Financial Markets and Institutions
Exam Solutions
Course Introduction
Financial Markets and Institutions explores the structure, function, and role of financial markets and the various institutions that operate within them. The course provides an in-depth understanding of how money and capital markets facilitate the flow of funds, support economic growth, and manage risks. Topics include the characteristics and functions of financial instruments, the regulatory framework governing financial institutions, the operations of banks and non-bank financial intermediaries, interest rate determination, and the impact of monetary policy. By examining case studies and current developments, students gain insights into the challenges and opportunities faced by market participants in an increasingly globalized and technologically advanced financial system.
Recommended Textbook
Investment Analysis and Portfolio Management 1st Canadian Edition by Frank
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K. Reilly
Chapter 1: The Investment Setting
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Sample Questions
Q1) Refer to Exhibit 1-7. Calculate the real rate of return for Canadian large-cap stocks.
A) 7.06%
B) 6.18%
C) 4.75%
D) 3.75%
E) None of the above
Answer: B
Q2) The total risk for a security can be measured by its
A) Beta with the market portfolio
B) Systematic risk
C) Standard deviation of returns
D) Unsystematic risk
E) Alpha with the market portfolio
Answer: C
Q3) The geometric mean of a series of returns is always larger than the arithmetic mean and the difference increases with the volatility of the series.
A)True
B)False
Answer: False
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Page 3
Chapter 2: The Asset Allocation Decision
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Sample Questions
Q1) Equity allocations of pension funds in Japan and Germany are similar to those in the United States.
A)True
B)False
Answer: False
Q2) Individual security selection is far more important than the asset allocation decision.
A)True
B)False
Answer: False
Q3) Refer to Exhibit 2-1. What is the average tax for a single individual with taxable income of $85,000?
A) 13.57%
B) 15.68%
C) 21.68%
D) 25.74%
E) 29.55%
Answer: C
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Chapter 3: Selecting Investments in a Global Market
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Sample Questions
Q1) Which of the following is not considered a fixed income investment?
A) Corporate bonds.
B) Preferred stock.
C) Treasury bills, notes, and bonds.
D) Money market mutual funds.
E) Guaranteed investment securities.
Answer: D
Q2) Convertible bonds are bonds
A) That are convertible into more bonds.
B) That are convertible from unsecured to secured status.
C) That are convertible into company stock.
D) That are convertible into specific assets.
E) That have an option attached.
Answer: C
Q3) Treasury bills are long-term investments that make regular interest and principal payments.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Securities Markets and the Economy
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Sample Questions
Q1) Suppose you buy a round lot of DG Solutions stock on 60% margin when it is selling at $55 per share. The broker charges a 10% annual interest rate and commissions are 3% of the total stock value on both the purchase and the sale. If at year end you receive a $1.10 per share dividend and sell the stock for 55 5/8, what is your rate of return on the investment?
A) -10.38%
B) -12.84%
C) -10.95%
D) 21.84%
E) 28.38%
Q2) Which of the following is not a function of the specialist?
A) Assists Bank of Canada in controlling the money supply
B) Acts as a broker who handles the limit orders or special orders placed with member brokers
C) Buys and sells securities in order to stabilize the market
D) Acts as a dealer in assigned stocks to maintain a fair and orderly market
E) All of the above are functions of a specialist
Q3) Only the stocks of large companies are traded in the primary market.
A)True
B)False
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Chapter 5: Efficient Capital Markets
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Sample Questions
Q1) Which is not an implication of the EMH?
A) To do superior industry or company analysis you must understand the variables that affect returns and do a superior job of estimating these variables.
B) Aggregate market analysis that involves very detailed analysis of reliable historical economic data should outperform a simple buy-and-hold policy.
C) A superior analyst is one who can consistently select stocks that provide positive abnormal returns on a risk-adjusted basis.
D) If a portfolio manager does not have any superior analysts, he/she should consider investing funds in an index fund.
E) If a portfolio manager has some superior analytical skills, they should be encouraged to concentrate in second tier stocks which have liquidity, but may be neglected.
