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Study set 3 Q&A 2024
Study set 3 Q&A 2024
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Study set 3The segment of the security trading marketplace that allows for institutional
✅✅
investors to trade with other institutional investors outside of normal trading
hours is known as - -the fourth market.
The top 10 shareholders of publicly held Emax, Inc., are selling 10 million
✅✅
shares they personally own through a public offering. The investment banker
will offer these shares as part of which of the following offerings? - -The
answer is a secondary offering. If a company has already issued shares but
wants to raise additional capital through the sale of more stock, it does so by
what is called a secondary or seasoned offering.
Elayne recently purchased a municipal bond through her stockbroker. The
✅✅
broker told her that the bond is backed by the full faith and credit of the issuer.
What type of bond did Elayne buy for her portfolio? - -The answer is
general obligation bond (GO). GOs are municipal bonds that are issued to
finance capital improvements for the benefit of the entire community. Because
taxes back most GOs, municipalities may require a taxpayer vote to approve
new issues.
Ronald owns a Hydro Industries 7% convertible bond. The bond is convertible
into 30 shares of Hydro Industries, which is currently trading at $43 per share.
The investment value of the bond is $980, and the current market price of the
✅✅
bond is $1,433.
What is the conversion value of Larry's bond? - -The answer is $1,290.
Conversion value = conversion ratio × market price of common stock, or 30 ×
$43 = $1,290.
Portfolio immunization is designed to mitigate which type of risk? - ✅✅ -The
answer is interest rate risk. A bond portfolio is immunized when the duration of
the portfolio is equal to the time horizon of the investor, thereby mitigating both
interest rate risk and reinvestment rate risk.
✅✅
Which of the following statements regarding common stock is CORRECT? -
-The answer is if Jacob sells his XYZ stock to Darlene the day before the
record date, Jacob will receive the dividend for that period. The person who is
the owner of the stock on the second business day before the record date is
issued the dividend for that period. Jacob sold the stock to Darlene after the
ex-dividend date; therefore, he is still the owner of record because the trade
,will not settle for two business days following the sale. Darlene purchased the
stock after the ex-dividend date. Stock owned in street name is held by the
brokerage firm; the corporation does not issue a certificate to the investor.
Growth stocks typically do not pay dividends. The value of the stock is
expected to grow—or appreciate—with the reinvestment of earnings.
Defensive stocks typically perform better than cyclical stocks in a recessionary
economy.
✅✅
Which of the following statements regarding hedge funds is CORRECT? -
-The answer is hedge funds are usually structured as a partnership. The
partnership is with the general partner as the investment manager and the
investors as limited partners. Hedge funds are actively and aggressively
managed, seek superior returns, and are best suited for wealthy, sophisticated
investors. Hedge fund managers are largely compensated for performance,
not assets under management.
✅✅
Which of the following statements regarding fundamental and technical
analysis is CORRECT? - -Technical analysis is not considered valid
under the efficient market hypothesis because this type of analysis is
attempting to predict future prices based on past price movement.
ABC Corporation pays a current annual dividend of $0.75 per share. This
dividend is expected to grow at a 30% rate per year during Years 1 and 2.
After Year 2, the company's dividend is expected to grow at a constant rate of
✅✅
8%. What is the value of the stock today, assuming a required rate of return of
10%? - -The answer is $58.50. Using the multistage growth dividend
discount model, the value of the stock equals $58.50.
Compute the value of each future dividend until the growth rate stabilizes
(Years 1-2).
D1 = $0.75 × 1.30 = $0.9750
D2 = $0.9750 × 1.30 = $1.2675
Use the constant growth dividend discount model to compute the remaining
intrinsic value of the stock at the beginning of the year when the dividend
growth rate stabilizes (Year 3).
D3 = $1.2675 × 1.08 = $1.3689
V = $1.3689 ÷ (0.10 - 0.08) = $68.4450
Use the uneven cash flow method to solve for the net present (intrinsic) value
of the stock.
CF0 = $0
CF1 = $0.9750
, CF2 = $1.2675 + $68.4450 = $69.7125
I/YR = 10%
Solve for NPV = $58.50
✅✅
All of the following correctly explain advantages of investing in real estate
investment trusts (REITs) except - -The answer is tax deferral. Tax
deferral is not an advantage of investing in REITs. REITs are professionally
managed assets investing in a diversified portfolio of real estate holdings.
Many REITs trade on the exchanges and over the counter, thereby providing
investors with liquidity.
A call option with an exercise price of $105 is selling in the open market for
✅✅
$4.25 when the market price of the underlying stock is $102. What is the
intrinsic value of this option? - -The answer is $0. This call option is
out-of-the-money; thus, its intrinsic value is zero.
Which type of hedge should a wheat farmer select? - ✅✅ -The answer is a
short hedge—sell wheat futures contracts as a hedge against a decline in the
price of wheat. Because the wheat farmer is long wheat, he would be
interested in a short hedge to protect against a decline in the price of wheat.
✅✅
Which of the following combinations of risks is associated with art and other
collectibles? - -The answer is liquidity risk and market risk. The
collectibles market is usually characterized by an inefficient market and
inherent lack of liquidity.
Assume the nominal return on 30-year U.S. T-bonds is 6.5%, and the inflation
✅✅
rate is 1.75%. Which of the following is the real rate of return on the T-bonds?
- -The answer is 4.67%. The real rate of return is 4.67%, calculated as
follows: {[(1 + 0.065) ÷ (1 + 0.0175)] -1} × 100 = 0.0467, or 4.67%.
During the past year, the stock market had a return of 8%, while the risk-free
✅✅
rate of return was 3%. Fund B had a realized return of 12%, a standard
deviation of 15, and a beta of 1.20. Jensen's alpha for the fund is - -The
answer is 3.00%. Alpha = 12% - [3% + (8% - 3%)1.20] = 12% - 9% = 3%
Connie, 45, has an extensive amount of assets in a separately managed
account. The account is mostly compromised of small-cap growth companies.
✅✅
What is the best benchmark to analyze the performance of her account? -
-The answer is Russell 2000 Index. Connie should use the Russell 2000
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