Capital Markets
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Course Introduction
This course provides an in-depth exploration of capital markets, examining the structure, functions, and operations of financial markets where long-term debt and equity securities are traded. Students will study the roles played by various market participants, such as issuers, investors, brokers, and regulators, and analyze key instruments including stocks, bonds, and derivatives. Topics include market efficiency, valuation techniques, risk management, regulatory frameworks, and the impact of global events on capital market dynamics. Through case studies and practical exercises, students will gain a foundational understanding of how capital markets support economic growth and facilitate capital allocation.
Recommended Textbook Investments 10th Edition by Zvi Bodie
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Chapter 1: The Investment Environment
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Q1) Financial intermediaries exist because small investors cannot efficiently
A)diversify their portfolios.
B)assess credit risk of borrowers.
C)advertise for needed investments.
D)diversify their portfolios and assess credit risk of borrowers.
E)All of the options
Answer: E
Q2) Theoretically, takeovers should result in
A)improved management.
B)increased stock price.
C)increased benefits to existing management of taken-over firm.
D)improved management and increased stock price.
E)All of the options
Answer: D
Q3) Investors trade previously issued securities in the ________ market(s).
A)primary
B)secondary
C)primary and secondary
D)derivatives
Answer: B
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Chapter 2: Asset Classes and Financial Instruments
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Q1) If a Treasury note has a bid price of $995, the quoted bid price in the Wall Street Journal would be
A)99:50.
B)99:16.
C)99:80.
D)99:24.
E)99:32.
Answer: B
Q2) Certificates of deposit are insured for up to ____________ in the event of bank insolvency.
A)$10,000
B)$100,000
C)$250,000
D)$500,000
Answer: C
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Chapter 3: How Securities Are Traded
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Sample Questions
Q1) Which of the following orders instructs the broker to sell at or above a specified price
A)Limit-buy order
B)Discretionary order
C)Limit-sell order
D)Stop-buy order
E)Market order
Answer: C
Q2) Which of the following statements regarding the specialist are true
A)Specialists maintain a book listing outstanding unexecuted limit orders.
B)Specialists earn income from commissions and spreads in stock prices.
C)Specialists stand ready to trade at quoted bid and ask prices.
D)Specialists cannot trade in their own accounts.
E)Specialists maintain a book listing outstanding unexecuted limit orders, earn income from commissions and spreads in stock prices, and stand ready to trade at quoted bid and ask prices.
Answer: E
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Chapter 4: Mutual Funds and Other Investment Companies
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Sample Questions
Q1) A mutual fund had year-end assets of $250,000,000 and liabilities of $4,000,000.There were 3,750,000 shares in the fund at year-end.What was the mutual fund's net asset value
A)$92.53
B)$67.39
C)$63.24
D)$65.60
E)$17.46
Q2) The Profitability Fund had NAV per share of $17.50 on January 1, 2012.On December 31 of the same year, the fund's NAV was $19.47.Income distributions were $0.75, and the fund had capital gain distributions of $1.00.Without considering taxes and transactions costs, what rate of return did an investor receive on the Profitability Fund last year
A)11.26%
B)15.54%
C)16.97%
D)21.26%
E)9.83%
Q3) List and describe the more important types of mutual funds according to their investment policy and use.
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Page 6
Chapter 5: Risk, Return, and the Historical Record
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Sample Questions
Q1) If a portfolio had a return of 8%, the risk-free asset return was 3%, and the standard deviation of the portfolio's excess returns was 20%, the Sharpe measure would be
A)0.08.
B)0.03.
C)0.20.
D)0.11.
E)0.25.
Q2) Annual percentage rates (APRs) are computed using A)simple interest.
B)compound interest.
C)either simple interest or compound interest.
D)best estimates of expected real costs.
E)None of the options
Q3) In words, the real rate of interest is approximately equal to
A)the nominal rate minus the inflation rate.
B)the inflation rate minus the nominal rate.
C)the nominal rate times the inflation rate.
D)the inflation rate divided by the nominal rate.
E)the nominal rate plus the inflation rate.
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Chapter 6: Capital Allocation to Risky Assets
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Q1) An investor invests 70% of his wealth in a risky asset with an expected rate of return of 0.15 and a variance of 0.04 and 30% in a T-bill that pays 5%.His portfolio's expected return and standard deviation are __________ and __________, respectively.
