Financial Management Exam Review
Course Introduction
Financial Management is a foundational course that explores the principles and practices involved in managing an organizations financial resources. Students will learn about budgeting, financial analysis, capital structure, valuation, investment decisions, risk management, and the use of financial markets. Emphasis is placed on understanding financial statements, maximizing shareholder value, and making sound financial decisions in both short-term and long-term contexts. The course also covers topics such as the cost of capital, working capital management, and financial planning, equipping students with the analytical skills necessary for effective financial decision-making in real-world business environments.
Recommended Textbook
Analysis of Investments and Mangement of Portfolios International 10th Edition by Reilly
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Chapter 1: An Overview of the Investment Process
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Sample Questions
Q1) Refer to Exhibit 1.5.What are the real rates of return for each of these securities?
A) 4.29% and 6.32%
B) 1.23% and 4.29%
C) 3.20% and 6.32%
D) 1.23% and 3.20%
E) 3.75% and 5.75%
Answer: D
Q2) All of the following are major sources of uncertainty EXCEPT
A) Business risk
B) Financial risk
C) Default risk
D) Country risk
E) Liquidity risk
Answer: C
Q3) An individual who selects the investment that offers greater certainty when everything else is the same is known as a risk averse investor.
A)True
B)False
Answer: True
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Chapter 2: The Asset Allocation Decision
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Sample Questions
Q1) The first step in the investment process is the development of a(n)
A) Objective statement.
B) Policy statement.
C) Financial statement.
D) Statement of cash needs.
E) Statement of cash flows.
Answer: B
Q2) Investing 30 to 40 percent of your retirement funds in the company you work for is reasonable when they match funds.
A)True
B)False
Answer: False
Q3) Refer to Exhibit 2.1.What is the tax liability for a married couple filing jointly with taxable income of $125,000?
A) $23,800
B) $18,427
C) $24,958
D) $16,867
E) $19,650
Answer: C
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Chapter 3: The Global Market Investment Decision
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Sample Questions
Q1) Refer to Exhibit 3.1.What is the real return on T-bills?
A) 1.02%
B) 3.68%
C) 4.71%
D) 11.27%
E) 13.33%
Answer: A
Q2) In order to diversify risk an investor must have investments that have correlations with other investments in the portfolio that are
A) low positive
B) zero
C) negative
D) any of the above
E) none of the above
Answer: D
Q3) A U.S.investor who ignores foreign markets reduces overall number of investment choices.
A)True
B)False
Answer: True
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Chapter 4: Securities Markets: Organization and Operation
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Sample Questions
Q1) Super DOT is an electronic order-routing system through which member firms can transmit market and limit orders directly to the posts where the securities are traded.
A)True
B)False
Q2) A 1994 study concluded dealers were colluding to maintain wide bid/ask spreads by concentrating market quotes in quarters instead of eighths.This study eventually led to new order handling rules that required quotes to be available to the public through:
A) NASDAQ market
B) Electronic communications networks (ECN)
C) High frequency trading (HFT)
D) Algorithmic trading (AT)
E) Intermarket trading system (ITS)
Q3) 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
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Chapter 5: Security-Market Indexes
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Sample Questions
Q1) The Morgan Stanley group index for Europe,Australia,and the Far East (EAFE)is a price weighted index.
A)True
B)False
Q2) Which of the following are factors that make it difficult to create and maintain a bond index?
A) The universe of bonds is broader than stocks.
B) The universe of bonds is constantly changing due to new issues, bond maturities, calls, and bond sinking funds.
C) It is difficult to derive value, up-to-date prices.
D) Choices a and c
E) All of the above
Q3) Refer to Exhibit 5.2.Calculate a value weighted index for Jan.14th if the initial index value is 100.
A) 100
B) 102.31
C) 123.07
D) 111.54
E) None of the above
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Page 7
Chapter 6: Efficient Capital Markets
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Sample Questions
Q1) Refer to Exhibit 6.5.What is the abnormal rate of return for Stock Z when you consider its systematic risk measure (beta)?
A) 0.1%
B) 1.0%
C) 0.5%
D) -1.0%
E) -2.0%
Q2) Refer to Exhibit 6.1.What is the abnormal rate of return for Stock C during period t using only the aggregate market return (ignore differential systematic risk)?
A) 4.0%
B) 1.2%
C) -1.05%
D) 2.0%
E) -8.50
Q3) If the efficient market hypothesis is true price changes are independent and biased. A)True B)False
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8
Chapter 7: An Introduction to Portfolio Management
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Sample Questions
Q1) Refer to Exhibit 7.2.What is the expected return of a portfolio of two risky assets if the expected return E(R?),standard deviation (s?),covariance (COV?,?),and asset weight (W?)are as shown above?
