Financial Management
Textbook Exam Questions
Course Introduction
Financial Management is a comprehensive course that explores the principles and practices essential for effective financial decision-making within organizations. The course covers key topics such as financial analysis, planning and forecasting, capital budgeting, risk and return assessment, cost of capital, and working capital management. Students will learn to evaluate investment opportunities, understand the structure of financial markets, analyze financial statements, and develop strategies to maximize shareholder value. Through case studies and practical exercises, learners gain hands-on experience in applying financial concepts to real-world business scenarios, preparing them for roles in corporate finance, banking, and financial consulting.
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) Sources of risk for an investment include
A) variance of returns and business risk.
B) coefficient of variation of returns and financial risk.
C) business risk and financial risk.
D) variance of returns and coefficient of variation of returns.
E) variance of returns and economic risk.
Answer: C
Q2) The nominal risk-free rate of interest is a function of the
A) real risk-free rate and the investment's variance.
B) prime rate and the rate of inflation.
C) T-bill rate plus the inflation rate.
D) tax free rate plus the rate of inflation.
E) real risk-free rate and the rate of inflation.
Answer: E
Q3) The holding period return (HPR) is equal to the holding period yield (HPY) stated as a percentage.
A)True
B)False
Answer: False
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Page 3
Chapter 1: The Investment Setting: Part A
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Sample Questions
Q1) 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
Q2) 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.
Answer: B
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Chapter 2: Asset Allocation and Security Selection
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Sample Questions
Q1) The asset allocation decision must involve a consideration of A) cultural differences.
B) the objectives stated in the investor's policy statement.
C) the types of assets that are appropriate for the investor.
D) the risk associated with different investments.
E) All of these are correct.
Answer: E
Q2) You currently have $150,000 in an IRA designated for retirement. If you save an additional $100 at the end of every month and expect to earn an annual return of 12 percent, how much do you expect to have in the IRA in 10 years?
A) $467,632
B) $518,062
C) $732,546
D) $949,328
E) $1,215,234
Answer: B
Q3) Average tax rate is defined as total tax payment divided by total income.
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) Refer to Exhibit 2A.1. Calculate the covariance.
A) -32.20
B) -23.32
C) 1.00
D) 23.32
E) 32.20
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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Page 6
Chapter 3: Organization and Functioning of Securities Markets
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87 Flashcards
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Sample Questions
Q1) Secondary markets are important because
A) the prevailing market price of securities is determined in the secondary market.
B) it has an impact on price stability.
C) it has an impact on price continuity.
D) the proceeds from a sale go to the issuing unit.
E) they prevent price discovery.
Q2) Refer to Exhibit 3.3. How many shares of Jackson can Kathy buy?
A) 1875
B) 1500
C) 1750
D) 1200
E) 950
Q3) In a call market, trading for individual stocks
A) occurs anytime the market is open.
B) takes place at specific times.
C) takes place at the open and close of the trading day.
D) is priced either by auction or by dealers.
E) None of these are correct.
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Chapter 4: Security Market Indexes and Index Funds
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Sample Questions
Q1) Refer to Exhibit 4.1. Assume that a stock price-weighted indicator consisted of the four issues with their prices. What are the values of the stock indicator for Day T and T + 1, and what is the percentage change?
A) 36.25, 38.75, 6.9 percent
B) 38.75, 36.25, -6.9 percent
C) 100, 106.9, 6.9 percent
D) 107.48, 106.33, 1.15 percent
E) 106.9, 100, 5.7 percent
Q2) Studies of correlations among monthly U.S. bond price index returns have found
A) low correlations between investment grade bonds and high yield bonds.
B) high correlations between investment grade bonds and high yield bonds.
C) low correlations between various investment grade bond indexes.
D) negative correlations between investment grade bonds and high yield bonds.
E) None of these are correct.
Q3) Bond-market indicator series have been around much longer than stock-market indicator series.
A)True
B)False
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Chapter 5: Efficient Capital Markets, Behavioral Finance, and Technical Analysis
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Sample Questions
Q1) According to technical analysts, which mutual fund cash position guides investment decisions?
A) A low cash ratio position is a bullish indicator.
B) A high cash position is a bullish indicator.
C) A high cash position is a bearish indicator.
D) A low cash position is neither bearish nor bullish.
E) A low cash ratio position is a bearish indicator.
Q2) According to the strong-form efficient market hypothesis, stock prices fully reflect A) all security market information only.
B) all public information only.
C) all public and private information.
D) all private information only.
E) limited public and private information.
Q3) Advances and declines are associated with market
A) efficiency.
B) position.
C) diffusion.
D) depth.
E) breadth.
