Advanced Investments
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Course Introduction
Advanced Investments delves into sophisticated concepts and analytical tools utilized in the management of investment portfolios. The course explores topics such as risk-return tradeoffs, portfolio optimization, asset pricing models, active and passive investment strategies, derivatives, and alternative investments. Emphasis is placed on quantitative methods, portfolio construction, performance evaluation, and the practical application of theory to real-world financial markets. Students will also examine contemporary issues such as behavioral finance, market efficiency, and the impact of global events on investment decisions, preparing them for advanced roles in investment analysis and portfolio management.
Recommended Textbook Investment Analysis and Portfolio Management 1st Canadian Edition by Frank K. Reilly
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Page 2
Chapter 1: The Investment Setting
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Q1) A decrease in the expected real growth in the economy, all other things constant, will cause the security market line to
A) Shift up
B) Shift down
C) Have a steeper slope
D) Have a flatter slope
E) Remain unchanged
Answer: B
Q2) The coefficient of variation is the expected return divided by the standard deviation of the expected return.
A)True
B)False
Answer: False
Q3) Refer to Exhibit 1-3. What was your annual holding period yield (Annual HPY)?
A) 0.1462
B) 0.1247
C) 1.8
D) 0.40
E) 0.25
Answer: B
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Chapter 2: The Asset Allocation Decision
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Q1) Refer to Exhibit 2-1. What is the tax liability for a single individual with taxable income of $85,000?
A) $23,800
B) $18,427
C) $24,958
D) $16,867
E) $19,650
Answer: B
Q2) The cash surrender value of the life insurance policy cannot be used for retirement purpose.
A)True
B)False
Answer: False
Q3) One of the first steps in developing a financial plan is to purchase adequate life insurance.
A)True
B)False
Answer: True
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Chapter 3: Selecting Investments in a Global Market
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Sample Questions
Q1) In order to diversify risk an investor must have investments that have correlations with other investments in the portfolio that are
A) low positive
B) zero
C) negative
D) any of the above
E) none of the above
Answer: D
Q2) Senior secured bonds are
A) The most senior bonds in a firm's capital structure.
B) Bonds with the lowest risk of default.
C) Bonds that are not backed by specific assets.
D) A and B
E) A and C
Answer: B
Q3) A Canadian investor who ignores foreign markets reduces overall number of investment choices.
A)True
B)False
Answer: True
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Chapter 4: Securities Markets and the Economy
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Sample Questions
Q1) When a market is externally efficient, it means that
A) Timely and accurate information is available
B) The market is liquid
C) Transaction costs are low
D) Prices adjust rapidly to new information
E) The number of buyers and sellers are the same
Q2) Refer to Exhibit 4-6. At the end of one year you close out your short position by purchasing share of XCorp at $45 per share. The commission is 1.25%. What is your rate of return on the investment?
A) -55.92%
B) 10.31%
C) 51.06%
D) 23.1%
E) -33.05%
Q3) In a dealer market trading system shares of stock are sold to the investor with the highest bid price and bought from the seller with the lowest offering price.
A)True
B)False
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Chapter 5: Efficient Capital Markets
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Sample Questions
Q1) In tests of the semi-strong form EMH, it is not necessary to use risk-adjusted rates of return.
A)True
B)False
Q2) Behavioural finance differs from the standard model of finance because behavioural finance
A) Precludes the impact of investor psychology.
B) Includes the impact of investor psychology.
C) Accepts the Efficient Markets Hypothesis.
D) Rejects the idea of market anomalies.
E) None of the above.
Q3) Refer to Exhibit 5-3. What is the abnormal rate of return for Hemlick during period t using only the aggregate market return (ignore differential systematic risk)?
A) 0.11
B) 1.10
C) -1.70
D) -1.80
E) -4.60
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7
Chapter 6: An Introduction to Portfolio Management
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Sample Questions
Q1) Refer to Exhibit 6-14. What is the expected return of the stock A and B portfolio?
