Introduction to Investments Midterm
Exam
Course Introduction
Introduction to Investments offers a foundational overview of the principles, strategies, and analytical tools used in the investment process. The course covers the key types of financial assets such as stocks, bonds, and mutual funds, and examines the mechanisms of financial markets where investments are traded. Students will learn about risk and return, diversification, portfolio construction, and the basics of fundamental and technical analysis. The course also introduces important concepts in market efficiency, behavioral finance, and ethical investing. By the end of the course, students will have a solid understanding of how investment decisions are made and the factors that influence portfolio performance.
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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Q1) A stock produced annual returns of 8.5,-18,15,17,and 12 percent over the past five years,respectively.What is the geometric average return?
A) 5.78 percent
B) 6.04 percent
C) 6.34 percent
D) 7.21 percent
E) 8.20 percent
Answer: B
Q2) Based on the period of 1926-2015,the risk premium for small-company stocks averaged:
A) 12.3 percent.
B) 13.9 percent.
C) 15.0 percent.
D) 16.8 percent.
E) 17.4 percent.
Answer: B
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Chapter 2: The Investment Process
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Q1) A company that owns income-producing real estate such as an apartment complex or a retail shopping center is called a(n):
A) REIT.
B) SIPC.
C) REEF.
D) EAR.
E) SPIC.
Answer: A
Q2) Walter is trying to decide whether he wants to purchase shares in General Motors,Ford,or Honda,all of which are auto manufacturers.Walter is making a(n)_______ decision.
A) security selection
B) tax-advantaged
C) risk aversion
D) active strategy
E) asset allocation
Answer: A
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Page 4
Chapter 3: Overview of Security Types
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Sample Questions
Q1) Options expire on the ________ of the expiration month.
A) last trading day
B) 3<sup>rd</sup> Friday
C) last Friday
D) Saturday following the 3<sup>rd</sup> Friday
E) Saturday following the last Friday
Answer: D
Q2) What is the current yield on Buy Rite stock?
A) 1.38 percent
B) 2.60 percent
C) 3.55 percent
D) 4.25 percent
E) 5.20 percent
Answer: A
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Chapter 4: Mutual Funds and Other Investment Companies
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Q1) Matt owns 724.08 shares of a fund which has a current NAV of $41.04.He has owned all of these shares for 3.3 years.The fund charges a contingent deferred sales charge which starts at 5 percent for the first year and declines by 1 percent each year.How much cash will he receive if he redeems all of his shares today?
A) $29,121.92
B) $29,709.36
C) $30,334.82
D) $30,647.55
E) $31,023.14
Q2) Which one of the following types of funds is most apt to invest in preferred stocks?
A) income
B) balanced
C) world
D) insured
E) index
Q3) What are the primary differences between an ETF and an ETN?
Q4) Which type of investor is most apt to purchase municipal bond funds and why?
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Chapter 5: The Stock Market
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Q1) A public offering of securities which are offered first to current shareholders is called a(n):
A) existing shareholder offer.
B) limited offer.
C) rights offer.
D) venture offer.
E) preference offer.
Q2) The market where individual investors directly trade exchange-listed securities with other individual investors is referred to as the ________ market.
A) home
B) independent
C) third
D) fourth
E) SuperDOT
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Chapter 6: Common Stock Valuation
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Q1) The common stock of A.G.Tailor has a required return of 16 percent.The latest press release stated that last year's dividend was $0.90 per share and that future dividends will increase by 15 percent for the following 3 years.After that,the dividend growth rate will be 3 percent indefinitely.What is one share of this stock worth to you today?
A) $8.42
B) $9.60
C) $10.26
D) $10.75
E) $12.03
Q2) Blue Water Tours just paid an annual dividend of $0.80 a share.The firm has a policy of increasing the dividend by 3.5 percent annually.What is the current value of this stock at a discount rate of 11.5 percent?
A) $9.52
B) $9.78
C) $9.91
D) $10.02
E) $10.35
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Chapter 7: Stock Price Behavior and Market Efficiency
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Q1) Stocks A,B,and C have identical risks.Stock A earns an annual return of 9.9 percent as compared to 9.6 percent returns on stocks B and C.Given this,you can correctly assume that:
A) Stock A is overpriced.
