Investment Analysis
Textbook Exam Questions
Course Introduction
Investment Analysis is a comprehensive course designed to equip students with the foundational knowledge and analytical skills necessary to evaluate various investment opportunities. The course explores the principles and techniques used to assess the risk and return profiles of different financial instruments, including stocks, bonds, and mutual funds. Students learn how to interpret financial statements, use valuation models, and analyze macroeconomic factors that influence investment decisions. Through case studies and practical exercises, the course emphasizes portfolio theory, asset allocation strategies, and the application of quantitative tools to make informed investment choices in both domestic and international markets.
Recommended Textbook Investments 9th Edition by Zvi Bodie
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Chapter 1: The Investment Environment
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Q1) Financial intermediaries exist because small investors cannot efficiently ________.
A)diversify their portfolios
B)assess credit risk of borrowers
C)advertise for needed investments
D)all of the above.
E)A and B only.
Answer: D
Q2) Mortgage-backed securities were created when ________ began buying mortgage loans from originators and bundling them into large pools that could be traded like any other financial asset.
A)GNMA
B)FNMA
C)FHLMC
D)B and C
E)A and B
Answer: D
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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Q1) The largest component of the money market is ____________.
A)repurchase agreements
B)money market mutual funds
C)T-bills
D)Eurodollars
E)savings deposits
Answer: E
Q2) The money market is a subsector of the A)money market.
B)capital market.
C)derivatives market.
D)fixed income market.
E)None of the above.
Answer: E
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Chapter 3: How Securities are Traded
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Q1) You purchased 100 shares of XON common stock on margin at $60 per share.Assume the initial margin is 50% and the maintenance margin is 30%.Below what stock price level would you get a margin call? Assume the stock pays no dividend; ignore interest on margin.
A)$42.86
B)$50.75
C)$49.67
D)$80.34
E)none of the above
Answer: A
Q2) You purchased 100 shares of common stock on margin at $40 per share.Assume the initial margin is 50% and the stock pays no dividend.What would the maintenance margin be if a margin call is made at a stock price of $25? Ignore interest on margin.
A)0.33
B)0.55
C)0.20
D)0.23
E)0.25
Answer: C
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Chapter 4: Mutual Funds and Other Investment Companies
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Sample Questions
Q1) In 2009 the proportion of mutual funds (based on total assets)specializing in common stocks was
A)21.7%
B)28.0%
C)38.6%
D)73.4%
E)63.5%
Q2) A mutual fund had NAV per share of $23.00 on January 1,2009.On December 31 of the same year the fund's NAV was $23.15.Income distributions were $0.63 and the fund had capital gain distributions of $1.26.Without considering taxes and transactions costs,what rate of return did an investor receive on the fund last year?
A)11.26%
B)10.54%
C)8.87%
D)8.26%
E)9.63%
Q3) What is an Exchange-traded fund? Give two examples of specific ETFs.What are some advantages they have over ordinary open-end mutual funds? What are some disadvantages?
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Page 6
Chapter 5: Introduction to Risk,return,and the Historical Record
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Q1) ________ is a risk measure that indicates vulnerability to extreme negative returns.
A)Value at risk
B)Lower partial standard deviation
C)Expected shortfall
D)None of the above
E)All of the above
Q2) If the nominal return is constant,the after-tax real rate of return
A)declines as the inflation rate increases.
B)increases as the inflation rate increases.
C)declines as the inflation rate declines.
D)increases as the inflation rate decreases.
E)A and D.
Q3) You purchased a share of stock for $30.One year later you received $1.50 as a dividend and sold the share for $32.25.What was your holding-period return?
A)12.5%
B)12.0%
C)13.6%
D)11.8%
E)none of the above
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Chapter 6: Risk Aversion and Capital Allocation to Risky Assets
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Q1) The utility score an investor assigns to a particular portfolio,other things equal,
A)will decrease as the rate of return increases.
B)will decrease as the standard deviation decreases.
C)will decrease as the variance decreases.
D)will increase as the variance increases.
E)will increase as the rate of return increases.
