Course Introduction
Advanced Investments
Final Exam Questions
Advanced Investments explores the theoretical foundations and practical applications of investment strategies in financial markets. The course covers topics such as portfolio construction, asset pricing models, active and passive investment strategies, market efficiency, risk management, and derivative securities. Students analyze real-world case studies and employ quantitative techniques to evaluate investment performance, assess risk-return trade-offs, and make informed decisions about equities, fixed income, alternative assets, and derivatives. The course emphasizes the use of analytical tools and financial technology to understand modern investing complexities and prepare students for professional roles in asset management, portfolio analysis, and financial advisory services.
Recommended Textbook
Investments Analysis and Management 13th Edition by Charles P. Jones
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Page 2
Chapter 1: Understanding Investments
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Q1) Due to the Internet,institutional investors have gained in importance.
A)True
B)False
Answer: False
Q2) Which of the following professionals would be considered an institutional investor?
A)Investment banker
B)Security analyst
C)Stockbroker
D)Portfolio manager
Answer: D
Q3) The investment professionals that arrange the sale of new securities are called: A)arbitragers.
B)traders.
C)investment bankers.
D)specialists.
Answer: C
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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Q1) What rate would a taxable corporate bond have to pay to be comparable to a municipal bond with a coupon rate of 7 percent if the investor is in the 28 percent tax bracket?
Answer: Taxable equivalent yield is 0.07/(1-0.28)= 9.72%
Q2) The par value of Blaze,Inc.common stock is $0.50,the earnings per share is $4,the stock price is $60,and the dividend per share is $1.Calculate the dividend yield.
Answer: Dividend yield = $1/$60 = 0.0167 = 1.67%
Q3) Savings accounts are:
A)negotiable but are not liquid.
B)marketable but are not liquid.
C)liquid but are not personal.
D)liquid but are not marketable.
Answer: D
Q4) Marketable securities all fall into the category of capital market securities.
A)True
B)False
Answer: False
Q5) How is the earnings retention rate related to the dividend payout rate?
Answer: Earnings retention rate = 1-dividend payout rate
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Chapter 3: Indirect Investing
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Q1) Which of the following is not a characteristic of investments companies?
A)Pooled investing
B)Diversification
C)Managed portfolios
D)Reduced expenses
Answer: D
Q2) Most unit investment trusts are considered active investments.
A)True
B)False
Answer: False
Q3) The ___________________________________ requires most investment companies to register with the Securities and Exchange Commission (SEC),the primary federal agency regulating investment companies.
Answer: Investment Company Act of 1940
Q4) Total return for a mutual fund includes capital gains less any reinvested dividends.
A)True
B)False
Answer: False
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Chapter 4: Securities Markets and Market Indexes
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Q1) What impact does the increasing amount of institutional investing have on the securities markets today,and what role do you think institutional investors will play in the future?
Q2) What document summarizes information about a new security issue?
A)The syndicate offer
B)The IPO
C)The prospectus
D)The shelf registration
Q3) NASDAQ stocks:
A)are generally foreign stocks.
B)trade via the Blue Sheets.
C)are sometimes not listed on organized exchanges.
D)represent less than 1,000 companies.
Q4) In private placements,new security issues are sold directly to financial institutions.
A)True
B)False
Q5) The S&P 500 comprises approximately ___ percent of the market capitalization of all U.S.publicly traded companies.
Q6) What is the Nasdaq National Market System?
Page 6
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Chapter 5: How Securities Are Traded
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Q1) Which of the following laws eliminated all fixed commissions?
A)Securities Exchange Act of 1934
B)Securities Acts Amendments of 1975
C)Investor Advisor Act of 1940
D)Securities Investor Protection Act of 1970
Q2) Buying Treasury securities through the Treasury Direct Program eliminates all brokerage commissions and other fees.
A)True
B)False
Q3) The use of stock certificates,compared to book-entry systems,is on the rise due,in part,to increased computer fraud.
A)True
B)False
Q4) Insider trading often occurs when mergers and takeovers are imminent.
A)True
B)False
Q5) Compare and contrast the functions and responsibilities of an NYSE designated market maker (specialist)with those of an OTC dealer.
Q6) What are two methods of investing in stocks without a broker?
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Chapter 6: The Risks and Returns From Investing
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Q1) When should an investor use the arithmetic mean return?The geometric mean return?
