Investment Analysis
Practice Questions
Course Introduction
Investment Analysis focuses on the principles and techniques used to evaluate investment opportunities and make informed financial decisions. The course covers key topics such as risk and return, portfolio theory, asset valuation, security analysis, and market efficiency. Students will learn how to assess stocks, bonds, and alternative investments, as well as how to construct and manage effective investment portfolios. Through practical examples, case studies, and quantitative tools, this course prepares students to analyze financial markets, understand investor behavior, and develop investment strategies that align with specific financial goals.
Recommended Textbook Investments 9th Edition by Zvi Bodie
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Page 2
Chapter 1: The Investment Environment
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Q1) In 2009,____________ was the most significant financial asset of U.S.commercial banks in terms of total value.
A)loans and leases
B)cash
C)real estate
D)deposits
E)investment securities
Answer: A
Q2) In 2009,____________ was the most significant asset of U.S.households in terms of total value.
A)real estate
B)mutual fund shares
C)debt securities
D)life insurance reserves
E)pension reserves
Answer: A
Q3) Discuss securitization as it relates to the field of investments.
Answer: Securitization refers to aggregating underlying financial assets, su
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Chapter 2: Asset Classes and Financial Instruments
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Sample Questions
Q1) The ____ is an example of a U.S.index of large firms.
A)Wilshire 5000
B)DJIA
C)DAX
D)Russell 2000
E)All of the above
Answer: B
Q2) In order for you to be indifferent between the after tax returns on a corporate bond paying 7% and a tax-exempt municipal bond paying 5.5%,what would your tax bracket need to be?
A)22.6%
B)21.4%
C)26.2%
D)19.8%
E)Cannot tell from the information given
Answer: B
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4
Chapter 3: How Securities are Traded
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Q1) The securities act of 1933 ____________.
I.requires full disclosure of relevant information relating to the issue of new securities
II.requires registration of new securities
III.requires issuance of a prospectus detailing financial prospects of the firm
IV.established the SEC
V.requires periodic disclosure of relevant financial information
VI.empowers SEC to regulate exchanges,OTC trading,brokers,and dealers
A)I, II and III
B)I, II, III, IV, V, and VI
C)I, II and V
D)I, II and IV
E)IV only
Answer: A
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Chapter 4: Mutual Funds and Other Investment Companies
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Q1) A mutual fund had average daily assets of $3.0 billion in 2009.The fund sold $600 million worth of stock and purchased $700 million worth of stock during the year.The fund's turnover ratio is ___.
A)27.5%
B)12%
C)15%
D)25%
E)20%
Q2) Which one of the following statements regarding open-end mutual funds is false?
A)The funds redeem shares at net asset value.
B)The funds offer investors professional management.
C)The funds offer investors a guaranteed rate of return.
D)B and C.
E)A and B.
Q3) Which of the following statements about Real Estate Investment Trusts is true?
A)REITs may be equity trusts or mortgage trusts.
B)REITs are usually highly leveraged.
C)REITs are similar to closed-end funds.
D)All of the above are true.
E)Both A and C are true.
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Chapter 5: Introduction to Risk,return,and the Historical Record
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Q1) Discuss the historical distributions of each of the following in terms of their average return and the dispersion of their returns:
U.S.small company stocks,U.S.large company stocks,and U.S.long-term government bonds.Would any of these investments cause a loss in purchasing power during a 1926-2009 holding period?
Q2) A year ago,you invested $12,000 in an investment that produced a return of 16%.What is your approximate annual real rate of return if the rate of inflation was 2% over the year?
A)18%.
B)2%.
C)16%.
D)15%.
E)none of the above.
Q3) The holding-period return (HPR)for a stock is equal to
A)the real yield minus the inflation rate.
B)the nominal yield minus the real yield.
C)the capital gains yield minus the tax rate.
D)the capital gains yield minus the dividend yield.
E)the dividend yield plus the capital gains yield.
Page 7
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Chapter 6: Risk Aversion and Capital Allocation to Risky Assets
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Q1) Based on their relative degrees of risk tolerance
A)investors will hold varying amounts of the risky asset in their portfolios.
B)all investors will have the same portfolio asset allocations.
C)investors will hold varying amounts of the risk-free asset in their portfolios.
D)A and C.
E)none of the above.
Q2) The presence of risk means that
A)investors will lose money.
B)more than one outcome is possible.
C)the standard deviation of the payoff is larger than its expected value.
D)final wealth will be greater than initial wealth.
E)terminal wealth will be less than initial wealth.