Q2) In a return-standard deviation space,which of the following statements is (are)true for risk-averse investors? (The vertical and horizontal lines are referred to as the expected return-axis and the standard deviation-axis,respectively.)
I.An investor's own indifference curves might intersect.
II.Indifference curves have negative slopes.
III.In a set of indifference curves,the highest offers the greatest utility.
IV.Indifference curves of two investors might intersect.
A)I and II only
B)II and III only
C)I and IV only
D)III and IV only
E)none of the above
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Chapter 7: Optimal Risky Portfolios
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Q1) The coefficient of correlation between A and B is
A)0.474.
B)0.612.
C)0.590.
D)1.206.
E)none of the above.
Q2) The expected rates of return of stocks A and B are _____ and _____,respectively.
A)13.2%; 9%
B)14%; 10%
C)13.2%; 7.7%
D)7.7%; 13.2%
E)none of the above
Q3) Non-systematic risk is also referred to as
A)market risk, diversifiable risk.
B)firm-specific risk, market risk.
C)diversifiable risk, market risk.
D)diversifiable risk, unique risk.
E)none of the above.
Q4) State Markowitz's mean-variance criterion.Give some numerical examples of how the criterion would be applied.
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Chapter 8: Index Models
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Q1) Assume that stock market returns do not resemble a single-index structure.An investment fund analyzes 100 stocks in order to construct a mean-variance efficient portfolio constrained by 100 investments.They will need to calculate _____________ expected returns and ___________ variances of returns.
A)100, 100
B)100, 4950
C)4950, 100
D)4950, 4950
E)none of the above
Q2) Suppose you forecast that the market index will earn a return of 15% in the coming year.Treasury bills are yielding 6%.The unadjusted of Mobil stock is 1.30.A reasonable forecast of the return on Mobil stock for the coming year is _________ if you use a common method to derive adjusted betas.
A)15.0%
B)15.5%
C)16.0%
D)16.8%
E)none of the above
Q3) Discuss the security characteristic line (SCL).
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Page 10
Chapter 9: The Capital Asset Pricing Model
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Q1) The expected return - beta relationship of the CAPM is graphically represented by
A)the security market line.
B)the capital market line.
C)the capital allocation line.
D)the efficient frontier with a risk-free asset.
E)the efficient frontier without a risk-free asset.
Q2) According to the Capital Asset Pricing Model (CAPM),underpriced securities
A)have positive betas.
B)have zero alphas.
C)have negative betas.
D)have positive alphas.
E)none of the above.
Q3) A "fairly priced" asset lies
A)above the security market line.
B)on the security market line.
C)on the capital market line.
D)above the capital market line.
E)below the security market line.
Q4) List and discuss two of the assumptions of the CAPM.
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Chapter 10: Arbitrage Pricing Theory and Multifactor Models
of Risk and Return
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Q1) Consider the multifactor model APT with three factors.Portfolio A has a beta of 0.8 on factor 1,a beta of 1.1 on factor 2,and a beta of 1.25 on factor 3.The risk premiums on the factor 1,factor 2,and factor 3 are 3%,5% and 2%,respectively.The risk-free rate of return is 3%.The expected return on portfolio A is __________if no arbitrage opportunities exist.
A)13.5%
B)13.4%
C)16.5%
D)23.0%
E)none of the above
Q2) If you invested in an equally weighted portfolio of stocks A and B,your portfolio return would be ___________ if economic growth were moderate.
A)3.0%
B)14.5%
C)15.5%
D)16.0%
E)none of the above
Q3) Discuss arbitrage opportunities in the context of violations of the law of one price.
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Chapter 11: The Efficient Market Hypothesis
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Q1) Nicholas Manufacturing just announced yesterday that its fourth quarter earnings will be 10% higher than last year's fourth quarter.You observe that Nicholas had an abnormal return of -1.2% yesterday.This suggests that A)the market is not efficient.
B)Nicholas' stock will probably rise in value tomorrow.
C)investors expected the earnings increase to be larger than what was actually announced.
D)investors expected the earnings increase to be smaller than what was actually announced.
E)earnings are expected to decrease next quarter.
