Deck 3: Selecting Investments in a Global Market

Question 1

It is very important when diversifying that the correlation between rates of return for various countries be high and very stable over time.

Answer 1

False

Question 2

A call option is usually issued in conjunction with convertible bonds.

Answer 2

False

Question 3

Agency securities that are issued by Crown corporations and various agencies, are direct obligation of the government.

Answer 3

False

Question 4

REITS are investment companies that invest in high-quality money market instruments such as Treasury bills, high-grade commercial paper, and guaranteed investment securities.

Question 5

An investor who purchases a put option:

A) Has the right to buy a given stock at a specified price during a designated time period.
B) Has the right to sell a given stock at a specified price during a designated time period.
C) Has the obligation to buy a given stock at a specified price during a designated time period.
D) Has the obligation to sell a given stock at a specified price during a designated time period.
E) None of the above.

Question 6

Yields on money market funds are often lower than yields available to individuals investing in guaranteed investment securities because of the fees involved.

Question 7

The U.S. equity and bond markets have grown in terms of their relative size of the world equity and bond market.

Question 8

Municipal bond nominal yields are generally below comparable taxable bond yields.

Question 9

A Canadian investor who ignores foreign markets reduces overall number of investment choices.

Question 10

Diversification with foreign securities can help reduce portfolio risk.

Question 11

The decrease in the standard deviation of returns after adding 30 to 40 securities within a country is known as domestic diversification.

Question 12

Subordinated bondholders have claim to the assets of the firm only after the firm has satisfied the claims of all senior secured and debenture bondholders.

Question 13

Income bonds are considered as safe as debentures because they pay higher rates of interest.

Question 14

If you are considering investing in German stocks as a means to reduce the risk of your portfolio, the initial factor that you should examine is:

A) The average rate of return of the portfolio when you combine Canadian and German stocks.
B) The standard deviation of the German stocks.
C) The standard deviation of the German stocks compared to the standard deviation of Canadian stocks.
D) The correlation between the rates of return for German stocks and Canadian stocks.
E) The coefficient of variation (CV) of rates of return for German stocks versus the CV of rates of return for Canadian stocks.

Question 15

Warrants are options often issued in connection with the sale of fixed income securities.

Question 16

A debenture is an option issued by a corporation that gives the holder the right to acquire common stock from the issuing firm at a specified price within a designated period of time.

Question 17

The performance of the Canadian bond market ranked higher than the U.S. bond market.

Question 18

A Eurobond is an international bond denominated in a currency other than that of Canada.

Question 19

The total domestic return on German bonds is the return that would be experienced by a Canadian investor who owned German bonds.

Question 20

Treasury bills are long-term investments that make regular interest and principal payments.

Question 21

A statistic that measures how two variables tend to move together is the

A) Coefficient of variation
B) Correlation coefficient
C) Standard deviation
D) Mean
E) Variance

Question 22

Which of the following is not an international bond?

A) Eurobond
B) Maple bond
C) International domestic bond
D) Guaranteed investment security
E) Yankee bond

Question 23

The correlation between Canadian government bonds and U.K. government bonds is

A) Strongly positive.
B) Weakly positive.
C) Strongly negative.
D) Weakly negative.
E) Indeterminate.

Question 24

Which of the following is not a considered fixed income security?

A) Debentures
B) Eurobonds
C) Preferred stock
D) Mutual funds
E) Guaranteed investment certificates

Question 25

The best way to directly acquire the shares of a foreign company is through

A) International mutual funds.
B) Global mutual funds.
C) American Depository Receipts (ADRs)
D) Investment in Canadian companies operating internationally.
E) Eurobonds.

Question 26

Rank the following four investments in increasing order of historical risk.

A) Art, T-bills, corporate bonds, and common stock
B) T-bills, common stock, corporate bonds, art
C) Corporate bonds, T-bills, common stock, art
D) Common stock, corporate bonds, T-bills, art
E) T-bills, corporate bonds, common stock, art

Question 27

Which of the following would be considered a low liquidity investment?

A) Warrants
B) Call options
C) Zero coupon bonds
D) Balanced mutual funds
E) Diamonds

Question 28

Which of the following is a type of investment company?

A) Money market funds
B) Common stock funds
C) Balanced funds
D) Bond funds
E) All of the above.

Question 29

If this year is consistent with historical trends you would expect the return for small capitalization stocks to be

A) Below common stocks and above long-term government bonds.
B) Below common stocks and below long-term government bonds.
C) Above last year's return on the same stocks.
D) Above common stock, long-term government, and corporate bonds.
E) The least variable among long-term bonds and common stocks.

Question 30

An investor who purchases a call option:

A) Has the right to buy a given stock at a specified price during a designated time period.
B) Has the right to sell a given stock at a specified price during a designated time period.
C) Has the obligation to buy a given stock at a specified price during a designated time period.
D) Has the obligation to sell a given stock at a specified price during a designated time period.
E) None of the above.

