Investment Management
Mock Exam
Course Introduction
Investment Management is a comprehensive course that explores the principles, strategies, and tools used in managing investment portfolios. The course covers key topics such as financial markets and instruments, portfolio theory, asset allocation, risk assessment, security analysis, and performance evaluation. Students will learn how to analyze stocks, bonds, and alternative investments, as well as how to construct and manage diversified portfolios to meet various investment objectives. Emphasis is placed on both theoretical concepts and practical decision-making skills, preparing students to understand market dynamics, apply quantitative techniques, and make informed investment choices in real-world scenarios.
Recommended Textbook
Investment Analysis and Portfolio Management 1st Canadian Edition by Frank K. Reilly
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Chapter 1: The Investment Setting
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Sample Questions
Q1) Refer to Exhibit 1-4. Compute the coefficient of variation for your portfolio.
A) 0.043
B) 0.12
C) 1.40
D) 0.69
E) 1.04
Answer: E
Q2) Which of the following is not a component of the required rate of return?
A) Expected rate of inflation
B) Time value of money
C) Risk
D) Holding period return
E) All of the above are components of the required rate of return
Answer: D
Q3) The risk premium is a function of the volatility of operating earnings, sales volatility and inflation.
A)True
B)False
Answer: False
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Page 3
Chapter 2: The Asset Allocation Decision
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Sample Questions
Q1) The cash surrender value of the life insurance policy cannot be used for retirement purpose.
A)True
B)False
Answer: False
Q2) What would the equivalent taxable yield be on an investment that offers a 6% tax exempt yield? Assume a marginal tax rate of 28%.
A) 0.125%
B) 7.20%
C) 6.48%
D) 8.33%
E) 32.14%
Answer: D
Q3) The spending phase occurs when investors are relatively young.
A)True
B)False
Answer: False
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Chapter 3: Selecting Investments in a Global Market
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Sample Questions
Q1) If this year is consistent with historical trends you would expect the return for small capitalization stocks to be
A) Below common stocks and above long-term government bonds.
B) Below common stocks and below long-term government bonds.
C) Above last year's return on the same stocks.
D) Above common stock, long-term government, and corporate bonds.
E) The least variable among long-term bonds and common stocks.
Answer: D
Q2) Warrants are options often issued in connection with the sale of fixed income securities.
A)True
B)False
Answer: True
Q3) Refer to Exhibit 3-1. What is the real return on T-bills?
A) 1.02%
B) 3.68%
C) 4.71%
D) 11.27%
E) 13.33%
Answer: A
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Chapter 4: Securities Markets and the Economy
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Sample Questions
Q1) Refer to Exhibit 4-3. If the maintenance margin is 25%, to what price can Jackson Industries fall before Kathy receives a margin call?
A) $21.75
B) $23.00
C) $10.67
D) $15.93
E) None of the above
Q2) A market is a means through which buyers and sellers are brought together to aid in the transfer of goods and/or services.
A)True
B)False
Q3) Refer to Exhibit 4-1. How many shares of Turtle can Jackie purchase?
A) 5,000
B) 3,000
C) 1,800
D) 1,200
E) None of the above
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Chapter 5: Efficient Capital Markets
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Sample Questions
Q1) In his original article, Fama divided the efficient market hypothesis into two subhypotheses.
A)True
B)False
Q2) Examples of anomalies providing contrary evidence to the semi-strong efficient market hypothesis include studies of all of the following except
A) Quarterly earnings reports.
B) Price earnings ratios.
C) Total market value.
D) Stocks ranked by Canadian Bond Rating Service.
E) The January effect.
Q3) Which of the following behaviours is consistent with escalation bias?
A) Buying more of a stock as it increases in value.
B) Buying more of a stock as it decreases in value.
C) Selling a stock as it decreases in value.
D) Selling a stock as it increases in value.
E) Buying or selling a stock as it increases in value.
Q4) An efficient market requires a large number of profit-maximizing investors.
A)True
B)False
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Chapter 6: An Introduction to Portfolio Management
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Sample Questions
Q1) Semi-variance, when applied to portfolio theory, is concerned with
A) The square root of deviations from the mean.
