Financial Analysis
Exam Materials
Course Introduction
Financial Analysis is a foundational course designed to equip students with the skills required to interpret and evaluate financial statements, apply key financial ratios, and assess the financial health of organizations. Through the study of balance sheets, income statements, and cash flow statements, students will learn how to analyze profitability, liquidity, solvency, and operational efficiency. The course also introduces methods of forecasting and budgeting, providing a framework for making informed financial decisions in both corporate and investment contexts. By applying analytical tools and real-world case studies, students will develop the ability to critically assess financial performance and formulate strategies for improvement.
Recommended Textbook Investment Analysis and Portfolio Management 11th Edition by Frank K. Reilly
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22 Chapters
2045 Verified Questions
2045 Flashcards
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Chapter 1: The Investment Setting
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Sample Questions
Q1) Refer to Exhibit 1.7. Calculate your holding period return (HPR) for this investment in GE stock.
A) 0.9655
B) 1.0086
C) 1.0357
D) 1.0804
E) 1.0973
Answer: B
Q2) Unsystematic risk refers to risk that is
A) undiversifiable.
B) diversifiable.
C) due to fundamental risk factors.
D) due to market risk.
E) unexplainable.
Answer: B
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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Chapter 1: The Investment Setting: Part A
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Sample Questions
Q1) 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
Answer: A
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) 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) nominal preservation
Answer: E
Q2) Assume that you invest $750 at the end of each quarter for the next 20 years in a mutual fund. The annual rate of interest that you expect to earn in this account is 5.25 percent. The amount in the account at the end of 20 years is
A) $60,000.00.
B) $105,039.84.
C) $37,009.35.
D) $123,510.52.
E) $115,637.37.
Answer: B
Q3) Long-term, high-priority goals include some form of financial independence.
A)True
B)False
Answer: True
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Chapter 2: Asset Allocation and Security Selection: Part A
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Sample Questions
Q1) 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
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 2A.1. Calculate the covariance.
A) -32.20
B) -23.32
C) 1.00
D) 23.32
E) 32.20
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Chapter 3: Organization and Functioning of Securities Markets
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Sample Questions
Q1) You own 50 shares of Auto Corporation that you purchased for $30 a share. The stock is currently selling for $50 a share, and you placed a stop loss order at $45. If the stock price drops to $35 a share what is your return on this investment?
A) -30.0 percent
B) 16.7 percent
C) 50.0 percent
D) 66.7 percent
E) 150.0 percent
Q2) The primary market is where issues are traded between current and potential owners.
A)True
B)False
Q3) Only the stocks of large companies are traded in the primary market.
A)True B)False
Q4) Negotiation, competitive bids, and best efforts are three forms of underwriting arrangements.
A)True
B)False
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Chapter 4: Security Market Indexes and Index Funds
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Sample Questions
Q1) Refer to Exhibit 4.3. Calculate the average annual rate of change for GB Industries for the five-year period using the arithmetic mean.
A) 0.098%
B) 9.80%
C) 8.50%
D) 8.00%
E) 89.00%
Q2) To solve comparability problems across countries, global equity indexes with consistent sample selection, weighting, and computational procedures have been developed.
A)True
B)False
Q3) The NYSE series should have higher rates of return and risk measures than the AMEX and OTC series.
A)True
B)False
Q4) The Dow Jones Industrial Average is a value weighted average.
A)True
B)False
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Chapter 5: Efficient Capital Markets, Behavioral Finance, and Technical Analysis
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162 Verified Questions
162 Flashcards
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Sample Questions
Q1) The use of trading rules requires a great deal of subjective judgment.
A)True
B)False
Q2) The prospect theory contends that utility depends on deviations from moving reference points rather than absolute wealth.
A)True
B)False
Q3) Which of the following is NOT an advantage of technical analysis identified by technicians?
A) Fundamental analysis depends heavily on financial accounting statements.
B) The majority of investors cannot consistently process new information correctly.
C) Fundamental analysis may not time the investment properly when trading under- or over-valued securities.
D) The majority of investors cannot process new information quickly enough.
E) All of these are correct.
Q4) An efficient market requires a large number of profit-maximizing investors.
A)True
B)False
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Chapter 6: An Introduction to Portfolio Management
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Sample Questions
Q1) A portfolio manager is considering adding another security to his portfolio. The correlations of the five alternatives available are listed below. Which security would enable the highest level of risk diversification?