A)0.120; 0.14
B)0.087; 0.06
C)0.295; 0.12
D)0.087; 0.12
Q2) Consider a risky portfolio, A, with an expected rate of return of 0.15 and a standard deviation of 0.15, that lies on a given indifference curve.Which one of the following portfolios might lie on the same indifference curve
A)E(r) = 0.15; Standard deviation = 0.20
B)E(r) = 0.15; Standard deviation = 0.10
C)E(r) = 0.10; Standard deviation = 0.10
D)E(r) = 0.20; Standard deviation = 0.15
E)E(r) = 0.10; Standard deviation = 0.20
Q3) Describe how an investor may combine a risk-free asset and one risky asset in order to obtain the optimal portfolio for that investor.
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Chapter 7: Optimal Risky Portfolios
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Q1) The risk that can be diversified away in a portfolio is referred to as ___________. I) diversifiable risk
II) unique risk
III) systematic risk
IV) firm-specific risk
A)I, III, and IV
B)II, III, and IV
C)III and IV
D)I, II, and IV
E)I, II, III, and IV
Q2) As the number of securities in a portfolio is increased, what happens to the average portfolio standard deviation
A)It increases at an increasing rate.
B)It increases at a decreasing rate.
C)It decreases at an increasing rate.
D)It decreases at a decreasing rate.
E)It first decreases, then starts to increase as more securities are added.
Q3) Draw a graph of a typical efficient frontier.Explain why the efficient frontier is shaped the way it is.
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Page 9
Chapter 8: Index Models
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Q1) If a firm's beta was calculated as 1.6 in a regression equation, a commonly used adjustment technique would provide an adjusted beta of
A)less than 0.6 but greater than zero.
B)between 0.6 and 1.0.
C)between 1.0 and 1.6.
D)greater than 1.6.
E)zero or less.
Q2) Assume that stock market returns do follow a single-index structure.An investment fund analyzes 217 stocks in order to construct a mean-variance efficient portfolio constrained by 217 investments.They will need to calculate ________ estimates of expected returns and ________ estimates of sensitivity coefficients to the macroeconomic factor.
A)217; 47,089
B)217; 217
C)47,089; 217
D)47,089; 47,089
E)None of the options
Q3) Discuss the security characteristic line (SCL).
Q4) Discuss a commonly used adjustment technique to provide an adjusted beta.
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Chapter 9: The Capital Asset Pricing Model
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Q1) Discuss the differences between the capital market line and the security market line.
Q2) Your opinion is that Boeing has an expected rate of return of 0.08.It has a beta of 0.92.The risk-free rate is 0.04 and the market expected rate of return is 0.10.According to the Capital Asset Pricing Model, this security is
A)underpriced.
B)overpriced.
C)fairly priced.
D)Cannot be determined from data provided.
Q3) The risk-free rate and the expected market rate of return are 0.056 and 0.125, respectively.According to the capital asset pricing model (CAPM), the expected rate of return on a security with a beta of 1.25 is equal to
A)0.142.
B)0.144.
C)0.153.
D)0.134.
E)0.117.
Q4) Discuss how the CAPM might be used in capital budgeting decisions and utility rate decisions.
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Page 11
Chapter 10: Arbitrage Pricing Theory and Multifactor Models
of Risk and Return
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Q1) In the APT model, what is the nonsystematic standard deviation of an equally weighted portfolio that has an average value of (e<sub>i</sub>) equal to 18% and 250 securities
A)1.14%
B)625%
C)0.5%
D)3.54%
E)3.16%
Q2) Which of the following is false about the security market line (SML) derived from the APT
A)The SML has a downward slope.
B)The SML for the APT shows expected return in relation to portfolio standard deviation.
C)The SML for the APT has an intercept equal to the expected return on the market portfolio.
D)The benchmark portfolio for the SML may be any well-diversified portfolio.
E)The SML has a downward slope, shows expected return in relation to portfolio standard deviation, and has an intercept equal to the expected return on the market portfolio.
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Page 12
Chapter 11: The Efficient Market Hypothesis
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Q1) Matthews Corporation has a beta of 1.2.The annualized market return yesterday was 13%, and the risk-free rate is currently 5%.You observe that Matthews had an annualized return yesterday of 17%.Assuming that markets are efficient, this suggests that
A)bad news about Matthews was announced yesterday.
B)good news about Matthews was announced yesterday.
C)no news about Matthews was announced yesterday.
D)interest rates rose yesterday.
E)interest rates fell yesterday.
Q2) Arbel (1985) found that
A)the January effect was highest for neglected firms.
B)the book-to-market value ratio effect was highest in January.
C)the liquidity effect was highest for small firms.
D)the neglected firm effect was independent of the small firm effect.
E)small firms had higher book-to-market value ratios.