Q3) What are the proportions of Stocks A,B,and C,respectively in Bo's complete portfolio?
A)40%, 25%, 35%
B)8%, 5%, 7%
C)32%, 20%, 28%
D)16%, 10%, 14%
E)20%,12.5%,17.5%
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Chapter 7: Optimal Risky Portfolios
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Q1) Other things equal,diversification is most effective when
A)securities' returns are uncorrelated.
B)securities' returns are positively correlated.
C)securities' returns are high.
D)securities' returns are negatively correlated.
E)B and C.
Q2) Discuss how the investor can use the separation theorem and utility theory to produce an efficient portfolio suitable for the investor's level of risk tolerance.
Q3) The coefficient of correlation between C and D is A)0.67.
B)0.50.
C)-0.50.
D)-0.67.
E)none of the above.
Q4) State Markowitz's mean-variance criterion.Give some numerical examples of how the criterion would be applied.
Q5) Theoretically,the standard deviation of a portfolio can be reduced to what level? Explain.Realistically,is it possible to reduce the standard deviation to this level?
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Chapter 8: Index Models
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Q1) The beta of a stock has been estimated as 0.85 using regression analysis on a sample of historical returns.A commonly used adjustment technique would provide an adjusted beta of ___________.
A)1.01
B)0.95
C)1.13
D)0.90
E)none of the above
Q2) Discuss the advantages of the single-index model over the Markowitz model in terms of numbers of variable estimates required and in terms of understanding risk relationships.
Q3) Suppose the following equation best describes the evolution of over time: <sub>t</sub>= 0.18 + 0.63 <sub>t</sub>-1 If a stock had a of 1.09 last year,you would forecast the to be _______ in the coming year.
A)0.87
B)0.18
C)0.63
D)0.81
E)none of the above
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Chapter 9: The Capital Asset Pricing Model
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Sample Questions
Q1) Discuss how the CAPM might be used in capital budgeting decisions and utility rate decisions.
Q2) According to the Capital Asset Pricing Model (CAPM),which one of the following statements is false?
A)The expected rate of return on a security increases in direct proportion to a decrease in the risk-free rate.
B)The expected rate of return on a security increases as its beta increases.
C)A fairly priced security has an alpha of zero.
D)In equilibrium, all securities lie on the security market line.
E)All of the above statements are true.
Q3) List and discuss two of the assumptions of the CAPM.
Q4) According to the Capital Asset Pricing Model (CAPM),
A)a security with a positive alpha is considered overpriced.
B)a security with a zero alpha is considered to be a good buy.
C)a security with a negative alpha is considered to be a good buy.
D)a security with a positive alpha is considered to be underpriced.
E)none of the above.
Q5) Discuss the differences between the capital market line and the security market line.
Q6) Discuss the mutual fund theorem.
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Chapter 10: Arbitrage Pricing Theory and Multifactor Models
of Risk and Return
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Q1) Multifactor models seek to improve the performance of the single-index model by A)modeling the systematic component of firm returns in greater detail.
B)incorporating firm-specific components into the pricing model.
C)allowing for multiple economic factors to have differential effects.
D)all of the above are true.
E)none of the above are true.
Q2) Discuss the similarities and the differences between the CAPM and the APT with regard to the following factors:capital market equilibrium,assumptions about risk aversion,risk-return dominance,and the number of investors required to restore equilibrium.
Q3) Assuming no arbitrage opportunities exist,the risk premium on the factor F<sub>1</sub>portfolio should be __________.
A)3%
B)4%
C)5%
D)6%
E)none of the above
Q4) Discuss arbitrage opportunities in the context of violations of the law of one price.
Page 12
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Chapter 11: The Efficient Market Hypothesis
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Q1) At freshman orientation,1,500 students are asked to flip a coin 20 times.One student is crowned the winner (tossed 20 heads).This is most closely associated with ________.
A)regret avoidance
B)selection bias
C)overconfidence
D)the lucky event issue
E)none of the above
Q2) The Food and Drug Administration (FDA)just announced yesterday that they would approve a new cancer-fighting drug from King.You observe that King had an abnormal return of 0% yesterday.This suggests that
A)the market is not efficient.
B)King stock will probably rise in value tomorrow.
C)King stock will probably fall in value tomorrow.
D)the approval was already anticipated by the market.
E)none of the above.
Q3) Why might the degree of market efficiency differ across various markets? State three reasons why this might occur and explain each reason briefly.
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Chapter 12: Behavioral Finance and Technical Analysis
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Sample Questions
Q1) List and discuss two of the assumptions of the CAPM.
