Advanced Investments Exam Preparation Guide
Course Introduction
Advanced Investments is a comprehensive course designed to deepen students' understanding of investment theories, strategies, and analysis in complex financial markets. The course explores topics such as portfolio management, asset pricing models, derivatives, risk management techniques, and alternative investments. Students will engage with empirical research, real-world case studies, and advanced quantitative tools to evaluate and construct diversified portfolios. Emphasis is placed on critically assessing modern investment strategies, understanding behavioral biases, and navigating evolving global financial environments. This course prepares students for professional roles in investment management, financial analysis, and related fields.
Recommended Textbook
Investment Analysis and Portfolio Management 11th Edition by Frank K. Reilly
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22 Chapters
2045 Verified Questions
2045 Flashcards
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Chapter 1: The Investment Setting
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72 Verified Questions
72 Flashcards
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Sample Questions
Q1) Two measures of the risk premium are the standard deviation and the variance.
A)True
B)False
Answer: False
Q2) Refer to Exhibit 1.5. What are the real rates of return for each of these securities?
A) 4.29% and 6.32%
B) 1.23% and 4.29%
C) 3.20% and 6.32%
D) 1.23% and 3.20%
E) 3.75% and 5.75%
Answer: D
Q3) Refer to Exhibit 1.1. What was your holding period return?
A) -10%
B) -0.8
C) 25%
D) 0.8
E) -20%
Answer: D
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3
Chapter 1: The Investment Setting: Part A
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6 Verified Questions
6 Flashcards
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Sample Questions
Q1) Refer to Exhibit 1A.2. The expected return for project X is
A) 0.0 percent.
B) 0.5 percent.
C) 2.5 percent.
D) 5.0 percent.
E) 7.5 percent.
Answer: C
Q2) Refer to Exhibit 1A.1. The coefficient of variation of this investment is
A) -0.06.
B) -0.65.
C) 6.60.
D) 16.53.
E) 165.10.
Answer: D
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Chapter 2: Asset Allocation and Security Selection
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77 Verified Questions
77 Flashcards
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Sample Questions
Q1) The gifting phase is similar to, and may be concurrent with, the spending phase.
A)True
B)False Answer: True
Q2) The typical investor's goals rarely change during his/her lifetime.
A)True
B)False Answer: False
Q3) A study examining the performance of numerous assets from the United States and around the world confirms that
A) riskier assets with higher standard deviations experienced lower returns.
B) riskier assets with higher standard deviations experienced higher returns.
C) standard deviation did a better job of explaining the returns than beta.
D) U.S. equities are highly correlated with world government bonds and with the commodities index.
E) most assets (including common stocks) have positive correlations with inflation. Answer: B
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Page 5
Chapter 2: Asset Allocation and Security Selection: Part A
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3 Verified Questions
3 Flashcards
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Sample Questions
Q1) What is the correlation coefficient for two assets with a covariance of .0032, if asset 1 has a standard deviation of 12 percent and asset 2 has a standard deviation of 9 percent?
A) 0.2963
B) 0.3456
C) 0.8721
D) 1.5980
Q2) Refer to Exhibit 2A.1. Calculate the covariance.
A) -32.20
B) -23.32
C) 1.00
D) 23.32
E) 32.20
Q3) Refer to Exhibit 2A.1. Calculate the coefficient of correlation.
A) -0.456
B) -0.354
C) 0.000
D) 0.456
E) 3.538
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Page 6
Chapter 3: Organization and Functioning of Securities Markets
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87 Flashcards
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Sample Questions
Q1) Refer to Exhibit 3.7. At the end of one year, shares of RossCorp stock are selling for $55 per share and the company paid dividends of $0.85 per share. Assuming that you paid the full cost of the purchase, what is your rate of return if you sell RossCorp stock?
A) 18.08 percent
B) 23.51 percent
C) 22.32 percent
D) 14.96 percent
E) 19.28 percent
Q2) Which of the following statements about a market is true?
A) It is not necessary for the market to have a physical location.
B) The market does not necessarily own the goods or services involved.
C) A market can deal in any variety of goods and services.
D) Both buyers and sellers benefit from the existence of a market.
E) All of these are correct.
Q3) Negotiation, competitive bids, and best efforts are three forms of underwriting arrangements.
A)True
B)False
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Chapter 4: Security Market Indexes and Index Funds
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89 Verified Questions
89 Flashcards
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Sample Questions
Q1) The New York Stock Exchange Index is based on a sample of all of the New York Stock Exchange stocks.
A)True
B)False
Q2) Of the following indices, which includes the most comprehensive list of stocks?
