1) Studies of firms classified on the basis of P/E ratios come to the conclusion that low-P/E-ratio stocks earn much higher    returns, after adjusting for risk, than high-P/E-ratio stocks. This is because

a. low-P/E-ratio stocks are riskier than high-P/E-ratio stocks.

b. investors like low-P/E-ratio stocks.

c. low-P/E-ratio stocks are more likely to be undervalued.

2) Which of the following statement is correct with regard to bond valuation?

a) All else equal, the longer the time to maturity, the smaller the interest rate risk.

b) All else equal, the higher the coupon rate, the greater the interest rate risk

c) Spot interest rates are yields to maturity on loan or bonds that pay multiple cash flows to the investor.

d) Bond price will fall as the market interest rate rise, as the present value of the bond’s future cash flows is obtained by discounting at a higher interest rate.

3) All other things equal, which of the following bond price is more sensitive to interest rate changes?

a. a 10 year bond with a 10% coupon

b. a 20 year bond with a 7% coupon

c. a 20 year bond with a 10% coupon

d. a 30 year bond with 7% coupon 

4) The CAPM implies that:

a. investors may invest in assets with expected returns lower than the riskless interest rate.

b. no investor should invest in the risk-free asset.

c. the only relevant measure of risk is standard deviation.

d. the expected return on an efficient portfolio may be lower than the riskless interest rate.

5) In case of a simple CAPM being used to estimate a time series data:

a. the mean of a residual risk should be equal to zero.

b. the regression coefficient should be equal to zero.

c. the difference between the market return and the risk free rate of return should be equal to zero.

d. the beta of the portfolio should be equal to zero.