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1. According to the Flow of Funds Accounts of the United States, the largest liability of U.S. households is ________. A. mortgages B. consumer credit C. bank loans D. gambling debts 2. Asset allocation refers to the _________. A. allocation of the investment portfolio across broad asset classes B. analysis of the value of securities C. choice of specific assets within each asset class D. none of the answers define asset allocation 3. Which one of the following best describes the purpose of derivatives markets? A. Transferring risk from one party to another B. Investing for a short time period to earn a small rate of return C. Investing for retirement D. Earning interest income 4. In a capitalist system capital resources are primarily allocated by ____________. A. governments B. the SEC C. financial markets D. investment bankers 5. __________ are an indirect way U.S. investors can invest in foreign companies. A. ADRs B. IRAs C. SDRs D. CPCs 6. The historical average rate of return on the large company stocks since 1926 has been A. 5% B. 8% C. 12% D. 20% 7. Which of the following is not a financial intermediary? A. a mutual fund B. an insurance company C. a real estate brokerage firm D. a savings and loan company 8. The efficient markets hypothesis suggests that _______. A. active portfolio management strategies are the most appropriate investment strategies B. passive portfolio management strategies are the most appropriate investment strategies C. either active or passive strategies may be appropriate, depending on the expected direction of the market D. a bottom up approach is the most appropriate investment strategy 9. Surf City Software Company develops new surf forecasting software. It sells the software to Microsoft in exchange for 1000 shares of Microsoft common stock. Surf City Software has exchanged a _____ asset for a _____ asset in this transaction. A. real, real B. financial, financial C. real, financial D. financial, real 10. A major cause of mortgage market meltdown in 2007 and 2008 was linked to ________. A. globalization B. securitization C. negative analyst recommendations D. online trading 11. When computing the bank discount yield you would use ____ days in the year. A. 260 B. 360 C. 365 D. 366 12. Which one of the following is a true statement? A. Dividends on preferred stocks are tax-deductible to individual investors but not to corporate investors B. Common dividends cannot be paid if preferred dividends are in arrears on cumulative preferred stock C. Preferred stockholders have voting power D. Investors can sue managers for nonpayment of preferred dividends 13. A T-bill quote sheet has 90 day T-bill quotes with a 4.92 bid and a 4.86 ask. If the bill has a $10,000 face value an investor could buy this bill for A. $10,000.00 B. $9,878.50 C. $9,877.00 D. $9,880.16 14. A __________ gives its holder the right to buy an asset for a specified exercise price on or before a specified expiration date. A. call option B. futures contract C. put option D. interest rate swap 15. An investor purchases one municipal and one corporate bond that pay rates of return of 5.00% and 6.40% respectively. If the investor is in the 15% tax bracket, his after tax rates of return on the municipal and corporate bonds would be respectively A. 5.00% and 6.40% B. 5.00% and 5.44% C. 4.25% and 6.40% D. 5.75% and 5.44% 16. An investor in a 28% tax bracket is trying to decide whether to invest in a municipal bond or a corporate bond. She looks up municipal bond yields (rm) but wishes to calculate the taxable equivalent yield r. The formula she should use is given by ______. A. r = rm * (1 – 28%) B. r = rm/(1 – 72%) C. r = rm * (1 – 72%) D. r = rm/(1 – 28%) 17. A firm that fails to pay dividends on its preferred stock is said to be _________. A. insolvent B. in arrears C. insufferable D. delinquent 18. Which of the following is most like a short-term collateralized loan? A. Certificate of deposit B. Repurchase agreement C. Banker’s acceptance D. Commercial paper 19. A stock quote indicates a stock price of $60 and a dividend yield of 3%. The latest quarterly dividend received by stock investors must have been ______ per share. A. $0.55 B. $1.80 C. $0.45 D. $1.25 20. The Chompers Index is a price weighted stock index based on the 3 largest fast food chains. The stock prices for the three stocks are $54, $23, and $44. What is the price weighted index value of the Chompers Index? A. 23.43 B. 35.36 C. 40.33 D. 49.58 21. In a defined benefit pension plan, the _____ bears all of the fund’s investment performance risk. A. employer B. employee C. fund manager D. government 22. Which one of the following would be considered to be a “cash equivalent” investment? A. Treasury bills B. Common stock C. Corporate bonds D. Real estate 23. The two most important factors in describing an individual or organization’s investment objectives are ________________. A. income level and age B. income level and risk tolerance C. age and risk tolerance D. return requirement and risk tolerance 24. An employee has an average wage of $60,000 and they have worked for the firm for 25 years. The defined benefit pension plan pays retirees 2.5% of the average wage times the years of service. The employee can expect to receive _______ per year upon retirement. A. $18,000 B. $37,500 C. $45,325 D. $55,250 25. _______ is a life insurance policy that provides a death benefit and a fixed rate tax deferred savings plan. A. Term life B. Whole life C. Variable life D. Universal life 26. Earnings on variable life and universal life insurance policies are ___________. A. never taxed B. taxed only at the capital gains tax rate C. not taxed until the money is withdrawn D. not taxed at the federal level but are taxed at the state level 27. The objectives of personal trusts normally are __________ in scope than those of individual investors and personal trust managers typically are __________ than individual investors. A. broader; more risk averse B. broader; less risk averse C. more limited; more risk averse D. more limited; less risk averse 28. Conservative investors are likely to want to invest in __________ mutual funds while risktolerant investors are likely to want to invest in __________. A. income, high growth B. income, moderate growth C. moderate