Tutorial 1: The investment setting.

1. Investors are willing to forgo current consumption in order to increase future consumption
for a nominal rate of interest.
a. True
b. False

2. An investment is the current commitment of dollars over time to derive future payments to
compensate the investor for the time funds are committed, the expected rate of inflation, and
the uncertainty of future payments.
a. True
b. False

3. An individual who selects the investment that offers greater certainty when everything else
is the same is known as a risk averse investor.
a. True
b. False
4. The line that reflects the combination of risk and return available on alternative
investments is referred to as the security market line (SML).
a. True
b. False
5. The arithmetic mean is a superior measure of the long-term performance because it
indicates the compound annual rate of return based on the ending value of the investment
e e
z(ending
val
versus its beginning value.
Al I IHPV
a. True
b. False I
value
M

6. The ____ the variance of returns, everything else remaining constant, the ____ the
dispersion of expectations and the ____ the risk.
a. larger, greater, lower
b. larger, smaller, higher
c. larger, greater, higher
d. smaller, greater, lower
e. smaller, greater, greater

7. The nominal risk-free rate of interest is a function of the

a. real risk-free rate and the investment's variance.
b. prime rate and the rate of inflation.
c. T-bill rate plus the inflation rate.
d. tax free rate plus the rate of inflation.
e. real risk-free rate and the rate of inflation.

USE THE INFORMATION BELOW FOR THE PROBLEMS 8 and 9.

Assume you bought 100 shares of NewTech common stock on January 15, 2003 at $50.00
per share and sold it on January 15, 2004 for $40.00 per share.

8. What was your holding period return?

a. -10%
b. -0.8
c. 25%
d. 0.8
e. -20%

9. What was your holding period yield?

a. -10%
b. -0.8
c. 25%
d. 0.8
e. -20%

USE THE INFORMATION BELOW FOR THE PROBLEMS 10, 11 and 12.

You have concluded that next year the following relationships are possible:

Economic Status Probability Rate of Return

Weak Economy .15 -5%
Static Economy .60 5%
Strong Economy .25 15%

10. What is your expected rate of return [E(Ri)] for next year?
a. 4.25%
b. 6.00%
c. 6.25%
d. 7.75%
e. 8.00%

11. Compute the standard deviation of the rate of return for the one-year period.
a. 0.65%
b. 1.45%
c. 4.0%
d. 6.25%
e. 6.4%

12. Compute the coefficient of variation for your portfolio.

a. 0.043
b. 0.12
c. 1.40
d. 0.69
 e. 1.04

13. Which of the following is NOT a component of the risk premium?

a. business risk
b. financial risk
c. liquidity risk
d. exchange rate risk
e. unsystematic market risk

14. The variability of operating earnings is associated with

a. business risk.
b. liquidity risk.
c. exchange rate risk.
d. financial risk.
e. market risk.

15. If over the past 20 years the annual returns on the S&P 500 market index averaged 12
percent with a standard deviation of 18 percent, what was the coefficient of variation?
a. 0.6
b. 0.6%
c. 1.5
d. 1.5%
e. 0.66%
16. Which of the following is least likely to move a firm's position to the right on the Security Market
Line (SML)?
a. an increase in the firm's beta
b. adding more financial debt to the firm's balance sheet relative to equity
c. changing the business strategy to include new product lines with more volatile expected
cash flows
d. Investors perceive the stock as being riskier.
e. an increase in the risk-free required rate of return
Tutorial 2: Organization and Functioning of Securities Markets

1. A market is a means through which buyers and sellers are brought together to aid in the transfer of
goods and/or services.
a. True
b. False

2. It is required by law that a stock market must have a physical location.

a. True
b. False

3. A continuous market that has price continuity requires depth of buyers and sellers.
a. True
b. False

4. The primary market is where issues are traded between current and potential owners.
a. True
b. False

5. A good secondary market is important to the efficiency of the primary market.

a. True
b. False

6. Which of the following statements about a market is true?

a. It is not necessary for the market to have a physical location.
b. The market does not necessarily own the goods or services involved.
c. A market can deal in any variety of goods and services.
d. Both buyers and sellers benefit from the existence of a market.
e. All of these are correct.