A) New York Exchange Index
B) Standard and Poor's Index
C) American Stock Exchange Index
D) NASDAQ Series Index
E) Wilshire Equity Index
Q3) The Dow Jones Industrial Average has been criticized for being blue-chip biased.
A)True
B)False
Q4) The Value Line Composite Average is calculated using the ____ of percentage price changes.
A) arithmetic average
B) harmonic average
C) expected value
D) geometric average
E) logarithmic average
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Chapter 5: Efficient Capital Markets, Behavioral Finance, and Technical Analysis
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162 Verified Questions
162 Flashcards
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Sample Questions
Q1) When the 50-day MA line crosses the 200-day MA line from above, it is considered a buy signal.
A)True
B)False
Q2) In an event study the objective is to
A) determine whether it is possible to predict stock prices.
B) determine how fast stock prices adjust to news.
C) examine the cross-sectional distributions of returns.
D) conduct a time series analysis of returns.
E) determine normal P/E ratios.
Q3) Refer to Exhibit 5.3. What is the abnormal rate of return for Elliot during period t using only the aggregate market return (ignore differential systematic risk)?
A) 1.50
B) 1.10
C) -1.50
D) -5.10
E) -8.00
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Page 9
Chapter 6: An Introduction to Portfolio Management
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114 Verified Questions
114 Flashcards
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Sample Questions
Q1) As the number of securities in a portfolio increases, the amount of systematic risk A) remains constant.
B) decreases. C) increases.
D) changes.
E) resets to zero.
Q2) An investor is risk neutral if she chooses the asset with lower risk given a choice of several assets with equal returns.
A)True
B)False
Q3) What is the standard deviation of an equally weighted portfolio of two stocks with a covariance of 0.009, if the standard deviation of the first stock is 15% and the standard deviation of the second stock is 20%?
A) 2.0%
B) 2.1%
C) 7.8%
D) 14.2%
E) 14.7%
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10
Chapter 6: An Introduction to Portfolio Management: Part A
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2 Verified Questions
2 Flashcards
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Sample Questions
Q1) Refer to Exhibit 6A.1. What weight of security 1 gives the minimum portfolio variance when r<sub>1.2</sub> = .60, E( \(\sigma\)1) = .10 and E( \(\sigma\)2) = .16?
A) .0244
B) .3679
C) .5697
D) .6309
E) .9756
Q2) Refer to Exhibit 6A.1. Show the minimum portfolio variance for a two-stock portfolio when r<sub>1.2</sub> = 1.
A) E( \(\sigma\)2) \(\div\) [E( \(\sigma\)1) -E( \(\sigma\)2)]
B) E( \(\sigma\)2) \(\div\) [E( \(\sigma\)1) + E( \(\sigma\)2)]
C) E( \(\sigma\)1) \(\div\) [E( \(\sigma\)1) - E( \(\sigma\)2)]
D) E( \(\sigma\)1) \(\div\) [E( \(\sigma\)1) + E( \(\sigma\)2)]
E) None of these are correct.
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11
Chapter 6: An Introduction to Portfolio Management: Part B
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2 Verified Questions
2 Flashcards
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Sample Questions
Q1) Refer to Exhibit 6B.1. What is the value of W<sub>1</sub> when r<sub>1.2</sub> = -1 and E( \(\sigma\)1) = .10 and E( \(\sigma\)2) = .12?
A) 45.46 percent
B) 50.00 percent
C) 59.45 percent
D) 54.55 percent
E) 74.55 percent
Q2) Refer to Exhibit 6B.1. Show the minimum portfolio variance for a portfolio of two risky assets when r<sub>1.2</sub> = -1.
A) E( \(\sigma\)1) \(\div\) [E( \(\sigma\)1) + E( \(\sigma\)2)]
B) E( \(\sigma\)1) \(\div\) [E( \(\sigma\)1) - E( \(\sigma\)2)]
C) E( \(\sigma\)2) \(\div\) [E( \(\sigma\)1) + E( \(\sigma\)2)]
D) E( \(\sigma\)2) \(\div\) [E( \(\sigma\)1) - E( \(\sigma\)2)]
E) None of these are correct.
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12
Chapter 7: Asset Pricing Models
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152 Verified Questions
152 Flashcards
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Sample Questions
Q1) To date, the results of empirical tests of the Arbitrage Pricing Model have been A) clearly favorable.
B) clearly unfavorable. C) mixed.
D) unavailable.
E) biased.
Q2) The betas for the market portfolio and risk-free security are: Market Risk-free
A) 0 1
Q3) Refer to Exhibit 7.1. Compute the intercept of the characteristic line for RA Computer.
