-
Midterm for Principles of Finance, Spring
2014
March 29, 2:15-4:15; Xi Jie.
Instructor: Meixin Guo.
Part I Multiple Choice
Questions
(total 40 points)
1. Suppose an investor is considering
one of two investments which are identical in all
respects except
for risk. If the
investor anticipates a fair return for the risk of
the security, they can expect to
A.
earn no more than the Treasury bill rate on either
security; D. earn more if interest rates are lower
B. pay less for the security that has
higher risk;
C. pay less for the
security that has lower risk
2. An example of a financial asset is
_________.
I. Debt securities;
II. customer goodwill;
III.
a patent
A. I only;
B. II
only;
C. I and III only;
D. I, II and III
3. You short-sell 200 shares of
Tuckerton Trading Co., now selling for $$50 per
share. What is your
maximum possible
loss?
A. $$50;
B. $$20,000;
C. $$10,000;
D. unlimited
4.
The Dow Jones Industrial Average is _________.
A. a price weighted average;
B. a value weight and
average
C. an equally weighted average;
D. an unweighted average
5. Which one of the
following is not an example of a brokered market?
A. Residential real estate market;
B. Market for large block security
transactions
C. Primary market for
securities;
D. NASDAQ
6. On a given day a stock dealer
maintains a bid price of $$1000.50 for a bond and
an ask price of
$$1003.40. The dealer
made 10 trades which totaled 500 bonds traded that
day. What was the dealer's
gross
trading profit for this security?
A.
$$1,375;
B. $$500;
C. $$275;
D. $$1,450
7. You
short-sell 200 shares of Rock Creek Fly Fishing
Co. with IMM 50%, now selling for $$47.25 per
share. If you wish to limit your loss
to $$2,500, you should place a stop-buy order at
____.
A. $$37.50;
B.
$$62.50;
C. $$56.25;
D.
$$59.75
8. You put up $$50 at
the beginning of the year for an investment. The
value of the investment grows 4%
and
you earn a dividend of $$2.50. Your HPR was ____.
A. 4.00%;
B. 9.00%;
C. 5.00%;
D. 3.50%
9. Rank the following from
highest average historical return to lowest
average historical return from
1926-2008. I. Small stocks; II. Long
term bonds; III. Large stocks;
I
V. T-bills
A.
I, II, III, IV;
B. III, IV, II, I;
C. I, III, II, IV;
D. III,
I, II, IV
10. You have
calculated the historical holding period return,
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. internal rate of return;
B. geometric
average return;
C. dollar weighted
return;
D.
arithmetic average return
11. An investment earns 10% the first
year, 15% the second year and loses 12% the third
year. Your
total compound return over
the three years was ______.
A. 41.68%;
B. 11.32%;
C. 3.64%;
D. 13.00%
12.
During the 1985 to 2008 period the Sharpe ratio
was greatest for which of the following asset
classes?
A. Small U.S.
stocks;
B.
Large US stocks;
C. Long-
Term U.S. Treasury Bonds;
D. Large Canadian stocks in U.S.
dollars
13. Among the
factors explaining the return on a stock, _______
factors are generally most important
while _______ factors are generally
least important.
A. Political;
industrial; B. domestic; currency; C. world;
industrial; D. Politial; domestic
14. Consider the single factor APT.
Portfolio M has a beta of 0.2 and an expected
return of 13%.
Portfolio N has a beta
of 0.4 and an expected return of 15%. The risk-
free rate of return is 10%. If you
wanted to take advantage of an
arbitrage opportunity, you should take a short
position in portfolio
__________ and a
long position in portfolio _________.
A. M, M;
B. M, N;
C. N, M;
D. N,N
15. Fama and French claim that after
controlling for firm size and the ratio of firm's
book value to
market value, beta on the
market portfolio is ______________.
I.
a relative useless predictor
of firm’s
systematic risk
; III. a bad predictor
of firm's specific risk.
II. really
useful in predicting future stock returns
A. I only;
B. II
only;
C. I and III only;
D. I, II and III
16. A U.S. insurance firm
must pay ?75,000 in 6 months. The spot exchange
rate is $$1.32 per euro and
in 6 months
the exchange rate is expected to be $$1.35. The 6
month forward rate is currently $$1.36 per
euro. If the insurer's goal is to limit
its risk should the insurer hedge this
transaction? If so how?
A. The insurer
need not hedge because the expected exchange rate
move will be favorable.
B. The insurer
should hedge by buying euro forward even though
this will cost more than the expected
cost of not hedging.
C. The
insurer should hedge by selling euro forward
because this will cost less than the expected cost
of
not hedging.
D. The
insurer should hedge by short selling euros now
even though this will cost less than the expected
cost of not hedging.
17. Two assets have the following
expected returns and s.d. when the risk-free rate
is 5%: