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Test 2 2010.pdf

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McMaster University
Kevin Brewer

Com 2FA3 Midterm 2 VERSION 1 NAME: SECTION: _________________________ STUDENT NUMBER: TEST-LOCATION: _________________ COMMERCE 2FA3 – Mid-term Test 2: March 12, 2010 Professor: Dr. Richard Deaves Duration: 2 hours INSTRUCTIONS: 1. This paper comprises 9 pages (including this page). There are 14 TRUE/FALSE questions each worth 1 mark; 14 MULTIPLE CHOICE questions each worth two marks; and 6 more MULTIPLE CHOICE questions, each worth 3 marks. For all questions, there is only one best answer. 2. You are responsible for ensuring that your copy of the question paper is complete. Bring any discrepancy to the attention of the invigilator. 3. On the question paper, fill in your name, student number and section number. The full question paper (intact) must be returned to have any credit. All answers however must be written on a scan sheet (see below). 4. The use of a standard McMaster calculator (Casio fx- 991) is permitted. In addition, a double -sided (8 1/2 by 11 inches) formula sheet prepared by the student, and which must be handed in with the test , may be used. If you do not have a formula sheet please point this out to an invigilator. 5. Instructions for use of the computer scan sheets: The special scanner which scans the answer sheet senses the shaded areas by their non-flection of light. A heavy mark must be made, completely filling the circular bubble, with an HB pencil. Marks made with a pen or felt tip marker will NOT be sensed. Erasures must be thorough or the scanner may still sense a mark. Do NOT use correction fluid on the sheets. Do NOT put any unnecessary marks or writing on the sheet. i. Print your name, student number, course name, section number and the date of the test in the s pace provided at the top of side 1 of the sheet. The sheet MUST be signed in the space marked SIGNATURE. ii. Mark your student number in the space provided on the side of sheet 1 and fill in the corresponding bubbles underneath. Com 2FA3 Midterm 2 VERSION 1 True/False (14 questions - 1 mark each): 1 Use of the dividend discount model assumes that a firm’s dividends are constant. A) True B) False 2 The growth rate in the constant growth model can be estimated as the retention ratio times ROE. A) True B) False 3 Most evidence indicates that mutual funds earn returns sufficiently high to justify their fees. A) True B) False 4 The foreign exchange market is o ne market where arbitrage opportuniti es are virtually non-existent. A) True B) False 5 Historically, growth stocks have tended to outperform value stocks. A) True B) False 6 The Palm/3Com case illustrates that markets are largely efficient. A) True B) False 7 In a semi-strong form efficient market, one cannot earn excess returns by looking at publically available information. A) True B) False 2 Com 2FA3 Midterm 2 VERSION 1 8 Payment of a management expense ratio (MER) suggests that one is investing in a defined benefit pension plan. A) True B) False 9 The subprime crisis of 2008 was caused by over-regulation. A) True B) False 10 The definition of market efficiency that stipulates t hat value and price are always equal leads to an apparent paradox. A) True B) False 11 The security market line and the capital market line both relate expected returns to the same measure of risk. A) True B) False 12 It can make sense to invest in a security or asset with a negative expected return. A) True B) False 13 Arbitrage is the act of attempting to profit from relative mispricing. A) True B) False 14 If arbitrage is highly limited, markets should be efficient. A) True B) False 3 Com 2FA3 Midterm 2 VERSION 1 Multiple Choice (14 questions -2 marks each): 15 If a stock has an expected return equal to the riskfree rate: A) Its beta is negative. B) The correlation of its return and the market is +1. C) It must be a crown corporation. D) Its beta is equal to zero. E) None of the other answers. 16 Suppose you have $30,000 invested in three stocks. You have $1 4,000 in A which has a beta of 1.25; $10,000 invested in B with a beta of .8; and the rest invested in C. Your portfolio has a beta equivalent to the market beta. The beta of C is: A) 0.45 B) 0.75 C) 0.90 D) 1. 10 E) None of the other answers. 17 At the beginning of this year, Cathy expects the market to return 10%. The riskfree rate is 5%. Cathy expects a particular security to return 12%. It is expected that the security will: A) Outperform its risk-adjusted benchmark. B) Underperform its risk-adjusted benchmark. C) Perform at a level consistent with risk. D) Outperform its risk-adjusted benchmark if its beta is 1.5. E) Underperform its risk-adjusted benchmark if its beta is 2.0. 18 A lack of trust in financial markets is particularly negative because it: A) Leads to outrage at excessive bonuses. B) Tilts the maturity of debt to the short term. C) Leads to costly litigation. D) Makes people nervous to participate in markets. E) None of the other answers. 4 Com 2FA3 Midterm 2 VERSION 1 19 Assuming the constant grow th model is appropriate, if the required return on a stock is 13%, the divide
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