7. When a market is externally efficient, it means that

a. timely and accurate information is available.
b. the market is liquid.
c. transaction costs are low.
d. prices adjust rapidly to new information.
e. the number of buyers and sellers are the same.

8. When a market is internally efficient, it means that the market has

a. price continuity.
b. minimal transactions costs.
c. good depth.
d. more buyers than sellers.
e. more sellers than buyers.

9. Municipal bonds are sold using the following method or methods:

a. competitive bid
b. negotiated sale
 c. private placement
d. using an underwriting function.
e. All of these are correct.

10. The basic distinction between a primary and a secondary market is that
a. proceeds from sales in the primary market go to the current owner of a security; proceeds
in secondary market go to the original owner.
b. primary markets involve direct dealings within regional exchanges.
c. only new securities are sold in the primary market; only outstanding securities are bought
and sold in the secondary market.
d. primary markets deal exclusively in bonds; secondary markets deal primarily in common
stock.
e. primary markets deal exclusively in common stocks; secondary markets deal primarily in
bonds.

11. In a call market, trading for individual stocks

a. occurs anytime the market is open.
b. takes place at specific times.
c. takes place at the open and close of the trading day.
d. is priced either by auction or by dealers.
e. None of these are correct.

USE THE INFORMATION BELOW FOR THE PROBLEMS 12, 13, and 14.

Jackie has a margin account with a balance of $150,000. The initial margin deposit is 60 percent and
Turtle Industries is currently selling at $50 per share.

12. How many shares of Turtle can Jackie purchase?

a. 5,000
b. 3,000
c. 1,800
d. 1,200
e. 750

13. What is Jackie's profit/loss if Turtle's price after one year is $40?
a. $50,000
b. -$50,000
c. $100,000
d. -$100,000
e. $40,000

14. If the maintenance margin is 25 percent, to what price can Turtle Industries fall before Jackie
receives a margin call?
a. $14.56
b. $23.17
c. $32.42
d. $26.67
 e. $25.52

15. Suppose you purchase 200 shares of Best Hat Corporation at $52 a share by making a margin
deposit of 50 percent. If the maintenance margin is 30 percent, at what price will you receive a
margin call?
a. $37.14
b. $37.95
c. $38.23
d. $38.76
e. $39.42
Tutorial 3: Security market indexes and index funds

1. The general purpose of a market indicator series is to provide an overall indication of aggregate
market changes or movements.
a. True
b. False

2. An aggregate market index can be used as a benchmark to judge the performance of professional
money managers.
a. True
b. False

3. A price weighted series is disproportionately influenced by larger capitalization companies.

a. True
b. False

4. A value weighted index automatically adjusts for stock splits.

a. True
b. False

5. A price-weighted index such as the DJIA is a geometric mean of current stock prices.
a. True
b. False

6. The most common way to test a portfolio manager's performance is to compare the portfolio
return to a benchmark.
a. True
b. False

7. Which of the following is NOT a use of security market indicator series?

a. to use as a benchmark of individual portfolio performance
b. to develop an index portfolio
c. to determine factors influencing aggregate security price movements
d. to use in the measurement of systematic risk
e. to use in the measurement of diversifiable risk

8. What effect does a stock substitution or stock split have on a price-weighted series?
a. Index remains the same; divisor will increase/decrease.
b. Divisor remains the same; index will increase/decrease.
c. Index and divisor will both remain the same.
d. Index and divisor will both reflect the changes (immediately).
e. None of these are correct.

9. A style index created to track ethical funds is known as the

a. green index.
b. SRI index.
 c. EAFE index.
d. freedom index.
e. ethical index.

