Introduction to Investments
Test Questions
Course Introduction
Introduction to Investments provides students with a foundational understanding of the principles and practices of investing in financial markets. The course covers key concepts such as risk and return, asset allocation, portfolio diversification, and the functioning of various investment vehicles including stocks, bonds, mutual funds, and exchange-traded funds (ETFs). Students will learn about fundamental and technical analysis, the importance of investment objectives, and the impact of economic and financial factors on investment decisions. By the end of the course, students will be equipped with essential knowledge to make informed investment choices and understand the workings of capital markets.
Recommended Textbook
Principles of Investments 1st Edition by Michael Drew
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18 Chapters
1052 Verified Questions
1052 Flashcards
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Chapter 1: Investments: Background and Issues
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Sample Questions
Q1) Financial institutions that specialise in assisting corporations in primary market transactions are called ________.
A)mutual funds
B)investment bankers
C)pension funds
D)globalisation specialists
Answer: B
Q2) The value of a derivative security ________.
A)depends on the value of other related security
B)affects the value of a related security
C)is unrelated to the value of a related security
D)can only be integrated by calculus professors
Answer: A
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Page 3
Chapter 2: Asset Classes and Financial Instruments
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Q1) Preferred share can be callable by the issuing firm, in which case it is said to be
A)insolvent
B)redeemable
C)insufferable
D)delinquent
Answer: B
Q2) Which of the following provides an important source of funding for the Australian Commonwealth Government?
A)Certificate of deposit
B)Treasury notes
C)Eurodollar deposits
D)Commercial paper
Answer: B
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Chapter 3: Securities Markets
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Sample Questions
Q1) You short-sell 200 shares of Rock Creek Fly Fishing Co., now selling for $50 per share. If you wish to limit your loss to $2 500, you should place a stop-buy order at ________.
A)$37.50
B)$62.50
C)$56.25
D)$59.75
Answer: B
Q2) The ________ price is the price at which a dealer is willing to purchase a security.
A)bid
B)ask
C)clearing
D)settlement
Answer: A
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Page 5
Chapter 4: Managed Funds and Other Investment Companies
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Sample Questions
Q1) The aims of the ETF include all but which one of the following?
A)achieving the same return as the S&P/ASX 200
B)replicating the S&P/ASX 200
C)achieving guaranteed rates of return
D)keeping management fees very low
Q2) Management fees for open-end and closed-end funds, typically range between ________ and ________.
A)1%; 2.5%
B)0.5%; 5%
C)2%; 5%
D)3%; 8%
Q3) A mutual fund has total assets outstanding of $69 million. During the year the fund bought and sold assets equal to $17.25 million. This fund's turnover rate was ________.
A)25.00%
B)28.50%
C)18.63%
D)33.40%
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Page 6
Chapter 5: Risk and Return: Past and Prologue
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Sample Questions
Q1) You invest $1000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 16% and a standard deviation of 20% and a Treasury bond with a rate of return of 6%. The slope of the capital allocation line formed with the risky asset and the risk-free asset is ________.
A)1.40
B)0.80
C)0.50
D)0.40
Q2) One method to forecast the risk premium is to use the ________.
A)coefficient of variation of analysts' earnings forecasts
B)variations in the risk-free rate over time
C)average historical excess returns for the asset under consideration
D)average abnormal return on the index portfolio
Q3) You purchased a share for $29. One year later you received $2.25 as dividend and sold the share for $28. Your holding-period return was ________.
A)-3.57%
B)-3.45%
C)4.31%
D)8.03%
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Page 7
Chapter 6: Efficient Diversification
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Sample Questions
Q1) What is the standard deviation of a portfolio of two shares given the following data? Share A has a standard deviation of 18%. Share B has a standard deviation of 14%. The portfolio contains 40% of Share A and the correlation coefficient between the two shares is -.23.
A)9.7%
B)12.2%
C)14.0%
D)15.6%
Q2) The ________ decision should take precedence over the ________ decision.
A)asset allocation, share selection
B)bond selection, mutual fund selection
C)share selection, asset allocation
D)share selection, mutual fund selection
Q3) Market risk is also called ________ and ________.
A)systematic risk, diversifiable risk
B)systematic risk, nondiversifiable risk
C)unique risk, nondiversifiable risk
D)unique risk, diversifiable risk
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8
Chapter 7: Capital Pricing and Arbitrage Pricing Theory
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Q1) In his famous critique of the CAPM, Roll argued that the CAPM ________.