Q2) There is little evidence from studies examining initial public offerings (IPOs) that suggest markets are semi-strong form efficient.
A)True
B)False
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Chapter 6: An Introduction to Portfolio Management
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Sample Questions
Q1) Refer to Exhibit 6-9. What is the standard deviation of this portfolio?
A) 5.16%
B) 5.89%
C) 6.11%
D) 6.57%
E) 7.02%
Q2) If the covariance of two stocks is positive, these stocks tend to move together over time.
A)True
B)False
Q3) Between 1989 and 1999, the standard deviation of the returns for the S&P/TSX and the DJIA indexes were 0.19 and 0.06, respectively, and the covariance of these index returns was 0.0014. What was the correlation coefficient between the two market indicators?
A) 8.1428
B) 0.0233
C) 0.0073
D) 0.2514
E) 0.1228
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Page 8
Chapter 7: Asset Pricing Models: Capm and Apt
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Sample Questions
Q1) Calculate the expected return for B Services which has a beta of 0.83 when the risk free rate is 0.05 and you expect the market return to be 0.12.
A) 14.96%
B) 16.15%
C) 10.81%
D) 17.00%
E) 15.25%
Q2) Unlike the capital asset pricing model, the arbitrage pricing theory requires only the following assumption(s):
A) A quadratic utility function.
B) Normally distributed returns.
C) The stochastic process generating asset returns can be represented by a factor model.
D) A mean-variance efficient market portfolio consisting of all risky assets.
E) All of the above
Q3) One of the assumptions of capital market theory is that investors can borrow or lend at the risk free rate.
A)True
B)False
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Chapter 8: Economic and Industry Analysis
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Sample Questions
Q1) The rates of returns for firms within an industry vary which indicates that company analysis is necessary after industry analysis.
A)True
B)False
Q2) Which of the following is not a stage in the industrial life cycle?
A) Early pioneering development
B) Rapid accelerating growth
C) Acquisition and consolidation
D) Mature growth
E) Stabilization and market maturity
Q3) Which of the following is not considered a structural influence on the economy and industry?
A) Demographics
B) Life-styles
C) International economics
D) Social values
E) Technology
Q4) Structural changes do have a cyclical pattern.
A)True
B)False
Page 10
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Chapter 9: Company Analysis and Stock Valuation
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Sample Questions
Q1) Refer to Exhibit 9-1. In the listing above, which three factors influence the earnings multiple for a stock?
A) 1, 4, and 5
B) 1, 4, and 6
C) 2, 4, and 6
D) 2, 5, and 6
E) 4, 5, and 6
Q2) Porter contends that _________ and ______________ are two important competitive strategies.
A) Low cost leadership, barrier to entry
B) New entrant deterrent, differentiation
C) Low cost leadership, differentiation
D) Differentiation, monopolistic
E) Monopolistic simulation, differentiation
Q3) Operating free cash flow and free cash flow to equity are equivalent cash flow concepts.
A)True
B)False
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Chapter 10: Technical Analysis
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Sample Questions
Q1) A support level is the price range at which the technician would expect an increase in the supply of stock and a price reversal.
A)True
B)False
Q2) Technicians believe that an industry or stock that is outperforming the market will tend to
A) Continue to outperform the market.
B) Return to normal.
C) Reverse trend.
D) Meet a resistance level.
E) Form head and shoulder patterns.
Q3) The confidence index published by Barron's is the ratio of the average yield on 10 top grade corporate bonds to the
A) Average yield on 30 blue chip corporate stocks.
B) Average yield on 40 convertible corporate bonds.
C) Yield on Treasury bills.
D) Yield on intermediate-grade bonds.
E) Yield on the Scotia Capital Bond Universe Index
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Chapter 11: Bond Fundamentals
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Sample Questions
Q1) In the Eurozone, the government sector is the largest bond market segment.
A)True
B)False
Q2) Bond ratings are negatively related to
A) Profitability.
B) Cash flow coverage.
C) Earnings instability.
D) All of the above.
E) None of the above.