10. Which of the fundamental factors was NOT used in the Fundamental Index created by Research
Affiliates, Inc.?
a. sales
b. profits (cash flow)
c. leverage (debt/equity)
d. net assets (book value)
e. dividends

USE THE INFORMATION BELOW FOR THE PROBLEMS 11, 12 &13

Number of shares Closing Prices (per share)

Companies outstanding Day T Day T + 1
1 2,000 $30.00 $25.00
2 7,000 55.00 60.00
3 5,000 20.00 25.00
4 4,000 40.00 45.00

11. Assume that a stock price-weighted indicator consisted of the four issues with their prices. What
are the values of the stock indicator for Day T and T + 1, and what is the percentage change?
a. 36.25, 38.75, 6.9 percent
b. 38.75, 36.25, -6.9 percent
c. 100, 106.9, 6.9 percent
d. 107.48, 106.33, 1.15 percent
e. 106.9, 100, 5.7 percent

12. For a value-weighted series, assume that Day T is the base period and the base value is 100. What
is the new index value for Day T + 1, and what is the percentage change in the index from Day T?
a. 106.33, 6.33 percent
b. 107.48, 7.48 percent
c. 109.93, 9.93 percent
d. 108.7, 8.7 percent
e. 107.56, 7.3 percent

13. Compute an unweighted price indicator series, using geometric means. What is the percentage
change in the index from Day T to Day T+1? Assume a base index value of 100 on Day T.
a. 5.35 percent
b. 7.48 percent
c. 9.93 percent
d. 6.33 percent
e. 0 percent
USE THE INFORMATION BELOW FOR THE PROBLEMS 14 & 15

Year % Price Change for GB Industries

2000 10.0%
2001 12.0%
2002 10.0%
2003 11.0%
2004 6.0%
14. Calculate the average annual rate of change for GB Industries for the five-year period using the
arithmetic mean.
a. 0.098%
b. 9.80%
c. 8.50%
d. 8.00%
e. 89.00%

15. Calculate the average annual rate of change for GB Industries for the five-year period using the
geometric mean.
a. 9.7800%
b. 0.0978%
c. 9.0700%
d. 0.0970%
e. 3.6400%
 Tutorial 4: Security market indexes and index funds

1. Prices in efficient capital markets fully reflect all available information and rapidly adjust to new
information.
a. True
b. False

2. If the efficient market hypothesis is true, price changes are independent and biased.
a. True
b. False

3. The weak form of the efficient market hypothesis contends that stock prices fully reflect all public
and private information.
a. True
weal form historical information
:

b. False

4. The weak form of the efficient market hypothesis contends that technical trading rules are of little
value.
a. True
b. False

5. Technical analysis and the efficient market hypothesis have a consistent set of assumptions
concerning stock market behavior.
a. True
b. False

6. Even when fees and costs are considered, most mutual fund managers outperform the aggregate

4
market.
a. True
b. False

7. Behavioral finance considers how various psychological traits affect how individuals or groups
act as investors, analysts, and portfolio managers.
a. True
b. False

8. Technical analysts believe that security prices do not adjust rapidly.

O
a. True
b. False

9. For technical trading rules to consistently generate superior returns, the market would have to be
inefficient.
Oa. True
b. False

10. The T-Bill-Eurodollar yield spread widens during periods of international crisis.
Oa. True
b. False
11. Which of the following would be inconsistent with an efficient market?
a. Information arrives randomly and independently.
b. Stock prices adjust rapidly to new information.
c. Price changes are independent.
d. Price changes are random.
e. Price adjustments are biased.

12. Which statement is true concerning alternative efficient market hypothesis?

a. The weak hypothesis encompasses the semi-strong hypothesis.
b. The weak hypothesis encompasses the strong hypothesis.
c. The semi-strong hypothesis encompasses the weak hypothesis.
d. The strong hypothesis relates only to public information.
e. The semi-strong hypothesis encompasses the strong hypothesis.

13. A "runs test" on successive stock price changes which supports the efficient market hypothesis
would show the actual number of runs
a. falls into the range expected of a random series.
b. falls into the range expected of a dependent series.
c. is small.
d. is large.
e. would approximate N/2.

14. According to prospect theory,

a. investors have a propensity to sell winners too soon and hang on to losers too long.
b. investors ignore bad news and overemphasize good news.
c. investors tend to follow the herd.
d. investors put more money into a failure rather than into a success.
e. investors are all noise traders.

15. Behavioral finance differs from the standard model of finance because behavioral finance
a. precludes the impact of investor psychology.
b. includes the impact of investor psychology.
c. accepts the Efficient Markets Hypothesis.
d. rejects the idea of market anomalies.
e. rejects the idea of technical analysis.