Question 31

Which of the following is not considered a capital market instrument?

A) Canadian Treasury notes and bonds.
B) Canadian Treasury bills.
C) Canadian government agency securities.
D) Municipal bonds.
E) Corporate bonds.

Question 32

What is the original maturity of a Canadian Treasury bond?

A) Zero years to five years.
B) Six months to ten years.
C) One year or less.
D) One year to ten years.
E) Over ten years.

Question 33

What is the original maturity of a Canadian Treasury bill?

A) Zero years to five years.
B) Six months to ten years.
C) One year or less.
D) One year to ten years.
E) Over ten years.

Question 34

Which of the following is not considered a fixed income investment?

A) Corporate bonds.
B) Preferred stock.
C) Treasury bills, notes, and bonds.
D) Money market mutual funds.
E) Guaranteed investment securities.

Question 35

An agreement that provides for the future delivery or receipt of an asset at a specified date for a specified price is a

A) Eurobonds contract.
B) Futures contract.
C) Put option contract.
D) Call option contract.
E) Warrant contract.

Question 36

What is the original maturity of a Canadian Treasury note?

A) Zero years to five years.
B) Six months to ten years.
C) One year or less.
D) Over one year to ten years.
E) Over ten years.

Question 37

What is the name of the legal document setting forth the obligations of a bond's issuer?

A) A debenture.
B) A warrant.
C) An indenture.
D) The preemptive right.
E) A trustee deed.

Question 38

An ETF (exchange traded fund) is:

A) priced once a day at the opening of trading.
B) priced once a day at the close of trading.
C) priced continuously during the trading day.
D) priced at the open and close of trading.
E) None of the above.

Question 39

Antiques, art, coins, stamps, jewellery, etc., are not included in the investment portfolios of financial institutions because

A) Prices vary substantially.
B) Transaction costs are relatively high.
C) They are illiquid.
D) None of the above.
E) All of the above.

Question 40

The purchase and sale of commodities for current delivery and consumption is known as dealing in the _________________ market.

A) Futures
B) Spot
C) Money
D) Capital
E) Options

Question 41

Senior secured bonds are

A) The most senior bonds in a firm's capital structure.
B) Bonds with the lowest risk of default.
C) Bonds that are not backed by specific assets.
D) A and B
E) A and C

Question 42

How often is a mutual fund priced?

A) Once a day at the opening of trading.
B) Once a day at the close of trading.
C) Continuously during the trading day.
D) At the open and close of trading.
E) None of the above.

Question 43

Which of the following are reasons that Canadian investors should consider foreign markets when constructing global portfolios?

A) Ignoring foreign markets reduced their choices of investment opportunities.
B) Foreign markets have low correlations with Canadian markets.
C) Returns on non-Canadian stocks can substantially exceed returns for Canadian securities.
D) All of the above.
E) None of the above.

Question 44

Which of the following statements regarding real estate investments is false?

A) The large number of transactions and national data sources provide accurate readily available estimates of historical returns.
B) S&P/TSX had higher returns than 90-day Treasury-bill from 1993 to 2009.
C) S&P/TSX had lower returns than 90-day Treasury-bill from 1993 to 2009.
D) S&P/TSX had higher volatility than 90-day Treasury-bill from 1993 to 2009.
E) All of the above are false.

Question 45

Which of the following is not a characteristic of a warrant?

A) The right to buy common stock in a corporation.
B) Issued by the corporation or an individual.
C) Typically valid for longer time periods than options.
D) Similar to a call option with respect to a striking price.
E) All of the above are characteristics of a warrant.

Question 46

Exhibit 3-1
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\begin{array}{lc} \text {Security } & \text { Annual Percentage Return } \\\hline \text { Canadian government T-bills } & 3.04 \\\text { Long-term government bonds } & 5.75 \\\text { Long-term corporate bonds } & 6.80 \\\text { Large capitalization common stocks } & 13.50 \\\text { Small capitalization common stocks } & 15.60\end{array}$
The annual rate of inflation is 2%.

-Refer to Exhibit 3-1. What is the real return on large capitalization stocks?

A) 1.02%
B) 3.68%
C) 4.71%
D) 11.27%
E) 13.33%

Question 47

Correlations between bond markets in different countries have been changing over time because

A) Countries are developing closer trade and economic links.
B) Countries are becoming more segmented.
C) There are fewer barriers to travel.
D) Canadian investors are purchasing more foreign securities.
E) Correlations between bond markets of different countries have been rising.