A)is not testable because the true market portfolio can never be observed
B)is of limited use because systematic risk can never be entirely eliminated
C)should be replaced by the APT
D)should be replaced by the Fama French 3 factor model
Q2) According to the CAPM, what is the market risk premium given an expected return on a security of 13.6%, a share beta of 1.2, and a risk-free interest rate of 4.0%?
A)4.0%
B)4.8%
C)6.6%
D)8.0%
Q3) Standard deviation of portfolio returns is a measure of ________.
A)total risk
B)relative systematic risk
C)relative non-systematic risk
D)relative business risk
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9
Chapter 8: The Efficient Market Hypothesis and Behavioral Finance
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Sample Questions
Q1) If investors overweight recent performance in forecasting the future they are exhibiting ________.
A)representativeness bias
B)framing error
C)memory bias
D)overconfidence
Q2) An investor needs cash to pay some bills. He is willing to use his dividend income to pay the bills but he will not sell any shares to do so. He is engaging in ________.
A)overconfidence
B)representativeness
C)forecast errors
D)mental accounting
Q3) Growth shares usually exhibit ________ price-to-book ratios and ________ price-to-earnings ratios.
A)low, low
B)low, high
C)high, low
D)high, high
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Chapter 9: Bond Prices and Yields
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Sample Questions
Q1) A callable bond pays annual interest of $60, has a par value of $1 000, matures in 20 years but is callable in 10 years at a price of $1 100, and has a value today of $1 055.84. The yield to call on this bond is ________.
A)6.00%
B)6.58%
C)7.20%
D)8.00% 1055.84 = 60
Q2) Bonds with coupon rates that fall when the general level of interest rates rise are called ________.
A)asset-backed bonds
B)convertible bonds
C)inverse floaters
D)index bonds
Q3) The ________ of a bond is computed as the ratio of coupon payments to market price.
A)nominal yield
B)current yield
C)yield to maturity
D)yield to call
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11
Chapter 10: Managing Bond Portfolios
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Sample Questions
Q1) A bank has $50 million in assets, $47 million in liabilities and $3 million in shareholders' equity. If the duration of its liabilities are 1.3 and the bank wants to immunise its net worth against interest rate risk and thus set the duration of equity equal to zero, it should select assets with an average duration of ________.
A)1.22
B)1.50
C)1.60
D)2.00
Q2) The duration of a 5-year zero coupon bond is ________ years.
A)4.5
B)5.0
C)5.5
D)3.5
Q3) Convexity of a bond is ________.
A)the same as horizon analysis
B)the rate of change of the price-yield curve divided by bond price
C)a measure of bond duration
D)none of the above
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12
Chapter 11: Equity Valuation
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Sample Questions
Q1) A firm increases its dividend plowback ratio. All else equal you know that ________.
A)earnings growth will increase and the share's P/E will increase
B)earnings growth will decrease and the share's P/E will increase
C)earnings growth will increase and the share's P/E will decrease
D)earnings growth will increase and the share's P/E may or may not increase
Q2) Lifecycle Motorcycle Company is expected to pay a dividend in Year 1 of $2.00, a dividend in Year 2 of $3.00, and a dividend in Year 3 of $4.00. After Year 3, dividends are expected to grow at the rate of 7% per year. An appropriate required return for the shares is 12%. Using the multistage DDM, the shares should be worth ________ today.
A)$63.80
B)$65.13
C)$67.95
D)$85.60
Q3) Value shares are more likely to have a PEG ratio ________.
A)less than one
B)equal to one
C)greater than one D)less than zero
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Page 13
Chapter 12: Macroeconomic and Industry Analysis
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Sample Questions
Q1) A top-down analysis of a firm's prospects starts with an analysis of the ________.
A)firm's position in its industry
B)local economy or even the global economy
C)industry
D)specific firm under consideration
Q2) Which one of the following shares represents industries with below-average sensitivity to the state of the economy?
A)Financials
B)Technology
C)Food and beverage
D)Cyclicals
Q3) Which one of the following is not a US supply shock?
A)Unions force an increase in national wage rates
B)30% drop in oil supply from the Middle East
C)Extended droughts reduce US food production by 25%
D)Increases in Chinese purchases of US exports
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14
Chapter 13: Financial Statement Analysis
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Sample Questions
Q1) Operating ROA is calculated as ________ while ROE is calculated as ________.
A)EBIT/Total assets; Net profit/Total assets
B)Net profit/Total assets; EBIT/Total assets
C)EBIT/Total assets; Net profit/Equity
D)Net profit/EBIT; Sales/Total assets
Q2) Firm A acquires Firm B when Firm B has a book value of assets of $155 million and a book value of liabilities of $35 million. Firm A actually pays $175 million for Firm B. This purchase would result in goodwill for Firm A equal to ________.
