Capital Markets
Final Test Solutions
Course Introduction
Capital Markets provides a comprehensive overview of the structure, operations, and functions of financial markets that facilitate the raising of capital and the trading of securities. The course explores the roles of key market participants, such as investors, issuers, regulators, and intermediaries, as well as the characteristics and valuation of various financial instruments, including stocks, bonds, and derivatives. Topics include the processes of initial public offerings (IPOs), secondary market trading, market efficiency, risk management, regulatory frameworks, and recent developments in global capital markets. By the end of the course, students will gain a strong foundation to understand how capital markets contribute to economic growth and the allocation of resources in a modern financial system.
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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Sample Questions
Q1) Most financial advisors are registered with the Securities and Exchange Commission as:
A)registered representatives.
B)registered investment advisors.
C)registered financial planners.
D)registered securities consultants.
Answer: B
Q2) Financial planners must pass a standardized test and possess certain credentials.
A)True
B)False
Answer: False
Q3) One reason for the declining importance of pension funds is the:
A)decrease in pension benefits for workers.
B)downsizing of U.S.companies.
C)large number of conversions into self-directed plans.
D)increasing number of federal regulations that restrict pension fund portfolios. Answer: C
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Page 3
Chapter 2: Investment Alternatives
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Sample Questions
Q1) Treasury bills are traded in the:
A)money market.
B)capital market.
C)government market.
D)regulated market.
Answer: A
Q2) Callable bonds attract investors because they can be redeemed early.
A)True
B)False
Answer: False
Q3) How do asset-backed securities improve the flow of funds from savers to borrowers?
Answer: Asset-backed securities can be sold to a broader market of investors than the underlying securities.
Q4) The major attraction of municipal bonds is their extremely low risk.
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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Sample Questions
Q1) A group of mutual funds with a common management are known as:
A)fund syndicates.
B)fund conglomerates.
C)fund families.
D)fund complexes.
Answer: D
Q2) Which of the following generally do not trade on stock exchanges?
A)Unit investment trusts
B)Closed-end investment companies
C)Open-end investment companies
D)Exchange traded funds
Answer: C
Q3) 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
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Page 5
Chapter 4: Securities Markets and Market Indexes
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Q1) What is the difference between a price-weighted index and a capitalization-weighted (value-weighted)index?
Q2) A large public offering is often handled by a syndicate of investment banking firms,with one lead managing underwriter.
A)True
B)False
Q3) The largest electronic screen-based equity securities market in the U.S.is known as: A)BATS.
B)Instinet.
C)Amex.
D)NASDAQ.
Q4) The issue of common stock of which there are already shares publicly held is known as:
A)an IPO.
B)a secondary market issue.
C)an EPO.
D)a seasoned issue.
Q5) What are the major advantages of a private placement for the issuer of securities?
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Chapter 5: How Securities Are Traded
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Sample Questions
Q1) Buying Treasury securities through the Treasury Direct Program eliminates all brokerage commissions and other fees.
A)True
B)False
Q2) All asset management accounts offer automatic reinvestment of credit balances in shares of a money market or other fund.
A)True
B)False
Q3) Most securities are sold on a regular way basis,which means the settlement date is one week after the trade date.
A)True
B)False
Q4) Charles Schwab,Fidelity,and Vanguard are examples of premium discount brokers.
A)True
B)False
Q5) Most short sales are executed by the broker acting as the "lender" of the security sold.
A)True
B)False
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Chapter 6: The Risks and Returns From Investing
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Sample Questions
Q1) Which of the following is true regarding the cumulative wealth index?It:
A)is measured by adding up the total returns over the holding period and dividing by the investment.
B)uses a beginning index value (often set to $1,but it can be set to any amount).
C)is the present value of the future cash flows expected from the investment.
D)uses the arithmetic mean as the rate of growth of one's wealth.
Q2) 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
Q3) Adding 1 to return produces the:
A)arithmetic mean.
B)return relative.
C)cumulative wealth index.
D)geometric mean.
Q4) It is generally easier to predict interest rate risk than market risk.
