Equity Analysis
Exam Materials
Course Introduction
Equity Analysis is a comprehensive course designed to equip students with the tools and techniques necessary to evaluate the value and potential of publicly traded companies. The course explores various methods of valuing stocks, including fundamental analysis, ratio analysis, discounted cash flow models, and qualitative assessments of management and industry dynamics. Students learn how to interpret financial statements, assess risk and return profiles, and apply valuation models in real-world scenarios to make informed investment decisions. Through case studies and practical exercises, the course bridges theory with practice, enabling students to develop critical skills for careers in investment research, portfolio management, and financial consulting.
Recommended Textbook Investment Analysis and Portfolio Management 1st Canadian Edition by Frank K. Reilly
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Chapter 1: The Investment Setting
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Sample Questions
Q1) Refer to Exhibit 1-3. What was your arithmetic mean annual yield for the investment in XMen?
A) 0.1462
B) 0.1247
C) 1.8
D) 0.40
E) 0.25
Answer: A
Q2) Modern portfolio theory assumes that most investors are
A) Risk averse
B) Risk neutral
C) Risk seekers
D) Risk tolerant
E) None of the above
Answer: A
Q3) The variance of expected returns is equal to the square root of the expected returns.
A)True
B)False
Answer: False
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Chapter 2: The Asset Allocation Decision
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Sample Questions
Q1) Which of the following is not considered to be an investment objective?
A) Capital preservation
B) Capital appreciation
C) Current income
D) Total return
E) None of the above (that is, all are considered investment objectives)
Answer: E
Q2) In an investment policy statement the objectives of an investor are expressed in terms of
A) risk and return
B) risk
C) return
D) time horizon
E) liquidity needs
Answer: A
Q3) The typical investor's goals rarely change during his/her lifetime.
A)True
B)False
Answer: False
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Page 4
Chapter 3: Selecting Investments in a Global Market
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Sample Questions
Q1) Which of the following is not an international bond?
A) Eurobond
B) Maple bond
C) International domestic bond
D) Guaranteed investment security
E) Yankee bond
Answer: D
Q2) A return series has an arithmetic mean of 12.8% and standard deviation of 7.8%. Assuming the returns are normally distributed, what is the range of returns that an investor would expect to receive 90% of the time?
A) 12.8% to 20.6%
B) -10.6% to 36.2%
C) -2.8% to 28.4%
D) -12.8% to 20.6%
E) 10.6% to 36.2%
Answer: C
Q3) A call option is usually issued in conjunction with convertible bonds.
A)True
B)False
Answer: False
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Chapter 4: Securities Markets and the Economy
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Sample Questions
Q1) 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
Q2) Refer to Exhibit 4-8. What is your total dollar return on this investment?
A) $1,000
B) $900
C) $850
D) $670
E) $520
Q3) An order that specifies the highest buy or lowest sell price is a
A) Limit order.
B) Short sale.
C) Market order.
D) Margin call.
E) Stop loss.
Q4) Specialists benefit from their exclusive knowledge of the limit order books.
A)True
B)False
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Chapter 5: Efficient Capital Markets
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Sample Questions
Q1) Refer to Exhibit 5-3. What is the abnormal rate of return for Elliot during period t using only the aggregate market return (ignore differential systematic risk)?
A) 1.50
B) 1.10
C) -1.50
D) -5.10
E) -8.00
Q2) Researchers have found a positive relationship between default spread and stock returns in the long run because a large default spread implies
A) a high risk premium and higher expected returns.
B) a high risk premium and lower expected returns.
C) a low risk premium and higher expected returns.
D) a low risk premium and lower expected returns.
E) None of the above.
Q3) Studies concerning quarterly earnings reports indicate that information in quarterly statements is of value and can provide an above-average risk-adjusted return.
A)True
B)False
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Chapter 6: An Introduction to Portfolio Management
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Sample Questions
Q1) The slope of the utility curves for a strongly risk-averse investor, relative to the slope of the utility curves for a less risk-averse investor, will
A) Be steeper.
B) Be flatter.
C) Be vertical.
D) Be horizontal.
E) None of the above.
Q2) What is the expected return of the three-stock portfolio described below? \(\begin{array}{lcc}
\text { Common Stock } & \text { Market Value } & \text { Expected Return } \\
\hline\text { Lupko Inc. } & 50,000 & 13 \% \\
\text { Mackey Co. } & 25,000 & 9 \% \\
\text { Nippon Inc. } & 75,000 & 14 \% \end{array}\)
A) 12.04%
B) 12.83%
C) 13.07%
D) 15.89%
E) 17.91%
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Page 8
Chapter 7: Asset Pricing Models: Capm and Apt
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Sample Questions
Q1) The ____ the number of stocks in a portfolio and the ____ the time period the ____ the portfolio beta.