Q2) Adding 1 to return produces the:
A)arithmetic mean.
B)return relative.
C)cumulative wealth index.
D)geometric mean.
Q3) In order to determine the compound growth rate of an investment over some period,an investor would calculate the:
A)arithmetic mean.
B)geometric mean.
C)calculus mean.
D)arithmetic median.
Q4) Assume an investor purchases a bond when the Euro is quoted at $0.96 per Euro and sells the bond when the Euro is quoted at $1.12 per Euro.Relative to the dollar,the Euro has:
A)appreciated,and the investor has gained from the currency move.
B)appreciated,and the investor has lost from the currency move.
C)depreciated,and the investor has gained from the currency move.
D)depreciated,and the investor has lost from the currency move.
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Chapter 7: Portfolio Theory
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Q1) Portfolio risk is most often measured by professional investors using the:
A)expected value.
B)portfolio's beta.
C)weighted average of the individual asset's risk.
D)portfolio's standard deviation.
Q2) An efficiently diversified portfolio still has _____________________ risk.
Q3) Probability distributions:
A)are always discrete.
B)are always continuous.
C)can be either discrete or continuous.
D)are always symmetric.
Q4) Which of the following statements regarding expected return of a portfolio is true? It can:
A)be higher than the weighted average expected return of the individual assets.
B)be lower than the weighted average return of the individual assets.
C)never differ from the weighted average expected return of the individual assets.
D)not be calculated.
Q5) How is the correlation coefficient important in choosing among securities for a portfolio?
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Chapter 8: Portfolio Selection
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Q1) Which of the following statements is true regarding TIPS?
A)As inflation changes,the interest rate on the bond is adjusted.
B)The correlation between TIPS and the S&P 500 Index has often been negative.
C)TIPS are more volatile than regular Treasury bonds of similar maturity.
D)The return on TIPS is often lower than the inflation rate.
Q2) Based on recent history,an investor would 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.
Q3) Which of the following would not be considered a source of systematic risk?
A)A hostile takeover
B)An increase in inflation
C)A decrease in GDP
D)A panic on Wall Street
Q4) Real estate has never been shown to be positively correlated with the performance of stocks.
A)True
B)False
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Chapter 9: Asset Pricing Models
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Q1) In a declining market,a portfolio manager should attempt to increase the overall beta of the portfolio.
A)True
B)False
Q2) The APT is based on the: A)law of averages.
B)law of attraction.
C)law of accelerating return.
D)law of one price.
Q3) The characteristic line is the regression fitting total returns for a stock against total ?returns for the marketand is sometimes calculated using excess returns.
A)True
B)False
Q4) Why is market risk sometimes said to be the "relevant" risk for a portfolio manager?What is the measure of market risk?
Q5) The CML indicates the required return for each portfolio risk level. A)True B)False
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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Q1) Which of the following increases the price an investor is willing to pay for stock?
A)The investor increases his estimate of the constant growth rate for dividends.
B)The investor decreases his estimate of the constant growth rate for dividends.
C)The investor increases his estimate of the required rate of return.
D)The investor assumes a higher beta for the stock.
Q2) The only reliable way to value a common stock is to discount the future flow of dividends at a discount rate appropriate to the riskiness of the company.
A)True
B)False
Q3) Stan expects Terta Corp.to pay its first dividend of $3 in five years.He expects the dividend to grow at 6% thereafter,and his required return on the stock is 9.5%.The largest amount that Stan should pay for the stock is closest to:
A)$54.
B)$60.
C)$68.
D)$86.
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Chapter 11: Common Stocks: Analysis and Strategy
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Q1) If security markets are fully efficient,the best common stock strategy is:
A)a rotation strategy.
B)a buy low,sell high strategy.
C)an active strategy.
D)a passive strategy.
Q2) One of the most famous investment advisory services since 1965 is:
A)the Wall Street Journal.
B)Standard and Poor's Corporate Records.
C)Moody's.
D)the Value Line Investment Survey.
Q3) Which strategy involves shifting the weights of securities in a portfolio to take advantage of security groups expected to do relatively better than others?
A)Portfolio management
B)Technical analysis
C)Momentum strategy
D)Sector rotation
Q4) How is the required rate of return utilized in stock analysis?
Q5) Compare and contrast the passive strategies of buy-and-hold and buying index funds.