income, high growth D. moderate income, moderate growth 29. An investor is looking at different retirement investment choices and he is willing to accept one with upside potential even if that means sacrificing certainty. Which of the following will he most likely select? A. Fixed annuity B. Defined benefit plan C. Defined contribution plan D. Bonds invested in an IRA 30. The asset universe is the _____________________. A. set of investments an investment company can legally invest in B. existing set of assets the investment company currently owns in one or more of its portfolios C. list of assets approved by the investment committee that may be placed in the investment company’s portfolios D. market portfolio of all available risky assets 31. Barnegat Light sold 200,000 shares in an initial public offering. The underwriter’s explicit fees were $90,000. The offering price for the shares was $35, but immediately upon issue, the share price jumped to $43. What is the best estimate of the total cost to Barnegat Light of the equity issue? A. $90,000 B. $1,290,000 C. $2,390,000 D. $1,690,000 32. Circuit breakers will be imposed if the Dow Jones Industrial Average drops by a minimum of ______ by 2.30 pm. A. 10% B. 20% C. 30% D. 40% 33. The __________ was established to protect investors from losses if their brokerage firms fail. A. CFTC B. SEC C. SIPC D. AIMR 34. According to Loughran and Ritter, initial public offerings tend to exhibit __________ performance initially, and __________ performance over the long term. A. bad; good B. bad; bad C. good; good D. good; bad 35. The bid-ask spread exists because of _______________. A. market inefficiencies B. discontinuities in the markets C. the need for dealers to cover expenses and make a profit D. lack of trading in thin markets 36. You find that the bid and ask prices for a stock are $10.25 and $10.30 respectively. If you purchase or sell the stock you must pay a flat commission of $25. If you buy 100 shares of the stock and immediately sell them, what is your total implied and actual transaction cost in dollars? A. $50 B. $25 C. $30 D. $55 37. You short-sell 200 shares of Rock Creek Fly Fishing Co., now selling for $50 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 38. Which Congressional action directed the SEC to implement a national competitive securities market? A. Securities Act of 1933 B. SEC Act of 1934 C. Securities Act Amendments of 1975 D. Financial Services Modernization Act of 1999 39. Brokerage firms can change margin-loan practices ____. A. without notice B. only after 72 hours notice C. only on new orders D. only with permission from the SEC 40. The commission structure on a stock purchase is $20 plus $0.02 per share. If you purchase 4 round lots of a stock selling for $56, what is your commission? A. $20 B. $22 C. $26 D. $28 41. The two principal types of REITs are equity trusts which _______________ and mortgage trusts which _______________. A. invest directly in real estate; invest in mortgage and construction loans B. invest in mortgage and construction loans; invest directly in real estate C. use extensive leverage; distribute less than 95% of income to shareholders D. distribute less than 95% of income to shareholders; use extensive leverage 42. The type of mutual fund that primarily engages in market timing is called a/an _______. A. sector fund B. index fund C. ETF D. asset allocation fund 43. Assume that you have recently purchased 100 shares in an investment company. Upon examining the balance sheet, you note the firm is reporting $225 million in assets, $30 million in liabilities, and 10 million shares outstanding. What is the Net Asset Value (NAV) of these shares? A. $25.50 B. $22.50 C. $19.50 D. $1.95 44. Investors who wish to liquidate their holdings in a unit investment trust may ___________________. A. sell their shares back to the trustee at a discount B. sell their shares back to the trustee at net asset value C. sell their shares on the open market D. sell their shares at a premium to net asset value 45. Low load mutual funds have front-end loads of no more than _____. A. 2% B. 3% C. 4% D. 5% 46. If a mutual fund has multiple class shares, which class typically has a front end load? A. Class A B. Class B C. Class C D. Class D 47. Consider a no-load mutual fund with $200 million in assets and 10 million shares at the start of the year, and $250 million in assets and 11 million shares at the end of the year. During the year investors have received income distributions of $2 per share, and capital gains distributions of $0.25 per share. Assuming that the fund carries no debt, and that the total expense ratio is 1%, what is the rate of return on the fund? A. 36.25% B. 24.90% C. 23.85% D. There is not sufficient information to answer this question 48. A/an _____ is an example of an exchange-traded fund. A. SPDR or spider B. samurai C. Vanguard D. open-end fund 49. A mutual fund has total assets outstanding of $69 million. During the year the fund bought and sold assets equal to $17.25 million. This fund’s turnover rate was _____. A. 25.00% B. 28.50% C. 18.63% D. 33.40% 50. The assets of a mutual fund are $25 million. The liabilities are $4 million. If the fund has 700,000 shares outstanding and pays a $3 dividend, what is the dividend yield? A. 5% B. 10% C. 15% D. 20% 51. 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 $3.50. Your HPR was ____. A. 4.00% B. 3.50% C. 7.00% D. 11.00% 52. The geometric average of -12%, 20% and 25% is _________. A. 8.42% B. 11.00% C. 9.70% D. 18.88% 53. Suppose you pay $9,800 for a $10,000 par Treasury bill maturing in two months. What is the annual percentage rate of return for this investment? A. 2.04% B. 12.00 % C. 12.24% D. 12.89% 54. Historically small firm stocks have earned higher returns than large firm stocks. When viewed in the context of an efficient market, this suggests that ___________. A. small firms are better run than large firms B. government subsidies available to small firms produce effects that are discernible in stock market statistics C. small firms are riskier than large firms D. small firms are not being accurately represented in the data 55. If you are promised a nominal return of 12% on a one year investment, and you expect the rate of inflation to be 3%, what real rate do you expect to earn? A. 5.48% B. 8.74% C. 