Financial Management
Exam Questions
Course Introduction
Financial Management is a foundational course that introduces students to the principles and practices governing the effective management of an organizations financial resources. The course covers key topics such as financial analysis, planning and forecasting, valuation of assets, capital budgeting, risk and return, cost of capital, and working capital management. Through case studies and practical applications, students learn to make informed decisions regarding investments, financing, and dividend policies, while understanding the broader objectives of financial managers in maximizing shareholder value and ensuring long-term organizational growth.
Recommended Textbook Fundamentals of Investments 3rd Canadian Edition by Bradford Jordan
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Page 2
Chapter 1: A Brief History of Risk and Return
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Sample Questions
Q1) You find a stock with returns of 14.2%, - 10.1%, 8.7%, 29.7%, and 18.2%. The risk-free rate over this period was 6.4%, 6.8%, 5.2%, 4.4% and 5.3%. What was the variance of the returns?
A) .01876
B) .02139
C) .02647
D) .02968
E) .03192
Answer: B
Q2) An asset has a return of 10.5 percent and a variance of 70 percent square. What range of returns would you expect to see two-thirds of the time?
A) - 73.17% to 94.17%
B) - 6.24% to 27.24%
C) - 31.2% to 51.7%
D) - 43.8% to 62.8%
E) - 59.5% to 80.5%
Answer: A
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Chapter 2: Diversification and Risky Asset Allocation
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Sample Questions
Q1) Which of the following is true regarding the standard deviation for a portfolio?
A) The portfolio's standard deviation must be less than the individual standard deviations.
B) The standard deviation of the portfolio falls continuously as more assets are added. C) The standard deviation for a portfolio is a weighted average of individual standard deviations.
D) All of the above.
E) None of the above.
Answer: E
Q2) Suppose a portfolio has 55 percent of its assets invested in Stock S with a standard deviation of 40 percent and the remainder in Stock T with a standard deviation of 12 percent. If the correlation between the two stocks is 0.22, what is the standard deviation of the portfolio?
A) 21.05%
B) 22.94%
C) 23.78%
D) 24.68%
E) 25.56%
Answer: C
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4
Chapter 3: The Investment Process
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Sample Questions
Q1) An investor places $200,000 in a discretionary account and makes all trades based on his own research. Three years later the account is worthless. To somehow recover his money, the investor can:
A) file a claim with the CIPF.
B) file a lawsuit.
C) request an arbitration hearing.
D) file a claim with the provincial securities commission.
E) none of the above.
Answer: E
Q2) Short selling is:
A) a low risk strategy.
B) a bear market strategy.
C) non-taxable.
D) a bull market strategy.
E) a recommended strategy for investors with losses.
Answer: B
Q3) Why would a brokerage firm have different margin requirements on different securities?
Answer: The margin requirement can vary based on the type, the price and the volatility of the security.
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Chapter 4: Overview of Security Types
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Sample Questions
Q1) You purchased 300 shares of ABC stock at a price of $34.20 a share. You then purchased put options on your shares with a strike price of $45 and an option premium of $1.10. At expiration, the stock was selling for $46.10 a share. What is your net profit or loss on these transactions assuming that you disposed of your shares on the expiration date?
A) $2,910
B) $3,180
C) $3,240
D) $3,680
E) $3,900
Q2) Money market instruments are:
A) debt instruments.
B) equity.
C) options.
D) futures.
E) none of the above.
Q3) Preferred stock is sometimes considered to be a cross between debt and equity. Describe the characteristics of preferred stock that make it similar to debt as well as the characteristics that make it similar to equity.
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Page 6
Chapter 5: Mutual Funds
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Sample Questions
Q1) The dollar amount per share of a front-end load is the ___________ minus the
A) sales price; NAV
B) offer price; NAV
C) NAV; negotiated price
D) sales price; offer price
E) NAV; offer price
Q2) You purchase a closed-end fund at its initial public offering. The initial offering price is $30 per share. The fund promoter receives a 7 percent fee from the offering, and the fund sells at a 9 percent discount to NAV the day after the offering. What is the value of your investment per share?
