What is the taxable equivalent yield on a municipal bond with a yield to maturity of 4.5 percent for an investor in the 39 percent marginal tax bracket?
1.76 percent
4.50 percent
7.38 percent
11.54 percent
Rank the following bonds in order from lowest credit risk to highest risk all with the same time to maturity, by their yield to maturity: JM Corporate bond with yield of 12.25 percent, IB Corporate bond with yield of 4.49 percent, TC Corporate bond with yield of 8.76 percent, and B&O Corporate bond with a yield of 5.99 percent.
JM bond, TC bond, B&O bond, IB bond
IB bond, B&O bond, TC bond, JM bond
TC bond, B&O bond, IB bond, JM bond
JM bond, IB bond, B&O bond, TC bond
A 5.75 percent coupon bond with 12 years left to maturity is offered for sale at $978.83. What yield to maturity is the bond offering? (Assume interest payments are paid semi-annually and par value is $1,000.)
3.00 percent
3.09 percent
5.75 percent
6.00 percent
A client in the 28 percent marginal tax bracket is comparing a municipal bond that offers a 3.25 percent yield to maturity and a similar-risk corporate bond that offers a 4.10 percent yield. Which bond will give the client more profit after taxes?
The municipal bond.
The corporate bond.
Both give the client equal profits after taxes.
There is not enough information given to determine answer.
Portfolio Weights An investor owns $15,000 of Adobe Systems stock, $15,500 of Dow Chemical, and $17,000 of Office Depot. What are the portfolio weights of each stock?
Adobe System = 0.3333, Dow Chemical = 0.3333, Office Depot = 0.3333
Adobe System = 0.3158, Dow Chemical = 0.3263, Office Depot = 0.3579
Adobe System = 0.3263, Dow Chemical = 0.3158, Office Depot = 0.3579
Adobe System = 0.2667, Dow Chemical = 0.3333, Office Depot = 0.4000
Portfolio Return Year-to-date, Company O had earned a -7.4 percent return. During the same time period, Company V earned 9.65 percent and Company M earned 2.68 percent. If you have a portfolio made up of 20 percent Company O, 40 percent Company V, and 40 percent Company M, what is your portfolio return?
4.93%
6.41%
3.45%
19.73%
Average Return The past five monthly returns for K and Company are 4.55 percent, 4.72 percent, -.65 percent, -.15 percent, and 9.30 percent. What is the average monthly return?
3.874%
1.614%
1.481%
3.554%
Portfolio Weights If you own 270 shares of Air Line Inc at $18.95, 170 shares of BuyRite at $9.9, and 370 shares of Motor City at $45.95, what are the portfolio weights of each stock?
Air Line = .2700, BuyRite = .1700, MotorCity = .3700
Air Line = .3333, BuyRite = .3333, MotorCity = .3333
Air Line = .3333, BuyRite = .2099, MotorCity = .4568
Air Line = .2150, BuyRite = .0707, MotorCity = .7143
Portfolio Return At the beginning of the month, you owned $6,500 of Company G, $8,900 of Company S, and $2,800 of Company N. The monthly returns for Company G, Company S, and Company N were 8.15 percent, -1.59 percent, and -.14 percent. What is your portfolio return?
2.14%
6.42%
3.29%
2.13%
The standard deviation of the past five monthly returns for PG Company are 2.75 percent, -0.75 percent, 4.15 percent, 6.29 percent, and 3.84 percent. What is the standard deviation?
2.309 percent
2.581 percent
3.256 percent
3.406 percent
Rank the following three stocks by their risk-return relationship, best to worst. Rail Haul has an average return of 10 percent and standard deviation of 19 percent. The average return and standard deviation of Idol Staff are 12 percent and 22 percent; and of Poker-R-Us are 11 percent and 25 percent.
Idol Staff, Rail Haul, Poker-R-Us
Rail Haul, Idol Staff, Poker-R-Us
Idol Staff, Poker-R-Us, Rail Haul
Poker-R-Us, Rail Haul, Idol Staff
Which of the following statements is correct?
A single stock has a lot of diversifiable risk.
A single stock has more market risk than a diversified portfolio of stocks.
Bonds and stocks have a high correlation because they are both financial assets.
None of these statements is correct.
Which of the following statements is correct with regards to diversification?
Diversifying reduces the return of the portfolio.