A) 0.0
B) 0.25
C) - 0.25
D) - 0.75
E) 1.0
Q2) Refer to Exhibit 6.15. What is the expected return of a portfolio of two risky assets if the expected return E(R<sub>i</sub>), standard deviation ( \(\sigma\)i), covariance (COV<sub>i,j</sub>), and asset weight (W<sub>i</sub>) are as shown above?
A) 13.8%
B) 14.6%
C) 15.0%
D) 15.2%
E) 16.8%
Q3) A measure that only considers deviations above the mean is semi-variance.
A)True B)False
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Page 10
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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Chapter 7: Asset Pricing Models
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152 Flashcards
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Sample Questions
Q1) Consider the following two factor APT model: E(R) = \(\lambda\)0 + \(\lambda\)1b1 + \(\lambda\)2b2
A) \(\lambda\)1 is the expected return on the asset with zero systematic risk.
B) \(\lambda\)1 is the expected return on asset 1.
C) \(\lambda\)1 is the pricing relationship between the risk premium and the asset.
D) \(\lambda\)1 is the risk premium.
E) \(\lambda\)1 is the factor loading.
Q2) Refer to Exhibit 7.7. What is your investment strategy concerning the three stocks?
A) buy A and B; sell C
B) sell A, B, and C
C) sell A and B; buy C
D) buy A, B, and C
E) buy A and C; sell B
Q3) Arbitrage Pricing Theory (APT) specifies the exact number of risk factors and their identity.
A)True
B)False
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Chapter 8: Equity Valuation
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Sample Questions
Q1) Refer to Exhibit 8.2. How much should you be willing to pay for the stock if you feel that the 7 percent growth rate can be maintained indefinitely and you require a 16 percent return?
A) $11.15
B) $14.44
C) $14.86
D) $18.90
E) $19.24
Q2) Refer to Exhibit 8.3. The dividends for years 1, 2, and 3 are
A) $2, $2.08, and $2.16.
B) $2, $2.05, and $2.10.
C) $2.16, $2.24, and $2.32.
D) $2.16, $2.33, and $2.52.
E) $2.07, $2.14, and $2.21.
Q3) Refer to Exhibit 8.4. The future price of the stock in year 3 is
A) $81.75.
B) $84.81.
C) $92.56.
D) $101.85.
E) $111.16.
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Chapter 9: The Top-Down Approach to Market, Industry, and Company Analysis
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Sample Questions
Q1) Recent studies indicate that one can earn excess returns in the stock market by forecasting unanticipated changes in the money supply.
A)True
B)False
Q2) Refer to Exhibit 9.15. Calculate the dollar cost of capital.
A) 286.2
B) 207
Q3) One way to measure a company's intrinsic value is to divide the company's current dividends by the required return less the dividend growth rate.
A)True
B)False
Q4) A growth company is a firm that has the opportunities and ability to invest capital in projects that generate rates of return greater than the firm's cost of debt.
A)True
B)False
Page 15
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Chapter 10: The Practice of Fundamental Investing
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Sample Questions
Q1) A company goes public for many reasons, including that the original investors and the management team would like liquidity.
A)True
B)False
Q2) The declaration date is the date that a dividend is announced by the board of directors.
A)True B)False
Q3) A company is going public with an offering price of $10 per share. The gross spread is 7 percent. How much will the bank receive? How much will the issuing firm receive?
A) $1.07; $17.00
B) $1.70; $7.00
C) $0.70; $9.30
D) $7.00; $10.00
E) $7.00; $3.00
Q4) The sell-side refers to firms that facilitate securities transactions.
A)True
B)False
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Chapter 11: Equity Portfolio Management Strategies
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Sample Questions
Q1) In ____ asset allocation, the investor's risk tolerance and constraints are assumed to be constant over time. However, changes in capital market conditions result in changes in the portfolio's stock-bond mix.
A) integrated
B) strategic
C) tactical
D) insured
E) replication
Q2) Style investing allows control of the total portfolio to be shared between investment managers and pension fund managers.
A)True
B)False
Q3) The difference between the actual and expected return is often called the portfolio's alpha,
A)True
B)False
Q4) Active equity portfolio management is a long-term buy-and-hold strategy.
A)True
B)False
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Chapter 12: Bond Fundamentals and Valuation
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Sample Questions
Q1) If the price before yields changed was $975, what is the resulting price?