A) 17.0%
B) 17.5%
C) 18.0%
D) 18.5%
E) 19.0%
Q2) Refer to Exhibit 6-4. What is the standard deviation of this portfolio?
A) 5.02%
B) 3.88%
C) 6.21%
D) 4.04%
E) 4.34%
Q3) Refer to Exhibit 6-8. What is the standard deviation of this portfolio?
A) 4.51%
B) 5.94%
C) 6.75%
D) 7.09%
E) 8.62%
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Chapter 7: Asset Pricing Models: Capm and Apt
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Sample Questions
Q1) All portfolios on the capital market line are
A) Perfectly positively correlated.
B) Perfectly negatively correlated.
C) Unique from each other.
D) Weakly correlated.
E) Unrelated except that they contain the risk free asset.
Q2) Refer to Exhibit 7-7. Which are not assumptions of the Arbitrage Pricing model?
A) 1 and 3
B) 1, 2, and 3
C) 1, 2, and 5
D) 2, 4, and 6
E) All six are assumptions
Q3) Refer to Exhibit 7-1. Compute the correlation coefficient between RA Computer and the Market Index.
A) -0.32
B) 0.78
C) 0.66
D) 0.58
E) 0.32
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Page 9
Chapter 8: Economic and Industry Analysis
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Sample Questions
Q1) Which of the following industries do not have a strong, consistent industry component?
A) Gold
B) Steel
C) Railroads
D) Tobacco
E) Paper
Q2) While there is substantial dispersion in industry risk over periods of time, there is consistency in the industry risk during a period of time.
A)True
B)False
Q3) What might cause an industry's sales to decline?
A) Changes in consumer tastes
B) Product obsolescence
C) Growth of substitute products
D) Sluggish economic growth
E) All of the above.
Q4) Structural changes do have a cyclical pattern.
A)True
B)False
Page 10
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Chapter 9: Company Analysis and Stock Valuation
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Sample Questions
Q1) ABC Co. has paid annual dividends in the past five years of $.20, $.25, $.28, $.33, and $.36. Calculate the average growth rate of its dividends.
A) 1.16%
B) 1.80%
C) 12.47%
D) 15.83%
E) None of the above
Q2) Refer to Exhibit 9-8. Calculate the total intrinsic value of the firm.
A) $19,644,612
B) $15,558,546
C) $17,327,250
D) $20,830,412
E) $10,779,025
Q3) "Economic profit" is analogous to ____ in capital budgeting.
A) Weighted average cost of capital
B) Internal rate of return
C) Composite discount rates
D) Discounted cashflows
E) Net present value
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Chapter 10: Technical Analysis
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Q1) The market is considered to be overbought and subject to a negative correction when more than
A) 60% of the stocks are selling above their 90 day average.
B) 70% of the stocks are selling above their 100 day average.
C) 80% of the stocks are selling above their 200 day average.
D) 700% of the stocks are selling above their 150 day average.
E) 90% of the stocks are selling above their 150 day average.
Q2) An increase in debit balances means more investing by naive investors and would be a bearish indicator.
A)True
B)False
Q3) Technicians consider a high short interest ratio to be bearish.
A)True
B)False
Q4) An increase in debit balances in brokerage accounts is viewed by technicians as a bullish sign.
A)True
B)False
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Page 12
Chapter 11: Bond Fundamentals
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Q1) At what point would an investor be indifferent between a Bridgford corporate bond yielding 8.0% and a tax-free municipal bond of equal financial strength if the investor's marginal tax rate is 25%?
A) 5.00%
B) 7.10%
C) 8.00%
D) 9.15%
E) 6.00%
Q2) The bonds issued by the Bank of England are known as
A) Gilts.
B) Bunds.
C) Limies.
D) Treasuries.
E) Benchmarks.
Q3) Alternative institutions favour different sectors of the bond market based on A) The level of interest rates.
B) The tax code applicable to the institution.