Q3) Most U.S. municipal bonds are serial issues which are subject to state and local taxes when they are issued in the investor's home state.
A)True
B)False
Q4) Bonds can have different types of collateral and can be secured, unsecured or registered bonds.
A)True
B)False
Q5) High-yield bonds are considered "investment" grade.
A)True
B)False
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Chapter 12: The Analysis and Valuation of Bonds
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Sample Questions
Q1) Suppose you have a 15%, 25 year bond traded at $975. If it is callable in 5 years at $1050, what is the bond's yield to call? Interest is paid annually.
A) 15%
B) 16.5%
C) 7.65%
D) 8.52%
E) 9.64%
Q2) According to the expectations hypothesis, a rising yield curve indicates that investors demand for long maturity bonds is expected to rise.
A)True
B)False
Q3) The expectations hypothesis is also known as both the institutional theory and the hedging pressure theory.
A)True
B)False
Q4) An interest rate is the price of loanable funds.
A)True
B)False
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Chapter 13: An Introduction to Derivative Markets and Securities
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Sample Questions
Q1) 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
Q2) Refer to Exhibit 13-8. If you establish a long strap using the options with an 95 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?
A) $81.25 loss
B) $1,606.25 gain
C) $1,606.25 loss
D) $268.75 loss
E) $268.75 gain
Q3) The minimum value of an option is zero.
A)True
B)False
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Page 15
Chapter 14: Derivatives: Analysis and Valuation
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Sample Questions
Q1) An investor considering investment in warrants as part of an overall program, should consider which of the following?
A) Diversification
B) Cutting losses short, and letting profits run
C) A low intrinsic value
D) Viewing warrant selection as a portion of the total investment process
E) All of the above.
Q2) An equity call option issued directly by the company whose stock serves as the underlying asset is known as a
A) Collar.
B) Cap.
C) Floor.
D) Warrant.
E) Swap.
Q3) The conversion premium for a convertible bond is calculated as:
A) (Market Price + Minimum Value) / Minimum Value.
B) (Market Price / Minimum Value) ´ Minimum Value.
C) (Market Price + Minimum Value) ´ Minimum Value.
D) (Market Price - Minimum Value) / Minimum Value.
E) (Market Price ´ Minimum Value) / Minimum Value.
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Chapter 15: Equity Portfolio Management Strategies
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Sample Questions
Q1) The asset allocation strategy that separately examines capital market conditions and the investor's objectives and constraints is called
A) Integrated asset allocation.
B) Tactical asset allocation.
C) Sector rotation.
D) Strategic asset allocation.
E) Insured asset allocation.
Q2) Growth stocks consistently outperform value stocks.
A)True
B)False
Q3) 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) Choices a and b.
E) Choices b and c.
Q4) Growth oriented investors focus on the price component of the Price/Earnings ratio.
A)True B)False
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Chapter 16: Bond Portfolio Management Strategies
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Sample Questions
Q1) In valuation analysis, undervalued bonds are bonds where the expected YTMs are lower than the prevailing YTM.
A)True
B)False
Q2) The duration of a perpetual bond is always equal to its term to maturity.
A)True
B)False
Q3) Refer to Exhibit 16-10. Calculate the Modified Duration for Bond A.
A) 0.98
B) 1.79
C) 1.90
D) 1.93
E) 2.31
Q4) Refer to Exhibit 16-9. Calculate the modified duration for Bond Y.
A) 7.8
B) 4.22
C) 4.34
D) 7.5
E) 9.8
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Chapter 17: Professional Money Management, Alternative
Assets, and Industry Ethics
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Sample Questions
Q1) In the case of open-end investment companies, shares of the company
A) Trade on the secondary market.
B) Can be bought from or sold to the investment company at the NAV.
C) Are determined by supply and demand.
D) Choices a and c.
E) Choices b and c.
Q2) An open-end investment company differs from a closed-end investment company by the way they operate after the initial public offering.
A)True
B)False
Q3) Suppose you consider investing $1,000 in a load fund which charges a fee of 2%, and you expect the fund to earn 14% over the next year. Alternatively, you could invest in a no-load fund with similar risk that is expected to earn 9% and charges a 1/2% redemption fee. Which is better and by how much?