A)True
B)False
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Chapter 7: Portfolio Theory
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Sample Questions
Q1) Each individual asset's weight in the portfolio is found by:
A)dividing the asset's standard deviation by its expected value.
B)calculating the percentage of the asset's value to the total portfolio value.
C)calculating the return of the asset as a percent of total portfolio return.
D)dividing the asset's expected value by its standard deviation.
Q2) In the case of a four-security portfolio,there will be 8 covariances.
A)True
B)False
Q3) In a portfolio consisting of two perfectly negatively correlated securities,the highest attainable expected return will consist of a portfolio containing 100% of the asset with the highest expected return.
A)True
B)False
Q4) Are the expected return and standard deviation of a portfolio both weighted averages of the individual security's expected returns and standard deviations?If not,what other factors are required?
Q5) Conventional wisdom has long held that diversification of a stock portfolio should be across industries.Does the correlation coefficient indirectly recommend the same thing?
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Chapter 8: Portfolio Selection
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Sample Questions
Q1) A portfolio which lies below the efficient frontier is described as:
A)optimal.
B)unattainable.
C)dominant.
D)dominated.
Q2) Because of its complexity,the Markowitz model is no longer used by institutional investors.
A)True
B)False
Q3) An indifference curve shows:
A)the one most desirable portfolio for an investor.
B)all combinations of portfolios that are equally desirable to an investor.
C)all combinations of portfolios that are equally desirable to all investors.
D)the one most desirable portfolio for all investors.
Q4) A major assumption of the Markowitz model is that investors base their decisions strictly on expected return and risk.
A)True
B)False
Q5) Explain what is efficient about the efficient frontier.
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Chapter 9: Asset Pricing Models
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Sample Questions
Q1) Betas of individual securities are unstable over time.What are some characteristics that could cause a company's beta to change over time?
Q2) What does it mean when the CAPM is called "robust?"
A)The CAPM requires no assumptions.
B)Even if the CAPM's major assumptions are relaxed,most of its conclusions still hold.
C)The CAPM is based on realistic assumptions.
D)No other model can represent stock returns better than the CAPM.
Q3) Which of the following statements regarding investors and the CMT is true?
A)Investors recognize that all the assumptions of the CMT are unrealistic.
B)Investors recognize that all of the CMT assumptions are not unrealistic.
C)Investors are not aware of the assumptions of the CMT model.
D)Investors recognize the CMT is useless for individual investors.
Q4) Under the CMT,the relevant risk to consider with any security is:
A)its correlation with other securities in the portfolio.
B)its covariance with the market portfolio.
C)its deviation from the portfolio required rate of return.
D)its variance from the risk-free rate of return.
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) Carl is evaluating a stock that just paid a dividend of $2.00 per share.He expects this dividend to grow by 4% per year,and he has determined that 11% is the appropriate required return.What is the most he should pay for the stock?
A)$18.18
B)$18.91
C)$28.57
D)$29.71
Q2) Stephen used the dividend discount model to determine that the price of a stock should be $23.50.Stephen checks on the internet and finds the latest price quoted for the stock is $27.00.What should he do?
A)Buy the stock at $27.00
B)Sell the stock at $27.00,or sell short if he does not own it
C)Do nothing,as his estimate of the intrinsic value may be off as much as 15%
D)Buy the stock at $23.50 because that is all it is worth
Q3) The required return needed to discount a stock's future cash flows can be determined using the CAPM.
A)True
B)False
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Page 12
Chapter 11: Common Stocks: Analysis and Strategy
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Sample Questions
Q1) A common asset allocation for a number of institutional investors using only two asset classes is 60 percent equities and 40 percent bonds.
A)True
B)False
Q2) A passive investment strategy attempts to:
A)achieve returns available in various market sectors at minimum risk.
B)achieve maximum returns available in various market sectors.
C)achieve minimum risk in various market sectors.
D)achieve returns available in various market sectors at minimum cost.
Q3) The nominal risk-free rate is calculated by subtracting an expected inflation premium from the real risk-free rate.
A)True
B)False
Q4) A fund that uses futures to hold the S&P 500 Index and invests the remainder in bonds would be an example of:
A)a value index fund.
B)a derivatives index fund.
C)an enhanced index fund.