16. Fusion investing is the integration of the following elements of investment valuation:
a. fundamental value and investor sentiment.
b. fads and fashions.
c. technical analysis and investor sentiment.
d. historical prices and returns.
e. transaction costs and fundamental value.

17. A portfolio manager without superior analytical skills should

a. determine and quantify the risk preferences of a client.
 b. minimize transaction costs.
c. maintain the specified risk level.
d. ensure that the portfolio is completely diversified.
O
e. All of these are correct.

18. The implication of efficient capital markets and a lack of superior analysts have led to the
introduction of
a. balanced funds.
b. naive funds.
c. January funds.
O d. index funds.
e. futures and options.

19. Technical analysis differs from fundamental analysis in that

a. technical analysts contend that in-depth assessments of basic aggregate market, industry,
and company performance is necessary; past price movements indicate future price
movements.
Ob. technical analysts believe the market value of common stocks is determined by the
interaction of supply and demand.
c. technical analysts argue that the market constantly weighs rational and irrational factors
and that both of these affect price.
d. technical analysts depend far more heavily on objective, data-based approaches than the
fundamentalists do.
e. technical analysts hold that the price of a security is determined by an expected return risk.

20. An advantage of technical analysis over fundamental analysis is that technical analysis
a. has an increased amount of data that allows the analyst to process the information.
b. can more thoroughly investigate accounting information.
c. adjusts for differences in GAAP accounting procedures across the industry.
Od. can capture non-quantifiable variables such as psychological factors.
e. can capture variables such as macroeconomic factors.
 Tutorial 5: Market, Industry, and Company Analysis

1. A fair investment is one that gives us a return that is greater than the risk.

4 O
a. True
b. False

2. An overvalued investment is so expensive that we will not receive a fair return if we bought it.
O
a. True
b. False

3. Fundamentalists typically use the "Bottom-Up Approach", whereas technicians use the "Top-

4 Down Approach" to the valuation process.

a. True
O
b. False

4. Those who employ the bottom-up approach start their search immediately at the company level.
Oa. True
b. False
market analysis
5. Given an optimistic economic and stock-market outlook for a country, the investor should
underweight the allocation to this country in his/her portfolio.
a. True
O
b. False

6. Within a specific market, the top-down analyst then searches for the best industries.
O
a. True
b. False

7. Earnings growth and dividend yield will be impacted by GDP growth.

O
a. True
b. False

8. Leading indicators of the business cycle include economic series that reach peaks or troughs
before the peaks and troughs of the overall economy.
Oa. True
b. False

9. The cyclical indicator approach to market analysis is based on the belief that the economy
expands and contracts in a random manner.
Oa. True
b. False

10. Returns from the overall market (or an individual stock) can be thought of as a combination of
which of the following factors?
Ga. earnings growth, multiple expansion, and dividend yield
b. earnings growth, multiple expansion, and annualized return
c. earnings growth, interest rates, and dividend yield
d. inflation, multiple contraction, and dividend yield
 e. inflation, contraction, and annualized return

11. Which of the following variables was NOT considered significant in explaining stock returns?
a. industrial production
b. changes in the risk premium
Gc. consumption
d. twists in the yield curve
e. inflation

12. Which of the following economic series are included in the Conference Board coincident

&
indicator group?
Oa. employees on nonagricultural payrolls
b. change in consumer price index for services
c. index of consumer expectations
d. spread of 10-year Treasury yield less fed funds
e. index of stock prices

13. Which of the following economic series are included in the Conference Board lagging indicator
series?
a. vendor performance
b. index of industrial production
c. manufacturing and trade sales data in 1992 dollars
d. manufacturers' new orders, non-defense capital goods
Ge. average duration of unemployment in weeks

14. The initial effect of a change in monetary policy appears in ____ and only later in ____.
a. the aggregate economy, financial markets
O b. financial markets, the aggregate economy
c. bond markets, stock markets
-monetary policy
d. stock markets, bond markets
e. stock markets, the aggregate economy

15. If interest rates increase due to inflation, but expected cash flows to a firm do not change, then

&
you would expect stock prices to
a. rise.
b. rise and then decline.
c. remain unchanged.
O d. decline.
e. decline and then rise.