B) All deviations below the mean.
C) All deviations above the mean.
D) All deviations.
E) The summation of the squared deviations from the mean.
Q2) A basic assumption of the Markowitz model is that investors base decisions solely on expected return and risk.
A)True
B)False
Q3) Refer to Exhibit 6-4. What is the expected return of a portfolio of two risky assets if the expected return E(R<sub>i</sub>), standard deviation (?<sub>i</sub>), covariance (COV<sub>i,j</sub>), and asset weight (W<sub>i</sub>) are as shown above?
A) 8.6%
B) 8.1%
C) 9.3%
D) 10.2%
E) 11.6%
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Chapter 7: Asset Pricing Models: Capm and Apt
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Sample Questions
Q1) Studies have shown the beta is more stable for portfolios than for individual securities.
A)True
B)False
Q2) The market portfolio consists of all
A) Toronto Stock Exchange stocks.
B) High grade stocks and bonds.
C) Stocks and bonds.
D) Canadian and non-Canadian. stocks and bonds.
E) Risky assets.
Q3) Refer to Exhibit 7-3. What is the beta for Radtron using the proxy index?
A) 0.87
B) 0.97
C) 1.02
D) 1.15
E) 1.28
Q4) The market portfolio consists of all risky assets.
A)True
B)False
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Chapter 8: Economic and Industry Analysis
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Sample Questions
Q1) At what stage in the industrial life cycle is there an influx of competition?
A) Early pioneering development
B) Rapid accelerating growth
C) Acquisition and consolidation
D) Mature growth
E) Stabilization and market maturity
Q2) What have studies found when analyzing risk levels among industries?
A) risk levels vary among different industries.
B) risk levels remained fairly constant across industries.
C) risk levels for the same industry varied over time.
D) risk levels for the same industry remain fairly constant over time.
E) Choices a and d
Q3) Refer to Exhibit 8-1. Estimate the industry growth rate in sales per share.
A) 10.5%
B) 11%
C) 12.16%
D) 9.5%
E) 8.73%
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Chapter 9: Company Analysis and Stock Valuation
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Sample Questions
Q1) Speculative companies are firms where
A) Sales, earnings and cash flows are extremely uncertain and not necessarily related to the economy.
B) Sales, earnings and cash flows are likely to withstand changes caused by the economic environment.
C) Sales, earnings and cash flows are heavily influenced by aggregate business activity.
D) Sales, earnings and cash flows are growing exponentially.
E) None of the above.
Q2) A cyclical company's sales and earnings are heavily influenced by aggregate business activity.
A)True
B)False
Q3) Present value of free cash flow to equity resembles the present value of earnings concept except that it includes the capital expenditures required to maintain and grow the firm and the change in working capital required for a growing firm.
A)True
B)False
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Chapter 10: Technical Analysis
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Sample Questions
Q1) One of the potential disadvantages of technical analysis is that it can lead to investing too early, even before fundamental analysts do.
A)True
B)False
Q2) Which of the following is not considered a contrary trading rules?
A) Futures traders bullish on stock index futures
B) Investment advisory opinions
C) Credit balance in brokerage accounts
D) Montreal Exchange put/call ratio
E) Confidence index
Q3) The Dow theory contends that stock price movements are similar to the movement of tides, waves, and ripples.
A)True
B)False
Q4) The relative strength ratio for a stock can be computed by dividing the value of the S&P 500 stock index by the price of a stock.
A)True
B)False
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Page 12
Chapter 11: Bond Fundamentals
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Sample Questions
Q1) A bond's price is determined by the issue's coupon rate, length to maturity, and the prevailing yield in the market.
A)True
B)False
Q2) Refer to Exhibit 11-2. What is the price of the XLR Corporate bond?
A) $901.04
B) $932.04
C) $1,102.62
D) $1,105.94
E) $1,106.78
Q3) Which bond market segments tend to be highly correlated and move together?
A) Short and long term bonds.
B) Short and intermediate term bonds.
C) Intermediate and long term bonds.
D) Short, intermediate and long term bonds.
E) None of the above.
Q4) High-yield bonds are considered "investment" grade.
