Introduction to Investments
Exam Answer Key
Course Introduction
Introduction to Investments offers students a comprehensive overview of the fundamental principles and practices of investing in financial markets. The course explores various asset classes such as stocks, bonds, mutual funds, and real estate, along with key concepts including risk and return, diversification, portfolio construction, and the time value of money. Emphasizing both theoretical frameworks and practical applications, students will learn about investment strategies, market efficiency, and the impact of economic and financial information on investment decisions. By the end of the course, students will be equipped with the foundational knowledge required to make informed investment choices and understand the dynamics of global financial markets.
Recommended Textbook Fundamentals of Investments 8th Edition by Bradford Jordan
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Page 2
Chapter 1: A Brief History of Risk and Return
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Sample Questions
Q1) The mean plus or minus one standard deviation defines the ________ percent probability range of a normal distribution.
A) 50
B) 68
C) 82
D) 90
E) 95
Answer: B
Q2) Tom decides to begin investing some portion of his annual bonus,beginning this year with $6,000.In the first year he earns an 8 percent return and adds $3,000 to his investment.In the second his portfolio loses 4 percent but,sticking to his plan,he adds $1,000 to his portfolio.In this year his portfolio returns 2 percent.What is Tom's dollar-weighted average return on his investments?
A) 0.34 percent
B) 1.20 percent
C) 1.54 percent
D) 2.23 percent
E) 2.58 percent
Answer: B
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3
Chapter 2: The Investment Process
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Sample Questions
Q1) On August 8 of this year,Brent sold 500 shares of ADO stock for $24 a share.On September 6 of this year,he purchased 500 shares of ADO stock to cover his position.The transaction on August 8:
A) was a short sale.
B) was a margin trade.
C) was a wrap transaction.
D) created a long transaction.
E) was a pooling transaction.
Answer: A
Q2) The maximum loss you can incur on a short sale is:
A) limited to your initial equity.
B) limited to your initial margin.
C) limited to the margin loan plus interest.
D) zero.
E) unlimited.
Answer: E
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Chapter 3: Overview of Security Types
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Sample Questions
Q1) You would like to lock in the selling price on 60,000 bushels of wheat,which you plan to harvest and deliver to the market in September.The September futures price quote is currently 902 6.If you write September futures contracts on your wheat,you will be guaranteed a total price of ________ for your crop.Each contract is quoted in cents and 1/8 ths of a cent per bushel with a contract size of 5,000 bushels.
A) $45,637.50
B) $541,650.00
C) $11,908.75
D) $297,700.50
E) $2,977,000.25
Answer: B
Q2) If you want the right,but not the obligation,to buy a stock at a specified price you should:
A) buy a call.
B) sell a call.
C) buy a put.
D) sell a put.
E) either sell a call or buy a put.
Answer: A
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Page 5
Chapter 4: Mutual Funds and Other Investment Companies
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Sample Questions
Q1) Money market mutual funds:
A) must be valued at $1 a share or more.
B) invest only in certificates of deposit.
C) produce income that is always tax-exempt.
D) can provide "triple-tax-free" income.
E) are insured by the FDIC.
Q2) A 12b-1 fee is a fee charged by a mutual fund:
A) at the time shares are issued.
B) if shares are sold within a stated period of time.
C) to cover trading costs.
D) to pay the fund's managers.
E) to cover marketing costs.
Q3) The Toledo Fund has assets with a market value of $11.5 million and liabilities of $708,000.What is the net asset value if there are 190,000 shares outstanding?
A) $53.02
B) $55.00
C) $56.80
D) $57.18
E) $58.25
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Page 6
Chapter 5: The Stock Market
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Sample Questions
Q1) A private equity fund: I.is set up as a limited partnership II)usually uses a 2/20 fee structure
III)place no constraints on manager compensation
IV)typically have a stated life of 7 to 10 years
A) I and II only
B) I and III only
C) I, II and III only
D) I, II and IV only
E) I, II, III, and IV
Q2) Lucas wants to sell 9,000 shares of stock and places a market order.The floor broker is unable to arrange the sale with another floor broker so the specialist agrees to "stop" the stock.What has the specialist agreed to do?
