Financial Markets and Institutions
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Course Introduction
This course provides an in-depth analysis of the structure, function, and role of financial markets and institutions in the global economy. Topics include the organization and operation of money and capital markets, the characteristics and regulation of financial intermediaries, and the impact of monetary policy on market performance. Students will explore the mechanisms of asset pricing, risk management, and the process of financial intermediation, as well as contemporary issues such as fintech innovations and global financial crises. The course equips students with the foundational knowledge necessary to understand how financial systems facilitate economic growth and stability.
Recommended Textbook Investments Analysis and Management 13th Edition by Charles P. Jones
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Chapter 1: Understanding Investments
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Q1) What are some of the steps involved in valuing a company's common stock?
Answer: The investor must evaluate the overall economy,industry and individual company,since all have an impact on the value of the stock.In addition,the expected return and appropriate risk must be estimated,based upon the expected future cash flows of the company.And lastly,the efficiency of stock markets must be consideredand whether the current market value of the stock is greater or less than its perceived economic value.
Q2) Regulation FD applies to disclosure between:
A)private companies and public officials.
B)public companies and investment professionals.
C)public companies and public officials.
D)private companies and investment professionals.
Answer: B
Q3) Financial planners must pass a standardized test and possess certain credentials.
A)True
B)False
Answer: False
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Chapter 2: Investment Alternatives
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Q1) Bond ratings are primarily used to assess interest rate risk.
A)True
B)False
Answer: False
Q2) What is the major difference between municipal bonds and other types of bonds?
A)Municipal bonds are always insured;other bonds are not.
B)Unlike other bonds,municipal bonds sell at a discount.
C)Municipal bond interest is tax-exempt;interest on other bonds is not.
D)There is no brokerage commission on municipal bonds unlike other bonds.
Answer: C
Q3) Savings accounts are:
A)negotiable but are not liquid.
B)marketable but are not liquid.
C)liquid but are not personal.
D)liquid but are not marketable.
Answer: D
Q4) The par value of Blaze,Inc.common stock is $0.50,the earnings per share is $4,the stock price is $60,and the dividend per share is $1.Calculate the payout ratio.
Answer: Payout rate = $1/$4 = 0.25 = 25%
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Chapter 3: Indirect Investing
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Q1) Which of the following types of funds tend to keep 25% of its assets in the securities of U.S.companies?
A)Emerging markets funds
B)Single-country funds
C)International funds
D)Global funds
Answer: D
Q2) Three common costs incurred by Class A shares are:
Answer: front-end sales charge,12b-1 distribution fee (typically smaller than for other share classes),and annual expense ratio (also typically smaller than for other share classes)
Q3) Which of the following is not a characteristic of investments companies?
A)Pooled investing
B)Diversification
C)Managed portfolios
D)Reduced expenses
Answer: D
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Chapter 4: Securities Markets and Market Indexes
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Q1) How do you think the globalization of the securities markets will impact the NYSE and the Nasdaq? What specific developments do you foresee happening soon for the global marketplace?
Q2) Which exchange member is assigned to a specific trading post?
A)Commission broker
B)Floor trader
C)Specialist
D)Dealer
Q3) A market capitalization-weighted index obtains the current market value of each stock by:
A)averaging the trade price for each day.
B)multiplying price times shares outstanding.
C)multiplying price times daily volume.
D)dividing earnings by shares outstanding.
Q4) Investment bankers are compensated by:
A)the underwriting spread.
B)commissions paid by the buyers of the security.
C)commission paid by the sellers of the security.
D)guaranteed investment contracts.
Q5) What is the Nasdaq National Market System?
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Chapter 5: How Securities Are Traded
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Q1) Charles Schwab,Fidelity,and Vanguard are examples of premium discount brokers.
A)True
B)False
Q2) A trading halt on the NYSE occurs:
A)only when the SEC officially declares one is necessary.
B)when the market declines more than 10 percent during the day.
C)to allow a company to announce important news or where there is a significant order imbalance between buyers and sellers in a security.
D)any time designated market makers exhaust their capital.
Q3) What is the difference between the potential gains and losses on long positions versus the potential gains and losses on short sales?
Q4) FINRA's objective is to:
A)protect the bid-ask spread and exchange participants' profits.
B)protect corporations and investors.
C)protect investors and ensure market integrity.
D)ensure market integrity and protect the stock exchanges from loss.
Q5) Specialists often sell short to meet public buy orders.
