PRACTICE FINAL EXAM FOR FIN350

Please note, these questions are provided to assist students in preparing for the final exam in
FIN350. You should not take the provision of this material to in any way suggest that final
examination questions will be similar to the questions provided below. The best way to
prepare for the final exam is to practice and improve your knowledge and skills using these
questions along with tutorial questions, assessment tasks and material covered in lectures and
the text book
SECTION A
20 Multiple Choice Questions Worth 0.4 Mark Each
1. The material wealth of a society is equal to the sum of .
A. all financial assets
B. all real assets
C. all financial and real assets
D. all physical assets
E. none of the above
2. A bond issue is broken up so that some investors will receive only interest payments while
others will receive only principal payments, which is an example of .
A. bundling
B. credit enhancement
C. unbundling
D. financial engineering
E. C and D
3. The money market is a subsector of the
A. money market.
B. capital market.
C. derivatives market.
D. fixed income market.
E. None of the above.
4. Treasury Inflation-Protected Securities (TIPS)
A. pay a fixed interest rate for life.
B. pay a variable interest rate that is indexed to inflation.
C. provide a constant stream of income in real (inflation-adjusted) dollars.
D. have their principal adjusted in proportion to the Consumer Price Index.
E. C and D
5. The trading of stock that was previously issued takes place
A. in the secondary market.
B. in the primary market.
C. usually with the assistance of an investment banker.
D. A and B.
E. B and C.
6. The following statements regarding the specialist are true:
A. Specialists maintain a book listing outstanding unexecuted limit orders.
B. Specialists earn income from commissions and spreads in stock prices.
C. Specialists stand ready to trade at quoted bid and ask prices.
D. Specialists cannot trade in their own accounts.
E. A, B, and C are all true.
7. Which one of the following statements regarding open-end mutual funds is false?
A. The funds redeem shares at net asset value.
B. The funds offer investors professional management.
C. The funds offer investors a guaranteed rate of return.
D. B and C.
E. A and B.
8. Which one of the following statements regarding closed-end mutual funds is false?
A. The funds always trade at a discount from NAV.
B. The funds redeem shares at their net asset value.
C. The funds offer investors professional management.
D. A and B.
E. None of the above.
9. Over the past year you earned a nominal rate of interest of 10 percent on your money. The
inflation rate was 5 percent over the same period. The exact actual growth rate of your
purchasing power was
A. 15.5%.
B. 10.0%.
C. 5.0%.
D. 4.8%.
E. 15.0%
10. Over the past year you earned a nominal rate of interest of 8 percent on your money. The
inflation rate was 4 percent over the same period. The exact actual growth rate of your
purchasing power was
A. 15.5%.
B. 10.0%.
C. 3.8%.
D. 4.8%.
E. 15.0%
11. Which of the following statements regarding risk-averse investors is true?
A. They only care about the rate of return.
B. They accept investments that are fair games.
C. They only accept risky investments that offer risk premiums over the risk-free rate.
D. They are willing to accept lower returns and high risk.
E. A and B.
12. Which of the following statements is (are) true?
I) Risk-averse investors reject investments that are fair games.
II) Risk-neutral investors judge risky investments only by the expected returns.
III) Risk-averse investors judge investments only by their riskiness.
IV) ) Risk-loving investors will not engage in fair games.
A. I only
B. II only
C. I and II only
D. II and III only
E. II, III, and IV only
13. Market risk is also referred to as
A. systematic risk, diversifiable risk.
B. systematic risk, nondiversifiable risk.
C. unique risk, nondiversifiable risk.
D. unique risk, diversifiable risk.
E. none of the above.

Use data in the below table for question 14 & 15

Consider the following probability distribution for stocks A and B:

14. The expected rates of return of stocks A and B are and , respectively.
A. 13.2%; 9%
B. 14%; 10%
C. 13.2%; 7.7%
D. 7.7%; 13.2%
E. none of the above
15. The standard deviations of stocks A and B are and , respectively.
A. 1.5%; 1.9%
B. 2.5%; 1.1%
C. 3.2%; 2.0%
D. 1.5%; 1.1%
E. none of the above
16. a relationship between expected return and risk.
A. APT stipulates
B. CAPM stipulates
C. Both CAPM and APT stipulate
D. Neither CAPM nor APT stipulate
E. No pricing model has found
17. Consider a single factor APT. Portfolio A has a beta of 1.0 and an expected return of 16%.
Portfolio B has a beta of 0.8 and an expected return of 12%. The risk-free rate of return is 6%.
If you wanted to take advantage of an arbitrage opportunity, you should take a short
position in portfolio------and a long position in portfolio------- .
A. A, A
B. A, B
C. B, A
D. B, B
 E. A, the riskless asset
18. If a 7.25% coupon bond is trading for $982.00, it has a current yield of percent.
A. 7.38
B. 6.53
C. 7.25
D. 8.53
E. 7.18
19. Holding other factors constant, the interest-rate risk of a coupon bond is higher when the
bond's:
A. term-to-maturity is lower.
B. coupon rate is higher.
C. yield to maturity is lower.
D. current yield is higher.
E. none of the above.
20. The term structure of interest rates is:
A. The relationship between the rates of interest on all securities.
B. The relationship between the interest rate on a security and its time to maturity.
C. The relationship between the yield on a bond and its default rate.
D. All of the above.
E. None of the above.
SECTION B
1. Why might the degree of market efficiency differ across various markets? State three
reasons why this might occur and explain each reason briefly. (1)

2. Discuss arbitrage opportunities in the context of violations of the law of one price. (1)

Total Marks = 2