# Multiple Choice (1 Point each) The Securities Exchange Act of 1934 (a) requires full disclosure of information

Multiple Choice (1

Point each)

1. The Securities Exchange Act of 1934

(a) requires full disclosure of information on all

new security issues.

(b) authorized the SEC to regulate mutual funds.

(c) established trade associations such as the

NASD.

(d) created the SEC as the regulator of the

securities exchanges.

2.

Nancy sells short 100 shares of

XYZ stock at $31.25 per share and six months later purchases the shares at

$29.00 each. Ignoring brokerage fees, Nancy will

(a) earn a total profit of $225.00.

(b) lose a total of $225.00.

(c) earn a total profit of $2,225.00.

(d) lose

a total of $202.50.

3.

When calculating the present

value of either a future single sum or a future annuity, the applicable

interest rate is usually called the

(a) yield

to maturity.

(b) compound

interest rate.

(c) internal

rate of return.

(d) discount

rate.

4.

Stocks are a(n) ______

investment representing ______ of a business.

(a) direct;

ownership

(b) direct;

debt

(c) indirect;

ownership

(d) indirect;

debt

5.

Assume the foreign exchange

rate for the euro was US $1.00=€1.13 last month. This month, the exchange

rate is US $1.00=€1.09. This information indicates that over the past month the

(a) US dollar remained unchanged relative to the

euro.

(b) US dollar appreciated relative to all foreign

currencies.

(c) euro appreciated relative to the dollar.

(d) euro depreciated relative to the dollar.

6.

Debt represents funds loaned in

exchange for

(a) dividend

income and the repayment of the loan principal.

(b) dividend

income and an ownership interest in the firm.

(c) interest

income and a partial ownership interest in the firm.

(d) interest

income and the repayment of the loan principal.

7.

Which one of the following is

NOT published by the U.S. Government?

(a) Federal

Reserve Bulletin

(b) Survey

of Current Business

(c) Kiplinger

Washington Letter

(d) Economic

Report of the President

8.

Risk can be defined as the

possibility that

(a) a

negative return can be expected.

(b) actual

returns can vary from expected returns.

(c) expected

returns will vary from past returns.

(d) actual

returns will exceed past returns.

9.

Including foreign investments

in a portfolio

(a) decreases the overall diversification of the

portfolio.

(b) reduces the potential rate of return.

(c) provides potential benefits from changes in

currency values.

(d) limits

the diversification amongst industries.

10.

A $5,000 ten-year 8% coupon

bond which pays interest semi-annually will

(a) pay

the bondholder $400 in interest every six months.

(b) repay

the $5,000 to the bondholder at the end of eight years.

(c) pay

the bondholder $200 in interest every six months.

(d) pay

the bondholder $200 in interest every three months.

11.

Bond yields are

(a) quoted

as the average monthly rate of return and assume the bond is purchased today at

the quoted price and held for twelve months.

(b) quoted

as annual rates of return and assume the bond is purchased today at the stated

price and sold one year from today.

(c) stated

as a percentage of the maturity value and assume the bond is held to maturity.

(d) stated

as an annual rate of return and assume the bond is purchased today and held

until maturity.

12.

The law that requires

investment advisers to register with the SEC is the

(a) Investment Company Act of 1940.

(b) Investment Advisers Act of 1940.

(c) Maloney Act of 1938.

(d) Securities Act of 1933.

13. Susie purchased a stock one year ago at a price of $24 a share. In

the past year, she has received four quarterly dividends of $0.50 each. Today

she sold the stock for $27 a share. The amount of capital gain per share is

(a) $3.00.

(b) $3.50.

(c) $4.00.

(d) $5.00.

14.

Stock market averages and

indexes are commonly used to measure the

(a) specific

behavior of companies.

(b) general

behavior of stock prices.

(c) specific

behavior of alternative investments.

(d) specific

behavior of the economy.

15.

Roy is going to receive a

payment of $5,000 one year from today. He earns an average of 6% on his

investments. What is the present value of this payment?

(a) $4,717

(b) $4,821

(c) $5,000

(d) $5,300

16.

Short-term securities are

bought and sold in the

(a) capital

market.

(b) primary market.

(c) money market.

(d) stock market.

17.

Which one of the following

statements concerning the primary market is correct?

(a) A transaction in the primary market is between

two private stockholders.

(b) The

first public sale of a company’s stock in the primary market is called a

seasoned new issue.

(c) A private placement occurs in the primary

market.

(d) A

rights offering is a direct sale of stock to an institution that participates

in the primary market.

18.

The governmental agency that

oversees the capital markets is the

(a) Federal Trade Commission.

(b) Federal Reserve.

(c) Securities and Exchange Commission.

(d) Fair Trade and Banking Agency.

19.

Which of the following are

functions of the secondary market?

I. Provide

liquidity for current stockholders

II. Equate

the demand and supply of securities

III. Provide

a market for seasoned new issues

IV. Provide continuous pricing of securities

(a) I

and II only

(b) II

and IV only

(c) I

and III only

(d) I,

II and IV only

20.