A) $937.46
B) $918.66
C) $965.55
D) $898.62
E) $1012.45
Q2) The expectations hypothesis is also known as both the institutional theory and the hedging pressure theory.
A)True
B)False
Q3) Institutional investors typically account for about
A) 90 to 95 percent of bond market trading.
B) 40 to 50 percent of bond market trading.
C) 10 to 15 percent of bond market trading.
D) less than 5 percent of bond market trading.
E) less than 1 percent of bond market trading.
Q4) There is a direct relationship between coupon and price.
A)True
B)False
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Chapter 13: Bond Analysis and Portfolio Management Strategies
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Sample Questions
Q1) Consider a bond with a duration of 8 years having a yield to maturity of 8 percent, and interest rates are expected to rise by 50 basis points. What is the percentage change in the price of the bond?
A) 3.85 percent
B) 3.45 percent
C) -4.02 percent
D) -3.45 percent
E) -3.85 percent
Q2) Option adjusted duration can be calculated as
A) duration of noncallable bond - duration of call option on the bond.
B) duration of noncallable bond + duration of call option on the bond.
C) duration of callable bond - duration of call option on the bond.
D) duration of callable bond + duration of call option on the bond.
E) None of these are correct.
Q3) A bond swap involves liquidating a current bond position and later investing in a similar issue under more favorable conditions.
A)True
B)False
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Chapter 14: An Introduction to Derivative Markets and Securities
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Sample Questions
Q1) The price at which a futures contract is set at the end of the day is the A) stock price.
B) strike price.
C) maintenance price.
D) settlement price.
E) parity price.
Q2) Which of the following statements is FALSE?
A) Derivatives help shift risk from risk-adverse investors to risk-takers.
B) Derivatives assist in forming cash prices.
C) Derivatives provide additional information to the market.
D) In many cases, the investment in derivatives (both commissions and required investment) is more than in the cash market.
E) Some derivatives trade hypothetical underlying assets.
Q3) The minimum value of an option is zero.
A)True
B)False
Q4) An option buyer must exercise the option on or before the expiration date.
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 15.10. Calculate the overall profit.
A) $1,550,000
B) -$2,000,000
C) $2,050,000
D) -$5,000,000
E) $2,400,000
Q2) Refer to Exhibit 15.3. What is the implied 90-day forward rate at the beginning of the fourth quarter?
A) 6.19%
B) 5.10%
C) 6.07%
D) 5.68%
E) 0%
Q3) Margin accounts are adjusted, or marked to market, at the end of each trading day.
A)True
B)False
Q4) Equity swaps are traded in the OTC markets.
A)True
B)False
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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) The binomial option pricing model and the Black and Scholes model are similar because they are both discrete models.
A)True
B)False
Q3) A calendar spread requires the purchase and sale of two calls or two puts in the same stock with
A) the same expiration date but different exercise prices.
B) the same exercise price but different expiration dates.
C) different exercise prices and different expiration dates.
D) the same exercise price and the same expiration month.
E) traded in different markets.
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Chapter 17: Professional Money Management, Alternative
Assets, and Industry Ethics
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Sample Questions
Q1) Hedge funds are far less liquid than mutual fund shares.
A)True
B)False
Q2) An investment vehicle that acts like a mutual fund of hedge funds and allows investors access to managers that may otherwise be unavailable is known as
A) managed futures funds.
B) long-short equity funds.
C) fund of funds.
D) private equity funds.
E) leveraged Buyouts (LBOs).
Q3) Management and advisory firms can advise clients on how to structure their own portfolios.
A)True
B)False
Q4) An open-end investment company functions like any other public firm.
A)True
B)False
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Chapter 18: Evaluation of Portfolio Performance
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Sample Questions
Q1) The advantage of evaluating a fund's alpha using a multifactor approach is that it is designed to control for market style (SMB and HML) and momentum (MOM) risk.
A)True
B)False
Q2) Portfolio managers are often evaluated using a boxplot of returns for a universe of investors over a specific period of time which is known as a(n)
A) return adjusted comparison.
B) efficient frontier comparison.
C) time plot comparison.
D) peer group comparison.
E) None of these are correct.
Q3) Refer to Exhibit 18.2. According to the Treynor Measure, which portfolio performed best?
A) W
B) X
C) Y
D) Z
E) Two portfolios are tied.
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