D)an active index fund.
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Chapter 12: Market Efficiency
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Sample Questions
Q1) Data mining refers to the search for security return patterns by:
A)regressing firm stock returns against firm price multiples.
B)calculating CARs relative to firm earnings announcements.
C)applying various investment techniques to a set of return data.
D)applying filter tests to very large samples of return data.
Q2) In an efficient market,the expected abnormal return on a security is:
A)equal to zero.
B)equal to the risk-free rate of return.
C)equal to the security's required return.
D)greater than the security's required return.
Q3) The SUE effect suggests that superior performance is associated:
A)with stocks exhibiting strong recent price performance.
B)with stocks exhibiting weak long-term past price performance.
C)with stocks that have beat their earnings estimate.
D)with stocks that have low price multiples.
Q4) The overconfidence bias tends to encourage investors to:
A)trade too much.
B)trade too infrequently.
C)sell winners to early.
D)hold losers to long.
Page 14
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Chapter 13: Economy Market Analysis
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Sample Questions
Q1) When investors say that "the market" is up,they are usually referring to:
A)the DJIA.
B)the NYSE.
C)the NASDAQ.
D)GDP.
Q2) If interest rates rise,the risk-free rate declines.
A)True
B)False
Q3) The Dow Jones Industrial Average provides the best representation of the performance of U.S.stocks.
A)True
B)False
Q4) Which of the following is included in Gross Domestic Product (GDP)?
A)The value of final goods,only
B)The value of final goods and services,only
C)The value of final goods,services,and labor,only
D)The value of final goods,services,labor,and capital
Q5) Over the past 30 years,the average P/E ratio for the S&P 500 has been 20.
A)True
B)False
15
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Chapter 14: Industry Analysis
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Sample Questions
Q1) The food industry is a good example of a countercyclical industry.
A)True
B)False
Q2) Growth industries often perform well during economic setbacks.
A)True
B)False
Q3) The basic competitive forces facing industries include all of the following except:
A)bargaining power of suppliers.
B)threat of government regulation.
C)rivalry between existing competitors.
D)threat of substitute products.
Q4) It is a relatively simple matter of finding industries that will perform well in the short run.
A)True
B)False
Q5) Since performance is not always consistent,an industry's track record should not be of much concern to investors.
A)True
B)False
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Chapter 15: Company Analysis
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Sample Questions
Q1) What three variables affect the P/E ratio?How does each affect it?
Q2) Earnings derived under GAAP and shown on the income statement are known as:
A)reported earnings.
B)certified earnings.
C)audited earnings.
D)verified earnings.
Q3) If business risk decreases for Megabucks,Inc. ,its P/E should:
A)increase.
B)stay the same.
C)decrease.
D)increase or decrease depending on the level of interest rates.
Q4) Which of the following is not one of the relative valuation multipliers used in fundamental analysis?
A)P/E ratio
B)P/S ratio
C)P/M ratio
D)P/B ratio
Q5) What is the relationship of the Financial Accounting Standards Board and the Securities and Exchange Commission?
Page 17
Q6) What is the internal (sustainable)growth rate?How is it calculated?
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Chapter 16: Technical Analysis
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Sample Questions
Q1) In order to have confirmation of a major market trend under the Dow Theory,the:
A)industrial and utility averages must confirm each other.
B)transportation and utility averages must confirm each other.
C)utility average must lead the transportation average.
D)transportation and industrial average must confirm each other.
Q2) How can relative strength analysis be helpful in a top-down approach to security analysis?
Q3) Explain how profit taking and support levels are related.
Q4) Technical analysts agree with fundamental analysts regarding the usefulness of accounting data.
A)True
B)False
Q5) The bearish-sentiment index is calculated as the ratio of advisory services that are bearish to the total number with an opinion.
A)True
B)False
Q6) The cash position of mutual funds is a contrarian indicator.
A)True
B)False
Q7) What is the advance-decline line?What does it tell the technician?
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Chapter 17: Bond Yields
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Sample Questions
Q1) 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
Q2) Relative to a decrease in interest rates,an increase in interest rates of the same size will produce:
A)a larger percentage change in a bond's price.
