Course Introduction
Financial Planning Practice
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Financial Planning is a comprehensive course that introduces students to the principles and practices involved in managing personal and organizational finances. The course covers foundational topics such as budgeting, savings, investment strategies, risk management, insurance, retirement planning, and tax considerations. Through real-world case studies and practical exercises, students learn how to develop and implement effective financial plans, set achievable financial goals, and make informed decisions to maximize wealth and financial security. Emphasis is placed on both theoretical frameworks and tangible skill-building to prepare students for successful personal financial management and careers in financial planning and advisory roles.
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) A 25-year old college graduate is participating in a 401(k)retirement plan and wishes to minimize risk by eliminating stock-based mutual funds and other equities from his investment portfolio.What will this probably do to his ending retirement funds in 40 years?
Answer: If he minimizes risk,then he will also minimize return.His retirement fund will likely be much smaller than if he chose to take more risk over the long run.
Q2) A 401(k)plan is an example of a defined-benefit retirement plan.
A)True
B)False
Answer: False
Q3) Which of the following would be considered a risk-free investment?
A)Gold
B)Equity in a house
C)High-grade corporate bonds
D)U.S.Treasury bills
Answer: D
Q4) Define risk in the context of investments.
Answer: Risk is the chance that the actual return on an investment will differ from its expected return.
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Chapter 2: Investment Alternatives
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Q1) 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
Q2) How is the earnings retention rate related to the dividend payout rate?
Answer: Earnings retention rate = 1-dividend payout rate
Q3) Rank (lowest to highest)the following securities in terms of the risk-expected return tradeoff from the investors' viewpoint:common stock,corporate bonds, U.S.Treasury bonds,preferred stock.
Answer: U.S.Treasury bonds,corporate bonds,preferred stock,common stock
Q4) If a bond has a coupon greater than the current market yield,it should be selling at a premium.
A)True
B)False
Answer: True
Q5) What are some advantages of asset-backed securities to investors?
Answer: High yields with manageable risk.
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Chapter 3: Indirect Investing
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Q1) An equity mutual fund began the year with a net asset value (NAV)of $6.50 per share.During the year,it received $0.15 of dividend income,$1.25 in realized capital losses,and $0.50 in unrealized capital gains.Ninety percent of the income was distributed to shareholders.Calculate the fund's year-end NAV.
Answer: \(\begin{array}{lr}
\text { Beginning NAV } & \$6.50 \\ \\
\text {Income from investment operations } \\
\text { net investment income } &\$ 0.15 \\
\text { net realized and unrealized gain} (-\$ 1.25+.50) &\underline{0.75}\\
\text { Total income from investment operations } &\$ 0.60\\ \\
\text { Less distributions to shareholders } \\
\text { from net investment income} (90 \% \times \$ .15) &(\$ 0.135)\\
\text { from net realized capital gain } &\underline{(-)}\\
\text {Total distribution } &{(\$ 0.135)}\\ \\
\text { Ending NAV } &\$ 5.77 \\ \end{array}\)
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Chapter 4: Securities Markets and Market Indexes
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Q1) Investment bankers operate in the:
A)primary market.
B)secondary market.
C)tertiary market.
D)fourth market.
Q2) Smaller companies with fewer publicly held shares are more likely to meet the listing requirements of the NYSE.
A)True
B)False
Q3) Some OTC stocks are traded through the:
A)blue sheets.
B)red sheets.
C)pink sheets
D)green sheets.
Q4) Which of the following statements regarding the NASDAQ Stock Market is not true?
A)It was less affected by the 2008 financial crisis than the NYSE.
B)NASDAQ dealers make a market by posting offers to buy or sell securities.
C)Stocks listed on the NYSE may also trade on NASDAQ.
D)NASDAQ's electronic trading system provides instantaneous transactions.
Q5) What is the difference between a seasoned issue and an IPO?
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Chapter 5: How Securities Are Traded
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Q1) Which of the following statements regarding discount brokers is true?
A)Discount brokers do not offer access to foreign securities.
B)Discount brokers only execute orders on stock transactions.
C)Discount brokers frequently offer limited investment advice.
D)Discount brokers do not offer SIPC protection.
Q2) What costs and risks are incurred in using a margin account that are not present in a cash account?
Q3) The NYSE is:
A)a free agent market.
B)an agency auction market.
C)a negotiated market.
D)a dealer market.