Q2) The weak form of the efficient market hypothesis asserts that A)stock prices do not rapidly adjust to new information contained in past prices or past data.
B)future changes in stock prices cannot be predicted from past prices. C)technicians cannot expect to outperform the market.
D)A and B
E)B and C
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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Q1) The risk premium on the market portfolio will be proportional to A)the average degree of risk aversion of the investor population.
B)the risk of the market portfolio as measured by its variance.
C)the risk of the market portfolio as measured by its beta.
D)both A and B are true.
E)both A and C are true.
Q2) Capital Asset Pricing Theory asserts that portfolio returns are best explained by:
A)economic factors.
B)specific risk.
C)systematic risk.
D)diversification.
E)none of the above.
Q3) Discuss the assumptions of the capital asset pricing model,and how these assumptions relate to the "real world" investment decision process.
Q4) List and discuss two of the assumptions of the CAPM.
Q5) Discuss the assumptions of the capital asset pricing model,and how these assumptions relate to the "real world" investment decision process.
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) If a professionally managed portfolio consistently outperforms the market proxy on a risk-adjusted basis and the market is efficient,it should be concluded that _________.
A)the CAPM is invalid
B)the proxy is inadequate
C)either the CAPM is invalid or the proxy is inadequate
D)the CAPM is valid and the proxy is adequate
E)none of the above
Q2) If a market proxy portfolio consistently beats all professionally managed portfolios on a risk-adjusted basis,it may be concluded that
A)the CAPM is valid.
B)the market proxy is mean/variance efficient.
C)the CAPM is invalid.
D)A and B.
E)B and C.
Q3) Describe some of the ways the CAPM is applied in practice.
Q4) Discuss Roll's critique of the CAPM.
Q5) Discuss the results of the studies of John Lintner (1965)and Merton Miller and Myron Scholes (1972)in terms of the validity of the capital asset pricing model (CAPM).
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Chapter 14: Bond Prices and Yields
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Q1) 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
Q2) If a 6.75% coupon bond is trading for $1016.00,it has a current yield of ____________ percent.
A)7.38
B)6.64
C)7.25
D)8.53
E)7.18
Q3) Why are many bonds callable? What is the disadvantage to the investor of a callable bond? What does the investor receive in exchange for a bond being callable? How are bond valuation calculations affected if bonds are callable?
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Chapter 15: The Term Structure of Interest Rates
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Q1) Term structure of interest rates is the relationship between what variables?What is assumed about other variables?How is term structure of interest rates depicted graphically?
Q2) 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
Q3) What is the yield to maturity of a 4-year bond?
A)4.69%
B)4.95%
C)5.02%
D)5.05%
E)5.08%
Q4) Discuss the theories of the term structure of interest rates.Include in your discussion the differences in the theories,and the advantages/disadvantages of each.
Q5) Explain what the following terms mean: spot rate,short rate,and forward rate.Which of these is (are)observable today?
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Chapter 16: Managing Bond Portfolios
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Q1) The duration of a par value bond with a coupon rate of 8% and a remaining time to maturity of 5 years is
A)5 years.
B)5.4 years.
C)4.17 years.
D)4.31 years.
E)none of the above.
Q2) Which of the following offers a bond index?
A)Merrill Lynch
B)Salomon
C)Barclays Capital
D)All of the above
E)All but Merrill Lynch
Q3) Which of the following bonds has the longest duration?
A)An 8-year maturity, 0% coupon bond.
B)An 8-year maturity, 5% coupon bond.
C)A 10-year maturity, 5% coupon bond.
D)A 10-year maturity, 0% coupon bond.
E)Cannot tell from the information given.
Q4) Discuss rate anticipation swaps as a bond portfolio management strategy.
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Chapter 17: Options Markets: Introduction
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Q1) ________ is a proposition that a strong proponent of supply side economics would most likely stress.
A)Higher marginal tax rates will lead to a reduction in the size of the budget deficit and lower interest rates as they depend on government revenues.
B)Higher marginal tax rates promote economic inefficiency and thereby retard aggregate output as they encourage investors to undertake low productivity projects with substantial tax shelter benefits.
