RIESGO, CRÉDITO Y MERCADO

1. A commitment of current resources in the expectation of deriving greater resources in

the future is the definition of a(n) INVESTMENT.
Correct Answer
Blank 1: investment

2. The material wealth of a society, determined by the productive capacity of the

economy is a function of real ASSETS of the economy.
Correct Answer
Blank 1: assets

3. Unlike REAL assets, one person's FINANCIAL asset is another person's liability.
Correct Answer
Blank 1: real
Blank 2: financial

4. Which of the following financial assets are included in household wealth?

Multiple choice question.

Bank accounts, corporate stock, and bonds

5. The types of financial asses includes fixed income, equity, and DERIVATIVES.
Correct Answer
Blank 1: derivatives

6. True or false: An investment, for example the purchase of shares of stock, should
justify not only time the money tied up but also the risk of the investment.

True

7. Which securities are considered fixed income?

Multiple select question.

Floating-rate bonds
Junk bonds

8. Which of the following would all be considered real assets?

Multiple choice question.

Land, buildings, and equipment

 9. Capital markets allow the risk inherent in all investments to be borne by the
INVESTORS most willing to bear it.

Blank 1: investors or investor

10. FINANCIAL assets are claims to the income generated by REAL assets.
Correct Answer
Blank 1: Financial
Blank 2: Real

11. The agency problem refers to the possible conflicts of interest between self-interested
managers as ______ and shareholders of the firm who are the ______.

agents; principals

12. Which real assets are

13. included in household wealth?
Multiple select question.

Real estate
Consumer durables

14. The following are mechanisms to mitigate potential agency problems:

15.
poor or bad performers may be subjected to the threat of a takeover.
boards of directors can force out management teams that are underperforming.
compensation plans tie to the income of managers to the success of the firm.

16. What are the types of financial assets?

Multiple select question.

Fixed income
Equity
Derivatives

17. When a securities market conveys accurate information, thereby facilitating the most
productive use of capital resources, the market is said to be ______.
Multiple choice question.

transparent

18. A security such as a bond that pays a specified cash flow over a specific period is a(n)
FIXED-INCOME or DEBT security.
Correct Answer
 Blank 1: fixed
Blank 2: income
Blank 3: debt

19. Which of the following companies went bankrupt between the years of 2000 and
2008?
Enron
WorldCom
Lehman Brothers

20. Financial assets allow the risk of a real asset to be borne by investors ______.

through the sale of securities for the best prices

whose preferences match the securities' risk-return characteristics

21. In 2002 in response to the spate of ethics scandals, what act did Congress pass to
tighten the rules of corporate governance?

Sarbanes-Oxley Act

22. That managers of a public corporation often pursue their own interests rather than the
interests of the shareholders is referred to as the ______ problem.
Multiple choice question.

agency

23. Portfolio construction techniques that start with the asset allocation decision and then
progress to more specific security-selection decisions are referred to as ______.

top-down

24. True or false: Agency problems are easy to fix

False

25. MARKET SIGNALS help to allocate capital efficiently only if investors are acting on
accurate information.
Correct Answer
Blank 1: Market
Blank 2: signals or signal

26. Due to the risk–return trade-off in the securities markets, the higher-risk assets are
priced to offer higher expected returns than lower-risk assets.
 True

27. Which of the following US firms manipulated and misstated their accounts to the tune
of billions of dollars? (Select all that apply.)

Qwest Communications
HealthSouth

28. Holding highly diversified portfolios without spending effort or other resources
attempting to improve investment performance through security analysis is referred to
as PASSIVE management.
Correct Answer
Blank 1: passive

29. What are requirements of the Sarbanes-Oxley Act?

The CFO must personally vouch for the corporation’s accounting statements.
Corporations must have more independent directors.

30. If markets are efficient and prices reflect all relevant information, it is probably better
to follow ______ strategies.

passive

31. In constructing portfolios, the choice among stocks, bonds, real estate and other broad
classes is the ASSET ALLOCATION decision.
Correct Answer
Blank 1: asset
Blank 2: allocation

32. Firms specializing in the sale of new securities to the public, typically by underwriting
the issue, are called ______.

investment banks

33. Start-up companies rely on bank loans and investors who are willing to invest in them
in return for an ownership stake in the firm. What do you call the equity investment in
these young companies?

Venture capital

34. The risk-reward trade-off of an asset depends on its effect on the risk of a(n)
DIVERSIFIED portfolio, that is, one with many assets so that the exposure to any
particular asset is limited.
 Correct Answer
Blank 1: diversified or diverse

35. What are private equity investments?

Investment in firms that are not traded on a public stock exchange.

36. The attempt to improve performance either by identifying mis-priced securities or by

timing the performance of broad asset classes is referred to as ACTIVE management.
Correct Answer
Blank 1: active

37. A market is said to be EFFICENT when prices reflect all available information
concerning the values of securities.
Correct Answer
Blank 1: efficient

38. Investment banking firms handle the marketing of new issues in the PRIMARY
market, and later investors trade the previously-issued securities among themselves in
the SECONDARY market.
Correct Answer
Blank 1: primary
Blank 2: secondary

39. Sources of venture capital are dedicated venture capital funds, wealthy individuals
known as ANGEL INVESTORS, and institutions such as pension funds.
Correct Answer
Blank 1: angel
Blank 2: investors

40. Investments in firms that do not trade on public stock exchanges are known as
PRIVATE EQUITY investments.
Correct Answer
Blank 1: private
Blank 2: equity

41. If markets are efficient and prices reflect all relevant information, it is probably better
to follow ______ strategies.

passive

42. Which are mechanisms to mitigate potential agency problems?

Top executives are provided with shares or stock options.

 Shareholders can launch proxy contests.

43. A problem with the ______ strategy is the possibility of unintended bets on one or
another sector of the economy.

bottom-up

44. In constructing portfolios, the choice of which particular assets to hold within an asset
class is the SECURITY SELECTION decision.
Correct Answer
Blank 1: security
Blank 2: selection

45. Investors' collections of investment assets are referred to as their PORTFOLIO.

Correct Answer
Blank 1: portfolios

46. Drag and drop assets against the correct corresponding asset types.

The material wealth of a society is a function of

R = all real assets.

_______ are real assets.

Land
Machines
Stocks and bonds
Knowledge
R = Land, machines, and knowledge

The means by which individuals hold their claims on real assets in a well-developed economy
are

investment assets.
depository assets.
derivative assets.
R = financial assets.
exchange-driven assets.