Question 48

Certificates of ownership issued by a U.S. bank that represent indirect ownership of a certain number of shares of a specific foreign firm on deposit in a bank in the firm's home country are known as:

A) American Depository Receipts (ADRs)
B) Exchange Traded Funds (ETFs)
C) Warrants
D) Options
E) Futures

Question 49

Foreign equities can be acquired by purchasing all of the following

A) American Depository Receipts (ADRs)
B) American shares
C) Foreign shares listed on foreign stock exchange
D) Global Exchange-Traded Funds (GETFs)
E) All of the above.

Question 50

Which of the following are ways to invest in real estate?

A) Real Estate Investment Trusts (REITs)
B) Raw Land purchase
C) Land Development
D) Rental Properties
E) All of the above.

Question 51

What is a bond provision that specifies payments the issuer must make to redeem a given percentage of the outstanding issue prior to maturity known as?

A) Call provision
B) Indenture
C) Collateralization
D) Sinking fund
E) Collateral trust bond

Question 52

Exhibit 3-1
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\begin{array}{lc} \text {Security } & \text { Annual Percentage Return } \\\hline \text { Canadian government T-bills } & 3.04 \\\text { Long-term government bonds } & 5.75 \\\text { Long-term corporate bonds } & 6.80 \\\text { Large capitalization common stocks } & 13.50 \\\text { Small capitalization common stocks } & 15.60\end{array}$
The annual rate of inflation is 2%.

-Refer to Exhibit 3-1. What is the real return on small capitalization stocks?

A) 1.02%
B) 3.68%
C) 4.71%
D) 11.27%
E) 13.33%

Question 53

Exhibit 3-1
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\begin{array}{lc} \text {Security } & \text { Annual Percentage Return } \\\hline \text { Canadian government T-bills } & 3.04 \\\text { Long-term government bonds } & 5.75 \\\text { Long-term corporate bonds } & 6.80 \\\text { Large capitalization common stocks } & 13.50 \\\text { Small capitalization common stocks } & 15.60\end{array}$
The annual rate of inflation is 2%.

-Refer to Exhibit 3-1. What is the real return on long-term corporate bonds?

A) 1.02%
B) 3.68%
C) 4.71%
D) 11.27%
E) 13.33%

Question 54

Convertible bonds are bonds

A) That are convertible into more bonds.
B) That are convertible from unsecured to secured status.
C) That are convertible into company stock.
D) That are convertible into specific assets.
E) That have an option attached.

Question 55

Which of the following statements concerning historical investment risk and return is false?

A) The geometric mean of the rates of return was always lower than the arithmetic mean of the rates of return.
B) The rates of return on long-term Canadian government bonds were lower than on stocks.
C) Real estate investments consistently provide higher rates of return than those provided by common stock.
D) Stocks and bonds experienced results in the middle of the art and antiques series.
E) None of the above statements are false.

Question 56

For a Canadian-based investor, a weaker dollar means that overall dollar based returns on overseas security investment will be higher because

A) A weaker dollar means that exports will rise.
B) A weaker dollar means that more foreign investors will by U.S. securities.
C) A weaker dollar means that the foreign currency will convert to more dollars.
D) A weaker dollar means that more investors will purchase the foreign security.
E) None of the above.

Question 57

Exhibit 3-2
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\begin{array}{c} \text { Real Returns } \\\begin{array}{lc} \text {INVESTMENT } & \text { REAL ANNUAL RETURN } \\\hline\text { Large company stock } & 6.50 \% \\\text { Small capitalization stock } & 8.60 \% \\\text { Long-term corporate bonds } & 3.60 \% \\\text { Long-term government bonds } & 2.80 \% \\\text { Canadian Treasury bills } & 1.03 \%\end{array}\end{array}$
The annual rate of inflation is 2.5%

-Refer to Exhibit 3-2. What is the large company stock nominal return?

A) 3.56%
B) 5.37%
C) 6.19%
D) 9.16%
E) 11.32%

Question 58

In order to diversify risk an investor must have investments that have correlations with other investments in the portfolio that are

A) low positive
B) zero
C) negative
D) any of the above
E) none of the above

Question 59

Exhibit 3-1
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\begin{array}{lc} \text {Security } & \text { Annual Percentage Return } \\\hline \text { Canadian government T-bills } & 3.04 \\\text { Long-term government bonds } & 5.75 \\\text { Long-term corporate bonds } & 6.80 \\\text { Large capitalization common stocks } & 13.50 \\\text { Small capitalization common stocks } & 15.60\end{array}$
The annual rate of inflation is 2%.

-Refer to Exhibit 3-1. What is the real return on T-bills?

A) 1.02%
B) 3.68%
C) 4.71%
D) 11.27%
E) 13.33%

Question 60

A Eurobond is an international bond

A) Sold by an issuer within its own country in that country's currency.
B) Denominated in a currency not native to where it is issued.
C) Also known as a Maple bond.
D) Is a bond denominated in Canadian dollars but issued by a foreign company.
E) That is sold only to European investors.