B) the market return is 9.75 percent.
C) Stock A represents the smallest-sized firm.
D) Stock A has a positive excess return.
E) Stocks B and C represent firms that are in the process of merging.
Q2) Samson Co.announced its merger plans on October 25 and had a daily return of 0.7 percent.Thompson Co.announced its merger plans on October 26 and had a daily return of 0.4 percent.The Whitewood Co.announced its merger plans on October 27 and had a daily return of -0.6 percent.The daily market returns for October 25 through October 27 were 0.2,-0.3,and 0.4,respectively.What is the combined cumulative abnormal return for the announcement date?
A) 0.0 percent
B) 0.2 percent
C) 0.6 percent
D) 0.8 percent
E) 1.0 percent
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Chapter 8: Behavioral Finance and the Psychology of Investing
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Q1) Which one of the following is a trader whose trades are not based on meaningful financial analysis or information?
A) specialist
B) arbitrageur
C) noise trader
D) sentiment trader
E) market maker
Q2) Loss aversion is defined as:
A) the inability to mentally acknowledge a loss on a security.
B) selling any security for less than the price paid to acquire it.
C) selling a security as soon as it has increased significantly in value.
D) the reluctance to sell a security after it has decreased in value.
E) the tendency to quickly sell any investment that has decreased in value.
Q3) Which one of the following is the tendency to believe that random events that occur in clusters are not really random?
A) clustering illusion
B) sequential clustering
C) random grouping
D) representativeness heuristic
E) gambler's fallacy
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Chapter 9: Interest Rates
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Q1) A $1,000 face value,240-day bond is quoted at a bank discount yield of 3.3 percent.What is the current bond price?
A) $957.60
B) $960.09
C) $978.00
D) $982.02
E) $988.73
Q2) Capital Bank needs a one-day reserve loan of $3.6 million from Countryside Bank.Which one of the following interest rates will be charged on this loan?
A) money market
B) Federal funds
C) discount
D) prime
E) Treasury bill
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Chapter 10: Bond Prices and Yields
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Q1) You own a bond that pays semiannual interest payments of $38.The bond is callable in 2 years at a premium of $76.What is the callable bond price if the yield to call is 7.9 percent?
A) $995.46
B) $1,016.86
C) $1,059.64
D) $1,124.87
E) $1,220.87
Q2) The price of a bond decreased by 1.45 percent in response to an increase in the yield to maturity from 7.2 to 7.6 percent.What is the bond's Macaulay duration?
A) 3.39 years
B) 3.76 years
C) 3.92 years
D) 4.04 years
E) 4.16 years
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Chapter 11: Diversification and Risky Asset Allocation
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Q1) The division of a portfolio's dollars among various types of assets is referred to as:
A) the minimum variance portfolio.
B) the efficient frontier.
C) correlation.
D) asset allocation.
E) setting the investment opportunities.
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
Q3) Correlation is the:
A) squared measure of a security's total risk.
B) extent to which the returns on two assets move together.
C) measurement of the systematic risk contained in an asset.
D) daily return on an asset compared to its previous daily return.
E) spreading of an investment across a number of assets.
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Chapter 12: Return,Risk,and the Security Market Line
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Q1) Which one of the following measures systematic risk?
A) beta
B) alpha
C) variance
D) standard deviation
E) correlation coefficient
Q2) Pat realized a total return of 11.8 percent which is less than his expected return of 12.5 percent.What is the amount of his unexpected return?
A) -1.4 percent
B) -0.7 percent
C) 0.7 percent
D) 1.4 percent
E) 1.8 percent
Q3) Which one of the following terms is another name for systematic risk?
A) unique risk
B) firm risk
C) market risk
D) asset-specific risk
E) diversifiable risk
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Page 14
Chapter 13: Performance Evaluation and Risk Management
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Q1) The risk premium of a portfolio divided by the portfolio's standard deviation defines which one of the following performance measures?