A)True
B)False
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Chapter 6: The Risks and Returns From Investing
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Q1) Political stability is the major factor concerning:
A)exchange-rate risk.
B)systematic risk.
C)nonsystematic risk.
D)country risk.
Q2) New financial disclosure regulations affecting the brokerage industry are a type of:
A)market risk.
B)financial risk.
C)business risk.
D)liquidity risk.
Q3) What is the major drawback of a return measure?Why is it the most common return calculation used by investors?
Q4) New regulations concerning auto emissions would be a type of market risk for the auto industry.
A)True
B)False
Q5) Return and risk are inversely related.
A)True
B)False
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Chapter 7: Portfolio Theory
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Q1) Security A and Security B have a correlation coefficient of 0.If Security A's return is expected to increase by 10 percent,Security B's:
A)return should also increase by 10 percent.
B)return should decrease by 10 percent.
C)return should be zero.
D)expected return is impossible to determine from the above information.
Q2) The major problem with the Markowitz model is that it requires a full set of ___________ between the asset returns in order to calculate portfolio variance.
Q3) The correlation coefficient identifies what causes the relative movement in returns between two securities.
A)True
B)False
Q4) The major problem with the Markowitz model is its:
A)lack of accuracy.
B)predictability flaws.
C)complexity.
D)inability to handle large number of inputs.
Q5) An efficiently diversified portfolio still has _____________________ risk.
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Chapter 8: Portfolio Selection
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Q1) In the past 20 years,the benefits of international diversification have:
A)increased.
B)decreased.
C)disappeared.
D)become more volatile.
Q2) Which of the following statements about diversification is most accurate?The purpose of diversification is to:
A)increase a portfolio's expected return.
B)reduce a portfolio's non-diversifiable risk.
C)reduce a portfolio's systematic risk.
D)reduce a portfolio's total risk.
Q3) What variable is manipulated to determine efficient portfolios,and why are the other variables not changed at will?
Q4) Which of the following is true regarding the Markowitz model?
A)It fully addresses the use of leverage.
B)The inputs to the model are the portfolio asset weights.
C)An investor's optimal portfolio occurs where the investor's indifference curve is tangent to the efficient frontier.
D)Markowitz diversification is inefficient diversification.
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Chapter 9: Asset Pricing Models
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Q1) The APT is based on the:
A)law of averages.
B)law of attraction.
C)law of accelerating return.
D)law of one price.
Q2) Which of the following is generally used as a proxy for the risk-free rate of return?
A)Savings account
B)Certificate of deposit
C)Treasury security
D)AAA-rated bond
Q3) Which of the following is not one of the assumptions of the CMT?
A)All investors have the same one-period time horizon.
B)There are no personal income taxes.
C)There is no interest rate charged on borrowing.
D)There are no transaction costs.
Q4) Assume a risk-free rate of 5 percent and an expected market return of 15 percent.Now suppose that the SML shifts,changing slope,so that kRF is still 5 percent but kM is now 16 percent.What does this shift suggest about investors' risk aversion?If the slope were to change downward,what would that suggest?
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Chapter 10: Common Stock Valuation
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Q1) Tanex Inc.has a return on assets (ROA)of 12%,a return on equity (ROE)of 15%,and a dividend payout ratio of 60%.Based on the sustainable growth formula,Tanex's estimated growth is:
A)4.8%.
B)6.0%.
C)7.2%.
D)9.0%.
Q2) Stan expects Terta Corp.to pay its first dividend of $3 in five years.He expects the dividend to grow at 6% thereafter,and his required return on the stock is 9.5%.The largest amount that Stan should pay for the stock is closest to:
A)$54.
B)$60.
C)$68.
D)$86.
Q3) Economic value added (EVA)indicates the amount by which a company's operating profit exceeds its cost of capital.
A)True
B)False
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Chapter 11: Common Stocks: Analysis and Strategy
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Q1) One of the most famous investment advisory services since 1965 is:
A)the Wall Street Journal.
B)Standard and Poor's Corporate Records.
C)Moody's.
D)the Value Line Investment Survey.
Q2) How is the required rate of return utilized in stock analysis?
Q3) Which of the following statements regarding a buy-and-hold strategy are true?
A)There are no selection choices to be made under this strategy.
B)This strategy is applicable only to large portfolios.
C)There is no reinvestment decision to make under this strategy.
D)This strategy produces relatively low transactions and search costs.