9.00% D. 12.00% 56. The holding period return on a stock was 25%. Its ending price was $18 and its beginning price was $16. Its cash dividend must have been _________. A. $0.25 B. $1.00 C. $2.00 D. $4.00 57. Consider the following two investment alternatives. First, a risky portfolio that pays 20% rate of return with a probability of 60% or 5% with a probability of 40%. Second, a treasury bill that pays 6%. If you invest $50,000 in the risky portfolio, your expected profit would be _________. A. $3,000 B. $7,000 C. $7,500 D. $10,000 58. A security with normally distributed returns has an annual expected return of 18% and standard deviation of 23%. The probability of getting a return between -28% and 64% in any one year is A. 68.26% B. 95.44% C. 99.74% D. 100.00% 59. Which one of the following would be considered a risk-free asset in real terms as opposed to nominal? A. Money market fund B. U.S. T-bill C. Short term corporate bonds D. U.S. T-bill whose return was indexed to inflation 60. Which of the following are correct arguments supporting passive investment strategies? I. Active trading strategies may not guarantee higher returns but guarantee higher costs II. Passive investors can free ride on the activity of knowledge investors whose trades force prices to reflect currently available information III. Passive investors are guaranteed to earn higher rates of return than active investors over sufficiently long time horizons A. I only B. I and II only C. II and III only D. I, II and III 61. Adding additional risky assets to the investment opportunity set will generally move the efficient frontier _____ and to the ______. A. up, right B. up, left C. down, right D. down, left 62. The correlation coefficient between two assets equals to _________. A. their covariance divided by the product of their variances B. the product of their variances divided by their covariance C. the sum of their expected returns divided by their covariance D. their covariance divided by the product of their standard deviations 63. Market risk is also called __________ and _________. A. systematic risk, diversifiable risk B. systematic risk, nondiversifiable risk C. unique risk, nondiversifiable risk D. unique risk, diversifiable risk 64. The standard deviation of return on investment A is .10 while the standard deviation of return on investment B is .04. If the correlation coefficient between the returns on A and B is -.50, the covariance of returns on A and B is _________. A. -.0447 B. -.0020 C. .0020 D. .0447 65. A measure of the riskiness of an asset held in isolation is ____________. A. beta B. standard deviation C. covariance D. semi-variance 66. According to Tobin’s separation property, portfolio choice can be separated into two independent tasks consisting of __________ and __________. A. identifying all investor imposed constraints; identifying the set of securities that conform to the investor’s constraints and offer the best risk-return tradeoffs B. identifying the investor’s degree of risk aversion; choosing securities from industry groups that are consistent with the investor’s risk profile C. identifying the optimal risky portfolio; constructing a complete portfolio from T-bills and the optimal risky portfolio based on the investor’s degree of risk aversion D. choosing which risky assets an investor prefers according to their risk aversion level; minimizing the CAL by lending at the risk-free rate 67. A stock has a correlation with the market of 0.45. The standard deviation of the market is 21% and the standard deviation of the stock is 35%. What is the stock’s beta? A. 1.00 B. 0.75 C. 0.60 D. 0.55 68. Decreasing the number of stocks in a portfolio from 50 to 10 would likely _________________________. A. increase the systematic risk of the portfolio B. increase the unsystematic risk of the portfolio C. increase the return of the portfolio D. decrease the variation in returns the investor faces in any one year 69. What is the standard deviation of a portfolio of two stocks given the following data? Stock A has a standard deviation of 30%. Stock B has a standard deviation of 18%. The portfolio contains 60% of stock A and the correlation coefficient between the two stocks is -1.0. A. 0.0% B. 10.8% C. 18.0% D. 24.0% 70. A project has a 50% chance of doubling your investment in one year and a 50% chance of losing half your money. What is the expected return on this investment project? A. 0% B. 25% C. 50% D. 75% 71. Fama and French claim that after controlling for firm size and the ratio of firm’s book value to market value, beta is ______________. I. highly significant in predicting future stock returns II. relatively useless in predicting future stock returns III. a good predictor of firm’s specific risk A. I only B. II only C. I and III only D. I, II and III 72. In a well diversified portfolio, __________ risk is negligible. A. nondiversifiable B. market C. systematic D. unsystematic 73. You have a $50,000 portfolio consisting of Intel, GE and Con Edison. You put $20,000 in Intel, $12,000 in GE and the rest in Con Edison. Intel, GE and Con Edison have betas of 1.3, 1.0 and 0.8 respectively. What is your portfolio beta? A. 1.048 B. 1.033 C. 1.000 D. 1.037 74. Consider the one-factor APT. The variance of the return on the factor portfolio is .08. The beta of a well-diversified portfolio on the factor is 1.2. The variance of the return on the welldiversified portfolio is approximately _________. A. .1152 B. .1270 C. .1521 D. .1342 75. The possibility of arbitrage arises when ____________. A. there is no consensus among investors regarding the future direction of the market, and thus trades are made arbitrarily B. mis-pricing among securities creates opportunities for riskless profits C. two identically risky securities carry the same expected returns D. investors do not diversify 76. The risk-free rate is 4%. The expected market rate of return is 11%. If you expect stock X with a beta of .8 to offer a rate of return of 12 percent, then you should _________. A. buy stock X because it is overpriced B. buy stock X because it is underpriced C. sell short stock X because it is overpriced D. sell short stock X because it is underpriced 77. Beta is a measure of ______________. A. total risk B. relative systematic risk C. relative non-systematic risk D. relative business