Deck 3: Selecting Investments in a Global Market

Question 1

Exhibit 3A.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Given the following annual returns for both Alpine Corporation and Tauber Industries:

Refer to Exhibit 3A.1. Calculate the covariance.

A)-32.20
B)-23.32
C)1.00
D)23.32
E)32.20

Answer 1

-32.20

Question 2

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

Answer 2

False

Question 3

If the exchange rate effect for Japanese bonds is negative, it means that the domestic rate of return will be greater than the U.S. dollar return.

Answer 3

True

Question 4

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

Question 5

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

Question 6

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 7

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

Question 8

Diversification with foreign securities can help reduce portfolio risk.

Question 9

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 10

The decrease in the standard deviation of returns after adding 40 to 50 securities within a country is known as domestic diversification.

Question 11

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

Question 12

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

Question 13

Exhibit 3A.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Given the following annual returns for both Alpine Corporation and Tauber Industries:

Refer to Exhibit 3A.1. Calculate the coefficient of correlation.

A)-0.456
B)-0.354
C)0.000
D)0.456
E)3.538

Question 14

The total domestic return on German bonds is the return that would be experienced by an U.S. investor who owned German bonds.

Question 15

Government agency securities are issued by local government entities as either general obligation or revenue bonds.

Question 16

Yields on money market funds are often lower than yields available to individuals investing in CD's because of the fees involved.

Question 17

A Eurobond is an international bond denominated in a currency other than that of the United States.

Question 18

REITS are investment companies that invest in high-quality money market instruments such as Treasury bills, high-grade commercial paper, and large CD's.

Question 19

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

Question 20

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

Question 21

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 22

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 23

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 24

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 U.S.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 U.S.stocks.
D)The correlation between the rates of return for German stocks and U.S.stocks.
E)The coefficient of variation (CV) of rates of return for German stocks versus the CV of rates of return for U.S.stocks.

Question 25

Which of the following is not a type of investment company?

A)Money market funds
B)Common stock funds
C)Balanced funds
D)Bond funds
E)None of the above

Question 26

The original maturity of a United States Treasury bond is

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 27

All of the following are considered fixed income securities except

A)Debentures.
B)Eurobonds.
C)Preferred stock.
D)Mutual funds.
E)Yankee bonds.

Question 28

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 29

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 30

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 31

The legal document setting forth the obligations of a bond's issuer is called

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

Question 32

The correlation between U.S. equities and U.S. government bonds is

A)Strongly positive.
B)Weakly Positive.
C)Strongly Negative.
D)Weakly Negative.
E)Indeterminate.

Question 33

Capital market instruments include all of the following except

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

Question 34

The original maturity of a United States Treasury note is

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 35

Which of the following is not a U.S. government agency?

A)Federal National Mortgage Association
B)Federal Home Loan Bank
C)Government National Mortgage Association
D)Government Employees Insurance Company
E)Federal Housing Administration

Question 36

All of the following are considered fixed income investments except

A)Corporate bonds.
B)Preferred stock.
C)Treasury bills, notes, and bonds.
D)Money market mutual funds.
E)Certificates of deposit (CDs).

Question 37

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.
D)Investment in U.S.companies operating internationally.
E)Eurobonds.

Question 38

The correlation of returns between a single pair of countries remains constant over time.

Question 39

The relative size of U.S. financial markets to the total investable assets in the global capital markets has grown considerably over the last three decades.

Question 40

The original maturity of a United States Treasury bill is

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 41

For a U.S. 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 42

Antiques, art, coins, stamps, jewelry, 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)All of the above.
E)None of the above.

Question 43

Foreign equities can be acquired by purchasing all of the following except

A)American Depository Receipts (ADRs)
B)American shares
C)Foreign shares listed on a U.S.or foreign stock exchange
D)Global Exchange-Traded Funds (GETFs)
E)All of the above are ways to purchase foreign equities.

Question 44

Which of the following are reasons that U.S. 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 U.S.markets.
C)Returns on non-U.S.stocks can substantially exceed returns for U.S securities.
D)All of the above.
E)None of the above.

Question 45

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)U.S.investors are purchasing more foreign securities.
E)Correlations between bond markets of different countries have been rising.

Question 46

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 47

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)Real Estate Investment Trusts (REITs) had higher returns than common stocks from 1972 to 1987.
C)Real Estate Investment Trusts (REITs) had lower volatility than common stocks from 1972 to 1987.
D)All of the above statements are true.
E)All of the above statements are false.

Question 48

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 49

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 Yankee Bond.
D)Denominated in U.S.dollars but issued by a foreign company.
E)That is sold only to European investors.

Question 50

An ETF (exchange traded fund):

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

Question 51

Investments with predetermined contractual payments are known as:

A)Fixed-income
B)Real estate
C)Real assets
D)Equities
E)Low liquidity investments

Question 52

All of the following are ways to invest in real estate except

A)Real Estate Investment Trusts (REITs)
B)Raw Land
C)Land Development
D)Rental Properties
E)All of the above are ways to invest in real estate.

Question 53

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 U.S.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 (that is, all are true statements)

Question 54

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 statements are characteristics of a warrant.

Question 55

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 56

A mutual fund:

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

Question 57

Adding international investments to an all U.S. portfolio will most likely:

A)Increase the overall risk of the portfolio
B)Decrease the overall risk of the portfolio
C)Increase the expected return of the portfolio
D)Decrease the expected return of the portfolio
E)None of the above

Question 58

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 59

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 60

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

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

Question 61

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 62

Exhibit 3.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
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 63

An individual with only $10,000 to invest is most likely better off investing in:

A)Mutual funds to increase the expected return
B)ETFs to increase the diversification
C)Individual equities to increase portfolio efficiency
D)Individual bonds and individual equities to increase efficiency
E)All of the above are rational choices

Question 64

Which of the following investments can be purchased with future contracts?

A)Commodities
B)T-bills
C)Treasury bonds
D)Eurobonds
E)All of the above

Question 65

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 66

What is the 95 percent confidence interval for an investment with an expected return of 9 percent and a standard deviation of 15%?

A)9% to 15%
B)-6% to 24%
C)-15% to 32%
D)-21% to 39%
E)-36% to 56%

Question 67

Exhibit 3.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
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 68

Exhibit 3.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
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 69

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 70

Exhibit 3.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
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 71

What type of mutual fund issues "redeemable securities" meaning that the fund stands ready to buy or sell the shares at their net asset value with a transaction fee?

A)No-load, closed-end fund
B)No-load, open-end fund
C)Load, closed-end fund
D)Load, open-end fund
E)None of the above

Question 72

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%

Question 73

Exhibit 3.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
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 74

Exhibit 3.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
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 75

Exhibit 3.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
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 76

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 77

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 78

Exhibit 3.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
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 79

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 80

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%