Capital allocation line (CAL) describes all feasible risk-return combinations available from allocating the complete portfolio between a risky portfolio and the risk-free asset.
True
Passive investment strategy attempts to identify mispriced securities or to forecast broad market trends
False
The Sharpe ratio of the market portfolio should be one.
False
Short selling is an advantageous strategy if you expect a stock price to decline in the future
True
Under the CAPM assumptions, stocks of small firms cannot have higher returns than those of big firms
False
Participating in financial markets allows you to smooth your consumption.
True
Financial market is where real assets are traded
False
Land, buildings, equipment, and knowledge are examples of real assets.
True
Risk neutral investors require risk premium for holding risky assets.
False
No arbitrage opportunity implies that equivalent investment opportunities must be traded at the same price.
True
Empirical evidence shows that the CAPM has a significant predictability of stocks’ returns.
False
The portfolio weights of a self-financing portfolio sum to one.
False
The CAPM may be wrong even when the market is efficient.
True
If market is strong-form efficient, past prices do not give any information.
True
High book-to-market stocks have historically earned higher average returns than low book-to-market stocks.
True (Warren Buffett)
Yield to maturity is the discount rate that sets the present value of the promised bond payments equal to the current market price of the bond.
True
An American option cannot be worth less than its European counterpart.
True
The value of an option generally decreases with the volatility of the stock.
False
OTC markets have advantages such as ease of trading, high liquidity.
False
Option delta measures the change in the price of the call option given a 1% change in the price of the stock.
False
Financial assets are claims on real assets or the income generated by them.
True
The law of one price states that equivalent assets must be traded at the same price.
True
In the presence of limits to arbitrage, bubbles may arise because even an obvious violation of the law of one price cannot be corrected.
True
Under the CAPM assumptions, there may exist a portfolio whose Sharpe ratio is higher than that of the market portfolio.
False
The CAPM implies that an active investment strategy is efficient.
False
The existence of momentum effect provides evidence against the weak form efficiency.
True
According to the semi-strong form efficiency, technical analysis should be useful.
False
If the market is efficient, stock prices should slowly increase for an extended period of time after good earnings are announced.
False
The default premium of a risk-free bond is equal to zero.
True
The writer (or seller) of a put option has the right to sell the underlying asset.
False
Including options in your portfolio generally increases the risk of your portfolio.
False
The value of an option generally increases with the volatility of the underlying asset.
True
Investment with higher volatility should always have a higher risk premium
False
If the market is efficient, then the market portfilio should have the highest Sharpe ratio
True
Stock 1 has a beta of 1, and Stock 2 has a beta of 2. If you hold a portfilio that consists of 30% stock 1 and 70% stock 2, the portfilio's beta is 1.7
True
In the CAPM model, any two portfolios with the same expected return should have the same beta.
True
Stock A and Stock B have equivalent risk, i.e. they have the same beta. Then, the CAPM implies that the expected return of Stock A should be equal to that of Stock B although stock A has more idiosyncratic risk relative to Stock B
True (because the CAPM does not take idiosyncratic risk into consideration, only systematic risk)
In both the Binomial and Black-Scholes Option Pricing Models, we do not need to know the actual probabilities of each possible future stock price to calculate the option price.
True
The current stock price of ABC Corp. is $50 per share, and the price of an at-the-money, 6-months European put option is $ 5. If one-year risk-free rate is 8 %, the price of an at-the-money, 6-months EUropean call option is higher than $7,50.
False
If the Law of one Price holds, the price of a security must be equal to the present value of its cash flows.
True
Suppose that the market risk premium is 5 %, and the risk-free rate is 3 %. The expected return of a stock is 9 %, and its beta is 1. Then, the stock has a positive alpha.
True (according to the CAPM, E[r]=risk-free rate+β(market risk premium), so if 9%=3%+1*5% we need to fill it up with 1% positive α.)
The Real interest rate measures the rate of growth of purchasing power of invested money
True
According to the semi-strong-form market efficiency, it is impossible to profit from trading on public information
True
The yield to maturity of a bond is the discount rate that sets the present value of the expected bond payments equal to the current market price of the bond.
False
The YTM of a defaultable bond is equal to the expected return of investing in the bond.
False
The credit spread is high for bonds with low ratings
True
APR can be higher than EAR depending on the number of compounding periods.
False
The beta of the risk-free asset is zero.
True
The Sharpe ratio of the market portfolio should be one
False
The CAPM may be wrong even when the market is efficient.