risk 78. Standard deviation of portfolio returns is a measure of ___________. A. total risk B. relative systematic risk C. relative non-systematic risk D. relative business risk 79. The expected return on the market is the risk free rate plus the _____________. A. diversified returns B. equilibrium risk premium C. historical market return D. unsystematic return 80. Using the index model, the alpha of a stock is 3.0%, the beta if 1.1 and the market return is 10%. What is the residual given an actual return of 15%? A. 0.0% B. 1.0% C. 2.0% D. 3.0% 81. The strong form of the EMH states that ________ must be reflected in the current stock price. A. all security price and volume data B. all publicly available information C. all information including inside information D. all costless information 82. If you believe in the __________ form of the EMH, you believe that stock prices reflect all publicly available information but not information that is available only to insiders. A. semi-strong B. strong C. weak D. perfect 83. You are an investment manager who is currently managing assets worth $6 billion. You believe that active management of your fund could generate between an additional one tenth of 1% return on the portfolio. If you want to make sure your active strategy adds value, how much can you spend on security analysis? A. $12,000,000 B. $6,000,000 C. $3,000,000 D. $0 84. Evidence supporting semi-strong form market efficiency suggests that investors should _________________________. A. rely on technical analysis to select securities B. rely on fundamental analysis to select securities C. use a passive trading strategy such as purchasing an index fund or an ETF D. select securities by throwing darts at the financial pages of the newspaper 85. Fundamental analysis is likely to yield best results for _______. A. NYSE stocks B. neglected stocks C. stocks that are frequently in the news D. fast growing companies 86. J.M. Keyes put all his money in one stock and the stock doubled in value in a matter of months. He did this three times in a row with three different stocks. J.M. got his picture on the front page of the Wall Street Journal. However the paper never mentioned the thousands of investors who made similar bets on other stocks and lost most of their money. This is an example of the ________ problem in deciding how efficient the markets are. A. magnitude B. selection bias C. lucky event D. small firm 87. Stock market analysts have tended to be ___________ in their recommendations to investors. A. slightly overly optimistic B. overwhelmingly optimistic C. slightly overly pessimistic D. overwhelmingly pessimistic 88. Fundamental indexing refers to ________. A. investing in index stocks in proportion to the stock’s fundamental value B. investing in index stocks in proportion to the stock’s market value C. investing an equal dollar amount in index stocks D. investing in an equal amount shares in each of the index stocks 89. Someone who invests in the Vanguard Index 500 mutual fund could most accurately be described as using what approach? A. Active management B. Arbitrage C. Fundamental analysis D. Passive investment 90. Most evidence indicates that U.S. stock markets are _______________________. A. reasonably weak form and semi-strong form efficient B. strong form efficient C. reasonably weak form but not semi- or strong form efficient D. neither weak form, semi- or strong form efficient 91. Testing many different trading rules until you find one that would have worked in the past is called _______. A. data mining B. perceived patterning C. pattern searching D. behavioral analysis 92. According to market technicians it is time to sell stock in a head-and-shoulders formation when ___________. A. the price index pierces the left shoulder B. the price index pierces the right shoulder C. the price index pierces head D. none of the above takes place. 93. According to Elliot wave theory, the stock market behavior can be explained as _________________. A. a series of medium-term wave cycles with no short-term trend B. a series of long-term wave cycles with no short-term trend C. a series of superimposed long-term and short-term wave cycles D. sine and cosine functions 94. An investor holds a very conservative portfolio invested for retirement but she takes some extra cash she earned from her year-end bonus and buys gold futures. She appears to be engaging in ___________. A. overconfidence B. representativeness C. forecast errors D. mental accounting 95. Which one of the following statements on the Dow Theory is correct? A. The Elliot wave theory is the only recent variation of the Dow Theory. B. The theory of Kondratieff waves is the only recent variation of the Dow Theory. C. Both the Elliot wave theory and the theory of Kondratieff waves are recent variations of the Dow Theory. D. Neither the Elliot wave theory nor the theory of Kondratieff waves are recent variations of the Dow Theory. 96. On a particular day, there were odd-lot sales of 830,000 on the NYSE and 746,000 odd-lot purchases. The odd-lot trading index is __________. A. 0.43 B. 0.90 C. 0.77 D. 1.11 97. On a particular day, there were 890 stocks which advanced on the NYSE and 723 which declined. The volume in advancing issues was 80,846,000 and the volume in declining issues was 70,397,000. The common measure of market breadth is __________. A. -10,449,000 B. -167 C. 167 D. 10,449,000 98. The tendency of investors to hold on to losing investments is called the ________. A. overweighting effect B. head-in-the-sand effect C. disposition effect D. prospector effect 99. Problems with behavioral finance include: I. the behavioralists tell us nothing about how to exploit any irrationality II. the implications of behavioral patterns are inconsistent from case to case, sometimes suggesting overreaction, sometimes underreaction III. like technical trading rules, behavioralists can always find some pattern in past data that supports a behavioralist trait A. I only B. II only C. I and III only D. I, II and III 100. The price of a stock fluctuates over a period of 10 days. The movement of the stock price below the 10 day minimum price of $25 triggers a rash of selling. The $25 price might now be considered the _______________. A. congestion area B. penetration point C. resistance level D. support level