Q3) Basu (1977, 1983) found that firms with high P/E ratios
A)earned higher average returns than firms with low P/E ratios.
B)earned the same average returns as firms with low P/E ratios.
C)earned lower average returns than firms with low P/E ratios.
D)had higher dividend yields than firms with low P/E ratios.
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Page 13
Chapter 12: Behavioral Finance and Technical Analysis
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Sample Questions
Q1) Compare and contrast the efficient market hypothesis with the school of thought termed behavioral finance.
Q2) Barber and Odean (2001) report that men __________ women.
A)earn higher returns than B)earn lower returns than C)earn about the same returns as D)generate lower trading costs than
Q3) Information processing errors consist of I) forecasting errors. II) overconfidence.
III) conservatism.
IV) framing.
A)I and II
B)I and III
C)III and IV
D)IV only
E)I, II, and III
Q4) Discuss what technical analysis is, what technical analysts do, and the relationship between technical analysis, fundamental analysis, and behavioral finance.
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Chapter 13: Empirical Evidence on Security Returns
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Q1) In the 1972 empirical study by Black, Jensen, and Scholes, they found that the estimated slope of the security market line was _______ what the CAPM would predict. A)higher than B)equal to C)less than D)twice as much as
E)More information is required to answer this question.
Q2) In developing their test of a multifactor model, Chen, Roll, and Ross hypothesized that __________ might be a proxy for systematic factors.
A)the monthly growth rate in industrial production
B)unexpected inflation
C)expected inflation
D)the monthly growth rate in industrial production and unexpected inflation
E)the monthly growth rate in industrial production, unexpected inflation, and expected inflation
Q3) Discuss the results of the studies of John Lintner (1965) and Merton Miller and Myron Scholes (1972) in terms of the validity of the capital asset pricing model (CAPM).
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Page 15
Chapter 14: Bond Prices and Yields
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Sample Questions
Q1) SIVs are
A)structured investment vehicles.
B)structured interest rate vehicles.
C)semi-annual investment vehicles.
D)riskless investments.
E)structured insured variable rate instruments.
Q2) Using semi-annual compounding, a 15-year zero-coupon bond that has a par value of $1,000, and a required return of 8% would be priced at approximately A)$308.
B)$315.
C)$464.
D)$555.
E)None of the options
Q3) The bond indenture includes
A)the coupon rate of the bond.
B)the par value of the bond.
C)the maturity date of the bond.
D)All of the options
E)None of the options
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Page 16
Chapter 15: The Term Structure of Interest Rates
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Q1) Treasury STRIPS are
A)securities issued by the Treasury with very long maturities.
B)extremely risky securities.
C)created by selling each coupon or principal payment from a whole Treasury bond as a separate cash flow.
D)created by pooling mortgage payments made to the Treasury.
Q2) The yield curve
A)is a graphical depiction of term structure of interest rates.
B)is usually depicted for U.S.Treasuries in order to hold risk constant across maturities and yields.
C)is usually depicted for corporate bonds of different ratings.
D)is a graphical depiction of term structure of interest rates and is usually depicted for U.S.Treasuries in order to hold risk constant across maturities and yields.
E)is a graphical depiction of term structure of interest rates and is usually depicted for corporate bonds of different ratings.
Q3) Term Structure of Interest Rates is the relationship between what variables
What is assumed about other variables
How is term structure of interest rates depicted graphically
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17
Chapter 16: Managing Bond Portfolios
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Q1) Holding other factors constant, the interest-rate risk of a coupon bond is lower when the bond's
A)term to maturity is lower.
B)coupon rate is higher.
C)yield to maturity is higher.
D)term to maturity is lower and coupon rate is higher.
E)All of the options
Q2) One way that banks can reduce the duration of their asset portfolios is through the use of
A)fixed rate mortgages.
B)adjustable rate mortgages.
C)certificates of deposit.
D)short-term borrowing.
Q3) The basic purpose of immunization is to
A)eliminate default risk.
B)produce a zero net-interest-rate risk.
C)offset price and reinvestment risk.
D)eliminate default risk and produce a zero net-interest-rate risk.
E)produce a zero net-interest-rate risk and offset price and reinvestment risk.
Q4) Discuss rate anticipation swaps as a bond portfolio management strategy.
Page 18
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Chapter 17: Macroeconomic and Industry Analysis
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Q1) The industry with the highest ROE in 2012 was
A)restaurants.
B)trucking.
C)business software.
D)computer systems.
E)integrated oil and gas.
Q2) If the economy is shrinking, firms with high operating leverage will experience
A)higher decreases in profits than firms with low operating leverage.
