Course Introduction
Finance Principles Review
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Finance Principles introduces students to the foundational concepts and tools essential for understanding financial decision-making in businesses and personal contexts. The course covers time value of money, risk and return, financial statement analysis, capital budgeting, cost of capital, and the basics of securities markets. Emphasizing both theoretical frameworks and practical applications, it equips students to analyze financial data, evaluate investment opportunities, and understand the implications of financial decisions on organizations and individuals. This course provides a vital base for advanced studies in finance and prepares students for real-world financial problem-solving.
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Investments Analysis and Management 13th Edition by Charles P. Jones
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Page 2
Chapter 1: Understanding Investments
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Q1) Which of the following is the best definition of wealth?
A)The sum of all current and future income
B)The total of all assets and all income
C)The total of assets and income less any liabilities
D)The sum of current income and the present value of future income
Answer: D
Q2) Investors always seek to minimize their risk of investing.
A)True
B)False
Answer: False
Q3) A 25-year old college graduate is participating in a 401(k)retirement plan and wishes to minimize risk by eliminating stock-based mutual funds and other equities from his investment portfolio.What will this probably do to his ending retirement funds in 40 years?
Answer: If he minimizes risk,then he will also minimize return.His retirement fund will likely be much smaller than if he chose to take more risk over the long run.
Q4) Define risk in the context of investments.
Answer: Risk is the chance that the actual return on an investment will differ from its expected return.
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Chapter 2: Investment Alternatives
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Q1) Does the options market help stabilize or destabilize the stock market?Explain.
Answer: Options should be a stabilizing force if options are used to hedge stock positions.Options might be destabilizing if used for speculation.
Q2) How is the total book value of equity affected by stock splits?
Answer: Stock splits do not affect total value of equity or the individual accounts,other than the number of shares outstanding and the par value.
Q3) Marketable securities all fall into the category of capital market securities.
A)True
B)False
Answer: False
Q4) Which of the following would not be considered a capital market security?
A)A 20-year corporate bond
B)A common stock
C)A 6-month Treasury bill
D)A mutual fund share
Answer: C
Q5) What are some advantages of asset-backed securities to investors?
Answer: High yields with manageable risk.
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Chapter 3: Indirect Investing
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Q1) A major difference between a closed-end investment company and an open-end investment company is that:
A)closed-end investment companies are generally much riskier.
B)their security portfolios are substantially different.
C)closed-end investment companies are passive investments and open-ends are not.
D)the capitalization of closed-end companies is more fixed.
Answer: D
Q2) A 12b-1 fee is used to cover a fund's cost of distribution.
A)True
B)False
Answer: True
Q3) Which of the following statements regarding mutual funds is true?
A)Higher-performing funds generally have higher expenses.
B)Stock funds generally have higher expenses than bond funds.
C)Index funds generally have higher expenses than non-index funds.
D)Lower performing funds generally have higher expenses.
Answer: D
Q4) Briefly explain the fees charged by mutual funds.
Answer: Load fees are sales charges,management fees include advisory fees and operating expenses,and 12b-1 fees are marketing expenses.
Page 5
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Chapter 4: Securities Markets and Market Indexes
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Q1) The largest electronic screen-based equity securities market in the U.S.is known as: A)BATS.
B)Instinet.
C)Amex.
D)NASDAQ.
Q2) A block trade is defined as a transaction involving at least: ?
A)1,000 shares.
B)5,000 shares.
C)10,000 shares.
D)1 million shares.
Q3) Global Stock Index is a value-weighted index with just 2 stocks in the index: ABC stock and XYZ stock.
ABC ended 2015 at a price of $55 and had 1 million shares outstanding. XYZ stock ended 2015 at a price of $32 and had 4 million shares outstanding.
ABC ended 2016 at a price of $29 (after a 2-for-1 split). XYZ stock closed at $35 for 2016.Calculate the new value of the index.
Q4) The DJIA is a _______-weighted index.
Q5) What is the difference between a seasoned issue and an IPO?
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Chapter 5: How Securities Are Traded
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Q1) What is the rationale for different margin requirements on different types of securities?(For example,50 percent on common stock,and 30 percent on bonds)
Q2) Designated market makers (DMMs)are required to:
A)maintain a bid-ask spread no greater than 1 cent per share.
B)maintain a fair and orderly market.
C)buy when most others are selling,and vice versa.
D)sell excess inventory to maintain a strictly neutral position.