B)a smaller percentage change in a bond's price.
C)the same sized change in a bond's price.
D)no change in the bond's price since its coupon rate is fixed.
Q3) 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.
Q4) 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.
Page 19
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Chapter 18: Bonds: Analysis and Strategy
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Sample Questions
Q1) A bond strategy that attempts to immunize the portfolio from interest rate risk is based on the concept of:
A)buy and hold.
B)horizon analysis.
C)duration.
D)indexing.
Q2) A commercial bank that always invests in short-term bonds in order to meet deposit withdrawals is a good example of a firm following the liquidity preference theory.
A)True
B)False
Q3) The introduction of the Euro:
A)increased the transactions cost of trading foreign bonds.
B)decreased the transactions cost of trading foreign bonds.
C)had no effect on the transactions cost of trading foreign bonds.
D)had a minimal effect on the transactions cost of trading foreign bonds.
Q4) Why are upward sloping yield curves more consistent with the usual risk-return tradeoff than downward sloping yield curves?
Q5) What are two passive management strategies?Two active strategies?
Q6) Why is immunization considered to be a hybrid strategy?
Page 20
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Chapter 19: Options
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Sample Questions
Q1) There is a positive relationship between the price of a put option and the volatility of the underlying common stock.
A)True
B)False
Q2) The way to protect a stock portfolio from a bear market is to:
A)buy stock index calls.
B)buy stock index puts.
C)write stock index calls.
D)write stock index puts.
Q3) To provide insurance against declining prices on previously purchased stock,an investor could:
A)buy a call.
B)write a put.
C)buy a stock index option.
D)buy a put.
Q4) An investor wants to hedge the Microsoft stock he holds in his portfolio.How can he use a protective put to do this?
Q5) What organizational feature of options trading prevents individual traders from having to worry about defaults if options are exercised?
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Chapter 20: Futures
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Sample Questions
Q1) Are futures - commodity,interest-rate,stock-index,or currency - appropriate for most individual investors?
Q2) How often are futures contracts marked to market?
A)Daily
B)Weekly
C)Monthly
D)Quarterly
Q3) Which of the following statements about the basis risk on futures is correct?
A)Basis risk is often completely eliminated by hedging.
B)Although the basis fluctuates over time,it can be precisely predicted.
C)The basis is approximately zero on the maturity date of the contract.
D)A hedge will reduce risk as long as the basis does not fluctuate.
Q4) Do options on futures serve any economic purpose,or are they just sophisticated games?
Q5) As an economic function of futures markets,what does "price discovery" mean?
A)The futures price and spot price converge over time.
B)The spot price is a discounted value of the futures price.
C)The futures price provides information about the expected future spot price.
D)In equilibrium,the spot price and futures price are equal.
Q6) What is meant by the term "marked to market"?
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Chapter 21: Portfolio Management
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Q1) The long-term geometric mean return for the S&P 500 is between 15 and 20%.
A)True
B)False
Q2) An efficient set of portfolios offers maximum risk for any level of return.
A)True
B)False
Q3) In order to arrive at an investment policy,it is necessary to determine whether the market is headed for a bull or bear market.
A)True
B)False
Q4) Historically,the annual return on the U.S.stock market has averaged approximately:
A)3.0%
B)7.0%
C)10.0%
D)15.0%
Q5) What is the difference between strategic asset allocation and tactical asset allocation?
Q6) Explain the life-cycle theory of portfolio policies.
Q7) What are the steps in the portfolio management process?
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Chapter 22: Evaluation of Investment Performance
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Q1) Standard deviation,beta,and coefficient of determination are readily available for mutual funds from sources like Morningstar.
A)True
B)False
Q2) What are some of the problems associated with using risk-adjusted portfolio performance measures?
Q3) Total risk of a portfolio is measured by the beta coefficient.
A)True
B)False
Q4) The coefficient of determination,also known as R-squared,is used to denote the degree of diversification.
A)True
B)False
Q5) The time-weighted rate of return is affected by any cash flows to the portfolio.
A)True
B)False
Q6) What are the appropriate uses of the Sharpe and the Treynor performance measures?
Q7) What is performance attribution?
Page 24
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