Q6) How could one invest indirectly in sectors and practice sector rotation?
Page 13
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Chapter 12: Market Efficiency
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Q1) On average,small,less well-known companies have lower long-run returns than larger,more well-known companies.
A)True
B)False
Q2) In tests of market efficiency,CAR refers to:
A)cumulative average return.
B)compound average return.
C)compound annual return.
D)cumulative abnormal return.
Q3) Which of the following observations is most consistent with the EMH?
A)The January effect
B)The random walk
C)The low P/E effect
D)The success of the Value Line Investment Survey
Q4) Which of the following is the best definition of "behavioral finance?"
A)Behavioral finance studies how financial market participants behave.
B)Behavioral finance studies the ethical behavior of investors.
C)Behavioral finance studies what investors should do to optimize performance.
D)Behavioral finance studies how investor biases and emotions affect stock prices.
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Chapter 13: Economy Market Analysis
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Q1) The relationship between the stock market and the business cycle is generally considered reliable,but the stock market tends to give false signals about:
A)business cycle peaks (booms).
B)business cycle troughs (recessions).
C)business cycle inflection points between peaks and troughs.
D)ex post stock market returns.
Q2) Which of the following is considered a leading indicator of a country's economy?
A)Unemployment rate
B)Stock prices
C)Money supply
D)Interest rate spread
Q3) In the U.S. ,since the end of World War II,the typical business cycle consists of an expansion of how many months?
A)10
B)23
C)35
D)57
Q4) Use the constant-growth dividend discount model to explain why stock prices have an inverse relationship to interest rates.
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Chapter 14: Industry Analysis
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Q1) Which of the following types of industries is likely to be least affected in a recession?
A)Expansionary
B)Interest-rate sensitive
C)Defensive
D)Countercyclical
Q2) Which of the following sectors was most adversely affected by the accounting changes requiring the expensing of stock options?
A)Manufacturing
B)Technology
C)Energy
D)Utilities
Q3) Which of the following is not one of the stages of the industry life cycle?
A)Expansion
B)Destabilization
C)Declining
D)Pioneering
Q4) What industries do you think will be the growth industries of the next decade?
Q5) What are the five competitive factors identified in the Michael Porter model?
Q6) When should companies in cyclical industries be bought?
Page 16
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Chapter 15: Company Analysis
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Q1) Other things being equal,as k rises,the P/E ratio will also rise.
A)True
B)False
Q2) It is necessary to determine a point estimate of the intrinsic value of a stock when using relative valuation techniques.
A)True
B)False
Q3) Fixed assets consist of:
A)cash and marketable securities.
B)property,plant,and equipment.
C)intangible assets,like goodwill.
D)shareholders' equity.
Q4) How could unexpected inflation affect the P/E ratio?
Q5) Which of the following represents an estimate of the rate at which a company can grow from internal sources?
A)Return on assets
B)Sustainable growth rate
C)Adjusted EPS
D)Return on equity
Q6) 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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Q1) Technical analysts agree with fundamental analysts regarding the usefulness of accounting data.
A)True
B)False
Q2) Which of the following is not an assumption made by technical analysts?
A)Changes in trend are caused by shifts in supply and demand relationships.
B)Stock price movements are independent of one another.
C)Security prices tend to move in trends.
D)Supply and demand of securities are determined by various factors.
Q3) A support level is a price range:
A)at which a significant increase in demand for a stock is expected.
B)at which a significant increase in supply of a stock is expected.
C)below which a stock price cannot go.
D)above which a stock price cannot go.
Q4) Which of the following is not true regarding the Dow Theory?
A)It is intended to forecast the start of a primary movement.
B)It does not forecast how long a movement will last.
C)It has a very high success rate.
D)It is subject to many criticisms.
Q5) What is the advance-decline line?What does it tell the technician?
Page 18
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Chapter 17: Bond Yields
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Q1) Relative to interest rates,bond prices have:
A)an inverse and linear relationship.
B)a direct and linear relationship.
C)an inverse and convex relationship.
D)an inverse and concave relationship.
Q2) If a bond has a coupon rate that is greater than the bond's YTM,the bond:
A)will sell at a premium.
B)will sell at par.
C)will sell at a discount.
D)will not be called.
Q3) An investor has three sources of dollar returns from a bond investment.Which of the following is not included among the three sources?