B)similar decreases in profits as firms with low operating leverage.
C)smaller decreases in profits than firms with low operating leverage.
D)no change in profits.
Q3) Monetary policy is determined by
A)government budget decisions.
B)presidential mandates.
C)the Board of Governors of the Federal Reserve System.
D)congressional actions.
E)None of the options
Q4) Discuss the ways in which the global economy might have an effect on a firm whose headquarters are in Montana.Be specific-cite some of the relevant factors that should be considered.
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Chapter 18: Equity Valuation Models
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Q1) A preferred stock will pay a dividend of $6.00 in the upcoming year and every year thereafter; i.e., dividends are not expected to grow.You require a return of 10% on this stock.Use the constant growth DDM to calculate the intrinsic value of this preferred stock.
A)$0.60
B)$6.00
C)$600
D)$60.00
E)None of the options
Q2) You are considering acquiring a common stock that you would like to hold for one year.You expect to receive both $0.75 in dividends and $16 from the sale of the stock at the end of the year.The maximum price you would pay for the stock today is _____ if you wanted to earn a 12% return.
A)$23.91
B)$14.96
C)$26.52
D)$27.50
E)None of the options
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20
Chapter 19: Financial Statement Analysis
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Q1) A firm has a net profit/pretax profit ratio of 0.625, a leverage ratio of 1.2, a pretax profit/EBIT of 0.9, an ROE of 17.82%, a current ratio of 8, and a return on sales ratio of 8%.The firm's asset turnover is
A)0.3.
B)1.3.
C)2.3.
D)3.3.
Q2) Comparability problems arise because
A)firms may use different generally accepted accounting principles.
B)inflation may affect firms differently due to accounting conventions used.
C)financial analysts do not know how to compare financial statements.
D)firms may use different generally accepted accounting principles and inflation may affect firms differently due to accounting conventions used.
E)firms may use different generally accepted accounting principles and financial analysts do not know how to compare financial statements.
Q3) Publicly traded firms must prepare audited financial statements according to generally accepted accounting principles (GAAP).How do comparability problems arise
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Chapter 20: Options Markets: Introduction
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Q1) To the option holder, put options are worth ______ when the exercise price is higher; call options are worth ______ when the exercise price is higher.
A)more; more
B)more; less
C)less; more
D)less; less
E)It doesn't matter-they are too risky to be included in a reasonable person's portfolio.
Q2) The lower bound on the market price of a convertible bond is
A)its straight bond value.
B)its crooked bond value.
C)its conversion value.
D)its straight bond value and its conversion value.
E)None of the options
Q3) A call option on a stock is said to be in the money if
A)the exercise price is higher than the stock price.
B)the exercise price is less than the stock price.
C)the exercise price is equal to the stock price.
D)the price of the put is higher than the price of the call.
E)the price of the call is higher than the price of the put.
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Page 22
Chapter 21: Option Valuation
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Q1) Before expiration, the time value of an in-the-money put option is always
A)equal to zero.
B)negative.
C)positive.
D)equal to the stock price minus the exercise price.
E)None of the options
Q2) A hedge ratio for a call option is ________ and a hedge ratio for a put option is ______.
A)negative; positive
B)negative; negative
C)positive; negative
D)positive; positive
E)zero; zero
Q3) At expiration, the time value of an in-the-money call option is always
A)equal to zero.
B)positive.
C)negative.
D)equal to the stock price minus the exercise price.
E)None of the options
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Chapter 22: Futures Markets
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Q1) Futures contracts __________ traded on an organized exchange, and forward contracts __________ traded on an organized exchange.
A)are not; are
B)are; are
C)are not; are not D)are; are not
E)are; may or may not be
Q2) The expectations hypothesis of futures pricing
A)is the simplest theory of futures pricing.
B)states that the futures price equals the expected value of the future spot price of the asset.
C)is not a zero-sum game.
D)is the simplest theory of futures pricing and states that the futures price equals the expected value of the future spot price of the asset.
E)is the simplest theory of futures pricing and is not a zero-sum game.
Q3) Discuss marking to market and margin accounts in the futures market.
Q4) Distinguish between the short and long positions in futures transactions.
Q5) Describe the differences between futures and forward contracts.
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Chapter 23: Futures, Swaps, and Risk Management
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Q1) If covered interest arbitrage opportunities exist,
A)interest rate parity does not hold.
B)interest rate parity holds.
C)arbitragers will be able to make risk-free profits.
D)interest rate parity does not hold and arbitragers will be able to make risk-free profits.
E)interest rate parity holds and arbitragers will be able to make risk-free profits.