Q2) The risk-free rate is 5 percent.The expected market rate of return is 11 percent.If you expect stock X with a beta of 2.1 to offer a rate of return of 15 percent,you should
A)buy stock X because it is overpriced.
B)sell short stock X because it is overpriced.
C)sell stock short X because it is underpriced.
D)buy stock X because it is underpriced.
E)none of the above,as the stock is fairly priced.
Q3) Which statement is not true regarding the Capital Market Line (CML)?
A)The CML is the line from the risk-free rate through the market portfolio.
B)The CML is the best attainable capital allocation line.
C)The CML is also called the security market line.
D)The CML always has a positive slope.
E)The risk measure for the CML is standard deviation.
Q4) Discuss the differences between the capital market line and the security market line.
Q5) Discuss how the CAPM might be used in capital budgeting decisions and utility rate decisions.
Q6) List and discuss two of the assumptions of the CAPM.
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Chapter 13: Empirical Evidence on Security Returns
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Q1) A major finding by Heaton and Lucas (2000)is that:
A)the market rate of return does not help explain the rate of return of individual securities and CAPM must be rejected.
B)the market rate of return does explain the rate of return of individual securities.
C)the change in proprietary wealth helps explain the rate of return of individual securities.
D)A and C.
E)none of the above
Q2) Fama and MacBeth (1973)found that the relationship between average excess returns and betas was _______.
A)linear
B)nonexistent
C)as expected, based on earlier studies
D)Fama and MacBeth did not examine the relationship between excess returns and beta
E)A and C
Q3) Discuss Roll's critique of the CAPM.
Q4) Describe some of the ways the CAPM is applied in practice.
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Chapter 14: Bond Prices and Yields
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Q1) A coupon bond that pays interest annually has a par value of $1,000,matures in 7 years,and has a yield to maturity of 9.3%.The intrinsic value of the bond today will be ______ if the coupon rate is 8.5%.
A)$712.99
B)$960.14
C)$1,123.01
D)$886.28
E)$1,000.00
Q2) A 10% coupon bond,annual payments,10 years to maturity is callable in 3 years at a call price of $1,100.If the bond is selling today for $975,the yield to call is _________.
A)10.26%
B)10.00%
C)9.25%
D)13.98%
E)none of the above
Q3) If you are buying a coupon bond between interest paying dates,is the amount you would pay to your broker for the bond more or less than the amount quoted in the financial quotation pages? Discuss the differences and how these differences arise.
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Chapter 15: The Term Structure of Interest Rates
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Q1) The pure yield curve can be estimated
A)by using zero-coupon Treasuries.
B)by using stripped Treasuries if each coupon is treated as a separate "zero."
C)by using corporate bonds with different risk ratings.
D)by estimating liquidity premiums for different maturities.
E)A and B
Q2) Explain what the following terms mean: spot rate,short rate,and forward rate.Which of these is (are)observable today?
Q3) The value of a Treasury bond should
A)be equal to the sum of the value of STRIPS created from it.
B)be less than the sum of the value of STRIPS created from it.
C)be greater than the sum of the value of STRIPS created from it.
D)A or B
E)B or C
Q4) What is the yield to maturity on a 3-year zero coupon bond?
A)6.37%
B)9.00%
C)7.33%
D)10.00%
E)none of the above
Page 17
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Chapter 16: Managing Bond Portfolios
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Q1) Ceteris paribus,the duration of a bond is positively correlated with the bond's A)time to maturity.
B)coupon rate.
C)yield to maturity.
D)all of the above.
E)none of the above.
Q2) A 7%,14-year bond has a yield to maturity of 6% and duration of 7 years.If the market yield changes by 44 basis points,how much change will there be in the bond's price?
A)1.85%
B)2.91%
C)3.27%
D)6.44%
E)none of the above
Q3) Identify the bond that has the longest duration (no calculations necessary).
A)20-year maturity with an 8% coupon.
B)20-year maturity with a 12% coupon.
C)20-year maturity with a 0% coupon.
D)10-year maturity with a 15% coupon.
E)12-year maturity with a 12% coupon.
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Chapter 17: Options Markets: Introduction
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Q1) If the economy is strong,the total cost of Firm C will be ________.
A)$1,680,000
B)$1,170,000
C)$1,350,000
D)$420,000
E)none of the above
Q2) During which stage of the industry life cycle would a firm experience stable growth in sales?
A)Consolidation
B)Relative Decline
C)Maturity
D)Start-up
E)Stabilization
Q3) If the economy is strong,the after-tax profit of Firm C will be _______.
