Investments
Exam Solutions
Course Introduction
This course provides a comprehensive introduction to investment principles and practices, covering the theoretical foundations and practical applications of portfolio management and securities analysis. Key topics include financial markets and instruments, risk and return analysis, asset allocation, valuation of stocks and bonds, and an overview of alternative investments such as mutual funds, exchange-traded funds, and derivatives. Through a combination of lectures, case studies, and hands-on projects, students learn to assess investment opportunities, analyze market trends, and develop strategies for constructing diversified investment portfolios to meet specific financial goals.
Recommended Textbook Investments 10th Edition by Zvi Bodie
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28 Chapters
2186 Verified Questions
2186 Flashcards
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Page 2
Chapter 1: The Investment Environment
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Sample Questions
Q1) The material wealth of a society is a function of
A)all financial assets.
B)all real assets.
C)all financial and real assets.
D)all physical assets.
Answer: B
Q2) ________ specialize in helping companies raise capital by selling securities.
A)Commercial bankers
B)Investment bankers
C)Investment issuers
D)Credit raters
Answer: B
Q3) Theoretically, takeovers should result in
A)improved management.
B)increased stock price.
C)increased benefits to existing management of taken-over firm.
D)improved management and increased stock price.
E)All of the options
Answer: D
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Page 3
Chapter 2: Asset Classes and Financial Instruments
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Sample Questions
Q1) In the event of the firm's bankruptcy
A)the most shareholders can lose is their original investment in the firm's stock.
B)common shareholders are the first in line to receive their claims on the firm's assets.
C)bondholders have claim to what is left from the liquidation of the firm's assets after paying the shareholders.
D)the claims of preferred shareholders are honored before those of the common shareholders.
E)the most shareholders can lose is their original investment in the firm's stock and the claims of preferred shareholders are honored before those of the common shareholders.
Answer: E
Q2) Commercial paper is a short-term security issued by ________ to raise funds.
A)the Federal Reserve Bank
B)commercial banks
C)large, well-known companies
D)the New York Stock Exchange
E)state and local governments
Answer: C
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Chapter 3: How Securities Are Traded
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Sample Questions
Q1) Assume you sold short 100 shares of common stock at $70 per share.The initial margin is 50%.What would be the maintenance margin if a margin call is made at a stock price of $85
A)40.5%
B)20.5%
C)35.5%
D)23.5%
Answer: D
Q2) Assume you sell short 1,000 shares of common stock at $35 per share, with initial margin at 50%.What would be your rate of return if you repurchase the stock at $25 per share The stock paid no dividends during the period, and you did not remove any money from the account before making the offsetting transaction.
A)20.47%
B)25.63%
C)57.14%
D)77.23%
Answer: C
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Chapter 4: Mutual Funds and Other Investment Companies
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Sample Questions
Q1) A mutual fund had year-end assets of $750,000,000 and liabilities of $7,500,000.There were 40,000,000 shares in the fund at year-end.What was the mutual fund's net asset value
A)$9.63
B)$18.56
C)$16.42
D)$17.87
E)$17.26
Q2) List and describe the more important types of mutual funds according to their investment policy and use.
Q3) The Yachtsman Fund had NAV per share of $36.12 on January 1, 2012.On December 31 of the same year the fund's NAV was $39.71.Income distributions were $0.64 and the fund had capital gain distributions of $1.13.Without considering taxes and transactions costs, what rate of return did an investor receive on the Yachtsman Fund last year
A)22.92%
B)17.68%
C)14.39%
D)18.52%
E)14.84%
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Page 6
Chapter 5: Risk, Return, and the Historical Record
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Sample Questions
Q1) A year ago, you invested $10,000 in a savings account that pays an annual interest rate of 5%.What is your approximate annual real rate of return if the rate of inflation was 3.5% over the year
A)1.5%
B)10%
C)7%
D)3%
E)None of the options
Q2) Discuss some reasons why an investor with a longtime horizon might choose to invest in common stocks, even though they have historically been riskier than government bonds or T-bills.
Q3) A year ago, you invested $1,000 in a savings account that pays an annual interest rate of 9%.What is your approximate annual real rate of return if the rate of inflation was 4% over the year
A)5%
B)10%
C)7%
D)3%
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Chapter 6: Capital Allocation to Risky Assets
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Sample Questions
Q1) An investor invests 30% of his wealth in a risky asset with an expected rate of return of 0.11 and a variance of 0.12 and 70% in a T-bill that pays 3%.His portfolio's expected return and standard deviation are __________ and __________, respectively.
