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					SET 1 ANSWERS to PRACTICE QUESTIONS Background Chapters 1-5

CHAPTER 1:

1.     b (definition)
2.     a (they minimize risk consistent with return)
3.     c (a and d are incorrect—must be upward sloping for the future)
4.     a
5.     c (common stocks are more risky than preferreds or bonds)
6.     d (could be—does not have to be)
7.     b (always involves return and risk; must be expected for future)
8.     a

CHAPTER 2:

9.     c (it is possible to invest only indirectly, using mutual funds)
10.    b (savings bond are monmarketable; other Treasury bonds are marketable)
11.    b (this is a nonmarketable security)
12.    d
13.    b
14.    c (Treasuries have the lowest risk of all)
15.    b (there are no guarantees from bond ratings)
16.    a (first four are investment grade)
17.    b (AAA would have lowest yield, AA next lowest)
18.    d (with c, average return should be more; with a, long-term fund should do better over
long run)

19.    d (.055/[1 - .35] = .0846 or 8.46%

20.    b (.037/[1 - .35] = .0569 which is >.056

21.    c   (c—should be homogeneous)
22.    d   (hybrid security, therefore middle position)
23.    a   (no guarantees, last priority)
24.    d
25.    c   (there are no specific promises with common stock that can be counted on)
26.    c
27.    a   (puts and calls are created by investors)
28.    d   (same reason as #27)
29.    a   (calls are short term options to buy)
30.    b   (believes price will be flat or rise)
31.    b   (most contracts are offset, not exercised)
32     d   (short-term, wasting asset)
CHAPTER 3:

33.   b
34.   a
35.   a (they earn money by charging a management fee)
36.   d (barring an emergency)
37.   b
38.   b
39.   a (from $1 trillion to about $7 trillion)
40.   c (money market shares are, as standard practice, set at $1/share)
41.   c
42.   d
43.   c
44.   d (no sales fee, are open-end, can hold taxable or nontaxable)
45.   d (computed once a day, change often)

46.   a ($55.46 + .92 + .73 - .72 – 2.12 = $54.27)

47.   b
48.   a
49.   b
50.   d (must buy from and sell to the company)
51.   b

52.   c ($10,000 X 1.103 X .868 X 1.143 = $10,943.13)

53.   c ($10,000 X 1.143 X .981 = $11,212.83)

54.   b ($10,943.13 [from #52] X .981 [for 2002] = $10,735.21)

55.   b (11.5% = 1.115; [1.115]5 = 1.7234; 1.7234 – 1.0 = .723 or 72.3%)

56.   a (for a one-year period, the annual return = the cumulative total return)
57.   d (b and c are equivalent; both represent compounding)

CHAPTER 4:

58.   b
59.   b   (up from 1995 through 1999, down 2000 through 2002)
60.   d   (Nasdaq has most number of companies)
61.   a   (secondary market, which the NYSE refers to as an agency auction market)
62.   c
63.   b
64.   c   (NYSE, Amex and Nasdaq have listed stocks)
65.   d
66.   d
67.    a   (not linked to all brokers; clearly a threat)
68.    d
69.    b   (S&P Index is higher)
70.    b   (a few corporates trade on exchanges)
71.    c   (left undefined, more change expected)
72.    c
73.    d   (growth stocks often split, lowering their price)
74.    b
75.    d
76.    b   (remember, only the DJIA is price weighted)
77.    c
78.    a   (all indexes except DJIA are capitalization weighted)
79.    d   ($7.50/.10 = 75 points on Dow; 75/225 = 1/3)

CHAPTER 5:

80.    b (investors not assured of exact price)
81.    c
82.    d
83.    d
84.    b
85.    d
86.    a
87.    a (only required full disclosure; no assurance of quality)
88.    d
89.    c

90.    a (200 shares x $100 = $20,000; $20,000 x .6 = $12,000)

91.   a (100 shares x $20 profit = $2,000; amount investor puts up = $60% of $20,000, or
$12,000; $2,000/$12,000 = 16.67%)

92.    c ($1675 x 55% borrowed = $921.25)

93.    b ($3,000/.60 = $5,000; borrow $2,000; buy 100 shares)

94.    a ($2,000/.40 = $5,000; borrow $3,000; buy 125 shares)

95.    b (no time limit; need margin account; must pay dividends)
96.    c (price moves against you)
97.    a
98.    d
99.      d (your out-of-pocket investment is $2000 [buy on margin] + $40 brokerage cost;

         you receive $100 dividends and $200 price appreciation;

         you pay $200 interest + $42 brokerage cost to sell; therefore,

         you net $300 - $242 = $58;

         return on actual cash investment = $58/$2040 = 2.84%)