A) 18.64%
B) 20.0%
C) 22.5%
D) 13.65%
E) 11%
Q2) Refer to Exhibit 7.6.What is the expected return of a portfolio of two risky assets if the expected return E(R?),standard deviation (s?),covariance (COV?,?),and asset weight (W?)are as shown above?
A) 10.6 %
B) 10.2%
C) 13.0%
D) 11.9%
E) 14.0%
Q3) A measure that only considers deviations above the mean is semi-variance.
A)True B)False
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Page 9
Chapter 8: An Introduction to Asset Pricing Models
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Sample Questions
Q1) Refer to Exhibit 8.5.Which of the three portfolios are most likely to be the market portfolio?
A) Portfolio A
B) Portfolio B
C) Portfolio C
D) All of the portfolios are equally likely to be the market portfolio
E) There is insufficient information to differentiate between the three portfolios
Q2) Your broker has advised you that he believes that the stock of Brat Inc.is going to rise from $20 to $22.15 per share over the next year.You know that the annual return on the S&P 500 has been 11.25% and the 90-day T-bill rate has been yielding 4.75% per year over the past 10 years.If beta for Brat is 1.25,will you purchase the stock?
A) Yes, because it is overvalued
B) No, because it is overvalued
C) No, because it is undervalued
D) Yes, because it is undervalued
E) Yes, because the expected return equals the estimated return
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Chapter 9: Multifactor Models of Risk and Return
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Sample Questions
Q1) A 1994 study by Burmeister,Roll,and Ross defined all of the following risk factors except
A) Confidence risk
B) Market risk
C) Inflation risk
D) Market-timing risk
E) Business cycle risk
Q2) In a micro-economic (or characteristic)based risk factor model the following factor would be one of many appropriate factors:
A) Confidence risk.
B) Maturity risk.
C) Expected inflation risk.
D) Call risk.
E) Return difference between small capitalization and large capitalization stocks.
Q3) 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
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Chapter 10: Analysis of Financial Statements
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Sample Questions
Q1) Cash flow from operations = Net Income + Non cash revenue and expensesChanges in net working capital.
A)True
B)False
Q2) 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
Q3) Refer to Exhibit 10.1.What was BMC'S current ratio at year-end 2004?
A) 0.852
B) 1.000
C) 1.368
D) 1.722
E) 1.943
Q4) Traditional cash flow and Free cash flow are equivalent concepts.
A)True
B)False
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Chapter 11: Security Valuation Principles
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Sample Questions
Q1) Using the constant growth model,an increase in the required rate of return from 14 to 15 percent combined with an increase in the growth rate from 6 to 7 percent would cause the price to
A) Rise more than 1%
B) Rise less than 1%.
C) Remain constant.
D) Fall more than 1%.
E) Fall less than 1%.
Q2) Dividend growth is a function of
A) Return on equity.
B) The retention rate.
C) The payout ratio.
D) All of the above.
E) None of the above.
Q3) The general economic influences would include inflation,political upheavals,monetary policy,and fiscal policy initiatives.
A)True
B)False
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13
Chapter 12: Macroanalysis and Microvaluation of the Stock Market
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Sample Questions
Q1) When estimating a major stock market value using the earnings multiplier approach near-term estimates of the required rate of return and growth rate are essential due to the impact of near-term events on cash flows.
A)True
B)False
Q2) The valuation techniques presented in the chapter can only be applied to the stock market in the United States,since the U.S.stock market is inefficient.
A)True
B)False
Q3) Refer to Exhibit 12.5.The firm's sustainable growth rate is
A) 15%
B) 10%
C) 9%
D) 8%
E) 7%
Q4) Stock prices move coincidentally with the economy.
A)True
B)False
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Chapter 13: Industry Analysis
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Sample Questions
Q1) Refer to Exhibit 13.1.Calculate the industry EBT per share for the year 2004.
A) $53.29
B) $67.89
C) $68.75
D) $59.63
E) $57.49
Q2) The fact that all firms in an industry do not move together negates the value of industry analysis.
A)True
B)False
Q3) At what stage in the industrial life cycle is there an influx of competition?
A) Early pioneering development
B) Rapid accelerating growth
C) Acquisition and consolidation
D) Mature growth
E) Stabilization and market maturity
Q4) In the rapid accelerating growth stage,profit margins are typically very high.
A)True
B)False
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Chapter 14: Company Analysis and Stock Valuation
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Sample Questions
Q1) Refer to Exhibit 14.6.Calculate the cash operating expenses for the firm.
