Financial Management Exam
Bank
Course Introduction
Financial Management explores the fundamental principles and practices involved in the effective management of an organizations financial resources. The course covers key topics such as financial analysis, planning and control, capital budgeting, cost of capital, financial markets, and the management of assets and liabilities. Students will learn to interpret financial statements, assess investment opportunities, make financing decisions, and formulate strategies to maximize firm value while managing risks. Through lectures, case studies, and practical exercises, the course equips students with the analytical tools and decision-making skills essential for financial managers in todays dynamic business environment.
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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Q1) Risk is defined as the possibility of loss.
A)True
B)False
Answer: False
Q2) The retirement plans that guarantee retirees a set amount of money each month are known as:
A)401(k)plans.
B)self-directed plans.
C)defined-benefit plans.
D)defined-contribution plans.
Answer: C
Q3) The risk-free rate of return (RF)equals:
A)0.0%.
B)the rate on the bonds of financially sound corporations.
C)the average of the last 3 years' inflation rate.
D)the return on Treasury securities.
Answer: D
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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Sample Questions
Q1) Treasury bonds generally have maturities of:
A)5 to 15 years.
B)5 to 30 years.
C)10 to 20 years.
D)10 to 30 years.
Answer: D
Q2) Compare the cash flows an investor expects from coupon bonds,zero-coupon bonds,and preferred stock.
Answer: Coupon bonds - annuity of interest payments plus lump sum of principal at maturity
Zero-coupon bonds - principal at maturity Preferred stock - annuity ad infinitum (perpetuity)
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) Bond ratings are primarily used to assess interest rate risk.
A)True
B)False
Answer: False
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Chapter 3: Indirect Investing
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Q1) No-load funds charge a one-time expense fee to cover all operating expenses.
A)True
B)False
Answer: False
Q2) An investor who buys shares in a closed-end fund for less than the fund's net asset value is said to be buying shares at a _____________________.
Answer: discount
Q3) Closed-end investment companies typically sell additional shares of their own stock every few years.
A)True
B)False
Answer: False
Q4) Investment company managers seek to increase assets under management (AUM)since the cost of overseeing additional amounts of money rises less than the revenue rate.
A)True
B)False
Answer: True
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Chapter 4: Securities Markets and Market Indexes
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Sample Questions
Q1) NASDAQ listed stocks tend to be concentrated in the:
A)aerospace industry.
B)energy industry.
C)technology industry.
D)telecommunications industry.
Q2) Orders on NASDAQ come from market makers,ECNs,and on-line brokers.
A)True
B)False
Q3) The type of bond with the thinnest secondary market is:
A)agency bonds.
B)corporate bonds.
C)Treasury bonds.
D)municipal bonds.
Q4) Prices of stocks traded on the NYSE are determined through supply and demand.
A)True
B)False
Q5) Why do the DJIA and the S&P 500 have a high correlation?
Q6) What is the Nasdaq National Market System?
Q7) What is Instinet and what does it offer for investors?
Q8) 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 are some of the functions of the NASD?
Q2) The Securities and Exchange Commission is a division of the Department of Justice.
A)True
B)False
Q3) Which of the following statements is true regarding short sales?
A)An investor can only remain in a short position for 6 months or less.
B)Short sales can be done on either a cash or margin account.
C)Short sellers borrow the stock sold short from the exchanges.
D)Dividends paid during the short sale must be covered by the seller.
Q4) Treasury bonds can be purchased without paying transaction costs through:
A)the U.S.Federal Reserve Bank.
B)Treasury Direct.
C)DSPs.
D)discount brokers.
Q5) What is the actual margin when the stock price is $56?
A)65.9%
B)75.9%
C)79.9%
D)80.9%
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Chapter 6: The Risks and Returns From Investing
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Sample Questions
Q1) The most common measure of inflation is the Producer Price Index.
A)True
B)False
Q2) Both present value and future value are based upon the concept of the time value of money.
A)True
B)False
Q3) The standard deviation of a security measures the:
A)systematic risk of the security.
B)unsystematic risk of the security.
C)total risk of the security.
D)risk per unit of return for the security.