C)Income redistribution payments will exert little impact on real aggregate supply as they do not consume resources directly.
D)A tax reduction will increase the disposable income of households, and thus, the primary impact of a tax reduction on aggregate supply will stem from the influence of the tax change on the size of the budget deficit or surplus.
E)None of the above is a likely statement for a supply-side proponent.
Q2) List and discuss three of the five determinants of competition suggested in Porter's 1985 study.
Q3) Discuss the industry life cycle,how this concept can be used by security analysts,and the limitations of this concept for security analysis.
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Chapter 18: Option Valuation
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Q1) The growth in dividends of XYZ,Inc.is expected to be 10%/year for the next two years,followed by a growth rate of 5%/year for three years; after this five year period,the growth in dividends is expected to be 2%/year,indefinitely.The required rate of return on XYZ,Inc.is 12%.Last year's dividends per share were $2.00.What should the stock sell for today?
A)$8.99
B)$25.21
C)$40.00
D)$110.00
E)none of the above
Q2) The Gordon model
A)is a generalization of the perpetuity formula to cover the case of a growing perpetuity.
B)is valid only when g is less than k.
C)is valid only when k is less than g.
D)A and B.
E)A and C.
Q3) Discuss the relationships between the required rate of return on a stock,the firm's return on equity,the plowback rate,the growth rate,and the value of the firm.
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Page 20
Chapter 19: Futures Markets
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Q1) Refer to the financial statements of Black Barn Company.The firm's average collection period for 2009 is _____.
A)59.31
B)55.05
C)61.31
D)49.05
E)none of the above
Q2) The dollar value of a firm's return in excess of its opportunity costs is called its A)profitability measure.
B)excess return.
C)economic value added.
D)prospective capacity.
E)return margin.
Q3) Proceeds from a company's sale of stock to the public are included in ________.
A)par value
B)additional paid-in capital
C)retained earnings
D)A and B
E)A,B,and C
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Chapter 20: Futures, swaps, and Risk Management
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Q1) List three types of exotic options and describe their characteristics.
Q2) To adjust for stock splits
A)the exercise price of the option is reduced by the factor of the split and the number of options held is increased by that factor.
B)the exercise price of the option is increased by the factor of the split and the number of options held is reduced by that factor.
C)the exercise price of the option is reduced by the factor of the split and the number of options held is reduced by that factor.
D)the exercise price of the option is increased by the factor of the split and the number of options held is increased by that factor.
E)none of the above
Q3) Describe the protective put.What are the advantages of such a strategy?
Q4) The value of a stock put option is positively related to
A)the time to expiration.
B)the striking price.
C)the stock price.
D)all of the above.
E)A and B.
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Chapter 21: Macroeconomic and Industry Analysis
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Q1) If the hedge ratio for a stock call is 0.60,the hedge ratio for a put with the same expiration date and exercise price as the call would be _______.
A)0.60
B)0.40
C)-0.60
D)-0.40
E)-.17
Q2) Other things equal,the price of a stock put option is negatively correlated with the following factors
A)the stock price.
B)the time to expiration.
C)the stock volatility.
D)the exercise price.
E)B,C,and D.
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) You purchased one silver future contract at $3 per ounce.What would be your profit (loss)at maturity if the silver spot price at that time is $4.10 per ounce? Assume the contract size is 5,000 ounces and there are no transactions costs.
A)$5.50 profit
B)$5,500 profit
C)$5.50 loss
D)$5,500 loss
E)none of the above.
Q2) Agricultural futures contracts are actively traded on A)corn.
B)oats.
C)pork bellies.
D)A and B.
E)all of the above.
Q3) Who guarantees that a futures contract will be fulfilled?
A)the buyer
B)the seller
C)the broker
D)the clearinghouse
E)nobody
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Chapter 23: Financial Statement Analysis
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Q1) You hold a $50 million portfolio of par value bonds with a coupon rate of 10 percent paid annually and 15 years to maturity.How many T-bond futures contracts do you need to hedge the portfolio against an unanticipated change in the interest rate of 0.18%?