A) 225
B) 228
C) 232
D) 242
E) 252
Q2) What is the implied growth duration of Freed Industries given the following:
\[\begin{array} { l c c }
& \text { Susp Industrials } & \text { Frepd Industries } \\
\text { P/ERatios } & 19 & 22 \\
\text { Average Guoth (\%) } & 11.0 & 16.0 \\
\text { Dividend Yield } & 0.33 & { 0.08 }
\end{array}\]
A) 1.8 years
B) 1.3 years
C) 5.0 years
D) 4.5 years
E) 3.5 years
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Chapter 15: Equity Portfolio Management Stragtegies
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Sample Questions
Q1) An advantage of sampling is that portfolio returns will not track the index as closely as with full replication.
A)True
B)False
Q2) Exchange traded funds
A) Are exactly the same as index mutual funds.
B) Can be bought and sold like common stocks.
C) Can be sold short.
D) a and b.
E) b and c.
Q3) Which of the following is <b>not</b> a technique for constructing a passive index portfolio?
A) Full replication
B) Sampling
C) Quadratic programming
D) Linear programming
E) None of the above (that is, all are techniques for constructing a passive index portfolio)
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Chapter 16: Technical Analysis
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Sample Questions
Q1) The T-Bill-Eurodollar yield spread widens during periods of international crisis.
A)True
B)False
Q2) To a technician that believed in the importance of volume,a bullish signal would occur when
A) Prices increase on light volume.
B) Prices decrease on light volume.
C) Prices increase on heavy volume.
D) Prices decrease on heavy volume.
E) None of the above.
Q3) Technicians consider a high short interest ratio to be bearish.
A)True
B)False
Q4) A technical analyst might consider the following a bearish signal.
A) The percentage of speculators in stock index futures exceeds 70%.
B) The percentage of speculators in stock index futures exceeds 30%.
C) The percentage of speculators in stock index futures falls to 30%.
D) The percentage of speculators in stock index futures remains flat.
E) None of the above.
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Chapter 17: Bond Fundamentals
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Sample Questions
Q1) A bond's maturity is affected by: call features,non-refunding provisions,and sinking fund provisions.
A)True
B)False
Q2) Which of the following statements regarding Collateralized Debt Obligations (CDOs)is <b>false</b>?
A) CDOs experienced rapid growth since the year 2000.
B) The assets used to back the CDOs are substantially diverse.
C) The credit quality within a CDO at the time of issue is diverse.
D) CDOs have generated significant credit and liquidity problems.
E) All of the above statements are true.
Q3) 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
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Chapter 18: The Analysis and Valuation of Bonds
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Q1) The promised yield to maturity calculation assumes that
A) All coupon interest payments are reinvested at the current market interest rate for the bond.
B) All coupon interest payments are reinvested at the coupon interest rate for the bond.
C) All coupon interest payments are reinvested at short term money market interest rates.
D) All coupon interest payments are not reinvested.
E) None of the above
Q2) The yield to call is a more conservative yield measure whenever the price of a callable bond is quoted at a value
A) Equal to or greater than par plus one year's interest.
B) Equal to par.
C) Equal to par less one year's interest.
D) Less than par.
E) Five percent over par.
Q3) For a given change in yield bond price volatility is directly related to duration.
A)True
B)False
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Chapter 19: Bond Portfolio Management Strategies
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Q1) Investment horizon is the future time when an investor must begin an investment program to generate the required funds for a future liability.
A)True
B)False
Q2) The bond management strategy intended to eliminate interest rate risk is immunization.
A)True B)False
Q3) Contingent immunization strategies
A) Provide the bond portfolio manager to engage in various active portfolio strategies if the client is willing to accept a floor value.
B) Insure that the modified duration of the portfolio is always equal to the desired investment horizon.
C) Guarantee that the end of the holding period wealth will not be impacted by interest rate changes.
D) All of the above statements are true.
E) None of the above statements are true.
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21
Chapter 20: An Introduction to Derivative Markets and Securities
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Q1) The price at which the stock can be acquired or sold is the exercise price.
A)True
B)False
Q2) A forward contract gives its holder the option to conduct a transaction involving another security or commodity.
A)True
B)False
Q3) You own a call option and put option that both have the same exercise price of $50 and their respective prices are $4 and $3.The stock is currently trading at $60.Calculate the dollar return on this strategy.
A) $1.00
B) $2.00
C) $3.00
D) $4.00
E) $5.00
Q4) The payoffs to both long and short position in the forward contact are symmetric around the contract price.
A)True
B)False
22
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Chapter 21: Forward and Futures Contracts
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Q1) The basis (B<sub>t,T</sub>)at time t between the spot price (S<sub>t</sub>)and a futures contract expiring at time T (F<sub>t,T</sub>)is
A) B<sub>t,T</sub> = St<sub> </sub>+ F<sub>t,T</sub>
B) B<sub>t,T</sub> = S<sub>t </sub>- F<sub>t,T</sub>
C) B<sub>t,T </sub>= S<sub>t</sub> × F<sub>t,T</sub>
D) B<sub>t,T</sub> = S<sub>t</sub>/F<sub>t,T</sub>
E) None of the above
Q2) The bond that maximizes the difference between the invoice price and the delivery price is referred to as the
A) Cheapest-to-deliver.