A) cancel the order
B) place the order into the order book to hold until an order to buy 9,000 shares is received
C) purchase the shares if no other buyer is readily available
D) sell the shares to the next available buyer regardless of the price received
E) sell the shares at the end of the trading day at the best price available at that time
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Chapter 6: Common Stock Valuation
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Sample Questions
Q1) Southern Foods just paid an annual dividend of $1.10 a share.Management estimates the dividend will increase by 10 percent a year for the next four years.After that,the annual dividend growth rate is estimated at 3.2 percent.The required rate of return is 12 percent.What is the value of this stock today?
A) $12.55
B) $13.00
C) $14.54
D) $15.81
E) $16.21
Q2) You would like to know the value of a firm's equity today in relation to the cost of that equity.Which one of the following ratios will provide you with this information?
A) price-earnings
B) price-book
C) price-sales
D) price-cash flow
E) price-assets
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8
Chapter 7: Stock Price Behavior and Market Efficiency
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Sample Questions
Q1) Tom is an engineer for Talbot Tech and has just discovered a revolutionary method for strengthening metals.He knows this knowledge will add value to Talbot Tech's stock.Tom happens to mention this discovery and its value to his neighbor,Fred.Fred can be charged with insider trading if he:
A) continues to hold the Talbot Tech shares of stock he already owns.
B) shares this information with another neighbor.
C) sells his shares in Talbot Tech immediately after the news of the discovery is announced.
D) provides this information to a friend who will trade the stock and split the profits with him.
E) buys shares in Talbot Tech immediately after the news is announced and then shortly thereafter sells the shares at a profit.
Q2) Which one of the following statements concerning the stock market is correct?
A) Leverage was one of the contributing factors of the Crash of 1929.
B) "Black Monday" refers to October 29, 1929.
C) Program trading is cited as the sole cause of the Crash of 1987.
D) Generally speaking, market crashes tend to last longer than market bubbles.
E) It took the market 10 years to recover from the Crash of 1987.
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Chapter 8: Behavioral Finance and the Psychology of Investing
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Sample Questions
Q1) Which one of the following statements is correct regarding moving averages?
A) The 50-day moving average reflects the long-term trend of the market.
B) An exponential moving average is a weighted average.
C) Moving averages are used primarily to measure trading volume.
D) Short-term and long-term moving averages always move in the same direction.
E) Moving averages are generally computed using average daily prices.
Q2) Which one of the following indicates the long-run direction of the market according to Dow Theory?
A) daily fluctuations
B) secondary reaction
C) monthly changes
D) primary trend
E) tertiary trend
Q3) Bollinger bands:
A) graphically reflect the differences between two moving averages.
B) graphically depict the relative strength of a security as compared to the market.
C) are a graphical representation of an exponential moving average.
D) depict a 2-standard deviation bound around a moving average.
E) are equal to the 20-day moving average plus or minus one standard deviation.
Page 10
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Chapter 9: Interest Rates
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Sample Questions
Q1) Which one of the following statements concerning the modern fixed-income market is correct?
A) Pension funds generally have a preference for short maturities.
B) Current maturity preference theory states that both borrowers and lenders prefer short maturities.
C) Market segmentation theory does little to explain the modern fixed-income market.
D) The major borrower in the modern market borrows primarily on a long-term basis.
E) Institutional investors tend to invest in only one maturity range.
Q2) Pure discount bonds which are created by separating the interest and principal payments from U.S.Treasury bonds are called U.S.Treasury: A) notes.
B) bills.
C) STRIPS.
D) SWAPS.
E) tax-exempts.