Q3) Under SIPC,customer accounts with brokerage firms are insured for up to $1 million.
A)True
B)False
Q4) An order that must be filled immediately in its entirety,or otherwise must be canceled,is known as:
A)an immediate or cancel order.
B)an all or none order.
C)a fill or kill order.
D)a full or bust order.
Q5) What are some of the functions of the NASD?
Q6) What is the chief advantage of a market order?
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Chapter 6: The Risks and Returns From Investing
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Q1) Over the past 50 years,which of the following financial assets showed the greatest amount of price volatility,as measured by standard deviation?
A)Small-cap stocks
B)Large-cap stocks
C)Treasury bonds
D)Treasury bills
Q2) The equity risk premium is the difference between the expected return:
A)on stocks and bonds.
B)on high-grade stocks and low-grade stocks.
C)on stocks and the risk-free rate.
D)on a stock market index and the inflation rate.
Q3) A number of prominent observers expect the equity risk premium in the future to be:
A)considerably lower than that of the past.
B)considerably higher than that of the past.
C)very similar to the historical average.
D)very similar to the recent value.
Q4) What is the best measure of risk for a sole proprietorship?
Q5) What was the effect on foreign investors owning U.S.stocks when the dollar fell in 2008?
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Chapter 7: Portfolio Theory
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Q1) When the covariance is positive,the correlation will be:
A)positive.
B)negative.
C)zero.
D)impossible to determine.
Q2) A change in the correlation coefficient of the returns of two securities in a portfolio causes a change in:
A)both the expected return and the risk of the portfolio.
B)only the expected return of the portfolio.
C)only the risk level of the portfolio.
D)neither the expected return nor the risk level of the portfolio.
Q3) With a discrete probability distribution:
A)a probability is assigned to each possible outcome.
B)possible outcomes are constantly changing.
C)an infinite number of possible outcomes exist.
D)there is no variance.
Q4) An efficiently diversified portfolio still has _____________________ risk.
Q5) In the case of a four-security portfolio,there will be 8 covariances.
A)True
B)False
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Chapter 8: Portfolio Selection
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Q1) When using the Markowitz model,aggressive investors would select portfolios on the left end of the efficient frontier.
A)True
B)False
Q2) What variable is manipulated to determine efficient portfolios,and why are the other variables not changed at will?
Q3) Based on recent history,an investor would have a lower risk level with a portfolio consisting of:
A)all stocks.
B)all bonds.
C)some stocks and some bonds.
D)Impossible to tell.
Q4) 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.
Q5) Explain what is efficient about the efficient frontier.
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Chapter 9: Asset Pricing Models
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Q1) Which of the following is generally used as a proxy for the risk-free rate of return?
A)Savings account
B)Certificate of deposit
C)Treasury security
D)AAA-rated bond
Q2) Compare the capital market line and the security market line.
Q3) Under the separation theorem,investors should:
A)hold the same portfolio of risky assets.
B)have different optimal portfolios of risky assets.
C)hold the same percentage of their portfolio in risk-free securities.
D)borrow at the risk-free rate to achieve a lower risk portfolio.
Q4) For which of the following models is beta the slope term?
A)Risk-free model
B)CAPM
C)CML
D)Market model
Q5) An analyst determined that for the past two quarters the risk-free rate has exceeded the return on the market portfolio.Does this information disprove the CML?
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Chapter 10: Common Stock Valuation
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Q1) Which of the following is frequently used as a measure of cash flow in the P/CF ratio?
A)Revenue
B)Gross Profit
C)EBITDA
D)Income from continuing operations
Q2) No one knows with precision which valuation model to apply for any particular stock.
A)True
B)False
Q3) Rita has calculated the discounted value of the free cash flows to the firm (FCFFs)for a company that has no preferred stock.What additional adjustment(s)does she have to make to her calculated discounted value to derive an estimate of the firm's stock price?
A)Subtract the value of debt and divide by shares outstanding
B)Add the value of debt and divide by shares outstanding
C)Subtract the value of capital expenditures and divide by shares outstanding
D)Divide by shares outstanding
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Chapter 11: Common Stocks: Analysis and Strategy
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Q1) Which of the following statements about analysts' earnings forecasts is correct?Analysts' long-term forecasts tend to be too:
A)high,whereas their near-term forecasts tend to be too low.
B)high,and their near-term forecasts also tend to be too high.
C)low,whereas their near-term forecasts tend to be too high.
D)low,and their near-term forecasts also tend to be too low.