Assume the market interest rate is 10 percent and that T-bond futures contracts call for delivery of an 8 percent coupon (paid annually),20-year maturity T-bond.
A)398 contracts long
B)524 contracts short
C)1048 contracts short
D)398 contracts short
E)none of the above
Q2) In the equation Profits = a + b*($/ exchange rate),b is a measure of
A)the firm's beta when measured in terms of the foreign currency.
B)the ratio of the firm's beta in terms of dollars to the firm's beta in terms of pounds.
C)the sensitivity of profits to the exchange rate.
D)the sensitivity of the exchange rate to profits.
E)the frequency with which the exchange rate changes.
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Chapter 24: Portfolio Performance Evaluation
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Q1) Suppose the risk-free return is 6%.The beta of a managed portfolio is 1.5,the alpha is 3%,and the average return is 18%.Based on Jensen's measure of portfolio performance,you would calculate the return on the market portfolio as
A)12%
B)14%
C)15%
D)16%
E)none of the above
Q2) Calculate the information ratio for Sooner Stock Fund.
A)1.53
B)1.30
C)8.67
D)31.43
E)37.14
Q3) The geometric average rate of return is based on
A)the market's volatility.
B)the concept of expected return.
C)the standard deviation of returns.
D)the CAPM.
E)the principle of compounding.
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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) WEBS portfolios
A)are passively managed.
B)are shares that can be sold by investors.
C)are free from brokerage commissions.
D)A and B
E)A,B,and C
Q3) The performance of an internationally diversified portfolio may be affected by
A)country selection
B)currency selection
C)stock selection
D)all of the above
E)none of the above
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Chapter 26: Hedge Funds
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Q1) Regarding hedge fund incentive fees,hedge fund managers ______ if the portfolio return is very large and ______ if the portfolio return is negative.
A)get nothing; get nothing
B)refund the fee; get the fee
C)get the fee; lose nothing except the incentive fee
D)get the fee; lose the management fee
E)none of the above
Q2) Unlike 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) 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
Q4) Explain the five major differences between hedge funds and mutual funds.
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Chapter 27: The Theory of Active Portfolio Management
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Q1) Benchmark risk is defined as
A)the return difference between the portfolio and the benchmark
B)the standard deviation of the return of the benchmark portfolio
C)the standard deviation of the return difference between the portfolio and the benchmark
D)the standard deviation of the return of the actively-managed portfolio
E)none of the above.
Q2) Consider these two investment strategies: \[\begin{array} { | l | l | l | }
\hline & \text { Strategy 1 } ( \% ) & \text { Strategy 2 } ( \% ) \\
\hline \text { Expected return } & 6 & 9 \\
\hline \text { Standard deviation } & 0 & 4 \\
\hline \text { Highest return } & 6 & 15 \\
\hline \text { Lowest return } & 6 & 6 \\
\hline
\end{array}\] Strategy __________ is the dominant strategy because __________.
A)1, it is riskless
B)1, it has the highest reward/risk ratio
C)2, its return is at least equal to Strategy 1 and sometimes greater
D)2, it has the highest reward/risk ratio
E)both strategies are equally preferred.
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Page 29
Chapter 28: Investment Policy and the Framework of the
CFA Institute Appendices
Available Study Resources on Quizplus for this Chatper
83 Verified Questions
83 Flashcards
Source URL: https://quizplus.com/quiz/58294
Sample Questions
Q1) Discuss investments as a hedge against inflation
Q2) A ___________ is established when an individual confers legal title to property to another person or institution to manage the property for one or more beneficiaries.
A)tax shelter
B)defined contribution plan
C)personal trust
D)fixed annuity
E)Keogh plan
Q3) How much can Alan expect to have in his risky account at retirement?
A)$158,982
B)$309,529
C)$543,781
D)$224,651
E)$345,886
Q4) Discuss some of the advantages "personal funds" have over mutual funds.
Q5) Discuss the tax status of the major categories of institutional investors described in the text.
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Q6) Discuss four factors you would need to include if you were constructing a retirement planning worksheet.