Advanced Investments
Final Exam
Course Introduction
Advanced Investments explores sophisticated investment strategies and analytical techniques used in portfolio management and asset valuation. This course covers topics such as market efficiency, derivatives pricing, bond portfolio management, alternative investments, and risk management. Emphasis is placed on applying quantitative models to assess securities, optimize portfolio performance, and manage financial risk. Students will engage with real-world case studies and current trends in global financial markets, developing the skills necessary to analyze complex investment opportunities and make informed decisions in a dynamic economic environment.
Recommended Textbook
Investments Analysis and Management 12th Edition by Charles P. Jones
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Page 2
Chapter 1: Understanding Investments
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Sample Questions
Q1) Regulation FD applies to disclosure between:
A)private companies and public officials
B)public companies and investment professionals
C)public companies and public officials
D)private companies and investment professionals
Answer: B
Q2) A Chartered Financial Analyst designation is a (an)
A)SEC-approved and awarded designation.
B)certification of a successful investing record.
C)professional designation awarded for meeting recognized standards of conduct and competency.
D)professional designation awarded by the brokerage industry.
Answer: C
Q3) What are some of the career opportunities in the investment industry?
Answer: Investment banker,merger and acquisition specialist,security traders,sales people,security analyst,portfolio manager,registered investment advisor and financial planner.
Q4) Define risk in the context of investments?
Answer: Risk is the chance that the actual return on an investment will differ from its expected return.
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Chapter 2: Investment Alternatives
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Sample Questions
Q1) Which of the following statements regarding common stocks is true?
A)The par value of common stock is usually $100
B)The market value of common stock is equal to its book value
C)Dividends on common stock are at the discretion of the company
D)Common stock has a senior claim on company assets
Answer: C
Q2) Marketable securities all fall into the category of capital market securities.
A)True
B)False
Answer: False
Q3) Bonds trade on an accrual interest basis.This means an investor:
A)can sell a bond at any time without losing the interest that has accrued
B)can buy a bond at any time and gain the interest accrued from the time of the last payment
C)can sell a bond at any time and retain the interest portion of the bond
D)buy a bond at any time and receive an immediate interest check
Answer: A
Q4) How is the total book value of equity affected by stock splits?
Answer: Stock splits do not affect total value of equity or the individual accounts,other than the number of shares outstanding and the par value.
Page 4
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Chapter 3: Indirect Investing
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Sample Questions
Q1) On average,which type of mutual fund is expected to have the highest performance?
A)money market funds
B)bond funds
C)equity funds
D)municipal bond funds
Answer: C
Q2) A portfolio of directly-owned individual securities guided by an investment manager is known as a:
A)IRA.
B)IMA.
C)SMA.
D)DCA.
Answer: C
Q3) The most popular type of investment company is a:
A)unit investment trust.
B)mutual fund.
C)closed-end investment company
D)real estate investment trust.
Answer: B
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Page 5
Chapter 4: Securities Markets and Market Indexes
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Sample Questions
Q1) Why do the DJIA and the S&P 500 have a high correlation?
Q2) How do you think the globalization of the securities markets will impact the NYSE and the Nasdaq? What specific developments do you foresee happening soon for the global marketplace?
Q3) Which of the following limits the usefulness of the S&P 500 Index as a market benchmark?
A)It is too weighted with NYSE stocks to be representative.
B)It is too difficult to calculate for the average investor.
C)Its use of a base year in its calculations affects its performance.
D)Its performance can be greatly affected by a small number of stocks.
Q4) ECNs offer the advantages of automation,lower costs and anonymity to its members.
A)True
B)False
Q5) A major difference between the Standard & Poor's 500 Index (S&P)and the Dow-Jones Industrial Average (DJIA)is that:
A)the S&P 500 is more dominated by OTC stocks than the DJIA
B)the S&P 500 is more difficult to calculate than the DJIA
C)the DJIA is a price-weighted rather than value-weighted index like the S&P 500
D)the S&P 500 is more stable than the DJIA
Page 6
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Chapter 5: How Securities Are Traded
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Sample Questions
Q1) If a security issue is registered with the SEC,there is less chance the investor will lose money on the investment.
A)True
B)False
Q2) What is the chief advantage of a market order?
Q3) Open orders,if not cancelled or renewed,remain in effect for:
A)one week.
B)one month.
C)six months
D)twelve months.
Q4) The initial margin requirement on security trades is set by the:
A)SEC
B)FINRA
C)SIPC
D)Federal Reserve
Q5) Under margin accounts,investors can purchase more stock without putting up additional cash by leveraging the value of the eligible shares.
