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The basic purpose of immunization is to Select one: A. produce a zero net-interest-rate risk. B. produce a zero net-interest-rate risk and offset price and reinvestment risk. When a portfolio is immunized, price risk and reinvestment risk exactly offset each other resulting in zero net-interest-rate risk. C. offset price and reinvestment risk. D. eliminate default risk and produce a zero net-interest-rate risk. E. eliminate default risk The two components of interest-rate risk are Select one: A. reinvestment risk and systematic risk. B. call risk and price risk. C. price risk and reinvestment risk. Default, systematic, and call risks are not part of interest-rate risk. Only price and reinvestment risks are part of interest-rate risk. D. price risk and default risk. E. None of the options are correct. Duration measures Select one: A. weighted-average time until cash flow payment and the time required to make excessive profit from the investment. B. weighted-average time until a bond's half-life. C. the time required to make excessive profit from the investment. D. weighted-average time until a bond's half-life and the time required to make excessive profit from the investment. E. weighted-average time until cash flow payment. Duration measures the weighted average time until cash flow payment, as one receives coupon payments throughout the life of the bond (for coupon bonds); thus, duration is less than time to maturity (except for zeros).

Par Value Time to Maturity Coupon Current price Yield to Maturity

$ $

1,000 20 Years 10% (paid annually) 850 12%

Given the bond described above, if interest were paid semi-annually (rather than annually), and the bond continued to be priced at $850, the resulting effective annual yield to maturity would be Select one: A. more than 12%. FV = 1000, PV = −850, PMT = 50, n = 40, i = 5.9964 (semi-annual); (1.059964) 2 − 1 = 12.35%. B. less than 12%. C. 12%. D. Cannot be determined. E. None of the options are correct.

Feedback FV = 1000, PV = −850, PMT = 50, n = 40, i = 5.9964 (semi-annual); (1.059964) 2 − 1 = 12.35%. FV = 1000, PV = −850, PMT = 50, n = 40, i = 5.9964 (semi-annual); (1.059964) 2 − 1 = 12.35%. The correct answer is: more than 12%.

Annual percentage rates (APRs) are computed using Select one: A. compound interest. B. best estimates of expected real costs. C. simple interest. APRs use simple interest. D. either simple interest or compound interest. E. None of the options are correct.

Feedback APRs use simple interest. APRs use simple interest. The correct answer is: simple interest.

The line representing all combinations of portfolio expected returns and standard deviations that can be constructed from two available assets is called the Select one: A. portfolio opportunity set. The portfolio opportunity set is the line describing all combinations of expected returns and standard deviations that can be achieved by a portfolio of risky assets. B. capital allocation line. C. efficient frontier. D. risk/reward tradeoff line. E. Security Market Line.

Feedback The portfolio opportunity set is the line describing all combinations of expected returns and standard deviations that can be achieved by a portfolio of risky assets. The portfolio opportunity set is the line describing all combinations of expected returns and standard deviations that can be achieved by a portfolio of risky assets. The correct answer is: portfolio opportunity set. When an investment advisor attempts to determine an investor's risk tolerance, which factor would they be least likely to assess? Select one: A. The investor's tendency to make risky or conservative choices B. The level of return the investor prefers Investment advisors would be least likely to assess the level of return the investor prefers. The investor's investing experience, financial security, feelings about loss, and disposition toward risky or conservative choices will impact risk tolerance. C. The investor's feelings about loss D. The investor's prior investing experience E. The investor's degree of financial security

In a return-standard deviation space, which of the following statements is(are) true for risk-averse investors? (The vertical and horizontal lines are referred to as the expected return-axis and the standard deviation-axis, respectively.) I) An investor's own indifference curves might intersect. II) Indifference curves have negative slopes. III) In a set of indifference curves, the highest offers the greatest utility. IV) Indifference curves of two investors might intersect. Select one: A. III and IV only An investor's indifference curves are parallel (thus they cannot intersect) and have positive slopes. The highest indifference curve (the one in the most northwestern position) offers the greatest utility. Indifference curves of investors with similar risk-return tradeoffs might intersect. B. II and III only C. I and IV only D. I and II only E. None of the options are correct.

Which of the following statement(s) is(are) false regarding the variance of a portfolio of two risky securities? I) The higher the coefficient of correlation between securities, the greater the reduction in the portfolio variance. II) There is a linear relationship between the securities' coefficient of correlation and the portfolio variance. III) The degree to which the portfolio variance is reduced depends on the degree of correlation between securities. Select one: A. I and III The lower the correlation between the returns of the securities, the more portfolio risk is reduced. B. I only C. I and II D. II only E. III only

Feedback The lower the correlation between the returns of the securities, the more portfolio risk is reduced. The lower the correlation between the returns of the securities, the more portfolio risk is reduced. The correct answer is: I and II

The first major step in asset allocation is Select one: A. assessing risk tolerance. Assessing risk tolerance should be the first consideration in asset allocation. The other options refer to security selection. B. identifying market anomalies. C. estimating security betas. D. analyzing financial statements.

The change from a straight to a kinked capital allocation line is a result of Select one: A. the reward-to-volatility ratio increasing. B. an investor's risk tolerance decreasing. C. the borrowing rate exceeding the lending rate. D. an increase in the portfolio allocation to the risk-free asset. E. changes in the weightings of the optimal risky portfolio.

Feedback The linear capital allocation line assumes that the investor may borrow and lend at the same rate (the risk-free rate), which obviously is not true. Relaxing this assumption and incorporating the higher borrowing rates into the model results in the kinked capital allocation line. The linear capital allocation line assumes that the investor may borrow and lend at the same rate (the risk-free rate), which obviously is not true. Relaxing this assumption and incorporating the higher borrowing rates into the model results in the kinked capital allocation line. The correct answer is: the borrowing rate exceeding the lending rate.

Consider a T-bill with a rate of return of 5% and the following risky securities: Security Security Security Security

A: E(r) = 0.15; Variance = 0.04 B: E(r) = 0.10; Variance = 0.0225 C: E(r) = 0.12; Variance = 0.01 D: E(r) = 0.13; Variance = 0.0625

From which set of portfolios, formed with the T-bill and any one of the four risky securities, would a risk-averse investor always choose his portfolio? Select one: A. The set of portfolios formed with the T-bill and security D. B. The set of portfolios formed with the T-bill and security A. C. The set of portfolios formed with the T-bill and security B. D. The set of portfolios formed with the T-bill and security C. Security C has the highest reward-to-volatility ratio. E. Cannot be determined.

Feedback Security C has the highest reward-to-volatility ratio. Security C has the highest reward-to-volatility ratio. The correct answer is: The set of portfolios formed with the T-bill and security C. Consider an investment opportunity set formed with two securities that are perfectly negatively correlated. The global-minimum variance portfolio has a standard deviation that is always Select one: A. equal to -1. B. equal to the sum of the securities' standard deviations. C. greater than zero. D. equal to zero. If two securities were perfectly negatively correlated, the weights for the minimum variance portfolio for those securities could be calculated, and the standard deviation of the resulting portfolio would be zero.

Feedback If two securities were perfectly negatively correlated, the weights for the minimum variance portfolio for those securities could be calculated, and the standard deviation of the resulting portfolio would be zero.

If two securities were perfectly negatively correlated, the weights for the minimum variance portfolio for those securities could be calculated, and the standard deviation of the resulting portfolio would be zero. The correct answer is: equal to zero....