A) $25.39
B) $27.90
C) $26.95
D) $27.30
E) $26.34
Q3) What is a soft-dollar transaction?
Q4) How do open-end and closed-end mutual funds differ?
How do closed-end funds offer the potential for an 'extra' return?
Q5) Are ETFs only for stocks?
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Chapter 6: The Stock Market
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Sample Questions
Q1) In Canada, ___________ is the most influential provincial regulatory agency charged with regulating TSX listed securities and the companies.
A) OSC
B) NYSE
C) CDIC
D) CDNX
E) MX
Q2) LOL Financial is buying 100,000 shares of stock from OMG Inc., as part of a new stock issues trading on the TSX. This sale is occurring in the ___________ market
A) Third
B) Primary
C) Initial
D) Secondary
E) OTC
Q3) What role does the Ontario Securities and Exchange Commission (OSC) play in an IPO?
Q4) What are the major differences between NASDAQ and the NYSE?
Q5) Describe how a stop-limit sell order is executed.
Q6) What is the main advantage of a market order?
Page 8
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Chapter 7: Common Stock Valuation
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Sample Questions
Q1) ABC Inc. has 125,000 shares of stock outstanding, sales of $1,200,000 and net income of $152,000. If the P/E ratio of the stock is 15.5, what is the current stock price?
A) $18.85
B) $17.47
C) $12.18
D) $15.32
E) $13.64
Q2) The sustainable growth rate for a company is stated as:
A) g = ROE * payout ratio
B) g = ROA * payout ratio
C) g = ROA * (1 - payout ratio)
D) g = ROE * retention ratio
E) g = ROE * (1 - retention ratio)
Q3) Why is the residual income model sometimes referred to as "economic value added"?
Q4) What information regarding company stocks can be regularly found in the financial pages of newspaper and on-line financial services?
Q5) A number of traded stocks pay no dividends. Why would an investor buy these stocks?
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Chapter 8: Stock Price Behaviour and Market Efficiency
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Sample Questions
Q1) Ruth has taken two approaches to trading stocks. First, she found what she thought was a repetitive pattern in ABC Co.'s historical prices. Secondly, she found that using the financial statements of LKO Co. to compute changes in the return on equity would help predict the future stock price for that firm. She traded using both strategies. Ruth earned excess profit on market is at least __________ efficient but less than __________ efficient.
A) weak-form; mild-form
B) mild-form; semi-strong form
C) weak-form; semi-strong form
D) semi-strong form; full-form
E) semi-strong form; strong-form
Q2) If financial markets are highly efficient:
A) technical analysis will produce superior results.
B) fundamental analysis will provide better results.
C) market efficiency will be increased by analysts trying to analyze securities.
D) stock prices will always rise instantaneously with the release of new information.
E) none of the above.
Q3) Describe an example of a market which is weak-form but not strong-form efficient.
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Chapter 9: Behavioural Finance and the Psychology of Investing
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Sample Questions
Q1) What is the area of finance called that addresses issues such as how reasoning errors affect investment decisions?
A) Logical
B) Economic
C) Behavioural
D) Rational
E) Personal
Q2) __________ finance is the area of study which addresses issues such as how reasoning errors affect
A) Logical
B) Economic
C) Behavioural
D) Rational
E) Personal
Q3) Which of the following is a Fibonacci number
A) 12
B) 13
C) 14
D) 15
E) Cannot be determined
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Chapter 10: Interest Rates
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Sample Questions
Q1) A one-year STRIPS sells at an interest rate of 6.40 percent, and a two-year STRIPS sell at an interest rate of 6.10 percent. What is the implied one-year forward rate? Assume that rates are effective annual rates.
A) 5.67%
B) 5.80%
C) 4.63%
D) 6.86%
E) 4.83%
Q2) The _________ theory states that to induce investors to hold long-term securities they must be paid a higher interest rate than they would require on short-term securities.
