Darlenc Villanueva provides analytical support for portfolio managers at a small investment management firm, Villanueva's latest report highlights two companies, Company X and Company Y. Company X has consistently earned a higher rate of return on assets than their cost of capital, but the stock price is substantially greater than the fair value. Company Y's earnings have been pulled down by the recent economic slowdown, but its stock price has remained stable despite the negative returns on the overall market. Which of the following statements correctly categorizes the two companies?
A. Stock X is a value stock and Company Y is a defensive company.
B. Stock X is a growth stock and Company Y is a cyclical company.
C. Company X is a growth company and Stock Y is a defensive stock.
Jim Boo, CFA, is analyzing Justin Corp., a maker of home appliances. Boo's research provides the
following facts:
Calculate Justin's expected price to earnings ratio (/).
A. 8.0X
B. 10.Ox
C. I2.0x
A 10-year, semiannual-pay $1,000 bond with a 6% coupon is currently priced at $864.10, to yield 8%. If yields increase by 50 basis points (bp), the new price of the bond would be $833.82. If yields decrease by 50 bp, the new price of the bond would be $895.78. The expected percentage change in the price of this bond for a 100 bp change in yield is closest to:
A. 3.6%.
B. 7.2%.
C. 14.4%.
The current price of a $1,000 par value, 6-year, 4.2% semiannual coupon bond is $958.97. The bond's PVBP is closest to:
A. $0.50
B. $4.20
C. $5.01
Jack Hare, CFA, is a fixed income analyst. Hare is evaluating a 15-year zero-coupon bond, which is priced at $30.83. Determine the issue's approximate yield to maturity.
A. 6%.
B. 7%.
C. 8%.
Bond X and Bond Y were issued at a premium to par value three years ago. Bond X matures in five years, and Bond Y matures in ten years. Both bonds carry the same credit rating. Bond X has a coupon of 7.25%, and Bond Y has a coupon of 8.00%. Currently the required yield for both bonds is 7.60%. Determine whether each bond is currently priced at a premium or discount to par value.
A. Both bonds are priced at a premium.
B. Bond X is priced at a premium, and Bond Y is priced at a discount.
C. Bond X is priced at a discount, and Bond Y is priced at a premium
George Judas, CFA, manages a small capitalization mutual fund. Judas only invests in companies with low price to earnings ratios. Judas states that research suggests that returns on both small capitalization and low P/E companies are anomalous, in that they will provide investors with superior risk-adjusted long-term returns. Judas' supervisor counters with the following two observations. Observation 1:The research does not adequately account for the level of risk of small capitalization and low price to earnings ratio companies. Observation 2:The research on small capitalization and low price to earnings ratio companies suffers from a small sample bias. Are the supervisor's observations most likely correct?
A. Yes.
B. Only Observation 1 is correct.
C. Only Observation 2 is correct.
Kerry Garrett, CFA, manages a hedge fund. The hedge fund industry has enjoyed strong growth over the past ten years. Garrett states that the hedge fund industry has a goal of absolute returns. In addition, Garrett states that the industry's high Sharpe ratio indicates that hedge funds are superior investment vehicles. Is Garrett correct with regard to his statement on hedge fund returns and/or his statement on hedge funds as superior investment vehicles?
A. Only the statement on return is correct.
B. Only the statement on superiority is correct.
C. None
Wiotech, LLC, a private company, is in the process of developing a revolutionary drug to fight Alzheimer's disease. The drug is in stage 2 development. The management team consists of several experienced clinical doctors. A reputable Wall Street firm has provided venture capital financing. The company would like to go public in the next few years. Which of the following is least likely to be a unique risk of this investment compared to other types of investment?
A. Inexperienced entrepreneurs.
B. Uncertain time to success.
C. Limited information.
Suppose that stock prices are mean reverting over a three to five year period. Which form of the efficient market hypothesis does this violate?
A. None.
B. Weak form only.
C. Semistrong and weak forms only.
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