Equity Analysis Exam
Questions
Course Introduction
Equity Analysis is a comprehensive course that explores the principles and techniques used to evaluate publicly traded companies and their stocks. Students learn to analyze financial statements, assess industry and competitive environments, apply valuation models such as discounted cash flow (DCF) and price multiples, and interpret key market indicators. The course emphasizes both quantitative and qualitative analysis, critical thinking, and effective communication skills necessary for making informed investment decisions. By integrating real-world case studies and hands-on projects, students gain practical experience in forming investment recommendations and understanding the dynamics of equity markets.
Recommended Textbook
Analysis of Investments and Mangement of Portfolios International 10th Edition by Reilly
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Page 2
Chapter 1: An Overview of the Investment Process
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Q1) Refer to Exhibit 1.7.Calculate the annual real rate of return for U.S.long-term bonds.
A) 3.06%
B) 2.27%
C) 2.51%
D) 3.5%
E) None of the above
Answer: B
Q2) The holding period return (HPR)is equal to the holding period yield (HPY)stated as a percentage.
A)True
B)False
Answer: False
Q3) The coefficient of variation is the expected return divided by the standard deviation of the expected return.
A)True
B)False
Answer: False
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Page 3
Chapter 2: The Asset Allocation Decision
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Q1) An individual in the 15% tax bracket has $10,000 invested in a tax-exempt IRA account.If the individual earns 8% annually before taxes and inflation is 2.5% per year,what is the real value of the investment in 20 years?
A) $23,211
B) $28,467
C) $29,178
D) $37,276
E) $46,610
Answer: B
Q2) The asset allocation decision must involve a consideration of A) Cultural differences.
B) The objectives stated in the investor's policy statement.
C) The types of assets that are appropriate for the investor.
D) The risk associated with different investments.
E) All of the above.
Answer: E
Q3) Average tax rate is defined as total tax payment divided by total income.
A)True
B)False
Answer: True
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Chapter 3: The Global Market Investment Decision
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Sample Questions
Q1) All of the following are considered fixed income investments <b>except</b>
A) Corporate bonds.
B) Preferred stock.
C) Treasury bills, notes, and bonds.
D) Money market mutual funds.
E) Certificates of deposit (CDs).
Answer: D
Q2) An investor who purchases a put option:
A) Has the right to buy a given stock at a specified price during a designated time period.
B) Has the right to sell a given stock at a specified price during a designated time period.
C) Has the obligation to buy a given stock at a specified price during a designated time period.
D) Has the obligation to sell a given stock at a specified price during a designated time period.
E) None of the above.
Answer: B
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Chapter 4: Securities Markets: Organization and Operation
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Q1) The US secondary market with the largest number of issues traded is the:
A) AMEX
B) NASDAQ
C) NYSE
D) LSE
E) Both a and c
Q2) In a pure auction market buyers and sellers submit bid-and-ask prices for a given stock to a central location.
A)True
B)False
Q3) Initial public offerings (IPOs)involve selling of bonds to the public for the first time.
A)True
B)False
Q4) In recent years there has been a trend toward the consolidation of existing exchanges in developed markets,such as London,Frankfurt and Paris.
A)True
B)False
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Chapter 5: Security-Market Indexes
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Q1) Which of the following is <b>not</b> a value-weighted series?
A) NASDAQ Industrial Index
B) Dow Jones Industrial Average
C) Wilshire 5000 Equity Index
D) American Stock Exchange Series
E) NASDAQ Composite Index
Q2) Refer to Exhibit 5.5.Calculate the percentage return in the price weighted series for the period Dec 31,2000 to Dec 31,2004.
A) 12.68%
B) 20.00%
C) 21.76%
D) 33.33%
E) 40.00%
Q3) A bond market index is easier to create than a stock market index because the universe of bonds is much broader than that of stocks.
A)True
B)False
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Chapter 6: Efficient Capital Markets
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Q1) In order to confirm the weak-form efficient market hypothesis you could develop trading rules that consider
A) Advance-decline ratios.
B) Short sales.
C) Specialist activities.