A)0.086; 0.242
B)0.054; 0.104
C)0.295; 0.123
D)0.087; 0.182
E)None of the options
Q2) What is a fair game
Explain how the term relates to a risk-averse investor's attitude toward speculation and risk and how the utility function reflects this attitude.
Q3) 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.
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Chapter 7: Optimal Risky Portfolios
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Sample Questions
Q1) The variance of a portfolio of risky securities
A)is a weighted sum of the securities' variances.
B)is the sum of the securities' variances.
C)is the weighted sum of the securities' variances and covariances.
D)is the sum of the securities' covariances.
E)None of the options
Q2) Security M has expected return of 17% and standard deviation of 32%.Security S has expected return of 13% and standard deviation of 19%.If the two securities have a correlation coefficient of 0.78, what is their covariance
A)0.038
B)0.049
C)0.047
D)0.045
E)0.054
Q3) A two-asset portfolio with a standard deviation of zero can be formed when
A)the assets have a correlation coefficient less than zero.
B)the assets have a correlation coefficient equal to zero.
C)the assets have a correlation coefficient greater than zero.
D)the assets have a correlation coefficient equal to one.
E)the assets have a correlation coefficient equal to negative one.
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Chapter 8: Index Models
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Sample Questions
Q1) Analysts may use regression analysis to estimate the index model for a stock.When doing so, the intercept of the regression line is an estimate of A)the of the asset.
B)the of the asset.
C)the of the asset.
D)the of the asset.
Q2) The beta of Exxon stock has been estimated as 1.6 using regression analysis on a sample of historical returns.A commonly used adjustment technique would provide an adjusted beta of
A)1.20.
B)1.32.
C)1.13.
D)1.40.
Q3) As diversification increases, the standard deviation of a portfolio approaches A)0.
B)1.
C)infinity.
D)the standard deviation of the market portfolio.
E)None of the options
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Page 10
Chapter 9: The Capital Asset Pricing Model
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Sample Questions
Q1) Discuss the differences between the capital market line and the security market line.
Q2) Research by Jeremy Stein of MIT resolves the dispute over whether beta is a sufficient pricing factor by suggesting that managers should use beta to estimate
A)long-term returns but not short-term returns.
B)short-term returns but not long-term returns.
C)both long- and short-term returns.
D)book-to-market ratios.
E)None of the options was suggested by Stein.
Q3) According to the Capital Asset Pricing Model (CAPM), underpriced securities have A)positive betas.
B)zero alphas.
C)negative betas.
D)positive alphas.
E)None of the options
Q4) Discuss the assumptions of the capital asset pricing model and how these assumptions relate to the "real world" investment decision process.
Q5) List and discuss two of the assumptions of the CAPM.
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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Sample Questions
Q1) A professional who searches for mispriced securities in specific areas such as merger-target stocks, rather than one who seeks strict (risk-free) arbitrage opportunities is engaged in
A)pure arbitrage.
B)risk arbitrage.
C)option arbitrage.
D)equilibrium arbitrage.
Q2) Discuss arbitrage opportunities in the context of violations of the law of one price.
Q3) The ____________ provides an unequivocal statement on the expected return-beta relationship for all assets, whereas the _____________ implies that this relationship holds for all but perhaps a small number of securities.
A)APT, CAPM
B)APT, OPM
C)CAPM, APT
D)CAPM, OPM
Q4) Discuss the advantages of arbitrage pricing theory (APT) over the capital asset pricing model (CAPM) relative to diversified portfolios.
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Chapter 11: The Efficient Market Hypothesis
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Sample Questions
Q1) Discuss the various forms of market efficiency.Include in your discussion the information sets involved in each form and the relationships across information sets and across forms of market efficiency.Also discuss the implications for the various forms of market efficiency for the various types of securities' analysts.
Q2) Nicholas Manufacturing just announced yesterday that its fourth quarter earnings will be 10% higher than last year's fourth quarter.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.
Q3) Discuss the small firm effect, the neglected firm effect, and the January effect, the tax effect and how the four effects may be related.