A) modern term structure
B) expectations
C) maturity preference
D) preferred habitat
E) market segmentation
Q3) What is the difference between the term structure of interest rates and the Treasury yield curve?
Q4) What is the yield curve?Why is it important?
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Chapter 11: Bond Prices and Yields
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Sample Questions
Q1) The yield value of a 32<sup>nd</sup> is the change needed in which one of the following to cause a bond's price to change by 1/32<sup>nd</sup>?
A) current yield
B) yield to maturity
C) coupon rate
D) call premium
E) call date
Q2) Rebalancing a portfolio periodically so that the duration continues to match the target date is called
A) Portfolio updating
B) Dedication rematching
C) Portfolio marking
D) Portfolio matching
E) Dynamic immunization
Q3) For a bond selling at a discount, which of the following relationships is true?
A) Coupon rate = Current yield = Yield to maturity
B) Coupon rate > Current yield < Yield to maturity
C) Coupon rate < Current yield > Yield to maturity
D) Coupon rate > Current yield > Yield to maturity
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Page 13
Chapter 12: Return, Risk and Security Management
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Sample Questions
Q1) Based on CAPM, the expected return on a stock is affected by the A) Stock's beta
B) Market return
C) Risk-free rate
D) All of the above
E) None of the above
Q2) Stock X has a beta of 0.87 and an expected return of 10.4%. Stock Y has a beta of 1.1 and an expected return of 12.2%. What is the risk-free rate of return assuming that both Stock X and Stock Y are correctly priced?
A) 2.50%
B) 4.38%
C) 3.59%
D) 3.94%
E) 3.09%
Q3) The risk of owning a security comes from
A) Expected news
B) Surprises
C) Anticipated events
D) Predictable announcement
E) Expected returns
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Chapter 13: Performance Evaluation and Risk Management
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Sample Questions
Q1) _______ gives the excess return of a hypothetical portfolio over the market portfolio while they carry the same risk.
A) The Treynor ratio
B) The Tobin's q
C) The Jensen's alpha
D) The Sharpe ratio
E) The M<sup>2</sup> measure
Q2) Explain how to calculate Jensen's alpha and the Treynor ratio. What does each measure?
If Jensen's alpha is positive for a portfolio, what do you know about the Treynor ratio for the portfolio?
Q3) The statistical model for assessing probabilities based on a mean and standard deviation is called the ___________ distribution.
A) t-
B) Chi squared
C) F
D) Normal
E) Binomial
Q4) What is the importance of value-at-risk?
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Chapter 14: Options
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Sample Questions
Q1) Which of the following is the main reason for the Options Clearing Corporation to change the system of options symbols?
A) Investors were having trouble understanding the former 20-letter system.
B) Options exchanges had to use special symbols for NASDAQ listed stocks.
C) Different stocks had the same options ticker symbol.
D) Letter combinations did not differentiate between a put and a call.
E) All possible symbol combinations had been taken making it impossible for new options to be traded
Q2) By convention, standardized stock options expire on the
A) first day of the expiry month
B) last day of the expiry month
C) 28<sup>th</sup> day of the expiry month
D) Saturday following the third Friday of the expiry month
E) Friday after the first Monday of the month
Q3) An example of a straddle is:
A) Buying a Jan 25 put and a Jan 30 call
B) Buying a Jan 30 put and selling a Jan 30 call
C) Buying a Jan 30 put and a Feb 30 call
D) Buying a Jan 30 put and a Jan 25 call
E) Selling a Jan 30 put and a Jan 30 call
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Chapter 15: Option Valuation
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Sample Questions
Q1) What is the delta of the call option?
A) 0.506
B) 0.511
C) 0.652
D) 0.762
E) 0.916
Q2) How many options values at expiration would you have to calculate in a four-period binomial option pricing model?
A) 1
B) 2
C) 3
D) 4
E) 5
Q3) Which one of the following statements is correct
A) Both call and put option deltas are always positive.