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Page 11
Chapter 10: Bond Prices and Yields
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Sample Questions
Q1) A basic bond that has a face value of $1,000 and pays regular semiannual coupon payments is referred to as which one of the following?
A) pure discount bond
B) premium bond
C) inflation bond
D) straight bond
E) conversion bond
Q2) Phil owns a 7 percent,semiannual coupon bond that has a face value of $1,000 and matures in 16 years.The bond has a current yield to maturity of 7.1 percent.What will the percentage change in the price of his bond be if interest rates decrease by 50 basis points?
A) 4.33 percent
B) 4.68 percent
C) 4.91 percent
D) 5.17 percent
E) 5.26 percent
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Chapter 11: Diversification and Risky Asset Allocation
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Sample Questions
Q1) A portfolio that belongs to the Markowitz efficient set of portfolios will have which one of the following characteristics? Assume the portfolios are comprised of five individual securities.
A) the lowest return for any given level of risk
B) the largest number of potential portfolios that can achieve a specific rate of return
C) the largest number of potential portfolios that can achieve a specific level of risk
D) a positive rate of return and a zero standard deviation
E) the lowest risk for any given rate of return
Q2) A portfolio comprised of which one of the following is most apt to be the minimum variance portfolio?
A) 100 percent stocks
B) 100 percent bonds
C) 50/50 mix of stocks and bonds
D) 30 percent stocks and 70 percent bonds
E) 30 percent bonds and 70 percent stocks
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13
Chapter 12: Return,Risk,and the Security Market Line
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Sample Questions
Q1) Which one of the following terms is the measure of the tendency of two things to move or vary together?
A) variance
B) squared deviation
C) standard deviation
D) alpha
E) covariance
Q2) Farm Tractors,Inc.,stock has a beta of 1.12 and an expected return of 12.8 percent.The risk-free rate is 3.84 percent.What is the market rate of return?
A) 6.67 percent
B) 8.90 percent
C) 9.08 percent
D) 11.84 percent
E) 12.63 percent
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Chapter 13: Performance Evaluation and Risk Management
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Sample Questions
Q1) Which one of the following is the primary purpose of the Value-at-Risk computation?
A) determine the 99 percent probability range given an abnormal distribution
B) evaluate the risk-return tradeoff for a given mix of securities
C) evaluate the probability of a significant loss
D) determine the portfolio that maximizes the risk premium per unit of total risk
E) determine the portfolio that maximizes the excess return per unit of systematic risk
Q2) The unadjusted total percentage return on a security that has not been compared to any benchmark is referred to as which one of the following?
A) raw return
B) indexed return
C) real return
D) marginal return
E) absolute return
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15
Chapter 14: Futures Contracts
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Sample Questions
Q1) You purchased 4 DJIA index futures at a price of 17,600.The contract size is $10 times the level of the index.The futures are maturing today when the price is 17,282.What is the amount of your profit or loss?
A) -$1,270
B) -$1,408
C) -$12,720
D) -$13,080
E) -$14,260
Q2) Which one of the following statements is correct?
A) Futures contracts must be held to maturity.
B) Futures contracts can be closed out only by contract buyers.
C) Futures contracts can be closed out, but only during the week prior to maturity.
D) You cannot avoid accepting delivery once you purchase a futures contract.
E) Futures contracts can be closed out by entering a reverse trade.
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16
Chapter 15: Stock Options
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Sample Questions
Q1) Which one of the following distinguishes an option as an American style option?
A) option that grants its holder the right to purchase at the strike price
B) option that grants its holder the right to sell at the strike price
C) option that obligates its holder to sell at the strike price
D) option that can be exercised at any time prior to expiration
E) option that can only be exercised at expiration
Q2) Amy bought a $50 May call and a $50 May put on the same underlying stock.This strategy is referred to as which one of the following?
A) bull spread
B) bear spread
C) parity play
D) short straddle
E) long straddle
Q3) What is the maximum percentage loss you can incur if you buy a put option?