D) Any of the above.
E) None of the above.
Q2) Refer to Exhibit 6.2.What is the abnormal rate of return for Stock ABC when you consider its systematic risk measure (beta)?
A) 2.4%
B) 1.5%
C) -1.5%
D) 2.0%
E) -3.2%
Q3) Even when fees and costs are considered most mutual fund managers outperform the aggregate market.
A)True
B)False
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8
Chapter 7: An Introduction to Portfolio Management
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Q1) Refer to Exhibit 7.3.What is the standard deviation of this portfolio?
A) 3.68%
B) 4.56%
C) 4.99%
D) 5.16%
E) 6.02%
Q2) The optimal portfolio is identified at the point of tangency between the efficient frontier and the
A) highest possible utility curve.
B) lowest possible utility curve.
C) middle range utility curve.
D) steepest utility curve.
E) flattest utility curve.
Q3) Refer to Exhibit 7.14.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%
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Page 9
Chapter 8: An Introduction to Asset Pricing Models
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Q1) The capital market line is the tangent line between the risk free rate of return and the efficient frontier.
A)True
B)False
Q2) Refer to Exhibit 8.3.The covariance between Radtron and the proxy index is
A) 57.30
B) 86.50
C) 88.00
D) 92.50
E) 107.90
Q3) Recently you have received a tip that the stock of Buttercup Industries is going to rise from $76.00 to $85.00 per share over the next year.You know that the annual return on the S&P 500 has been 13% and the 90-day T-bill rate has been yielding 3% per year over the past 10 years.If beta for Buttercup is 1.0,will you purchase the stock?
A) Yes, because it is overvalued.
B) Yes, because it is undervalued.
C) No, because it is undervalued.
D) No, because it is overvalued.
E) Yes, because the expected return equals the estimated return.
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Page 10
Chapter 9: Multifactor Models of Risk and Return
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Q1) Refer to Exhibit 9.1.In the list above,which are <b>not</b> 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
Q2) Findings by Basu that stocks with high P/E ratios tended to outperform stocks with low P/E ratios challenge the efficacy of the CAPM.
A)True
B)False
Q3) Consider the following two factor APT model
E(R)= ?? + ??b? + ??b?
A) ?1 is the expected return on the asset with zero systematic risk.
B) ?1 is the expected return on asset 1.
C) ?1 is the pricing relationship between the risk premium and the asset.
D) ?1 is the risk premium.
E) ?1 is the factor loading.
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11
Chapter 10: Analysis of Financial Statements
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Q1) Refer to Exhibit 10.6.The firm's free cash flow is
A) $2100
B) $1900
C) $1800
D) $1700
E) $1600
Q2) Financial risk is the additional uncertainty of returns to equity holders due to
A) The firm's use of fixed financial obligations
B) The firm's level of fixed productions costs
C) Business risk
D) a and b.
E) b and c.
Q3) The practice of comparing the firm to a subset of industry firms comparable in size or characteristics is referred to as
A) Common size analysis
B) Cross-sectional analysis
C) DuPont analysis
D) Proforma analysis
E) Time-series analysis
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Page 12
Chapter 11: Security Valuation Principles
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Q1) The most appropriate discount rate to use when applying the Operating Free Cash Flows model is the firm's
A) Required rate of return based on the capital asset pricing model (CAPM)
B) Required rate of return based on the dividend discount model (DDM)
C) Weighted average cost of capital (WACC)
D) Historical cost of debt and equity
E) All of the above are appropriate depending on the situation
Q2) An example of a relative valuation technique is the Price/Cash Flow ratio.
A)True
B)False
Q3) The most difficult part of valuing a bond is determining the required rate of return on this investment.
A)True
B)False
Q4) Refer to Exhibit 11.3.What is the current value of these securities?
A) $656.40
B) $899.00
C) $822.70
D) $569.50
E) $962.00
Page 13
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Chapter 12: Macroanalysis and Microvaluation of the Stock Market
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Q1) Refer to Exhibit 12.6.Calculate the firm's EBT per share for the year 2004.