A)True
B)False
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Chapter 12: The Analysis and Valuation of Bonds
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Sample Questions
Q1) Consider a bond with a price of $944.44 and a coupon of 8 1/2%. What is the current yield?
A) 9.4%
B) 6.8%
C) 8.6%
D) 9.0%
E) 11.0%
Q2) Which of the following is not a major risk premium component for bond investors?
A) Quality differentials.
B) Term to maturity.
C) Indenture provisions.
D) Yield to maturity.
E) Exchange rate risk differences.
Q3) The nominal yield of a bond is the
A) Annual coupon as a percent of the current price.
B) Annual rate earned including the capital gain or loss.
C) Rate earned giving consideration to coupon reinvestment.
D) Coupon rate.
E) Promised yield to maturity.
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Page 14
Chapter 13: An Introduction to Derivative Markets and Securities
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Sample Questions
Q1) A futures contract eliminates uncertainty about the future spot price that an individual can expect to pay for an asset at the time of delivery.
A)True
B)False
Q2) Which of the following statements is a true definition of an out-of-the-money option?
A) A call option in which the stock price exceeds the exercise price.
B) A call option in which the exercise price exceeds the stock price.
C) A call option in which the exercise price exceeds the stock price
D) A put option in which the exercise price exceeds the stock price.
E) A call option in which the call premium exceeds the stock price.
Q3) A stock currently sells for $75 per share. A put option on the stock with an exercise price $70 currently sells for $0.50. The put option is
A) At-the-money.
B) In-the-money.
C) Out-of-the-money.
D) At breakeven.
E) None of the above.
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Chapter 14: Derivatives: Analysis and Valuation
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Q1) In the Black-Scholes option pricing model, an increase in security volatility (s) will cause
A) An increase in call value and an increase in put value
B) An increase in call value and a decrease in put value
C) An decrease in call value and an increase in put value
D) An decrease in call value and a decrease in put value
E) An increase in call value and an increase or decrease in put value
Q2) In the Black-Scholes option pricing model, an increase in time to expiration (T) will cause
A) An increase in call value and an increase in put value
B) An increase in call value and a decrease in put value
C) An decrease in call value and an increase in put value
D) An decrease in call value and a decrease in put value
E) An increase in call value and an increase or decrease in put value
Q3) All of the following are normal characteristics of a convertible bond, except
A) Conversion at the option of the issuer.
B) Conversion into a fixed number of shares of common stock.
C) A conversion price initially above the market price of the common stock.
D) An interest rate lower than that on straight debentures.
E) Subordination.
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Chapter 15: Equity Portfolio Management Strategies
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Sample Questions
Q1) An advantage of quadratic programming is that it relies on historical correlations.
A)True
B)False
Q2) Which of the following statements concerning active equity portfolio management strategies is true?
A) The goal of active equity portfolio management is to earn a portfolio return that exceeds the return of a passive benchmark portfolio (net of transaction costs) on a risk-adjusted basis.
B) An actively managed equity portfolio has lower total transaction costs.
C) An actively managed equity portfolio has lower risk than the passive benchmark.
D) A key to success for an actively managed equity portfolio is to maximize trading activity.
E) All of the above.
Q3) Active equity portfolio management is a long-term buy-and-hold strategy.
A)True
B)False
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Chapter 16: Bond Portfolio Management Strategies
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Sample Questions
Q1) Refer to Exhibit 16-10. Calculate the Modified Duration for Bond A.
A) 0.98
B) 1.79
C) 1.90
D) 1.93
E) 2.31
Q2) Altman-Nammacher (1987) created a modified Z-score model using a multiple regression analysis technique.
A)True
B)False
Q3) Interest rate anticipation is the most conservative management strategy.
A)True
B)False
Q4) If an investor swaps identical issues to establish a loss, the loss is disallowed and the transaction is known as a
A) Switch sale.
B) Wash sale.
C) Green shoe.
D) Flashback.
E) White knight.
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Chapter 17: Professional Money Management, Alternative
Assets, and Industry Ethics
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Sample Questions
Q1) An open-end investment company is commonly referred to as a(n)
A) Balanced fund.