A)$0
B)$6,000
C)$36,000
D)$60,000
E)$630,000
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Chapter 18: Option Valuation
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Q1) Lamm Corporation is expected have EBIT of $6.2M this year.Lamm Corporation is in the 40% tax bracket,will report $1.2M in depreciation,will make $1.4M in capital expenditures,and have a $160,000 increase in net working capital this year.What is Lamm's FCFF?
A)6,200,000
B)6,160,000
C)3,360,000
D)3,680,000
E)4,625,000
Q2) Sales Company paid a $1.00 dividend per share last year and is expected to continue to pay out 40% of earnings as dividends for the foreseeable future.If the firm is expected to generate a 10% return on equity in the future,and if you require a 12% return on the stock,the value of the stock is ________.
A)$17.67
B)$13.00
C)$16.67
D)$18.67
E)none of the above
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Chapter 19: Futures Markets
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Q1) If you wish to compute economic earnings and are trying to decide how to account for inventory,_______.
A)FIFO is better than LIFO
B)LIFO is better than FIFO
C)FIFO and LIFO are equally good
D)FIFO and LIFO are equally bad
E)none of the above
Q2) A firm has an ROE of -2%,a debt/equity ratio of 1.0,a tax rate of 0%,and an interest rate on debt of 10%.The firm's ROA is ________.
A)2%
B)4%
C)6%
D)8%
E)none of the above
Q3) Return on total assets is the product of _______.
A)interest rates and pre-tax profits
B)the debt-equity ratio and P/E ratio
C)the after-tax profit margin and the asset turnover ratio
D)sales and fixed assets
E)none of the above
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Chapter 20: Futures, swaps, and Risk Management
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Q1) The maximum loss a buyer of a stock call option can suffer is equal to
A)the striking price minus the stock price.
B)the stock price minus the value of the call.
C)the call premium.
D)the stock price.
E)none of the above.
Q2) An American call option can be exercised
A)any time on or before the expiration date.
B)only on the expiration date.
C)any time in the indefinite future.
D)only after dividends are paid.
E)none of the above.
Q3) Binary Options
A)are based on two possible outcomes - yes or no.
B)may make a payoff of a fixed amount if a specified event happens.
C)may make a payoff of a fixed amount if a specified event does not happen.
D)A and B only.
E)A,B,and C.
Q4) Describe the protective put.What are the advantages of such a strategy?
Q5) List three types of exotic options and describe their characteristics.
Page 22
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Chapter 21: Macroeconomic and Industry Analysis
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Q1) Delta is defined as
A)the change in the value of an option for a dollar change in the price of the underlying asset.
B)the change in the value of the underlying asset for a dollar change in the call price.
C)the percentage change in the value of an option for a one percent change in the value of the underlying asset.
D)the change in the volatility of the underlying stock price.
E)none of the above.
Q2) If the hedge ratio for a stock call is 0.50,the hedge ratio for a put with the same expiration date and exercise price as the call would be ________.
A)0.30
B)0.50
C)-0.60
D)-0.50
E)-.17
Q3) Discuss the relationship between option prices and time to expiration,volatility of the underlying stocks,and the exercise price.
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Chapter 22: Equity Valuation Models
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Q1) The expectations hypothesis of futures pricing
A)is the simplest theory of futures pricing.
B)states that the futures price equals the expected value of the future spot price of the asset.
C)is not a zero sum game.
D)A and B.
E)A and C.
Q2) An investor with a long position in Treasury notes futures will profit if
A)interest rates decline.
B)interest rate increase.
C)the prices of Treasury notes increase.
D)the price of the long bond increases.
E)none of the above.
Q3) Futures contracts __________ traded on an organized exchange,and forward contracts __________ traded on an organized exchange.
A)are not; are
B)are; are
C)are not; are not
D)are; are not
E)are; may or may not be
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Chapter 23: Financial Statement Analysis
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Q1) Assume the current market futures price is 1.66 A$/$.You borrow 167,000 A$ and convert the proceeds to U.S.dollars and invest them in the U.S at the risk-free rate.You simultaneously enter a contract to purchase 170,340 A$ at the current futures prices (maturity of 1 year).What would be your profit (loss)?
A)Profit of 630 A$
B)Loss of 2300 A$
C)Profit of 2300 A$
D)Loss of 630 A$
E)None of the above
Q2) If the anticipated market value materializes,what will be your expected loss on the portfolio?
