Posted: September 4th, 2024

MD University College-FINANCE 340-FINC 340 INVESTMENTS FINAL EXAMINATION_04

FINC 340 INVESTMENTSFINAL EXAMINATION_04DIRECTIONS: Here is the Final Examination Question Sheet. Please submit your Final Examinaiton Answer Sheet to your FinalExamination Folder.Please submit your Midterm Examination MS Word format with the following file name:LastNameFirstInitial_MidtermExamAnswerSheet.docx. For example, if you name is John Smith, the file name of yourAnswer Sheet should be SmithJ_MidtermExamAnswerSheet.docx.NAME: _____________________________________QuizNumber1QuestionA company has paid $2 per share in dividends for the past several yearsand plans to continue to do so indefinitely. If an investor’s required return is13%, what is the most she should pay for a share of this firm’s stock?A:B:C:D:E:2Answer$15.38$20.00$22.60$26.13$65.00Bond mutual funds offer the following advantages over directinvestment in bonds EXCEPT:A: Better diversificationB: Transaction cost economiesC: Buy and sell individual bonds at individual investor’sdiscretionD: Reinvestment of intermediate cash flowsE: Better liquidity1FINC 340 INVESTMENTSFINAL EXAMINATION_043A $1,000 par value bond with a 5% coupon that pays interest semiannuallyand matures in 2 ½ years and has a current price of $977. What is theannualized yield to maturity?A:B:C:D:E:4An immunization strategy protects a portfolio from:A:B:C:D:E:53.0%4.0%5.0%6.0%7.0%Interest rate riskDefault riskLiquidity riskPrepayment riskEvent risk1. Market multiple methods include valuations based on all of thefollowing EXCEPT:A:B:C:D:E:6Price/earningsPrice/free cash flowPrice/dividendsPrice/salesAll of the above are acceptable market multiplesFactors that should be considered in taking a stock option positioninclude:A: The dividend paid on the underlying stockB: The volatility of the underlying stock2FINC 340 INVESTMENTSFINAL EXAMINATION_04C: The time to expirationD: The anticipated direction of market movementE: All of the above are relevant factors in the option decision7A three-year project costs $50,000 and returns $20,000 the first year,$30,000 the second year, and $25,000 the third year. If the required returnis 10.0%, what is the Net Present Value (NPV)?A:B:C:D:E:8Disadvantages of investing in the futures market include all of thefollowing EXCEPT:A:B:C:D:E:9$11,758$12,547$25,000$61,758$62,547Market is extremely volatileDaily mark-to-marketClearinghousePossibility of frequent margin callsPossibility of losing more than the original investmentA portfolio has a standard deviation of 22%. If the risk-free rate is 3.5%, theexpected return on the market portfolio is 12%, and the standard deviationof the market portfolio is 25%, what is the required return on the marketportfolio?A:B:C:7.48%10.98%12.00%3FINC 340 INVESTMENTSFINAL EXAMINATION_04D:E:10Factors that should be considered in the purchase of a stockincludes all of the following EXCEPT:A:B:C:D:E:11$17.25$20.99$24.56$31.14$32.76Rob pays 28% in combined local, state, and federal taxes. If a corporatebond yields 8.3%, what is the after-tax yield?A:B:C:D:E:13DividendGrowth potentialQuality of firm’s managementCoupon rate on the firm’s bondsPriceThe risk-free rate is 3.6% and the required return on the market portfolio is11.8%. A company that has just paid $1.80 per share in annual dividendshas a beta of 0.9 and long-term growth rate of 5.2%. What is the dollarvalue of this stock?A:B:C:D:E:1213.16%14.06%2.3%6.0%8.3%10.7%11.5%The risk-free rate is currently 2.8%. In one year the price of a given share4FINC 340 INVESTMENTSFINAL EXAMINATION_04of stock that currently trades at $40 per share is expected to eitherincrease by 8% or decrease by 2%. What is the current value of a call onthis stock with exercise price of $40?A:B:C:D:E:14Information included in “tombstone ads” include all of the followingEXCEPT:A:B:C:D:E:15$0.00$1.09$1.24$1.49$1.62The bond issuerThe price of the bondThe size of the issueThe maturity dateThe couponAdvantages of investing in tax-exempt bond funds include all of thefollowing EXCEPT:A: DiversificationB: Provides additional benefits to tax-deferred retirementplansC: Automatic reinvestingD: Fund maintains individual investor’s tax reports andrecordsE: Low initial deposit5FINC 340 INVESTMENTSFINAL EXAMINATION_04The next two problems refer to a four year project with an opportunity cost of 9% andthe following cash flows:16What is the safe-rate-reinvestment-rate IRR for this project?A:B:C:D:E:17What is the borrowing-rate-reinvestment-rate IRR for this project?A:B:C:D:E:1810.6%11.1%11.6%12.1%12.6%10.6%11.1%11.6%12.1%12.6%The satisfaction an investor gets out of consumption of goods and servicesand out of obtaining a given level of wealth isA:B:C:D:GreedUtilityReturnRisk6FINC 340 INVESTMENTSFINAL EXAMINATION_04E:19Susan has 40% of her portfolio invested in a mutual fund to track the S&P500 and 40% in a mutual fund to track the Dow Jones Industrial Average(DJIA) and 20% in government securities. To evaluate the performance ofher portfolio, what is Susan’s best benchmark?A:B:C:D:E:20Betathe DJIA Indexthe S&P 500 Indexa government security indexa 50%/50% combination of A and Ba combination of A, B, and