Ian Clark, CFA, is a technical analyst. Clark believes that information is incorporated gradually into securities markets and that, as a technician, he can take advantage of this process. However, tests of the efficient market hypothesis indicate security returns are random over time and new information is processed rapidly. Clark makes the following statements: Statement 1:Studies have reported that small capitalization stock returns are positive on a risk-adjusted basis. Statement 2:Although the academic research indicates that markets are weak form efficient, they are not because many technical analysts beat the market. Determine whether Clark's statements regarding tests of market efficiency are correct or incorrect.
A. Both statements arc correct.
B. Only Statement 1 is correct.
C. Only Statement 2 is correct.
One of the functions of secondary markets is that they: A. provide liquidity, and a financial futures contract is an example of a security trading on such a market.
B. provide liquidity, and a private placement is an example of a security trading on such a market.
C. provide fees, and a financial futures contract is an example of a security trading on such a market.
Mike Bowers has observed that during 2004 the SandP 500 index officially reported a return of 20%. After recalculating the returns on an equally weighted basis, Bowers estimates that the index returned 15%. The difference in the two calculations of return is best explained by:
A. large capitalization stocks outperforming small capitalization stocks.
B. small capitalization stocks outperforming large capitalization stocks.
C. the interest expenses on margin accounts.
John Gavin, CFA, manages money for high net worth individuals. Gavin utilizes a combination of open-end and closed-end mutual funds to meet each individual's investment objectives. Gavin is evaluating a mutual fund that has assets of $233 million and liabilities of $2 million. In addition, the Fund has a sales charge of 4% and a redemption fee of 1%. The Fund has 16.8 million shares. Gavin makes the following two statements. Statement 1: The net asset value (NAV) of the fund is $13.75. Statement 2: The primary difference between a closed-end and open-end fund is their method of computing net asset value(NAV). Indicate whether Statement 1 and Statement 2 are correct.
A. Only Statement 1 is correct.
B. Only Statement 2 is correct.
C. Statements 1 and 2 are both correct.
An analyst valuing the non-controlling shares of a closely held company is using a similar firm quoted on the NASDAQ with relatively high trading volume as his base for a comparable company analysis. He is most likely to use the shares of the publicly traded comparable company and apply:
A. only a marketability discount
B. only a minority interest discount
C. both a marketability and minority interest discount
Wireless Company received venture capital financing that allowed the company to begin commercial manufacturing. This stage of financing is known as:
A. first-stage
B. second-stage
C. third-stage
Consider two options, X and Y. Option X has a strike price of S40 and is selling in the marketplace for $4. Option Y has a strike price of $32 and is selling in the market place for $3. The underlying assets for the options, Stock X and Stock Y, have a current market price of $43 and $29, respectively. Which of the following are most likely TRUE about Option X and Option Y?
A. Option X is an expiring call, and option Y is an in-the-money put.
B. Option X is an in-the-money put, and option Y is an expiring call.
C. Option X is an in-the-money call, and option Y is an expiring put.
Gus McCray, CFA, went long one oil futures contract at a price of SI 10 on Monday. Oil closed at $115 on Wednesday, and the contract expired on Thursday with oil at $117. To maximize his gain, McCray should:
A. have closed out his position by selling one oil futures contract close to expiration.
B. have accepted cash settlement on his long position.
C. be indifferent between closing out his position by selling the contract and accepting cash settlement.
Pete Morris has written a deep out-of-the-money call option on the stock of Omacon, a small capitalization technology company with a very promising medical software product. Omacon stock had risen 365% for the 12 months ended just three weeks ago, but delays with release of the new software have disappointed investors, and the stock has lost 50% of its market value in the past three weeks. When he wrote the options yesterday, Morris received a premium of $3.00 each. Morris would have risk only:
A. if the stock price rose above the option strike price.
B. if the stock price fell below the option strike price.
C. in the amount of the premium he received.
KCE stock is currently selling for $51.13 per share in the market. Six-month American put options on KCE with a strike price of $55 are available, and the risk-free rate of interest is 3.66%. Calculate the lower bound for the KCE American put options.
A. $2.89
B. $3.75
C. $3.87.
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