Personal Finance Exam Practice Tests
Course Introduction
Personal Finance introduces students to the principles and practices of managing their individual and family financial resources. The course covers fundamental topics such as budgeting, saving, investing, credit management, insurance, taxes, retirement planning, and financial decision-making. Students will learn to set financial goals, create effective budgets, understand the implications of credit and debt, and make informed choices about insurance and investments. By developing essential skills in personal finance, students will be better prepared to achieve financial stability and make sound economic choices throughout their lives.
Recommended Textbook
Investments Analysis and Management 12th Edition by Charles P. Jones
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1336 Verified Questions
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Page 2
Chapter 1: Understanding Investments
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Sample Questions
Q1) Briefly explain the difference between expected returns and realized returns and between ex ante returns an ex post returns.
Answer: Expected returns are mean returns based on probability distributions dealing with the future.Realized returns are the returns that actually occurred in the past.Ex ante returns are in the future.Ex post returns are in the past.
Q2) Which of the following would be considered a risk-free investment?
A)gold
B)equity in a house
C)high-grade corporate bonds
D)U.S.Treasury bills
Answer: D
Q3) Gold coins would be classified as:
A)real assets
B)indirect assets
C)personal assets
D)financial assets
Answer: A
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Chapter 2: Investment Alternatives
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Sample Questions
Q1) A municipal bond issue that was sold to finance a toll bridge would most likely be a:
A)general obligation bond.
B)revenue bond.
C)special assessment bond.
D)zero-coupon bond.
Answer: B
Q2) ---------------- represent shares of foreign companies kept in banks.
A)convertible bonds
B)American Depository Receipts (ADRs)
C)asset-backed securities
D)LEAPS
Answer: B
Q3) Treasury bonds generally have maturities of:
A)5 to 15 years
B)5 to 30 years
C)10 to 20 years
D)10 to 30 years
Answer: D
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Chapter 3: Indirect Investing
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Sample Questions
Q1) In the mutual fund industry,the most common performance measure is a hypothetical rate of return which assumes performance is constant over the entire period and is known as the:
A)cumulative total return.
B)average annual total return.
C)total indexed return.
D)compounded geometric return.
Answer: B
Q2) Briefly explain the fees charged by funds.
Answer: Load fees are sales charges,management fees include advisory fees and operating expenses,and 12b-1 fees are marketing expenses.
Q3) Loaded funds generally outperform the no-load funds.
A)True
B)False
Answer: False
Q4) An investor who buys shares in a closed fund for less than the net asset value per share of the fund is said to be buying shares at a _____________________.
Answer: discount
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Chapter 4: Securities Markets and Market Indexes
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Sample Questions
Q1) Which of the following statements about NYSE is true?
A)The NYSE is the oldest and most prominent primary market in the U.S.
B)Specialists account for over 50 percent of the seats on the NYSE.
C)The NYSE is the oldest and most prominent secondary market in the U.S.
D)Institutional investors do not trade on the NYSE
Q2) By 2005,program trading accounted for over 70 percent of total NYSE volume.
A)True
B)False
Q3) Normal stock exchange hours in the U.S.are 9:30 a.m.to 4 p.m.
A)True
B)False
Q4) NASDAQ stocks:
A)are generally foreign stocks.
B)trade via the Blue Sheets.
C)are not generally listed on organized exchanges.
D)represent less than 1,000 companies.
Q5) What is the Nasdaq National Market System?
Q6) What impact does the increasing amount of institutional investing have on securities markets today and what role do you think institutional investors will play in the future?
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Chapter 5: How Securities Are Traded
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Sample Questions
Q1) A margin call occurs anytime the equity position of the margin account falls below the initial margin.
A)True B)False
Q2) All asset management accounts offer automatic reinvestment of credit balances in shares of a money market or other fund.
A)True B)False
Q3) Under margin accounts,investors can purchase more stock without putting up additional cash by leveraging the value of the eligible shares.
A)True
B)False
Q4) The interest rate charged on margin accounts is determined by:
A)adding a percentage to the broker call rate.
B)adding a percentage to the margin interest rate.
C)subtracting a percentage to the broker call rate.
D)subtracting a percentage to the margin interest rate.
Q5) Compare and contrast the functions and responsibilities of a NYSE specialist with those of an OTC dealer.
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Chapter 6: The Risks and Returns From Investing
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Sample Questions
Q1) Assume you are a U.S.citizen who purchases $20,000 worth of bonds of the Deep Shaft Mining Company in Kenya.What sources of risk can you identify with this investment?
Q2) International mutual funds offer investors global diversification without exchange rate risk.
A)True
B)False
Q3) Liquidity risk:
A)is the risk that investment bankers normally face
B)is lower for small OTC stocks than for large NYSE stocks
C)is a risk associated with secondary market transactions
D)increases whenever interest rates increase
Q4) Present value is based on the concept of:
A)compounding
B)systematic risk
C)duration
D)discounting
Q5) When should an investor use the arithmetic mean return? The geometric mean return?