_______ are financial assets.

Bonds
Machines
Stocks
R = Bonds and stocks
Bonds, machines, and stocks

_________ financial asset(s).

Buildings are
Land is a
Derivatives are
U.S. agency bonds are
R = Derivatives and U.S. agency bonds are

47. The attempt to improve performance either by identifying mis-priced securities or by

timing the performance of broad asset classes is referred to as ___________
management.
ACTIVE
CAP 2

1. Drag and drop the financial instruments against the corresponding financial markets.
Money markets: Commercial paper,A three-month certificate of deposit (CD),A four-
week US Treasury bill

Capital markets:A thirty-year bond,A share of stock

 2. Match the money market instrument with its description.
T-bill: A US government obligation with initial maturity of one year or less
CD: A time deposit with a bank
Commercial paper:Short-term unsecured debt notes typically issued by large, well-known
companies
Banker´s acceptance:An order to pay a sum of money at a future date, like a postdated check,
used widely in foreign trade
Repo:An agreement to sell and repurchase an asset

3. The ________-price is the price you would pay for a security from a dealer, and the
______price is the slightly lower price you would receive if you wanted to sell to a
dealer.
ask
Bid

4. True or false: Time deposits may be withdrawn on demand. FALSE

5. Commercial paper, backed by a bank line of credit gives the
BORROWER access to cash that can be used to pay off the paper at maturity.
 6. Both Treasury notes and Treasury bonds may be issued in increments of $
___(100/1,000) but are typically traded in denominations of $
_____ (100/1,000).100
1000

7. _______markets include short-term, highly liquid, and relatively low-risk debt

instruments, whereas ______ markets include longer term and riskier securities
R = MONEY, CAPITAL

8. Match the following terms with the most correct statements.

repurchase agreements: a form of short-term borrowing
term repo: an identical transaction except that the term of the implicit loan can be 30
days or more
reverse repo: the mirror image of a repo

9. Which statements are true of money market instruments?

R = They have relatively low credit risk.
R = They can be purchased indirectly through mutual funds.

10. Which statements are true about bid-ask spreads?

R = Dealers buy at the bid price and sell at the ask price.
R = They are a source of profit for a dealer.

11. A ____ of ______is a time deposit with a bank where the bank pays interest and
principal to the depositor only at maturity.
R = CERTIFICATE / DEPOSIT

12. Which of the following statements are correct regarding commercial paper?
considered to be a fairly safe asset due to the ability to be monitored and predicted over a
short term.
is backed by a bank line of credit

13. Funds in the bank's reserve account are called FEDERAL FUNDS
 14. True or false: Repos or RPs are short for repurchase agreements and are considered a
form of short-term borrowing.
True

15. True or false: British regulators have proposed phasing out LIBOR by 2021 to be
replaced with a rate called SONIA (Sterling Overnight Interbank Average Rate).
R = TRUE

16. Select all that apply

Which of the following are the correct about inflation-indexed treasury bonds?

They provide a constant stream of income in real dollars.

The principal amount on them is adjusted in proportion to increases in the Consumer Price
Index.
Their yields are interpreted as real interest rates.

17. Select all that apply

Which of the following are mortgage-related government agencies, created because
Congress believed that adequate credit was not being received through normal private
sources

18.Which of the following are mortgage-related government agencies, created because

Congress believed that adequate credit was not being received through normal private
sources.
Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac).
Federal Home Loan Bank (FHLB)
Government National Mortgage Association (GNMA or Ginnie Mae)
Federal National Mortgage Association (FNMA or Fannie Mae)

19. The fed funds rate is simply the rate of interest on

very short-term loans among financial institutions

20. The rate at which large banks in London are willing to lend money among themselves is
known by the acronym LIBOR

21. Select all that apply

Identify the statements that describe the similarities between Treasury bonds and Treasury
notes.

Both Treasury bonds and Treasury notes commonly trade in denominations of $1,000.
Both Treasury bonds and Treasury notes can be sold in increments of $100.
Both Treasury bonds and Treasury notes make semiannual interest payments.

23. In the United States, inflation-indexed Treasury bonds are referred to by their acronym
TIPS
 24. The two types of _______ bonds are 1) foreign bonds which are issued in foreign
countries but in the currency of the investor and 2) Eurobonds which are denominated in a
currency other than that of the country in which it is issued.
INTERNATIONAL

25. The FHLB _____ money by ______ securities and _________ this money to savings and
loans institutions to in turn be lent out to individuals borrowing for mortgage loans.
R = BORROWS/ ISSUING/ LENDS

26. Select all that apply

Which statements are true about municipal bonds?
Their interest income is usually exempt from state and local taxation in the issuing state.
Their interest income is exempt from federal income taxation.
Capital gains taxes must be paid if they are sold for more than the investor's purchase price.

27. Select all that apply

Which statements about the equivalent taxable yield are correct? Define t as the marginal tax
rate, rmuni as the rate on munis, and rtaxable as the taxable rate.
R = The cutoff tax bracket at which investors are indifferent between it and the muni
rate is given by the expression 1 -
rmuni
rtaxaable
rmunirtaxaable.

R = It is higher than the rate on munis because munis are tax advantaged.

28. _______bonds give the firm the option to repurchase the bond from the holder at a
stipulated call price. R = CALLABLE

29. An ownership claim on a pool of mortgages or an obligation that is secured by such a pool
is referred to as a mortgage- BACKED security.

30. True or false: Eurobonds are always denominated only in euros.

R = FALSE

31. A difficulty for portfolio construction is that we only observe ______ rates of return
rather than the ______ returns needed.
R = REALIZED/ EXPECTED

32. Bonds issued by state and local governments are MUNICIPAL bonds, often referred to
by the nickname MUNI bonds.

33. The equivalent taxable yield is simply the ______ rate divided by 1 - t.
TAX FREE

34. Match the type of corporate bond with its description.

Secured: Have specific collateral backing them in the event of firm bankruptcy

Debentures: Unsecured bonds which have no collateral

Callable: Firm has the option to repurchase the bond from the holder at a stipulated price

Convertible: Give the bondholder the option to convert each bond into a stipulated number of
shares of stock

35. ____mortgages satisfy certain underwriting guidelines before they may be purchased by
Fannie Mae or Freddie Mac. whereas ______ mortgages are riskier loans made to financially
weaker borrowers

R = Conforming; subprime

36. Which of the following are true about the relationship between the nominal interest rate (rnom),
the real interest rate (rreal) and the inflation rate (i)?

rreal ≈ rnom - i
1+ rreal =
1+rnom
1+i

37. What are reasons why historical rates of return are used to estimate expected returns?
There is no theory about the frequency and importance of events affecting corporations.
Neither expected returns nor risk are directly observable.
There is no theory about the levels of risk we should find in the marketplace.

38. Select all that apply

Which statements are true of the situation depicted in the figure? (Click to enlarge.)
 The increase in demand has resulted in a higher real interest rate.
The demand curve slopes down because firms invest more at lower interest rates.

39. Which statements about the equivalent taxable yield are correct? Define t as the marginal
tax rate, rmuni as the rate on munis, and rtaxable as the taxable rate.

40. The realized rate of return on an investment over a given period is referred to as the
_____-_______return.

R = HOLDING PERIOD

41. The real interest rate is the nominal interest rate adjusted for the effect of INFLATION

42. Select all that apply

Which formulas are correct? Define p(s) as the probability of state s, r(s) as the return in state
s, and E(r) as the expected return.

43. Interest rates are affected by the Federal Reserve's ________-- policy, whereas government
budget deficits are affected by _______- policy.

