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1. Increasing number of randomly chosen stocks in a portfolio from 5 to 10 would likely ______________.

1. Decrease the nonsystematic risk of the portfolio
2. Increase the nonsystematic risk of the portfolio
3. Decrease the systematic risk of the portfolio
4. Increase the systematic risk of the portfolio

2. A portfolios expected return is 12%, its standard deviation is 20%, and the risk-free rate is 4%. Which one of the following would make for the smallest increase in the portfolios Sharpe ratio?

1. A decrease if 1% in the risk-free rate
2. An increase of 1% in the portfolio expected return
3. A decrease of 1% in the portfolio standard deviation
4. All the above lead to the same Sharper ratio

3. Asset A has an expected return of 18% and a reward-to-volatility ratio of 0.6. Asset B has an expected return of 14% and a reward-to-volatility ratio of 0.8. A rational risk-averse investor would prefer a portfolio consisting of the risk-free asset and __________.

1. Asset A
2. Asset B
3. No risky asset
4. Cannot tell with the given information

4. Under CAPM, beta is a measure of _______ risk and a portfolio with beta of 0.8 is ________ than the market.

1. Systematic; riskier
2. Systematic; less risky
3. Nonsystematic; riskier
4. Nonsystematic; less risky

5. The major force that drives a security market toward efficiency arises from _________.

1. Security market rules
2. Government regulation
3. Investors behavioral biases
4. The competition among investors

6. In an efficient market, professional portfolio management can offer the following benefits except __________.

1. A superior risk-return trade-off
2. Low-cost record keeping
3. Low-cost diversification
4. A targeted risk levels

7. Most of the time Tony loses money on his stock investments. Learning that, Bob decided to sell (buy) whatever stocks that Tony buys (sells). We know that Bobs strategy is flawed because __________.

1. Tony may be reluctant to tell Bob the truth
2. Tony may be making money on his bond investments
3. Bob may not have enough capital to follow this strategy
4. Excessive transaction cost mat be the reason why Tony loses money

8. A market anomaly refers to __________.

1. A price or a volume event that is inconstant with historical price or volume trends
2. Security price behavior that differs from what the efficient market hypothesis predicts
3. A trading practice that interferes with efficient buying and selling of securities
4. An exogenous shock to the market that is sharp but not persistent

9. Adam found that each time he watched real-time stock quotations he felt the urges to trade. To avoid this problem, Adam should __________.

1. Avoid any stock investments.
2. Increase his investment on bonds.
3. Avoid watching the real-time quotations
4. Watch more real-time quotations, and then follow the urges to trade.

10. A bond with a call feature_________.

1. Will usually have a higher yield to maturity with similar noncallable bond
2. Is attractive because the imitate receipt of principal plus premiums produces a higher return
3. Is more apt to be called when interest rates are higher because of interest saving for the issuer will be greater
4. None of the above

11. There is one coupon bond that pays an interest of $60 annually, has a par value of $1,000, matures in 5 years and is selling at $961.54. The current yield on this bond is ___________.

1. 5.00%
2. 5.36%
3. 5.94%
4. 6.24%

12. There is a 10-year bond with a 9% coupon rate and a yield to maturity of 7%. Holding other things equal, in one year the bond price will be ___________ the current bond price.

1. Lower than
2. Higher than
3. The same as
4. 2% higher than

13. Suppose we observe the annual yields of treasury securities for two years and three years to be 5% and 6%, respectively. What is the implied one-year forward rate, two years from now, if the expectations hypothesis holds?

1. 5.5%
2. 7.0%
3. 8.0%
4. 9.0%

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