A)7.58%
B)6.52%
C)15.43%
D)8.57%
E)6.42%
Q3) Why are commodity futures prices different from other futures prices? Explain the difference and give an example of a commodity and the factors involved.
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Chapter 24: Portfolio Performance Evaluation
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Q1) Suppose two portfolios have the same average return,the same standard deviation of returns,but Buckeye Fund has a higher beta than Gator Fund.According to the Sharpe measure,the performance of Buckeye Fund
A)is better than the performance of Gator Fund.
B)is the same as the performance of Gator Fund.
C)is poorer than the performance of Gator Fund.
D)cannot be measured as there is no data on the alpha of the portfolio.
E)none of the above is true.
Q2) Define and discuss the Sharpe,Treynor,and Jensen measures of portfolio performance evaluation,and the situations in which each measure is the most appropriate measure.
Q3) In measuring the comparative performance of different fund managers,the preferred method of calculating rate of return is __________.
A)internal rate of return
B)arithmetic average
C)dollar-weighted
D)time-weighted
E)none of the above
Q4) Discuss,in general,the performance attribution procedures.
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Chapter 25: International Diversification
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Q1) U.S.investors
A)can trade derivative securities based on prices in foreign security markets.
B)cannot trade foreign derivative securities.
C)can trade options and futures on the Nikkei stock index of 225 stocks traded on the Tokyo stock exchange and on FTSE (Financial Times Share Exchange)indexes of U.K.and European stocks.
D)A and C.
E)none of the above.
Q2) Investors looking for effective international diversification should
A)invest about 60% of their money in foreign stocks.
B)invest the same percentage of their money in foreign stocks that foreign equities represent in the world equity market.
C)frequently hedge currency exposure.
D)both A and B.
E)none of the above.
Q3) Discuss some of the factors that might be included in a multifactor model of security returns in an international application of arbitrage pricing theory (APT).
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Chapter 26: Hedge Funds
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Q1) The risk profile of hedge funds ______,making performance evaluation ______.
A)can shift rapidly and substantially; challenging
B)can shift rapidly and substantially; straightforward
C)is stable; challenging
D)is stable; straightforward
E)none of the above
Q2) Like mutual funds,hedge funds
A)allow private investors to pool assets to be managed by a fund manager.
B)are commonly organized as private partnerships.
C)are subject to extensive SEC regulations.
D)are typically only open to wealthy or institutional investors.
E)B and D
Q3) If the yield on mortgage-backed securities was abnormally low compared to Treasury bonds,a hedge fund pursuing a relative value strategy would _______.
A)short sell the Treasury bonds and short sell the mortgage-backed securities
B)short sell the Treasury bonds and buy the mortgage-backed securities
C)buy the Treasury bonds and buy the mortgage-backed securities
D)buy the Treasury bonds and short sell the mortgage-backed securities
E)none of the above
Q4) Explain the five major differences between hedge funds and mutual funds.
Page 28
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Chapter 27: The Theory of Active Portfolio Management
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Sample Questions
Q1) There appears to be a role for a theory of active portfolio management because
A)some portfolio managers have produced sequences of abnormal returns that are difficult to label as lucky outcomes.
B)the "noise" in the realized returns is enough to prevent the rejection of the hypothesis that some money managers have outperformed a passive strategy by a statistically small,yet economic,margin.
C)some anomalies in realized returns have been persistent enough to suggest that portfolio managers who identified these anomalies in a timely fashion could have outperformed a passive strategy over prolonged periods.
D)A and B.
E)A,B,and C.
Q2) The Black-Litterman model and Treynor-Black model are
A)nice in theory but practically useless in modern portfolio management.
B)complementary tools that should be used in portfolio management.
C)contradictory models that cannot be used together; therefore, portfolio managers must choose which one suits their needs.
D)not useful due to their complexity.
E)none of the above.
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Chapter 28: Investment Policy and the Framework of the
CFA Institute Appendices
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Sample Questions
Q1) The optimal portfolio on the efficient frontier for a given investor depends on
A)the investor's degree of risk tolerance.
B)the coefficient,A,which is a measure of risk aversion.
C)the investor's required rate of return.
D)A and C.
E)A and B.
Q2) The scope and purpose section of an Investment Policy Statement for individual investors typically consists of defining the ________.
A)return, distribution, and risk requirements
B)process for review of the IPS
C)appropriate metrics for risk measurement
D)relevant constraints
E)context,investor,and structure
Q3) How much can Genny be sure of having in the safe account at retirement?
A)$45,473
B)$62,557
C)$78,943
D)$54,968
E)$74,643
Q4) Discuss investments as a hedge against inflation
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