C) The nature of the institution's asset structure
D) Choices a and b.
E) Choices b and c.
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Chapter 12: The Analysis and Valuation of Bonds
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Sample Questions
Q1) For a given change in yield bond price volatility is directly related to duration.
A)True
B)False
Q2) The lower a bond's yield to maturity, the greater its duration.
A)True
B)False
Q3) Suppose you have a 15%, 25 year bond traded at $975. If it is callable in 5 years at $1050, what is the bond's yield to call? Interest is paid annually.
A) 15%
B) 16.5%
C) 7.65%
D) 8.52%
E) 9.64%
Q4) The realized yield measures the expected rate of return of a bond that you expect to sell prior to its maturity.
A)True
B)False
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Chapter 13: An Introduction to Derivative Markets and Securities
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Sample Questions
Q1) Refer to Exhibit 13-9. A covered call is an appropriate strategy if
A) An investor wishes to generate additional income.
B) An investor wished to insure against a decline in share values.
C) An investor expected share prices to be volatile.
D) An investor expected share prices to remain in a trading range.
E) An investor expected share prices to be volatile, but was inclined to be bullish.
Q2) Assume that you have just sold a stock for a loss at a price of $75, for tax purposes. You still wish to maintain exposure to the sold stock. Suppose that you buy a call with a strike price of $70 and a price of $6.75. Calculate the effective price paid to repurchase the stock if the price after 35 days is $80.
A) $81.75
B) $73.25
C) $86.75
D) $76.75
E) None of the above
Q3) The initial value of a future contract is the price agreed upon in the contract.
A)True
B)False
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Chapter 14: Derivatives: Analysis and Valuation
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Q1) The owner of a call option on a futures contract has the obligation to buy the futures contract at a predetermined strike price during a specified time period.
A)True
B)False
Q2) In the Black-Scholes option pricing model, an increase in security price (S) 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) An decrease in call value and an increase in put value
D) An decrease in call value and a decrease in put value
E) An increase in call value and an increase or decrease in put value
Q3) Refer to Exhibit 14-12. What is the market value of the swap to the Skalmory Corporation?
A) -$9,000,000
B) -$1,804,000
C) -$87,654
D) $91,830
E) $7,620,000
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Chapter 15: Equity Portfolio Management Strategies
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Sample Questions
Q1) Completeness funds are portfolios designed to complement active portfolios that do not cover the entire market.
A)True
B)False
Q2) Style investing involves constructing portfolios in such a way to capture one or more of the characteristics of equity securities.
A)True
B)False
Q3) If you have a portfolio with a market value of $100 million and a beta (measured against the S&P 500) of 1.5, then if the market rises by 10%, what value would you expect your portfolio to have?
A) $100 million
B) $110 million
C) $150 million
D) $165 million
E) $1.65 billion
Q4) The goal of a passive portfolio is to track the index as closely as possible.
A)True B)False
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Chapter 16: Bond Portfolio Management Strategies
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Sample Questions
Q1) Refer to Exhibit 16-6. The realized compound yield on the current bond is
A) 10.00%
B) 11.9985%
C) 12.9397%
D) 13.9399%
E) 12.3585%
Q2) Refer to Exhibit 16-3. The value of the swap is ____ basis points in one year A) 40.4 B) 60.6
Q3) Indexing is an active portfolio management strategy that seeks to copy the composition and performance of a selected market index.
A)True
B)False
Q4) Credit analysis and core-plus management are examples of active bond portfolio management.
A)True
B)False
Page 18
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Chapter 17: Professional Money Management, Alternative
Assets, and Industry Ethics
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Sample Questions
Q1) Ethical conflicts may arise as a result of
A) Incentive compensation schemes.
B) Soft dollar arrangements.
C) Marketing investment management services.
D) All of the above.
E) None of the above.
Q2) Market index funds attempt to match the composition and performance of a specified market indicator series.