A) $13.29
B) $27.89
C) $18.75
D) $19.63
E) $22.91
Q2) Refer to Exhibit 12.6.Calculate the firm's year 2004 EBITDA per share.
A) $95.05
B) $87.15
C) $112.56
D) $104.73
E) $99.96
Q3) Refer to Exhibit 12.2.What is your expectation of the market P/E ratio?
A) 3.92
B) 6.25
C) 6.67
D) 8.33
E) 12.00
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Chapter 13: Industry Analysis
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Q1) Refer to Exhibit 13.1.Calculate the industry year 2004 EBITDA per share.
A) $95.05
B) $89.15
C) $92.56
D) $94.73
E) $86.23
Q2) A number of economic variables affect both the economy and industries.Which of the following statements is <b>false</b>?
A) Industries with high levels of operating and financial leverage should benefit from lower inflation rates.
B) Banks generally benefit from volatile interest rates, while stable interest rates reduce margins.
C) Consumers who are optimistic about the economy will spend money on high-priced items, such as autos and houses.
D) The abundance or scarcity of input components can affect the perceived attractiveness of an industry.
E) None of the above (that is, all are true statements)
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Chapter 14: Company Analysis and Stock Valuation
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Q1) Refer to Exhibit 14.2.Determine the justified P/E ratio for Modular Industries assuming Modular can maintain its superior growth rate for the next 5 years.
A) 6.4
B) 13.1
C) 16.5
D) 23.8
E) 15.7
Q2) Which of the following ratios is least likely to be impacted by accounting manipulation?
A) P/E
B) ROE
C) ROI
D) P/S
E) PM
Q3) By definition growth companies have growth stocks.
A)True
B)False
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Page 16
Chapter 15: Equity Portfolio Management Stragtegies
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Q1) Which of the following statements regarding momentum strategies is <b>true</b>?
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 the above statements are true
Q2) A portfolio manager who uses tactical asset allocation is attempting to create alpha.
A)True
B)False
Q3) A benchmark portfolio is defined as a passive portfolio whose average characteristics match the client's risk-return objectives.
A)True
B)False
Q4) Growth stocks consistently outperform value stocks.
A)True
B)False
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Chapter 16: Technical Analysis
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Q1) Based on the daily closings for the Dow Jones Industrial Average given in the table below,calculate a four-day moving average for Day 4.
\[\begin{array} { c c }
\text { Day } & \text { Price } \\
\hline 1 & 10500 \\ 2 & 10025 \\ 3 & 10125 \\ 4 & 10210
\end{array}\]
A) 10,500
B) 10,210
C) 10,215
D) 10,000
E) 11,000
Q2) The breadth of the market measures the daily volume for a particular market.
A)True
B)False
Q3) Technicians consider a high short interest ratio to be bearish.
A)True
B)False
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Chapter 17: Bond Fundamentals
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Q1) Which of the following is <b>not </b>a major rating agency for bonds?
A) Moody's
B) Standard & Poor's
C) Fitch Investor Services
D) Value Line
E) Duff and Phelps
Q2) What is the value of a zero coupon bond with a yield to maturity of 9%,a par value of $1,000,and 10 years to maturity? (Assume semi-annual compounding)
A) $208.29
B) $414.64
C) $422.41
D) $643.93
E) $910.00
Q3) The face value of a U.S.government agency security
A) Is always $1000.
B) Ranges from $1000 to $5000.
C) Ranges from $1000 to $100,000.
D) Ranges from $1000 to $50,000.
E) Is always $10,000.
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Chapter 18: The Analysis and Valuation of Bonds
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Q1) Reinvestment risk is greatest for bonds that have
A) Short maturities and low coupon rates
B) Long maturities and high coupon rates
C) Short maturities and high coupon rates
D) Long maturities and low coupon rates
E) None of the above
Q2) Consider a bond portfolio manager who expects interest rates to decline and has to choose between the following two bonds.
Bond A: 10 years to maturity,5% coupon,5% yield to maturity
Bond B: 10 years to maturity,3% coupon,4% yield to maturity
A) Bond A because it has a higher coupon rate.
