HS 328 CLASS TERMS AND QUESTIONS
Identify the financial asset with the highest Treynor ratio if the risk-free rate of return is
3%.
Average Standard Beta
Return Deviation
Index I 10 12 1.0
Index II 18 20 1.0
Fund I 22 28 1.7
Fund II 16 17 1.2
A) Index I
B) Index II
C) Fund I
D) Fund II
B) Index II
Index I: (10 - 3) / 1.0 = 7.0
Index II: (18 - 3) / 1.0 =15.0
Fund I: (22 - 3) / 1.7 = 11.2
Fund II: (16 - 3) / 1.2 = 10.8
Securities Act 1933
Regulates the offering and sales of securities to ensure more transparency in financial
statements
Banking Act of 1933 (Glass-Steagall Act)
Prohibited commercial banks from selling stock or financing corporations; created FDIC
Securities Exchange Act 1934
Governs secondary market trading (established the Securities and Exchange
Commission)
Investment Company Act 1940
Forms the backbone of financial regulation and establishes the foundation for mutual
funds and hedge funds.
Investment Advisers Act 1940
,Regulates investment advisers. Requires registration with the SEC for firms or any
individual advisors with assets under management exceeding $110 million
Financial Services Modernization Act 1999 (Gramm-Leach-Bliley Act)
Repealed part of Glass-Steagall Act of 1933 and removes barriers among securities
firms, financial institutions, and insurance companies
Sarbanes Oxley ACT 2002
Establishes expanded financial regulations in response to the major accounting
scandals of last 1990s
Frank Dodd ACT
Establishes new government agencies to reduce volatility in financial markets in
response to the Great Recession.
1. A wealthy investor purchases a money market mutual fund to manage the liquidity of
her portfolio.
The least like security that would be included in the fund is:
a. US Treasury note.
b. Commercial paper.
c. 180-day certificate of deposit.
d. Banker’s acceptance
a. US Treasury note.
US Treasury notes mature in two to ten years, making its maturity date outside the
range of the short-term securities included in the money market. Commercial paper,
CDs, and Banks acceptance notes mature in less than one year.
1. The most likely reason an organization would issue commercial paper is to:
a. Manage working capital.
b. Finance a budget deficit.
c. Invest in long-term projects.
d. Refinance a long-term bond issue.
a. Manage working capital.
Large corporations typically are the only organizations that can issue commercial paper.
They issue CP to manage their short-term cash flow issues, including current assets
and current liabilities, which are the best basis for working capital management.
1. A bond issued for the purpose of building a tunnel between New Jersey and New
York in which tolls are expected to pay the coupon and principal payments to the
,bondholders is most likely characterized as a(n):
a. Revenue bond
b. General obligation bond
c. Treasury bond.
d. Industrial development bond.
a. Revenue bond
Municipal bonds are issued by states, cities and other local governments to build
tunnels, bridges and roads. When the tolls collected by users are earmarked for the
repayment of interest and principal, the bonds are known as revenue bonds. General
obligation bonds are backed by the taxing authority of the municipality.
1. A financial institution hopes to form an equity mutual fund that invests solely in blue-
chip stocks. The most likely piece of legislation that dictates the law surrounding the
fund is the:
a. Dodd Frank Act of 2010
b. Banking Act of 1933
c. Financial Services Modernization Act of 1999.
d. Investment Company Act of 1940.
d. Investment Company Act of 1940.
The Investment Company Act forms the backbone of financial regulation and
established the foundation for mutual funds and hedge funds.
Ian Chesterton, chartered financial analyst®, uses fundamental analysis to evaluate
equity securities. Chesterton has been able to use inflation data, historical dividend
information, and price-to-book ratios to consistently outperform a broad equity index.
Chesterton would most likely identify markets as being
A. weak-form efficient.
B. strong-form efficient.
C. semistrong-form efficient.
D. all of the above.
A. weak-form efficient.
The use of fundamental analysis to generate abnormal returns violates the semistrong
and strong forms of the efficient market hypothesis. Using publicly available information
such as dividends and inflation would not result in outperformance in a semistrong-form
or strong-form market. Therefore, the market can be only a weak-form level of
efficiency.
One investor uses fundamental analysis to form a portfolio of equity securities and
outperformed his benchmark for almost a decade. Another investor forms a portfolio
using technical analysis but has never beat her benchmark. The market under these
conditions is most likely?
, A. inefficient.
B. weak-form efficient.
C. semistrong-form efficient.
D. strong-form efficient.
B. weak-form efficient.
A semistrong-form market is one in which fundamental analysis would not lead to
superior returns. Thus, a market that provides persistent out-performance opportunities
must be only weak-form efficient.
Firms are least likely to use the primary equity market to raise capital for
A. global expansion.
B. research and development investments.
C. the launch of new product lines.
D. a desire to increase its financial leverage.
D. a desire to increase its financial leverage.
Firms use the equity markets for a variety of reasons, but always it is to raise capital for
global expansion, for research costs, and for the introduction of new product lines.
When firms issue new shares of equity, however, their debt-equity ratios and therefore
financial leverage will fall.
We have an expert-written solution to this problem!
Which of the following statements is (are) correct in regard to the functions of a broker-
dealer?
I. To act as intermediaries that help clients buy and sell securities
II. To hold an inventory of securities they believe are undervalued in order to sell them
later for a profit
A. I only
B. II only
C. Both I and II
D. Neither I nor II
C. Both I and II
Broker-dealers serve two functions: To act as an intermediary in helping clients buy and
sell securities and to generate a profit on the trading of undervalued securities. In their
dealer function, broker-dealers can hold inventory when they believe the shares are
undervalued with the intent of selling them later when the price rises.