Q4) In deriving changes in wealth over time,the return relative solves the problem of: A)inflation.
B) negative returns.
C)interest rates.
D)tax differences.
Q5) When should an investor use the arithmetic mean return?The geometric mean return?
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Chapter 7: Portfolio Theory
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Q1) Standard deviations for well-diversified portfolios are reasonably steady over time.
A)True
B)False
Q2) Which of the following statements about the correlation coefficient of the returns for two securities is not true?
A)It is a statistical measure.
B)It measures the relationship between the two securities' returns.
C)It determines the cause of the relationship between the two securities' returns.
D)Its value falls between -1 and +1.
Q3) When the covariance is positive,the correlation will be:
A)positive.
B)negative.
C)zero.
D)impossible to determine.
Q4) Portfolio risk is a weighted average of the individual security risks.
A)True
B)False
Q5) An efficiently diversified portfolio still has _____________________ risk.
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Chapter 8: Portfolio Selection
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Q1) What variable is manipulated to determine efficient portfolios,and why are the other variables not changed at will?
Q2) Asset allocation explains less than 50 percent of the variance in quarterly returns for a typical pension fund.
A)True
B)False
Q3) The optimal portfolio for a risk-averse investor:
A)cannot be determined.
B)occurs at the point of tangency between the highest indifference curve and the highest expected return.
C)occurs at the point of tangency between the highest indifference curve and the efficient set of portfolios.
D)occurs at the point of tangency between the highest expected return and lowest-risk efficient portfolio.
Q4) Asset allocation is one of the most widely used applications of:
A)the Capital Asset Pricing Model.
B)random diversification.
C)passive portfolio approach.
D)modern portfolio theory.
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Chapter 9: Asset Pricing Models
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Q1) Which of the following is the correct calculation for the required rate of return under the CAPM?
A)Beta × (market risk premium)
B)Beta + market risk premium
C)Risk-free rate + risk premium
D)Risk-free rate × (market risk premium)
Q2) At a given point in time,the SML dictates that a security with a beta of 1.10 should require a return of 18 percent.Analysts determine that a particular stock with an observed beta of 1.10 has an expected return of 20 percent.Outline the scenario that will bring the security's return into equilibrium.
Q3) Betas of individual securities are unstable over time.What are some characteristics that could cause a company's beta to change over time?
Q4) Which of the following is not a characteristic of the risk factors in the APT?
A)The factors must be readily observable in risk/return space.
B)Each factor must have a pervasive influence on stock returns.
C)The factors must influence expected return.
D)Factors must be unpredictable.
Q5) Compare the security market line model and the arbitrage pricing theory.
Q6) Compare the capital market line and the security market line.
Page 11
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Chapter 10: Common Stock Valuation
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Q1) What is the major difficulty with using discounted cash flow approaches to estimate a stock's intrinsic value?
A)Prices in the stock market move from moment to moment.
B)Small changes to the assumptions of k or g result in major changes in the estimated value.
C)It is extremely unlikely that a stream of cash flows will continue to grow at the same rate.
D)The relative valuation techniques are more accurate approaches.
Q2) The only reliable way to value a common stock is to discount the future flow of dividends at a discount rate appropriate to the riskiness of the company.
A)True
B)False
Q3) The required return needed to discount a stock's future cash flows can be determined using the CAPM.
A)True
B)False
Q4) Historically,the average P/E for the S&P 500 is approximately 16.
A)True
B)False
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Chapter 11: Common Stocks: Analysis and Strategy
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Q1) What evidence,gathered during the 1990s,about analysts was instrumental in motivating changes in market regulations?
A)They were paid too much.
B)They were unable to accurately pinpoint earnings.
C)They gave buy recommendations to win investment banking business.
D)They shared private information about companies with investors.
Q2) In an upward trending market,what sectors might investors consider to increase absolute returns?
Q3) 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.
Q4) One of the major benefits of employing a buy and hold strategy is the savings on trading costs.
A)True
B)False
Q5) How is the required rate of return utilized in stock analysis?
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Chapter 12: Market Efficiency
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Sample Questions
Q1) Financial economists have tested various technical trading rules and found they fail to earn consistent abnormal returns.