Q2) Buy-side analysts will more likely have a potential conflict of interest in a stock than a sell-side analyst.
A)True
B)False
Q3) How could one invest indirectly in sectors and practice sector rotation?
Q4) Which of the following statements regarding a buy-and-hold strategy are true?
A)There are no selection choices to be made under this strategy.
B)This strategy is applicable only to large portfolios.
C)There is no reinvestment decision to make under this strategy.
D)This strategy produces relatively low transactions and search costs.
Q5) In an upward trending market,what sectors might investors consider to increase absolute returns?
Q6) How is the required rate of return utilized in stock analysis?
Page 13
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Chapter 12: Market Efficiency
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Q1) A test which investigates whether publicly available financial accounting information can be used to generate abnormal returns is a direct test of:
A)weak form market efficiency.
B)semi-strong form market efficiency.
C)strong form market efficiency.
D)mean variance market efficiency.
Q2) Evidence indicates that the majority of actively-managed,large cap equity funds outperform the S&P 500 Index.
A)True
B)False
Q3) Behavioral finance integrates sociology with finance.It argues that investors often make systematic mistakes when processing social information about market participants.
A)True
B)False
Q4) If a public company reports earnings substantially lower than expected,the stock should subsequently earn a positive abnormal return.
A)True
B)False
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Chapter 13: Economy Market Analysis
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Q1) How does the increased globalization of business and finance affect business cycles and the leading,lagging,and coincident economic indicators?
Q2) 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
Q3) Which of the following is not a type of index of general economic activity?
A)Lagging indicators
B)Emerging indicators
C)Leading indicators
D)Coincident indicators
Q4) In the U.S. ,since the end of World War II,the typical business cycle contraction has had a duration of:
A)10 months.
B)21 months.
C)32 months.
D)46 months.
Q5) Why do stock investors pay attention to the bond market?
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Chapter 14: Industry Analysis
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Q1) Standard and Poor's new Global Industry Classification Standard includes approximately:
A)10,000 companies.
B)25,000 companies.
C)60,000 companies.
D)100,000 companies.
Q2) Which of the following is not considered an interest-rate sensitive industry?
A)Building industry
B)Banking industry
C)Financial services industry
D)Tobacco industry
Q3) Mature industries typically have much higher P/E ratios than growth industries,which are riskier.
A)True
B)False
Q4) Portfolio diversification often focuses on cross-industry diversification to pick up correlation coefficients and risk-expected return characteristics that create the portfolio effect.Suggest a realignment of "industry" classifications to reflect fundamental relationships sought through the more casual traditional industries.
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Chapter 15: Company Analysis
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Q1) The auditor's report guarantees the accuracy of the earnings reported in the financial statements.
A)True
B)False
Q2) Which of the following methods of security analysis involves the use of a computer Program to imitate the brain?
A)Decision trees
B)Program trading
C)Day traders
D)Neural networks
Q3) Which of the following would be found in the "cash flows from investing activities" portion of a firm's statement of cash flows?
A)Changes in accounts receivable
B)Depreciation
C)Net borrowings
D)Capital expenditures
Q4) What are "earnings surprises?"How do they affect stock prices?
Q5) What is meant by "quality of earnings," and how does it affect the equity analyst's job?
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Chapter 16: Technical Analysis
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Q1) A support level is a price range:
A)at which a significant increase in demand for a stock is expected.
B)at which a significant increase in supply of a stock is expected.
C)below which a stock price cannot go.
D)above which a stock price cannot go.
Q2) The Dow Theory is intended to forecast the start but not the duration of a primary movement.
A)True
B)False
Q3) Technical analysis utilizes a top-down,fundamental approach to common stock analysis.
A)True
B)False
Q4) Volume and specific calendar time are not considered important in a:
A)logarithmic price and volume chart.
B)point and figure chart.
C)nominal price and volume chart.
D)moving average convergence and divergence chart.
Q5) What four factors should be considered in testing technical trading rules?
Q6) What is the advance-decline line?What does it tell the technician?
Page 18
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Chapter 17: Bond Yields
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Q1) Assume an investor buys an 8 percent,semi-annual,10-year bond at par.He sells it two years later after market interest rates have decreased to 6 percent.The investor's capital gain is closest to:
A)$41.
B)$124.
C)$126.
D)$149.
Q2) Risk premiums,or yield spreads,refer to the issue characteristics of bonds.They are the result of which 7 factors:1)______ 2)______3)______4)______5)______6)_____7)_____
Q3) Which of the following bonds will be most sensitive to changes in market interest rates?