B) Conversion bond.
C) Delivery bond.
D) Cheapest to substitute.
E) Cost-of-carry.
Q3) Forward contracts are individually designed agreements,and can be tailored to the specific needs of the ultimate end-user.
A)True
B)False
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23
Chapter 22: Option Contracts
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Q1) Credit risk in the options market is only a concern to the option seller.
A)True
B)False
Q2) Refer to Exhibit 22.5.Calculate the price of the call option today (C ).
A) $7.56
B) $17.48
C) $9.26
D) $5.0
E) $17.15
Q3) Refer to Exhibit 22.8.Calculate the net value of a protective put position at an expiration stock price of $20.
A) $2.85
B) $17.15
C) $19.85
D) $21.65
E) $22.85
Q4) European options can only be exercised on the expiration date.
A)True B)False
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Chapter 23: Swap Contracts,convertible Securities,and
Other Embedded Derivatives
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Q1) Refer to Exhibit 23.5.Calculate the conversion value if the stock price is $24.00 per share.
A) $600.00
B) $700.00
C) $800.00
D) $900.00
E) $1,000.00
Q2) All of the following are normal characteristics of a convertible bond,<b>except</b>
A) Conversion at the option of the issuer.
B) Conversion into a fixed number of shares of common stock.
C) A conversion price initially above the market price of the common stock.
D) An interest rate lower than that on straight debentures.
E) Subordination.
Q3) In a forward rate agreement (FRA)two parties agree today to a future exchange of cash flows based on two different interest rates.
A)True
B)False
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Assets, and Industry Ethics
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Q1) An open-end investment company functions like any other public firm.
A)True
B)False
Q2) Open-end investment companies continue to sell and repurchase shares after their initial public offering.
A)True
B)False
Q3) When alternative assets of investors are pooled together into a single pool of assets
A) The collection of assets is formed as a limited partnership.
B) One or more general partners are responsible for running the organization.
C) The limited partners are only liable to the extent of their investments.
D) Both a and c
E) All of the above.
Q4) The closed-end fund index is
A) Value weighted and based on market values.
B) Value weighted and based on NAVs.
C) Price weighted and based on market values.
D) Price weighted and based on NAVs.
E) Equally weighted and based on market values.
26
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Chapter 25: Evaluation of Portfolio Performance
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Q1) Refer to Exhibit 25.12.Rank the four funds and market portfolio in order from highest to lowest based on their Sharpe measures.
A) A, B, C, D, M
B) B, C, M, D, A
C) C, A, M, D, B
D) D, A, B, M, C
E) D, B, A, C, M
Q2) Which measure of portfolio performance allows analysts to determine the statistical significance of abnormal returns?
A) Sharpe measure
B) Jensen measure
C) Fama measure
D) Alternative components model (MCV)
E) Treynor measure
Q3) Attribution analysis separates a portfolio manager's performance into an allocation effect and selection effect.
A)True
B)False
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Chapter 26: Investment Return and Risk Analysis Questions
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Q1) 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
Q2) Refer to Exhibit 1A.1.The coefficient of variation of this investment is
A) -0.06
B) -0.65
C) 6.60
D) 16.53
E) 165.10
Q3) Refer to Exhibit 1A.1.The expected return from this investment is
A) -0.0752
B) -0.0040
C) 0.00
D) 0.0075
E) 0.4545
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28
Chapter 27: Investment and Retirement Plans
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Q1) Endowment funds
A) Are formed from the contributions to charitable and educational institutions.
B) Are attractive investments for individuals with low liquidity needs.
C) Usually have very short investment horizons.
D) Provide retirement benefits for public employees.
E) Provide death benefits for its contributor's survivors.
Q2) Banks face regulatory constraints at both the state and federal level.
A)True
B)False
Q3) Which of the following statements concerning defined benefit plans is <b>false</b>?
A) The company bears the risk of investments
B) Employees are entitled to either a lump-sum payment or income stream at retirement
C) Risk tolerance depends on funding status and its actuarial rate
D) Defined benefit plans for young workers are typically more conservatively invested than defined contribution plans
E) All of the above are true statements
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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 covariance.
A) -32.20
B) -23.32
C) 1.00
D) 23.32
E) 32.20
Q2) 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
Q3) 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
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Chapter 29: Portfolio Variance and Stock Weight
Calculations
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Q1) 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
Q2) 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
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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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