16. There are several techniques available to help an investor make a market decision. Which of the
following is NOT such an analysis technique?
a. macro techniques that are based on the strong relationship between the economy and
security markets
b. micro techniques that estimate future market values by applying one of several basic
valuation models to equity markets
 c. technical analysis in which an investor analyzes past and recent market movements for
indications of future performance
d. fundamental analysis that considers the effect of market on the entire portfolio
e. None of these are correct (that is, all are techniques available to make market decisions).

17. Which of the following is NOTa factor under the Free Cash Flow to Equity (FCFE) Model?
a. depreciation expense
b. capital expenditure
c. change in working capital
d. principal debt repayment
e. earnings multiplier

18. If, for the S&P Industrials Index, the profit margin was 0.35 and the equity turnover ratio was 10,
the ROE would be
a. 0.035 percent.
b. 2.857 percent.
c. 3.500 percent.
d. 28.57 percent.
e. 35.00 percent.
 Chapter 6&7
Tutorial 6: Equity valuation - Discounted cash flow (DCF) valuation approach

1. If the estimated value of an asset is greater than the market price, you would want to buy the
investment.
a. True
b. False

2. The two components that are required in order to carry out asset valuation are (1) the stream of
expected cash flows and (2) the required rate of return.
a. True
b. False

3. Growth companies are those firms that consistently earn higher rates of return by assuming
greater amounts of risk.
a. True
b. False

4. The real risk-free rate depends on the real growth in the economy and can be affected for short
time periods by temporary tightness or ease in the capital markets.
a. True
b. False

5. The dividend growth models are only meaningful for companies that have a required rate of
return that exceeds their dividend growth rate.
a. True
b. False

6. The dividend discount model (DDM) can be used to value preferred stock by simply using a
growth rate of zero in the DDM model.
a. True
b. False

7. The process of fundamental valuation requires estimates of all the following factors, EXCEPT for
the
a. time pattern of returns.
b. economy's real risk-free rate.
c. risk premium for the asset.
d. times series of stock prices.
e. expected rate of inflation.

8. Which of the following is correct?

a. if estimated value > Market price, you should buy.
b. if estimated value > Market price, you should sell.
c. if estimated value < Market price, you should do nothing.
d. if estimated value < Market price, you should buy.
e. if estimated value > Market price, you should do nothing.

9. Which securities can be valued by dividing the annual dividend by the required rate of return?
 a. low coupon bonds
b. junk bonds
c. common stocks
d. preferred stocks
e. constant growth common stocks

10. According to the dividend growth model, if a company were to declare that it would never pay
dividends, its value would be
a. based on earnings.
b. based on expectations regarding.
c. higher than similar firms because it could reinvest a greater amount in new projects.
d. zero.
e. based on the capital asset pricing model.

11. In 2018, Montpelier Inc. issued a $100 par value preferred stock that pays a 9 percent annual
dividend. Due to changes in the overall economy and in the company's financial condition,
investors are now requiring a 10 percent return. What price would you be willing to pay for a
share of the preferred if you receive your first dividend one year from now?
a. $100
b. $110
c. $75
d. $90
e. $85

USE THE INFORMATION BELOW FOR THE PROBLEMS 12, 13 and 14.

Davenport Corporation's last dividend was $2.70, and the directors expect to maintain the historic 3
percent annual rate of growth. You plan to purchase the stock today because you feel that the growth
rate will increase to 5 percent for the next three years and the stock will then reach $25 per share.

12. How much should you be willing to pay for the stock if you require a 17 percent return?
a. $16.97
b. $22.16
c. $21.32
d. $32.63
e. $23.63

13. How much should you be willing to pay for the stock if you feel that the 5 percent growth rate can
be maintained indefinitely and you require a 17 percent return?
a. $22.16
b. $19.28
c. $21.32
d. $23.63
e. $25.46

14. Hunter Corporation had a dividend payout ratio of 63 percent in 1999. The retention rate in 1999
was
a. 37 percent.
 b. 63 percent.
c. 50 percent.
d. 0 percent.
e. 100 percent.