Q2) E-Minis typically have a value of ____________ percent of the standard contract and exist for ____________.
A)50; individual stocks and commodities
B)50; stock indexes and foreign currencies
C)40; stock indexes and commodities
D)20; individual stocks and commodities
E)20; stock indexes and foreign currencies
Q3) Why are commodity futures prices different from other futures prices
Explain the difference and give an example of a commodity and the factors involved.
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Chapter 24: Portfolio Performance Evaluation
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Q1) Discuss, in general, the performance attribution procedures.
Q2) The geometric average rate of return is based on
A)the market's volatility.
B)the concept of expected return.
C)the standard deviation of returns.
D)the CAPM.
E)the principle of compounding.
Q3) Suppose two portfolios have the same average return, the same standard deviation of returns, but Aggie Fund has a lower beta than Raider Fund.According to the Treynor measure, the performance of Aggie Fund
A)is better than the performance of Raider Fund.
B)is the same as the performance of Raider Fund.
C)is poorer than the performance of Raider Fund.
D)cannot be measured as there are no data on the alpha of the portfolio.
Q4) To determine whether portfolio performance is statistically significant requires
A)a very long observation period due to the high variance of stock returns.
B)a short observation period due to the high variance of stock returns.
C)a very long observation period due to the low variance of stock returns.
D)a short observation period due to the low variance of stock returns.
E)a low variance of returns over any observation period.
Page 26
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Chapter 25: International Diversification
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Q1) The present exchange rate is C$ = U.S.$0.78.The 1-year future rate is C$ = U.S.$0.76.The yield on a 1-year U.S.bill is 4%.A yield of __________ on a 1-year Canadian bill will make investor indifferent between investing in the U.S.bill and the Canadian bill.
A)2.4%
B)1.3%
C)6.4%
D)6.7%
E)None of the options
Q2) The performance of an internationally diversified portfolio may be affected by A)country selection.
B)currency selection.
C)stock selection.
D)All of the options
E)None of the options
Q3) Discuss some of the factors that might be included in a multifactor model of security returns in an international application of arbitrage pricing theory (APT).
Q4) Discuss performance evaluation of international portfolio managers in terms of potential sources of abnormal returns.
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Chapter 26: Hedge Funds
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Q1) ________ refers to sorting through huge amounts of historical data to uncover systematic patterns in returns that can be exploited by traders.
A)Data mining
B)Pairs trading
C)Alpha transfer
D)Beta shifting
Q2) Alpha seeking hedge funds typically ______ relative mispricing of specific securities and ______ broad market exposure.
A)bet on; bet on
B)hedge; hedge
C)hedge; bet on
D)bet on; hedge
E)None of the options
Q3) Performance evaluation of hedge funds is complicated by A)liquidity premiums.
B)survivorship bias.
C)unreliable market valuations of infrequently traded assets.
D)unstable risk attributes.
E)All of the options
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Page 28
Chapter 27: The Theory of Active Portfolio Management
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Q1) Kane, Marcus, and Trippi (1999) show that the annualized fee that investors should be willing to pay for active management, over and above the fee charged by a passive index fund, does not depend on I) the investor's coefficient of risk aversion.
II. the value of at-the-money call option on the market portfolio.
III. the value of out-of-the-money call option on the market portfolio.
IV. the precision of the security analyst.
V. the distribution of the squared information ratio of in the universe of securities.
A)I, II, and IV
B)II, III, and V
C)II and III
D)I, IV, and V
E)II, IV, and V
Q2) Perfect timing ability is equivalent to having __________ on the market portfolio.
A)a call option
B)a futures contract
C)a put option
D)a commodities contract
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Chapter 28: Investment Policy and the Framework of the
Cfa Institute
Available Study Resources on Quizplus for this Chatper
83 Verified Questions
83 Flashcards
Source URL: https://quizplus.com/quiz/52445
Sample Questions
Q1) Assume that at retirement you have accumulated $825,000 in a variable annuity contract.The assumed investment return is 5.5% and your life expectancy is 18 years.What is the hypothetical constant benefit payment
A)$73,358.93
B)$33,333.33
C)$51,481.38
D)$52,452.73
E)Cannot tell without additional information
Q2) A ___________ is established when an individual confers legal title to property to another person or institution to manage the property for one or more beneficiaries.
A)tax shelter
B)defined contribution plan
C)personal trust
D)fixed annuity
E)Keogh plan
Q3) Discuss the tax status of the major categories of institutional investors described in the text.
Q4) Discuss investments as a hedge against inflation
Q5) Discuss some of the advantages "personal funds" have over mutual funds.
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