Financial Management
Final Exam
Course Introduction
Financial Management introduces students to the fundamental principles and techniques of managing financial resources within organizations. The course covers essential topics such as financial analysis, planning, and control; time value of money; valuation of stocks and bonds; risk and return; capital budgeting; cost of capital; and working capital management. Through a combination of theoretical frameworks and practical case studies, students will develop the skills necessary to make informed financial decisions, allocate resources efficiently, and understand the impact of financial strategies on an organizations overall performance.
Recommended Textbook Investments 7th Canadian Edition by Zvi Bodie
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Page 2
Chapter 1: Investments: Background and Issues
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Q1) Important trends changing the contemporary investment environment are
A) globalization
B) securitization
C) bundling and unbundling
D) financial engineering
E) all of these
Answer: E
Q2) The material wealth of a society is a function of _________.
A) all financial assets
B) all real assets
C) all financial and real assets
D) all physical assets
E) all commodities
Answer: B
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Chapter 2: Asset Classes and Financial Instruments
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Q1) What is the bond equivalent yield of a T-Bill that is selling for $9,453 and has 173 days remaining until maturity?
A) 11.54%
B) 12.21%
C) 12.04%
D) 11.38%
E) 12.15%
Answer: B
Q2) Which of the following statements regarding the Dow Jones Industrial Average (DJIA)is false?
A) The DJIA is not very representative of the market as a whole.
B) The DJIA consists of 30 blue chip stocks.
C) The DJIA is affected equally by changes in low and high priced stocks.
D) The DJIA divisor needs to be adjusted for stock splits.
E) The value of the DJIA is much higher than individual stock prices.
Answer: C
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Chapter 3: Securities Markets
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Q1) Assume you purchased 100 shares of common stock at $50 per share.The initial margin is 40%.Your investment was
A) $3,000
B) $5000
C) $2000
D) $9000
E) $7800
Answer: C
Q2) Assume you sell short 100 shares of common stock at $45 per share,with initial margin at 50%.What would be your rate of return if you repurchase the stock at $40/share? The stock paid no dividends during the period,and you did not remove any money from the account before making the offsetting transaction.
A) 20%
B) 25%
C) 22%
D) 77%
E) none of these
Answer: C
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Chapter 4: Mutual Funds and Other Investment Companies
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Q1) If the annual real rate of interest is 5% and the expected inflation rate is 4%,the nominal rate of interest would be approximately
A) 1%.
B) 9%.
C) 20%.
D) 15%.
E) none of these.
Q2) Discuss some reasons why an investor with a long time horizon might choose to invest in common stocks,even though they have historically been riskier than government bonds or T-bills.
Q3) What has been the relationship between T-Bill rates and inflation rates throughout the 1980s and 1990s?
A) The T-Bill rate was sometimes higher than and sometimes lower than the inflation rate.
B) The T-Bill rate has equaled the inflation rate plus a constant percentage.
C) The inflation rate has equaled the T-Bill rate plus a constant percentage.
D) The T-Bill rate has been higher than the inflation rate.
E) The T-Bill rate has been lower than the inflation rate.
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Chapter 5: Risk and Return: Past and Prologue
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Q1) Passive investing
A) may be accomplished by investing in index mutual funds.
B) involves considerable security selection.
C) involves considerable transaction costs.
D) a and c.
E) b and c.
Q2) Toby and Hannah are two risk-averse investors.Toby is more risk-averse than Hannah.Draw one indifference curve for Toby and one indifference curve for Hannah on the same graph.Show how these curves illustrate their relative levels of risk aversion.
Q3) The Capital Allocation Line can be described as the
A) investment opportunity set formed with a risky asset and a risk-free asset.
B) investment opportunity set formed with two risky assets.
C) line on which lie all portfolios that offer the same utility to a particular investor.
D) line on which lie all portfolios with the same expected rate of return and different standard deviations.
E) none of these.
Q4) Discuss the differences between the asset allocation decision and the security selection decision.
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Chapter 6: Efficient Diversification
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Q1) Security X has expected return of 12% and standard deviation of 20%.Security Y has expected return of 15% and standard deviation of 27%.If the two securities have a correlation coefficient of 0.7,what is their covariance?
A) 0.038
B) 0.070
C) 0.018
D) 0.013
E) 0.054
Q2) Unique risk is also referred to as
A) systematic risk,diversifiable risk.
B) systematic risk,market risk.
C) diversifiable risk,market risk.
D) diversifiable risk,firm-specific risk.
E) market risk.
