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Financial Markets Investments Exam Solutions, Exams of Economics

Cambridge Technical InstituteEconomics

Financial Markets Investments Exam Solutions

Typology: Exams

2024/2025

Available from 06/26/2025

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Financial Markets Investments Exam Solutions
1. Real assets in the economy include all but which one of the following?: -
Common stock
2. blank is not a derivative security.: A share of common stock
3. Active trading in markets and competition among securities analysts
helps ensure that:
Security prices approach informational efficiency.
Riskier securities are priced to offer higher potential returns.
Investors are unlikely to be able to consistently find under- or overvalued
securities.: 1, 2, and 3
4. The material wealth of society is determined by the economy's
blank, which is a function of the economy's blank.: -
productive capacity; real assets
5. blank assets generate net income to the economy, and
blank assets define allocation of income among investors.:
Real; financial
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Financial Markets Investments Exam Solutions

  1. Real assets in the economy include all but which one of the following?: - Common stock
  2. blank is not a derivative security.: A share of common stock
  3. Active trading in markets and competition among securities analysts helps ensure that: Security prices approach informational efficiency. Riskier securities are priced to offer higher potential returns. Investors are unlikely to be able to consistently find under- or overvalued securities.: 1, 2, and 3
  4. The material wealth of society is determined by the economy's blank, which is a function of the economy's blank.: - productive capacity; real assets
  5. blank assets generate net income to the economy, and blank assets define allocation of income among investors.: Real; financial
  1. Which of the following are financial assets? Debt securities Equity securities Derivative securities: 1, 2, and 3
  2. Asset allocation refers to blank.: the allocation of the investment portfolio across broad asset classes
  3. Which one of the following best describes the purpose of derivatives mar- kets?: Transferring risk from one party to another.
  4. Security selection refers to the blank.: choice of specific securities within each asset class
  5. blank is (are) real assets.: Production equipment
  6. blank portfolio construction starts with selecting attractively priced securities.: Bottom-up
  7. In a market economy, capital resources are primarily allocated by blank.: financial markets
  8. blank represents an ownership share in a corporation.: Com- mon stock
  1. blank portfolio construction starts with asset allocation.: - Top-down
  2. Debt securities promise: A fixed stream of income. A stream of income that is determined according to a specific formula. A share in the profits of the issuing entity.: 1 or 2 only
  3. The success of common stock investments depends on the success of blank.: the firm and its real assets
  4. An example of a real asset is: A college education Customer goodwill A patent: 1, 2, and 3
  5. Money market securities are characterized by: Maturity less than 1 year Safety of the principal investment Low rates of return: 1, 2, and 3
  6. After much investigation, an investor finds that Intel stock is

currently underpriced. This is an example of blank.: security analysis

  1. After considering current market conditions, an investor decides to place 60% of her funds in equities and the rest in bonds. This is an example of blank.: asset allocation
  2. Suppose an investor is considering one of two investments that are iden- tical in all respects except for risk. If the investor anticipates a fair return for the risk of the security he invests in, he can expect to blank.: pay less for the security that has higher risk
  3. The efficient market hypothesis suggests that blank.: passive portfolio management strategies are the most appropriate investment strategies
  4. In a perfectly efficient market the best investment strategy is probably blank.: a passive strategy
  5. Market signals will help to allocate capital efficiently only if investors are acting blank.: on accurate information Correct

specific price.: right; sell

  1. Ownership of a call option entitles the owner to the blank to blank a specific stock, on or before a specific date, at a specific price.: right; buy
  2. In a blank index, changes in the value of the stock with the greatest market value will move the index value the most, everything else equal.: value-weighted index
  3. The blank measure of returns ignores compounding.: arith- metic average
  4. If you want to measure the performance of your investment in a fund, including the timing of your purchases and redemptions, you should calculate the blank.: dollar-weighted return
  5. Which one of the following measures time-weighted returns and allows for compounding?: Geometric average return
  6. You have calculated the historical dollar-weighted return, annual geomet- ric average return, and annual arithmetic average return. If you desire to forecast performance for next year, the best forecast will be given

by the blank.: arithmetic average return

  1. he complete portfolio refers to the investment in the blank.: - risk-free asset and the risky portfolio combined
  2. The holding period return on a stock is equal to the blank.: cap- ital gain yield over the period plus the dividend yield
  3. Another name for the dollar-weighted return is the blank.: inter- nal rate of return
  4. The market risk premium is best approximated by the blank.: - difference between the return on an index fund and the return on Treasury bills
  5. The excess return is the blank.: rate of return in excess of the Treasury-bill rate
  6. The rate of return on blank is known at the beginning of the holding period, while the rate of return on blank is not known until the end of the holding period.: Treasury bills; risky assets
  1. You invest all of your money in 1-year T-bills. Which of the following state- ments is (are) correct? Your nominal return on the T-bills is riskless. Your real return on the T-bills is riskless. Your nominal Sharpe ratio is zero.: 1 and 3 only
  2. Which one of the following would be considered a risk-free asset in real terms as opposed to nominal?: U.S. T-bill whose return was indexed to inflation
  3. The CAL provided by combinations of 1-month T-bills and a broad index of common stocks is called the blank.: CML
  4. The normal distribution is completely described by its blank.- : mean and standard deviation
  5. Risk that can be eliminated through diversification is called blank risk.: All of these options are correct.
  6. The blank decision should take precedence over the blank decision.: asset allocation; security selection
  7. Adding additional risky assets to the investment opportunity set will

