# Multiple Choice Questions- Financial Markets

Multiple Choice Questions:

1. The interest rate charged by banks with excess reserves at a Federal Reserve Bank to

banks needing overnight loans to meet reserve requirements is called the_________.

A) prime rate

B) discount rate

C) federal funds rate

D) call money rate

E) money market rate

2. You want to purchase XYZ stock at $60 from your broker using as little of your own money

as possible. If initial margin is 50% and you have $3000 to invest, how many shares can

you buy?

A) 100 shares

B) 200 shares

C) 50 shares

D) 500 shares

E) 25 shares

3. Which of the following statements is (are) true regarding municipal bonds?

I) A municipal bond is a debt obligation issued by state or local governments.

II) A municipal bond is a debt obligation issued by the federal government.

III) The interest income from a municipal bond is exempt from federal income taxation.

IV) The interest income from a municipal bond is exempt from state and local taxation

in the issuing state.

A) I and II only

B) I and III only

C) I, II, and III only

D) I, III, and IV only

E) I and IV only

4. A form of short-term borrowing by dealers in government securities is-

A) reserve requirements.

B) repurchase agreements.

C) banker's acceptances.

D) commercial paper.

E) brokers' calls.

5. Fama and French, in their 1992 study, found that-

A) firm size had better explanatory power than beta in describing portfolio returns.

B) beta had better explanatory power than firm size in describing portfolio returns.

C) beta had better explanatory power than book-to-market ratios in describing

portfolio returns.

D) macroeconomic factors had better explanatory power than beta in describing

portfolio returns.

E) none of the above is true.

6. Restrictions on trading involving insider information apply to the following except-

A) corporate officers and directors.

B) relatives of corporate directors and officers.

C) major stockholders.

D) All of the above are subject to insider trading restrictions.

E) None of the above is subject to insider trading restrictions.

7. Consider a well-diversified portfolio, A, in a two-factor economy. The risk-free rate is 6%,

the risk premium on the first factor portfolio is 4% and the risk premium on the second

factor portfolio is 3%. If portfolio A has a beta of 1.2 on the first factor and .8 on the second

factor, what is its expected return?

A) 7.0%

B) 8.0%

C) 9.2%

D) 13.0%

E) 13.2%

8. Given an optimal risky portfolio with expected return of 14% and standard deviation of 22%

and a risk free rate of 6%, what is the slope of the best feasible CAL?

A) 0.64

B) 0.14

C) 0.08

D) 0.33

E) 0.36

9. Security X has expected return of 12% and standard deviation of 20%. Security Y has

expected return of 15% and standard deviation of 27%. If the two securities have a

correlation coefficient of 0.7, what is their covariance?

A) 0.038

B) 0.070

C) 0.018

D) 0.013

E) 0.054

10. You are considering investing $1,000 in a T-bill that pays 0.05 and a risky portfolio, P,

constructed with 2 risky securities, X and Y. The weights of X and Y in P are 0.60 and 0.40,

respectively. X has an expected rate of return of 0.14 and variance of 0.01, and Y has an

expected rate of return of 0.10 and a variance of 0.0081. The correlation is 1.If you want

to form a portfolio with an expected rate of return of 0.11, what percentages of your

money must you invest in the T-bill and P, respectively?

A) 0.25; 0.75

B) 0.19; 0.81

C) 0.65; 0.35

D) 0.50; 0.50

E) cannot be determined

#### Solution Summary

This posting gives the answer key to a set of multiple choice questions based on the financial markets.