1. According to the Flow of Funds Accounts of the United States, the largest liability of U.S.
households is ________.
A. mortgages
B. consumer credit
C. bank loans
D. gambling debts

2. Asset allocation refers to the _________.
A. allocation of the investment portfolio across broad asset classes
B. analysis of the value of securities
C. choice of specific assets within each asset class
D. none of the answers define asset allocation

3. Which one of the following best describes the purpose of derivatives markets?
A. Transferring risk from one party to another
B. Investing for a short time period to earn a small rate of return
C. Investing for retirement
D. Earning interest income

4. In a capitalist system capital resources are primarily allocated by ____________.
A. governments
B. the SEC
C. financial markets
D. investment bankers

5. __________ are an indirect way U.S. investors can invest in foreign companies.
A. ADRs
B. IRAs
C. SDRs
D. CPCs

6. The historical average rate of return on the large company stocks since 1926 has been
A. 5%
B. 8%
C. 12%
D. 20%

7. Which of the following is not a financial intermediary?
A. a mutual fund
B. an insurance company
C. a real estate brokerage firm
D. a savings and loan company

8. The efficient markets hypothesis suggests that _______.
A. active portfolio management strategies are the most appropriate investment strategies
B. passive portfolio management strategies are the most appropriate investment strategies
C. either active or passive strategies may be appropriate, depending on the expected direction of
the market
D. a bottom up approach is the most appropriate investment strategy

9. Surf City Software Company develops new surf forecasting software. It sells the software to
Microsoft in exchange for 1000 shares of Microsoft common stock. Surf City Software has
exchanged a _____ asset for a _____ asset in this transaction.
A. real, real
B. financial, financial
C. real, financial
D. financial, real

10. A major cause of mortgage market meltdown in 2007 and 2008 was linked to ________.
A. globalization
B. securitization
C. negative analyst recommendations
D. online trading

11. When computing the bank discount yield you would use ____ days in the year.
A. 260
B. 360
C. 365
D. 366

12. Which one of the following is a true statement?
A. Dividends on preferred stocks are tax-deductible to individual investors but not to corporate
investors
B. Common dividends cannot be paid if preferred dividends are in arrears on cumulative
preferred stock
C. Preferred stockholders have voting power
D. Investors can sue managers for nonpayment of preferred dividends

13. A T-bill quote sheet has 90 day T-bill quotes with a 4.92 bid and a 4.86 ask. If the bill has a
$10,000 face value an investor could buy this bill for
A. $10,000.00
B. $9,878.50
C. $9,877.00
D. $9,880.16

14. A __________ gives its holder the right to buy an asset for a specified exercise price on or
before a specified expiration date.
A. call option
B. futures contract
C. put option
D. interest rate swap

15. An investor purchases one municipal and one corporate bond that pay rates of return of
5.00% and 6.40% respectively. If the investor is in the 15% tax bracket, his after tax rates of
return on the municipal and corporate bonds would be respectively
A. 5.00% and 6.40%
B. 5.00% and 5.44%
C. 4.25% and 6.40%
D. 5.75% and 5.44%

16. An investor in a 28% tax bracket is trying to decide whether to invest in a municipal bond or
a corporate bond. She looks up municipal bond yields (rm) but wishes to calculate the taxable
equivalent yield r. The formula she should use is given by ______.
A. r = rm * (1 – 28%)
B. r = rm/(1 – 72%)
C. r = rm * (1 – 72%)
D. r = rm/(1 – 28%)

17. A firm that fails to pay dividends on its preferred stock is said to be _________.
A. insolvent
B. in arrears
C. insufferable
D. delinquent

18. Which of the following is most like a short-term collateralized loan?
A. Certificate of deposit
B. Repurchase agreement
C. Banker’s acceptance
D. Commercial paper

19. A stock quote indicates a stock price of $60 and a dividend yield of 3%. The latest quarterly
dividend received by stock investors must have been ______ per share.
A. $0.55
B. $1.80
C. $0.45
D. $1.25

20. The Chompers Index is a price weighted stock index based on the 3 largest fast food chains.
The stock prices for the three stocks are $54, $23, and $44. What is the price weighted index
value of the Chompers Index?
A. 23.43
B. 35.36
C. 40.33
D. 49.58

21. In a defined benefit pension plan, the _____ bears all of the fund’s investment performance
risk.
A. employer
B. employee
C. fund manager
D. government

22. Which one of the following would be considered to be a “cash equivalent” investment?
A. Treasury bills
B. Common stock
C. Corporate bonds
D. Real estate

23. The two most important factors in describing an individual or organization’s investment
objectives are ________________.
A. income level and age
B. income level and risk tolerance
C. age and risk tolerance
D. return requirement and risk tolerance

24. An employee has an average wage of $60,000 and they have worked for the firm for 25
years. The defined benefit pension plan pays retirees 2.5% of the average wage times the years of
service. The employee can expect to receive _______ per year upon retirement.
A. $18,000
B. $37,500
C. $45,325
D. $55,250

25. _______ is a life insurance policy that provides a death benefit and a fixed rate tax deferred
savings plan.
A. Term life
B. Whole life
C. Variable life
D. Universal life

26. Earnings on variable life and universal life insurance policies are ___________.
A. never taxed
B. taxed only at the capital gains tax rate
C. not taxed until the money is withdrawn
D. not taxed at the federal level but are taxed at the state level

27. The objectives of personal trusts normally are __________ in scope than those of individual
investors and personal trust managers typically are __________ than individual investors.
A. broader; more risk averse
B. broader; less risk averse
C. more limited; more risk averse
D. more limited; less risk averse

28. Conservative investors are likely to want to invest in __________ mutual funds while risktolerant investors are likely to want to invest in __________.
A. income, high growth
B. income, moderate growth
C. moderate income, high growth
D. moderate income, moderate growth

29. An investor is looking at different retirement investment choices and he is willing to accept
one with upside potential even if that means sacrificing certainty. Which of the following will he
most likely select?
A. Fixed annuity
B. Defined benefit plan
C. Defined contribution plan
D. Bonds invested in an IRA