R = MONETARY/FISCAL

44. An asset like T-bills that has the same nominal return in every scenario is referred to as
RISK- FREE
45. True or false: Investors are risk adverse if the risk premium were zero they would invest
money in stocks. FALSE
46. The rate of return provided by an increase in the price of a security is referred to as the
rate of CAPITAL GAINS

47. You can only infer the EXPECTED real rate on bank certificate of deposits by adjusting
the NOMINAL rate for your expectation of the rate of inflation.

48. The probability-weighted average of the returns in all scenarios is referred to as the
EXPECTED rate of return.

49. The amount of return required by investors to accept a given level of risk depends on their
degree of RISK AVERSION

50. The rate of return provided by a stock's dividend payments during a given period is
referred to as the DIVIDEND YIELD

51. Which statements about expected return and standard deviation are correct?
The standard deviation is the square root of the variance.
The expected return and standard deviation completely describe the distribution of returns
when it is normal.

52. The standard deviation is a measure of an asset's _____ risk.

R = TOTAL
53. ______ markets include short-term, highly liquid, and relatively low-risk debt
instruments, whereas ______ markets include longer term and riskier securities
Money; capital
54. Which statements are true of money market instruments?
They can be purchased indirectly through mutual funds.
They have relatively low credit risk.
55. The ask price is the price you would pay for a security from a dealer, and the , bid price is
the slightly lower price you would receive if you wanted to sell to a dealer.
56. True or false: Time deposits may be withdrawn on demand. FALSE
57. Which of the following statements are correct regarding commercial paper?
is backed by a bank line of credit

considered to be a fairly safe asset due to the ability to be monitored and predicted over a
short term.
58. Drag and drop the financial instruments against the corresponding financial markets.

59. True or false: Repos or RPs are short for repurchase agreements and are considered a
form of short-term borrowing.
True
60. Match the money market instrument with its description.

61. Which statements are true about bid-ask spreads?

Dealers buy at the bid price and sell at the ask price.
They are a source of profit for a dealer.

62. A certificate of deposite is a time deposit with a bank where the bank pays interest and
principal to the depositor only at maturity.

63. Funds in the bank's reserve account are called Federal Funds.

64. Commercial paper, backed by a bank line of credit gives the borrower access to cash that
can be used to pay off the paper at maturity.

65. True or false: British regulators have proposed phasing out LIBOR by 2021 to be replaced
with a rate called SONIA (Sterling Overnight Interbank Average Rate).
TRUE.

66. Match the following terms with the most correct statements.

67. Identify the statements that describe the similarities between Treasury bonds and Treasury
notes.
Both Treasury bonds and Treasury notes commonly trade in denominations of $1,000.
Both Treasury bonds and Treasury notes can be sold in increments of $100.
Both Treasury bonds and Treasury notes make semiannual interest payments.

68. The fed funds rate is simply the rate of interest on:
very short-term loans among financial institutions

69. In the United States, inflation-indexed Treasury bonds are referred to by their acronym
TIPS.

70. The rate at which large banks in London are willing to lend money among themselves is
known by the acronym LIBOR.

71. Which of the following are mortgage-related government agencies, created because
Congress believed that adequate credit was not being received through normal private
sources.
Government National Mortgage Association (GNMA or Ginnie Mae)
Federal National Mortgage Association (FNMA or Fannie Mae)
Federal Home Loan Bank (FHLB)
Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac).

72. Both Treasury notes and Treasury bonds may be issued in increments of $100 but are
typically traded in denominations of $1 000

True or false: Eurobonds are always denominated only in euros.

False.

73. Bonds issued by state and local governments are Municipal bonds, often referred to by the
nickname munis bonds.

74. The equivalent taxable yield is simply the tax free rate divided by 1 - t.
75. Callable bonds give the firm the option to repurchase the bond from the holder at a
stipulated call price.
76. The two types of International bonds are 1) foreign bonds which are issued in foreign
countries but in the currency of the investor and 2) Eurobonds which are denominated in a
currency other than that of the country in which it is issued.
77. An ownership claim on a pool of mortgages or an obligation that is secured by such a pool
is referred to as a mortgage- backed security.
78. Which statements are true of the situation depicted in the figure? (Click to enlarge.)
The demand curve slopes down because firms invest more at lower interest rates.
The increase in demand has resulted in a higher real interest rate.

79. The ______ is the difference between the risk-free rate and an asset's ______.
excess return; actual return in a particular period
risk premium; expected HPR

80. Which expressions are correct for a stock's holding period return (HPR)?
TAREA NÚMERICA

1. Lanni Products is a start-up computer software development firm. It currently owns

computer equipment worth $34,500 and has cash on hand of $11,000 contributed by
Lanni’s owners.

For each of the following transactions, identify the real and/or financial assets that
trade hands. Are any financial assets created or destroyed in the transaction?

a. Lanni takes out a bank loan. It receives $41,000 in cash and signs a note
promising to pay back the loan over 3 years.

The bank loan is a financial liability for Lanni, and a financial asset for the bank.
The cash Lanni receives is a financial asset. The new financial asset created is
Lanni's promissory note to repay the loan.

b. Lanni uses the cash from the bank plus $11,000 of its own funds to finance the
development of new financial planning software.

Lanni transfers financial assets (cash) to the software developers. In return, Lanni
receives the completed software package, which is a real asset.

c. Lanni sells the software product to Microsoft, which will market it to the public
under the Microsoft name. Lanni accepts payment in the form of 1,000 shares of
Microsoft stock.

Lanni exchanges the real asset (the software) for a financial asset, which is 1,000
shares of Microsoft stock. If Microsoft issues new shares in order to pay Lanni, then
this would represent the creation of new financial assets.

d. Lanni sells the shares of stock for $76 per share and uses part of the proceeds to
pay off the bank loan.

By selling its shares in Microsoft, Lanni exchanges one financial asset (1,000
shares of stock) for another ($76,000 in cash). Lanni uses the financial asset of
$41,000 in cash to repay the bank and retire its promissory note. The bank must
return its financial asset to Lanni. The loan is destroyed in the transaction, since it
is retired when paid off and no longer exists.

2. Suppose housing prices across the world double.

a. Is society any richer for the change?

Yes
No

b. Are homeowners wealthier?

Yes
No

3. Lanni Products is a start-up computer software development firm. It currently owns

computer equipment worth $30,000 and has cash on hand of $20,000 contributed by
Lanni’s owners.

For each of the following transactions, identify the real and/or financial assets that
trade hands. Are any financial assets created or destroyed in the transaction?

a. Lanni takes out a bank loan. It receives $50,000 in cash and signs a note
promising to pay back the loan over 3 years.

The bank loan is a financial liability for Lanni, and a financial asset for the bank.
The cash Lanni receives is a financial asset. The new financial asset created is
Lanni's promissory note to repay the loan.

b. Lanni uses the cash from the bank plus $20,000 of its own funds to finance the
development of new financial planning software.