A)A bond with an 8 percent semiannual coupon and 8 years to maturity
B)A bond with a 6 percent semiannual coupon and 8 years to maturity
C)A bond with an 8 percent semiannual coupon and 6 years to maturity
D)A bond with a 6 percent semiannual coupon and 6 years to maturity
Q4) If interest rates rise,then price risk and reinvestment risk decline.
A)True B)False
Q5) Yield spreads vary inversely with the: ______________________________.
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Chapter 18: Bonds: Analysis and Strategy
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Q1) An increase in expected inflation tends to decrease bond prices.
A)True
B)False
Q2) Which of the following statements about the bond market is not true?
A)Short maturities sacrifice price appreciation opportunities.
B)Longer maturities have greater price fluctuations.
C)Short maturities serve to protect the investor when rates are rising.
D)Long term interest rates are more volatile than short term interest rates.
Q3) The term structure of interest rates shows the relationship between yields of several categories of bonds,such as municipals and corporates,and their maturities.
A)True
B)False
Q4) Which of the following statements is true regarding investments in bonds?
A)Shorter maturity bonds generally return more than longer maturity bonds.
B)Treasury bonds generally return more than corporate bonds of the same maturity.
C)Longer maturity bonds generally return more than shorter maturity bonds.
D)Higher-rated bonds generally return more than lower-rated bonds.
Q5) Why is immunization considered to be a hybrid strategy?
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Chapter 19: Options
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Q1) How can the owner of a large stock portfolio use options on individual stocks to enhance the income from the portfolio?
Q2) At expiration,the writer of a stock index call option that was written at the money will be required to:
A)deliver the underlying stocks in the index if the index value moves up.
B)deliver the underlying stocks in the index if the index value moves down.
C)deliver a cash value if the index value moves up.
D)deliver a cash value if the index value moves down.
Q3) With regard to options,which of the following is not true of the hedge ratio?
A)It indicates the change in the option price for a $1 change in stock price.
B)It represents the ratio of options written to shares held long in a riskless portfolio.
C)It is frequently greater than 1.
D)It is commonly referred to as the option's delta.
Q4) Which of the following statements about portfolio insurance is false?
A)There are several methods of insuring a portfolio.
B)It seeks to provide a minimum return while offering the opportunity to Participate in rising prices.
C)Futures are typically not used to hedge stock portfolios.
D)Puts and calls typically are not used to insure portfolios.
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Chapter 20: Futures
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Q1) To protect the value of a bond portfolio against a rise in interest rates using bond futures contracts,the portfolio owner should execute a:
A)long hedge.
B)duration hedge.
C)short hedge.
D)maturity hedge.
Q2) Futures trade on the:
A)spot market.
B)over-the-counter market.
C)forward exchanges.
D)futures exchanges.
Q3) Explain a long position and a short position in futures trading.
Q4) Futures exchanges standardize nonstandard forward contracts,establishing such features as contract size,delivery dates,and grades that can be delivered.Only the price and number of contracts are left for futures traders to negotiate.
A)True
B)False
Q5) What are the methods of settling a futures contract?
Q6) What is the difference between hedgers and speculators in the futures markets?
Page 22
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Chapter 21: Portfolio Management
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Q1) 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%
Q2) Living expenses are covered from accumulated assets rather than from earned income in the:
A)accumulation phase of the life cycle.
B)consolidation phase of the life cycle.
C)spending phase of the life cycle.
D)saving phase of the life cycle.
Q3) The spending phase of the life cycle is avoided by investors who follow the prudent man rule.
A)True
B)False
Q4) An efficient set of portfolios offers maximum risk for any level of return.
A)True
B)False
Q5) What are the steps in the portfolio management process?
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Chapter 22: Evaluation of Investment Performance
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Q1) Which fund has the most total risk?
A)Fund 1
B)Fund 2
C)Fund 3
D)Fund 4
Q2) Investors who have all their assets in one portfolio of securities should rely on the Sharpe measure rather than the Treynor measure.
A)True
B)False
Q3) Performance attribution separates return performance into the following two sources:
A)security analysis and portfolio management.
B)money market and capital market securities.
C)traditional assets and alternative assets.
D)asset allocation and security selection.
Q4) What is performance attribution?
Q5) The purpose of performance attribution is to assess the risk of a portfolio.
A)True
B)False
Q6) How is regression analysis used to measure portfolio diversification?
Page 24
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