A) Larger, longer, less stable
B) Larger, longer, more stable
C) Larger, shorter, less stable
D) Larger, shorter, more stable
E) Smaller, longer, more stable
Q2) Refer to Exhibit 7-3. What is the covariance between Radtron and the true index?
A) 57.30
B) 86.50
C) 88.00
D) 92.50
E) 107.90
Q3) Refer to Exhibit 7-8. The new prices now for stocks X, Y, and Z that will not allow for arbitrage profits are
A) $53.55, $54.4, $55.25
B) $45.35, $54.4, $55.25
C) $55.55, $56.35, $57.15
D) $50, $50, $50
E) $51.35, $47.79, $51.58.
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Chapter 8: Economic and Industry Analysis
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Sample Questions
Q1) Refer to Exhibit 8-1. Calculate industry Total Assets per share for the year 2010.
A) $450
B) $565.67
C) $513.58
D) $479.07
E) $385.77
Q2) The capital goods industry typically outperforms other sectors during a recession.
A)True
B)False
Q3) Global industry analysis must evaluate the effects not only of world supply, demand and cost components for an industry, but also different valuation levels due to accounting conventions and the impact of exchange rates.
A)True
B)False
Q4) In the rapid accelerating growth stage, profit margins are typically very high. A)True
B)False
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Chapter 9: Company Analysis and Stock Valuation
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Sample Questions
Q1) The price/cash flow ratio has grown in prominence and use for valuing firms because many analysts contend that a firm's cash flow is less subject to manipulation than the firm's earnings per share.
A)True
B)False
Q2) A cyclical company's sales and earnings are heavily influenced by aggregate business activity.
A)True
B)False
Q3) Refer to Exhibit 9-8. Calculate the weighted average cost of capital (WACC).
A) 8.2%
B) 9.4%
C) 9.0%
D) 10.3%
E) 7.3%
Q4) Operating free cash flow and free cash flow to equity are equivalent cash flow concepts.
A)True B)False
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Chapter 10: Technical Analysis
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Sample Questions
Q1) According to Dow theory, a major market
A) Advance has few price fluctuations indicate a new upward trend.
B) Advance does not go straight up, because some investors will take profits.
C) Decline is easier to predict than an advance.
D) Decline typically has a higher level of volume than a major market advance.
E) Choices a and d.
Q2) Refer to Exhibit 10-2. Calculate the final value of the cumulative advance-decline line at the end of the fifth day.
A) -3,883
B) 9,540
C) -2,354
D) 13,356
E) 7,953
Q3) Which of the following is not considered a contrary trading rules?
A) Futures traders bullish on stock index futures
B) Investment advisory opinions
C) Credit balance in brokerage accounts
D) Montreal Exchange put/call ratio
E) Confidence index
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Chapter 11: Bond Fundamentals
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Sample Questions
Q1) 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) Dominion Bond Rating Service
Q2) Most U.S. municipal bonds are serial issues which are subject to state and local taxes when they are issued in the investor's home state.
A)True
B)False
Q3) Refer to Exhibit 11-1. What is the current yield for this bond?
A) 4.18%
B) 5.88%
C) 4.77%
D) 8.125%
E) 4.063%
Q4) Bonds can have different types of collateral and can be secured, unsecured or registered bonds.
A)True
B)False
Page 13
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Chapter 12: The Analysis and Valuation of Bonds
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Sample Questions
Q1) Refer to Exhibit 12-1. Calculate the Macaulay duration for the bond.
A) 4.19 years
B) 4.36 years
C) 8.72 years
D) 8.38 years
E) 9.52 years
Q2) Estimate the percentage price change for a 5-year $1,000 par value bond, with a 6% coupon, if the yield rises from 8% to 8.5%. Interest is paid semiannually.
A) 2.1%
B) -2.1%
C) 4.4%
D) -4.4%
E) None of the above
Q3) Because you expect market interest rates to decline during the next four months, if you were offered two bonds with equal duration, you would select the one with the higher measure of convexity.
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 13-10. What would the net value of a protective put position be if the stock price at expiration is $35?
A) $3.10
B) $30.15
C) $32.10
D) $34.05
E) $35.00
Q2) The initial value of a future contract is the price agreed upon in the contract.
A)True
B)False
Q3) A stock currently sells for $15 per share. A put option on the stock with an exercise price $15 currently sells for $1.50. The put option is
A) At-the-money.
B) In-the-money.
C) Out-of-the-money.
D) At breakeven.
E) None of the above.
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Chapter 14: Derivatives: Analysis and Valuation
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Sample Questions
Q1) In the Black-Scholes option pricing model, an increase in time to expiration (T) 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
Q2) The investment value of a convertible bond is the price which it would be expected to sell as a straight debt instrument.
A)True B)False
Q3) The intrinsic value of a warrant = (Market price of common stock + Warrant exercise price) ´ Number of shares specified by warrant. A)True B)False
Q4) The Options Clearing Corporation (OCC) acts as the guarantor of each Chicago Board Options Exchange (CBOE) traded contract.
