equipment C) Stocks D) Life insurance

Q: ________ is a mechanism for mitigating potential agency problems. A) Tying income of managers to success of the firm B) Directors defending top management C) Antitakeover strategies D) All of the options.

Q: Which of the following is an example of an agency problem? A) Managers engage in empire building. B) Managers protect their jobs by avoiding risky projects. C) Managers overconsume luxuries such as corporate jets. D) All of the options are examples of agency problems.

Q: Security selection refers to the ________. A) allocation of the investment portfolio across broad asset classes B) analysis of the value of securities C) choice of specific securities within each asset class D) top-down method of investing

Q: Which one of the following best describes the purpose of derivatives markets? A) Transferring risk from one party to another. B) Investing for a short time period to earn a small rate of return. C) Investing for retirement. D) Earning interest income.

Q: Asset allocation refers to ________. A) the allocation of the investment portfolio across broad asset classes B) the analysis of the value of securities C) the choice of specific assets within each asset class D) none of the options

Q: ________ are examples of financial intermediaries. A) Commercial banks B) Insurance companies C) Investment companies D) All of the options

Q: Which of the following are financial assets? I. Debt securities II. Equity securities III. Derivative securities A) I only B) I and II only C) II and III only D) I, II, and III

Q: ________ assets generate net income to the economy, and ________ assets define allocation of income among investors. A) Financial, financial B) Financial, real C) Real, financial D) Real, real

Q: Which of the following is not a money market security? A) U.S. Treasury bill B) 6-month maturity certificate of deposit C) common stock D) All of the options.

Q: The material wealth of society is determined by the economy's ________, which is a function of the economy's ________. A) investment bankers; financial assets B) investment bankers; real assets C) productive capacity; financial assets D) productive capacity; real assets

Q: Active trading in markets and competition among securities analysts helps ensure that: I. Security prices approach informational efficiency. II. Riskier securities are priced to offer higher potential returns. III. Investors are unlikely to be able to consistently find under- or overvalued securities. A) I only B) I and II only C) II and III only D) I, II, and III

Q: According to the Flow of Funds Accounts of the United States, the largest financial asset of U.S. households is ________. A) mutual fund shares B) corporate equity C) pension reserves D) deposits

Q: ________ is not a derivative security. A) A share of common stock B) A call option C) A futures contract D) None of the options (All of the answers are derivative securities.)

Q: According to the Flow of Funds Accounts of the United States, the largest liability of U.S. households is ________. A) mortgages B) consumer credit C) bank loans D) gambling debts

Q: According to the Flow of Funds Accounts of the United States, the largest single asset of U.S. households is ________. A) mutual fund shares B) real estate C) pension reserves D) corporate equity

Q: Net worth represents ________ of the liabilities and net worth of commercial banks. A) about 51% B) about 91% C) about 11% D) about 31%

Q: Real assets in the economy include all but which one of the following? A) land B) buildings C) consumer durables D) common stock

Q: Financial assets represent ________ of total assets of U.S. households. A) under 70% B) over 90% C) under 10% D) about 30%

Q: 77) The Modigliani M2 measure and the Treynor T2 measure A) are identical. B) are nearly identical and will rank portfolios the same way. C) are nearly identical, but might rank portfolios differently. D) are somewhat different; M2 can be used to rank portfolios, but T2 cannot. E) are somewhat different; T2 can be used to rank portfolios, but M2 cannot.

Q: 76) Rodney holds a portfolio of risky assets that represents his entire risky investment. To evaluate the performance of Rodney's portfolio, in which order would you complete the steps listed? I. Compare the Sharpe measure of Rodney's portfolio to the Sharpe measure of the best portfolio. II. State your conclusions. III. Assume that past security performance is representative of expected performance. IV. Determine the benchmark portfolio that Rodney would have held if he had chosen a passive strategy. A) I, III, IV, II B) III, IV, I, II C) IV, III, I, II D) III, II, I, IV E) III, I, IV, II

Q: 75) The M2 measure was developed by A) Merton and Miller. B) Miller and Miller. C) Modigliani and Miller. D) Modigliani and Modigliani. E) the M&M Mars Company.

Q: 74) The geometric average rate of return is based on A) the market's volatility. B) the concept of expected return. C) the standard deviation of returns. D) the CAPM. E) the principle of compounding.

Q: 73) A portfolio manager's ranking within a comparison universe may not provide a good measure of performance because A) portfolio returns may not be calculated in the same way. B) portfolio durations can vary across managers. C) if managers follow a particular style or subgroup, portfolios may not be comparable. D) portfolio durations can vary across managers and if managers follow a particular style or subgroup, portfolios may not be comparable. E) All of the options are correct.

Q: 72) The dollar-weighted return on a portfolio is equivalent to A) the time-weighted return. B) the geometric average return. C) the arithmetic average return. D) the portfolio's internal rate of return. E) None of the options are correct.

Q: 71) The M-squared measure considers A) only the return when evaluating mutual funds. B) the risk-adjusted return when evaluating mutual funds. C) only the total risk when evaluating mutual funds. D) only the market risk when evaluating mutual funds. E) None of the options are correct.

Q: 70) The Jensen portfolio evaluation measure A) is a measure of return per unit of risk, as measured by standard deviation. B) is an absolute measure of return over and above that predicted by the CAPM. C) is a measure of return per unit of risk, as measured by beta. D) is a measure of return per unit of risk, as measured by standard deviation, and is an absolute measure of return over and above that predicted by the CAPM. E) is an absolute measure of return over and above that predicted by the CAPM, and is a measure of return per unit of risk, as measured by beta.

