Financial Markets and Investments: Wal-Mart Case Study, Exams of Investment Management and Portfolio Theory

Download Financial Markets and Investments: Wal-Mart Case Study and more Exams Investment Management and Portfolio Theory in PDF only on Docsity! INVESTMENT THEORY MULTIPLE CHOICE QUESTIONS (100 pts, 1 pt ea) 1. As of October 6, 1997, Wal-Mart Stores, Inc. had a current price of $37, and was expected to pay a 324 dividend next year and grow dividends at a rate of 15.5% for the foreseeable future. According to the dividend discount model, the required rate of return for Wal-Mart investors is: A. 15.5%. B. 0.86%. > C. 16.36%. D. 10%. 2. As of October 6, 1997, Wal-Mart Stores, Inc. had a current price of $37, and was expected to pay a 324 dividend next year and grow dividends at a rate of 15.5% for the foreseeable future. According to the dividend discount model, Wal-Mart is: A. overvalued if the actual rate of growth is 16.5%. > B. over valued if investors require an 18% rate of return. C. undervalued if the actual dividend next year are 354. D. worth $40 if investors require an 18% rate of return. 3. If General Electric comprised 3% of the value of the S&P 500 index, a 1% rise in the value of GE would: > A. increase the S&P 500 by 0.03%. B. increase the S&P 500 by 3%. C. increase the S&P 500 by 1%. D. increase the S&P 500 by 3 points. 4. In a Value Line regression, the relevant Y-variable is: > A. stock price. B. earnings per share. C. stockholders' equity. D. expected total return. 5. The arithmetic mean return for a stock with a three-year performance history of +50%, -50%, +30% is: A. 30%. B. -1%. C. -10%. > D. 10%. 6. Organized trading of outstanding securities on exchanges and over-the-counter markets is called the: A. primary market. B. IPO market. C. bond market. > D. secondary market. 7. An IPO is an: A. investment participation obligation. B. investment placement organization. C. investment partnership opportunity. > D. initial public offering. 8. Regional exchanges generate what percentage of total NYSE composite volume? A. roughly 5%. B. roughly 80%. > C. roughly 10%. D. none of the above. docsity.com 2 9. On the London Stock Exchange, the least actively traded stocks are called: A. alpha stocks. B. beta stocks. > C. gamma stocks. D. omega stocks. 10. The DJIA is a: > A. price-weighted index. B. value-weighted index. C. equally-weighted index. D. share-weighted index. 11. On October 3, 1997, the Wilshire (5000) Index value of 9340.08 signified: > A. a total market capitalization for U.S. stocks of $9.34 trillion. B. a total market capitalization for U.S. stocks of $9.34 billion. C. an increase of 934.0% from the index base of 10 in 1956-58. D. an increase of 93.40% from the index base of 100 in 1956-58. 12. On October 3, 1997, the DJIA reflected a divisor of 0.255, and closed up 11.05 points at 8038.58. At that time, the average share price of a DJIA component stock was: A. $30.00 > B. $68.32. C. $267.95. D. $230.63 13. On October 3, 1997, the DJIA reflected a divisor of 0.255, and closed up 11.05 points at 8038.58. The effect on the DJIA of Johnson & Johnson's 1 1/8 point gain on that day was: A. 1.13. > B. 4.41. C. 0.29. D. none of the above. 14. On October 6, 1997, the dividend yield on the DJIA was roughly: > A. 2%. B. 4%. C. 6%. D. 10%. 15. An R2 = 25.13% in the stock-price beta estimation for the Coca-Cola Company implies that 25.13% of the variation in the: A. S&P Index can be explained by variation in the Coca-Cola stock return. B. Coca-Cola stock price can be explained by variation in the S&P Index. > C. return on Coca-Cola can be explained by variation in the S&P Index return. D. S&P Index can be explained by variation in the Coca-Cola stock price. 16. A slope coefficient estimate of 1.15 in the stock-price beta estimation for the Coca-Cola Company implies: A. slightly below-market risk. B. a market risk level. > C. slightly above-market risk. D. none of the above. 17. In the stock-price beta estimation for the Coca-Cola Company, the independent variable is the: A. value of the S&P 500 Index. B. return on Coca-Cola. C. price of Coca-Cola stock. > D. return on the S&P 500. docsity.com 5 36. Zero-coupon bonds: > A. are sold at a discount to par value. B. pay coupon interest only. C. are issued only by corporations. D. promise to pay par value prior to maturity. 