A)True B)False
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Chapter 15: Equity Portfolio Management Strategies
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Sample Questions
Q1) A fundamental tenet of the contrarian investment strategy is the notion that
A) All stock returns are mean reverting.
B) Certain stocks outperform others during different stages of the business cycle.
C) Value stock investing is superior to growth stock investing.
D) Growth stock investing is superior to value stock investing.
E) None of the above.
Q2) There is a direct relationship between a passive portfolio's tracking error relative to its index and the time and expense necessary to create and maintain the portfolio.
A)True
B)False
Q3) A Long futures positions in the S&P500 has the effect of ____ portfolio exposure to equities, while short futures positions in the S&P500 has the effect of ____ portfolio exposure to equities.
A) Increasing, decreasing.
B) Decreasing, increasing,
C) Increasing, increasing.
D) Decreasing, decreasing.
E) None of the above.
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Chapter 16: Bond Portfolio Management Strategies
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Sample Questions
Q1) Refer to Exhibit 16-10. Calculate the Modified Duration for Bond A.
A) 0.98
B) 1.79
C) 1.90
D) 1.93
E) 2.31
Q2) Refer to Exhibit 16-4. The dollar investment in the candidate bond is
A) $780.34
B) $1483.25
C) $1361.54
D) $1413.95
E) $1000.00
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) The components of interest rate risk are: price risk and maturity risk.
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 total market value of all assets of a mutual fund divided by the number of shares of the fund is known as the net asset value.
A)True
B)False
Q2) A portfolio is generally managed by the board of directors of an investment company.
A)True
B)False
Q3) Suppose you consider investing $1,000 in a load fund which charges a fee of 2%, and you expect the fund to earn 14% over the next year. Alternatively, you could invest in a no-load fund with similar risk that is expected to earn 9% and charges a 1/2% redemption fee. Which is better and by how much?
A) Funds are equal
B) Load fund by $32.65
C) Load fund by $50.55
D) No-load fund by $64.55
E) No-load fund by $44.30
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Chapter 18: Evaluation of Portfolio Performance
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Sample Questions
Q1) Funds with low levels of diversification tend to "beat the market."
A)True
B)False
Q2) The typical proxy for the market portfolio is the S&P/TSX Composite Index because it is diversified and price weighted.
A)True
B)False
Q3) Refer to Exhibit 18-5. Compute the Sharpe Measure for the XXX fund.
A) 6.98
B) 2.35
C) 2.53
D) 3.86
E) 1.72
Q4) Refer to Exhibit 18-5. Compute the Jensen Measure for the YYY fund.
A) 6.98
B) 2.35
C) 2.53
D) 3.86
E) 1.72
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Chapter 19: Analysis of Financial Statements
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Sample Questions
Q1) Financial ratios are used in stock and bond valuation models.
A)True
B)False
Q2) Refer to Exhibit 19-1. What was the financial leverage multiplier used in the BMC system?
A) 2.058
B) 2.289
C) 3.014
D) 1.903
E) 0.904
Q3) Which of the following factors would be an indicative of high quality earnings?
A) Earnings are close to cash.
B) Earnings are the result of repeat business.
C) Revenue recognition is based on the installment principle.
D) All of the above.
E) None of the above.
Q4) According to the DuPont system ROE (return on equity) can be decomposed into the profit margin ratio and the total asset turnover ratio.
A)True
B)False
Page 21
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Chapter 20: An Introduction to Security Valuation
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Sample Questions
Q1) Using the constant growth model, an increase in the required rate of return from 19 to 17% combined with an increase in the growth rate from 11 to 9% would cause the price to
A) Fall more than 2%
B) Fall less than 2%.
C) Remain constant.
D) Rise more than 2%.
E) Rise less than 3%.
Q2) Growth companies are those firms that consistently earn higher rates of return by assuming greater amounts of risk.
A)True
B)False
Q3) Refer to Exhibit 20-6. What is the future price of the stock in year 5?
A) $113.40
B) $122.47
C) $132.27
D) $142.85
E) $154.35
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Chapter 21: Web Appendix: A Review of Statistics and the
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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 coefficient of variation of this investment is
A) -0.06
B) -0.65
C) 6.60
D) 16.53
E) 165.10
Q3) The expected return from this investment is
A) -0.0752
B) -0.0040
C) 0.00
D) 0.0075
E) 0.4545
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Chapter
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Sample Questions
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 retirement plan that promises to pay a specific benefit to its beneficiaries is
A) A defined contribution plan.
B) A defined benefit pension plan.
C) A non-contribution pension plan.
D) An actuarial pension plan.
E) Choices a and c.
Q2) Banks face regulatory constraints at both the state and federal level.
A)True
B)False
Q3) Non-life insurance companies have somewhat unpredictable cash outflows and are therefore faced with different investment constraints than life insurance companies.
A)True
B)False
Q4) Many endowments are tax-exempt.
A)True
B)False
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