A) 0%
B) 10%
C) 100%
D) 1,000%
E) unlimited percentage
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Page 17
Chapter 16: Option Valuation
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Q1) All else constant,which one of the following situations will produce the highest call price given a strike price of $25?
A) $30 stock price; 40 days to option expiration
B) $30 stock price; 60 days to option expiration
C) $35 stock price; 40 days to option expiration
D) $35 stock price; 60 days to option expiration
E) Insufficient information is provided to answer this question.
Q2) Which one of the following situations will produce the highest call price,all else constant?
A) $29 stock price; $30 strike price
B) $41 stock price; $40 strike price
C) $20 stock price; $20 strike price
D) $34 stock price; $35 strike price
E) $24 stock price; $25 strike price
Q3) An employee stock option is which one of the following?
A) call option
B) covered call
C) put option
D) protective put
E) index option
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Chapter 17: Projecting Cash Flow and Earnings
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Sample Questions
Q1) A company has net income of $66,000,a price-earnings ratio of 24.1,and 26,000 shares of stock outstanding.If the price-cash flow ratio is 19,what is the cash flow per share?
A) $2.05
B) $2.34
C) $2.50
D) $2.81
E) $3.22
Q2) A firm has net sales of $35,000,operating expenses of $6,100,depreciation of $1,700,and cost of goods sold of $18,300.What is the gross margin?
A) 31.1 percent
B) 35.4 percent
C) 47.7 percent
D) 52.9 percent
E) 59.2 percent
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Chapter 18: Corporate and Government Bonds
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Sample Questions
Q1) You own a principal STRIPS which is based on a 4.5 percent coupon Treasury bond that matures in 20 years.The STRIPS is priced at $22,868 and has a par value of $50,000.What is the yield to maturity on the STRIPS?
A) 3.79 percent
B) 3.90 percent
C) 3.93 percent
D) 3.95 percent
E) 3.99 percent
Q2) A bond has a face value of $1,000 and a call price of $1,030.The bond is callable in 3.5 years and pays a 5 percent,semi-annual coupon.What is the current price if the yield to call is 6 percent?
A) $912.36
B) $927.19
C) $966.25
D) $993.24
E) $1,009.01
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Chapter 19: Global Economic Activity and Industry Analysis
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Sample Questions
Q1) As a U.S.investor,you decide to invest $110,000 in Switzerland.You do so at a starting exchange rate of 1.093 SwFr/$.Your Swiss investment gains 7 percent,and the ending exchange rate is 1.091SwFr/$.What is your total return on this investment?
A) 6.30%
B) 6.85%
C) 7.20%
D) 7.40%
E) 7.55%
Q2) Which of the following was the largest sector in the S&P as of April 2012?
A) consumer discretionary
B) energy
C) health care
D) technology
E) financials
Q3) Which of the following is NOT considered a lagging economic indicator?
A) prime rate
B) change in CPI for services
C) industrial production
D) commercial and industrial loans
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Page 21
Chapter 20: Mortgage-Backed Securities
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Q1) Which one of the following statements regarding PAC bonds is correct?
A) The cash flows from a PAC bond are less certain than those from a Z-tranche bond from a sequential CMO.
B) PAC bondholders receive the residual cash flows from the underlying mortgage pool.
C) PAC bonds are defined by the specific rules which created them.
D) PAC bonds have bounds based on market interest rates.
E) PAC bond cash flows are unaffected by mortgage prepayments.
Q2) FHLMC and FNMA are government-sponsored enterprises charged with which one of the following duties?
A) providing home mortgages directly to homeowners
B) purchasing only defaulted mortgages from banking institutions
C) guaranteeing mortgages with the full faith and credit of the U.S. government
D) providing guarantees equal to GNMA's to the home mortgage market
E) promoting liquidity in the home mortgage market
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