Question 1: The uncertainty of investment returns associated with how a firm finances its investments is known as

• Business risk.
• Liquidity risk.
• Exchange rate risk.
• Financial risk.
• Market risk.

Question 2: Measures of risk for an investment include

• Variance of returns and business risk
• Coefficient of variation of returns and financial risk
• Business risk and financial risk
• Variance of returns and coefficient of variation of returns

Question 3: In the phrase "nominal risk free rate," nominal means

• Computed.
• Historical.
• Market.
• Average.
• Risk adverse.

Question 4: All of the following are major sources of uncertainty EXCEPT

• Business risk
• Financial risk
• Default risk
• Country risk
• Liquidity risk

Question 5: For an investor with a time horizon of 12 years and higher risk tolerance, an appropriate asset allocation strategy would be

• 100% stocks
• 30% cash, 50% bonds, and 20% stocks
• 10% cash, 30% bonds, and 60% stocks
• 50% bonds and 50% stocks
• 100% bonds

Question 6: Which of the following is not a step in the portfolio management process?

• Develop a policy statement.
• Study current financial and economic conditions.
• Construct the portfolio.
• Monitor investor's needs and market conditions.
• Sell all assets and reinvestment proceeds at least once a year.

Question 7: ____ phase is the stage when investors in their early-to-middle earning years attempt to accumulate assets to satisfy near-term needs, e.g., children's education or down payment on a home.

• Accumulation
• Spending
• Gifting
• Consolidation
• Divestiture

Question 8: ____ refer(s) to the ability to convert assets to cash quickly and at a fair market price and often increase(s) as one approaches the later stages of the investment life cycle.

• Liquidity needs
• Time horizons
• Liquidation values
• Liquidation essentials
• Capital liquidations

Question 9: An agreement that provides for the future delivery or receipt of an asset at a specified date for a specified price is a

• Eurobonds contract.
• Futures contract.
• Put option contract.
• Call option contract.
• Warrant contract.

Question 10: The original maturity of a United States Treasury bond is

• Zero years to five years.
• Six months to ten years.
• One year or less.
• One year to ten years.
• Over ten years.

Question 11: The purchase and sale of commodities for current delivery and consumption is known as dealing in the ____ market.

• Futures
• Spot
• Money
• Capital
• Options

Question 12: Which of the following is not a characteristic of a warrant?

• The right to buy common stock in a corporation.
• Issued by the corporation or an individual.
• Typically valid for longer time periods than options.
• Similar to a call option with respect to a striking price.

Question 13: An order that specifies the highest buy or lowest sell price is a

• Limit order.
• Short sale.
• Market order.
• Margin call.
• Stop loss.

Question 14: Which of the following is not a function of the specialist?

• Assists the Federal Reserve in controlling the money supply
• Acts as a broker who handles the limit orders or special orders placed with member brokers
• Buys and sells securities in order to stabilize the market
• Acts as a dealer in assigned stocks to maintain a fair and orderly market

Question 15: All of the following are characteristics of a dealer market except:

• Also referred to as a quote-driven market
• NASDAQ market is a dealer market
• Individual dealers buy and sell shares for themselves
• Centralized trading location

Question 16: A block trade is one which involves a minimum of

• 1,000 shares.
• 5,000 shares.
• 10,000 shares.
• 100,000 shares.
• 1,000,000 shares.

Question 17: The implication of efficient capital markets and a lack of superior analysts have led to the introduction of

• Balanced funds.
• Naive funds.
• January funds.
• Index funds.
• Futures options.

Question 18: Fama and French examined the relationship between the Book Value to Market Value ratio and average stock returns and found

• No evidence of a relationship for U.S. stocks.
• Evidence of a negative relationship in U.S. stocks only.
• Evidence of a positive relationship for Japanese stocks only.
• Evidence of a negative relationship for U.S. and Japanese stocks.
• Evidence of a positive relationship for U.S. and Japanese stocks.