True
Under the CAPM assumptions, stocks of small firms cannot have higher returns than those of big firms.
False
Under the CAPM assumptions, risk premium can be affected by idiosyncratic risk.
False
The average of a sequence of independent random variables is approximately normallydistributed as the number of the random variables are sufficiently large.
True (law of big numbers)
Short selling is an advantageous strategy if you expect a stock price to decline in the future.
True
If market is strong-form efficient, past prices do not give any information.
True
When the durations of a firm’s equities and liabilities are significantly different, the firm has a duration mismatch
False
An American option cannot be worth less than its European counterpart.
True (because American options are always more favourabe)
Futures contract is similar to forward contract except that futures contract is not traded on an exchange
False
If a firm can pass along the cost increases to its customers, the firm’s exposure to the commodity price risk is smaller.
True
Which of the following positions benefit if the stock price decreases?
a. Long position in a call
b. Short position in a call
c. Long position in a put
d. Short position in a put
b. Short call, and c. long put
Real assets are ______.
A. assets used to produce goods and services
B. always the same as financial assets
C. always equal to liabilities
D. claims on a company's income
Answer: A
Financial institutions that specialize in assisting corporations in primary market transactions are called _______.
A. mutual funds
B. investment bankers
C. pension funds
D. globalization specialists
Answer: B
Which of the following are true concerning short sales of exchange-listed stocks?
I. Proceeds from the short sale must be kept on deposit with the broker.
II. Short-sellers must post margin with their broker to cover potential losses on the position.
III. The short-seller earns interest on any cash deposited with the broker that is used to meet the margin requirement.
A. I only
B. I and III only
C. I and II only
D. I, II, and III
Answer: C
Maintenance requirements for margin accounts are set by ____.
A. brokerage firms
B. the SEC
C. the Federal Reserve System's Board of Governors
D. the Supreme Court
Answer: A
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
Answer: C
The holding period return (HPR) on a stock is equal to _________.
A. the capital gain yield over the period plus the inflation rate
B. the capital gain yield over the period plus the dividend yield
C. the current yield plus the dividend yield
D. the dividend yield plus the risk premium
Answer B
A security's beta coefficient will be negative if ____________.
A. its returns are negatively correlated with market-index returns
B. its returns are positively correlated with market-index returns
C. its stock price has historically been very stable
D. market demand for the firm's shares is very low
Answer: A
The ______ measure of returns ignores compounding.
A. geometric average
B. arithmetic average
C. IRR
D. dollar-weighted
Answer: B
Your timing was good last year. You invested more in your portfolio right before prices went up, and you sold right before prices went down. In calculating historical performance measures, which one of the following will be the largest?
A. Dollar-weighted return
B. Geometric average return
C. Arithmetic average return
D. Mean holding-period return
Answer: A
Which risk can be partially or fully diversified away as additional securities are added to a portfolio?
I. Total risk
II. Systematic risk
III. Firm-specific risk
A. I only
B. I and II only
C. I, II, and III
D. I and III
Answer: D
The strong form of the EMH states that ________ must be reflected in the current stock price.
A. all security price and volume data
B. all publicly available information
C. all information, including inside information
D. all costless information
Answer: C
You believe that stock prices reflect all information that can be derived by examining market trading data such as the history of past stock prices, trading volume, or short interest, but you do not believe stock prices reflect all publicly available and inside information. You are a proponent of the ____________ form of the EMH.
A. semistrong
B. strong
C. weak
D. perfect
Answer: C
Choosing stocks by searching for predictable patterns in stock prices is called ________.
A. fundamental analysis
B. technical analysis
C. index management
D. random-walk investing
Answer: B
Analysis of bond returns over a multiyear horizon based on forecasts of the bond's yield to maturity and reinvestment rate of coupons is called ______.
A. multiyear analysis
B. horizon analysis
C. maturity analysis
D. reinvestment analysis
Answer: B
The exchange of one bond for a bond that has similar attributes but is more attractively priced is called ______________.
A. a substitution swap
B. an intermarket spread swap
C. a rate anticipation swap
D. a pure yield pickup swap
Answer: A
The writer of a put option _______________.
A. agrees to sell shares at a set price if the option holder desires
B. agrees to buy shares at a set price if the option holder desires
C. has the right to buy shares at a set price
D. has the right to sell shares at a set price
Answer: B
You invest in the stock of Valleyview Corp. and purchase a put option on Valleyview Corp. This strategy is called a _________.