B) Mutual fund.
C) Money market fund.
D) Accessible fund.
E) Unit trust.
Q2) Refer to Exhibit 17-1. The fund originated by selling $100,000 of stock at $10.00 per share. What is its current NAV?
A) $1.47
B) $14.75
C) $16.03
D) $27.62
E) $234.12
Q3) When alternative assets of investors are pooled together into a single pool of assets
A) The collection of assets is formed as a limited partnership.
B) One or more general partners are responsible for running the organization.
C) The limited partners are only liable to the extent of their investments.
D) Both a and c
E) All of the above.
19
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Chapter 18: Evaluation of Portfolio Performance
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Sample Questions
Q1) Refer to Exhibit 18-10. Calculate the percentage return that can be attributed to the security selection decision.
A) 0.105%
B) 0.925%
C) 0.20%
D) 0.96%
E) 0.94%
Q2) The portfolio performance measure that can be most affected by a benchmark error is the Sharpe measure.
A)True
B)False
Q3) Refer to Exhibit 18-2. Using the Sharpe Measure, which portfolio performed best?
A) W
B) X
C) Y
D) Z
E) Two portfolios are tied
Q4) Overall performance is the total return above the risk free rate.
A)True
B)False
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Chapter 19: Analysis of Financial Statements
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Sample Questions
Q1) Limitations on the use of ratios include
A) Accounting comparability.
B) Company homogeneity.
C) Consistent results.
D) A reasonable range within the industry.
E) All of the above
Q2) Refer to Exhibit 19-1. What is BMC's traditional cash flow?
A) 69
B) 86
C) 38
D) 55
E) 701
Q3) Which of the following is not a flow ratio?
A) Interest coverage
B) Fixed charge coverage
C) Debt/equity
D) Cash flow/long term debt
E) Cash flow/total debt
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21
Chapter 20: An Introduction to Security Valuation
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Sample Questions
Q1) Refer to Exhibit 20-6. What is the future price of the stock in year 5?
A) $113.40
B) $122.47
C) $132.27
D) $142.85
E) $154.35
Q2) Refer to Exhibit 20-3. What will be the value of these securities in one year if the required return declines to 8%?
A) $899.43
B) $862.50
C) $869.88
D) $918.93
E) $946.98
Q3) The three step valuation process consists of 1) analysis of alternative economies and markets, 2) analysis of alternative industries and 3) analysis of industry influences.
A)True
B)False
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Chapter 21: Web Appendix: A Review of Statistics and the
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Sample Questions
Q1) The coefficient of variation of this investment is
A) -0.06
B) -0.65
C) 6.60
D) 16.53
E) 165.10
Q2) The expected return from this investment is
A) -0.0752
B) -0.0040
C) 0.00
D) 0.0075
E) 0.4545
Q3) The standard deviation of your expected return from this investment is
A) 0.001
B) 0.004
C) 0.124
D) 1.240
E) None of the above
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Chapter
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Sample Questions
Q1) The standard deviation of your expected return from this investment is
A) 0.001
B) 0.004
C) 0.124
D) 1.240
E) None of the above
Q2) The coefficient of variation of this investment is
A) -0.06
B) -0.65
C) 6.60
D) 16.53
E) 165.10
Q3) The expected return from this investment is
A) -0.0752
B) -0.0040
C) 0.00
D) 0.0075
E) 0.4545
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Chapter 23: Appendix: Objectives and Constraints of
Institutional Investors
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Q1) Non-life insurance companies have somewhat unpredictable cash outflows and are therefore faced with different investment constraints than life insurance companies.
A)True
B)False
Q2) In a defined contribution pension plan,
A) The plan does not promise to pay the retiree a specific income stream after retirement.
B) The plan does promise to pay the retiree a specific income stream after retirement.
C) The employee's retirement income is not an obligation of the firm.
D) The company carries the risk of paying future pension benefits to retirees.
E) Choices a and c.
Q3) Cash flows for nonlife insurance companies, such as property and casualty, are similar to cash flows of life insurance companies.
A)True
B)False
Q4) Banks face regulatory constraints at both the state and federal level.
A)True
B)False
25
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