B) Put option deltas are always positive.
C) Call option deltas are always positive.
D) Both call and put option deltas are always negative.
E) All deltas can be positive, negative, or equal to zero.
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Page 17
Chapter 16: Futures Contracts
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Sample Questions
Q1) Spot-futures parity defines the market situation that exists when
A) No arbitrage opportunities exist.
B) Futures prices equal spot prices.
C) Cash prices are higher than futures prices.
D) The number of potential buyers equals the number of potential sellers.
E) No marginal calls are required during a trading day.
Q2) A futures contract on as stock is currently selling for $81.87. The contract expires in three months, and the stock is selling for $80.65. What is the risk-free rate of interest?
A) 6.19%
B) 5.84%
C) 5.76%
D) 5.87%
E) 6.05%
Q3) The multiplier for S&P Canada 60 index futures contracts (SFX) is:
A) $1.
B) $100.
C) $200.
D) $500.
E) $100,000.
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Page 18
Chapter 17: Projecting Cash Flow and Earnings
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Sample Questions
Q1) What is the return on equity?
A) 6.41%
B) 5.28%
C) 8.56%
D) 4.05%
E) 3.16%
Q2) A company has earnings per share of $2.46 and cash flow per share of $3.12. If the price-earnings ratio is 26.5, what is the price-cash flow ratio?
A) 19.73
B) 20.89
C) 18.64
D) 21.87
E) 19.21
Q3) Explain the role the external financing need plays in the future growth outlook for a firm.
Q4) What do operating cash flow, investment cash flow and financing cash flow measure?
Q5) Explain why an income statement and a statement of cash flows will differ for the same company.
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Chapter 18: Corporate Bonds
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Sample Questions
Q1) Callable bonds I) normally have a call protection period II) frequently pay one year's coupon amount as the call premium III) tend to be called only if market interest rates rise IV) are preferred by investors over non-callable bonds
A) I and II
B) II and III
C) I, II and III
D) I, III and IV
E) I, II, III and IV
Q2) What are some of the advantages and disadvantages of owning convertible bonds?
Q3) _________ bonds are secured by financial assets of the issuing company.
A) Collateral trust
B) Plain vanilla
C) Debentures
D) Trust
E) Indentures
Q4) How do investors benefit when a bond has a put provision?
Q5) Why might a junk bond portfolio be attractive to an investor over a default-free portfolio of Treasury bonds, even though the investor expects that some of the junk bonds will default on their debt obligations?
Page 20
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Chapter 19: Government Bonds and Mortgaged-Backed Securities
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Sample Questions
Q1) Canada savings bonds are exempt from ________ taxes.
A) Federal
B) Non-resident withholding
C) Provincial and federal
D) Provincial
E) None of the above
Q2) The difference between a bond's face value and its call price is the
A) basis
B) put premium
C) discount
D) call premium
E) conversion value
Q3) How much interest does the bond pay during the second payment?
A) $125.00
B) $63.75
C) $127.50
D) $50.50
E) $250.00
Q4) What are the pros and cons of investing in municipal bonds?
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Q5) Explain how the CMHC plays a role in the creation of a mortgage-backed security.
Chapter 20: International Portfolio Investment
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Sample Questions
Q1) Emerging markets with high risk will likely have the
A) Weakest currency
B) Highest real interest rate
C) Lowest growth
D) Strongest currency
E) Perfect correlations with developed countries
Q2) Given three hypothetical exchange rates: \(\le\)/$ = 0.6, \(\times\)/$ = 0.9 and \(\times\)/\(\le\) = 1.6, what is the arbitrage profit assuming you have $100?
A) $10.00
B) $3.33
C) $5.00
D) $6.67
E) No arbitrage is possible
Q3) Companies may cross-list their shares to
A) Expand investor base for their stock
B) Increase name recognition in foreign market
C) Enhance market liquidity
D) All of the above
E) None of the above
Q4) How can a firm lower its cost of capital through cross listing?
22
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