Lanni transfers financial assets (cash) to the software developers. In return, Lanni
receives the completed software package, which is a real asset.

c. Lanni sells the software product to Microsoft, which will market it to the public
under the Microsoft name. Lanni accepts payment in the form of 1,250 shares of
Microsoft stock.,

Lanni exchanges the real asset (the software) for a financial asset, which is 1,250
shares of Microsoft stock. If Microsoft issues new shares in order to pay Lanni, then
this would represent the creation of new financial assets.

d. Lanni sells the shares of stock for $100 per share and uses part of the proceeds
to pay off the bank loan.
By selling its shares in Microsoft, Lanni exchanges one financial asset (1,250
shares of stock) for another ($125,000 in cash). Lanni uses the financial asset of
$50,000 in cash to repay the bank and retire its promissory note. The bank must
return its financial asset to Lanni. The loan is destroyed in the transaction, since it
is retired when paid off and no longer exists.

4. Consider Figure 1A, which describes an issue of American gold certificates.

a. Is this issue a primary or secondary market transaction?

Secondary-market transaction
Primary-market transaction

b. Are the certificates primitive or derivative assets?

Derivative assets
Primitive assets

HOW SECURITIES ARE TRADED?

1. A primary offering in which shares are sold directly to a small group of

institutional or wealthy investors by a private firm is a PRIVATE PLACEMENT
2. When stock is issued to the public for the first time by a formerly privately
owned company, it is referred to as the firm's ___________ or ___.
R = Initial public offering or IPO
3. Which statements are true about underwriters?
They purchase the securities from the issuing company and then resell to the public.
They are investment bankers that market stocks and bonds.
They may receive shares of common stock or other securities of the firm.
4. Which statements are true about Rule 415 and its consequences?
It was introduced in 1982.
It allows securities to be sold on short notice, with little additional paperwork.
Registered securities are said to be "on the shelf."
5. Already-existing securities are bought and sold, either on exchanges or OTC,
in what is collectively considered the _______ market
R = secondary
6. Which type of market is the least organized?
R = Direct search market
7. The number of shareholders a company may have before being required to
register its common stock with the SEC and file public reports was increased
from 500 to 2,000 by the 2012 ______ Business Act.
R = Jumpstart Our
8. The difference between a dealer's bid and ask price is the__________-
________ ___________
R = bid-ask spread
9. An equity offering (or new issue) is said to be ______ when it is the sale of
additional shares by a company that is already publicly traded.
R = seasoned
10. A limit sell instructs the broker to ____if and when the stock price rises above
a specified limit.
R = sell

11. A final and approved registration statement including the price at which the
security issue is offered is a(n) _______ R = prospectus
12. A computer-operated trading network offering an alternative to formal stock
exchanges or dealer markets for trading securities is often referred to as an
______.
R = ECN Electronic communication network

13. True or false: Shelf registration refers to ready to be issued securities. TRUE
14. Match the type of market with its description.

Direct Search Market

Buyers and sellers seek each other out and transact with each other.

Brokered Market

An intermediary offers search services to buyers and sellers.

Dealer Market

Traders specializing in particular assets buy and sell them for their own accounts.

Auction Market

All traders in an asset meet at one place to buy and sell it.
15. Match the NASDAQ level with the description.

Level 1: Receive only inside quotes (i.e., the best bid and ask prices)

Level 2:Receive all bid and ask quotes but cannot enter their own quotes

Level 3: Registered market makers that can enter and change bid–ask
quotes continually and have the fastest execution of trades

16. An investor who places a market order buys at the ask price and sells at the
bid price TRUE
17. An order specifying a maximum price at which an investor is willing to buy a
security, or a minimum price to sell a security, is a(n) _____ order.
R = LIMIT

18. Dealers quote prices at which they are willing to buy or sell securities in
an__________-___________-_________dealer market.

R = over-the-counter

19. The NYSE Euronext acquired the American Stock Exchange in 2008 to
focus on small firms and was renamed NYSE Amex

20. The U.S. stock market that provides an automated quotation system for the
OTC market, showing current bid-ask prices for thousands of stocks, is the
______. NASDAQ
21. The time it takes to accept, process, and deliver a trading order is the trade's
_________

latency

22. Which of the following statements are true about high-frequency trading?

R = Trade execution times for high-frequency traders are measured in milliseconds

or less.
R = High-frequency traders co-locate at exchanges because the speed of light is too
slow for them to be further away.
R = High-frequency strategies often attempt to profit from bid-ask spreads.

23. A transaction of more than 10,000 shares of stock is referred to as a(n)

______ trade. BLOCK
24. Which statements about bond trading are true?

R = The majority of bond trading occurs in the OTC market among bond dealers,
even for bonds that are actually listed on the NYSE.
R = The NYSE has expanded its electronic bond-trading platforms, which is now
called NYSE Bonds and is the largest centralized bond market.
R = Merrill Lynch, Salomon Smith Barney and Goldman Sachs are currently bond
dealers.
Corporate bonds have significantly more liquidity than stocks.

25. Which of the following statements does NOT describe The New York Stock
Exchange (NYSE)?
Daily trading volume on the NYSE is about a million shares.

26. True or false: An example of an average latency time for CBOE Global
Markets utilizing the BATS platform advertises times of.01 second.

R = FALSE

27. A subset of algorithmic trading that relies on computer programs to make

extremely rapid decisions is___________-_______ trading.

R = high - frequency

28. Electronic trading networks where participants can anonymously buy or sell
large blocks of securities are called_______ _______

R = dark, pools

29. New electronic trading platforms such as MarketAxess, now exist directly
to________ buyers and sellers.

R= connect

30. Trades in already existing ___________ take place in secondary market.

R= securities

31. New issues of securities are offered to the public in the market. R = primary

32. A trader who makes a market in the shares of one or more firms and who
maintains a “fair and orderly market” by dealing personally in the stock is
referred to as a(n) R = specialist

33. A transaction of more than 10,000 shares of stock is referred to as a(n)

R = blocks
 34. Companies whose shares are available for purchase to investors are
referred to as ______.

publicly traded
public companies
publicly listed

35. The New York Stock Exchange is an example of what type of market?

Auction market

Cap 3: Operaciones Agravantes de Riesgo: Margin Calls y Operación

en Corto

1. Rank the exchanges by the market capitalization (i.e., value of firm equity) of
the firms traded on them as of 2018.
- NYSE
- NASDAQ QMX
- Japan
- Shanghai
- London
2. Which are services offered by full-service brokers?

Extending margin loans

Trading for client accounts
Holding securities for safekeeping
Withdrawing funds on a client's behalf
Providing buy and sell recommendations

3. By buying securities on margin, an investor ______ the upside potential and

_______ the downside risk of an investment.

INCREASES - INCREASES

4. The sale of shares not owned by the investor but borrowed through a broker
and later repurchased to replace the loan is called a(n) short sale.
5. The major governing legislation includes the Securities Act of______and the
Securities Exchange Act of_____-

1933/1934
6. Which of the following statements regarding exchanges is NOT correct?