A) Funds are equal
B) Load fund by $32.65
C) Load fund by $50.55
D) No-load fund by $64.55
E) No-load fund by $44.30
Page 19
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Chapter 18: Evaluation of Portfolio Performance
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Sample Questions
Q1) In the evaluation of bond portfolio performance, the analysis effect refers to
A) The difference in portfolio duration and index duration.
B) The extra return attributable to acquiring bonds that are temporarily mispriced relative to risk.
C) To short-run changes in the portfolio during a specific period.
D) The differential return from changing duration of the portfolio during a specific period.
E) None of the above
Q2) Selectivity measures how well a portfolio performed relative to a
A) Market portfolio (S&P 400).
B) Portfolio of the same securities in the previous period.
C) Naively selected portfolio of equal risk.
D) Naively selected portfolio of equal return.
E) World market portfolio.
Q3) Portfolio managers who anticipate an increase in interest rates should
A) Act to keep the duration constant.
B) Decrease the portfolio duration.
C) Increase the portfolio duration.
D) Assume higher risk in the market.
E) Invest in junk bonds.
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Page 20
Chapter 19: Analysis of Financial Statements
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Sample Questions
Q1) Refer to Exhibit 19-6. What is the firm's cash flow from operating activities for the year 2009?
A) $2100
B) $1900
C) $1800
D) $1700
E) $1600
Q2) Which of the following is not a component of return on equity (ROE)?
A) Net income/sales
B) Total assets/equity
C) Equity/sales
D) Sales/total assets
E) Net Profit Margin
Q3) Operating performance is divided into which two subcategories of ratios?
A) Efficiency and profitability
B) Efficiency and debt
C) Profitability and growth
D) Debt and equity
E) Liquidity and leverage
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Chapter 20: An Introduction to Security Valuation
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Sample Questions
Q1) Ross Corporation paid dividends per share of $1.20 at the end of 1999. At the end of 2009 it paid dividends per share of $3.50. Calculate the compound annual growth rate in dividends.
A) 52.17%
B) 34.28%
C) 23%
D) 19.17%
E) 11.29%
Q2) Using the constant growth model, an increase in the required rate of return from 14 to 15% combined with an increase in the growth rate from 6 to 7% 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%.
Q3) A preferred stock is a perpetuity.
A)True
B)False
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Page 22
Chapter 21: Web Appendix: A Review of Statistics and the
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Sample Questions
Q1) The expected return from this investment is
A) -0.0752
B) -0.0040
C) 0.00
D) 0.0075
E) 0.4545
Q2) The coefficient of variation of this investment is
A) -0.06
B) -0.65
C) 6.60
D) 16.53
E) 165.10
Q3) The standard deviation of your expected return from this investment is
A) 0.001
B) 0.004
C) 0.124
D) 1.240
E) None of the above
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Chapter
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Sample Questions
Q1) The standard deviation of your expected return from this investment is
A) 0.001
B) 0.004
C) 0.124
D) 1.240
E) None of the above
Q2) The expected return from this investment is
A) -0.0752
B) -0.0040
C) 0.00
D) 0.0075
E) 0.4545
Q3) The coefficient of variation of this investment is
A) -0.06
B) -0.65
C) 6.60
D) 16.53
E) 165.10
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Chapter 23: Appendix: Objectives and Constraints of Institutional Investors
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Sample Questions
Q1) Cash flows for nonlife insurance companies, such as property and casualty, are similar to cash flows of life insurance companies.
A)True
B)False
Q2) Banks typically
A) Have low liquidity needs.
B) Face very few federal and state regulatory constraints.
C) Don't have to compete for funds.
D) Have high liquidity needs and a short time horizons constraint.
E) Low investment risk.
Q3) Banks face regulatory constraints at both the state and federal level.
A)True
B)False
Q4) Banks must compete for funds (savings deposits, CDs, etc.) in order to make loans and other types of investments.
A)True
B)False
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