Applied Investment Management
Practice Questions
Course Introduction
Applied Investment Management is designed to provide students with practical skills and theoretical foundations necessary for effective investment decision-making. The course covers key topics such as portfolio construction, asset allocation, risk management, and performance evaluation, combining financial theory with real-world application. Through analysis of case studies, market data, and contemporary investment tools, students learn to assess investment opportunities, understand market dynamics, and implement strategies to achieve specific risk-return objectives. Emphasis is placed on ethical considerations, global financial markets, and the use of quantitative techniques and financial technology in modern investment management.
Recommended Textbook
Investment Analysis and Portfolio Management 11th Edition by Frank K. Reilly
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2045 Flashcards
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Chapter 1: The Investment Setting
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Sample Questions
Q1) Sources of risk for an investment include
A) variance of returns and business risk.
B) coefficient of variation of returns and financial risk.
C) business risk and financial risk.
D) variance of returns and coefficient of variation of returns.
E) variance of returns and economic risk.
Answer: C
Q2) The basic trade-off in the investment process is
A) between the anticipated rate of return for a given investment instrument and its degree of risk.
B) between understanding the nature of a particular investment and having the opportunity to purchase it.
C) between high returns available on single instruments and the diversification of instruments into a portfolio.
D) between the desired level of investment and possessing the resources necessary to carry it out.
E) None of these are correct.
Answer: A
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Page 3
Chapter 1: The Investment Setting: Part A
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Sample Questions
Q1) Refer to Exhibit 1A.2. The standard deviation for project X is
A) -1.581 percent.
B) 0.000 percent.
C) 1.581 percent.
D) 2.738 percent.
E) 5.000 percent.
Answer: B
Q2) 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
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Chapter 2: Asset Allocation and Security Selection
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Sample Questions
Q1) The policy statement may include a ____ against which a portfolio's or portfolio manager's performance can be measured.
A) milestone
B) benchmark
C) landmark
D) reference point
E) market pair
Answer: B
Q2) Refer to Exhibit 2.1. What is the average tax for a single individual with taxable income of $85,000?
A) 13.57%
B) 15.68%
C) 21.68%
D) 25.74%
E) 29.55%
Answer: C
Q3) The spending phase occurs when investors are relatively young.
A)True
B)False
Answer: False
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Chapter 2: Asset Allocation and Security Selection: Part A
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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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Sample Questions
Q1) Refer to Exhibit 3.6. Suppose at the end of one year XCorp is selling at $90 per share and you cover your short position at this price. What is your rate of return on the investment? (Assume a 1.25 percent commission on the purchase.)
A) -40.64 percent
B) -25.53 percent
C) 5.21 percent
D) 72.7 percent
E) -71.2 percent
Q2) All of the following are characteristics of a dealer market EXCEPT that:
A) it is a quote-driven market.
B) the NASDAQ market is a dealer market.
C) individual dealers buy and sell shares for themselves.
D) it has a centralized trading location.
E) All of these are correct.
Q3) Refer to Exhibit 3.8. What is your total dollar return on this investment?
A) $1,000
B) $900
C) $850
D) $670
E) $520
Page 7
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Chapter 4: Security Market Indexes and Index Funds
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Sample Questions
Q1) Refer to Exhibit 4.5. Calculate the unweighted index (geometric mean) for Dec 31, 2004. Assume a base index value of 100. The base year is Dec 31, 2003.
A) 119.25
B) 121.25
C) 151.25
D) 95.25
E) 100.25
Q2) Refer to Exhibit 4.2. Calculate a price weighed average for January 15th.
A) 30
B) 36.13
C) 32
D) 34
E) 37
Q3) The New York Stock Exchange Index is based on a sample of all of the New York Stock Exchange stocks.
A)True
B)False
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Chapter 5: Efficient Capital Markets, Behavioral Finance, and Technical Analysis
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Sample Questions
Q1) Two major classes of technicians include the contrarians and those who "follow the smart money"
A)True
B)False
Q2) When ____ of stocks are trading above the 200-day moving average, the market is considered ____ and subject to a ____.
A) 20 percent, oversold, negative correction
B) 80 percent, overbought, negative correction
C) 80 percent, oversold, positive correction
D) 20 percent, overbought, positive correction
E) 0 percent, overbought, positive correction
Q3) A divergence between an increase in a stock market series and the rest of the stock market can be detected using
A) debit balances in brokerage accounts.
B) short interest.
C) the advance-decline line.
D) confidence index.
E) investor sentiment.
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Chapter 6: An Introduction to Portfolio Management
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Sample Questions
Q1) Combining assets that are NOT perfectly correlated does affect both the expected return of the portfolio as well as the risk of the portfolio.
A)True
B)False
Q2) The market portfolio consists of all
A) New York Stock Exchange stocks.