A)True
B)False
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Chapter 6: The Risks and Returns From Investing
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Sample Questions
Q1) Holding interest rates constant,a narrowing of the equity risk premium implies a decline in the rate of return on stocks because the amount earned beyond the risk-free rate is reduced.
A)True
B)False
Q2) As the dollar falls,
A)foreign investors owning U.S.stocks suffer.
B)U.S.investors owning U.S.stocks suffer.
C)U.S.investors owning foreign stocks suffer.
D)foreign investors owning foreign stocks suffer.
Q3) A major difference between real and nominal returns is that:
A)real returns adjust for inflation and nominal returns do not
B)real returns use actual cashflows and nominal returns use expected cashflows
C)real returns adjust for commissions and nominal returns do not
D)real returns show the highest possible return and nominal returns show the lowest possible return
Q4) What is the major drawback of the total return measure? Why is it the most common return calculation used by investors?
Q5) If you deposit $1,000 today at 12 percent,how much will you have in 10 years?
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Chapter 7: Portfolio Theory
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Sample Questions
Q1) Investments in commodities such as precious metals may provide additional diversification opportunities for portfolios consisting primarily of stocks and bonds.
A)True
B)False
Q2) Which of the following statements regarding portfolio risk and number of stocks is generally true?
A)Adding more stocks increases risk
B)Adding more stocks decreases risk but does not eliminate it
C)Adding more stocks has no effect on risk
D)Adding more stocks increases only systematic risk
Q3) The correlation coefficient explains the cause in the relative movement in returns between two securities.
A)True
B)False
Q4) Are the expected returns and standard deviation of a portfolio both weighted averages of the individual securities expected returns and standard deviations? If not,what other factors are required?
Q5) An efficiently diversified portfolio still has _____________________ risk.
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Chapter 8: Portfolio Selection
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Sample Questions
Q1) Under the Multi-Index Model,the industry relationship to stock prices would be assessed by the:
A)market factor
B)nonmarket factor
C)beta
D)unique part
Q2) Markowitz derived the efficient frontier as an upward-sloping straight line.
A)True
B)False
Q3) Based on recent history,an investor would probably have a lower risk level with a portfolio consisting of:
A)all stocks
B)all bonds
C)some stocks and some bonds
D)Impossible to tell
Q4) The Markowitz Model does not depend on the assumption of normally distributed security returns.
A)True
B)False
Q5) Explain what is efficient about the efficient frontier.
Page 10
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Chapter 9: Asset Pricing Models
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Sample Questions
Q1) Which of the following is generally used as a proxy for the risk-free rate of return?
A)savings account
B)certificate of deposit
C)Treasury bill
D)Treasury bond
Q2) A security that plots above the SML would be a good security to sell short.
A)True
B)False
Q3) At a given point in time the SML dictates that a security with a beta of 1.10 should require a return of 18 percent.Analysts determine that a particular stock with an observed beta of 1.10 has an expected return of 20 percent.Outline the scenario that will bring the security's return into equilibrium.
Q4) Securities with betas greater than l should have:
A)expected returns higher than the market.:::::
B)required returns higher than the market return.
C)required returns lower than the market return.
D)no systematic risk.
Q5) Compare the security market line model and the arbitrage pricing theory.
Q6) What is the formula for the slope of the CML? What does it represent?
Page 11
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Chapter 10: Common Stock Valuation
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Sample Questions
Q1) The directors of MJ Inc.expect to pay a dividend of $2.00 (annual)a year from today.It is estimated that during the next four years ,the dividend will grow at an annual rate of 16 percent (i.e.g<sub>1</sub> = 16 percent).After that,the growth rate (g<sub>2</sub>)will be equal to 12 percent per year and continue at that rate indefinitely.Calculate the present value of the MJ's stock if the required rate of return is 15 percent.
Q2) The constant growth dividend model uses the:
A)historical growth rate in dividends.
B)historical growth rate in earnings.
C)estimated growth rate in dividends.
D)estimated growth rate in earnings.
Q3) Under the zero-growth dividend model,expected dividends are the same as current dividends.
A)True
B)False
Q4) Bronco Inc.'s common stock is currently selling for $42 and paying a dividend of $3.If the investors expect dividends to double in 8 years,what is the required rate of return for Western Inc?
Q5) Why did investors favor large cap stocks in the mid to late 1990s?
Q6) Why have dividends historically been important in the valuation of common stock?
Page 12
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Chapter 11: Common Stocks: Analysis
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Sample Questions
Q1) How could one invest indirectly in sectors and practice sector rotation?