Question 19: The results of studies that have looked at the relationship between PEG ratios and subsequent stock returns

• Find an inverse relationship, with annual rebalancing.
• Find no relationship, with monthly or quarterly rebalancing.
• Find an inverse relationship, with monthly or quarterly rebalancing.
• Find a direct relationship, with monthly or quarterly rebalancing.
• Find a direct relationship with annual rebalancing

Question 20: A "runs test" on successive stock price changes which supports the efficient market hypothesis would show the actual number of runs

• Falls into the range expected of a random series.
• Falls into the range expected of a dependent series.
• Is small.
• Is large.
• Would approximate N/2.

Question 21: A portfolio manager is considering adding another security to his portfolio. The correlations of the 5 alternatives available are listed below. Which security would enable the highest level of risk diversification?

• 0.0
• 0.25
• -0.25
• -0.75
• 1.0

Question 22: Between 1980 and 2000, the standard deviation of the returns for the NIKKEI and the DJIA indexes were 0.08 and 0.10, respectively, and the covariance of these index returns was 0.0007. What was the correlation coefficient between the two market indicators?

• .0906
• .0985
• .0796
• .0875
• .0654

Question 23: Between 1994 and 2004, the standard deviation of the returns for the S&P 500 and the NYSE indexes were 0.27 and 0.14, respectively, and the covariance of these index returns was 0.03. What was the correlation coefficient between the two market indicators?

• 1.26
• 0.7937
• 0.2142
• 0.1111
• 0.44

Question 24: All of the following are common risk measurements except

• Standard deviation
• Variance
• Semivariance
• Covariance
• Range of returns

Question 25: If an individual owns only one security the most appropriate measure of risk is:

• Standard deviation
• Correlation
• Beta
• Covariance

Question 26: The line of best fit for a scatter diagram showing the rates of return of an individual risky asset and the market portfolio of risky assets over time is called the

• Security market line.
• Capital asset pricing model.
• Characteristic line.
• Line of least resistance.
• Market line.

Question 27: The fact that tests have shown the CAPM intercept to be greater than the RFR is consistent with a(n)

• Zero beta model.
• unstable beta or a higher borrowing rate.
• Zero beta model or a higher borrowing rate.
• higher borrowing rate.
• unstable beta.

Question 28: Utilizing the security market line an investor owning a stock with a beta of -2 would expect the stock's return to ____ in a market that was expected to decline 15 percent.

• Rise or fall an indeterminate amount
• Fall by 3%
• Fall by 30%
• Rise by 13%
• Rise by 30%

Question 29: Assume that you are embarking on a test of the small-firm effect using APT. You form 10 size-based portfolios. The following finding would suggest there is evidence supporting APT:

• The top five size based portfolios should have excess returns that exceed the bottom five size based portfolios.
• The bottom five size based portfolios should have excess returns that exceed the top five size based portfolios.
• The ten portfolios must have excess returns not significantly different from zero.
• The ten portfolios must have excess returns significantly different from zero.

Question 30: Under the following conditions, what are the expected returns for stocks A and C?

l0 = 0.07 ba,1 = 0.95
k1 = 0.04 ba,2 = 1.10
k2 = 0.03 bc,1 = 1.10
bc,2 = 2.35

• 14.1% and 17.65%
• 14.1% and 18.45%
• 17.65% and 18.45%
• 18.45% and 17.52%

Question 31: Under the following conditions, what are the expected returns for stocks X and Y?

l0 = 0.05 bx,1 = 0.90
k1 = 0.03 bx,2 = 1.60
k2 = 0.04 by,1 = 1.50
by,2 = 0.85

• 14.1% and 12.9%
• 12.5% and 19.5%
• 19.5% and 18.5%
• 21.2% and 18.5%

Question 32: The equation for the single-index market model is

• RFR_it = a_i + bR_mt + e_t
• R_it = a_i + bR_mt + e_t
• R_it = a_i + bRFR_t + e_t
• R_mt = a_i + bR_it + e_t
• R_it = a_i + b(R_mt - RFR_t) + e_t