Diversifying reduces the market risk of the portfolio.
Diversifying reduces the dollar return of the portfolio.
None of these statements is correct.
Expected Return Compute the expected return given these three economic states, their likelihoods, and the potential returns:
Economic State
Probability
Return
Fast Growth
.1
29%
Slow Growth
.8
14%
Recession
.1
-29%
14.0%
14.3%
11.2%
17.0%
Risk Premium If the annual return on the S&P 500 Index was 14.00 percent. The annual T-bill yield during the same period was 6.50 percent. What was the market risk premium during that year?
20.50%
14.00%
7.50%
6.50%
CAPM Required Return A company has a beta of .69. If the market return is expected to be 13.9 percent and the risk-free rate is 5.95 percent, what is the company's required return?
11.44%
15.54%
17.39%
9.59%
Portfolio Beta You have a portfolio with a beta of .94. What will be the new portfolio beta if you keep 40 percent of your money in the old portfolio and 60 percent in a stock with a beta of 1.54?
1.24
1.00
1.30
2.48
Under/Over Valued Stock A manager believes his firm will earn a 17.8 percent return next year. His firm has a beta of 1.68, the expected return on the market is 15.8 percent, and the risk-free rate is 5.8 percent. Compute the return the firm should earn given its level of risk and determine whether the manager is saying the firm is under-valued or over-valued.
22.6%, under-valued
27.544%, under-valued
27.544%, over-valued
22.6%, over-valued
What is the taxable equivalent yield on a municipal bond with a yield to maturity of 4.5 percent for an investor in the 39 percent marginal tax bracket?
1.76 percent
4.50 percent
7.38 percent
11.54 percent
Rank the following bonds in order from lowest credit risk to highest risk all with the same time to maturity, by their yield to maturity: JM Corporate bond with yield of 12.25 percent, IB Corporate bond with yield of 4.49 percent, TC Corporate bond with yield of 8.76 percent, and B&O Corporate bond with a yield of 5.99 percent.
JM bond, TC bond, B&O bond, IB bond
IB bond, B&O bond, TC bond, JM bond
TC bond, B&O bond, IB bond, JM bond
JM bond, IB bond, B&O bond, TC bond
A 5.75 percent coupon bond with 12 years left to maturity is offered for sale at $978.83. What yield to maturity is the bond offering? (Assume interest payments are paid semi-annually and par value is $1,000.)
3.00 percent
3.09 percent
5.75 percent
6.00 percent
A client in the 28 percent marginal tax bracket is comparing a municipal bond that offers a 3.25 percent yield to maturity and a similar-risk corporate bond that offers a 4.10 percent yield. Which bond will give the client more profit after taxes?
The municipal bond.
The corporate bond.
Both give the client equal profits after taxes.
There is not enough information given to determine answer.
Portfolio Weights An investor owns $15,000 of Adobe Systems stock, $15,500 of Dow Chemical, and $17,000 of Office Depot. What are the portfolio weights of each stock?
Adobe System = 0.3333, Dow Chemical = 0.3333, Office Depot = 0.3333
Adobe System = 0.3158, Dow Chemical = 0.3263, Office Depot = 0.3579
Adobe System = 0.3263, Dow Chemical = 0.3158, Office Depot = 0.3579
Adobe System = 0.2667, Dow Chemical = 0.3333, Office Depot = 0.4000
Portfolio Return Year-to-date, Company O had earned a -7.4 percent return. During the same time period, Company V earned 9.65 percent and Company M earned 2.68 percent. If you have a portfolio made up of 20 percent Company O, 40 percent Company V, and 40 percent Company M, what is your portfolio return?
4.93%
6.41%
3.45%
19.73%
Average Return The past five monthly returns for K and Company are 4.55 percent, 4.72 percent, -.65 percent, -.15 percent, and 9.30 percent. What is the average monthly return?
3.874%
1.614%
1.481%
3.554%
Portfolio Weights If you own 270 shares of Air Line Inc at $18.95, 170 shares of BuyRite at $9.9, and 370 shares of Motor City at $45.95, what are the portfolio weights of each stock?