Q3) Other things equal,diversification is most effective when
A) securities' returns are uncorrelated.
B) securities' returns are positively correlated.
C) securities' returns are high.
D) securities' returns are negatively correlated.
E) b and c.
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Chapter 7: Capital Asset Pricing and Arbitrage Pricing
Theory
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Q1) Your personal opinion is that security X has an expected rate of return of 0.11.It has a beta of 1.5.The risk-free rate is 0.05 and the market expected rate of return is 0.09.According to the Capital Asset Pricing Model,this security is A) underpriced.
B) overpriced.
C) fairly priced.
D) cannot be determined from data provided.
E) none of these.
Q2) Research by Jeremy Stein of MIT resolves the dispute over whether beta is a sufficient pricing factor by suggesting that managers should use beta to estimate A) long-term returns but not short-term returns.
B) short-term returns but not long-term returns.
C) both long-and short-term returns.
D) book-to-market ratios.
E) None of these was suggested by Stein.
Q3) Discuss the assumptions of the capital asset pricing model,and how these assumptions relate to the "real world" investment decision process.
Q4) List and discuss two of the assumptions of the CAPM.
Page 9
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Chapter 8: The Efficient Market Hypothesis
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Q1) Assume that stock market returns do not resemble a single-index structure.An investment fund analyzes 100 stocks in order to construct a mean-variance efficient portfolio constrained by 100 investments.They will need to calculate ____________ covariances.
A) 45
B) 100
C) 4,950
D) 10,000
E) none of these
Q2) An investor will take as large a position as possible when an equilibrium price relationship is violated.This is an example of ______________.
A) a dominance argument
B) the mean-variance efficiency frontier
C) a risk-free arbitrage
D) the capital asset pricing model
E) none of these
Q3) Discuss the advantages of the single-index model over the Markowitz model in terms of numbers of variable estimates required and in terms of understanding risk relationships.
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Page 10
Chapter 9: Behavioral Finance and Technical Analysis
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Q1) A study by Ball,Kothari and Shanken (1995)examines the reversal effect and finds
A) the reversal effect seems to be concentrated in low-priced shares.
B) the reversal effect is substantially diminished when portfolios are formed based on mid-year performance rather than December results.
C) the risk-adjusted return from trying to exploit the reversal effect is effectively zero.
D) all of these are true.
E) none of these.
Q2) __________ focus more on past price movements of a firm's stock than on the underlying determinants of future profitability.
A) Credit analysts
B) Fundamental analysts
C) Systems analysts
D) Technical analysts
E) Specialists
Q3) What is an event study? It is a test of what form of market efficiency? Discuss the process of conducting an event study,including the best variable(s)to observe as tests of market efficiency.
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11
Chapter 10: Bond Prices and Yield
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Q1) _____________ focus more on past price movements of a firm's stock than on the underlying determinants of its future profitability.
A) credit analysts
B) fundamental analysts
C) systems analysts
D) technical analysts
Q2) A high amount of short interest is considered as a _____________.
A) bearish signal
B) bullish signal
C) bearish signal by some technical analysts and as a bullish signal by other technical analysts
D) none of these
Q3) According to Kondratieff,the macro economy moves in a series of waves which recur at intervals of approximately ________________.
A) 18 months
B) 4 years
C) 8 years
D) 50 years
Q4) How do you distinguish between fundamental analysis and technical analysis?
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Chapter 11: Managing Bond Portfolios
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Q1) Which of the following is(are)a result(s)of the Fama and French (2002)study of the equity premium puzzle?
I.Average realized returns during 1950-1999 exceeded the internal rate of return (IRR)for corporate investments.
II.The statistical precision of average historical returns is far higher than the precision of estimates from the dividend-discount model (DDM).
III.The reward-to-variability ratio (Sharpe)ratio derived from the DDM is far more stable than that derived from realized returns.
IV.There is no difference between DDM estimates and actual returns with regard to IRR,statistical precision,or the Sharpe measure.
A) I,II,and III
B) I and III
C) I and II
D) II and III
E) IV
Q2) Discuss Roll's critique of the CAPM.
Q3) Describe some of the ways the CAPM is applied in practice.
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Chapter 12: Macroeconomic and Industry Analysis
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Q1) Most preferred stock
I.pays a fixed dividend.
II.pays a floating-rate dividend.
III.is held by corporations.
IV.is held by individuals.
A) I and III are true.
B) I and IV are true.
C) II and III are true.
D) II and IV are true.
E) only II is true.