B) Bond A because it has a higher yield to maturity.
C) Bond B because it has a lower coupon rate.
D) Bond A or Bond B because the maturities are the same.
E) None of the above.
Q3) According to the expectations hypothesis,a rising yield curve indicates that investors' demand for long maturity bonds is expected to rise.
A)True
B)False
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Page 20
Chapter 19: Bond Portfolio Management Strategies
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Q1) Refer to Exhibit 19.9.Assume that your investment horizon is 5 years and your portfolio consists only of Bond Y and Bond X.Indicate the proportions invested in each bond,so that the portfolio is immunized.
A) 50% in Bond Y and 50% in Bond X
B) 76% in Bond Y and 24% in Bond X
C) 36% in Bond Y and 64% in Bond X
D) 100% in Bond X
E) 100% in Bond Y
Q2) Refer to Exhibit 19.10.Calculate the Modified Duration for Bond B.
A) 1.44
B) 2.47
C) 2.55
D) 2.70
E) 2.78
Q3) Refer to Exhibit 19.4.The realized compound yield on the current bond is
A) 6.00%
B) 7.00%
C) 8.00%
D) 10.00%
E) 12.00%
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Chapter 20: An Introduction to Derivative Markets and Securities
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Q1) A put option is in the money if the current market price is above the strike price. A)True
B)False
Q2) Consider a stock that is currently trading at $65.Calculate the intrinsic value for a put option that has an exercise price of $55.
A) $10
B) $50
C) $55
D) -$10
E) $0
Q3) The cost of carry includes all of the following <b>except</b>
A) Storage costs.
B) Insurance.
C) Current price.
D) Financing costs.
E) Risk free rate.
Q4) The initial value of a future contract is the price agreed upon in the contract. A)True
B)False
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Chapter 21: Forward and Futures Contracts
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Q1) Interest rate parity is a key concept in managing risk in the commodities market.
A)True
B)False
Q2) A backwardated futures market occurs when
A) F<sub>0,T</sub> < S<sub>0</sub>
B) F<sub>0,T</sub> = S<sub>0</sub>
C) F<sub>0,T</sub> > S<sub>0</sub>
D) F<sub>0,T</sub> > E( S<sub>T</sub>)
E) F<sub>0,T</sub> > S<sub>T</sub>
Q3) Financial futures include all of the following underlying securities <b>except</b>
A) Stock indexes
B) Treasury bonds
C) Bank deposits
D) Foreign currencies
E) All of the above are examples of underlying securities for financial futures
Q4) The cost-of-carry model is useful for pricing future contracts.
A)True
B)False
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Page 23
Chapter 22: Option Contracts
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Q1) Refer to Exhibit 22.2.If you establish a long straddle using the options with an 85 exercise price,what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?
A) $18.75 loss
B) $18.75 gain
C) $1,668.75 gain
D) $1,668.75 loss
E) $1,687.50 loss
Q2) A money spread involves buying and selling call options in the same stock with A) The same time period and exercise price.
B) The same time period but different exercise price.
C) A different time period but same exercise price.
D) A different time period and different exercise price.
E) Options in different markets.
Q3) Refer to Exhibit 22.3.Calculate the price of the put option.
A) $1.086
B) $0.862
C) $6.234
D) $0.623
E) $2.317
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Page 24
Chapter 23: Swap Contracts,convertible Securities,and
Other Embedded Derivatives
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Q1) Refer to Exhibit 23.9.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
Q2) Refer to Exhibit 23.2.How much compensation does the dealer receive for transaction costs,credit risk and other costs associated with matching the FRA's?
A) $31,250
B) $21,350
C) $41,000
D) $48,150
E) None of the above
Q3) Risk management strategies involving interest rate agreements can be classified as forward-based or option-based.
A)True
B)False
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Assets, and Industry Ethics
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Q1) The main difference between a closed-end fund and an open-end fund is
A) The way each is traded after the initial public offering.
B) There is no significant difference.
C) The minimum initial investment.
D) The type of allowable investments.
E) The way in which each is regulated by the SEC.