Companies want to be able to go beyond national boarders when desiring to

raise capital
It is important to provide the cheapest and most efficient mechanism to
execute and clear trades.
Exchanges feel that 24-hour exchanges in global markets and platforms is not
necessary due to security.

7. A(n) ____________ broker provides a "no-frills" service that is limited to security

trading and custody, margin loans, and short selling. DISCOUNT
8. Which of the following statements regarding self-regulation is correct.

The most important overseer is the Fintech institutions

The purpose of self-regulation is to make more money.
CFA Institute trains future chief financial administrators
The securities market exercises considerable self and government regulation
9. If an investor's ______ in an account falls below the ______ level, the broker
will issue a ______, which requires the investor to add new cash or securities
to the margin account.
MARGIN
MAINTENANCE MARGIN
MARGIN CALL
10. Order the steps of a short sale of a share of stock.

BORROW THE SHARE

SELL THE SHARE

PAY ANY DIVIDENDS THAT ARE ISSUED

PURCHASE THE SHRE

RETURN SHARE TO LENDER

11. Match the law with its description.

 12. The Sarbanes-Oxley Act requires ______.

independent financial experts to serve on audit committees

corporate officers not hold stock options
limitation of compensation for corporate officers
corporate officers to sign off on the firm's financial statements

13. When officers, directors, major stockholders, or others who hold private inside
information allowing them to benefit in the buying or selling of stock do so, it is
referred to as INSIDER TRADING
14. In addition to government regulation, the securities market exercises
considerable self-regulation. The most important overseer in this regard is the

____,_______,______,________- which is the largest nongovernmental

regulator of all securities firms in the United States.

financial industry regulatory authority

15. When an investor borrows part of the purchase price of a stock from a
broker, the portion of the purchase price contributed by the investor is
the______________ in the account. MARGIN
16. The sale of shares not owned by the investor but borrowed through a broker
and later repurchased to replace the loan is called a(n)________ sale
SHORT

17. The Sarbanes-Oxley Act was passed by Congress in 2002 in response to

which issues?

Misleading financial statements and accounting practices

The subprime mortgage crisis and subsequent bailout of large financial
institutions
Tainted securities research and recommendations put out to the public
Allocations of shares in initial public offerings
 18. Nonpublic knowledge about a corporation possessed by corporate officers,
major owners, or other individuals with privileged access is INSIDE
INFORMATION
19. Research has found that when insider purchasers of a stock exceed insider
sellers of a stock, it has a ______ abnormal return and when insider sellers
exceed insider buyers, it has a ______ abnormal return.

positive

negative

20. True or false: A short sale allows investors to profit from a decline in a
security's price. TRUE

PROBLEMAS 2

1. Here is some price information on Marabel, Inc.:

Bid Ask
Marab
45.13 45.28
el

You have placed a stop-loss order to sell at $45.20.

What are you telling your broker?

To attempt to sell the stock as soon as the stock trades at a bid price
of $45.2 or less.
TEMARIO PRIMER PARCIAL

1.Considering the choice between investing $50,000 in a conventional 1-year

bank CD offering an interest rate of 5% and a 1-year “Inflation-Plus” CD
offering 1.5% per year plus the rate of inflation.

a. Which is the safer investment?

Conventional 1-year bank CD

1-year “Inflation-Plus” CD

b. Can you tell which offers the higher expected return?

Expected rate of inflation

Bank rate
Cannot be determined

c. If you expect the rate of inflation to be 3% over the next year, which is the
better investment?

Conventional CD
“Inflation-Plus” CD

d. If we observe a risk-free nominal interest rate of 5% per year and a risk-free

real rate of 1.5% on inflation-indexed bonds, can we infer that the market’s
expected rate of inflation is 3.5% per year?

Yes
No
2. When comparing investments with different horizons, the ____________
provides the more accurate comparison.

R = EFFECTIVE ANNUAL RATE

 3. If an investment provides a 2.1% return quarterly, its effective annual rate is

R = 8.67%, (1.021)4 − 1 = 8.67%.

4. Annual percentage rates (APRs) are computed using

R = SIMPLE INTEREST

5. When assessing tail risk by looking at the 5% worst-case scenario, the VaR
is the

R = most optimistic, as it takes the highest return (smallest loss) of all the
cases.

6. If a distribution has "fat tails," it exhibits KURTOSIS

7. If the Federal Reserve lowers the Fed Funds rate, ceteris paribus, the
equilibrium levels of funds lent will __________, and the equilibrium level of
real interest rates will ___________.

INCREASE ; DECREASE

8. You purchase a share of CAT stock for $90. One year later, after receiving a
dividend of $4, you sell the stock for $97. What was your holding-period
return?

12.22%

HPR = ([$97 − $90] + $4)/$90 = 12.22%.

9. An economy is making a rapid recovery from steep recession, and

businesses foresee a need for large amounts of capital investment. Why
would this development affect real interest rates?

Real interest rates are expected to rise.The investment activity will shift the
demand for funds curve (in Figure 5.1) to the right. Therefore the equilibrium
real interest rate will increase.

10. Ceteris paribus, a decrease in the demand for loans. R= drives the interest
rate down.
11. A year ago, you invested $1,000 in a savings account that pays an annual
interest rate of 4.3%. What is your approximate annual real rate of return if
 the rate of inflation was 3% over the year? R = None of the options (4.3% -
3.00% = 1.3%)
12. Which of the following statement(s) is(are) true?
I) The real rate of interest is determined by the supply and demand for funds.
II) The real rate of interest is determined by the expected rate of inflation.
III) The real rate of interest can be affected by actions of the Fed.
IV) The real rate of interest is equal to the nominal interest rate plus the expected
rate of inflation.
R = I and III only
13. You have been given this probability distribution for the holding-period return
for KMP stock:
Stock of the Economy Probability HPR
Boom 0.30 18%
Normal growth 0.50 12%
Recession 0.20 – 5%

What is the expected holding-period return for KMP stock?

R = 10.40%, HPR = 0.30 (18%) + 0.50 (12%) + 0.20 (−5%) = 10.4%.

14. If a portfolio had a return of 8%, the risk-free asset return was 3%, and the
standard deviation of the portfolio's excess returns was 20%, the Sharpe
measure would be R =0.25. (8 − 3)/20 = 0.25.
15. You have been given this probability distribution for the holding-period return
for KMP stock:
Probabilit
Stock of the Economy y HPR
Boom 0.30 18%
Normal growth 0.50 12%
Recession 0.20 – 5%

What is the expected standard deviation for KMP stock?