Q4) The use of stock certificates,compared to book-entry systems,is on the rise due,in part,to increased computer fraud.
A)True
B)False
Q5) A margin call occurs anytime the equity position of the margin account falls below the initial margin.
A)True
B)False
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Chapter 6: The Risks and Returns From Investing
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Q1) A number of prominent observers expect the equity risk premium in the future to be:
A)considerably lower than that of the past.
B)considerably higher than that of the past.
C)very similar to the historical average.
D)very similar to the recent value.
Q2) A Chinese stock denominated in Chinese yuan will have an increase in its dollar-denominated return if the Chinese yuan strengthens against the dollar.
A)True
B)False
Q3) Which of the following statements regarding the arithmetic mean and the geometric mean is true?
A)The arithmetic mean is always a better measure of average performance.
B)The geometric mean is always a better measure of average performance.
C)The arithmetic mean is a better measure of performance over single periods.
D)The geometric mean is the best estimate of the expected return for the next period.
Q4) What is the best measure of risk for a sole proprietorship?
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Chapter 7: Portfolio Theory
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Q1) Portfolio risk is a weighted average of the individual security risks.
A)True
B)False
Q2) Portfolio risk is most often measured by professional investors using the: A)expected value.
B)portfolio's beta.
C)weighted average of the individual asset's risk.
D)portfolio's standard deviation.
Q3) Company specific risk is also known as:
A)market risk.
B)systematic risk.
C)non-diversifiable risk.
D)diversifiable risk.
Q4) When returns are perfectly positively correlated,the risk of the portfolio is:
A)zero.
B)the weighted average of the individual security's risk.
C)equal to the correlation coefficient between the securities.
D)infinite.
Q5) An efficiently diversified portfolio still has _____________________ risk.
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Chapter 8: Portfolio Selection
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Q1) Which of the following best approximates the typical correlation between the S&P 500 and the
A)-50%
B)0%
C)25%
D)70%
Q2) According to the Markowitz model,an efficient portfolio is one that has the:
A)largest expected return for the smallest level of risk.
B)largest expected return and zero risk.
C)largest expected return for a given level of risk.
D)smallest level of risk.
Q3) Explain what is efficient about the efficient frontier.
Q4) An index commonly used as a proxy for developed market international equities is the:
A)MSCI EAFE Index.
B)MSCI Emerging Markets Index.
C)Russell 1000 Index.
D)FTSE NAREIT Index.
Q5) What variable is manipulated to determine efficient portfolios,and why are the other variables not changed at will?
10
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Chapter 9: Asset Pricing Models
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Q1) 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
Q2) Which of the following statements is most accurate?The:
A)CML plots individual stocks and efficient portfolios.
B)CML plots both efficient and inefficient portfolios.
C)SML plots individual securities and efficient portfolios,only.
D)SML plots individual securities,inefficient portfolios,and efficient portfolios.
Q3) Which of the following statements about the difference between the SML and the CML is true?
A)The intercept of the CML is the origin,whereas the intercept of the SML is RF.
B)The CML applies to efficient portfolios,whereas the SML applies to all Portfolios or securities.
C)The CML can be downward sloping,whereas that is impossible for the SML.
D)The CML and the SML are essentially the same except for the price of risk.
Q4) Compare the security market line model and the arbitrage pricing theory.
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Chapter 10: Common Stock Valuation
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Q1) Investors will arrive at the same intrinsic valuation for common stocks because valuation is based on an objective approach.
A)True
B)False
Q2) Which factor is least likely to explain why one company has a higher P/E ratio than another?
A)The company has a higher growth rate of earnings.
B)The company has a higher required rate of return.
C)The company has a higher current ratio.
D)The company has a higher return on equity.
Q3) To estimate the intrinsic value of a security,investors should rely on:
A)the approach that they are most comfortable using.
B)the approach that is easiest to apply and interpret.
C)the approach that generally gives the most conservative value.
D)more than one approach.
Q4) The required return needed to discount a stock's future cash flows can be determined using the CAPM.
A)True
B)False
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Chapter 11: Common Stocks: Analysis and Strategy
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Q1) Commodity ETF's are mainly used as speculative plays by:
A)hedge fund traders.
B)conservative investors.
C)mutual fund managers.
D)value investors.
Q2) With respect to proper diversification in asset allocation,what are the general guidelines for a U.S.investor's portfolio regarding foreign securities?
Q3) How is the required rate of return utilized in stock analysis?