B) high grade stocks and bonds.
C) stocks and bonds.
D) U.S. and non-U.S. stocks and bonds.
E) risky assets.
Q3) Refer to Exhibit 6.13. Calculate the standard deviation for Magnum Oil.
A) 0 percent
B) 11 percent
C) 16 percent
D) 20 percent
E) 26 percent
Q4) Studies have shown that a well-diversified investor needs as few as five stocks.
A)True
B)False
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Chapter 6: An Introduction to Portfolio Management: Part A
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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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Chapter 6: An Introduction to Portfolio Management: Part B
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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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Sample Questions
Q1) Unlike the capital asset pricing model, the arbitrage pricing theory requires only the following assumption(s):
A) a quadratic utility function.
B) normally distributed returns.
C) the stochastic process generating asset returns can be represented by a factor model.
D) a mean-variance efficient market portfolio consisting of all risky assets.
E) capital markets are imperfectly competitive.
Q2) Empirical tests of the APT model have found that as the size of a portfolio increased, so did the number of factors.
A)True
B)False
Q3) Refer to Exhibit 7.2. What is your investment strategy concerning the three stocks?
A) buy X and Y; sell Z
B) sell X, Y, and Z
C) sell X and Z; buy Y
D) buy X, Y, and Z
E) buy X and Z; sell Y
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13
Chapter 8: Equity Valuation
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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 require a 17 percent return?
A) $16.97
B) $22.16
C) $21.32
D) $32.63
E) $23.63
Q2) Hunter Corporation had a dividend payout ratio of 63 percent in 1999. The retention rate in 1999 was
A) 37 percent.
B) 63 percent.
C) 50 percent.
D) 0 percent.
E) 100 percent.
Q3) Refer to Exhibit 8.4. The dividends for years 1, 2, and 3 are
A) $1.5, $2.0, and $2.05.
B) $1.64, $1.78, and $1.94.
C) $1.64, $1.94, and $2.24.
D) $1.5, $2.40, and $3.30.
E) $2.07, $2.14, and $2.21.
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Chapter 9: The Top-Down Approach to Market, Industry, and Company Analysis
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Sample Questions
Q1) Stock prices move coincidentally with the economy.
A)True
B)False
Q2) An offensive competitive strategy involves positioning the firm to deflect the effect of the competitive forces in the industry.
A)True
B)False
Q3) Which of the following is NOT an analytical measure used by the Conference Board to examine behavior within a series?
A) diffusion indexes
B) rates of change
C) direction of change
D) ratios among series
E) comparison with previous cycles
Q4) The best-known measure of relative value for common stock is the P/E ratio.
A)True
B)False
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Chapter 10: The Practice of Fundamental Investing
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Sample Questions
Q1) The three goals of executive compensation are to align management's interest with the shareholders, to keep management from leaving in bad times, and to refrain from giving too much of shareholder profits to management.
A)True
B)False
Q2) The investment bank helps stabilize the price of new issues in the secondary market by
A) purchasing shares in the open market.
B) selling shares in the open market.
C) risking its capital.
D) market manipulation.
E) underallotment of shares.
Q3) _____ refers to the rules, policies, and procedures that are used to direct and control a company.
A) Corporate governance
B) Capital allocation
C) Executive compensation
D) Going public
E) A stock pitch
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Page 16
Chapter 11: Equity Portfolio Management Strategies
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Sample Questions
Q1) Which of the following statements regarding momentum strategies is TRUE?
A) Price momentum is a fundamental strategy.
B) Earnings momentum is a technical strategy.
C) Price momentum and earnings momentum strategies will often result in identical portfolio strategies and holdings.
D) The earnings momentum investor will most likely acquire stocks for companies that have positive earnings surprises.
E) All of these are correct.
Q2) Which of the following is NOT a technique for constructing a passive index portfolio?
A) full replication
B) sampling
C) quadratic programming
D) linear programming
E) indexing
Q3) The three basic techniques for constructing a passive index are: full replication, sampling, and linear programming.
A)True
B)False
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Chapter 12: Bond Fundamentals and Valuation
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Sample Questions
Q1) According to the liquidity preference hypothesis, yield curves generally slope upward because
A) investors prefer short maturity obligations to long maturity obligations.
B) investors prefer long maturity obligations to short maturity obligations.
C) investors prefer less volatile long maturity obligations.
D) investors prefer more volatile short maturity obligations.
E) None of these are correct.
Q2) When homeowners pay off mortgages when they sell their homes, or when homeowners refinance home mortgages, they effectively
A) make the maturities of GNMA securities longer.
B) make the maturities of GNMA securities shorter.
C) make the maturities of U.S. Treasury securities longer.
D) make the maturities of U.S. Treasury securities shorter.