R = 8.13%, s = [0.30 (18 − 10.4)2 + 0.50 (12 − 10.4)2 + 0.20 (−5 − 10.4)2]1/2 = 8.13%.
16. An investor purchased a bond 63 days ago for $980. He received $17 in
interest and sold the bond for $987. What is the holding-period return on his
investment? R = 2.45%, HPR = ($17 + $987 − $980)/$980 = 0.0244898 = approximately
2.45%.
17. Over the past year, you earned a nominal rate of interest of 8% on your
money. The inflation rate was 3.5% over the same period. The exact actual
growth rate of your purchasing power was R = 4.35%, r = (1 + R)/(1 + I) − 1;
1.08/1.035 − 1 = 4.35%.
18. Historical records regarding return on stocks, Treasury bonds, and Treasury
bills between 1926 and 2018 show that R = stocks offered investors greater
rates of return than bonds and bills.
 19. When assessing tail risk by looking at the 5% worst-case scenario, the VaR is
the R = most optimistic, as it takes the highest return (smallest loss) of all the
cases.
20. You purchased a share of stock for $25. One year later, you received $1 as a
dividend and sold the share for $29. What was your holding-period return?
R = 20%, ($1 + $29 − $25)/$25 = 0.20, or 20%.
21. If the annual real rate of interest is 6%, and the expected inflation rate is 2%,
the nominal rate of interest would be approximately R = 8%. , 6% + 2% = 8%.
22. If the annual real rate of interest is 3.5%, and the expected inflation rate is
3.5%, the nominal rate of interest would be approximately R = 7%., 3.5% +
3.5% = 7%.
23. You have been given this probability distribution for the holding-period return
for GM stock:
Probabilit
Stock of the Economy y HPR
Boom 0.40 30%
Normal growth 0.40 11%
Recession 0.20 –10%

What is the expected standard deviation for GM stock? R = 14.87%, s = [0.40 (30 −
14.4)2 + 0.40 (11 − 14.4)2 + 0.20 (−10 − 14.4)2]1/2 = 14.87%.
24. The continuously compounded annual return on a stock is normally
distributed with a mean of 25% and standard deviation of 33%. With 95.45%
confidence, we should expect its actual return in any particular year to be
between which pair of values? Hint: Refer to Figure 5.3.
−41.0% and 91.0% restas 2 desv estándar (33*2+25=91) y(25- 33*2=-41)
25. The continuously compounded annual return on a stock is normally distributed
with a mean of 20% and standard deviation of 30%. With 95.45% confidence,
we should expect its actual return in any particular year to be between which
pair of values? Hint: Refer to Figure 5.3.
−40.0% and 80.0% (20-2*30 = -40) y (20+2*30= 80)

QUIZZ
 1. The trading of stock that was previously issued takes place

R = in the secondary market

2. A purchase of a new issue of stock takes place

R = in the primary market and usually with the assistance of an

investment banker.

3. Firms raise capital by issuing stock

R = in the primary market.

4. Investment bankers

R = act as advisors to companies in helping them analyze their

financial needs and find buyers for newly-issued securities.

5. You purchased JNJ stock at $130 per share. The stock is currently
selling at $145. Your gains may be protected by placing a

R = limit-sell order

True or false: The optimal capital allocation depends in part on the

risk-return trade-off offered by the risky portfolio

R= True

PARCIAL 2

diversification con 2 activos de inversion

1.The standard deviation of a two-asset portfolio is less than the weighted average of
the individual security standard deviations if the correlation of the two assets is

- equal to zero
- less than zero
- equal to negative one
- less than one

2.Which statements about the expected return of a two-asset portfolio are correct?
Define the expected return of asset D as E(rD), the weight on asset D as wD, the
expected return of asset E as E(rE), and the weight on asset E as wE

- It is given by the formula wD E(rD) + wE E(rE).

- It is the weighted average of the component security expected returns with the
investment proportions as weights.

3. The risk that ______ extensive diversification is called _____ risk.

remains even after; market

can be eliminated by; unique

4. Spreading a portfolio over many investments to avoid excessive exposure to any

one source of risk is the definition of DIVERSIFICATION

5. Which parts of the investment decision form the optimal risky portfolio?
Asset allocation
Security selection

6.Extensive diversification can be expected to ______ firm-specific risk

Substantially reduce

7.Which statements about the variance of a two-asset portfolio are correct? Define
the variance of asset D as σD2, the weight on asset D as wD, the variance of asset E
as σE2, the weight on asset E as wE., and the covariance of the asset returns as
Cov(rD,rE). [Recall that a variance is the covariance of an asset with itself.]

It is the weighted sum of covariances, where each weight is the product of the
portfolio proportions of the pair of assets in the covariance term.

It is given by the formula w;0; + w;o + 2 wD wE Cov(rD,rE)

8.The portfolio of risky assets with lowest risk is referred to as the_________
portfolio

Blank 1: minimum
Blank 2: variance

9.Which statements about diversification of two-asset portfolios are true?

The benefit of diversification is that the standard deviation of a portfolio is lower than
the weighted average standard deviation.
Portfolios of less than perfectly correlated assets always offer some degree of
diversification benefit.

10.The expected return–standard deviation pairs of all portfolios that can be

constructed from a given set of assets is referred to as the ___________________

set.
Blank 1: portfolio
Blank 2: opportunity

11.Click and drag on elements in order

Viewing the investment decision as a top-down process, order the steps of portfolio
formation.

capital allocation
asset allocation
security selection

12.True or false: The minimum-variance portfolio has a standard deviation larger

than that of either of the individual component assets.
FALSE

13.Match the terms to the best fitting statement.

CAPITULO 6
1.True or false: The optimal capital allocation depends in part on the risk-return
trade-off offered by the risky portfolio
TRUE

2.A fair game is ______.

an investment prospect that has a risk premium of zero
not a speculative venture
a gamble

3.A risk-______ investor will consider risky portfolios only if they provide
compensation for risk via a risk premium.
AVERSE

4.For an investor with utility function U = E(r) - ½Aσ2, an increase in expected return
______ utility and an increase in variance ______ utility.
increases; decreases

5. A risk ________ is happy to engage in fair games and gambles. This investor
adjusts the expected return __________ to take into account the fun of the
prospect's risk
Blank 1: lover
Blank 2: up or upward

6.The division of the overall portfolio to safe assets versus risky assets is referred to
as the _________- decision.
Blank 1: capital
Blank 2: allocation

7. True or false: The certainty equivalent rate is a natural way to compare the utility
values of competing portfolios for an investor. True

8.A ___________ amounts to a gamble because there is no expected gain to

compensate for the risk entailed.
FAIR- GAME

9. Which statements are true based on the mean-variance criterion? (Click to

enlarge.)

Portfolios become worse when moving from quadrant I to quadrant IV.

Any portfolio in quadrant I is better than any portfolio in quadrant IV.

10. Which statements are true of risk-averse investors?

They are considered the most common type of investor.
They reject investment portfolios that are fair games or worse.

11.The graphical depiction of the portfolios with different levels of expected return
and standard deviation that provide an investor the same level of utility is referred to
as a(n)
Blank 1: indifference
Blank 2: curve

12.Match the term with its description for the following formula: U = E(r) - ½Aσ2.

13. A portfolio's asset allocation is the weighting of the portfolio among different
asset ______, versus the choice of individual ______-
Blank 1: classes
Blank 2: securities

14.Match the value of A to the attitude toward risk for an investor with the utility
function U = E(r) - ½Aσ2.