Q4) The Coffeehouse Portfolio suggests investors hold:
A)50% bonds,50% equities (including the S&P 500,Large Cap Value,International,Small Cap,and Small Cap Value stocks).
B)40% bonds,60% equities (including the S&P 500,Large Cap Value,International,Small Cap,Small Cap Value,and REITs).
C)60% bonds,40% equities (in two index funds).
D)40% bonds,60% equities (in two index funds).
Q5) What is meant by the term "defensive stocks?"Give some examples.
Q6) How could one invest indirectly in sectors and practice sector rotation?
Page 13
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Chapter 12: Market Efficiency
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Q1) A test which investigates whether publicly available financial accounting information can be used to generate abnormal returns is a direct test of:
A)weak form market efficiency.
B)semi-strong form market efficiency.
C)strong form market efficiency.
D)mean variance market efficiency.
Q2) Which of the following observations is most consistent with the EMH?
A)The January effect
B)The random walk
C)The low P/E effect
D)The success of the Value Line Investment Survey
Q3) The momentum effect indicates that stocks with the:
A)best long-term past performance will continue to perform well.
B)best short-term past performance will continue to perform well.
C)worst long-term past performance will reverse course and perform well.
D)worst short-term past performance will reverse course and perform well.
Q4) Efficient markets imply investors can not earn abnormal returns.
A)True
B)False
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Chapter 13: Economy Market Analysis
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Q1) Which of the following is not a component of GDP?
A)Business investment spending
B)Government investment spending
C)Net exports
D)Financial transactions
Q2) To value the market,an investor must analyze both corporate earnings and multipliers.
A)True
B)False
Q3) Traditionally,how many months before an economic recovery have stock prices started increasing?
A)3-5,with 4 typical
B)5-7,with 6 typical
C)8-10,with 9 typical
D)10-12,with 11 typical
Q4) Most analysts agree that using the money supply as an indicator of future economic activity is accurate.
A)True
B)False
Q5) Why is there an inverse relationship between P/Es and dividend yield?
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Chapter 14: Industry Analysis
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Q1) At what stage of a company's life cycle does an investor typically stand to earn the highest return?
A)Pioneering stage
B)Expansion stage
C)Stabilization stage
D)Declining stage
Q2) Which of the following has 10 economic sectors,24 industry groupings,64 industries and 139 sub-industries?
A)SIC
B)NAICS
C)GICS
D)Value Line Investment Survey
Q3) Based on past evidence,if an industry has the number one ranking on price performance,which of the following statements is most accurate?The investor should:
A)not expect that same industry to be ranked number one again next year.
B)expect that industry to maintain its top ranking for five years or more.
C)expect that industry to do well over the next 10 to 20 years.
D)expect that industry to drop out of the top ten rankings within five years.
Q4) Differentiate between defensive industries and countercyclical industries.
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Chapter 15: Company Analysis
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Q1) Which of the following approaches best indicates how EPS should be computed?Take after-tax net income and divide by:
A)current common shares outstanding.
B)previous years common shares outstanding.
C)treasury shares outstanding.
D)average common shares outstanding.
Q2) Other things being equal,as k rises,the P/E ratio will also rise.
A)True
B)False
Q3) In modern investment analysis,the market risk of a stock is measured by its: A)beta.
B)standard deviation.
C)leverage.
D)coefficient of variation.
Q4) What is meant by "quality of earnings," and how does it affect the equity analyst's job?
Q5) Free cash flow represents money left after all the bills are paid and dividend payments are made.
A)True
B)False
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Chapter 16: Technical Analysis
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Q1) A put/call ratio greater than the typical upper limit would be interpreted as a bullish signal by the contrarians.
A)True
B)False
Q2) Institutional investors are often considered to have the "smart money," while small,individual investors are not so well informed about the market.Which two sentiment indicators treat both institutions and individuals alike?
Q3) The cash position of mutual funds is a contrarian indicator.
A)True
B)False
Q4) Historical tests of filter rules indicate that:
A)several filters were profitable before commissions,but not after.
B)several filters were profitable before and after commissions.
C)no filters were profitable even before commissions.
D)all filters were profitable before commissions,but not after.
Q5) Explain three specific buy signals using a moving average.
Q6) Secondary movements are often termed technical corrections.
A)True
B)False
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Chapter 17: Bond Yields
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Q1) If the yield curve has a steep upward slope,investors expect:
A)interest rates to increase and inflation rates to decrease.
B)interest rates to decrease and inflation rates to increase.
C)interest rates to increase and inflation rates to increase.