Q4) 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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Page 13
Chapter 12: Behavioral Finance and Technical Analysis
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Sample Questions
Q1) Discuss what technical analysis is, what technical analysts do, and the relationship between technical analysis, fundamental analysis, and behavioral finance.
Q2) Information processing errors consist of I) forecasting errors. II) overconfidence.
III) conservatism.
IV) framing.
A)I and II
B)I and III
C)III and IV
D)IV only
E)I, II, and III
Q3) Forecasting errors are potentially important because
A)research suggests that people underweight recent information.
B)research suggests that people overweight recent information.
C)research suggests that people correctly weight recent information.
D)research suggests that people either underweight recent information or overweight recent information depending on whether the information was good or bad.
E)None of the options
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14
Chapter 13: Empirical Evidence on Security Returns
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Sample Questions
Q1) The Fama-French model I) is a useful tool for benchmarking performance against a well-defined set of factors.
II. premia are determined by market irrationality.
III. premia are determined by rational risk factors.
IV. the reason for the premia is unsettled.
V. is not a useful tool for benchmarking performance against a well-defined set of factors.
A)I only
B)V only
C)I and II
D)I and IV
E)II and V
Q2) Discuss Roll's critique of the CAPM.
Q3) The Fama and French three-factor model uses ___, ___, and ___ as factors.
A)industrial production; term spread; default spread
B)industrial production; inflation; default spread
C)firm size; book-to-market ratio; market index
D)firm size; book-to-market ratio; default spread
E)None of the options
Q4) Describe some of the ways the CAPM is applied in practice.
Page 15
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Chapter 14: Bond Prices and Yields
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Sample Questions
Q1) If a 7.5% coupon bond is trading for $1,050.00, it has a current yield of A)7.0%.
B)7.4%.
C)7.1%.
D)6.9%.
E)6.7%.
Q2) A coupon bond that pays interest annually has a par value of $1,000, matures in seven 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
Q3) Of the following four investments, ________ is considered the safest.
A)commercial paper
B)corporate bonds
C)U.S.agency issues
D)Treasury bonds
E)Treasury bills
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Chapter 15: The Term Structure of Interest Rates
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Sample Questions
Q1) If the value of a Treasury bond was higher than the value of the sum of its parts (STRIPPED cash flows) you could
A)profit by buying the stripped cash flows and reconstituting the bond.
B)not profit by buying the stripped cash flows and reconstituting the bond.
C)profit by buying the bond and creating STRIPS.
D)not profit by buying the stripped cash flows and reconstituting the bond and profit by buying the bond and creating STRIPS.
E)None of the options
Q2) An upward sloping yield curve is a(n) _______ yield curve.
A)normal
B)humped
C)inverted
D)flat
E)None of the options
Q3) An inverted yield curve is one
A)with a hump in the middle.
B)constructed by using convertible bonds.
C)that is relatively flat.
D)that plots the inverse relationship between bond prices and bond yields.
E)that slopes downward.
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Chapter 16: Managing Bond Portfolios
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Sample Questions
Q1) Two bonds are selling at par value and each has 17 years to maturity.The first bond has a coupon rate of 6% and the second bond has a coupon rate of 13%.Which of the following is true about the durations of these bonds
A)The duration of the higher-coupon bond will be higher.
B)The duration of the lower-coupon bond will be higher.
C)The duration of the higher-coupon bond will equal the duration of the lower-coupon bond.
D)There is no consistent statement that can be made about the durations of the bonds. E)The bond's durations cannot be determined without knowing the prices of the bonds.
Q2) Consider a bond selling at par with modified duration of 12 years and convexity of 265.A 1% decrease in yield would cause the price to increase by 12%, according to the duration rule.What would be the percentage price change according to the duration-with-convexity rule
A)21.2%
B)25.4%
C)17.0%
D)13.3%
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Page 18
Chapter 17: Macroeconomic and Industry Analysis
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Sample Questions
Q1) If the economy is growing, firms with high operating leverage will experience
A)higher increases in profits than firms with low operating leverage.
B)similar increases in profits as firms with low operating leverage.
C)smaller increases in profits than firms with low operating leverage.
D)no change in profits.
E)None of the options
Q2) Which of the following are not examples of defensive industries
A)Food producers
B)Durable goods producers
C)Pharmaceutical firms
D)Public utilities
Q3) Fiscal policy generally has a _______ direct impact than monetary policy on the economy, and the formulation and implementation of fiscal policy is ______ than that of monetary policy.