A. long straddle
B. naked put
C. protective put
D. short stroll
Answer: C
A call option on Brocklehurst Corp. has an exercise price of $35. The current stock price of Brocklehurst Corp. is $32. The call option is _________.
A. at the money
B. in the money
C. out of the money
D. knocked in
Answer: C (a call is the opportunity to buy at price $ 35. You want the current price to be above $ 35 to be in the money.)
The common stock of the Avalon Corporation has been trading in a narrow range around $40 per share for months, and you believe it is going to stay in that range for the next 3 months. The price of a 3-month put option with an exercise price of $40 is $3, and a call with the same expiration date and exercise price sells for $4.
What would be a simple options strategy using a put and a call to exploit your conviction about the stock price's future movement?
A. Sell a call.
B. Purchase a put.
C. Sell a straddle.
D. Buy a straddle.
Answer: C
The intrinsic value of a call option is equal to _______________.
A. the stock price minus the exercise price
B. the exercise price minus the stock price
C. the stock price minus the exercise price plus any expected dividends
D. the exercise price minus the stock price plus any expected dividends
Answer: A
__________ 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
Answer: C
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
Answer: D
Which of the following are true concerning short sales of exchange-listed stocks?
I. Proceeds from the short sale must be kept on deposit with the broker.
II. Short-sellers must post margin with their broker to cover potential losses on the position.
III. The short-seller earns interest on any cash deposited with the broker that is used to meet the margin requirement.
A. I only
B. I and III only
C. I and II only
D. I, II, and III
Answer: C
You have calculated the historical dollar-weighted return, annual geometric average return, and annual arithmetic average return. If you desire to forecast performance for next year, the best forecast will be given by the ________.
A. dollar-weighted return
B. geometric average return
C. arithmetic average return
D. index return
Answer: C
Beta is a measure of security responsiveness to _________.
A. firm-specific risk
B. diversifiable risk
C. market risk
D. unique risk
Answer: C
The figures below show plots of monthly excess returns for two stocks plotted against excess returns for a market index.
Which stock is likely to further reduce risk for an investor currently holding her portfolio in a welldiversified portfolio of common stock?
A. Stock A
B. Stock
B C. There is no difference between A or B.
D. The answer cannot be determined from the information given.
Answer: Stock A (Man avgör detta genom att titta på den aktie som har störst spridning från market index. Eftersom denna har hög firm-speficic risk kommer den att diversifiera portföljen mer än en aktie som redan föler marknaden.)
According to the capital asset pricing model, a fairly priced security will plot _________.
A. above the security market line
B. along the security market line
C. below the security market line
D. at no relation to the security market line
Answer: B
In the world where the CAPM holds, the SML (Security Market Line) is valid for _______________, and the CML (Capital Market Line) is valid for ______________.
A. only individual assets; well-diversified portfolios only
B. only well-diversified portfolios; only individual assets
C. both well-diversified portfolios and individual assets; both well-diversified portfolios and individual assets
D. both well-diversified portfolios and individual assets; well-diversified portfolios only
Answer: D
The strong form of the EMH states that ________ must be reflected in the current stock price.
A. all security price and volume data
B. all publicly available information
C. all information, including inside information
D. all costless information
Answer: C
The invoice price of a bond is the ______.
A. stated or flat price in a quote sheet plus accrued interest
B. stated or flat price in a quote sheet minus accrued interest
C. bid price
D. average of the bid and ask price
Answer: A
A __________ bond gives the issuer an option to retire the bond before maturity at a specific price after a specific date.
A. callable
B. coupon
C. puttable
D. Treasury
Answer: A
Banks and other financial institutions can best manage interest rate risk by _____________.
A. maximizing the duration of assets and minimizing the duration of liabilities
B. minimizing the duration of assets and maximizing the duration of liabilities
C. matching the durations of their assets and liabilities
D. matching the maturities of their assets and liabilities
Answer: C
The writer of a put option _______________.
A. agrees to sell shares at a set price if the option holder desires
B. agrees to buy shares at a set price if the option holder desires
C. has the right to buy shares at a set price
D. has the right to sell shares at a set price
Answer: B
An American call option gives the buyer the right to _________.
A. buy the underlying asset at the exercise price on or before the expiration date
B. buy the underlying asset at the exercise price only at the expiration date
C. sell the underlying asset at the exercise price on or before the expiration date
D. sell the underlying asset at the exercise price only at the expiration date
Answer: A
A call option on Brocklehurst Corp. has an exercise price of $30. The current stock price of Brocklehurst Corp. is $32. The call option is _________.
A. at the money
B. in the money
C. out of the money
D. knocked in
Answer: B (the call option gives the right to buy the stock at $ 30, so when current price > excercise price of the call option you are in the money)
You invest in the stock of Rayleigh Corp. and write a call option on Rayleigh Corp. This strategy is called a _________.
A. covered call
B. bullish spread
C. protective put
D. collar
Answer: A
The delta of an option is __________.
A. the change in the dollar value of an option for a dollar change in the price of the underlying asset
B. the change in the dollar value of the underlying asset for a dollar change in the call price
C. the percentage change in the value of an option for a 1% change in the value of the underlying asset
D. the percentage change in the value of the underlying asset for a 1% change in the value of the call
Answer: A
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
Answer: B
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
Answer: B
The ________ is equal to the square root of the systematic variance divided by the total variance.
A. covariance
B. correlation coefficient
C. standard deviation
D. reward-to-variability ratio
Answer: B
Diversification is most effective when security returns are _________.
A. high
B. negatively correlated
C. positively correlated
D. uncorrelated
Answer: B (because the negative correlation decreases the total correlation instead of just spreading it)
Beta is a measure of security responsiveness to _________.
A. firm-specific risk
B. diversifiable risk
C. market risk
D. unique risk
Answer: C
Standard deviation of portfolio returns is a measure of ___________.
A. total risk
B. relative systematic risk
C. relative nonsystematic risk
D. relative business risk
Answer: A
Arbitrage is __________________________.
A. an example of the law of one price
B. the creation of riskless profits made possible by relative mispricing among securities
C. a common opportunity in modern markets
D. an example of a risky trading strategy based on market forecasting
Answer: B
The weak form of the EMH states that ________ must be reflected in the current stock price.
A. all past information, including security price and volume data
B. all publicly available information
C. all information, including inside information
D. all costless information
Answer: A
The strong form of the EMH states that ________ must be reflected in the current stock price.
A. all security price and volume data
B. all publicly available information
C. all information, including inside information
D. all costless information
Answer: C
Proponents of the EMH typically advocate __________.
A. a conservative investment strategy
B. a liberal investment strategy
C. a passive investment strategy
D. an aggressive investment strategy
Answer: C (because there is no way you could beat the market)
Floating-rate bonds have a __________ that is adjusted with current market interest rates.
A. maturity date
B. coupon payment date
C. coupon rate
D. dividend yield
Answer: C
Duration is a concept that is useful in assessing a bond's _________.
A. credit risk
B. liquidity risk
C. price volatility
D. convexity risk
Answer: C
A writer of a call option will want the value of the underlying asset to __________, and a buyer of a put option will want the value of the underlying asset to _________.
A. decrease; decrease
B. decrease; increase
C. increase; decrease
D. increase; increase
Answer: A (the writer = den som säljer bort optionen. Den som säljer tjänar pengar om värdet minskar eftersom det gör att köparen av optionen måste betala ett högre pris än current value. Den som köper en put option köper rätten att sälja, och vill sälja till ett excercise-pris, då är det bra som värdet på underliggande tillgång sjunker så att det går att sälja den dyrare)
__________ is the most risky transaction to undertake in the stock-index option markets if the stock market is expected to fall substantially after the transaction is completed.
A. Writing an uncovered call option
B. Writing an uncovered put option
C. Buying a call option
D. Buying a put option
Answer: B
The Black-Scholes option-pricing formula was developed for __________.
A. American options
B. European options
C. Tokyo options
D. out-of-the-money options
Answer: B
The hedge ratio is often called the option's _______.
A. delta
B. gamma
C. theta
D. beta
Answer: A
The difference between an annuity and a perpetuity is that an annuity ends after some fixed number of payments.
True
The annual percentage rate (APR) indicates the amount of interest including the effect of compounding.
False
Suppose that the one-year spot interest rate is 5%, and the two-year spot interest rate is 3%. According to Expectations Hypothesis, the interest rates are expected to rise next year.
False
The relationship between the investment term and the interest rate is called the term structure of interest rates.
True
The interest rates that are quoted by banks and other financial institutions are real interest rates.
False
Payback rule always gives the same decision as NPV rule.
False
IRR sums up the attractiveness of investment opportunity without requiring an assumption about the cost of capital.
True
In capital budgeting decisions, interest expense is typically excluded.
True
Opportunity cost should be included in the incremental earnings analysis.