A)True
B)False
Q2) To have strong form market efficiency,semi-strong form efficiency is necessary.
A)True
B)False
Q3) If a public company reports earnings substantially lower than expected,the stock should subsequently earn a positive abnormal return.
A)True
B)False
Q4) Which of the following is not an investor trading bias?
A)Loss aversion
B)Framing
C)Overconfidence
D)Mean reversion
Q5) Efficient markets imply investors can not earn abnormal returns.
A)True
B)False
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Chapter 13: Economy Market Analysis
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Q1) The period from a peak to a trough in economic activity is:
A)a cycle.
B)an inflection point.
C)a recession.
D)a depression.
Q2) Which of the following types of yield curves is typically considered to be associated with an economic expansion?
A)A steep,upward-sloping yield curve
B)A flat yield curve
C)An inverted yield curve
D)A positively skewed yield curve
Q3) The Dow Jones Industrial Average provides the best representation of the performance of U.S.stocks.
A)True
B)False
Q4) When using the P/E valuation model,it is important to remember that the multiplier is more volatile than the earnings component.
A)True
B)False
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Chapter 14: Industry Analysis
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Q1) It is a relatively simple matter of finding industries that will perform well in the short run.
A)True
B)False
Q2) Which of the following statements about the industry life cycle is incorrect?
A)Companies may stay in one phase for a significant period of time.
B)All industries can be classified accurately into a specific phase.
C)The general framework may not apply to some industries.
D)The approach does not explicitly lead to a stock price determination.
Q3) At what stage in the industry life cycle do financial policies become firmly established?
A)Pioneering stage
B)Expansion stage
C)Stabilization stage
D)Declining stage
Q4) The food industry would be considered a:
A)growth industry.
B)defensive industry.
C)cyclical industry.
D)countercyclical industry.
Page 16
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Chapter 15: Company Analysis
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Sample Questions
Q1) Garner Inc.and Tanex Corp.are competitors in the equipment manufacturing industry.Garner has a P/S ratio of 3.2,whereas Tanex has a P/S ratio of 1.8.Which of the following best justifies the difference in P/S ratios between the two firms?Relative to Garner,Tanex has a:
A)higher total asset turnover.
B)lower beta.
C)lower net profit margin.
D)lower total asset turnover.
Q2) The auditor's report:
A)guarantees accuracy of the financial statements.
B)guarantees the quality of the earnings.
C)attests that the statements are a fair presentation of financial position.
D)includes a recommendation on the stock.
Q3) Which of the following statements regarding retained earnings is not true?
A)It is part of stockholders' equity.
B)It represents spendable funds for a company.
C)It designates that part of previous earnings not paid out as dividends.
D)It is irrelevant in security valuation.
Q4) Can an investor that wants to use the approach of projected earnings and P/Es find help in Value Line?
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Chapter 16: Technical Analysis
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Q1) Conclusions about technical analysis suggest that:
A)it is difficult to justify technical analysis.
B)it has been found to be completely deficient.
C)stock price movements repeat themselves constantly.
D)there is complete agreement about the interpretation of technical signals.
Q2) Which of the following is not true regarding the Dow Theory?
A)It is intended to forecast the start of a primary movement.
B)It does not forecast how long a movement will last.
C)It has a very high success rate.
D)It is subject to many criticisms.
Q3) Which of the following is true regarding the resistance level?
A)Resistance levels tend to develop due to profit taking.
B)It is the level at which a significant decrease in demand is expected.
C)It is the level at which a significant increase in supply is expected.
D)Resistance levels usually develop after a stock reaches a new low.
Q4) Which of the following is not an assumption made by technical analysts?
A)Changes in trend are caused by shifts in supply and demand relationships.
B)Stock price movements are independent of one another.
C)Security prices tend to move in trends.
D)Supply and demand of securities are determined by various factors.
Page 18
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Chapter 17: Bond Yields
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Q1) In finding a bond's value,the rate used to discount the bond's future cash flows is:
A)the bond's required rate of return.
B)the firm's weighted average cost of capital.