Q6) If you deposit $1,000 today at 12 percent,how much will you have in 10 years?
Page 8
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Chapter 7: Portfolio Theory
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Sample Questions
Q1) Standard deviations for well-diversified portfolios are reasonably steady over time.
A)True
B)False
Q2) Which of the following is true regarding the expected return of a portfolio?
A)It is a weighted average only for stock portfolios
B)It can only be positive
C)It can never be above the highest individual asset return
D)It is always below the highest individual asset return
Q3) With a continuous probability distribution,:
A)a probability is assigned to each possible outcome.
B)possible outcomes are constantly changing.
C)an infinite number of possible outcomes exist.
D)there is no variance.
Q4) Which of the following statements regarding portfolio risk and number of stocks is generally true?
A)Adding more stocks increases risk
B)Adding more stocks decreases risk but does not eliminate it
C)Adding more stocks has no effect on risk
D)Adding more stocks increases only systematic risk
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Chapter 8: Portfolio Selection
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Sample Questions
Q1) An indifference curve shows:
A)the one most desirable portfolio for a particular investor
B)all combinations of portfolios that are equally desirable to a particular investor
C)all combinations of portfolios that are equally desirable to all investors
D)the one most desirable portfolio for all investors
Q2) The Sharpe model was found to outperform the Markowitz model in longer time periods.
A)True
B)False
Q3) Because of its complexity,the Markowitz model is no longer used by institutional investors.
A)True
B)False
Q4) The single index model requires (3n+2)total pieces of data to implement.
A)True
B)False
Q5) Markowitz derived the efficient frontier as an upward-sloping straight line.
A)True
B)False
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Chapter 9: Asset Pricing Models
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Sample Questions
Q1) The APT is based on the law of one price,which states two identical assets cannot sell at different prices.
A)True
B)False
Q2) What are the assumptions in the CAPM? Can these be relaxed without destroying the conclusions of the model?
Q3) The market has an expected return of 13 percent and the risk-free rate is 5.5 percent.If Merrill Lynch has a beta of 1.85,what is the required return for Merrill Lynch?
Q4) The arbitrage pricing theory (APT)and the CAPM both assume all except the following?
A)Investors have homogeneous beliefs.
B)Investors are risk-averse utility maximizers.
C)Borrowing and lending can be done at the rate RF.
D)Markets are perfect.
Q5) When markets are in equilibrium,the CML will be upward sloping
A)because it shows the optimum combination of risky securities.
B)because the price of risk must always be positive.
C)because it contains all securities weighted by their market values.
D)because the CML indicates the required return for each portfolio risk level.
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Chapter 10: Common Stock Valuation
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Sample Questions
Q1) Morningstar reports a "fair value" for stocks based on a relative valuation analysis.
A)True
B)False
Q2) S&P's Outlook reports intrinsic value for stocks based on a combination of relative valuation and discounted cash flow analysis.
A)True
B)False
Q3) Which of the following changes will likely lead to a higher P/E,assuming other factors are equal?
A)A decrease in the dividend payout ratio
B)An increase in growth rate of earnings
C)An increase in the required rate of return
D)A decrease in the dividend yield
Q4) Discounted cash flow techniques used in valuing common stock are based on:
A)future value analysis.
B)present value analysis.
C)the CAPM.
D)the APT.
Q5) Why have dividends historically been important in the valuation of common stock?
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Chapter 11: Common Stocks: Analysis
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Sample Questions
Q1) What is usually considered the biggest risk of market timing?
A)getting out of the market too soon
B)high transactions costs
C)failing to adjust for short-term corrections
D)not being in the market at critical times
Q2) Market risk is the single most important risk affecting the price movements of common stocks.
A)True
B)False
Q3) In an upward trending market,what sectors might investors consider to increase absolute returns?
Q4) Which of the following statements regarding a buy and hold strategy are true?
A)There are no selection choices to be made under this strategy.
B)This strategy is applicable only to large portfolios.
C)There is no reinvestment decision to make under this strategy.
D)This strategy produces lower transactions and search costs.
Q5) Security analysts receive all of their information from the management of the company.
A)True
B)False
13
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Chapter 12: Market Efficiency
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Sample Questions
Q1) All of the following are considered market anomalies EXCEPT:
A)size effect
B)January effect
C)earnings announcement anomaly
D)accounting changes effect
Q2) If an investor searches for patterns in security returns by examining various techniques applied to a set of data and then applying the technique that works,this is known as:
A)fundamental analysis.
B)technical analysis.
C)random-walk theory.
D)data mining.
Q3) Calendar market anomalies include day-of-the-week,turn-of-the-month,day preceding a holiday effect.
A)True
B)False
Q4) A belief in the size-effect anomaly should encourage investors to buy large-firm stocks.