15. The ________rate of a risky portfolio is what a risk-free investment will have to
give an investor to provide the same utility as the risky portfolio.
Blank 1: certainty
Blank 2: equivalent

16. The ______________-______________criterion holds that Portfolio A dominates

B if E(rA) ≥ E (rB) and σA ≤ σB with at least one inequality holding strictly.

Blank 1: mean
Blank 2: variance

17.The indifference curve connects all portfolio points with the same
value
Blank 1: utility

18. Which are asset allocation choices?

The portion of the portfolio that is invested in Treasury bills versus stocks.
The portion of the portfolio that is invested in stocks versus bonds.

19.The entire portfolio, including risk-free and risky investments, is termed the
portfolio.
COMPLETE

20.It is common practice to view Treasury ______________as “the” risk-free asset.

Blank 1: bills

21. The rate of return on the risk-free asset is denoted as Blank 1: rf

22. The graphical depiction of the risk-return combinations of a risky and a risk-free
asset is the
Blank 1: capital
Blank 2: allocation
Blank 3: line

23.The simplest way to reduce the risk of a complete portfolio is to shift funds from
the ______ portfolio to the _________- asset.
Blank 1: risky
Blank 2: risk
Blank 3: free

24.Margin purchases may not exceed ________% of the purchase value.

Blank 1: 50 or fifty

25.An asset is termed risk-free if it will definitely provide a certain ______ return.
nominal
26.The ________rate of a risky portfolio is what a risk-free investment will have to
give an investor to provide the same utility as the risky portfolio.
Blank 1: certainty
Blank 2: equivalent

27.Which statements are true of the complete portfolio C that puts weight y on the
risky portfolio P and weight 1-y on the risk free asset F? Define C's return as rC, its
standard deviation as σC, P's return as rp, its standard deviation as σP, and the risk
free rate as rf.

σC = y σP
rC = y rP + (1 − y) rf

28. Which statements are true of the capital allocation line?

It is the investment opportunity set in the complete portfolio problem.
It goes from the risk-free asset through the risky asset.

29. If an investor cannot borrow at the risk-free rate in forming complete portfolios,
the investment opportunity set will ______.
have a kink at the risky portfolio

30.A risk - _______ investor judges risky prospects solely by their expected _______
of __________
Blank 1: neutral
Blank 2: rate or rates
Blank 3: return

A strategy that avoids any direct or indirect security analysis in the portfolio decision
is said to be
R= passive

The capital allocation line provided by one-month T-bills and a broad index of
common stocks is called the
Blank 1: capital
Blank 2: market
Blank 3: line

Which is the investor's utility maximization problem in finding the weight on the risky
asset y in the optimal complete portfolio?
r= Max U = rf + y [E(rP) − rf] − ½ A y2 σ2
The tangency point corresponds to the ______ and expected return of the optimal
complete portfolio.
Blank 1: standard
Blank 2: deviation

The CML represents a PASSIVE strategy that generates an investment opportunity.

______ risk-averse investors have ______ indifference curves because they require
a ______ increase in expected return to compensate for an increase in portfolio risk.

More; steeper; greater

Less; flatter; lesser

Which statements are true of the optimal amount of the risky asset y* in the optimal
complete portfolio problem?

r= It is inversely proportional to the level of risk.

It is directly proportional to the risk premium.

True or false: A passive strategy involves investment in two passive portfolios:

virtually risk-free short-term T-bills and a fund of common stocks that mimic a broad
market index.
True

What would be a good candidate for a passively-held risky asset?

R= A well-diversified portfolio of common stocks

Which of the following are reasons to pursue a passive investment strategy?

R= Because most assets are fairly priced, a well-diversified portfolio of common
stock will be a reasonably fair buy.
Passive investing has very low fees.

Which part of the investment decision depends on an investor's attitudes toward

risk?

Capital allocation

MODELO MARKOWITZ
 1. That ratio of the risk premium to the standard deviation of the excess returns
is known as the reward-to-volatility or the Sharpe ratio.
2. Which statements are true about portfolios, capital allocation lines (CALs),
and Sharpe ratios?

The higher the Sharpe ratio, the steeper the capital allocation line.
Steeper CALs provide higher excess returns for any level of risk.

3. Which statements are true of the optimal risky two-asset portfolio? Define the
variables as in the text. Recall that E(RD) is the expected excess return of D
and E(rD) is its expected return.
R=

4. Which of the following is NOT involved with establishing the risky portfolio
(asset allocation)?

Specify the return characteristics of all securities (expected returns, variances,

covariances)

5. The graph representing a set of portfolios that maximize expected return at

each level of portfolio risk is called the_______ __________ of risky assets.

Blank 1: efficient
Blank 2: frontier

6. The reward-to-volatility measure was first used extensively by William ______

thus giving the ratio its name.

Blank 1: Sharpe

7. The set of parameters such as expected returns, variances, and covariances

necessary to determine the optimal risky portfolio is referred to as the
________ _________.

Blank 1: input
Blank 2: list

8. The portfolio’s risk premium in excess of the risk-free rate, divided by the
standard deviation, is referred to as its ________ ratio.

Blank 1: Sharpe
 9. Constraints that restrict investment strategies or vehicles ______ the Sharpe
ratio of that portfolio.

reduce

10. Drag and drop the appropriate portfolio form against the corresponding
portfolio issues.

11. Click and drag on elements in order. Order the steps for finding the optimal
complete portfolio.

12. In the case of perfect correlation, all risk is _______.

Blank 1: systematic

13. Select all that apply

Which statements are true of the efficient frontier as depicted in the figure?
(Click to enlarge.)

The optimal risky portfolio is the one on it with the highest Sharpe ratio.

It is the part of the minimum-variance frontier that lies above the global minimum-
variance portfolio.

14. The primary assumption in the portfolio optimization techniques is that asset
returns have a(n) ________ distribution.

Blank 1: normal or Gaussian

 15. True or false: The input list is comprised of a set of expected rates of return
and a standard deviation matrix. FALSE
16. When many investors each take a portion of portfolio of a given size it is
referred to as risk _________.

Blank 1: sharing

17. Select all the apply. Examples of a type of constraint aimed at ruling out
investments in industries or constraints considered ethically or politically
undesirable are:

social
governance-focused
environmental

18. Which of the following is an example of risk sharing?

Selling portions of a risky portfolio to outside investors

19. The idea that portfolio choice can be separated into two independent tasks--
first, determination of the optimal risky portfolio and second the choice of the
optimal complete portfolio--is referred to as the ________ property.

Blank 1: separation

20. As portfolios become more diversified, the impact of a new security on

portfolio risk is primarily driven by _______.

the covariance of the security with the portfolio components

21. Potential ________ _______of returns requires us to pay attention to risk

measures that focus on worst-case losses such as value at risk (VaR) or
_________ _________(ES).

Blank 1: non
Blank 2: normality
Blank 3: expected
Blank 4: shortfall

22. Spreading your exposures across multiple uncorrelated risky ventures or by

investing in many risk assets is referred to as risk _________.