30. The asset universe is the _____________________.
A. set of investments an investment company can legally invest in
B. existing set of assets the investment company currently owns in one or more of its portfolios
C. list of assets approved by the investment committee that may be placed in the investment
company’s portfolios
D. market portfolio of all available risky assets

31. Barnegat Light sold 200,000 shares in an initial public offering. The underwriter’s explicit
fees were $90,000. The offering price for the shares was $35, but immediately upon issue, the
share price jumped to $43. What is the best estimate of the total cost to Barnegat Light of the
equity issue?
A. $90,000
B. $1,290,000
C. $2,390,000
D. $1,690,000

32. Circuit breakers will be imposed if the Dow Jones Industrial Average drops by a minimum of
______ by 2.30 pm.
A. 10%
B. 20%
C. 30%
D. 40%

33. The __________ was established to protect investors from losses if their brokerage firms
fail.
A. CFTC
B. SEC
C. SIPC
D. AIMR

34. According to Loughran and Ritter, initial public offerings tend to exhibit __________
performance initially, and __________ performance over the long term.
A. bad; good
B. bad; bad
C. good; good
D. good; bad

35. The bid-ask spread exists because of _______________.
A. market inefficiencies
B. discontinuities in the markets
C. the need for dealers to cover expenses and make a profit
D. lack of trading in thin markets

36. You find that the bid and ask prices for a stock are $10.25 and $10.30 respectively. If you
purchase or sell the stock you must pay a flat commission of $25. If you buy 100 shares of the
stock and immediately sell them, what is your total implied and actual transaction cost in
dollars?
A. $50
B. $25
C. $30
D. $55

37. You short-sell 200 shares of Rock Creek Fly Fishing Co., now selling for $50 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

38. Which Congressional action directed the SEC to implement a national competitive securities
market?
A. Securities Act of 1933
B. SEC Act of 1934
C. Securities Act Amendments of 1975
D. Financial Services Modernization Act of 1999

39. Brokerage firms can change margin-loan practices ____.
A. without notice
B. only after 72 hours notice
C. only on new orders
D. only with permission from the SEC

40. The commission structure on a stock purchase is $20 plus $0.02 per share. If you purchase 4
round lots of a stock selling for $56, what is your commission?
A. $20
B. $22
C. $26
D. $28

41. The two principal types of REITs are equity trusts which _______________ and mortgage
trusts which _______________.
A. invest directly in real estate; invest in mortgage and construction loans
B. invest in mortgage and construction loans; invest directly in real estate
C. use extensive leverage; distribute less than 95% of income to shareholders
D. distribute less than 95% of income to shareholders; use extensive leverage

42. The type of mutual fund that primarily engages in market timing is called a/an _______.
A. sector fund
B. index fund
C. ETF
D. asset allocation fund

43. Assume that you have recently purchased 100 shares in an investment company. Upon
examining the balance sheet, you note the firm is reporting $225 million in assets, $30 million in
liabilities, and 10 million shares outstanding. What is the Net Asset Value (NAV) of these
shares?
A. $25.50
B. $22.50
C. $19.50
D. $1.95

44. Investors who wish to liquidate their holdings in a unit investment trust may
___________________.
A. sell their shares back to the trustee at a discount
B. sell their shares back to the trustee at net asset value
C. sell their shares on the open market
D. sell their shares at a premium to net asset value

45. Low load mutual funds have front-end loads of no more than _____.
A. 2%
B. 3%
C. 4%
D. 5%

46. If a mutual fund has multiple class shares, which class typically has a front end load?
A. Class A
B. Class B
C. Class C
D. Class D

47. Consider a no-load mutual fund with $200 million in assets and 10 million shares at the start
of the year, and $250 million in assets and 11 million shares at the end of the year. During the
year investors have received income distributions of $2 per share, and capital gains distributions
of $0.25 per share. Assuming that the fund carries no debt, and that the total expense ratio is 1%,
what is the rate of return on the fund?
A. 36.25%
B. 24.90%
C. 23.85%
D. There is not sufficient information to answer this question

48. A/an _____ is an example of an exchange-traded fund.
A. SPDR or spider
B. samurai
C. Vanguard
D. open-end fund

49. A mutual fund has total assets outstanding of $69 million. During the year the fund bought
and sold assets equal to $17.25 million. This fund’s turnover rate was _____.
A. 25.00%
B. 28.50%
C. 18.63%
D. 33.40%

50. The assets of a mutual fund are $25 million. The liabilities are $4 million. If the fund has
700,000 shares outstanding and pays a $3 dividend, what is the dividend yield?
A. 5%
B. 10%
C. 15%
D. 20%

51. 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 $3.50. Your HPR was ____.
A. 4.00%
B. 3.50%
C. 7.00%
D. 11.00%

52. The geometric average of -12%, 20% and 25% is _________.
A. 8.42%
B. 11.00%
C. 9.70%
D. 18.88%

53. Suppose you pay $9,800 for a $10,000 par Treasury bill maturing in two months. What is the
annual percentage rate of return for this investment?
A. 2.04%
B. 12.00 %
C. 12.24%
D. 12.89%

54. Historically small firm stocks have earned higher returns than large firm stocks. When
viewed in the context of an efficient market, this suggests that ___________.
A. small firms are better run than large firms
B. government subsidies available to small firms produce effects that are discernible in stock
market statistics
C. small firms are riskier than large firms
D. small firms are not being accurately represented in the data

55. If you are promised a nominal return of 12% on a one year investment, and you expect the
rate of inflation to be 3%, what real rate do you expect to earn?
A. 5.48%
B. 8.74%
C. 9.00%
D. 12.00%