A)True
B)False
Q3) The returns received by the average individual investor on funds managed by investment companies will probably be superior to the average results for a specific U.S. or international market.
A)True
B)False
Q4) Closed-end investment companies never sell at discounts to their NAV.
A)True
B)False
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Chapter 18: Evaluation of Portfolio Performance
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Sample Questions
Q1) A portfolio manager has the following sequence of cash flows over a two year period.
\[\begin{array} { | l | c | c | c | }
\hline \text { Time } & 0 & 1 & 2 \\
\hline \text { autflows } & - \$ 2,000 & - \$ 500 & \\
\hline \text { inflows } & & \$ 50 & \$ 3,090 \\
\hline
\end{array}\] Calculate the portfolio manager's dollar weighted return.
A) 13.56%
B) 11.48%
C) 15.50%
D) 8.75%
E) 10.67%
Q2) The policy effect is a difference in bond portfolio performance from that of a benchmark index due to a difference in duration.
A)True
B)False
Q3) Sharpe's performance assumes that all portfolios are completely diversified.
A)True
B)False
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Page 20
Chapter 19: Analysis of Financial Statements
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Sample Questions
Q1) Refer to Exhibit 19-8. Calculate Zeco Company's Total Asset Turnover.
A) 0.59
B) 0.78
C) 1.28
D) 1.70
E) 1.97
Q2) The growth of business depends on the percentage of earnings reinvested and the return on equity.
A)True
B)False
Q3) Refer to Exhibit 19-8. Calculate the sustainable growth rate for Zeco Company.
A) 0.4%
B) 0.7%
C) 1.3%
D) 2.1%
E) 4.1%
Q4) A cross-sectional analysis compares a firm to a subset of industry firms comparable in size or characteristics.
A)True
B)False
21
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Chapter 20: An Introduction to Security Valuation
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Sample Questions
Q1) What is the P/E ratio is determined by?
A) The required rate of return.
B) The expected dividend payout ratio.
C) The expected growth rate of dividends.
D) Choices a and b
E) All of the above.
Q2) Refer to Exhibit 20-3. What will be the value of these securities in one year if the required return declines to 8%?
A) $899.43
B) $862.50
C) $869.88
D) $918.93
E) $946.98
Q3) Refer to Exhibit 20-3. What is the current value of these securities?
A) $656.40
B) $899.00
C) $822.70
D) $569.50
E) $962.00
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Chapter 21: Web Appendix: A Review of Statistics and the
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Q1) The expected return from this investment is
A) -0.0752
B) -0.0040
C) 0.00
D) 0.0075
E) 0.4545
Q2) The standard deviation of your expected return from this investment is
A) 0.001
B) 0.004
C) 0.124
D) 1.240
E) None of the above
Q3) The coefficient of variation of this investment is
A) -0.06
B) -0.65
C) 6.60
D) 16.53
E) 165.10
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Chapter
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Sample Questions
Q1) The standard deviation of your expected return from this investment is
A) 0.001
B) 0.004
C) 0.124
D) 1.240
E) None of the above
Q2) The expected return from this investment is
A) -0.0752
B) -0.0040
C) 0.00
D) 0.0075
E) 0.4545
Q3) The coefficient of variation of this investment is
A) -0.06
B) -0.65
C) 6.60
D) 16.53
E) 165.10
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Chapter
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Q1) Banks typically
A) Have low liquidity needs.
B) Face very few federal and state regulatory constraints.
C) Don't have to compete for funds.
D) Have high liquidity needs and a short time horizons constraint.
E) Low investment risk.
Q2) Banks must compete for funds (savings deposits, CDs, etc.) in order to make loans and other types of investments.
A)True
B)False
Q3) Banks typically have short-term investment horizons because
A) They have a strong need for liquidity.
B) They offer short-term deposit accounts.
C) They are required to by federal and state laws.
D) Choices a and b
E) All of the above
Q4) Banks have high liquidity needs and therefore, have a short time horizon.
A)True
B)False
25
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