Blank 1: pooling

23. Risk sharing is a complement to risk ________.

Blank 1: pooling
 24. An investor with the utility function U = E(r) - ½Aσ2 is ______ risk-averse
when A is ______.
more; higher
less; lower

25. Drag and drop the appropriate portfolio form against the corresponding
portfolio issues

26. Which of the following is NOT involved with establishing the risky portfolio
(asset allocation)?
Specify the return characteristics of all securities (expected returns, variances,
covariances)

27. In the case of perfect correlation, all risk is

systemic

28. The graph of the lowest possible variance that can be attained for a given
portfolio expected return is defined as the
minimum - variance frontier
of risky assets.

29. When many investors each take a portion of portfolio of a given size it is
referred to as risk
sharing
30. Constraints that restrict investment strategies or vehicles ______ the Sharpe
ratio of that portfolio.
REDUCE

RIESGO SISTÉMICO Y DIVERSIFICACIÓN ABSOLUTA

1. The graph of the lowest possible variance that can be attained for a given
portfolio expected return is defined as the _________ ___________
_________of risky assets.
Blank 1: minimum
Blank 2: variance
Blank 3: frontier
2. True or false: The input list is comprised of a set of expected rates of return
and a standard deviation matrix. FALSE
 3. Examples of a type of constraint aimed at ruling out investments in industries
or constraints considered ethically or politically undesirable are:
social
governance-focused
environmental

4. The idea that portfolio choice can be separated into two independent tasks--
first, determination of the optimal risky portfolio and second the choice of the
optimal complete portfolio--is referred to as the ________ property.
Blank 1: separation

5. In the case of perfect correlation, all risk is ________.

Blank 1: systematic
6. The graph representing a set of portfolios that maximize expected return at
each level of portfolio risk is called the ________ _________ of risky assets.
Blank 1: efficient
Blank 2: frontier

7. The set of parameters such as expected returns, variances, and covariances

necessary to determine the optimal risky portfolio is referred to as the
Input list

LINK DE ALGUNAS RESPUESTAS: https://quizlet.com/541041410/ch-7-reading-

flash-cards/

Which of the following is NOT involved with establishing the risky portfolio (asset
allocation)?

Multiple choice question.

CHAPTER 8

1. Which are advantages of using index models to solve for optimal risky
portfolio?
They simplify estimation of the covariance matrix.
They provide guidance for forecasting security risk premiums.
They allow for the explicit decomposition of risk into market and unique components.
2. The success of a portfolio selection rule depends up on the quality of the
___________ ___________ ,that is, the estimates of expected security
returns and the covariance matrix.
Blank 1: input
Blank 2: list
3. Which statements are true of returns in a single-factor model?
The return is given by the formula ri = E(ri) + βim + ei.
The two sources of a firm's return uncertainty are from the economy as a whole and
the firm in particular.
4. A(n) ________ - _______model of stock returns decomposes influences on
returns into one systematic factor measured by the return on a broad market
index and on firm-specific factors.
Blank 1: single
Blank 2: index
5. A graph that shows returns of one security versus returns of another security,
where each point represents a pair of returns for a given holding period, is an
example of a(n) __________ diagram.
Blank 1: scatter
6. Which are drawbacks of using the Markowitz model to solve for optimal risky
portfolios?
When there are many assets, the model requires a huge number of estimates to fill
the covariance matrix.
The model does not provide guidance for forecasting the security risk premiums.
7. Which of the statements are true of the residuals in a regression equation?
They measure the impact of firm-specific events.
8. Which of the statements with respect to the Markowitz model is true?
A challenge in applying the Markowitz model to portfolio optimization is that errors in
the assessment or estimation of correlation coefficients can lead to nonsensical
results.
The success of a portfolio selection rule depends on the quality of the input list, that
is, the estimates of expected security returns and the covariance matrix.
9. Rank the type of security from highest to lowest beta.
1-Cyclical Stocks
2- Market Index
3-Defensive Stocks
10. Which of the following risks are systematic?
The economy enters recession.
Natural resource costs fall.
Interest rates fall.
11. Which statements are true about alpha in the single-index model?
It is often expected to be zero in equilibrium.
It is a nonmarket premium.
12. True or false: Due to the relationship between the systematic factor affecting
the rate of return on all stocks, the rate of return on a broad market index can
reasonably proxy for that common factor.
TRUE
13. True or false: Correlation is equal to the product of betas X Market-index risk.
FALSE
14. Match the terms of the regression equation with their descriptions.
 15. Which statements are true of the number of inputs necessary in the single-
factor index model?
There are 3n+2 total estimates
There are n estimates of alpha.
16. The greater the residuals (either positive or negative), the ______is the scatter
of returns around the straight line.
Blank 1: wider or broader
17. When a single-index model is perfectly accurate, except for the residuals of
two stocks, which are correlated; the index model will ignore this correlation
and assume it to be _________, while the Markowitz algorithm will take the
residual _________ into account when minimizing portfolio variance.
Blank 1: zero
Blank 2: correlation
18. The __________ of the market index is, by definition, 1: the index responds 1-
for-1 to changes in itself.
Blank 1: beta
19. As more and more securities are combined into a portfolio, the portfolio
variance __________ (increases/decreases) because of the _________ of
firm-specific risk.
Blank 1: decreases
Blank 2: diversification
20. Securities with high betas have a magnified sensitivity to market risk and will
therefore enjoy a greater risk premium as compensation for this risk. This type
of risk premium is referred to as _________ risk.
Blank 1: systematic
21. The parameters of the single-index model are typically estimated with ______
observations of rates of return.
60 monthly
22. The correlation of two securities' returns in the single-index model is the
product of their ______.
correlations with the market index
23. A _________ _________line is a plot of the excess return for a security over
the risk-free rate as a function of the excess return on the market.
Blank 1: security
Blank 2: characteristic
24. Drag and drop the symbols against their corresponding descriptions.
 25. A cost of the single-factor index model is that when the correlation among
residuals for two securities is ______, it will ______ their potential
diversification value.
positive; overestimate
negative; underestimate
26. In the single-index model, as diversification increases, the total variance of a
portfolio approaches the ______ variance.
average systematic
27. Which of the following can be considered when estimating the single-index
model?
the market index actively traded on NASDAQ
the market index actively traded on NYSE
the market index actively traded on AMEX
28. In terms of regression coefficients, the slope of the security characteristic line
is the __________ of an asset, whereas the intercept is the asset’s ________
during the sample period.
Blank 1: beta
Blank 2: alpha

LINKS DE ALGUNAS RESPUESTAS:

https://quizlet.com/565518118/fin-3144-exam-1-practice-questions-flash-cards/
https://quizlet.com/383177609/fin-533-exam-2-conceptual-material-ch-8-9-10-18-
flash-cards/

29. When the line of best fit through a scatter diagram (with the market excess
return on the x-axis) is ______ it means that a security's rate of return is
______ responsive to the market return.
steeper; more
shallower; less

30. A security characteristic line is a plot of the excess return for a security over
the risk-free rate as a function of the excess return on the market.
31.