37. Select the false statement about Treasury bills: A. Typical maturities are 13 and 26 weeks. > B. T-bills are sold at par and pay interest at maturity. C. A good secondary market exists for T-bills. D. T-bills are sold on an auction basis every week. 38. The New York Stock Exchange is a: A. negotiated market. > B. secondary market. C. network of dealers. D. regional exchange. 39. The process under which an issuing company can sell new securities over a period of time under favorable conditions is known as: A. a private placement. B. NASDAQ. > C. the shelf rule. D. forming a syndicate. 40. The expected return on a security with possible outcomes of X1 = 10%; X2 = 20%; X3 = 25% and associated probabilities of P(X1) = 0.2; P(X2) = 0.5; P(X3) = 0.3 is: A. 25%. B. 20%. > C. 19.5%. D. 17.5%. 41. The link between the nominal interest rate (i), the real interest rate (r) and the expected inflation rate (ei) is: A. r = i + ei. B. i = r Η ei. > C. i = r + ei. D. not material. 42. Beta is: A. an absolute measure of risk. B. a measure of total risk. C. a measure of unsystematic risk. > D. a relative measure of risk. 43. Duration is measured in: A. percent. > B. years. C. dollars. D. dollars squared. 44. Which of the following bond relationships is not inverse? A. coupon and duration B. duration and yield to maturity > C. duration and maturity. D. interest rate changes and bond prices. docsity.com 6 45. As the coupon on a bond increases, the: A. percentage change in price for a given change in yield rises. > B. percentage change in price for a given change in yield falls. C. dollar price change for a given change in yield rises. D. dollar price change for a given change in yield falls. 46. The price of a 10% coupon bond with semiannual discounting, three years to maturity, and a market return of 8% is: A. $1,000. B. $1,260. C. 125 7/8. > D. 105 1/4. 47. The chance of loss due to fluctuations in the stock market is: A. interest rate risk. B. business risk. > C. market risk. D. inflation risk. 48. The standard deviation of the annual rate of return on common stocks over the period 1926-1989 is roughly: > A. 20%. B. 10%. C. 6%. D. 3%. 49. The market for equities is predominantly a: A. primary market. > B. secondary market. C. market dominated by individual investors. D. market dominated by foreign investors. 50. The three-year compound annual rate of return on a stock earning 26%, 100% and -50% is: > A. 8%. B. 25.3%. C. 76%. D. 96.9%. 51. The constant growth version of the dividend valuation model is: A. D1/(k+g). B. D0/(k+g). > C. D1/(k-g). D. D0/(k-g). 52. The P/E ratio is inversely related to the: A. payout ratio. B. expected growth of dividends. > C. required rate of return. D. expected growth of earnings. 53. The price of a 8% coupon bond with semiannual discounting, three years to maturity, and a market return of 6% is: A. $1,000. B. $1,260. C. 125 7/8. > D. 105 3/8. docsity.com 7 54. The arithmetic mean of annual stock returns is: > A. upward biased. B. unbiased. C. downward biased. D. the square root of geometric returns. 55. Correlation is: > A. a relative measure of comovement that varies between -1 and +1. B. an absolute measure of comovement that varies between -1 and +1. C. an absolute measure of comovement that varies between -4 and +4. D. a relative measure of comovement that varies between -4 and +4. 56. Treasury notes have an initial tern to maturity of: A. one year or less maturity. > B. two to ten years. C. more than ten years. D. more than thirty years. 57. The New York Stock Exchange: A. covers roughly 30,000 publicly traded issues. > B. competes with eight regional exchanges that generate 10% of composite volume. C. is the second-largest organized U.S. securities market. D. accounts for 95% of composite volume. 58. A NYSE specialist: A. acts as dealer for member firms. B. acts as broker out of own inventory. C. maintains a negotiated market in which investors deal directly with market makers. > D. maintains an orderly auction market during from 9:30 AM-4:00 PM ET. 59. The Russell 2000 is: A. a value-weighted index of the 2,000 largest U.S. stocks by market capitalization. B. a value-weighted index of the 2,000 smallest U.S. stocks by market capitalization. C. responsible for 97% of the total market value of listed and OTC stocks. > D. responsible for 10% of the total market value of listed and OTC stocks. 