📘 Second Midterm Exam Multiple Choice Questions - Solution

1. In a hypothetical investment scenario, an analyst is evaluating a stock under various macroeconomic conditions. The potential states include a recession, a normal economic cycle, and a boom, with assigned probabilities of 20%, 50%, and 30%, respectively. Each state results in a different return: -10%, 10%, and 25%. What is the long-term expected return on this stock when you consider the probability-weighted average of all possible outcomes?

9.5%
10.5%
12.0%
8.5%

2. Imagine a portfolio manager allocates 60% of her fund to Stock A, which exhibits a beta value of 1.2, and the remaining 40% to Stock B, which has a beta of 0.6. What would be the overall portfolio beta, assuming these weights remain unchanged over time and represent the entirety of her investment allocation?

0.72
1.0
0.96
1.4

3. Joe, a long-term investor, decided to purchase a stock exactly one year ago at a price of $20. After holding the stock without receiving any dividends or splits, he sold it today at a price of $24. Based on this single transaction over a one-year period, what was Joe’s holding period return, expressed as a percentage of the original investment?

4%
20%
24%
12%

4. A financial planner builds a diversified portfolio worth $100,000, distributing it among three different assets: 50% in Asset A yielding 12%, 25% in Asset B yielding 8%, and 25% in Asset C yielding 5%. Based on this allocation and the known returns of each component, what is the expected return of the total portfolio?

8.75%
9.25%
9.0%
10.25%

5. A financial analyst is calculating the expected return on a risky security using the Capital Asset Pricing Model (CAPM). The stock in question has a beta coefficient of 1.5. The current risk-free rate, as proxied by the 3-month Treasury bill, is 3%, and the expected return on the market portfolio is 10%. Using this data, what is the expected rate of return for the security according to CAPM?

10.5%
12%
13.5%
14%

6. A student is presented with an investment opportunity in a market with three potential economic outcomes. Each state has a probability and a corresponding return: Recession (20%, 10%), Normal (50%, 15%), and Strong (30%, 25%). What is the expected return on the investment considering the probabilities of each economic state and its corresponding outcome?

15%
16%
17%
18%

7. An investor constructs a three-asset portfolio where 40% is allocated to Apple stock (beta 1.4), 30% to GE stock (beta 1.9), and the remainder to Ford stock. Given this information, what percentage of the investor’s funds are allocated to Ford stock?

10%
20%
30%
40%

8. A portfolio manager wants to determine the weighted-average beta of a portfolio composed of Apple (40%, beta 1.4), GE (30%, beta 1.9), and Ford (30%, beta 2.1). What is the calculated portfolio beta, taking into account the proportional contributions of each stock?

1.60
1.90
1.70
1.76

9.Suppose an investment portfolio has a beta of 1.76. The current risk-free rate is 2%, as estimated using short-term government securities, and the expected return on the overall market is 10%. Based on the CAPM model, what is the required return on this portfolio that compensates investors for both time value and risk?

14.80%
16.08%
17.41%
16.66%

10. Callable bonds provide the issuer an option to redeem the bond before maturity. When is a company like GM most likely to call its bonds?

GM company is expected to call back this bond when the market interest rate decreases
GM bondholders can convert bond to stocks when the bond is called.
GM is expected to call back this bond when GM stock price increases.
GM is expected to call back this bond when GM stock price decreases.

11. The GM bond under consideration carries a 7% annual coupon rate and pays interest once per year. What is the annual coupon payment received by the bondholder?

$70
$73.5+$1000
$1000+$70
It is a decision of GM. It is unknown at this moment.

12. Moody’s has assigned a rating of 'B' to the GM bond. What does this rating indicate?

Moody is a bond ranking agency. B is a low ranking.
Moody is a mutual fund. B is a top ranking.
Moody is GM’s financial partner. B is a low ranking.
Moody is a bank. B is a high ranking.

13. A GM bond is priced at $1,250 and pays $70 in annual coupon. What is the current yield?

5.60%
4.30%
3.81%
3.69%

14. What was the price of a 10-year GM bond one year ago if the coupon was 7% and the market yield was 4%?

$1243.33
$1206.47
$1191.24
$1306.38

15. An investor forecasts that the market yield on a bond like GM’s will rise to 9%. With 9 years remaining until maturity and an annual coupon of 7%, what would be the anticipated market price of the bond under this new yield condition?

$1306.38
$880.10
$1191.24
$892.43

16. GE issued a zero-coupon bond that matures in 15 years. It does not make any periodic coupon payments. If the bond is expected to yield a 10% annual return compounded semiannually, what is the current price of the bond based on its discounted cash flow?

$231.38
$189.30
$292.43
$238.05

17. Suppose a financial institution is currently analyzing the yield performance of a corporate bond that has a maturity period of 30 years, a current market selling price of $958, and a fixed annual coupon rate of 7% that is distributed semiannually. Based on these parameters and assuming semiannual compounding, what would be the yield to maturity (YTM)?

6.90%
7.00%
7.35%
7.15%