A) -9.41
B) 11.63
C) 4.92
D) -4.92
E) -7.98
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Page 13
Chapter 8: Equity Valuation
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83 Flashcards
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Sample Questions
Q1) Refer to Exhibit 8.1. How much should you be willing to pay for the stock if you feel that the 5 percent growth rate can be maintained indefinitely and you require a 17 percent return?
A) $22.16
B) $19.28
C) $21.32
D) $23.63
E) $25.46
Q2) Refer to Exhibit 8.3. The future price of the stock in year 5 is
A) $113.40.
B) $122.47.
C) $132.27.
D) $142.85.
E) $154.35.
Q3) The three-step valuation process consists of (1) analysis of alternative economies and markets, (2) analysis of alternative industries, and (3) analysis of industry influences. A)True B)False
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Chapter 9: The Top-Down Approach to Market, Industry, and Company Analysis
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216 Verified Questions
216 Flashcards
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Sample Questions
Q1) Which of the following is NOT considered a relative valuation technique?
A) price-earnings ratio
B) price/cash flow ratio
C) price/book value ratio
D) price/cost of goods sold ratio
E) price/sales ratio
Q2) Which of the following is NOT a technique for valuing a firm's common stock?
A) present value of free cash flow to equity
B) present value of dividends
C) price-earnings ratio
D) price-book value ratios
E) price-cost of goods sold ratio
Q3) Refer to Exhibit 9.3. To what price will the market rise if the earnings expectation is $1.5?
A) $138.42
B) $90.36
C) $71.74
D) $105.30
E) $85.14
15
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Chapter 10: The Practice of Fundamental Investing
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60 Verified Questions
60 Flashcards
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Sample Questions
Q1) If there is a demand for more shares than are available at the offering price, the offering is said to be _____.
A) undersubscribed
B) oversubscribed
C) overpriced
D) underpriced
E) popular
Q2) A company goes public for many reasons, including that the original investors and the management team would like liquidity.
A)True
B)False
Q3) Which of the following is a document that helps potential investors understand the company?
A) Indications of interest
B) The pricing meeting
C) The registration statement
D) The road show
E) The prospectus
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16
Chapter 11: Equity Portfolio Management Strategies
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65 Verified Questions
65 Flashcards
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Sample Questions
Q1) Which of the following statements regarding 130/30 strategies is FALSE?
A) Analysts can make full use of their knowledge of undervalued and overvalued stocks.
B) Long positions up to 130 percent of the value of the portfolio can be made.
C) Short positions up to 30 percent of the value of the portfolio can be made.
D) 130/30 strategies are not very popular due to the increased risk of hedging.
E) The use of short positions creates leverage.
Q2) Active equity portfolio management is a long-term buy-and-hold strategy.
A)True
B)False
Q3) In ____ asset allocation, the investor's risk tolerance and constraints are assumed to be constant over time. However, changes in capital market conditions result in changes in the portfolio's stock-bond mix.
A) integrated
B) strategic C) tactical
D) insured
E) replication
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Chapter 12: Bond Fundamentals and Valuation
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138 Verified Questions
138 Flashcards
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Sample Questions
Q1) You purchase a 9 3/4s February $10,000 par Treasury note at 101:11 and hold it for exactly one year at which time you sell it. What is your rate of return if your selling price is 101:17?
A) 8.14 percent
B) 8.75 percent
C) 9.75 percent
D) 9.81 percent
E) 10.47 percent
Q2) A bond that only pays a principal payment at maturity date is known as a(n)
A) blank bond.
B) maturity bond.
C) interest free bond.
D) mini-coupon bond.
E) zero coupon bond.
Q3) The refunding provision of an indenture allows bonds to be retired EXCEPT if A) they are replaced with a lower coupon bond issue.
B) the remaining time to maturity is less than five years.
C) the remaining time to maturity is greater than five years.
D) the stated time period in the indenture has not passed.
E) the stated time period in the indenture has passed.
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Chapter 13: Bond Analysis and Portfolio Management Strategies
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125 Verified Questions
125 Flashcards
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Sample Questions
Q1) An example of an active strategy for bond management would be
A) buy and hold.
B) credit analysis.
C) indexing.
D) classical immunization.
E) horizon matching.
Q2) Refer to Exhibit 13.3. Calculate the Macaulay duration for the bond.
A) 3.19 years
B) 3.36 years
C) 3.57 years
D) 3.72 years
E) 3.84 years
Q3) The components of interest rate risk are price risk and maturity risk.
A)True
B)False
Q4) For a given change in yield bond price, volatility is inversely related to coupon.