A) raw return
B) Value-at-Risk
C) Jensen's alpha
D) Sharpe ratio
E) Treynor ratio
Q2) Angie owns a portfolio which has an expected annual return of 9.76 percent.What is the two-year expected return on her portfolio?
A) 13.80 percent
B) 19.52 percent
C) 23.40 percent
D) 27.60 percent
E) 29.10 percent
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Chapter 14: Futures Contracts
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Q1) What is the difference between this day's high and closing prices for one 10-year Treasury note futures contract Treasury note,$100,000,pts and one-half of 1/32 of a point.
A) $835.50
B) $968.75
C) $1,000.00
D) $1,171.88
E) $1,220.75
Q2) Which one of the following futures contracts is generally used to hedge a bond portfolio?
A) S&P 500 index
B) Eurodollar
C) U.S. Treasury notes
D) gold
E) LIBOR rates
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Chapter 15: Stock Options
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Q1) You currently own 200 shares of Amazon stock.If you purchase options on this stock to protect against future declines in the price of the stock you are implementing which one of the following?
A) covered call
B) naked call
C) protective put
D) bear spread
E) straddle
Q2) You own two SPX put options with a strike of 1,600.What is the payoff at maturity for this option contract if the S&P 500 index is 1,622?
A) -$2,200
B) -$22
C) $0
D) $22
E) $2,200
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Chapter 16: Option Valuation
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Q1) Which one of the following statements is correct?
A) Both call and put option deltas are always positive.
B) Put option deltas are always positive.
C) Call option deltas are always positive.
D) Both call and put option deltas are always negative.
E) All deltas can be positive, negative, or equal to zero.
Q2) You have determined that you need -1,589 call options to hedge your stock portfolio.What should you do based on this information?
A) buy 16 call option contracts
B) buy 1,589 call option contracts
C) write 16 call option contracts
D) write 160 call option contracts
E) write 1,589 call option contracts
Q3) Which one of the following best describes the graphical relationship between stock prices and option prices?
A) linearity
B) concavity
C) convexity
D) hyperbolic
E) exponential
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Chapter 17: Projecting Cash Flow and Earnings
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Q1) Which one of the following is the cash flow resulting from the payment of dividends and the issuance or repurchase of equity securities?
A) balance sheet cash flow
B) operating cash flow
C) financing cash flow
D) business cash flow
E) investment cash flow
Q2) Which of the following affect the earnings per share?
I.decrease in interest expense
II.share repurchase
III.increase in tax rates
IV.preferred stock dividend
A) I and III only
B) II and IV only
C) I, II, and III only
D) II, III, and IV only
E) I, II, III, and IV
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Chapter 18: Corporate and Government Bonds
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Q1) A bond has a conversion price of $47.62,a par value of $1,000,and a market price of $833.40.What is the conversion ratio?
A) 20
B) 21
C) 22
D) 23
E) 24
Q2) Which one of the following is the difference between the price a bond dealer is willing to pay to buy and the price at which he or she is willing to sell?
A) commission
B) imputed cost
C) imputed interest
D) bid-ask spread
E) ask price
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Chapter 19: Global Economic Activity and Industry Analysis
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Q1) Which of the following reflects the dollar value of economic output in terms of the current year?
A) current year GDP
B) real GDP
C) nominal GDP
D) adjusted GDP
E) actual GDP
Q2) Government determination of tax rates and spending policies is called ________.
A) tax policy
B) budgetary policy
C) federal spending policy
D) fiscal policy
E) monetary policy
Q3) If government expenditures exceed tax revenue the resulting shortfall is termed a ________.
A) budget shortfall
B) taxing deficiency
C) budget deficit
D) revenue shortfall
E) revenue deficiency
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Chapter 20: Mortgage-Backed Securities
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Q1) Generally,the average life of a mortgage is ________ the mortgage's stated maturity.
A) much less than B) marginally less than C) equal to
D) marginally greater than E) significantly greater than
Q2) A mortgage pool is divided into A,B,C,and Z-tranches based on the textbook example.The mortgage principal will initially be paid to which one of the tranches?
A) A-tranche
B) B-tranche
C) C-tranche
D) Z-tranche
E) all tranches on a pro-rata basis
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