A)The semi-annual coupon payments
B)The interest earned on reinvesting the coupon payments
C)The principal paid at maturity
D)The interest earned on reinvesting the last coupon and the principal
Q4) Yield spreads vary inversely with the: ______________________________.
Q5) The three most prominent theories proposed to explain the term structure of interest rates are:
19
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Chapter 18: Bonds: Analysis and Strategy
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Q1) During periods of economic expansion,the spread between corporate bonds and U.S.Treasuries generally:
A)widens.
B)narrows.
C)stays the same.
D)becomes negative.
Q2) A portfolio is said to be immunized if:
A)the present value of its cash flows equals the its principal value.
B)the duration of the portfolio is equal to its maturity.
C)the present value of its cash flows is greater than its principal value.
D)the duration of the portfolio is equal to the investor's investment horizon.
Q3) Regardless of its maturity date,it is very unusual for a coupon-paying bond to have a duration greater than:
A)2 years.
B)4 years.
C)7 years.
D)10 years.
Q4) Why is immunization considered to be a hybrid strategy?
Q5) What are the two components of interest-rate risk?How do they work to immunize a portfolio?
Page 20
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Chapter 19: Options
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Q1) Which of the following statements about portfolio insurance is false?
A)There are several methods of insuring a portfolio.
B)It seeks to provide a minimum return while offering the opportunity to Participate in rising prices.
C)Futures are typically not used to hedge stock portfolios.
D)Puts and calls typically are not used to insure portfolios.
Q2) LEAPS are typically:
A)more expensive than short-term options.
B)cheaper than short-term options.
C)only available for major indexes,not individual stocks.
D)long-term options,with maturities between 5 and 10 years.
Q3) Which of the following statements about call options is false?
A)A call is in the money if the stock price exceeds the exercise price.
B)A call has no time value if its intrinsic value is zero.
C)If a call is out of the money,its intrinsic value is zero.
D)If a call is in the money,its intrinsic value is zero.
Q4) How could an investor create 100 shares of artificial stock (i.e. ,a portfolio with the same payoffs as 100 shares of common stock)?
Q5) What type of equity derivatives are created by corporations?
Q6) List five options exchanges.
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Chapter 20: Futures
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Q1) How often are futures contracts marked to market?
A)Daily
B)Weekly
C)Monthly
D)Quarterly
Q2) Speculators in the futures market:
A)make the market more volatile.
B)contribute liquidity to the market.
C)engage mainly in short positions.
D)serve no real economic function.
Q3) In a margin account,if the account balance falls below the maintenance margin,a margin call is triggered.
A)True
B)False
Q4) 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 is not standardized.
D)a forward contract is non-binding.
Q5) What are the methods of settling a futures contract?
Page 22
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Chapter 21: Portfolio Management
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Q1) Relative to a conservative allocation,an aggressive asset allocation would contain larger proportions of:
A)value stocks and bonds.
B)bonds and large-cap stocks.
C)small-cap and international stocks.
D)defensive stocks.
Q2) Pension funds are governed by the prudent man rule since specific pension fund legislation has never passed.
A)True
B)False
Q3) Which of the following investors should allocate a relatively high portfolio weight to municipal bonds?
A)A tax-exempt institution
B)An individual investor in the accumulation phase of the life cycle
C)An individual investor with high liquidity needs
D)An individual investor in a high tax bracket
Q4) Explain the life-cycle theory of portfolio policies.
Q5) What are the differences between individual investors and institutional investors?
Q6) What are the steps in the portfolio management process?
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Chapter 22: Evaluation of Investment Performance
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Q1) A retired couple's assets consist of a $100,000 house,a $400,000 securities portfolio,a $15,000 car,and personal effects.Would they be more concerned with the Sharpe measure or the Treynor measure for the portfolio?
Q2) The information ratio is calculated as the ratio of:
A)mean active return to tracking risk.
B)alpha to beta.
C)excess return to portfolio standard deviation.
D)portfolio excess return to tracking risk.
Q3) Which of the following indices is most appropriate as a benchmark portfolio for a large-cap mutual fund?
A)Wilshire 5000
B)S&P 500
C)Dow Jones Industrial Average
D)Russell 2000
Q4) Modigliani-squared is a return adjusted for volatility that allows returns between portfolios to be compared.
A)True
B)False
Q5) What is the major difference between the Sharpe and Treynor measures?
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