A)$175 million
B)$155 million
C)$120 million
D)$55 million
Q3) What ratio will definitely increase when a firm increases its annual sales with no corresponding increase in assets?
A)Asset turnover
B)Current ratio
C)Liquidity ratio
D)Quick ratio
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Chapter 14: Options and Risk Management
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Sample Questions
Q1) You buy one Hewlett Packard August 50 call contract and one Hewlett Packard August 50 put contract. The call premium is $1.25 and the put premium is $4.50. Your highest potential loss from this position is ________.
A)$125
B)$450
C)$575
D)unlimited
Q2) A European put option gives its holder the right to ________.
A)buy the underlying asset at the exercise price on or before the expiration date
B)buy the underlying asset at the exercise price only at the expiration date
C)sell the underlying asset at the exercise price on or before the expiration date
D)sell the underlying asset at the exercise price only at the expiration date
Q3) Of the variables in the Black-Scholes OPM, the ________ is not directly observable.
A)price of the underlying asset
B)risk-free rate of interest
C)time to expiration
D)variance of the underlying asset return
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Chapter 15: Futures and Risk Management
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Sample Questions
Q1) A one-year gold futures contract is selling for $641. Spot gold prices are $600 and the one year risk free rate is 6%. The arbitrage profit implied by these prices is ________.
A)$3
B)$4
C)$5
D)$6
Q2) When dividend paying assets are involved, the spot-futures parity relationship can be stated as ________.
A)F<sub>1</sub> = S<sub>0</sub>(1 + r<sub>f</sub>)
B)F<sub>0</sub> = S<sub>0</sub>(1 + r<sub>f</sub> - d)<sup>T</sup>
C)F<sub>0</sub> = S<sub>0</sub>(1 + r<sub>f</sub> + d)<sup>T</sup>
D)F<sub>0</sub> = S<sub>0</sub>(1 + r<sub>f</sub>)<sup>T</sup>
Q3) An investor who goes short in a futures contract will ________ any increase in value of the underlying asset and will ________ any decrease in value in the underlying asset.
A)pay; pay
B)pay; receive
C)receive; pay
D)receive; receive
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Page 17
Chapter 16: Investors and the Investment Process
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Sample Questions
Q1) An employee has an average wage of $60 000 and they have worked for the firm for 25 years. The defined benefit pension plan pays retirees 2.5% of the average wage times the years of service. The employee can expect to receive ________ per year upon retirement.
A)$18 000
B)$37 500
C)$45 325
D)$55 250
Q2) Suppose that the pre-tax holding period returns on two shares are the same. Share
A has a high dividend payout policy and share B has a low dividend payout policy. If you are a high tax rate individual and do not intend to sell the shares during the holding period, ________.
A)Share A will have a higher after-tax holding period return than Share B
B)the after-tax holding period returns on Shares A and B will be the same
C)Share B will have a higher after-tax holding period return than Share A
D)it is impossible to determine which share will have a higher after-tax holding period return given the information available
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Page 18
Chapter 17: Hedge Funds
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Sample Questions
Q1) The collapse of the Long Term Capital Management hedge fund in 1998 was a case of an extreme unlikely statistical event called ________.
A)statistical arbitrage
B)an unhedged play
C)a tail event
D)a liquidity trap
Q2) Consider a hedge fund with $400 million in assets, 60 million in debt and 16 million shares at the start of the year; and $500 million in assets, 40 million in debt and 20 million shares at the end of the year. During the year investors have received an income dividend of $0.75 per share. Assuming that the fund carries no debt and that the total expense ratio is 2.75%, what is the rate of return on the fund?
A)6.45%
B)8.52%
C)8.95%
D)9.46%
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Chapter 18: Portfolio Performance Evaluation
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Sample Questions
Q1) Which one of the following performance measures is the Sharpe measure?
A)Average excess return to beta ratio
B)Average excess return to standard deviation ratio
C)Alpha to standard deviation of residuals ratio
D)Average return minus required return
Q2) Suppose that over the same period two portfolios have the same average return and the same standard deviation of return, but Portfolio A has a higher beta than Portfolio B. According to the Sharpe measure, the performance of Portfolio A ________.
A)is better than the performance of Portfolio B
B)is the same as the performance of Portfolio B
C)is poorer than the performance of Portfolio B
D)cannot be measured since there is no data on the alpha of the portfolio
Q3) The comparison universe is ________.
A)the bogey portfolio
B)a set of mutual funds with similar risk characteristics to your mutual fund
C)the set of all mutual funds in the USA
D)the set of all mutual funds in the world
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Page 20