Air Line = .2700, BuyRite = .1700, MotorCity = .3700
Air Line = .3333, BuyRite = .3333, MotorCity = .3333
Air Line = .3333, BuyRite = .2099, MotorCity = .4568
Air Line = .2150, BuyRite = .0707, MotorCity = .7143
Portfolio Return At the beginning of the month, you owned $6,500 of Company G, $8,900 of Company S, and $2,800 of Company N. The monthly returns for Company G, Company S, and Company N were 8.15 percent, -1.59 percent, and -.14 percent. What is your portfolio return?
2.14%
6.42%
3.29%
2.13%
The standard deviation of the past five monthly returns for PG Company are 2.75 percent, -0.75 percent, 4.15 percent, 6.29 percent, and 3.84 percent. What is the standard deviation?
2.309 percent
2.581 percent
3.256 percent
3.406 percent
Rank the following three stocks by their risk-return relationship, best to worst. Rail Haul has an average return of 10 percent and standard deviation of 19 percent. The average return and standard deviation of Idol Staff are 12 percent and 22 percent; and of Poker-R-Us are 11 percent and 25 percent.
Idol Staff, Rail Haul, Poker-R-Us
Rail Haul, Idol Staff, Poker-R-Us
Idol Staff, Poker-R-Us, Rail Haul
Poker-R-Us, Rail Haul, Idol Staff
Which of the following statements is correct?
A single stock has a lot of diversifiable risk.
A single stock has more market risk than a diversified portfolio of stocks.
Bonds and stocks have a high correlation because they are both financial assets.
None of these statements is correct.
Which of the following statements is correct with regards to diversification?
Diversifying reduces the return of the portfolio.
Diversifying reduces the market risk of the portfolio.
Diversifying reduces the dollar return of the portfolio.
None of these statements is correct.
Expected Return Compute the expected return given these three economic states, their likelihoods, and the potential returns:
| Economic State | Probability | Return |
| Fast Growth | .1 | 29% |
| Slow Growth | .8 | 14% |
| Recession | .1 | -29% |
14.0%
14.3%
11.2%
17.0%
Risk Premium If the annual return on the S&P 500 Index was 14.00 percent. The annual T-bill yield during the same period was 6.50 percent. What was the market risk premium during that year?
20.50%
14.00%
7.50%
6.50%
CAPM Required Return A company has a beta of .69. If the market return is expected to be 13.9 percent and the risk-free rate is 5.95 percent, what is the company's required return?
11.44%
15.54%
17.39%
9.59%
Portfolio Beta You have a portfolio with a beta of .94. What will be the new portfolio beta if you keep 40 percent of your money in the old portfolio and 60 percent in a stock with a beta of 1.54?
1.24
1.00
1.30
2.48
Under/Over Valued Stock A manager believes his firm will earn a 17.8 percent return next year. His firm has a beta of 1.68, the expected return on the market is 15.8 percent, and the risk-free rate is 5.8 percent. Compute the return the firm should earn given its level of risk and determine whether the manager is saying the firm is under-valued or over-valued.
22.6%, under-valued
27.544%, under-valued
27.544%, over-valued
22.6%, over-valued
Related questions
Question 5
The coefficient of variation is a better measure of risk than the standard deviation if the expected returns of the securities being compared differ significantly.
| True |
| False |
Question 6.
In portfolio analysis, we often use ex post (historical) returns and standard deviations, despite the fact that we are interested in ex ante (future) data.
| True |
| False |
Question 7
Typically, debentures have higher interest rates than mortgage bonds primarily because the mortgage bonds are backed by assets while debentures are unsecured.
| True |
| False |
Question 8
If two firms have the same current dividend and the same expected growth rate, their stocks must sell at the same current price or else the market will not be in equilibrium.
| True |
| False |
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Question 9
Which of the following is the best measure of the wealth of a firm's stockholders?
| The firm's Net Income during the past year |
| Expected Earnings per Share during the coming year |
| Book Value (or Net Worth) as recorded on the balance sheet |
| The price of the firm's stock on the open market |
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Question 10
Consider the following firms:
| Net Income | Stock Price at | Stock Price at | |
| this year | Beg of Year | End of Year | |
| Firm A: | $10,000,000 | $20 | $10 |
| Firm B: | $(10,000,000) | $10 | $20 |
| The manager of Firm A is doing a better job than B |
| The manager of Firm B is doing a better job than A |
| Neither manager is doing a good job |
| Both managers are doing a good job |
Question 11
A company has the following income statement. What is its net operating profit after taxes (NOPAT)?