D)interest rates to decrease and inflation rates to decrease.
Q2) The vast majority of corporate bonds pay floating rates on a quarterly basis.
A)True
B)False
Q3) Sam holds a $1 million bond portfolio with an average maturity of 9 years,whereas Walt holds a $1 million bond portfolio with an average maturity of 3 years.If interest rates increase substantially,Sam's portfolio will experience the:
A)larger decline in value of the two portfolios.
B)larger increase in value of the two portfolios.
C)smaller decline in value of the two portfolios.
D)smaller increase in value of the two portfolios.
Q4) Relative to interest rates,bond prices have:
A)an inverse and linear relationship.
B)a direct and linear relationship.
C)an inverse and convex relationship.
D)an inverse and concave relationship.
Page 19
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Chapter 18: Bonds: Analysis and Strategy
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Q1) Using its modified duration,the price of a coupon bond is forecasted to change from $990 to $925 due to an increase in interest rates.If the bond's convexity is considered,the new forecasted price of the bond will be:
A)higher than $925.
B)lower than $925.
C)equal to $925.
D)Cannot be determined.
Q2) The term structure of interest rates is also known as the:
A)yield to maturity.
B)probability distribution.
C)yield differential.
D)yield curve.
Q3) Which of the following European countries experienced a debt crisis in recent years?
A)Germany
B)Great Britain
C)Greece
D)France
Q4) Why is immunization considered to be a hybrid strategy?
Q5) What are two passive management strategies?Two active strategies?
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Chapter 19: Options
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Q1) A stock has a price of $68 per share.A two-month put (strike price = $70)on the stock is available at a $6 premium.The intrinsic value on the put is:
A)$0 and its time value is $6.
B)$0 and its time value is $4.
C)$2 and its time value is $4.
D)$4 and its time value is $2.
Q2) To provide insurance against declining prices on previously purchased stock,an investor could:
A)buy a call.
B)write a put.
C)buy a stock index option.
D)buy a put.
Q3) What organizational feature of options trading prevents individual traders from having to worry about defaults if options are exercised?
Q4) What is put-call parity?How is it related to arbitrage?
Q5) The Options Clearing Corporation does not ensure fulfillment of option obligations. A)True B)False
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Chapter 20: Futures
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Q1) Program trading generally involves positions in both stocks and stock-index futures.
A)True
B)False
Q2) In a margin account,if the account balance falls below the maintenance margin,a margin call is triggered.
A)True
B)False
Q3) What economic functions are fulfilled by futures?
Q4) When trading futures,margin:
A)is seldom used.
B)indicates that credit is being extended.
C)serves as a down payment.
D)in effect,is a performance bond.
Q5) Which of the following is not a potential advantage of speculating in futures?
A)Leverage
B)Ease of transacting
C)Low transactions costs
D)High and narrow probability distribution of expected returns
Q6) Briefly discuss the concept of margin in futures trading.
Page 22
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Chapter 21: Portfolio Management
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Q1) Once a year,Rita resets the weights of her largest client's portfolio to 50% debt and 50% equity.Which of the following best describes Rita's actions with respect to the client's portfolio?Rita is following a:
A)buy-and-hold approach with calendar rebalancing.
B)constant mix approach with calendar rebalancing.
C)constant proportion portfolio insurance approach with corridor rebalancing.
D)buy-and-hold approach with corridor rebalancing.
Q2) Which of the following is not true regarding the life-cycle approach to investment?
A)It is most appropriate for institutions.
B)It automatically becomes more conservative as the investor nears retirement age.
C)It is suited to 401(k)plans.
D)It can be implemented using life-cycle (also known as target-date)funds.
Q3) Historically,the annual return on the U.S.stock market has averaged approximately:
A)3.0%
B)7.0%
C)10.0%
D)15.0%
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Chapter 22: Evaluation of Investment Performance
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Q1) The information ratio is calculated as the ratio of:
A)mean active return to tracking risk.
B)alpha to beta.
C)excess return to portfolio standard deviation.
D)portfolio excess return to tracking risk.
Q2) Which fund's returns are best explained by the market's returns?
A)Fund 1
B)Fund 2
C)Fund 3
D)Fund 4
Q3) The coefficient of determination,also known as R-squared,is used to denote the degree of diversification.
A)True
B)False
Q4) The purpose of performance attribution is to assess the risk of a portfolio.
A)True
B)False
Q5) Jensen's alpha is a risk-adjusted performance measure.
A)True
B)False
24
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