15. The beta for the DAK Corporation is 1.25. The yield on 30-year T-bonds is 5.65 percent, and the
long-term average return on the S&P 500 is 11 percent. Calculate the required rate of return for
DAK Corporation.
a. 12.34 percent
b. 7.06 percent
c. 13.74 percent
d. 5.35 percent
e. 5.65 percent

16. Micro Corp. just paid dividends of $2 per share. Assume that over the next three years dividends
will grow as follows, 5 percent next year, 15 percent in year two, and 25 percent in year 3. After
that growth is expected to level off to a constant growth rate of 10 percent per year. The required
rate of return is 15 percent. Calculate the intrinsic value using the multistage model.
a. $5.56
b. $66.4
c. $49.31
d. $43.66
e. $35.21

17. If, for the S&P Industrials Index, the profit margin was 0.20 and the equity turnover ratio was 13,
the ROE would be
a. 0.026 percent.
b. 2.600 percent.
c. 6.500 percent.
d. 26.00 percent.
e. 65.00 percent.

18. If, for the S&P Industrials Index, the profit margin was .25 and the equity turnover ratio was 12,
the ROE would be
a. 0.83 percent.
b. 0.48 percent.
c. 3.00 percent.
d. 30.00 percent.
e. 48.00 percent.
 Chapter8
Tutorial 5: An Introduction to Portfolio Management

1. A good portfolio is a collection of individually good assets.

a. True
b. False

2. Prior to the work of Markowitz in the late 1950's and early 1960's, portfolio managers did NOT
have a well-developed, quantitative means of measuring risk.
a. True
b. False

3. A basic assumption of the Markowitz model is that investors base decisions solely on expected
return and risk.
a. True
b. False

4. The correlation coefficient and the covariance are measures of the extent to which two random
variables move together.
a. True
b. False

5. For a two stock portfolio containing Stocks i and j, the correlation coefficient of returns (rij) is
equal to the square root of the covariance (covij).
a. True
b. False

6. If the covariance of two stocks is positive, these stocks tend to move together over time.
a. True
b. False

7. The expected return and standard deviation of a portfolio of risky assets is equal to the weighted
average of the individual asset's expected returns and standard deviation.
a. True
b. False

8. When individuals evaluate their portfolios, they should evaluate

a. all the U.S. and non-U.S. stocks.
b. all marketable securities.
c. all marketable securities and other liquid assets.
d. all assets.
e. all assets and liabilities.

9. The Markowitz model is based on several assumptions regarding investor behavior. Which of the
following is NOT such any assumption?
a. Investors consider each investment alternative as being represented by a probability
distribution of expected returns over some holding period.
b. Investors maximize one-period expected utility.
 c. Investors estimate the risk of the portfolio on the basis of the variability of expected
returns.
d. Investors base decisions solely on expected return and risk.
e. None of these are correct (that is, all are assumptions of the Markowitz model).

10. Markowitz believes that any asset or portfolio of assets can be described by ____ parameter(s).
a. one
b. two
c. three
d. four
e. five

11. Semivariance, when applied to portfolio theory, is concerned with

a. the square root of deviations from the mean.
b. all deviations below the mean.
c. all deviations above the mean.
d. all deviations.
e. the summation of the squared deviations from the mean.

12. What is the expected return of the three-stock portfolio described below?

Common Stock Market Value Expected Return

Ando Inc. 95,000 12.0%
Bee Co. 32,000 8.75%
Cool Inc. 65,000 17.7%

a. 18.45%
b. 12.82%
c. 13.38%
d. 15.27%
e. 16.67%

USE THE INFORMATION BELOW FOR THE PROBLEMS 13 and 14.

Asset (A) Asset (B)

E(RA) = 10% E(RB) = 15%
(sA) = 8% (sB) = 9.5%
WA = 0.25 WB = 0.75
CovA,B = 0.006

13. What is the expected return of a portfolio of two risky assets if the expected return E(Ri), standard
deviation (si), covariance (COVi,j), and asset weight (Wi) are as shown above?
a. 8.79%
b. 12.5%
c. 13.75%
d. 7.72%
 e. 12%

14. What is the standard deviation of this portfolio?

a. 8.79%
b. 13.75%
c. 12.5%
d. 7.72%
e. 5.64%

USE THE INFORMATION BELOW FOR THE PROBLEMS 15 and 16.