Q2) Accrued interest
A) is quoted in the bond price in the financial press.
B) must be paid by the buyer of the bond and remitted to the seller of the bond.
C) must be paid to the broker for the inconvenience of selling bonds between maturity dates.
D) a and b.
E) a and c.
Q3) Discuss the taxation ramifications of zero coupon bonds.How has this taxation procedure changed over the years? How has this change affected the demand for these bonds?
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Chapter 13: Equity Valuation
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Q1) The following is a list of prices for zero coupon bonds with different maturities and par value of $1,000. \[\begin{array} { c c }
\text { Maturity (Years) } & \text { Price } \\
\hline 1 & \$ 943.40 \\
2 & \$ 881.68 \\
3 & \$ 808.88 \\
4 & \$ 742.09
\end{array}\]
What is the price of a 4-year maturity bond with a 12% coupon rate paid annually? (Par value = $1,000)
A) $742.09
B) $1,222.09
C) $1,000.00
D) $1,141.84
E) none of these
Q2) Discuss the two prevailing theories of the term structure of interest rates.Include in your discussion the differences in the theories,and the advantages/disadvantages of each.
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Chapter 14: Financial Statement Analysis
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Q1) You manage a portfolio for Ms.Angel Foodcake,who has instructed you to be sure her portfolio has a value of at least $350,000 at the end of six years.The current value of Ms.Foodcake's portfolio is $250,000.You can invest the money at a current interest rate of 8%.You have decided to use a contingent immunization strategy. What amount would need to be invested today to achieve the goal,given the current interest rate?
Suppose that four years have passed and the interest rate is 9%.What is the trigger point for Angel's portfolio at this time? (That is,how low can the value of the portfolio be before you will be forced to immunize to be assured of achieving the minimum acceptable return?)
Illustrate the situation graphically.
If the portfolio's value after 4 years is $291,437 what should you do?
Q2) A substitution swap is an exchange of bonds undertaken to
A) change the credit risk of a portfolio.
B) extend the duration of a portfolio.
C) reduce the duration of a portfolio.
D) profit from apparent mispricing between two bonds.
E) adjust for differences in the yield spread.
Q3) Discuss rate anticipation swaps as a bond portfolio management strategy.
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Page 16
Chapter 15: Options Markets
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Sample Questions
Q1) The Gordon model
A) is a generalization of the perpetuity formula to cover the case of a growing perpetuity.
B) is valid only when g is less than k.
C) is valid only when k is less than g.
D) a and b.
E) a and c.
Q2) Dividend discount models and P/E ratios are used by __________ to try to find mispriced securities.
A) technical analysts
B) statistical analysts
C) fundamental analysts
D) dividend analysts
E) psychoanalysts
Q3) Since 1955,Canada bond yields and earnings yields on stocks were
A) identical
B) negatively correlated
C) positively correlated
D) uncorrelated
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Chapter 16: Option Valuation
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Q1) Refer to the financial statements of Mt.Prevost Machine Corp.The firm's quick ratio for 2001 is ______.
A) 0.72
B) 1.53
C) 3.06
D) 47.90
E) none of these
Q2) __________ of the profitability of the firm over a period of time such as a year.
A) The balance sheet is a summary
B) The income statement is a summary
C) That statement of cash flows is a summary
D) The audit report is a summary
E) None of these is a summary
Q3) In an increasingly globalized investment environment,comparability problems become even greater.Discuss some of the problems for the investor who wishes to have an internationally diversified portfolio.
Q4) Discuss the differences between economic earnings and accounting earnings.Which is preferred in financial analysis? Which is most widely used,and why?
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Page 18
Chapter 17: Futures Markets and Risk Management
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Q1) An American put option allows the holder to
A) buy the underlying asset at the striking price on or before the expiration date. B) sell the underlying asset at the striking price on or before the expiration date.
C) potentially benefit from a stock price decrease with less risk than short selling the stock.
D) b and c.
E) a and c.
Q2) Suppose you purchase one IBM May 100 call contract at $5 and write one IBM May 105 call contract at $2.The maximum potential profit of your strategy is
A) $600.
B) $500.
C) $200.
D) $300.
E) $100.
Q3) Describe the protective put.What are the advantages of such a strategy?
Q4) List two types of exotic options and describe their characteristics.
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Chapter 18: Performance Evaluation and Active Portfolio Management
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Q1) Which of the variables affecting option pricing is not directly observable? If this variable is estimated to be higher or lower than the variable actually is how is the option valuation affected?
Q2) The elasticity of a stock put option is always
A) positive.
