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UCD ECN 134 - practice-Finals-S13

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[26 pts] Descriptive and Conceptual Questions[4 pts] 1. What are Collateralized Debt Obligations (CDOs)?AnswerPractice Final 2013Financiad Economics ECN134************************************************************************ Multiple Choice Questions: There are 22 MC questions each worth 2 points. 1. The weak form of the efficient market hypothesis contradicts A) technical analysis, but supports fundamental analysis as valid. B) fundamental analysis, but supports technical analysis as valid. C) both fundamental analysis and technical analysis. D) technical analysis, but is silent on the possibility of successful fundamental analysis. E) none of the above. Answer: D 2. 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. Answer: B 3. The Food and Drug Administration (FDA) just announced yesterday that they would approve a new cancer-fighting drug from King. You observe that King had an abnormal return of 0% yesterday. This suggests that A) the market is not efficient. B) King stock will probably rise in value tomorrow. C) King stock will probably fall in value tomorrow. D) the approval was already anticipated by the market E) none of the above. Answer: D 4. If you believe in the reversal effect, you should A) sell bonds in this period if you held stocks in the last period. B) sell stocks in this period if you held bonds in the last period. C) sell stocks this period that performed well last period. D) go long. E) C and D Answer: C5. The expected return/beta relationship is used ___________. A) by regulatory commissions in determining the costs of capital for regulated firms B) in court rulings to determine discount rates to evaluate claims of lost future incomes C) to advise clients as to the composition of their portfolios D) all of the above E) none of the above Answer: D 6. If a market proxy portfolio consistently beats all professionally managed portfolios on a risk-adjusted basis, it may be concluded that A) the CAPM is valid. B) the market proxy is mean/variance efficient. C) the CAPM is invalid. D) A and B. E) B and C. Answer: D 7. Malkiel (1995) calculated that the average alphas, or abnormal returns, on a large sample of mutual funds between 1972 and 1991 were A) significantly positive. B) significantly negative. C) statistically indistinguishable from zero. D) positive before 1981 and negative thereafter. E) negative before 1981 and positive thereafter. Answer: C8. Proponents of the EMH think technical analysts A) should focus on relative strength. B) should focus on resistance levels. C) should focus on support levels. D) should focus on financial statements. E) are wasting their time. Answer: E 9. In an efficient market, __________. A) security prices react quickly to new information B) security prices are seldom far above or below their justified levels C) security analysts will not enable investors to realize superior returns consistently D) one cannot make money E) A, B, and C Answer: E10. Other things equal, diversification is most effective when A) securities' returns are uncorrelated. B) securities' returns are positively correlated. C) securities' returns are high. D) securities' returns are negatively correlated. E) B and C. Answer: D11. The unsystematic risk of a specific security A) is likely to be higher in an increasing market. B) results from factors unique to the firm. C) depends on market volatility. D) cannot be diversified away. E) none of the above. Answer: B 12. If a 7% coupon bond is trading for $975.00, it has a current yield of ____________ percent. A) 7.00 B) 6.53 C) 7.24 D) 8.53 E) 7.18 Answer: E Rationale: 70/975 = 7.18.13. Which of the following statement(s) is (are) true regarding the selection of a portfoliofrom those that lie on the Capital Allocation Line? A) Less risk-averse investors will invest more in the risk-free security and less in the optimal risky portfolio than more risk-averse investors. B) More risk-averse investors will invest less in the optimal risky portfolio and more in the risk-free security than less risk-averse investors. C) Investors choose the portfolio that maximizes their expected utility. D) A and C. E) B and C. Answer: E Rationale: All rational investors select the portfolio that maximizes their expected utility; for investors who are relatively more risk-averse, doing so means investing less in the optimal risky portfolio and more in the risk-free asset.14. A zero-coupon bond has a yield to maturity of 9% and a par value of $1,000. If the bond matures in 8 years, the bond should sell for a price of _______ today. A) 422.41 B) $501.87 C) $513.16 D) $483.49 E) none of the above Answer: B Rationale: $1,000/(1.09)8 = $501.8715. Suppose that the average P/E multiple in the oil industry is 16. Mobil Oil is expected to have an EPS of $4.50 in the coming year. The intrinsic value of Mobil Oil stock should be _____. A) $28.12 B) $35.55 C) $63.00 D) $72.00 E) none of the above Answer: D Rationale: 16 X $4.50 = $72.00.16. The market capitalization rate on the stock of Flexsteel Company is 12%. The expected ROE is 13% and the expected EPS are $3.60. If the firm's plowback ratio is 50%, the P/E ratio will be _________. A) 7.69 B) 8.33 C) 9.09 D) 11.11 E) none of the above Answer: C Rationale: g = 13% X 0.5 = 6.5%; .5/(.12-.065) = 9.0917. In the 1972 empirical study by Black, Jensen, and Scholes, they found that the risk-adjusted returns of high beta portfolios were _____________ the risk-adjusted returns of low beta portfolios. A) greater than B) equal to C) less than D) unrelated to E) more information is necessary to answer this question Rationale: These results are inconsistent with what would be predicted with the CAPM.18. Fama and French, in their 1992 study, found that A) firm size had better explanatory power than beta in describing portfolio returns. B) beta had better explanatory power than firm size in describing portfolio returns. C) beta had better explanatory power than book-to-market ratios in describing portfolio returns. D)


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