      100.   d (you have a paper gain only because you have not sold yet)
SET 2 ANSWERS to PRACTICE QUESTIONS Returns and Bonds Chapters 6-9


CHAPTER 6:

1.    d
2.    d ([$60 for semiannual coupon + $45 price gain]/1005 = 10.45%)

3.    a ($90 interest is offset by $90 loss on sale; therefore zero return)

4.    c (10% TR = .10; 1 + .10 = 1.10 return relative)

5.    a ([$46 + $1]/$34 = 1.38)

6.    a ([$38 + $1]/40 = .975; this is a TR of -2.5%)

7.    a (-.10 + 1.0 = .90)

8.    c (divide CWI by CYI; geometric mean of $30.41 is 4.2%; $30.41 = (1.042)83
        therefore, dividing CWI by (1.042)83 produces the same answer)
9.    a
10.   c (this is approximate, but clearly the closest of the answers given)
11.   b (always true by definition)
12.   a (note that c is reversed—should be (1 + G)2 = (1 + A.M.) 2 etc.)

13.   d ($1 x 1.1676 x .98 = $1.1442)

14.   a (it is identical to cumulative total return, so d is incorrect)
15.   b (remember, no addition or subtraction with CWI)
16.   c (multiply these two together to get CWI)
17.   c

18.   b (RR = [(46+ 2)/50 = .96]; currency adj. = .96; .96 (.96) = .9216 as a RR;
         .9216 – 1.0 = -7.84% as a TR)

19.   a

20.   a (TR for French investor = ([300 + 10]/250) – 1.0 = 24%)


CHAPTER 7:

21.   a (10% x .2 + 20% x .5 + (-25%) x .3 = 4.5%)

22.   b (the two factors are the expected returns for securities and the weights)
23.   c (correlation coefficient is not in equation for expected return)
24.   c
25.   c (1/2 of 10% + 1/2 of 18%)

26.   b (choose the stock with the smallest standard deviation because corr. is +1.0)

27.   d (total # of terms = n2; 30 x 30 = 900)

28.   b (covariance = corr. coeff x std. dev x std. dev; .30 x 12 x 20 = 72)
29.   c (covariance = n (n – 1); unique covariances = [n (n -1)] /2)
30.   c
31.   a (proper weights must also be chosen to eliminate all risk in this situation)
32.   d

CHAPTER 8:

33.   d (covariances or correlations must also be provided)
34.   c
35.   d
36.   b
37.   c (the Markowitz efficient frontier is an arc and not a straight line)
38.   a
39.   d
40.   b (B is dominated by D; the other 2 portfolios are the extreme ends of the eff. frontier)
41.   c
42.   c (3n + 2)
43.   a
44.   a
45.   d
46.   b (many observers argue it is the most important decision)
47.   d
48.   a (market risk premium is expected market return – RF = 16 – 7)
49.   d
50.   c

CHAPTER 9:

51.   d
52.   c
53.   d
54.   b
55.   d
56.   b
57.   d (15% x .6 + 5% x .4 = 11%)
58.   a (riskless asset has no risk here; therefore, 60% of 18% = 10.8%)
59.   a
60.   a
61.   a
62.   d
63.   d
64.   c
65.   c
66.   c (stock’s risk premium = market risk premium x stock’s beta)
67.   d (the market risk premium = 9%)
68.   c
69.   d
70.   b (investors are compensated for taking systematic risk)
71.   b (7 + 1.4[16 – 7] = 19.6%
72.   a (calculate required return for each stock and compare to expected return)
73.   b
74.   b (it has less restrictive assumptions)
75.   c (requires less assumptions)
SET 3 ANSWERS to PRACTICE QUESTIONS Common Stocks (Valuation and
      Management), Efficient Markets, Market/Economy, Industry, Company Analysis
      Chapters 10-15

CHAPTER 10:

1.    a
2.    a
3.    b
4.    b
5.    b (d is incorrect—it is the value for someone using the equation)
6.    b (dividends, not earnings)

7.    b ([$1.20(1.07)] / [.14 - .07]) Note: $1.20 = current dividend

8.    e (k = Dl/P0 + g; therefore, g = k – Dl/P0; g = .15 - .05 = .10

9.    b ($20 / [.15 – .10] = 400)

10.   d (beta = .85 because BLC is 15% less risky; k = 6 + .85 [8] = 12.8;

         P0 = D1 / [k – g] = $1.50 / [12.8 - .07] = $25.86)

11.   a (D0 = $2.55; D1 = $2.75; P0 = $2.75 / [.15 - .08] = $39.29)

12.   b (k = 6 + 1.0 [8] = 14%; P0 = $1.20(1.07) / [.14 - .07] = $18.34)