56. The holding period return on a stock was 25%. Its ending price was $18 and its beginning
price was $16. Its cash dividend must have been _________.
A. $0.25
B. $1.00
C. $2.00
D. $4.00

57. Consider the following two investment alternatives. First, a risky portfolio that pays 20% rate
of return with a probability of 60% or 5% with a probability of 40%. Second, a treasury bill that
pays 6%. If you invest $50,000 in the risky portfolio, your expected profit would be _________.
A. $3,000
B. $7,000
C. $7,500
D. $10,000

58. A security with normally distributed returns has an annual expected return of 18% and
standard deviation of 23%. The probability of getting a return between -28% and 64% in any one
year is
A. 68.26%
B. 95.44%
C. 99.74%
D. 100.00%

59. Which one of the following would be considered a risk-free asset in real terms as opposed to
nominal?
A. Money market fund
B. U.S. T-bill
C. Short term corporate bonds
D. U.S. T-bill whose return was indexed to inflation

60. Which of the following are correct arguments supporting passive investment strategies?
I. Active trading strategies may not guarantee higher returns but guarantee higher costs
II. Passive investors can free ride on the activity of knowledge investors whose trades force
prices to reflect currently available information
III. Passive investors are guaranteed to earn higher rates of return than active investors over
sufficiently long time horizons
A. I only
B. I and II only
C. II and III only
D. I, II and III

61. Adding additional risky assets to the investment opportunity set will generally move the
efficient frontier _____ and to the ______.
A. up, right
B. up, left
C. down, right
D. down, left

62. The correlation coefficient between two assets equals to _________.
A. their covariance divided by the product of their variances
B. the product of their variances divided by their covariance
C. the sum of their expected returns divided by their covariance
D. their covariance divided by the product of their standard deviations

63. Market risk is also called __________ and _________.
A. systematic risk, diversifiable risk
B. systematic risk, nondiversifiable risk
C. unique risk, nondiversifiable risk
D. unique risk, diversifiable risk

64. The standard deviation of return on investment A is .10 while the standard deviation of return
on investment B is .04. If the correlation coefficient between the returns on A and B is -.50, the
covariance of returns on A and B is _________.
A. -.0447
B. -.0020
C. .0020
D. .0447

65. A measure of the riskiness of an asset held in isolation is ____________.
A. beta
B. standard deviation
C. covariance
D. semi-variance

66. According to Tobin’s separation property, portfolio choice can be separated into two
independent tasks consisting of __________ and __________.
A. identifying all investor imposed constraints; identifying the set of securities that conform to
the investor’s constraints and offer the best risk-return tradeoffs
B. identifying the investor’s degree of risk aversion; choosing securities from industry groups
that are consistent with the investor’s risk profile
C. identifying the optimal risky portfolio; constructing a complete portfolio from T-bills and the
optimal risky portfolio based on the investor’s degree of risk aversion
D. choosing which risky assets an investor prefers according to their risk aversion level;
minimizing the CAL by lending at the risk-free rate

67. A stock has a correlation with the market of 0.45. The standard deviation of the market is
21% and the standard deviation of the stock is 35%. What is the stock’s beta?
A. 1.00
B. 0.75
C. 0.60
D. 0.55

68. Decreasing the number of stocks in a portfolio from 50 to 10 would likely
_________________________.
A. increase the systematic risk of the portfolio
B. increase the unsystematic risk of the portfolio
C. increase the return of the portfolio
D. decrease the variation in returns the investor faces in any one year

69. What is the standard deviation of a portfolio of two stocks given the following data? Stock A
has a standard deviation of 30%. Stock B has a standard deviation of 18%. The portfolio contains
60% of stock A and the correlation coefficient between the two stocks is -1.0.
A. 0.0%
B. 10.8%
C. 18.0%
D. 24.0%

70. A project has a 50% chance of doubling your investment in one year and a 50% chance of
losing half your money. What is the expected return on this investment project?
A. 0%
B. 25%
C. 50%
D. 75%

71. Fama and French claim that after controlling for firm size and the ratio of firm’s book value
to market value, beta is ______________.
I. highly significant in predicting future stock returns
II. relatively useless in predicting future stock returns
III. a good predictor of firm’s specific risk
A. I only
B. II only
C. I and III only
D. I, II and III

72. In a well diversified portfolio, __________ risk is negligible.
A. nondiversifiable
B. market
C. systematic
D. unsystematic

73. You have a $50,000 portfolio consisting of Intel, GE and Con Edison. You put $20,000 in
Intel, $12,000 in GE and the rest in Con Edison. Intel, GE and Con Edison have betas of 1.3, 1.0
and 0.8 respectively. What is your portfolio beta?
A. 1.048
B. 1.033
C. 1.000
D. 1.037

74. Consider the one-factor APT. The variance of the return on the factor portfolio is .08. The
beta of a well-diversified portfolio on the factor is 1.2. The variance of the return on the welldiversified portfolio is approximately _________.
A. .1152
B. .1270
C. .1521
D. .1342

75. The possibility of arbitrage arises when ____________.
A. there is no consensus among investors regarding the future direction of the market, and thus
trades are made arbitrarily
B. mis-pricing among securities creates opportunities for riskless profits
C. two identically risky securities carry the same expected returns
D. investors do not diversify

76. The risk-free rate is 4%. The expected market rate of return is 11%. If you expect stock X
with a beta of .8 to offer a rate of return of 12 percent, then you should _________.
A. buy stock X because it is overpriced
B. buy stock X because it is underpriced
C. sell short stock X because it is overpriced
D. sell short stock X because it is underpriced