E) default on their mortgages.
Q3) Which of the following is NOT a major rating agency for bonds?
A) Moody's
B) Standard & Poor's
C) Fitch Investor Services
D) Value Line
E) Duff and Phelps
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Chapter 13: Bond Analysis and Portfolio Management Strategies
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Sample Questions
Q1) Calculate the modified duration for a 10-year, 12 percent bond with a yield to maturity of 10 percent and a Macaulay duration of 7.2 years.
A) 6.43 years
B) 6.55 years
C) 6.79 years
D) 6.86 years
E) 7.01 years
Q2) The term dedication, used to describe portfolio management techniques, is referring to servicing a prescribed set of A) interest payments.
B) assets.
C) liabilities.
D) pensioners.
E) sinking fund payments.
Q3) The components of interest rate risk are price risk and maturity risk.
A)True
B)False
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Chapter 14: An Introduction to Derivative Markets and Securities
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Sample Questions
Q1) A futures contract is an agreement between a trader and the clearinghouse of the exchange for delivery of an asset in the future.
A)True
B)False
Q2) Which of the following statements is TRUE?
A) The buyer of a futures contract is said to be long futures.
B) The buyer of a futures contract is said to be long futures
C) The seller of a futures contract is said to be long futures
D) The buyer of a futures contract is said to be short futures.
E) The buyer of a futures contract is unwinding a long position.
Q3) Which of the following is NOT a factor needed to calculate the value of an American call option?
A) price of the underlying stock
B) exercise price
C) price of an equivalent put option
D) volatility of the underlying stock
E) interest rate
Q4) Forward contracts do not require an upfront premium.
A)True B)False
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Chapter 15: Forward, Futures, and Swap Contracts
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Sample Questions
Q1) Refer to Exhibit 15.18. Suppose that three-month LIBOR is 4.0 percent on the rate determination day, and the contract specified settlement in advance, describe the transaction that occurs between the dealer and TexMex.
A) The dealer is obligated to pay TexMex $61,881.
B) The dealer is obligated to pay TexMex $61,500.
C) TexMex is obligated to pay the dealer $247,524.
D) TexMex is obligated to pay the dealer $246,000.
E) TexMex is obligated to pay the dealer $56,000.
Q2) Which of the following is true when F<sub>0,T</sub> < E(S<sub>T</sub>)?
A) occurs when long hedgers outnumber short hedgers
B) occurs when short hedgers outnumber long hedgers
C) The market is said to be in contango.
D) The market is said to be in normal contango.
E) The pure expectations hypothesis holds.
Q3) Which of the following is NOT considered a "cost of carry"?
A) commissions for physical storage
B) an opportunity cost for the net amount of invested capital
C) a premium for the convenience of consuming the asset now
D) a risk premium for uncertainty
E) the intrinsic price of the underlying
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Chapter 16: Option Contracts
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Sample Questions
Q1) Refer to Exhibit 16.5. Estimate n, which is the number of call options that must be written.
A) -1.4286
B) -2.9286
C) -2.8571
D) -2.5714
E) -1.1111
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 sell a put with a strike price of $80 and a price of $7.25. Calculate the effective price paid to repurchase the stock if the price after 35 days is $70.
A) $77.75
B) $87.25
C) $82.25
D) $72.75
E) $85.25
Q3) European options can only be exercised on the expiration date.
A)True
B)False
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Chapter 17: Professional Money Management, Alternative Assets, and Industry Ethics
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Sample Questions
Q1) The Investment Company Act of 1940
A) contains various anti-fraud provisions and record keeping and reporting requirements for fund advisors.
B) regulates broker-dealers.
C) requires federal registration of all public offerings of securities.
D) regulates the structure and operations of mutual funds.
E) contains a code of ethics and standards of professional conduct.
Q2) On January 2, 2017, you invest $100,000 in Righteous, 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 Righteous shares. The dollar value is
A) $12,800.00.
B) $12,892.50.
C) $100,000.00.
D) $128,925.00.
E) $10,000.00.
Q3) A portfolio is generally managed by the board of directors of an investment company.
A)True
B)False
Page 23
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Chapter 18: Evaluation of Portfolio Performance
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Sample Questions
Q1) The market rewards investors for bearing total risk.
A)True
B)False
Q2) The portfolio performance measure that can be most affected by a benchmark error is the Sharpe measure.
A)True
B)False
Q3) Which of the following performance measures is the most rigorous risk-adjustment process separating systematic and unsystematic risk?
A) Treynor ratio
B) Sharpe ratio
C) Jensen's Alpha
D) Information ratio
E) Sortino ratio
Q4) The CFA Institute encourages managers to disclose the volatility of the composite return and to identify benchmarks that parallel the risk or investment style that the composite tracks.
A)True
B)False
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