gener- ally move the efficient frontier blank and to the blank.- : up; left

  1. An investor's degree of risk aversion will determine their blank.: optimal mix of the risk-free asset and risky asset
  2. The blank is the covariance between two funds divided by the product of the standard deviations of the returns on each fund.: correlation coefficient
  3. Which of the following statistics cannot be negative?: Variance
  4. The correlation coefficient between two assets equals blank.- : their covariance divided by the product of their standard deviations
  5. Diversification is most effective when security returns are blank.: negatively correlated
  6. The expected rate of return of a portfolio of risky securities is the blank.: weighted sum of the individual securities' expected returns
  7. Beta is a measure of security responsiveness to blank.: market risk
  8. The risk that can be diversified away is blank.: firm-specific risk

blank.: the risk-free asset combined with at least one risky asset

  1. The optimal risky portfolio can be identified by finding: The minimum-variance point on the efficient frontier The maximum-return point on the efficient frontier and the minimum-variance point on the efficient frontier The tangency point of the capital market line and the efficient frontier The line with the steepest slope that connects the risk-free rate to the efficient frontier: 3 and 4 only
  2. The blank reward-to-variability ratio is found on the blank capital market line.: highest; steepest Correct
  3. A measure of the riskiness of an asset held in isolation is blank.: standard deviation
  4. The part of a stock's return that is systematic is a function of which of the following variables? Volatility in excess returns of the stock market The sensitivity of the stock's returns to changes in the stock market The variance in the stock's returns that is unrelated to the overall stock

market: 1 and 2 only

  1. Which risk can be partially or fully diversified away as additional securities are added to a portfolio? Total risk Systematic risk Firm-specific risk: 1 and 3
  2. According to Tobin's separation property, portfolio choice can be sep- arated into two independent tasks consisting of blank and blank.: identifying the optimal risky portfolio; constructing a complete portfolio from T-bills and the optimal risky portfolio based on the investor's degree of risk aversion
  3. The term excess return refers to the blank.: difference between the rate of return earned and the risk-free rate
  4. The values of beta coefficients of securities are blank.: usually positive but are not restricted in any particular way
  5. A security's beta coefficient will be negative if blank.: its returns are negatively correlated with market-index returns
  1. Investing in two assets with a correlation coefficient of 1 will reduce which kind of risk?: With a correlation of 1, no risk will be reduced. Correct
  2. A portfolio of stocks fluctuates when the Treasury yields change. Since this risk cannot be eliminated through diversification, it is called blank. Multiple Choice: systematic risk
  3. You are considering adding a new security to your portfolio. To decide whether you should add the security, you need to know the security's: Expected return Standard deviation Correlation with your portfolio: 1, 2, and 3
  4. Which of the following is a correct expression concerning the formula for the standard deviation of returns of a two-asset portfolio where the correlation coefficient is positive?: ÃP 2 >w21×Ã2 1 w+ 22 ×Ã
  5. The figures below show plots of monthly excess returns for two

stocks plotted against excess returns for a market index. Which stock is riskier to a nondiversified investor who puts all his money in only one of these stocks?: Stock A is riskier.

  1. The efficient frontier represents a set of portfolios that:: maximize expect- ed return for a given level of risk.
  2. The portfolio with the lowest standard deviation for any risk premium is called the blank.: global minimum variance portfolio
  3. The plot of a security's excess return relative to the market's excess return is called the .: security characteristic line
  4. The measure of risk used in the capital asset pricing model is blank.: beta
  5. Which of the following are assumptions of the simple CAPM model? Individual trades of investors do not affect a stock's price. All investors plan for one identical holding period. All investors analyze securities in the same way and share the same economic view of the world. All investors have the same level of risk aversion.: 1, 2, and 3 only

ex- pected returns to fall; risk premiums to fall

  1. The market portfolio has a beta of___________blank.: 1.
  2. In a well-diversified portfolio, blank risk is negligible.: unsys- tematic
  3. According to the capital asset pricing model, a security with a blank.: positive alpha is considered underpriced
  4. Arbitrage is based on the idea that blank.: assets with identical risks must have the same expected rate of return
  5. Investors require a risk premium as compensation for bearing blank.: systematic risk
  6. According to the capital asset pricing model, a fairly priced security will plot blank. Multiple Choice: on the security market line
  7. According to the capital asset pricing model, fairly priced securities have blank.: zero alphas
  8. The graph of the relationship between expected return and beta in

the CAPM context is called the blank.: SML

  1. Research has revealed that regardless of what the current estimate of a firm's beta is, beta will tend to move closer to__________blank over time.:
  3. According to the capital asset pricing model, in equilibrium blank.: all securities' returns must lie on the security market line
  4. Security X has an expected rate of return of 13% and a beta of 1.15. The risk-free rate is 5%, and the market expected rate of return is 15%. According to the capital asset pricing model, security X is blank.: overpriced Correct
  5. The possibility of arbitrage arises when blank.: mispricing among securities creates opportunities for riskless profits
  6. An important characteristic of market equilibrium is blank.: - the absence of arbitrage opportunities
  7. The risk-free rate is 4%. The expected market rate of return is 11%. If you expect stock X with a beta of 0.8 to offer a rate of return of 12%, then you should blank.: buy stock X because it is underpriced