Sales $1,000
Costs 700
Depreciation 100
EBIT $ 200
Interest expense 50
EBT $ 150
Taxes (40%) 60
Net income $ 90
| $ 90 |
| $120 |
| $150 |
| $180 |
| $200 |
Question 12
Carter Corporation has some money to invest, and its treasurer is choosing between City of Chicago municipal bonds and U.S. Treasury bonds. Both have the same maturity, and they are equally risky and liquid. If Treasury bonds yield 6 percent, and Carter's marginal income tax rate is 40 percent, what yield on the Chicago municipal bonds would make Carter's treasurer indifferent between the two?
| 2.40% |
| 3.60% |
| 4.50% |
| 5.25% |
| 6.00% |
Question 13
If a firm's current ratio is less than 1.0, it indicates that:
| The firm had negative net income for the year |
| The firm will be unable to pay its shortterm loans which come due this year |
| Current Assets are less than Current Liabilities |
| The firm is insolvent |
Question 14
A firm which has a relatively large amount of cash and receivables in its current assets accounts and a relatively small amount of current liabilities would be considered:
| liquid |
| profitable |
| risky |
| nuts |
Question 15
In November 2011 you bought 100 shares of Microsoft stock for $35.375 a share. In November 2013 you sold your stock for $92.5625 a share. What was your average annual rate of return on your Microsoft investment? (disregard dividends and commissions)
| 262% |
| 62% |
| 585% |
| 1.6% |
Question 16
You deposit $2,000 in a savings account that pays 10 percent interest, compounded annually. How much will your account be worth in 15 years?
| $2,030.21 |
| $5,000.00 |
| $8,091.12 |
| $8,354.50 |
| $9,020.10 |
Question 17
You can earn 8 percent interest, compounded annually. How much must you deposit today to withdraw $10,000 in 6 years?
| $5,402.69 |
| $6,301.70 |
| $6,756.76 |
| $8,432.10 |
| $9,259.26 |
Question 18
Calculate the required rate of return for Mercury, Inc., assuming that the real rate of interest is 3 percent, investors expect a 5 percent rate of inflation in the future, and they expect the rate of return on the overall stock market to be 13 percent. Mercury has a beta of 2.0.
| 15% |
| 16% |
| 17% |
| 18% |
| None of the above |
Question 19
Which is the best measure of risk for an asset held in isolation? Which is the best measure for an asset held in a diversified portfolio?
| Variance; correlation coefficient |
| Standard deviation; correlation coefficient |
| Beta; variance |
| Coefficient of variation; beta |
| Beta; beta |
Question 20
You have three stocks in your portfolio. $10,000 is invested in a stock with a beta of 1.50 and $15,000 is invested in a stock with a beta of 1.00, and $25,000 is invested in a stock with a beta of 0.50. What is the beta of your portfolio?
| 0.28 |
| 0.85 |
| 1.00 |
| 3.00 |
Question 21
A corporate bond with a $1,000 face value pays a $50 coupon every six months. The bond will mature in ten years, and has a nominal yield to maturity of 9 percent. What is the price of the bond?
| $ 634.86 |
| $1,064.18 |
| $1,065.04 |
| $1,078.23 |
| $1,094.56 |
Question 22
The Jones Company has decided to undertake a large project. Consequently, there is a need for additional funds. The financial manager plans to issue preferred stock with a perpetual annual dividend of $5 per share and a par value of $30. If the required return on this stock is currently 20 percent, what should be the stock's market value?
| $150 |
| $100 |
| $ 50 |
| $ 25 |
| $ 10 |
Question 23
A share of common stock has just paid a dividend of $2.00. If the expected long-run growth rate for this stock is 15 percent, and if investors require a 19 percent rate of return, what is the price of the stock?
| $57.50 |
| $62.25 |
| $71.86 |
| $64.00 |
| $44.92 |
Question 24
A stock is not expected to pay a dividend over the next four years. Five years from now, the company anticipates that it will establish a dividend of $1.00 per share (i.e., D5 = $1.00). Once the dividend is established, the market expects that the dividend will grow at a constant rate of 5 percent per year forever. The risk-free rate is 5 percent, the company's beta is 1.2, and the market risk premium is 5 percent. The required rate of return on the companyâs stock is expected to remain constant. What is the current stock price?
| $ 7.36 |
| $ 8.62 |
| $ 9.89 |
| $10.98 |
| $11.53 |