Page 9
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Chapter 6: An Introduction to Portfolio Management
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Sample Questions
Q1) The most important criteria when adding new investments to a portfolio is the
A) expected return of the new investment.
B) standard deviation of the new investment.
C) correlation of the new investment with the portfolio.
D) selection of the risk-free asset.
E) variance of the risk-free asset.
Q2) A portfolio is considered to be efficient if
A) no other portfolio offers higher expected returns with the same risk.
B) no other portfolio offers lower risk with the same expected return.
C) there is no portfolio with a higher return.
D) it is the risk-minimizing portfolio.
E) it is the risk-maximizing portfolio.
Q3) An investor is risk neutral if she chooses the asset with lower risk given a choice of several assets with equal returns.
A)True
B)False
Q4) A measure that only considers deviations above the mean is semi-variance.
A)True
B)False
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Chapter 6: An Introduction to Portfolio Management: Part A
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Sample Questions
Q1) 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.
Q2) 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
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11
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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12
Chapter 7: Asset Pricing Models
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Sample
Questions
Q1) One approach for using multifactor models is to use factors that capture systematic risk. Which of the following is NOT a common factor used in this approach?
A) unexpected changes in inflation
B) consumer confidence
C) yield curve shifts
D) unexpected changes in real GDP
E) All of these are correct.
Q2) A portfolio manager uses two different proxies for the market portfolio, the S&P 500 index, and the MSCI World index. Differences in the manager's portfolio performance resulting from the different market portfolios is referred to as
A) the size effect.
B) the market effect.
C) measurement error.
D) benchmark error.
E) manager's performance error.
Q3) CML and SML measure total risk by the standard deviation of the investment.
A)True
B)False
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13
Chapter 8: Equity Valuation
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Sample Questions
Q1) In 2018, Venus Fly Co. issued a $75 par value preferred stock that pays a 7 percent annual dividend. Due to changes in the overall economy and in the company's financial condition investors are now requiring a 5 percent return. What price would you be willing to pay for a share of the preferred if you receive your first dividend one year from now?
A) $125
B) $84
C) $91
D) $145
E) $105
Q2) In 2018, Smiths Corp. issued a $50 par value preferred stock that pays a 6 percent annual dividend. Due to changes in the overall economy and in the company's financial condition, investors are now requiring a 7 percent return. What price would you be willing to pay for a share of the preferred if you receive your first dividend one year from now?
A) $42.86
B) $30.00
C) $31.54
D) $33.38
E) $38.37
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Chapter 9: The Top-Down Approach to Market, Industry, and Company Analysis
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Sample Questions
Q1) Refer to Exhibit 9.14. What are the ROE's for Wal-Blue and its industry?
A) 24.3% and 27.0%
B) 29.7% and 27.0%
C) 29.7% and 30.0%
D) 33.6% and 30.0%
E) 34.5% and 31.5%
Q2) Refer to Exhibit 9.9. If the payout ratio changes to 50 percent, but there are no other changes, what will be the new P/E?
A) 3.25
B) 4.16
C) 5.75
D) 6.25
E) 7.67
Q3) Refer to Exhibit 9.2. What is the expected sustainable growth rate?
A) 9.0 percent
B) 7.2 percent
C) 6.0 percent
D) 3.0 percent
E) 3.6 percent
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Chapter 10: The Practice of Fundamental Investing
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Sample Questions
Q1) 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
Q2) The underpricing during the 1999-2000 technology bubble was above _____.
A) 18 percent
B) 30 percent
C) 25 percent
D) 66 percent
E) 55 percent
Q3) A stock pitch is like a book report or a news report.
A)True
B)False
Q4) Share repurchases do not always create value.
A)True
B)False
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Chapter 11: Equity Portfolio Management Strategies
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Sample Questions
Q1) Which of the following is NOT considered an active management strategy?
A) sector rotation
B) use of factor models
C) quantitative screens
D) full replication
E) linear programming
Q2) Fund XYZ had a pretax return of 10.2 percent and a tax-adjusted return of 9.5 percent. Calculate Fund XYZ's tax cost ratio.
A) 0.006
B) 0.106
C) 0.116
D) 0.342
E) 0.635
Q3) Style investing allows control of the total portfolio to be shared between investment managers and pension fund managers.
A)True
B)False
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Chapter 12: Bond Fundamentals and Valuation
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Sample Questions
Q1) Most U.S. municipal bonds are serial issues that are subject to state and local taxes when they are issued in the investor's home state.
A)True
B)False
Q2) Consider a bond with a current yield of 8 percent and a price of $1,250. What is this bond's coupon?