Q4) A fund that uses futures to hold the S&P 500 Index and invests the remainder in bonds would be an example of:
A)a value index fund.
B)a derivatives index fund.
C)an enhanced index fund.
D)an active index fund.
Q5) 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.
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Chapter 12: Market Efficiency
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Q1) Data mining refers to the search for security return patterns by:
A)regressing firm stock returns against firm price multiples.
B)calculating CARs relative to firm earnings announcements.
C)applying various investment techniques to a set of return data.
D)applying filter tests to very large samples of return data.
Q2) The SEC has laws to punish insider trading,which implies that the SEC believes in the strong form of the Efficient Market Hypothesis.
A)True
B)False
Q3) An efficient market requires that:
A)all investors are rational and react quickly to new information.
B)information can be obtained at a considerable cost by investors.
C)new information does not have a significant effect on market prices.
D)investors react quickly and fully to new information.
Q4) Efficient markets imply investors can not earn abnormal returns.
A)True
B)False
Q5) To have strong form market efficiency,semi-strong form efficiency is necessary. A)True
B)False
Page 14
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Chapter 13: Economy Market Analysis
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Q1) The institution most involved with the U.S.money supply and interest rates is:
A)the Treasury Department.
B)the Federal Reserve.
C)the Department of Commerce.
D)the U.S.Mint.
Q2) The longest peacetime expansion ran from 1991 to 2000.
A)True
B)False
Q3) The National Bureau of Economic Research (NBER)is:
A)a division of the Department of Commerce of the U.S.Government.
B)an association of academic and professional economic forecasters.
C)a unit within the U.S.Federal Reserve.
D)a private nonprofit organization.
Q4) What are the implications of the article "Overcoming the Bear Market Blues" for investors?
Q5) On average,the typical business cycle in the United States leads the stock market's turning point by a few months.
A)True
B)False
Q6) Why do stock investors pay attention to the bond market?
Page 15
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Chapter 14: Industry Analysis
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Q1) Which life cycle stage generally sees industries improving their products,lowering prices,and starting to attract considerable investment funds?
A)Pioneering stage
B)Expansion stage
C)Stabilization stage
D)Declining stage
Q2) Which of the following is a limitation of the life cycle approach to security ?analysis?
A)It focuses on sales rather than stock prices.
B)It focuses on the past more than the present.
C)It does not consider the risk in the different cycles.
D)It does not consider quantitative factors.
Q3) Which of the following industries would you have most liked to have been invested in over the past 25 years?
A)Steelworks
B)Consumer durables
C)Mining and minerals
D)Food
Q4) When should companies in cyclical industries be bought?
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Chapter 15: Company Analysis
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Q1) Some analysts believe that the P/E ratio of a company that is fairly valued will equal its expected growth rate.
A)True
B)False
Q2) The key item for investors on the income statement is:
A)sales.
B)interest expense.
C)cost of goods sold.
D)net income from continuing operations.
Q3) Which of the following would be found in the "cash flows from investing activities" portion of a firm's statement of cash flows?
A)Changes in accounts receivable
B)Depreciation
C)Net borrowings
D)Capital expenditures
Q4) Other things being equal,as k rises,the P/E ratio will also rise.
A)True
B)False
Q5) How could unexpected inflation affect the P/E ratio?
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Chapter 16: Technical Analysis
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Q1) A put/call ratio of 0.70 indicates:
A)puts have a cost 70% less than the cost of calls.
B)there are 7 puts purchased for every one call purchased.
C)there are 70% more puts purchased than calls.
D)there are 7 puts purchased for every 10 calls purchased.
Q2) If an investor buys a stock when its price has increased 2 percent from its previous price,the investor is employing:
A)a contrarian indicator.
B)a filter rule.
C)a sentiment indicator.
D)relative strength analysis.
Q3) Which of the following is generally viewed as a bearish indicator for a stock?
A)It has a relatively high short-interest ratio.
B)Its 50-day moving average price has penetrated the 200-day average from above.
C)Following a price drop,the price penetrates the moving average from below.
D)It has an increasing relative strength ratio.
Q4) How can relative strength analysis be helpful in a top-down approach to security analysis?
Q5) How does a point-and-figure chart compress many price changes into a small space?
Page 18
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Chapter 17: Bond Yields
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Q1) What is the difference between the yield-to-maturity (YTM)and the realized compound yield (RCY)?