C)the firm's after-tax cost of debt.
D)the bond's coupon rate
Q2) Reinvestment risk represents the possibility that future payments cannot be reinvested at the assumed rate.
A)True
B)False
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) The three most prominent theories proposed to explain the term structure of interest rates are:
Q5) Yield spreads vary inversely with the: ______________________________.
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Chapter 18: Bonds: Analysis and Strategy
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Q1) Duration is a measure that relates a:
A)bond's price to its time to maturity.
B)bond's price to its coupon rate.
C)bond's yield to maturity to its time to maturity.
D)bond's price to its yield to maturity.
Q2) Under the ladder approach,bond investors purchase bonds with different maturities in order to gain some protection from default risk.
A)True
B)False
Q3) The yield curve is normally plotted using Treasury securities because:
A)they have a wide range of maturities.
B)it is easier to obtain accurate and complete data on them.
C)they have no default risk.
D)it is easier to obtain historical data on them.
Q4) 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
Q5) Why is immunization considered to be a hybrid strategy?
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Chapter 19: Options
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Sample Questions
Q1) ?Options traded on organized exchanges are protected against cash dividends.
A)True
B)False
Q2) An investor wants to hedge the Microsoft stock he holds in his portfolio.How can he use a protective put to do this?
Q3) How can the owner of a large stock portfolio use options on individual stocks to enhance the income from the portfolio?
Q4) What is meant by portfolio insurance?
Q5) According to the Black Scholes option pricing model,option value is a function of stock price,exercise price,time to maturity,interest rate,and volatility of the underlying asset.
A)True
B)False
Q6) Which of the following is not a reason for investors to trade options?
A)Options eliminate leverage.
B)Options require a smaller investment than stock investments.
C)Options allow investors to trade on overall market movements.
D)Options can reduce risk.
Q7) What is a hedge ratio?
21
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Chapter 20: Futures
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Q1) With futures,hedging requires one to simply take an opposite position.
A)True
B)False
Q2) U.S.futures trading is regulated primarily by the CFTC.
A)True
B)False
Q3) Futures contracts are handled by specialists on futures exchanges.
A)True
B)False
Q4) Futures contracts are regulated by the:
A)Securities Exchange Commission.
B)National Association of Security Dealers.
C)National Association of Commodity Dealers.
D)Commodity Futures Trading Commission.
Q5) Explain a long position and a short position in futures trading.
Q6) Japan,which banned financial futures in 1985,is now very active in developing futures exchanges.
A)True
B)False
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Q7) What is the difference between hedgers and speculators in the futures markets?
Chapter 21: Portfolio Management
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Q1) Which of the following is not part of the portfolio management process?
A)Determining investor objectives,constraints,and preferences
B)Selling weak performing securities from the portfolio
C)Forming expectations for the economy and its sectors
D)Developing and implementing a strategy
Q2) In order to protect principal against possible loss caused by distressed selling,individuals are typically recommended to have a:
A)1-month emergency fund.
B)2-month emergency fund.
C)6-month emergency fund.
D)12-month emergency fund
Q3) The Prudent Man Rule,which applies to fiduciaries,is a relatively new concept in investment management.
A)True
B)False
Q4) Retirees would likely have a greater percentage of their wealth in common stock than would a recent college graduate.
A)True
B)False
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Chapter 22: Evaluation of Investment Performance
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Q1) The information ratio is calculated as the ratio of:
A)mean active return to tracking risk.
B)alpha to beta.
C)excess return to portfolio standard deviation.
D)portfolio excess return to tracking risk.
Q2) Discuss how constraints on portfolio managers affect the portfolio results.
Q3) Treynor's measure is a ratio of excess return to systematic risk.
A)True
B)False
Q4) Based on Jensen's measure,superior portfolio performance is exhibited by a:
A)statistically significant positive alpha.
B)statistically significant negative alpha.
C)zero alpha.
D)low positive alpha.
Q5) Which of the following measures uses the standard deviation and evaluates portfolio performance on the basis of both return and diversification.
A)Jensen's alpha
B)Treynor measure
C)M2
D)Sharpe ratio
24
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