Q2) A significant advantage of index funds is their:
A)lower market price than other types of funds.
B)sector rotation.
C)tax efficiency.
D)minimization of risk.
Q3) Which of the following is TRUE regarding fluctuations in both individual stock prices and portfolios of stocks?
A)aggregate market movements are the largest single factor explaining these fluctuations
B)beta is the largest single factor explaining these fluctuations
C)standard deviation of returns is the largest single factor explaining these fluctuations
D)financial risk is the largest single factor explaining these fluctuations
Q4) If security prices fully reflect all the relevant information that is available and usable,then a securities market is considered to be efficient.
A)True
B)False
Q5) How is the required rate of return utilized in stock analysis?
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Chapter 12: Market Efficiency
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Sample Questions
Q1) What types of information are considered in each of the three forms of the EMH?
Q2) If an astute (or lucky)market analyst were to find a "money machine" system that consistently beat the market,would the system eventually become self-defeating?
Q3) Stockholders that own more than ____% of a company's stock are considered insiders by the SEC.
A)10
B)20
C)30
D)40
Q4) The January effect concerns:
A)large cap stocks.
B)mid-cap stocks.
C)small cap stocks.
D)foreign stocks.
Q5) Calendar market anomalies include the neglected firm effect,which means few analysts follow the stock,or few institutions own the stock.
A)True
B)False
Q6) What is a market anomaly? Give examples of several market anomalies.
Page 14
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Chapter 13: Economy Market Analysis
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Sample Questions
Q1) During a typical contraction,stock prices decline 25 percent from peak.During recent recessions,however,the range of decline has been:
A)less than 20 percent.
B)between 20 and 30 percent.
C)between 30 and 40 percent.
D)greater than 40 percent.
Q2) The longest peacetime expansion ran from 1991 to 2000.
A)True
B)False
Q3) The typical business cycle in the United States seems to lead the stock market's turning point by a few months.
A)True
B)False
Q4) Stock prices often peak when?
A)Two years before the start of a recession.
B)One year before the start of a recession.
C)At the start of a recession.
D)One year after the start of a recession.
Q5) Why do stock investors pay attention to the bond market?
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Chapter 14: Industry Analysis
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Sample Questions
Q1) Which of the following is not one of the stages of the industry life cycle?
A)expansion
B)destabilization
C)declining
D)pioneering
Q2) A well-known and widely used system that classified industries for more than 60 years was the:
A)Commercial Industrial Classification system.
B)National Industrial Classification system.
C)Standard Industrial Classification system.
D)American Industrial Classification system.
Q3) The food industry would be considered:
A)growth industry.
B)defensive industry.
C)cyclical industry.
D)countercyclical industry.
Q4) Standard & Poor's industry analysis has been shown to be less accurate in predicting expected performance than the Value Line Investment Survey.
A)True
B)False
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Chapter 15: Company Analysis
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Sample Questions
Q1) The P/E ratio can be expected to change as the expected dividend payout ratio changes.
A)True
B)False
Q2) The two components of EPS are
A)ROA and leverage.
B)book value per share and leverage.
C)ROE and book value per share.
D)leverage and profit margin.
Q3) How would you explain P/E ratio differences among companies? By investor
A)expectations about the future growth of the market.
B)estimates of the recent growth of earnings.
C)expectations about the future growth of earnings.
D)estimates about the recent growth of dividends.
Q4) How could unexpected inflation affect the P/E ratio?
Q5) What is the relationship of the Financial Accounting Standards Board and the Securities and Exchange Commission?
Q6) Can an investor that wants to use the approach of projected earnings and P/Es find help in Value Line?
Q7) What three variables affect the P/E ratio? How does each affect it?
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Chapter 16: Technical Analysis
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Sample Questions
Q1) The Dow theory is intended to forecast the start but not the duration of a primary movement.
A)True
B)False
Q2) The two primary tools of a technical analyst are:
A)level of the market index and volume.
B)economic indicators and level of the market index.
C)price and earnings.
D)price and volume.
Q3) One of the primary tools of a technical analyst is:
A)sell-side research.
B)buy-side research.
C)Value Line earnings estimates.
D)chart of stock price and volume.
Q4) The cash position of mutual funds is a contrarian indicator.
A)True
B)False
Q5) A bar chart is the simplest type of chart used in technical analysis.
A)True
B)False
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Chapter 17: Bond Yields
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Sample Questions
Q1) Why is duration important for investing in bonds?
A)Investors need to know the relationship between interest rates and prices.