A)True
B)False
Page 19
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Chapter 14: An Introduction to Derivative Markets and Securities
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102 Verified Questions
102 Flashcards
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Sample Questions
Q1) According to put/call parity:
A) Stock price + Call Price = Put Price + Risk Free Bond Price
B) Stock price + Put Price = Call Price + Risk Free Bond Price
C) Put price + Call Price = Stock Price + Risk Free Bond Price
D) Stock price - Put Price = Call Price + Risk Free Bond Price
E) Stock price + Call Price = Put Price - Risk Free Bond Price
Q2) Which of the following statements is a true definition of an out-of-the-money option?
A) a call option in which the stock price exceeds the exercise price
B) a call option in which the exercise price exceeds the stock price.
C) a call option in which the exercise price exceeds the stock price
D) a put option in which the exercise price exceeds the stock price.
E) a call option in which the call premium exceeds the stock price
Q3) A stock currently sells for $15 per share. A put option on the stock with an exercise price of $20 currently sells for $6.50. The put option is
A) at-the-money.
B) in-the-money.
C) out-of-the-money.
D) at breakeven.
E) above-the-money.
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Chapter 15: Forward, Futures, and Swap Contracts
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148 Verified Questions
148 Flashcards
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Sample Questions
Q1) Refer to Exhibit 15.16. How much compensation does the dealer receive for transaction costs, credit risk, and other costs associated with matching the FRAs?
A) $30,000
B) $31,250
C) $7,500
D) $5,000
E) $0
Q2) Refer to Exhibit 15.3. If 90-day LIBOR rises to the levels "predicted" by the implied forward rates, what will the dollar level of the bank's interest receipt be at the end of the first quarter?
A) $35,250.00
B) $36,375.00
C) $38,250.00
D) $40,500.00
E) $0
Q3) The settlement price is set by the futures exchange after trading ends to reflect the midpoint of the closing price range.
A)True
B)False
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21
Chapter 16: Option Contracts
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122 Verified Questions
122 Flashcards
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Sample Questions
Q1) In the Black-Scholes option pricing model, an increase in security volatility ( \(\sigma\)) will cause
A) an increase in call value and an increase in put value.
B) an increase in call value and a decrease in put value.
C) a decrease in call value and an increase in put value.
D) a decrease in call value and a decrease in put value.
E) an increase in call value and an increase or decrease in put value.
Q2) The conversion premium for a convertible bond is calculated as
A) (Market Price + Minimum Value)/Minimum Value.
B) (Market Price/Minimum Value) * Minimum Value.
C) (Market Price + Minimum Value) * Minimum Value.
D) (Market Price - Minimum Value)/Minimum Value.
E) (Market Price * Minimum Value)/Minimum Value.
Q3) The delta in the Black-Scholes model is simply the slope of a line tangent to the call option price curve.
A)True
B)False
Q4) The longer the time to expiration, the greater the value of a call option.
A)True
B)False
Page 22
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Chapter 17: Professional Money Management, Alternative Assets, and Industry Ethics
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109 Verified Questions
109 Flashcards
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Sample Questions
Q1) All investment firms charge annual management fees to compensate the professional manager of the fund.
A)True
B)False
Q2) An open-end investment company functions like any other public firm.
A)True
B)False
Q3) On January 2, 2017, you invest $50,000 in A Mutual Fund, a load fund that charges a fee of 7 percent. The fund's returns were 12.8 percent in 2017, 13.9 percent in 2018, and 7.9 percent in 2019. On December 31, 2019, you redeem all your shares in A. The dollar value is
A) $64,462.57.
B) $644,625.70.
C) $50,000.00.
D) $6,446.25.
E) $10,000.00.
Q4) A common hedge fund strategy known as long-short equity is a type of arbitrage strategy.
A)True
B)False
Page 23
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Chapter 18: Evaluation of Portfolio Performance
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111 Verified Questions
111 Flashcards
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Sample Questions
Q1) The Sortino measure differs from the Sharpe ratio in that
A) it measures the portfolio's average return in excess of a user-selected minimum acceptable return threshold.
B) it measures the portfolio beta.
C) higher values of the Sortino measure are not desirable, while higher values in the Sharpe ratio are desirable.
D) it measures standard deviation of total portfolio return.
E) it measures portfolio beta relative to the market index proxy.
Q2) Relative return portfolio performance measures
A) adjust portfolio risk to match benchmark risk.
B) compare portfolio returns to expected returns under CAPM.
C) evaluate portfolio performance on the basis of return per unit of risk.
D) indicate historic average differential return per unit of historic variability of differential return.
E) the average market beta per unit of risk.
Q3) The market rewards investors for bearing total risk.
A)True
B)False
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