Q: 69) The Sharpe, Treynor, and Jensen portfolio performance measures are derived from the CAPM, A) therefore, it does not matter which measure is used to evaluate a portfolio manager. B) however, the Sharpe and Treynor measures use different risk measures. Therefore, the measures vary as to whether or not they are appropriate, depending on the investment scenario. C) therefore, all measure the same attributes. D) therefore, it does not matter which measure is used to evaluate a portfolio manager. However, the Sharpe and Treynor measures use different risk measures, so therefore, the measures vary as to whether or not they are appropriate, depending on the investment scenario. E) None of the options are correct.

Q: 68) Risk-adjusted mutual fund performance measures have decreased in popularity because A) in nearly efficient markets, it is extremely difficult for portfolio managers to outperform the market. B) the measures usually result in negative performance results for the portfolio managers. C) the high rates of return earned by the mutual funds have made the measures useless. D) in nearly efficient markets, it is extremely difficult for portfolio managers to outperform the market, and the measures usually result in negative performance results for the portfolio managers. E) None of the options are correct.

Q: 67) The Value Line Index is an equally-weighted geometric average of the returns of about 1,700 firms. The value of an index based on the geometric average returns of three stocks where the returns on the three stocks during a given period were 32%, 5%, and -10%, respectively, is A) 4.3%. B) 7.6%. C) 9.0%. D) 13.4% E) 5.0%.

Q: 66) A pension fund that begins with $500,000 earns 15% the first year and 10% the second year. At the beginning of the second year, the sponsor contributes another $300,000. The dollar-weighted and time-weighted rates of return, respectively, were A) 11.7% and 12.5%. B) 12.1% and 12.5%. C) 12.5% and 11.7%. D) 12.5% and 12.1%.

Q: 65) The ________ measures the reward to volatility trade-off by dividing the average portfolio excess return by the standard deviation of returns. A) Sharpe measure B) Treynor measure C) Jensen measure D) information ratio E) None of the options are correct.

Q: 64) In measuring the comparative performance of different fund managers, the preferred method of calculating rate of return is A) internal rate of return. B) arithmetic average. C) dollar weighted. D) time weighted. E) None of the options are correct.

Q: 62) In a particular year, Aggie Mutual Fund earned a return of 15% by making the following investments in the following asset classes: Weight Return Bonds 10 % 6 % Stocks 90 % 16 % The return on a bogey portfolio was 10%, calculated as follows: Weight Return Bonds (Lehman Brothers Index) 50 % 5 % Stocks (S&P 500 Index) 50 % 15 % The contribution of asset allocation across markets to the total excess return was A) 1%. B) 3%. C) 4%. D) 5%. E) 6%

Q: 59) In a particular year, Razorback Mutual Fund earned a return of 1% by making the following investments in asset classes: Weight Return Bonds 20 % 5 % Stocks 80 % 0 % The return on a bogey portfolio was 2%, calculated from the following information. Weight Return Bonds (Lehman Brothers Index) 50 % 5 % Stocks (S&P 500 Index) 50 % -1 % The contribution of asset allocation across markets to the Razorback Fund's total excess return was A) -1.80%. B) -1.00%. C) 0.80%. D) 1.00%. E) 1.80%

Q: 58) In a particular year, Razorback Mutual Fund earned a return of 1% by making the following investments in asset classes: Weight Return Bonds 20 % 5 % Stocks 80 % 0 % The return on a bogey portfolio was 2%, calculated from the following information. Weight Return Bonds (Lehman Brother Index) 50 % 5 % Stocks (S&P 500 Index) 50 % -1 % The total excess return on the Razorback Fund's managed portfolio was A) -1.80%. B) -1.00%. C) 0.80%. D) 1.00%. E) 1.90%

Q: 48) If an investor has a portfolio that has constant proportions in T-bills and the market portfolio, the portfolio's characteristic line will plot as a line with ________. If the investor can time bull markets, the characteristic line will plot as a line with ________. A) a positive slope; a negative slope B) a negative slope; a positive slope C) a constant slope; a negative slope D) a negative slope; a constant slope E) a constant slope; a positive slope

Q: 49) Studies of style analysis have found that ________ of fund returns can be explained by asset allocation alone. A) between 50% and 70% B) less than 10% C) between 40 and 50% D) between 75% and 90% E) over 90%

Q: Suppose you own two stocks, A and B. In year 1, stock A earns a 2% return and stock B earns a 9% return. In year 2, stock A earns an 18% return and stock B earns an 11% return. ________ has the higher arithmetic average return. A) Stock A B) Stock B C) The two stocks have the same arithmetic average return. D) At least three periods are needed to calculate the arithmetic average return.

Q: 37) Suppose you own two stocks, A and B. In year 1, stock A earns a 2% return and stock B earns a 9% return. In year 2, stock A earns an 18% return and stock B earns an 11% return. Which stock has the higher geometric average return? A) Stock A B) Stock B C) The two stocks have the same geometric average return. D) At least three periods are needed to calculate the geometric average return.

Q: Suppose you purchase one share of the stock of Cereal Correlation Company at the beginning of year 1 for $50. At the end of year 1, you receive a $1 dividend and buy one more share for $72. At the end of year 2, you receive total dividends of $2 (i.e., $1 for each share) and sell the shares for $67.20 each. The dollar-weighted return on your investment is A) 10.00%. B) 8.78%. C) 19.71%. D) 20.36%.

Q: 33) Suppose you purchase one share of the stock of Volatile Engineering Corporation at the beginning of year 1 for $36. At the end of year 1, you receive a $2 dividend and buy one more share for $30. At the end of year 2, you receive total dividends of $4 (i.e., $2 for each share) and sell the shares for $36.45 each. The dollar-weighted return on your investment is A) −1.75%. B) 4.08%. C) 8.53%. D) 8.00%. E) 12.35%.