A)They are actually the same concept.
B)The YTM is the actual return,whereas,the RCY is the expected return at the beginning of the investment.
C)The RCY is the actual return,whereas,the YTM is the expected return at the beginning of the investment.
D)The YTM considers only coupon payments,whereas,the RCY includes all the bond's cash flows.
Q2) Assume a bond has a YTM of 8% and its YTM increases by 2 basis points.What is the new YTM on the bond?
A)8.002%
B)8.020%
C)8.200%
D)10.000%
Q3) Bond traders use the term "basis point" to mean one percentage point in interest rate.
A)True
B)False
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Chapter 18: Bonds: Analysis and Strategy
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Q1) Which form of interest rate forecasting involves evaluating bonds to determine which will perform best over a selected holding period?
A)Horizon analysis
B)Yield-to-maturity analysis
C)Yield curve analysis
D)Bond immunization analysis
Q2) Why are upward sloping yield curves more consistent with the usual risk-return tradeoff than downward sloping yield curves?
Q3) A bond investor has $100,000 and has determined 5 years is his maximum term.He puts $20,000 in one-year bonds,$20,000 in two-year bonds,etc.up to $20,000 in five-year bonds.This is an example of:
A)a barbell strategy.
B)a laddering strategy.
C)an immunization strategy.
D)a term management strategy.
Q4) The term structure of interest rates shows the relationship between bond return and time to maturity.
A)True
B)False
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Chapter 19: Options
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Q1) The Options Clearing Corporation (OCC):
A)always has a net position of zero.
B)acts as a dealer in options,standing ready to buy or sell from its inventory.
C)selects the broker with the largest holdings to honor the exercise of an option.
D)uses first in,first out to select a broker to honor the exercise of an option.
Q2) With regard to options,which of the following is not true of the hedge ratio?
A)It indicates the change in the option price for a $1 change in stock price.
B)It represents the ratio of options written to shares held long in a riskless portfolio.
C)It is frequently greater than 1.
D)It is commonly referred to as the option's delta.
Q3) Which of the following inputs in the Black-Scholes option pricing model is not observed?
A)The interest rate
B)The time to expiration
C)The stock price
D)The variability of the stock
Q4) What is put-call parity?How is it related to arbitrage?
Q5) What is meant by portfolio insurance?
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Chapter 20: Futures
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Q1) How often are futures contracts marked to market?
A)Daily
B)Weekly
C)Monthly
D)Quarterly
Q2) As an economic function of futures markets,what does "price discovery" mean?
A)The futures price and spot price converge over time.
B)The spot price is a discounted value of the futures price.
C)The futures price provides information about the expected future spot price.
D)In equilibrium,the spot price and futures price are equal.
Q3) The initial margin requirement on an SSF contract is 50 percent.
A)True
B)False
Q4) To protect the value of a bond portfolio against a rise in interest rates using bond futures contracts,the portfolio owner should execute a:
A)long hedge.
B)duration hedge.
C)short hedge.
D)maturity hedge.
Q5) What is the difference between hedgers and speculators in the futures markets?
Page 22
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Chapter 21: Portfolio Management
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Q1) Rebalancing is difficult for many investors because it represents a contrarian strategy.
A)True
B)False
Q2) Relative to their holdings in their early careers,conservative retirees likely have greater holdings of:
A)small-cap stocks.
B)international stocks.
C)cyclical stocks.
D)low-beta stocks.
Q3) Based on empirical evidence,which of the following is the most important aspect in explaining portfolio performance?
A)Security selection
B)Market timing
C)Transactions costs
D)Asset allocation
Q4) An efficient set of portfolios offers maximum risk for any level of return.
A)True
B)False
Q5) Explain the life-cycle theory of portfolio policies.
Page 23
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Chapter 22: Evaluation of Investment Performance
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Q1) Modigliani-squared is a return adjusted for volatility that allows returns between portfolios to be compared.
A)True
B)False
Q2) A retired couple's assets consist of a $100,000 house,a $400,000 securities portfolio,a $15,000 car,and personal effects.Would they be more concerned with the Sharpe measure or the Treynor measure for the portfolio?
Q3) 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.
Q4) A portfolio with a beta of 0.8 earned a return of 13 percent when the risk-free rate was 6 percent and the market returned 9 percent.The portfolio's Treynor measure is closest to:
A)1.8.
B)3.8.
C)5.0.
D)8.8.
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