Q2) Hedge funds that are organized as a limited partnership
A) Are less restricted in how they make investments than general partnership hedge funds
B) Typically have larger abnormal returns than general partnership hedge funds
C) Are usually less correlated with traditional asset class investments than general partnership hedge funds
D) Have less liquid investments than mutual funds
E) None of the above
Q3) Convertible arbitrage hedge funds profit from disparities in the relationship between prices for convertible bonds and fixed-income bonds.
A)True
B)False
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Chapter 25: Evaluation of Portfolio Performance
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Q1) What is the Sharpe measure for the S&P 500 over the last ten years if the standard deviation was 8% and the return was 14%?
A) 1.55
B) 1.69
C) 1.75
D) 1.99
E) 2.09
Q2) Selectivity measures how well a portfolio performed relative to a
A) Market portfolio (S&P 400).
B) Portfolio of the same securities in the previous period.
C) Naively selected portfolio of equal risk.
D) Naively selected portfolio of equal return.
E) World market portfolio.
Q3) Refer to Exhibit 25.4.Compute the Treynor Measure for the CCC fund.
A) 5.43
B) 2.74
C) 2.19
D) 2.00
E) 1.65
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Chapter 26: Investment Return and Risk Analysis Questions
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Q1) Refer to Exhibit 1A.1.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) 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
Q3) An investment has a standard deviation of 12 percent and an expected return of 7 percent.What is the coefficient of variation for this investment?
A) 1.714
B) 1.372
C) 0.714
D) 0.583
E) 0.500
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Chapter 27: Investment and Retirement Plans
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Q1) 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
Q2) Banks must compete for funds (savings deposits,CD's,etc.)in order to make loans and other types of investments.
A)True B)False
Q3) Banks have high liquidity needs and therefore,have a short time horizon.
A)True
B)False
Q4) 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
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Chapter 28: Calculating Covariance and Correlation
Coefficient of Assets
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Q1) Refer to Exhibit 3A.1.Calculate the coefficient of correlation.
A) -0.456
B) -0.354
C) 0.000
D) 0.456
E) 3.538
Q2) 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
Q3) Refer to Exhibit 3A.1.Calculate the covariance.
A) -32.20
B) -23.32
C) 1.00
D) 23.32
E) 32.20
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Chapter 29: Portfolio Variance and Stock Weight
Calculations
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Q1) Refer to Exhibit 7A.1.What weight of security 1 gives the minimum portfolio variance when r<sub>1.2 </sub>= .60,E(?<sub>1</sub>)= .10 and E(?<sub>2</sub>)= .16?
A) .0244
B) .3679
C) .5697
D) .6309
E) .9756
Q2) Refer to Exhibit 7A.1.Show the minimum portfolio variance for a two stock portfolio when r<sub>1.2</sub> = 1.
A) E(?<sub>2</sub>) ¸ [E(?<sub>1</sub>) - E(?<sub>2</sub>)]
B) E(?<sub>2</sub>) ¸ [E(?<sub>1</sub>) + E(?<sub>2</sub>)]
C) E(?<sub>1</sub>) ¸ [E(?<sub>1</sub>) - E(?<sub>2</sub>)]
D) E(?<sub>1</sub>) ¸ [E(?<sub>1</sub>) + E(?<sub>2</sub>)]
E) None of the above
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Chapter 30: Portfolio Optimization with Negative
Correlation: Finding Minimum Variance and Weight
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Sample Questions
Q1) Refer to Exhibit 7B.1.What is the value of W when r . = -1 and E(s )= .10 and E(s )= .12?
A) 45.46%
B) 50.00%
C) 59.45%
D) 54.55%
E) 74.55%
Q2) Refer to Exhibit 7B.1.Show the minimum portfolio variance for a portfolio of two risky assets when r . = -1.
A) E( 1) ¸ [E( 1) + E( 2)]
B) E( 1) ¸ [E( 1) - E( 2)]
C) E( 2) ¸ [E( 1) + E( 2)]
D) E( 2) ¸ [E( 1) - E( 2)]
E) None of the above
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