A)more; quicker
B)more; slower
C)less; quicker
D)less; slower
E)Cannot tell from the information given
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Page 19
Chapter 18: Equity Valuation Models
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Sample Questions
Q1) The _______ is defined as the present value of all cash proceeds to the investor in the stock.
A)dividend payout ratio
B)intrinsic value
C)market capitalization rate
D)plowback ratio
Q2) Historically, P/E ratios have tended to be
A)higher when inflation has been high.
B)lower when inflation has been high.
C)uncorrelated with inflation rates but correlated with other macroeconomic variables.
D)uncorrelated with any macroeconomic variables including inflation rates.
Q3) The _________ is the fraction of earnings reinvested in the firm.
A)dividend payout ratio
B)retention rate
C)plowback ratio
D)dividend payout ratio and plowback ratio
E)retention rate and plowback ratio
Q4) Describe the free cash flow approach to firm valuation.How does it compare to the dividend discount model (DDM)
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Chapter 19: Financial Statement Analysis
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Sample Questions
Q1) Many different debt, or financial leverage, ratios are reported.Explain the relationship between total assets/equity and debt/equity.
Q2) __________ is a true statement.
A)During periods of inflation, LIFO makes the balance sheet less representative of the actual inventory values than if FIFO were used
B)During periods of inflation, FIFO makes the balance sheet less representative of actual inventory values than if LIFO were used
C)After inflation ends, distortion due to LIFO will disappear as inventory is sold
D)During periods of inflation, LIFO overstates earnings relative to FIFO
Q3) The DuPont system decomposes ROE into the following components:
Q4) 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 options
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21
Chapter 20: Options Markets: Introduction
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Sample Questions
Q1) Describe the protective put.What are the advantages of such a strategy
Q2) The price that the buyer of a call option pays to acquire the option is called the A)strike price.
B)exercise price.
C)execution price.
D)acquisition price.
E)premium.
Q3) The current market price of a share of a stock is $80.If a put option on this stock has a strike price of $75, the put A)is in the money.
B)is out of the money.
C)sells for a lower price than if the market price of the stock is $75.
D)is in the money and sells for a lower price than if the market price of the stock is $75.
E)is out of the money and sells for a lower price than if the market price of the stock is $75.
Q4) List three types of exotic options and describe their characteristics.
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Chapter 21: Option Valuation
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Sample Questions
Q1) The percentage change in the stock call option price divided by the percentage change in the stock price is called
A)the elasticity of the option.
B)the delta of the option.
C)the theta of the option.
D)the gamma of the option.
Q2) Other things equal, the price of a stock call option is negatively correlated with which of the following factors
A)The stock price
B)The time to expiration
C)The stock volatility
D)The exercise price
E)The stock price, time to expiration, and stock volatility
Q3) Other things equal, the price of a stock put option is positively correlated with the following factors except
A)the stock price.
B)the time to expiration.
C)the stock volatility.
D)the exercise price.
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Page 23
Chapter 22: Futures Markets
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Sample Questions
Q1) Distinguish between the short and long positions in futures transactions.
Q2) Financial futures contracts are actively traded on which of the following indices
A)The S&P 500 Index
B)The New York Stock Exchange Index
C)The Nikkei Index
D)The Dow Jones Industrial Index
E)All of the options
Q3) A trader who has a __________ position in oil futures believes the price of oil will __________ in the future.
A)short; increase
B)long; increase
C)short; stay the same
D)long; stay the same
Q4) Futures contracts are regulated by
A)the Commodities Futures Trading Corporation.
B)the Chicago Board of Trade.
C)the Chicago Mercantile Exchange.
D)the Federal Reserve.
E)the Securities and Exchange Commission.
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Chapter 23: Futures, Swaps, and Risk Management
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Q1) Suppose that the risk-free rates in the United States and in the Canada are 3% and 5%, respectively.The spot exchange rate between the dollar and the Canadian dollar (C$) is $0.80/C$.What should the futures price of the C$ for a one-year contract be to prevent arbitrage opportunities, ignoring transactions costs.