77. Beta is a measure of ______________.
A. total risk
B. relative systematic risk
C. relative non-systematic risk
D. relative business risk

78. Standard deviation of portfolio returns is a measure of ___________.
A. total risk
B. relative systematic risk
C. relative non-systematic risk
D. relative business risk

79. The expected return on the market is the risk free rate plus the _____________.
A. diversified returns
B. equilibrium risk premium
C. historical market return
D. unsystematic return

80. Using the index model, the alpha of a stock is 3.0%, the beta if 1.1 and the market return is
10%. What is the residual given an actual return of 15%?
A. 0.0%
B. 1.0%
C. 2.0%
D. 3.0%

81. The strong form of the EMH states that ________ must be reflected in the current stock
price.
A. all security price and volume data
B. all publicly available information
C. all information including inside information
D. all costless information

82. If you believe in the __________ form of the EMH, you believe that stock prices reflect all
publicly available information but not information that is available only to insiders.
A. semi-strong
B. strong
C. weak
D. perfect

83. You are an investment manager who is currently managing assets worth $6 billion. You
believe that active management of your fund could generate between an additional one tenth of
1% return on the portfolio. If you want to make sure your active strategy adds value, how much
can you spend on security analysis?
A. $12,000,000
B. $6,000,000
C. $3,000,000
D. $0

84. Evidence supporting semi-strong form market efficiency suggests that investors should
_________________________.
A. rely on technical analysis to select securities
B. rely on fundamental analysis to select securities
C. use a passive trading strategy such as purchasing an index fund or an ETF
D. select securities by throwing darts at the financial pages of the newspaper

85. Fundamental analysis is likely to yield best results for _______.
A. NYSE stocks
B. neglected stocks
C. stocks that are frequently in the news
D. fast growing companies

86. J.M. Keyes put all his money in one stock and the stock doubled in value in a matter of
months. He did this three times in a row with three different stocks. J.M. got his picture on the
front page of the Wall Street Journal. However the paper never mentioned the thousands of
investors who made similar bets on other stocks and lost most of their money. This is an example
of the ________ problem in deciding how efficient the markets are.
A. magnitude
B. selection bias
C. lucky event
D. small firm

87. Stock market analysts have tended to be ___________ in their recommendations to
investors.
A. slightly overly optimistic
B. overwhelmingly optimistic
C. slightly overly pessimistic
D. overwhelmingly pessimistic

88. Fundamental indexing refers to ________.
A. investing in index stocks in proportion to the stock’s fundamental value
B. investing in index stocks in proportion to the stock’s market value
C. investing an equal dollar amount in index stocks
D. investing in an equal amount shares in each of the index stocks

89. Someone who invests in the Vanguard Index 500 mutual fund could most accurately be
described as using what approach?
A. Active management
B. Arbitrage
C. Fundamental analysis
D. Passive investment

90. Most evidence indicates that U.S. stock markets are _______________________.
A. reasonably weak form and semi-strong form efficient
B. strong form efficient
C. reasonably weak form but not semi- or strong form efficient
D. neither weak form, semi- or strong form efficient

91. Testing many different trading rules until you find one that would have worked in the past is
called _______.
A. data mining
B. perceived patterning
C. pattern searching
D. behavioral analysis

92. According to market technicians it is time to sell stock in a head-and-shoulders formation
when ___________.
A. the price index pierces the left shoulder
B. the price index pierces the right shoulder
C. the price index pierces head
D. none of the above takes place.

93. According to Elliot wave theory, the stock market behavior can be explained as
_________________.
A. a series of medium-term wave cycles with no short-term trend
B. a series of long-term wave cycles with no short-term trend
C. a series of superimposed long-term and short-term wave cycles
D. sine and cosine functions

94. An investor holds a very conservative portfolio invested for retirement but she takes some
extra cash she earned from her year-end bonus and buys gold futures. She appears to be engaging
in ___________.
A. overconfidence
B. representativeness
C. forecast errors
D. mental accounting

95. Which one of the following statements on the Dow Theory is correct?
A. The Elliot wave theory is the only recent variation of the Dow Theory.
B. The theory of Kondratieff waves is the only recent variation of the Dow Theory.
C. Both the Elliot wave theory and the theory of Kondratieff waves are recent variations of the
Dow Theory.
D. Neither the Elliot wave theory nor the theory of Kondratieff waves are recent variations of the
Dow Theory.

96. On a particular day, there were odd-lot sales of 830,000 on the NYSE and 746,000 odd-lot
purchases. The odd-lot trading index is __________.
A. 0.43
B. 0.90
C. 0.77
D. 1.11

97. On a particular day, there were 890 stocks which advanced on the NYSE and 723 which
declined. The volume in advancing issues was 80,846,000 and the volume in declining issues
was 70,397,000. The common measure of market breadth is __________.
A. -10,449,000
B. -167
C. 167
D. 10,449,000

98. The tendency of investors to hold on to losing investments is called the ________.
A. overweighting effect
B. head-in-the-sand effect
C. disposition effect
D. prospector effect

99. Problems with behavioral finance include:
I. the behavioralists tell us nothing about how to exploit any irrationality
II. the implications of behavioral patterns are inconsistent from case to case, sometimes
suggesting overreaction, sometimes underreaction
III. like technical trading rules, behavioralists can always find some pattern in past data that
supports a behavioralist trait
A. I only
B. II only
C. I and III only
D. I, II and III

100. The price of a stock fluctuates over a period of 10 days. The movement of the stock price
below the 10 day minimum price of $25 triggers a rash of selling. The $25 price might now be
considered the _______________.
A. congestion area
B. penetration point
C. resistance level
D. support level

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