60. Current yield is the: A. internal rate of return that equates the prevailing market price with future interest and principal payments. B. approximate yield to call for premium bonds. > C. coupon rate expressed as a percent of the prevailing market price. D. coupon interest divided by the average of market and call prices. 61. Modified duration measures the sensitivity of bond prices to changes in: A. Maculay duration. B. the sensitivity of modified duration to changes in yield to maturity. > C. yield to maturity. D. the sensitivity of modified duration to changes in term to maturity. 62. A market anomaly is not associated with: A. earnings announcements. B. a size effect. > C. stock splits. D. a seasonal effect. docsity.com 10 81. Financial theory is useful if it is: A. logical. B. mathematically rigorous. C. derived from economic principles. > D. able to predict stock prices. 82. The average market capitalization of firms that comprise the Russell 2000 is about: > A. $200 million. B. $1.7 billion. C. $4 billion. D. $13 billion. 83. The required rate of return is comprised of: A. the real risk-free rate. B. the expected inflation rate. C. the required risk premium. > D. all of these. 84. ROE will fall with a rise in: A. profit margin. B. total asset turnover. > C. net worth. D. leverage. 85. During the 1926-90 time frame, the probability of outperforming a portfolio of stocks with long-term bonds over a 30-year holding period was: > A. 0%. B. 100%. C. 67%. D. 90%. 86. During the 1926-90 time frame, the probability of outperforming a portfolio of stocks with short-term bonds over a 5-year holding period was: > A. 20%. B. 80%. C. 0%. D. 100%. 87. As of October 6, 1997, the average P/E ratio for s&p 500 was roughly: > A. 25. B. 10. C. 15. D. 5. 88. The value of ROE is calculated as the ratio of: A. the EPS growth rate divided by P/E. B. P/E divided by ROE. C. P/E divided by the EPS growth rate. > D. ROE divided by P/E. 89. The yield curve would "flatten" with a rise in the: A. long-term bond rate. B. equity risk premium. > C. T-Bill rate. D. yield spread. docsity.com 11 90. On the NYSE, firms that make a market in a given security are called: A. brokers. B. members. > C. specialists. D. arbitragers. 91. The Vanguard Index Trust 500 Portfolio can be expected to produce a rate of return equal to the: A. S&P 500 less 2%. B. DJIA less 2%. > C. S&P 500 less 20 basis points. D. Wilshire Index less 20 basis points. 92. In an efficient market, what percentage of professionally managed pension funds would outperform the 10-year market averages? > A. 50% before expenses. B. 50% after expenses. C. 0% before expenses. D. 0% after expenses. 93. If a component stock of the DJIA first doubles in price, then splits 2:1, then tumbles by 50%; the DJIA will: A. decline 50%. > B. decline. C. rise 50%. D. none of the above. 94. The portfolio turnover rate for the Vanguard Index Trust 500 Portfolio: A. averages roughly 100% per year. B. averages roughly 50% per year. > C. is reduced by the net inflow of funds from new investors. D. is nil given the Trust's buy-and-hold philosophy. 95. The apparently superior long-term performance of small cap stocks can be explained by: A. lower systematic risk for small cap stocks. B. lower unsystematic risk for small cap stocks. > C. higher transaction costs for small cap stocks. D. the risk-reducing advantages of diversification. 96. In the finance literature, small cap stocks are small in terms of: A. sales. B. book value. > C. market value. D. all of the above. 97. Transaction costs in the over-the-counter market are increased by: A. competition among multiple market makers. B. tight bid-ask spreads. > C. payment for order flow. D. the open outcry nature of this auction market. 98. Holding all else equal, bond investment risk increases with an unexpected rise in: A. credit quality. B. bond demand. C. liquidity. > D. inflation. docsity.com 12 99. Holding all else equal, bond investment risk increases with a rise in: A. coupon yield. B. the frequency of interest payments. C. the call price. > D. term to maturity. 100. A useful relative measure of the risk/reward relationship is provided by the: > A. coefficient of variation. B. covariance. C. standard deviation. D. correlation coefficient. docsity.com