Asset (A) Asset (B)

E(RA) = 25% E(RB) = 15%
(sA) = 18% (sB) = 11%
WA = 0.75 WB = 0.25
COVA,B = -0.0009

15. What is the expected return of a portfolio of two risky assets if the expected return E(Ri), standard
deviation (si), covariance (COVi,j), and asset weight (Wi) are as shown above?
a. 18.64%
b. 20.0%
c. 22.5%
d. 13.65%
e. 11%

16. What is the standard deviation of this portfolio?

a. 5.45%
b. 18.64%
c. 20.0%
d. 22.5%
e. 13.65%

17. Consider two securities, A and B. Security A and B have a correlation coefficient of 0.65.
Security A has standard deviation of 12, and security B has standard deviation of 25. Calculate the
covariance between these two securities.
a. 300
b. 461.54
c. 261.54
d. 195
e. 200

USE THE INFORMATION BELOW FOR THE PROBLEMS 18 and 19

A financial analyst covering Magnum Oil has determined the following four possible returns given
four different states of the economy over the next period.

Probability Return
 0.10 -.20
0.25 -.05
0.40 0.15
0.25 0.30
18. Calculate the expected return for Magnum Oil.
a. 5.0 percent
b. 10.3 percent
c. 13.7 percent
d. 17.5 percent
e. 20.0 percent

19. Calculate the standard deviation for Magnum Oil.

a. 0 percent
b. 11 percent
c. 16 percent
d. 20 percent
e. 26 percent

USE THE INFORMATION BELOW FOR THE PROBLEMS 20, 21, and 22

Stocks A and B have a correlation coefficient of -0.8. The stocks' expected returns and standard
deviations are in the table below. A portfolio consisting of 40% of stock A and 60% of stock B is
constructed.

Stock Expected Return Standard Deviation

A 20% 25%
B 15% 19%

20. What is the expected return of the stock A and B portfolio?

a. 17.0%
b. 17.5%
c. 18.0%
d. 18.5%
e. 19.0%

21. What is the standard deviation of the stock A and B portfolio?

a. 0.0%
b. 0.5%
c. 4.1%
d. 6.9%
e. 20.3%

22. What percentage of stock A should be invested to obtain the minimum risk portfolio that contains
stock A and B?
a. 35%
b. 42%
c. 58%
d. 65%
e. 72%
Tutorial 9: Capital Asset pricing models

1. The capital asset pricing model (CAPM) extends capital market theory in a way that allows
investors to evaluate the risk–return trade-off for both diversified portfolios and individual
securities.
a. True
b. False

2. Beta is a measure of unsystematic risk.

a. True
b. False

3. The CAPM can also be illustrated as the security market line (SML).
a. True
b. False

4. CML and SML measure total risk by the standard deviation of the investment.
a. True
b. False

5. Securities with returns that lie below the security market line are undervalued.
a. True
b. False

6. Securities with returns that lie above the security market line are undervalued.
a. True
b. False

7. If the market portfolio is mean-variance efficient, it has the lowest risk for a given level of return
among the attainable set of portfolios.
a. True
b. False

8. A major advantage of the Arbitrage Pricing Theory is the risk factors are clearly and universally
identifiable.
a. True
b. False

9. All of the following are assumptions of the Capital Asset Pricing Model (CAPM) EXCEPT
a. investors can borrow and lend any amount at the risk-free rate.
b. investors all have homogeneous expectations regarding expected returns.
c. investors can have different time horizons, daily, weekly, annual, or some other period.
d. all investments are infinitely divisible.
e. capital markets are in equilibrium.

10. The capital market line (CML) uses ____ as a risk measurement, whereas the capital asset pricing
model (CAPM) uses ____.
a. beta; total risk
 b. standard deviation; total risk
O c. standard deviation; systematic risk
d. unsystematic risk; total risk
e. systematic risk; beta

11. The ____ the number of stocks in a portfolio and the ____ the time period, the ____ the portfolio
beta.
a. larger, longer, less stable
Ob. larger, longer, more stable
c. larger, shorter, less stable
d. larger, shorter, more stable
e. smaller, longer, more stable

12. If an individual owns only one security the most appropriate measure of risk is
O a. standard deviation.
b. correlation.
c. beta.
d. covariance.
e. the risk-free rate.

