Financial Markets and Institutions
Mock Exam
Course Introduction
This course provides an in-depth exploration of financial markets and institutions, focusing on their roles, functions, and impact on the global economy. Students will examine the structure and operations of various financial markets, such as money, capital, and derivatives markets, and analyze the financial instruments traded within them. The course also covers the major financial institutions, including commercial banks, investment banks, insurance companies, and mutual funds, highlighting their roles in facilitating economic activity and managing financial risk. Topics such as interest rate determination, regulation, financial crises, and innovations in financial technology are discussed to equip students with a comprehensive understanding of the dynamic financial landscape.
Recommended Textbook
Investment Analysis and Portfolio Management 11th Edition by Frank K. Reilly
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Page 2
Chapter 1: The Investment Setting
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Sample Questions
Q1) Measures 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: D
Q2) Refer to Exhibit 1.2. What was your annual holding period return?
A) 0.8667
B) -0.1333
C) 0.0333
D) 0.9534
E) -0.0466
Answer: D
Q3) An investment is the current commitment of dollars over time to derive future payments to compensate the investor for the time funds are committed, the expected rate of inflation, and the uncertainty of future payments.
A)True
B)False
Answer: True
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Chapter 1: The Investment Setting: Part A
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Sample Questions
Q1) 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.
Answer: D
Q2) 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
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Chapter 2: Asset Allocation and Security Selection
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Sample Questions
Q1) For an investor with a time horizon of eight years and higher risk tolerance, an appropriate asset allocation strategy would be
A) 100 percent stocks.
B) 100 percent cash.
C) 30 percent cash, 50 percent bonds, and 20 percent stocks.
D) 10 percent cash, 30 percent bonds, and 60 percent stocks.
E) 100 percent bonds.
Answer: D
Q2) An appropriate investment objective for a typical 25-year-old investor is a low-risk strategy, such as capital preservation or current income.
A)True
B)False
Answer: False
Q3) The spending phase occurs when investors are relatively young.
A)True
B)False
Answer: False
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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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Sample Questions
Q1) It is required by law that a stock market must have a physical location.
A)True
B)False
Q2) Refer to Exhibit 3.1. If the maintenance margin is 25 percent, to what price can Turtle Industries fall before Jackie receives a margin call?
A) $14.56
B) $23.17
C) $32.42
D) $26.67
E) $25.52
Q3) 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) the NASDAQ market.
B) electronic communications networks (ECN).
C) high frequency trading (HFT).
D) algorithmic trading (AT).
E) intermarket trading system (ITS).
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Chapter 4: Security Market Indexes and Index Funds
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Sample Questions
Q1) When constructing an index, a small percentage of the total population will provide valid indications of the behavior of the total population if the sample is properly selected.
A)True
B)False
Q2) Refer to Exhibit 4.7. If the December 31, 2011 value weighted index for ABC was 100, what is the value weighted index for ABC on December 31, 2012?
A) 108.35
B) 114.74
C) 120.19
D) 126.67
E) 131.54
Q3) The Value Line Composite Average is calculated using the ____ of percentage price changes.
A) arithmetic average
B) harmonic average
C) expected value
D) geometric average
E) logarithmic average
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8
Chapter 5: Efficient Capital Markets, Behavioral Finance, and Technical Analysis
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Sample Questions
Q1) There is empirical evidence that low P/E stocks have outperformed high P/E stocks for some historical time periods.
A)True
B)False
Q2) Banz and Reinganum found that small firms consistently outperformed large firms. This anomaly is referred to as the
A) large firm effect.
B) size effect.
C) small firm effect.
D) earnings effect.
E) growth firm effect.
Q3) A resistance level is the price range at which the technician would expect an increase in the demand of stock and a price reversal.
A)True
B)False
Q4) The Dow Theory contends that stock price movements are similar to the movement of tides, waves, and ripples.
A)True
B)False
Page 9
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Chapter 6: An Introduction to Portfolio Management
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Sample Questions
Q1) Refer to Exhibit 6.12. Calculate the expected returns and expected standard deviations of a two-stock portfolio when r<sub>1,2</sub> = .80 and w<sub>1</sub> = .60.
A) .144 and .0002
B) .144 and .0018
C) .136 and .0045
D) .136 and .0455
E) .136 and .4554
Q2) The correlation coefficient between the market return and a risk-free asset would
A) be +\(\infty\).
B) be -\(\infty\).
C) be +1.
D) be -1.
E) be zero.