Question 61

A return series has an arithmetic mean of 10.5% and standard deviation of 13%. Assuming the returns are normally distributed, what is the range of returns that an investor would expect to receive 90% of the time?

A) 10.5% to 13%
B) -2.5% to 23.5%
C) -28.5 to 49.5%
D) -15.5% to 36.5%
E) 0% to 10.5%

Question 62

Exhibit 3-2
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\begin{array}{c} \text { Real Returns } \\\begin{array}{lc} \text {INVESTMENT } & \text { REAL ANNUAL RETURN } \\\hline\text { Large company stock } & 6.50 \% \\\text { Small capitalization stock } & 8.60 \% \\\text { Long-term corporate bonds } & 3.60 \% \\\text { Long-term government bonds } & 2.80 \% \\\text { Canadian Treasury bills } & 1.03 \%\end{array}\end{array}$
The annual rate of inflation is 2.5%

-Refer to Exhibit 3-2. What is the T-bill nominal return?

A) 3.56%
B) 5.37%
C) 6.19%
D) 9.16%
E) 11.32%

Question 63

Exhibit 3-2
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\begin{array}{c} \text { Real Returns } \\\begin{array}{lc} \text {INVESTMENT } & \text { REAL ANNUAL RETURN } \\\hline\text { Large company stock } & 6.50 \% \\\text { Small capitalization stock } & 8.60 \% \\\text { Long-term corporate bonds } & 3.60 \% \\\text { Long-term government bonds } & 2.80 \% \\\text { Canadian Treasury bills } & 1.03 \%\end{array}\end{array}$
The annual rate of inflation is 2.5%

-Refer to Exhibit 3-2. What is the long term Treasury bond nominal return?

A) 3.56%
B) 5.37%
C) 6.19%
D) 9.16%
E) 11.32%

Question 64

A return series has an arithmetic mean of 12.8% and standard deviation of 7.8%. Assuming the returns are normally distributed, what is the range of returns that an investor would expect to receive 95% of the time?

A) 12.8% to 20.6%
B) -10.6% to 36.2%
C) -2.8% to 28.4%
D) -12.8% to 20.6%
E) 10.6% to 36.2%

Question 65

A return series has an arithmetic mean of 10.5% and standard deviation of 13%. Assuming the returns are normally distributed, what is the range of returns that an investor would expect to receive 95% of the time?

A) 10.5% to 13%
B) -2.5% to 23.5%
C) -28.5% to 49.5%
D) -15.5% to 36.5%
E) 0% to 36.5%

Question 66

If the nominal return on an investment of common stocks was 11% and inflation was 2.5% annually, what was the real return on common stock?

A) 8.3%
B) 8.5%
C) 9.7%
D) 11.0%
E) 12.6%

Question 67

You are trying to decide between a par value corporate bond carrying a coupon rate of 6.25% per year and a par value municipal bond that pays an annual coupon rate of 4.75%. Assuming all other factors are the same and you are in the 28% tax bracket, which bond should you choose and why?

A) Corporate bond because the after tax yield is 6.25%.
B) Corporate bond because the after tax yield is 4.5%.
C) Municipal bond because the equivalent taxable yield is 6.3%.
D) Municipal bond because the equivalent taxable yield is 6.6%.
E) You will be indifferent between the two because the after tax yields are the same.

Question 68

A return series has an arithmetic mean of 12.8% and standard deviation of 7.8%. Assuming the returns are normally distributed, what is the range of returns that an investor would expect to receive 90% of the time?

A) 12.8% to 20.6%
B) -10.6% to 36.2%
C) -2.8% to 28.4%
D) -12.8% to 20.6%
E) 10.6% to 36.2%

Question 69

Exhibit 3-2
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\begin{array}{c} \text { Real Returns } \\\begin{array}{lc} \text {INVESTMENT } & \text { REAL ANNUAL RETURN } \\\hline\text { Large company stock } & 6.50 \% \\\text { Small capitalization stock } & 8.60 \% \\\text { Long-term corporate bonds } & 3.60 \% \\\text { Long-term government bonds } & 2.80 \% \\\text { Canadian Treasury bills } & 1.03 \%\end{array}\end{array}$
The annual rate of inflation is 2.5%

-Refer to Exhibit 3-2. What is the small capitalization stock nominal return?

A) 3.56%
B) 5.37%
C) 6.19%
D) 9.16%
E) 11.32%

Question 70

What range of returns would an investor expect to achieve 99% of the time on an investment with an expected return of 11% and a standard deviation of 16%?

A) 5% to 27%
B) -5% to 27%
C) -21% to 43%
D) -37% to 59%
E) 5% to 21%

Question 71

If the real return for corporate bonds was 4% and the inflation rate was 2%, what is the nominal return for corporate bonds?

A) 1.96%
B) 2.00%
C) 4.00%
D) 6.08%
E) 6.42%