1. A zero-coupon bond has a yield to maturity of 12% and a par value of $1,000.

If the bond
matures in 18 years, the bond should sell for a price of ________ today.
Select one:
A. $130.04
B. $422.41
C. $513.16
D. $501.87

2. You have just purchased a 7-year zero-coupon bond with a yield to maturity of 11% and a
par value of $1,000. What would your rate of return at the end of the year be if you sell the
bond? Assume the yield to maturity on the bond is 9% at the time you sell.
Select one:
A. 10.00%
B. 1.4%
C. 13.8%
D. 23.8%

3. A bond has a par value of $1,000, a time to maturity of 20 years, a coupon rate of 10% with
interest paid annually, a current price of $850, and a yield to maturity of 12%. Intuitively and
without using calculations, if interest payments are reinvested at 10%, the realized compound
yield on this bond must be
Select one:
A. 12.0%.
B. 10.9%.
C. 10.00%.
D. 12.4%.
E. None of the options are correct.

4. Suppose that all investors expect that interest rates for the 4 years will be as follows:
Year Forward Interest Rate
0 (today) 5%
1 7%
2 9%
3 10%
What is the price of a 3-year zero-coupon bond with a par value of $1,000?
Select one:
A. $765.55
B. $863.83
C. $816.58
D. $772.18
E. None of the options are correct.

5. The following is a list of prices for zero-coupon bonds with different maturities and par
values of $1,000.
Maturity (Years) Price
1 $943.40
2 881.68
3 808.88
4 742.09
According to the expectations theory, what is the expected forward rate in the third year?
Select one:
A. 11.19%
B. 9.00%
C. 7.00%
D. 7.33%
E. None of the options are correct.

6. When computing yield to maturity, the implicit reinvestment assumption is that the interest
payments are reinvested at the
Select one:

A. coupon rate.
B. the average yield to maturity throughout the investment period.
C. yield to maturity at the time of the investment.
D. prevailing yield to maturity at the time interest payments are received.
E. current yield.
7. Given the time to maturity, the duration of a zero-coupon bond is higher when the discount
rate is
Select one:
A. equal to the risk-free rate.
B. higher.
C. The bond's duration is independent of the discount rate.
D. lower.
E. None of the options are correct.

8. Which one of the following par-value 12% coupon bonds experiences a price change of $23
when the market yield changes by 50 basis points?
Select one:
A. The bond with a duration of 5.15 years
B. The bond with a duration of 6 years
C. The bond with a duration of 2.7 years
D. The bond with a duration of 5 years

9. Holding other factors constant, which one of the following bonds has the smallest price
volatility?
Select one:
A. 20 year, 7% coupon bond
B. 20-year, 0% coupon bond
C. 20-year, 9% coupon bond
D. 20-year, 6% coupon bond
E. Cannot tell from the information given

9. You have been given this probability distribution for the holding-period return for a stock:
Stock of the Economy Probability HPR
Boom 0.40 22%
Normal growth 0.35 11%
Recession 0.25 –9%
What is the expected standard deviation for the stock?
Select one:
A. 7.04%
B. 2.07%
C. 1.44%
D. 9.96%
E. None of the options are correct.

10. Consider a risky portfolio, A, with an expected rate of return of 0.15 and a standard deviation
of 0.15, that lies on a given indifference curve. Which one of the following portfolios might lie
on the same indifference curve for a risk averse investor?
Select one:
A. E(r) = 0.10; Standard deviation = 0.20
B. E(r) = 0.10; Standard deviation = 0.10
C. E(r) = 0.15; Standard deviation = 0.20
D. E(r) = 0.20; Standard deviation = 0.15
E. E(r) = 0.15; Standard deviation = 0.10

11. You invest $100 in a risky asset with an expected rate of return of 0.12 and a standard
deviation of 0.15 and a T-bill with a rate of return of 0.05.
A portfolio that has an expected outcome of $115 is formed by
Select one:
A. Such a portfolio cannot be formed.
B. borrowing $43 at the risk-free rate and investing the total amount ($143) in the risky
asset.
C. investing $43 in the risky asset and $57 in the riskless asset.
D. investing $100 in the risky asset.
E. investing $80 in the risky asset and $20 in the risk-free asset.

12. Which of the following statement(s) is(are) true 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. III only
B. I and III
C. I only
D. II only
E. I and II

13. Consider a T-bill with a rate of return of 5% and the following risky securities:
Security A: E(r) = 0.15; Variance = 0.01
Security B: E(r) = 0.10; Variance = 0.0225
Security C: E(r) = 0.12; Variance = 0.01
Security 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.
E. Cannot be determined.

14. 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.

15. Consider two perfectly negatively correlated risky securities A and B. A has an expected
rate of return of 12% and a standard deviation of 17%. B has an expected rate of return of 9%
and a standard deviation of 14%.
The risk-free portfolio that can be formed with the two securities will earn ________ rate of
return.
Select one:
A. 10.9%
B. 9.9%
C. 10.4%
D. 9.5%

16. The separation property refers to the conclusion that

Select one:
A. the determination of the best risky portfolio is objective, and the choice of the best
complete portfolio is subjective.
B. investors are separate beings and will, therefore, have different preferences regarding the
risk-return tradeoff.
C. the choice of inputs to be used to determine the efficient frontier is objective, and the choice
of the best CAL is subjective.
D. the determination of the best CAL is objective, and the choice of the inputs to be used to
determine the efficient frontier is subjective.
E. the choice of the best complete portfolio is objective, and the determination of the best risky
portfolio is objective.

17. Consider the single-index model. The alpha of a stock is 0%. The return on the market index
is 16%. The risk-free rate of return is 5%. The stock earns a return that exceeds the risk-free
rate by 11%, and there are no firm-specific events affecting the stock performance. The β of the
stock is
Select one:
A. 1.0.
B. 1.33.
C. 0.67.
D. 1.50.
E. 0.75.

18. Which statement is not true regarding the market portfolio?

Select one:
A. It is the tangency point between the capital market line and the indifference curve.
B. All securities in the market portfolio are held in proportion to their market values.
C. It includes all publicly-traded financial assets.
D. It lies on the efficient frontier.
E. All of the options are true.

19. Which statement is not true regarding the capital market line (CML)?
Select one:
A. The CML is also called the security market line.
B. The CML is the best attainable capital allocation line.

C. The risk measure for the CML is standard deviation.

D. The CML is the line from the risk-free rate through the market portfolio.
E. The CML always has a positive slope.

20. The index model has been estimated for stock A with the following results:
𝑅𝐴 = 0.01 + 0.8𝑅𝑀 + 𝑒𝐴 .
𝛿𝑀 = 0.20; 𝛿𝑒𝐴 = 0.10.
The standard deviation of the return for stock A is
Select one:
A. 0.6400.
B. 0.1600.
C. 0.0356.
D. 0.1887.