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
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10
Chapter 6: An Introduction to Portfolio Management: Part A
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Sample Questions
Q1) 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
Q2) 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.
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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. 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.
Q2) 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
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12
Chapter 7: Asset Pricing Models
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Sample Questions
Q1) Consider the following two factor APT model: E(R) = \(\lambda\)0 + \(\lambda\)1b1 + \(\lambda\)2b2
A) \(\lambda\)1 is the expected return on the asset with zero systematic risk.
B) \(\lambda\)1 is the expected return on asset 1.
C) \(\lambda\)1 is the pricing relationship between the risk premium and the asset.
D) \(\lambda\)1 is the risk premium.
E) \(\lambda\)1 is the factor loading.
Q2) Calculate the expected return for C Inc., which has a beta of 0.8 when the risk-free rate is 0.04 and you expect the market return to be 0.12.
A) 8.10 percent
B) 9.60 percent
C) 10.40 percent
D) 11.20 percent
E) 12.60 percent
Q3) Studies have shown the beta is more stable for portfolios than for individual securities.
A)True
B)False
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13
Chapter 8: Equity Valuation
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Sample Questions
Q1) Ross Corporation paid dividends per share of $1.20 at the end of 1990. At the end of 2000, it paid dividends per share of $3.50. Calculate the compound annual growth rate in dividends.
A) 52.17 percent
B) 34.28 percent
C) 23 percent
D) 19.17 percent
E) 11.29 percent
Q2) Using the constant growth model, an increase in the required rate of return from 14 to 18 percent combined with an increase in the growth rate from 8 to 12 percent would cause the price to
A) fall more than 4%0
B) fall less than 4%.
C) rise more than 4%.
D) rise less than 4%.
E) remain constant.
Q3) Operating margins are defined as Operating Profit/Sales
A)True
B)False
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Page 14
Chapter 9: The Top-Down Approach to Market, Industry, and Company Analysis
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Sample Questions
Q1) In Berkshire Hathaway annual reports, Warren Buffet highlights financial tenets that he believes are important. Which of the following is NOT a financial tenet of Warren Buffet?
A) focus on return on equity (ROE) not earnings per share (EPS)
B) calculate owner earnings similar to free cash flow after capital expenditures
C) high profit margins relative to the industry
D) Company should create at least one dollar of market value for every dollar retained.
E) All of these are correct.
Q2) Refer to Exhibit 9.11. Determine the justified P/E ratio for Modular Industries assuming Modular can maintain its superior growth rate for the next five years.
A) 6.4
B) 13.1
C) 16.5
D) 23.8
E) 15.7
Q3) A stock with low systematic risk is considered to be a defensive stock.
A)True
B)False
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Chapter 10: The Practice of Fundamental Investing
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Sample Questions
Q1) Compensation for the top executives at public companies is set by a compensation committee, which is a subset of the board of directors.
A)True
B)False
Q2) Which of the following describes the process of when the underwriter takes the issuing company's management to meet with potential investors?
A) Indications of interest
B) The pricing meeting
C) The registration statement
D) The road show
E) The prospectus
Q3) A company is going public with an offering price of $15 per share. The gross spread is 7 percent. How much will the bank receive? How much will the issuing firm receive?
A) $1.05; $13.95
B) $1.50; $15.00
C) $1.50; $13.50
D) $1.05; $15.00
E) $7.00; $15.00
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Chapter 11: Equity Portfolio Management Strategies
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Sample Questions
Q1) Which of the following is considered a strategy for timing the market and adding value to actively managed portfolios?
A) timing the markets by shifting between different types of securities based on market forecasts and estimated risk premiums.
B) shifting funds between the various equity sectors, industries, investment styles, etc., in order to take advantage of the "hot" concept before the remainder of the market does.
C) individual stock picking in order to buy low and sell high.
D) using tactical asset allocation strategies.
E) All of these are correct.
Q2) Which of the following statements regarding momentum strategies is TRUE?
A) Price momentum is a fundamental strategy.
B) Earnings momentum is a technical strategy.
C) Price momentum and earnings momentum strategies will often result in identical portfolio strategies and holdings.
D) The earnings momentum investor will most likely acquire stocks for companies that have positive earnings surprises.
E) All of these are correct.
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17
Chapter 12: Bond Fundamentals and Valuation
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Sample Questions
Q1) A bond's price is determined by the issue's coupon rate, length to maturity, and the prevailing yield in the market.
A)True
B)False
Q2) Which of the following statements regarding Collateralized Debt Obligations (CDOs) is FALSE?
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 these are correct.
