Exam 1

Topics: Investment, Market capitalization, Rate of return Pages: 5 (1092 words) Published: February 25, 2015
Exam 1
1.) The ability to sell an asset quickly at a fair price is associated with: B. Liquidity Risk
2.) Sources of risk for an investment include:
C. Business risk and financial risk
3.) The real risk-free rate is affected by a two factors:
E. Time preference for income for consumption and the set of opportunities available in the economy.
4.) Two factors that influence the nominal risk-free rate are: A. The relative ease or tightness in capital markets and the expected rate of inflation 5.)The total risk for a security can be measured by its:

C. Standard Deviation or returns
6.) Which of the following is an underwriting function?
B. Risk-bearing
7.) An ETF (exchange fund):
C. Is priced continuously during the trading day
8.) Which of the following are reasons that U.S. investors should consider foreign markets when constructing global portfolios?
D. All of the above
9.)The original maturity of a United States Treasury and is: C. One year or less
10.) Certificates of ownership issued by a U.S. bank that represent indirect ownership of a certain number of shares of a specific foreign firm on deposit in a bank in the firm’s home country are known as:

A. American Depository Receipts (ADRs)
11.) _________ must be stated in terms of expected returns and risk. An investor’s tolerance for risk must be established before returns objectives can be stated. D. Investment objectives
12.) The first step in the investment process is the development of a(an): B. Policy Statement

13.) _________ phase is the stage when investors in their early to middle earning years attempt to accumulate assets to satisfy near term needs. (ie. Children’s education or down payment.
A. Accumulation
14.) __________ is an appropriate objective for investors who want their portfolio to grow in real terms (ie. Exceeds the rate of inflation).
B. Capital Appreciation
15.) Asset allocation is:
A. The process of dividing funds into asset classes
16.) Once the portfolio is constructed, it must be continuously: D. Monitored
17.) ___________ gains are taxable and occur when an asset is sold for more than its basis (the value of the asset when it is purchased by the original owner, or inherited by the heirs of the original owner).

A. Realized Capital
18.) John is 55 years old has $55,000 outstanding on mortgage and no other debt. John typically saves $5,000 in a Roth IRA account and another $10,000 C. Consolidation Phase
19.) Which of the following strategies seeks to increase the portfolio value by reinvesting current income in addition to capital gains?
B. Capital Preservation
20.) Regional exchanges exist because
B. They allow local brokers to trade deal listed stocks

PART B (70%)
1.) USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
Security
U.S. government T-bills
Long-term government bonds
Long-term corporate bonds
Large capitalization common stocks
Small capitalization common stocks

Annual Percentage Return
3.04 %
5.75 %
6.80 %
13.50 %
15.60 %

The annual rate of inflation is 2%.
= (1 + %) / (1 + Rate of Inflation) - 1
(i)

What is the real return on long-term corporate bonds?

Real return on long term corporate bonds = [(1 + 0.068) / (1 + .02)] − 1 = [(1.068) / (1.02)] – 1
= 1.04705 – 1
= 0.04705
= 4.71%
(ii)

What is the real return on T-bills?

Real return on T-bills = [(1 + 0.0304) / (1.02)] – 1
= [(1.0304) / (1.02)] – 1
= 1.0101 – 1
= 0.01019
= 1.02%
(iii)

What is the real return on small capitalization stocks?

Real return on small cap stocks = [(1 + 0.156) / (1.02)] – 1 = [(1.156) / (1.02)] – 1
= 1.1333 – 1
= 0.13333
= 13.33%
(iv)

What is the real return on large capitalization stocks?

Real return on large cap stocks = [(1 + 0.135) / (1.02)] – 1 = [(1.135) / (1.02)] – 1
= 1.1127 – 1
= 0.1127
= 11.27%

2.) 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....
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