13. Calculate the expected return for A Industries, which has a beta of 1.75 when the risk free rate is
0.03 and you expect the market return to be 0.11.
a. 11.13 percent
b. 14.97 percent 0 03 + 1 75 (0 11-0 03)
. . .
.

c. 16.25 percent
d. 22.25 percent
Oe. 17.0 percent

USE THE INFORMATION BELOW FOR THE PROBLEMS 14,15, and 16.

You expect the risk-free rate (RFR) to be 3 percent and the market return to be 8 percent. You also
have the following information about three stocks.

Current Expected Expected

Stock Beta Price Price Dividend
X 1.25 $20 $23 $1.25
Y 1.50 $27 $29 $0.25
Z 0.90 $35 $38 $1.00

14. What are the expected (required) rates of return for the three stocks (in the order X, Y, Z)?
a. 16.50 percent, 5.50 percent, 22.00 percent
O b. 9.25 percent, 10.5 percent, 7.5 percent
c. 21.25 percent, 8.33 percent, 11.43 percent
d. 6.20 percent, 2.20 percent, 8.20 percent
e. 15.00 percent, 3.50 percent, 7.30 percent

15. What are the estimated rates of return for the three stocks (in the order X, Y, Z)?
 Oa. 21.25 percent, 8.33 percent, 11.43 percent
b. 6.20 percent, 2.20 percent, 8.20 percent
c. 16.50 percent, 5.50 percent, 22.00 percent
d. 9.25 percent, 10.5 percent, 7.5 percent
e. 15.00 percent, 3.50 percent, 7.30 percent

16. What is your investment strategy concerning the three stocks?

a. buy X and Y; sell Z
b. sell X, Y, and Z
c. sell X and Z; buy Y
d. buy X, Y, and Z
Oe. buy X and Z; sell Y

17. Recently you have received a tip that the stock of Bubbly Incorporated is going to rise from $57
to $61 per share over the next year. You know that the annual return on the S&P 500 has been
9.25 percent and the 90-day T-bill rate has been yielding 3.75 percent per year over the past 10
years. If beta for Bubbly is 0.85, will you purchase the stock?
a. Yes, because it is overvalued.
O b. No, because it is overvalued.
c. No, because it is undervalued.
d. Yes, because it is undervalued.
e. Yes, because the expected return equals the estimated return.

18. Recently you have received a tip that the stock of Buttercup Industries is going to rise from
$76.00 to $85.00 per share over the next year. You know that the annual return on the S&P 500
has been 13 percent and the 90-day T-bill rate has been yielding 3 percent per year over the past
10 years. If beta for Buttercup is 1.0, will you purchase the stock?
a. Yes, because it is overvalued.
b. Yes, because it is undervalued.
c. No, because it is undervalued.
O d. No, because it is overvalued.
e. Yes, because the expected return equals the estimated return.
Tutorial 10 : Bond Fundamentals

1. The market for short-term issues with maturities of one year or less is commonly known as the
money market.
O
a. True
b. False

2. The coupon of a bond indicates the income that the bond investor will receive over the life of the
bond.
Ga. True
b. False

3. A bond's maturity is affected by call features, non-refunding provisions, and sinking fund
provisions.
G
a. True
b. False

4. In most countries, sovereign bond issues are the smallest bond market segment.
a. True
O b. False

5. High-yield bonds are considered "investment" grade.

a. True

Ob. False

6. According to the expectations hypothesis, a rising yield curve indicates that investors' demand for
long maturity bonds is expected to rise.
a. True
Ob. False

7. Which of the following statements is not true regarding bond ratings?

a. The ratings assigned are meant to indicate the probability of default for the bond issuer.
b. The bonds assigned one of the top four rating classes are considered investment grade
bonds.
O
c. Once a rating is assigned to an issue it cannot be changed for the first two years after
which it is reviewed on a regular basis.
d. Bonds rated BB and below are referred to as high yield or "junk" bonds.
e. The rating agencies modify the ratings with + and - signs or numbers after the letters.

8. Junk bonds are high yield bond bonds rated below

&a. BBB.
b. BB.
c. B.
d. CCC.
e. CC.

9. The institutions that invest most heavily in corporate bond issues are
a. life insurance companies and commercial banks.