True
Earnings does not include depreciation.
False
If the market portfolio is efficient, then all securities and portfolios must plot on the SML, not just individual stocks.
True
Beta corresponds to the slope of the best-fitting line in the plot of the security’s excess returns versus the market excess return.
True
Small firms’ stocks have historically earned higher average returns than large firms’ stocks.
True
If market is efficient and the CAPM is correct, positive-alpha trading strategies should not exist.
True
If the market portfolio is not efficient, then a portfolio of high book-to-market stocks will likely have positive alphas.
True
A financial option contract gives the writer the right (but not the obligation) to purchase or sell an asset at a fixed price at some future date.
False
An option holder would not exercise an out-of-the-money option
True
The deeper out-of-the-money the put option is, the less negative its beta, and the lower is its expected return.
False
We are able to solve for the price of an option without knowing the actual probabilities of the states in the binomial tree model.
True
An American option cannot be worth more than its European counterpart.
False
The price of a risk-free zero-coupon bond is always less than its face value (or, trades at a discount) as long as its yield to maturity is positive.
True
Suppose that the one-year spot interest rate is 5%, and the two-year spot interest rate is 3%. According to Expectations Hypothesis, the interest rates are expected to rise next year.
False
An immunized portfolio has a zero duration.
True
The price of a two-year, risk-free, $1000 bond with 10% coupon rate and annual coupon payments is $1000. Then, the yield to maturity of the bond is 10%.
True
According to the NPV Decision Rule, you have to choose the alternative with the highest NPV
True
If stock A has a higher volatility than stock B, the expected return of stock A should be higher than that of stock B.
False
Beta measures both idiosyncratic and systematic risk.
False
The beta of the market portfolio is one.
True
It is possible that a stock whose beta is zero has a positive volatility, i.e., the beta of a risky stock can be zero.
True
) If the market is weak-form efficient, it is impossible to profit by trading on information in past prices.
True
If there exists a portfolio which has a higher Sharpe ratio than the market portfolio, the market portfolio is not efficient.
True
Stock 1 has a beta of 1.5, and Stock 2 has a beta of 2. If you hold a portfolio that consists of 30% Stock 1 and 70% Stock 2, the portfolio’s beta is 1.7.
False (0.3*1.5+0.7*2=1.85)
Mr. A is a risk-averse person. He prefers a certain cash flow of $1000 to having either $2000 or $0 with an equal probability.
True
According to the CAPM, any two portfolios with the same expected return should have the same beta.
True
The value of an option generally increases with the volatility of the underlying stock. (Hint: An underlying stock is the stock on which the price of an option depends.)
True
If you exercise an out-of-the-money American call option right now, the payoff is positive.
False (since you are out of the money)
For a given strike price, the value of a call option is higher if the current price of the underlying stock is higher.
True (since you are allowed to buy at the strike price, if the underlying stock is higher then the price of the option will be higher given the same strike price)
The option delta, ∆, is interpreted as the sensitivity of an option value to changes in the price of the underlying stock.
True
The annual percentage rate (APR) indicates the amount of interest earned in one year without the effect of compounding.
True
The effective annual rate (EAR) decreases with the frequency of compounding
False
The yield to maturity of a corporate bond tends to be low when its credit rating is low (or bad).
False
The IRR decision rule always give the same answer as the NPV decision rule.
False
The Sharpe ratio of the riskfree asset is zero.
True
The SML shows the expected return for each security as a function of its volatility
False (SML shows the return as a function of Beta)
You can lower your portfolio’s return volatility to zero if you invest in two assets that have no correlation.
False
By holding an equal-weighted portfolio of all the assets, you can have a market portfolio
False (not equal-weighted, the market portfolio consists of all assets with no weighing)
The tendency to hang on to losers and sell winners is called as the disposition effect.
True
The Sharpe ratio of a portfolio increases if we buy stocks with negative alphas.
False (on the contrary, negative alphas will lower the expected return and thus decrease the Sharpe ratio)
The estimation of the mean is subject to statistical errors which are measured by the standard deviation.
False
According to the semi-strong form market efficiency, it should not be possible to profit by trading on private information
False
A financial option contract gives the writer the right (but not the obligation) to purchase or sell an asset at a fixed price at some future date.
False
Put leverage ratios are always negative.
True
In case of a futures contract, each counterparty of the contract is highly exposed to counterparty risk.
False (not each counterpart)
The value of a duration-neutral portfolio would not change if short-term interest rates rise while long-term rates remain stable.