A)$1.00/ C$
B)$1.70/ C$
C)$0.88/ C$
D)$0.78/ C$
E)$1.22/ C$
Q2) Which two indices had the highest correlation between them during the 2008-2012 period
A)S&P and DJIA; the correlation was 0.979
B)S&P and Russell 2000; the correlation was 0.948
C)DJIA and Russell 2000; the correlation was 0.908
D)S&P and NASDAQ 100; the correlation was 0.928
E)NASDAQ 100 and DJIA; the correlation was 0.876
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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Sample Questions
Q1) Most professionally managed equity funds generally
A)outperform the S&P 500 Index on both raw and risk-adjusted return measures.
B)underperform the S&P 500 Index on both raw and risk-adjusted return measures.
C)outperform the S&P 500 Index on raw return measures and underperform the S&P 500 Index on risk-adjusted return measures.
D)underperform the S&P 500 Index on raw return measures and outperform the S&P 500 Index on risk-adjusted return measures.
E)match the performance of the S&P 500 Index on both raw and risk-adjusted return measures.
Q2) The Modigliani M<sup>2</sup> measure and the Treynor T<sup>2</sup> measure A)are identical.
B)are nearly identical and will rank portfolios the same way.
C)are nearly identical, but might rank portfolios differently.
D)are somewhat different; M<sup>2</sup> can be used to rank portfolios, but T<sup>2</sup> cannot.
E)are somewhat different; T<sup>2</sup> can be used to rank portfolios, but M<sup>2</sup> cannot.
Q3) Discuss, in general, the performance attribution procedures.
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26
Chapter 25: International Diversification
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Q1) The developed country with the highest average U.S.dollar equity-market excess return between 2002-2011 is A)Japan.
B)Norway.
C)Austria.
D)U.S.
Q2) The emerging market country with the highest average U.S.dollar equity-market excess return between 2002-2011 is
A)China.
B)Colombia.
C)Poland.
D)Turkey.
Q3) WEBS portfolios
A)are passively managed.
B)are shares that can be sold by investors.
C)are free from brokerage commissions.
D)are passively managed and are shares that can be sold by investors.
E)All of the options.
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27
Chapter 26: Hedge Funds
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Questions
Q1) Hedge funds often have ______ provisions as long as ______, which preclude redemption.
A)crackdown; 2 months
B)lock-up; 2 months
C)crackdown; several years
D)lock-up; several years
E)None of the options
Q2) Hedge funds exhibit a pattern known as a
A)January effect.
B)Santa effect.
C)size effect.
D)book-to-market.
E)None of the options
Q3) ______ bias arises when the returns of unsuccessful funds are left out of the sample.
A)Survivorship
B)Backfill
C)Omission
D)Incubation
E)None of the options
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Chapter 27: The Theory of Active Portfolio Management
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Q1) In the Treynor-Black model
A)portfolio weights are sensitive to large alpha values which can lead to infeasible long or short positions for many portfolio managers.
B)portfolio weights are not sensitive to large alpha values which can lead to infeasible long or short positions for many portfolio managers.
C)portfolio weights are sensitive to large alpha values which can lead to the optimal portfolio for most portfolio managers.
D)portfolio weights are not sensitive to large alpha values which can lead to the optimal portfolio for most portfolio managers.
Q2) A purely passive strategy is defined as
A)one that uses only index funds.
B)one that allocates assets in fixed proportions that do not vary with market conditions.
C)one that is mean-variance efficient.
D)one that uses only index funds and allocates assets in fixed proportions that do not vary with market conditions.
E)All of the options
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Chapter 28: Investment Policy and the Framework of the
Cfa Institute
Available Study Resources on Quizplus for this Chatper
83 Verified Questions
83 Flashcards
Source URL: https://quizplus.com/quiz/52445
Sample Questions
Q1) The planning phase of the CFA Institute's investment management process
A)uses data about the client and capital market.
B)uses details of optimal asset allocation and security selection.
C)uses changes in expectations and objectives.
D)All of the options
E)None of the options
Q2) Assume that at retirement you have accumulated $750,000 in a variable annuity contract.The assumed investment return is 9% and your life expectancy is 25 years.What is the hypothetical constant benefit payment
A)$30,000.00
B)$33,333.33
C)$51,481.38
D)$76,354.69
E)Cannot tell without additional information
Q3) The stage an individual is in his/her life cycle will affect his/her A)return requirements.
B)risk tolerance.
C)asset allocation.
D)return requirements and risk tolerance.
E)All of the options
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