CDurationA:Increases with maturityB:Measures the linear relationship between bond prices andbond yieldsC:Is always greater than the maturityD:All of the above are trueE:A and B are true, but C is false21What is the Sharpe ratio for Portfolio P?A:B:C:0.4780.5770.5827FINC 340 INVESTMENTSFINAL EXAMINATION_04D:E:22What is the Treynor ratio for Portfolio P?A:B:C:D:E:23-1.81%-0.630.00%+1.58%+1.79%The financial planning process include all of the following EXCEPTA:B:C:D:E:258.40%10.20%11.79%12.92%14.43%What is Jensen’s alpha for Portfolio P?A:B:C:D:E:240.7830.817assessing the current status of the financial markets.analyzing the client’s financial status.monitoring the portfolio.developing a policy statement.establishing a client-advisor relationship.Techniques to actively select securities include:A:B:C:D:E:Bottom-up approachTop-down approachIndexing approachAll of the above are acceptable approachesA and B are active approaches, but C is not8FINC 340 INVESTMENTSFINAL EXAMINATION_0426What is the correlation with the greatest potential for diversification?A:B:C:D:E:27Regular, periodic investments in a security without regard to price isA:B:C:D:E:28income averaging.dollar cost averaging.dividend reinvesting.fundamental investing.time investing.Hedging strategies areA:B:C:D:E:29-1.0-0.50.0+1.0+2.0designed to limit investment losses.a form of investment insurance.transfers risk from one entity to another.all of these statements are true.statements A and C are true, but B is not.To calculate the total asset turnover, the following financial statements areneeded:A:B:C:D:E:Balance SheetIncome StatementStatement of Cash FlowsAll of the above are neededA and B, but not C9FINC 340 INVESTMENTSFINAL EXAMINATION_0430Variables in the put-call parity include all of the following EXCEPT:A:B:C:D:E:31Risk-free rateTime to maturityStrike pricePrice of the underlying assetPrice earnings ratioIn the accumulation phase of the investor life cycleA:investors with long-term time horizons should accept onlylow risk.B:investors have high net worth.C:investors are saving for retirement only.D:investors may seek to accumulate wealth through higher riskinvestments.E:none of these choices apply.32The semi-strong form of the efficient market hypothesis states:A:B:C:D:E:33Security prices reflect all information, public and privateSecurity prices reflect all public informationSecurity prices reflect all market informationSecurity prices reflect all accounting informationSecurity prices reflect all economic informationA company currently has $3.50 earnings per share of which $1.05 is paid inannual dividends per share. If the growth rate for the firm is 4% per yearand the required return is 9%, what is the theoretical P/E ratio?A:B:5.716.0010FINC 340 INVESTMENTSFINAL EXAMINATION_04C:D:E:34Given returns of 15%, -8%, 12%, and 5%, what is the difference betweenthe arithmetic average and geometric average?A:B:C:D:E:35ButterflyCollarStrangleAll of the above are deviations of a straddleA and C are deviations of a straddle, but B is notAn immunization strategy protects a portfolio from:A:B:C:D:E:370.00%0.07%0.39%1.30%1.53%Deviations of a straddle include:A:B:C:D:E:366.246.667.00Interest rate riskDefault riskLiquidity riskPrepayment riskEvent riskThe semi-strong form of the efficient market hypothesis states:A:Security prices reflect all information, public and private11FINC 340 INVESTMENTSFINAL EXAMINATION_04B:C:D:E:38Security prices reflect all public informationSecurity prices reflect all market informationSecurity prices reflect all accounting informationSecurity prices reflect all economic informationSusan has a 5-year “bunny bond” with a yield to maturity of 6.4%that will be automatically reinvested next month. She is consideringliquidating the bond and reinvesting in a 10-year 3.5% coupon bondwith a yield to maturity of 6.5%. Market rates are very unstable andare just as likely to rise or fall over Susan’s 5 year time horizon. Thebest action for Susan is toA: Invest in the 10-year bond since the yield is higherB: Invest in the 10-year bond because it has greater maturityC: Invest in the 10-year bond since the coupons can bereinvestedD: Reinvest in the “bunny bond” to avoid lost of accruedinterestE: Reinvest in the “bunny bond” to lock-in the yield39High price multiples:A:B:C:D:E:40May indicate the firm is overvaluedMay indicate high expected future growthMay indicate high levels of earnings or book valueAll of the above are trueA and B are true, but C is not trueThree years ago, an ETF was initiated with 1 million shares in 10stocks each with a market value of $10. The total market value of theETF was then $100 million (1 million shares * 10 stocks * $10). TheETF issued 20 million shares which originally sold for $5 a share.Last year, Nancy purchased 100,000 shares for $7 a share. The12FINC 340 INVESTMENTSFINAL EXAMINATION_04price has now increased to $12 a share, and Nancy is consideringredeeming her shares. Assume none of the original shares havebeen sold or redeemed. If Nancy redeems her shares, her cost basiswhen she sells the shares isA:B:C:D:E:$ 200,000$ 500,000$ 700,000$1,000,000$1,200,00013

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