B)Investors need to know the "average" maturity of the bonds they are considering.
C)Investors need to know the coupon rates of the bonds they are considering.
D)Investors need to know the yield to maturity.
Q2) The term structure of interest rates denotes the relationship between _____________ and _________________ for a specific category of bonds at a particular point in time.
Q3) A financial crisis or an accounting scandal can just as easily cause yield spreads to widen as weak earnings at a company.
A)True
B)False
Q4) For most long term bonds,when coupons are reinvested,what is the most important component of the bond's total return?
A)Coupon rate.
B)Interest-on-interest.
C)Yield to Maturity
D)Interest-on-principal.
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Page 19
Chapter 18: Bonds: Analysis and Strategy
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Q1) Which of the following is NOT true regarding bond maturities?
A)Short maturities sacrifice price appreciation opportunities.
B)Longer maturities have greater price fluctuations.
C)Short maturities serve to protect the investor when rates are rising.
D)Long term interest rates are more volatile than short term interest rates.
Q2) You are asked to invest $30 million in a bond portfolio consisting of only two bonds.Bond A has a duration of 4.36 years,and bond B has a duration of 6.50 years.The portfolio is to have an investment horizon of 5 years.How much of each bond issue would you have to buy to immunize the portfolio?
Q3) Holding maturity constant,a decrease in rates will raise bond prices on a percentage basis more than a corresponding increase in rates will lower bond prices.
A)True
B)False
Q4) Why are upward sloping yield curves more consistent with the usual risk-return tradeoff than downward sloping yield curves?
Q5) For a zero coupon bond,duration is the same as time to maturity.
A)True
B)False
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Chapter 19: Options
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Q1) What makes the risk-expected return profile attractive to speculators who purchase put and call options? What is the risk-expected return profile for writers of naked put and call options?
Q2) A protective put is a strategy in which an investor with a long position in stock buys one or more puts.
A)True
B)False
Q3) In the Black-Scholes model,
A)all of the inputs except two are observable.
B)all of the inputs except one are observable.
C)the greater the stock price,the lower the price of the call option.
D)there is an inverse relationship between the value of a call and interest rates in the market.
Q4) If the price of the underlying common stock is less than the exercise price of a call,it is in the money.
A)True
B)False
Q5) A stock investor wants to hedge the Microsoft stock in his portfolio.How can he use a protective put to do this?
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Chapter 20: Futures
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Sample Questions
Q1) Basis =
A)cash price
B)futures price
C)cash price + futures price
D)cash price - futures price
Q2) A forward contract differs from a futures contract in that:
A)a forward contract is for a shorter period of time.
B)a forward contract does not specify the selling price.
C)a forward contract does specify the selling price.
D)a forward contract is non-binding.
Q3) An attempt to exploit the differences between the prices of a stock index future and the prices of a stock index is known as:
A)index programming.
B)arbitrage speculation.
C)index arbitrage.
D)program speculation.
Q4) What is meant by the term "marked to the market"?
Q5) Investors in futures can take either a long,short,or neutral position.
A)True
B)False
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Chapter 21: Portfolio Management
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Sample Questions
Q1) An aggressive asset allocation would contain larger proportions of __________ than a conservative allocation.
A)cash and bonds
B)bonds and large-cap stocks
C)small-cap and international stocks
D)bonds
Q2) Which of the following is not among the usual constraints and preferences considered when formulating an investment policy?
A)Avoidance of so-called "sin" stocks (alcohol,tobacco,firearms,etc.)
B)Liquidity needs
C)Economic assessment
D)Time horizon
Q3) To avoid problems of underperformance,passive investing through the use of indexed mutual funds and ETFs is generally the way to go for most individuals.
A)True
B)False
Q4) Give an example of how individual investors' preferences are taken into account by institutional investors?
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Chapter 22: Evaluation of Investment
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Sample Questions
Q1) The Global Investment Performance Standards (GIPS) were created by:
A)CFA Institute,the successor to AIMR.
B)Russell/Mellon Financial,now Bank of New York Mellon Financial
C)Morningstar.
D)MSCI.
Q2) Which of these four funds had the largest total risk?
A)Fund 1
B)Fund 2
C)Fund 3
D)Fund 4
Q3) When evaluating the performance of a mutual fund holding several S&P 500 stocks,one should always use the S&P 500 as the benchmark.
A)True
B)False
Q4) Standard deviation,beta and coefficient of determination are readily available for mutual funds from sources like Morningstar.
A)True
B)False
Q5) How is regression analysis used to measure portfolio diversification?
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