A) 8.0 percent
B) 10.0 percent
C) 11.0 percent
D) 8.5 percent
E) 9.6 percent
Q3) How much would you expect to pay for a $10,000 stripped Treasury bond quoted at 101:16?
A) $10,150.00
B) $10,000.00
C) $101.16
D) $10,160.00
E) $1,011.60
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18
Chapter 13: Bond Analysis and Portfolio Management Strategies
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Sample Questions
Q1) Convexity is a desirable feature of bonds because as interest rates decline, the price of a low convexity bond
A) decreases at a decreasing rate
B) decreases at an increasing rate.
C) increases at a decreasing rate.
D) increases at an increasing rate
E) decreases at a decreasing rate.
Q2) The longer the time to maturity, the greater the percentage change in a bond's price.
A)True
B)False
Q3) Calculate the modified duration of a bond that has a Macaulay duration of 7.6 and the bond pays interest semi-annually with a coupon rate of 6 percent and a required rate of return of 8 percent.
A) 7.04
B) 7.17
C) 7.31
D) 7.38
E) 8.12
Page 19
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Chapter 14: An Introduction to Derivative Markets and Securities
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Sample Questions
Q1) A stock currently sells for $75 per share. A call option on the stock with an exercise price of $70 currently sells for $5.50. The call option is
A) at-the-money.
B) in-the-money.
C) out-of-the-money.
D) at breakeven.
E) above-the-money.
Q2) Consider a stock that is currently trading at $65. Calculate the intrinsic value for a put option that has an exercise price of $55.
A) $10
B) $50
C) $55
D) -$10
E) $0
Q3) Forward contracts are traded over-the-counter and are generally not standardized.
A)True
B)False
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Page 20
Chapter 15: Forward, Futures, and Swap Contracts
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Sample Questions
Q1) Refer to Exhibit 15.12. If the futures contract was currently available for 1280, indicate the appropriate strategy that would earn an arbitrage profit.
A) long futures and short the index
B) short futures and long the index
C) long futures and long the index
D) short futures and short the index
E) None of these are correct.
Q2) A pay-fixed interest rate swap can be viewed as equivalent to A) a long position in a par-valued FRN and a long position in a par-valued, fixed-rate note.
B) a long position in a par-valued FRN and a short position in a par-valued, fixed-rate note.
C) a short position in a par-valued FRN and a long position in a par-valued, fixed-rate note.
D) a short position in a par-valued FRN and a short position in a par-valued, fixed-rate note.
E) a flat position in a par-valued FRN and a short position in a par-valued, fixed-rate note.
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Page 21
Chapter 16: Option Contracts
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Sample Questions
Q1) The owner of a call option on a futures contract has the obligation to buy the futures contract at a predetermined strike price during a specified time period.
A)True
B)False
Q2) The conversion price parity for a convertible bond is defined as
A) Market Price of Convertible Bond / Conversion Ration.
B) Market Price of Convertible Bond * Conversion Ration.
C) Market Price of Convertible Bond - Conversion Ration.
D) Market Price of Convertible Bond + Conversion Ration.
E) None of these are correct.
Q3) Refer to Exhibit 16.6. What would the net value of a protective put position be if the stock price at expiration is $35?
A) $3.10
B) $30.15
C) $32.10
D) $34.05
E) $35.00
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Chapter 17: Professional Money Management, Alternative
Assets, and Industry Ethics
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Sample Questions
Q1) A function your portfolio manager may perform for you is to maintain the diversification of your portfolio within your desired risk class.
A)True
B)False
Q2) On January 2, 2017, you invest $10,000 in the Tiger Fund, a load fund that charges a fee of 6 percent. The fund's returns were 25 percent in 2017, 35 percent in 2018, and -5 percent in 2019. On December 31, 2019, you redeem all your shares of Tiger. The dollar value is
A) $5,200.89.
B) $13,345.89.
C) $7,931.25.
D) $15,896.34.
E) $8,646.91.
Q3) The total market value of all assets of a mutual fund divided by the number of shares of the fund is known as the net asset value.
A)True
B)False
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Page 23
Chapter 18: Evaluation of Portfolio Performance
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Sample Questions
Q1) Refer to Exhibit 18.7. Based on the Sharpe Measure, which portfolio preformed best?
A) A
B) B
C) C
D) D
E) market
Q2) The policy effect is a difference in bond portfolio performance from that of a benchmark index due to a difference in duration.
A)True
B)False
Q3) Refer to Exhibit 18.10. Calculate TI's selectivity.
A) 0.0113
B) 0.1200
C) 0.0687
D) 0.0530
E) 0.0696
Q4) The market rewards investors for bearing total risk.
A)True
B)False
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