Identify the financial asset with the highest Treynor ratio if the risk-free rate of return is
3%.
Average Standard Beta
Return Deviation
Index I 10 12 1.0
Index II 18 20 1.0
Fund I 22 28 1.7
Fund II 16 17 1.2
A) Index I
B) Index II
C) Fund I
D) Fund II
B) Index II
Index I: (10 - 3) / 1.0 = 7.0
Index II: (18 - 3) / 1.0 =15.0
Fund I: (22 - 3) / 1.7 = 11.2
Fund II: (16 - 3) / 1.2 = 10.8
Securities Act 1933
Regulates the offering and sales of securities to ensure more transparency in financial
statements
Banking Act of 1933 (Glass-Steagall Act)
Prohibited commercial banks from selling stock or financing corporations; created FDIC
Securities Exchange Act 1934
Governs secondary market trading (established the Securities and Exchange
Commission)
Investment Company Act 1940
Forms the backbone of financial regulation and establishes the foundation for mutual
funds and hedge funds.
Investment Advisers Act 1940
,Regulates investment advisers. Requires registration with the SEC for firms or any
individual advisors with assets under management exceeding $110 million
Financial Services Modernization Act 1999 (Gramm-Leach-Bliley Act)
Repealed part of Glass-Steagall Act of 1933 and removes barriers among securities
firms, financial institutions, and insurance companies
Sarbanes Oxley ACT 2002
Establishes expanded financial regulations in response to the major accounting
scandals of last 1990s
Frank Dodd ACT
Establishes new government agencies to reduce volatility in financial markets in
response to the Great Recession.
1. A wealthy investor purchases a money market mutual fund to manage the liquidity of
her portfolio.
The least like security that would be included in the fund is:
a. US Treasury note.
b. Commercial paper.
c. 180-day certificate of deposit.
d. Banker’s acceptance
a. US Treasury note.
US Treasury notes mature in two to ten years, making its maturity date outside the
range of the short-term securities included in the money market. Commercial paper,
CDs, and Banks acceptance notes mature in less than one year.
1. The most likely reason an organization would issue commercial paper is to:
a. Manage working capital.
b. Finance a budget deficit.
c. Invest in long-term projects.
d. Refinance a long-term bond issue.
a. Manage working capital.
Large corporations typically are the only organizations that can issue commercial paper.
They issue CP to manage their short-term cash flow issues, including current assets
and current liabilities, which are the best basis for working capital management.
1. A bond issued for the purpose of building a tunnel between New Jersey and New
York in which tolls are expected to pay the coupon and principal payments to the
,bondholders is most likely characterized as a(n):
a. Revenue bond
b. General obligation bond
c. Treasury bond.
d. Industrial development bond.
a. Revenue bond
Municipal bonds are issued by states, cities and other local governments to build
tunnels, bridges and roads. When the tolls collected by users are earmarked for the
repayment of interest and principal, the bonds are known as revenue bonds. General
obligation bonds are backed by the taxing authority of the municipality.
1. A financial institution hopes to form an equity mutual fund that invests solely in blue-
chip stocks. The most likely piece of legislation that dictates the law surrounding the
fund is the:
a. Dodd Frank Act of 2010
b. Banking Act of 1933
c. Financial Services Modernization Act of 1999.
d. Investment Company Act of 1940.
d. Investment Company Act of 1940.
The Investment Company Act forms the backbone of financial regulation and
established the foundation for mutual funds and hedge funds.
Ian Chesterton, chartered financial analyst®, uses fundamental analysis to evaluate
equity securities. Chesterton has been able to use inflation data, historical dividend
information, and price-to-book ratios to consistently outperform a broad equity index.
Chesterton would most likely identify markets as being
A. weak-form efficient.
B. strong-form efficient.
C. semistrong-form efficient.
D. all of the above.
A. weak-form efficient.
The use of fundamental analysis to generate abnormal returns violates the semistrong
and strong forms of the efficient market hypothesis. Using publicly available information
such as dividends and inflation would not result in outperformance in a semistrong-form
or strong-form market. Therefore, the market can be only a weak-form level of
efficiency.
One investor uses fundamental analysis to form a portfolio of equity securities and
outperformed his benchmark for almost a decade. Another investor forms a portfolio
using technical analysis but has never beat her benchmark. The market under these
conditions is most likely?
, A. inefficient.
B. weak-form efficient.
C. semistrong-form efficient.
D. strong-form efficient.
B. weak-form efficient.
A semistrong-form market is one in which fundamental analysis would not lead to
superior returns. Thus, a market that provides persistent out-performance opportunities
must be only weak-form efficient.
Firms are least likely to use the primary equity market to raise capital for
A. global expansion.
B. research and development investments.
C. the launch of new product lines.
D. a desire to increase its financial leverage.
D. a desire to increase its financial leverage.
Firms use the equity markets for a variety of reasons, but always it is to raise capital for
global expansion, for research costs, and for the introduction of new product lines.
When firms issue new shares of equity, however, their debt-equity ratios and therefore
financial leverage will fall.
We have an expert-written solution to this problem!
Which of the following statements is (are) correct in regard to the functions of a broker-
dealer?
I. To act as intermediaries that help clients buy and sell securities
II. To hold an inventory of securities they believe are undervalued in order to sell them
later for a profit
A. I only
B. II only
C. Both I and II
D. Neither I nor II
C. Both I and II
Broker-dealers serve two functions: To act as an intermediary in helping clients buy and
sell securities and to generate a profit on the trading of undervalued securities. In their
dealer function, broker-dealers can hold inventory when they believe the shares are
undervalued with the intent of selling them later when the price rises.