Q3) The nominal yield of a bond is the
A) annual coupon as a percent of the current price.
B) annual rate earned including the capital gain or loss.
C) rate earned giving consideration to coupon reinvestment.
D) coupon rate.
E) promised yield to maturity.
Q4) There is a direct relationship between coupon and price.
A)True B)False
Page 18
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Chapter 13: Bond Analysis and Portfolio Management Strategies
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Sample Questions
Q1) Which of the following would NOT normally be a reason for a bond swap?
A) increasing current yield
B) improving the quality of the portfolio
C) taking advantage of interest rate shifts
D) tax savings
E) realigning the portfolio's duration
Q2) Refer to Exhibit 13.3. Estimate the percentage price change for this four-year, $1,000 par value bond, with an annual 5 percent coupon, if the yield falls from 6 percent to 5.5 percent.
A)-3.50 percent
B) -1.75 percent
C) 1.75 percent
D) 3.50 percent
E) 0 percent
Q3) The components of interest rate risk are price risk and maturity risk.
A)True
B)False
Q4) Interest rate anticipation is the most conservative management strategy.
A)True
B)False
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Chapter 14: An Introduction to Derivative Markets and Securities
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Sample Questions
Q1) Refer to Exhibit 14.3. What is Sarah's annualized gain/loss?
A) 11.51 percent gain
B) 115.15 percent gain
C) 11.51 percent loss
D) 115.15 percent loss
E) 0 percent
Q2) The payoffs to both the long and short position in the forward contact are symmetric around the contract price.
A)True
B)False
Q3) The value of a call option just prior to expiration is (where V is the underlying asset's market price and X is the option's exercise price)
A) max [0, V - X].
B) max [0, X - V].
C) min [0, V - X].
D) min [0, X - V].
E) max [0, V > X].
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Page 20
Chapter 15: Forward, Futures, and Swap Contracts
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Sample Questions
Q1) The Chicago Board of Trade (CBT) uses conversion factors to correct for differences in deliverable bonds.
A)True
B)False
Q2) An investor in a hedge position is no longer exposed to the absolute price movement of the underlying asset, but the investor is still exposed to basis risk.
A)True B)False
Q3) Refer to Exhibit 15.3. If 90-day LIBOR rises to the levels "predicted" by the implied forward rates, what will the dollar level of the bank's interest receipt be at the end of the second quarter?
A) $40,500.00
B) $38,250.00
C) $35,250.00
D) $37,064.25
E) $34,500.00
Q4) The basis is the spot price minus the future price.
A)True B)False
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Chapter 16: Option Contracts
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Sample Questions
Q1) Which of the following is not a variable required to determine an option's value in the Black-Scholes valuation model?
A) future security price
B) exercise price
C) time to expiration
D) risk-free rate
E) security price volatility
Q2) In the Black-Scholes option pricing model, an increase in exercise price (X) will cause
A) an increase in call value and an increase in put value.
B) an increase in call value and a decrease in put value.
C) a decrease in call value and an increase in put value.
D) a decrease in call value and a decrease in put value.
E) an increase in call value and an increase or decrease in put value.
Q3) 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.
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Chapter 17: Professional Money Management, Alternative
Assets, and Industry Ethics
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Sample Questions
Q1) Which of the following is a characteristic of hedge funds?
A) They are generally less restricted in how and where they can make investments.
B) They are more liquid than mutual fund shares.
C) They have no limitations on when and how often investment capital can be contributed or removed.
D) They are more restricted in how and where they can make investments.
E) They are highly correlated with traditional asset class investments.
Q2) 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.
Q3) It is quite common for investors to form a "portfolio" of managers with different capabilities.
A)True
B)False
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Page 23
Chapter 18: Evaluation of Portfolio Performance
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Sample Questions
Q1) The most common manner of evaluating portfolio managers is a peer group comparison.
A)True
B)False
Q2) For a poorly diversified portfolio the appropriate measure of portfolio performance would be
A) the Treynor measure because it evaluates portfolio performance on the basis of return and diversification.
B) the Sharpe measure because it evaluates portfolio performance on the basis of return and diversification.
C) the Treynor measure because it uses standard deviation as the risk measure.
D) the Sharpe measure because it uses beta as the risk measure.
E) the Jensen measure because it measures the risk-adjusted performance.
Q3) Refer to Exhibit 18.4. Compute the Sharpe Measure for the AAA fund.
A) 2.01
B) 2.74
C) 2.91
D) 5.43
E) 1.72
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Page 24