B) smaller than one.
C) negative
D) infinite
E) none of these.
Q3) If the stock price increases,the price of a put option on that stock __________ and that of a call option _________.
A) decreases,increases
B) decreases,decreases
C) increases,decreases
D) increases,increases
E) does not change,does not change
Q4) What is an option hedge ratio? How does the hedge ratio for a call differ from that of a put (or are the two equivalent)? Explain.
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Chapter 19: Globalization and International Investing
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Q1) You would like to take a position in the S&P500 stock index,but have decided to use market-index futures contracts and T-bills rather than actually purchasing the index.Your strategy will duplicate the payoff you would receive if you held the index and your goal is to time the market.If you want to minimize transactions costs and are bullish you should
A) buy and hold T-bills and shift in and out of futures contracts as you expect the market to turn up or down.
B) sell futures contracts and T-bills and shift back and forth between them as you expect the market to turn up or down.
C) buy futures contracts and T-bills and shift back and forth between them as you expect the market to turn up or down.
D) buy and hold futures contracts and shift in and out of T-bills as you expect the market to turn up or down.
E) sell futures contracts and buy T-bills and shift back and forth between them as you expect the market to turn up or down.
Q2) You purchased the following futures contract today at the settlement price listed in the Wall Street Journal.Answer the questions below regarding the contract.
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Chapter 20: Taxes, Inflation, and Investment Strategy
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Q1) If Goldenlake Investors is actively managed,fairly priced,and will be mixed with the market index portfolio,calculate the value of the measure that should be used for evaluation.
A) 4.0%
B) 20.0%
C) 2.86%
D) 0.8%
E) 40%
Q2) Suppose you earned an arithmetic return on a stock of exactly10% every year for 10 years.The geometric average return on the stock will be _________.
A) greater than the arithmetic average return
B) equal to the arithmetic average return
C) less than the arithmetic average return
D) indeterminable
E) none of these
Q3) Define and discuss the Sharpe,Treynor,and Jensen measures of portfolio performance evaluation,and the situations in which each measure is the most appropriate measure.
Q4) Discuss the origins,the use of,and the principle behind the Sharpe measure.
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Chapter 21: Investors and the Investment Process
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Q1) Consider the Treynor-Black model.The alpha of an active portfolio is 3%.The expected return on the market index is 18%.The standard deviation of the return on the market portfolio is 25%.The nonsystematic standard deviation of the active portfolio is 15%.The risk-free rate of return is 6%.The beta of the active portfolio is 1.2.The optimal proportion to invest in the active portfolio is _________.
A) 50.0%
B) 69.4%
C) 72.3%
D) 80.6%
E) 100.0%
Q2) You hold a $10 million bond portfolio with a modified duration of 8 years.How would you,using T-bond futures,hedge this portfolio? Assume that the bond to be delivered has a modified duration of 9 years and that the futures price is currently $92 for $100 par value.
A) Sell approximately 97 contracts
B) Buy approximately 97 contracts
C) Sell approximately 90 contracts
D) Buy approximately 90 contracts
E) None of these
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Page 23
Chapter
Ratio, and More
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Q1) Performance evaluation of hedge funds is complicated by _____.
A) liquidity premiums
B) survivorship bias
C) unreliable market valuations of infrequently traded assets
D) unstable risk attributes
E) all of these
Q2) The risk profile of hedge funds _____,making performance evaluation _____.
A) can shift rapidly and substantially;challenging
B) can shift rapidly and substantially;straightforward
C) is stable;challenging
D) is stable;straightforward
E) none of these
Q3) Hedge funds may invest or engage in
A) distressed firms
B) convertible bonds
C) currency speculation
D) merger arbitrage
E) all of these
Q4) Discuss the tax status of the major categories of institutional investors described in the text.
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Chapter 23: International Finance and Investments: Understanding Foreign Markets and Risks
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Q1) WEBS portfolios
A) are passively managed.
B) are shares that can be sold by investors.
C) are free from brokerage commissions.
D) a and b
E) a,b,and c
Q2) In 1998,the largest proportion of market capitalization in the EAFE index was represented by ___________;by 2007 this country's proportion had __________:
A) the United Kingdom,risen
B) Germany,risen
C) Japan,fallen
D) Australia,fallen
E) the United States,fallen
Q3) A 1988 study by Richard Roll showed that
A) international equity markets move completely independently.
B) a world factor seems to be present in the returns of all countries.
C) there is no value in international diversification.
D) both a and c are true.
E) all of these are true.
25
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