Multiple choice questions
1. The value of a derivative security ______.
* a. depends on the value of its related primitive security
b. affects the value of its related primitive security
c. is unrelated to the value of its related primitive security
d. can only be measured by calculus professors
2. In securities analysis, there should be a risk-return tradeoff with higher risk assets having ______expected returns than lower-risk assets.
* a. higher
b. lower
c. the same
d. none of the above
3. 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 rate
d. none of the above
4. Deposits of commercial banks at the Federal Reserve are called ______.
a. bankers acceptances
* b. federal funds
c. repurchase agreements
d. time deposits
5. Net Asset Value is defined as ______.
a. book value of assets divided by shares outstanding
b. book value of assets minus liabilities divided by shares outstanding
c. market value of assets divided by shares outstanding
* d. market value of assets minus liabilities divided by shares outstanding
6. ______would be considered to be a ‘cash equivalent’.
* a. commercial paper
b. common stock
c. corporate bonds
d. real estate
7. Suppose you pay $9,800 for a Treasury bill maturing in two months. What is the annual percentage rate of return for this investment?
a. 2%
b. 12%
* c. 12.2%
d. 16.4%
APR = (10,000-9,800)/9,800 X 360/60
8. A treasury bill pays 5%. ______would definitely not be chosen by a risk averse investor.
a. An asset that pays 10% with a probability of 60% or 2% with a probability of 40%
b. An asset that pays 10% with a probability of 40% or 2% with a probability of 60%
* c. An asset that pays 10% with a probability of 20% or 3.75% with a
probability of 80%
d. An asset that pays 10% with a probability of 30% or 3.75% with a probability of 70%
Expected payoffs for each of the choices are:
(0.6)(0.1) + (0.4)(0.02) = 0.068
(0.4)(0.1) + (0.6)(0.02) = 0.052
(0.2)(0.1) + (0.8)(0.0375) = 0.05 this will NOT be chosen
(0.3)(0.1) + (0.7)(0.0375) = 0.05625
9. The holding period return on a stock was 25%. Its ending price was $18 and its beginning price was $16. Its cash dividend must have been ______.
a. $0.25
b. $1.00
* c. $2.00
d. $4.00
(D1 +P1)/P0 - 1 = return
(D1+18)/16 - 1 = 0.025 solving for D1 yields
10. You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed of treasury bills that pay 5% and a risky portfolio, P, constructed with 2 risky securities, X and Y. The weight of X and Y in P are 60% and 40% respectively. X has an expected return on 14% and Y has an expected return of 10%.
To form a complete portfolio with an expected rate of return of 8%, you should invest ______, ______, and ______of your complete portfolio in the treasury bill, X, and Y respectively.
a. 0%, 60%, 40%
b. 25%, 45%, 30%
* c. 60%, 24%, 16%
d. 50%, 30%, 20%
Exp ret on P = (0.6)(0.14) + (0.4)(0.10) = 0.124
Exp ret on portfolio = (wf)(Rf) + (1-wf)(E(Rp))
0.08 = (wf)(0.05) + (1-wf)(0.124)
solving for wf yields 0.6, i.e. 60% invested in the riskfree asset
So Investment in the risk free asset = 60%
Investment in X = (0.4)(0.6) = 0.24 = 24% (40% invested in P which is
made up of 60% in X)
Investment in Y = (0.4)(0.4) = 0.16 = 16%
11. Consider two perfectly negatively correlated risk securities, A and B. Security A has an expected rate of return of 16% and a standard deviation of return of 20%. B has an expected rate of return of 10% and a standard deviation of return of 30%. The weight of security B in the global minimum variance is ______.
a. 10%
b. 20%
* c. 40%
d. 60%
Using the equation for the min variance portfolio
Wb = (0.2)2 - (0.2)(0.3)(-1)
(0.3)2 + (0.2)2 - 2(0.2)(0.3)(-1)
= 0.4