Regulation FD requires

(a) company

executives to report critical information simultaneously to securities

professionals and the general public.

(b) all

news media to simultaneously broadcast analysts forecasts on individual stocks.

(c) penalties

for committing fraud if the regulations are violated by any news media

broadcaster.

(d) all

communications with rating agencies, such as Standard & Poor’s to be

immediately communicated to the general public.

21.

Which one of the following web

sites should you utilize to review the financial information in a company’s

10-K report?

(a) freeedgar.com

(b) valueline.com

(c) news.com

(d) newsalert.com

22.

Assume that the S&P 500

composite stock index is 995.50. This means that

(a) the

average stock in the index is selling for $99.55.

(b) an

investor would have to pay $995.50 to purchase one share of each of the stocks

represented in the index.

(c) the

market values of the stocks in the index increased by a factor of 99.55 since

the 1941–1943 base period.

(d) the

share prices of the stocks in the index have risen 995.50 times since 1941.

23.

Robin purchased a stock at a

price of $18 a share. She received quarterly dividends of $0.50 per share.

After one year, Robin sold the stock at a price of $19.50 a share. What is her

percentage total return on this investment?

(a) 10.3%

(b) 11.1%

(c) 17.9%

(d) 19.4%

24.

Which one of the following

statements concerning interest is correct?

(a) A

five-year investment paying 6% simple interest will provide a higher total

return than a comparable investment paying 6% compound interest.

(b) A

$100 investment paying 5% interest compounded annually will have a total value

of $115 at the end of three years.

(c) The

less frequently interest is compounded, the higher the true rate of interest.

(d) An

investment paying 7% compounded quarterly will have a larger value at the end

of one year than a comparable investment paying 7% compounded annually.

25.

Ted invests $400 today at a 7%

rate of return which is compounded annually. What is the future value of this

investment after five years?

(a) $428

(b) $500

(c) $540

(d) $561

26.

The risk-free rate is equal to

the real rate of return plus

(a) an

expected inflation premium.

(b) a

risk premium.

(c) both

an inflation and a risk premium.

(d) the

prevailing prime rate.

27.

Which of the following

represent unsystematic risks?

I. the

president of a company suddenly resigns

II. the

economy goes into a recessionary period

III. a

company’s product is recalled for defects

IV. the Federal Reserve unexpectedly changes

interest rates

(a) I,

II and IV only

(b) II

and IV only

(c) I

and III only

(d) I,

II and III only

28.

A stock’s beta value is a

measure of

(a) interest

rate risk.

(b) total

risk.

(c) systematic

risk.

(d) diversifiable

risk.

29.

The beta of the market is

(a) –1.0.

(b) 0.0.

(c) 1.0.

(d) undefined.

30. The following data has been gathered concerning a particular

investment and conditions in the market.

Risk-free

rate

4.5%

Market

return

11.0%

Beta

of investment

1.35

According to the

Capital Asset Pricing Model, the required return for this investment is

(a) 8.8%.

(b) 12.9%.

(c) 13.3%.

(d) 14.9%.

31.

The Capital Asset Pricing Model

(CAPM) is a mathematical model that depicts the

(a) positive

relationship between risk and return.

(b) standard

deviation between a risk premium and an investment’s expected return.

(c) exact

price that an investor should be willing to pay for any given investment.

(d) difference

between a risk-free return and the expected rate of inflation.

32.

When the Capital Asset Pricing

Model is depicted graphically, the result is the

(a) standard

deviation line.

(b) coefficient

of variation line.

(c) security

market line.

(d) alpha-beta

line.

33.

Beta can be defined as the

slope of the line that explains the relationship between

(a) the

return on a security and the return on the market.

(b) the

returns on a security and various points in time.

(c) the

return on stocks and the returns on bonds.

(d) the

risk free rate of return versus the market rate of return.

34.

The efficient frontier

(a) is

represented by the rightmost boundary of the feasible set of portfolios.

(b) represents

the best attainable tradeoff between risk and return.

(c) includes

all feasible sets of portfolios based on risk and return characteristics.

(d) provides

the highest level of risk for the lowest level of return.

35.

The risk-free rate of return is

4% while the market rate of return is 11%. Delta Company has a historical beta

of 1.25. Today, the beta for Delta Company was adjusted to reflect internal

changes in the structure of the company. The new beta is 1.38. What is the amount

of the change in the expected rate of return for Delta Company based on this

revision to beta?

(a) 0.4%

(b) 0.9%

(c) 9.7%

(d) 13.7%

(15 Points)

You are an analyst at Dewey, Cheatum, and

Howe. A mutual fund manager presents the

following free cash flow data for XYZ Corp (in millions of $).

Year Cash Flow

2007

300

2008

500

2009

600

2010

700

2011

500

She asks you to please calculate the:

Geometric

Total Return

Geometric

Annualized Return

Then, the mutual fund manager asks you to

make a 10 year forecast based upon the geometric annualized return.

Finally, she asks you to calculate the

present value of the forecasted cash flows assuming a weighted average cost of

capital of 8%.

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