13.   d (D1 = Earnings X payout ratio = $4.00 X .3 = $1.20; k = 5 + 1.1[14 - 5] = 14.9;

         P0 = $1.20 / [14.9 - .08] = $17.39)

14.   d (g = estimated growth rate, therefore use 6%; D1 = $2(1.06) = $2.12;

         P0 = $2.12 / [.16 - .06] = $21.20)

15.   b (k = expected return = D1/P0 + g; 2/40 + .07 = 12%)

16.   a (g = 8% [found by rule of 72]; D1 = $1.00 X 1.08 = $1.08;

         P0 = $1.08 / [.15 - .08] = $15.43)

17.   b (expected return = D1/P0 + g = 14.9; required return of 15.1 is greater than
         expected return; therefore, you cannot justify buying the stock)

18.   c (value is determined by a procedure regardless of holding period)
19.   c ([$2 / (.15 - .07)] = [$2 / (.16 - .08)]; D1 stays the same)

20.   c (D1 = $1.50 X 1.05 = $1.575; dividend yield = $1.575 / $15.75 = 10%;
        capital gains yield = the growth rate; Note: the sum of the two must be 15%)

21.   e (D0 = $2.00; D1 = $2 X .95 = $1.90; D2 = $1.90 X .95 = $1.81; D3 = $1.81 X
        .95 = $1.72; D4 = $1.72 x .95 = $1.63; D5 = $1.63 x .95 = $1.55;
        P4 = D5 / [k – g] = $1.55 / (k – [-.05]) = $1.55 / [.14 + .05] = $8.16)

22.   e (P0 = $2.00 (1/1.14) + $1.50 (1/(1.14)2) + $2.00 (1/(1.14)3) + $3.50 (1/(1.14)4) +
        ($3.50(1.08) / [.14 - .08)]) X (1/(1.14)4) = $43.62)

23.   c (multiple growth rate company; D0 = $2.00; D1 = $2.28; D2 = $2.60;
        D3 = $2.96; PV of D1 = $1.93; PV of D2 = $1.87; PV of D3 = $1.80;
        sum of these 3 present values = $5.60; constant growth rate is 6%;

          P3 = D4 / [k-g;]; D4 = $2.96 x 1.06 = $3.14; P3 = $3.14 / [.18 - .06] = $26.15;
          PV of $26.15 = $15.92; $15.92 + $5.60 = $21.52)

          (NOTE: round off error can account for a few cents difference)

24.   b (k = 7 + 2[11 – 7] = 15%); D1 = $3(1.20) = $3.60; D2 = $3.60(1.20) = $4.32;
         D3 = $4.32(1.10) = $4.75; PV of D1 and D2 = $6.40;

          P2 = D3 / [k – g] = $4.75 / [.15 - .10] = $95; PV of P2 = $71.83;
          P0 = $71.83 + $6.40 = $78.23;

          Dividend yield = $3.60 / $78.23 = 4.6%)

25.   b
26.   d

27.   c (P/E = [D/E] / (k – g) = .75 / [.16 - .06] = 7.5)

28.   a (if 70% is retained, 30% is paid out, therefore Earnings must be
        $1.50 / .3 = $5.00; k = 8 + 2 [12 – 8] = .16;

          P0 = $1.50 (1.10) / [.16 - .10] = $27.50
          P/E = $27.50 / $5.50 = $5

          Note: E0 = $5.00 and E1 = $5.00(1.10) = $5.50

29.   c

CHAPTER 11
30.   c   (pessimism leads to an increase)
31.   a   (risk-free rate + stock’s risk premium)
32.   d
33.   b
34.   d
35.   b
36.   a
37.   c
38.   c   (the top-down approach)
39.   b   (rising, not falling)

CHAPTER 12

40.   d
41.   c
42.   b
43.   c
44.   c
45.   b
46.   a
47.   a
48.   c (all have not been refuted)
49.   c
50.   c
51.   d

CHAPTER 13

52.   c (stock prices tend to lead the economy)
53.   d
54.   d
55.   (E1 = $30; D1 = $30 X .4 = $12; k = 9 + 8 = 17%;
      P0 = $12 / [.17 - .10] = $171.43)
56.   b
57.   c (can be calculated using estimated data)
58.   c
59.   a
60.   d (market tends to lead economy)
61.   d

CHAPTER 14

62.   b
63.   b
64.   c
65.   a
66.    a
67.    a
68.    a
69.    c
70.    c
71.    b
72.    b
73.    b

CHAPTER 15

74.    b
75.    a
76.    b
77.    d

78.    a (.15 x 2)

79.    d (.3 x 1.5)
80.    c
81.    c
82.    b (ROE = .1845 x 2.278; EPS = BVps x ROE)

83.    d ($10 x .10 = $1)

84.    d (g = ROE x retention rate)
85.    c
86.    c (should be Total Assets / Stockholders Equity)
87.    a
88.    c

89.    c (D1 = $2 X .10 = $2.20; P0 = $2.20 / [.20 - .10] = $22)

90.    b
91.    b
92.    a (negative numbers count the same as positive, therefore choose largest)
93.    c
94.    d (minimum expected return; NOTE: a is correct because it does not specify
       stock required rate of return or market required rate of return)
95.    c
96.    c
97.    c
98.    b
99.    a
100.   d ($2 / $4 = .5 payout; .5 / [.16 - .06] = 5)
SET 4 ANSWERS to PRACTICE QUESTIONS Technical Analysis Chapter 16


1.    d
2.    d
3.    d
4.    a
5.    d
6.    c
7.    a
8.    a
9.    b
10.   c
11.   d
12.   d
13.   a
14.   b
15.   b
SET 5 ANSWERS to PRACTICE QUESTIONS Bonds Chapters 17-18


CHAPTER 17:


1.    c
2.    c (remember, it is expected inflation)
3.    a
4.    b (price and yield move inversely; 1 3/32 = 1.0938%; .010938 x 1000 = $10.938)
5.    c (current yield = coupon/bond price; for bonds selling at a discount [<$1,000],
         current yield has to be > coupon rate)
6.    d (a debenture is an unsecured bond)
7.    a (since there are no coupons, there is nothing to reinvest)
8.    c
9.    b
10.   d
11.   d (YTM is a promised return)
12.   c (intrinsic value is a present value process)
13.   c
14.   b (not reinvesting the coupons lowers the realized yield)
15.   a
16.   b
17.   a
18.   c
19.   d (long-term bond prices fluctuate more than do short-term bond prices)
20.   c
21.   d (YTM has a reinvestment rate assumption, therefore c is incorrect)

22.   d (using a calculator, n = 40; PMT = 35; PV = -810; FV = 1000)

23.   d (using a calculator, n = 28; PMT = 30; FV = 1000; I/Y = 8%)

24.   d (1/24 = .0417; 1000/400 = 2.50; 2.50.0417 – 1.0 = 3.89; 3.89 x 2 = 7.79)

25.   a (.09/2 + 1.0 = 1.045; 1.04530 = 3.7453; 1 / 3.7453 = .267; $1000 x .267 = $267)

26.   c (coupons; capital gain; interest-on-interest)
27.   c
28.   d
29.   a (coupon is inverse; decreasing rate; weighted average)
30.   b (it is the same as the bond’s maturity)
31.   d

32.   b (-8 x .0075 = -.06 or -6%)
33.   c

CHAPTER 18:

34.   b
35.   c   (term structure is static because it is one point in time)
36.   a
37.   c   (this is dealt with in the term structure)
38.   c   (forward rates are anticipated but unobservable)
39.   a
40.   c   (during boom periods, risk decreases, spreads narrow)
41.   b
42.   d
43.   c   (remember, immunization deals with interest rate risk)
44.   d
45.   a
46.   b   (the horizon is specified)
SET 6 ANSWERS to PRACTICE QUESTIONS Derivative Securities Chapters 19
      and 20


CHAPTER 17:


1.    d (right only)
2.    c (could remain steady)
3.    d
4.    c
5.    e
6.    c
7.    e
8.    a
9.    c
10.   b
11.   c
12.   a
13.   b

CHAPTER 18:

14.   c
15.   d
16.   c
17.   c
18.   d
19.   b
20.   d
21.   d
22.   a
23.   b
24.   d
25.   a
26.   c (10 point loss [because investor sold and price went up] X $250 multiplier)
27.   d
SET 7 ANSWERS to PRACTICE QUESTIONS Portfolio Management,
      Performance Evaluation Chapters 21 and 22


CHAPTER 21:

1.    c
2.    a
3.    c
4.    d
5.    d
6.    b
7.    c
8.    b
9.    b
10.   c
11.   b
12.   d

CHAPTER 22:

13.   b
14.   a
15.   b
16.   b
17.   d
18.   b
19.   b
20.   a
21.   c (for d, alpha is the difference between excess return and what should have been
      earned given the risk of the portfolio)
22.   c
23.   a (13.2% is required using the CAPM, but only 13% was earned, therefore inferior)
24.   a
25.   a
26.   b (the square of the correlation coefficient is the coefficient of determination)
27.   b
28.   b
29.   d (for a, should be after the fact)
30.   d (need to know the risk of each portfolio)
31.   c (the largest R2)
32.   c (the largest beta)
33.   a (the largest standard deviation)
34.   b (this is the only fund with a statistically significant alpha)
35.   d (the one with the lowest R2)

				
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