A)True
B)False
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Chapter 13: Economy Market Analysis
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Sample Questions
Q1) Assuming a constant P/E ratio,the growth in stock prices should equal the growth in earnings.
A)True
B)False
Q2) Estrella and Mishkin (1996)developed a somewhat successful model to predict whether the economy is going into recession using what variable?
A)spread between the 10-year U.S.Treasury Inflation Protected Security and the 3- month T-Bill.
B)spread between the 5-year U.S.Treasury Note and the 3-month T-Bill.
C)spread between the 10-year U.S.Treasury Note and the 3-month T-Bill.
D)spread between the 30-year U.S.Treasury Note and the 3-month T-Bill.
Q3) Value Line's estimated dividends on its Industrial Composite for 199X are $2.00 while estimated earnings are $4.30.The expected spread between k and g is .04.
(a)What is the P/E ratio?
(b)What is the estimated price for this Index?
Q4) Over the past 30 years,the average P/E ratio for the S&P 500 has been 23.
A)True
B)False
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Page 15
Chapter 14: Industry Analysis
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Sample Questions
Q1) If an industry is ranked number one,based on price performance of the S&P Industry Stock Indexes,an investor
A)cannot necessarily expect that same industry to be ranked number one again next year.
B)can usually depend on an industry to maintain its top ranking for five years or more.
C)can expect that industry to do well over the next 10 to 20 years.
D)can expect that industry to drop out of the top ten within five years.
Q2) The basic competitive factors facing industries include all of the following except:
A)bargaining power of suppliers
B)threat of government regulation
C)rivalry between existing competitors
D)threat of substitute products
Q3) Which of the following is a limitation of the life cycle approach to security analysis?
A)It focuses on sales rather than stock prices.
B)It focuses on the past more than the present.
C)It does not consider the risk in the different cycles.
D)It does not consider quantitative factors.
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Page 16
Chapter 15: Company Analysis
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Sample Questions
Q1) Regardless of how closely a company adheres to good accounting practices and auditors do their job,investors need to examine "Notes to the Financial Statements" on 10-K and 10-Q Reports to understand the company's financial situation.
A)True
B)False
Q2) Since extraordinary items affecting earnings are typically non-recurring,investors should disregard their impact on earnings when evaluating the stock.
A)True
B)False
Q3) Which of the following is true regarding earnings estimates?
A)management at most firms will update estimates monthly
B)analysts typically rely on the estimates provided by management
C)some firms have chosen not to provide estimates of earnings
D)most analysts arrive at similar estimates of earnings
Q4) The last step in top-down fundamental analysis is to analyze:
A)individual industries
B)individual companies
C)individual securities
D)perform technical analysis
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Chapter 16: Technical Analysis
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Sample Questions
Q1) What four factors should be considered in testing technical trading rules?
Q2) What is the advance-decline line? What does it tell the technician?
Q3) A high short interest ratio is generally interpreted as:
A)a bullish signal.
B)evidence of a downside breakout.
C)a bearish signal.
D)evidence of the presence of odd-lot individual investors.
Q4) Investors who sell short expect to make money when the stock price goes down.How,then,can a high short-interest ratio be considered bullish?
Q5) The cash position of mutual funds is a contrarian indicator.
A)True
B)False
Q6) One of the primary tools of a technical analyst is:
A)sell-side research.
B)buy-side research.
C)Value Line earnings estimates.
D)chart of stock price and volume.
Q7) Discuss the difference in beliefs about price adjustments toward equilibrium in technical analysis and the Efficient Market Hypothesis.
Page 18
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Chapter 17: Bond Yields
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Sample Questions
Q1) The term structure of interest rates denotes the relationship between _____________ and _________________ for a specific category of bonds at a particular point in time.
Q2) What is meant by "Yield to Maturity"?
A)The coupon interest rate paid each year,divided by the face value of the bond.
B)The coupon interest rate paid each,divided by the current price of the bond.
C)The periodic interest rate that equates the current price with the expected future flows. D)The periodic interest rate that equates the current price with the expected future flows,up to the time of the first call.
Q3) Reinvestment risk represents the possibility that future payments cannot be reinvested at the assumed rate.
A)True
B)False
Q4) The vast majority of corporate bonds pay floating rate interest on a quarterly basis.
A)True
B)False
Q5) Yield spreads vary inversely with the: ______________________________.
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Page 19
Chapter 18: Bonds: Analysis and Strategy
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Sample Questions
Q1) Investors would expect a higher yield on a smaller,regional corporate bond than on a large,national corporate bond mainly due to:
A)differences in coupon rates.
B)differences in quality.
C)differences in tax treatments.
D)differences in marketability.
Q2) A weaker dollar increases the value of dollar-denominated assets to foreign investors.
A)True
B)False
Q3) Consider Example 18-11 and Table 18-1.Let's say the price is $950.00 rather $974.17 (so the YTM goes to 6.1% from 5.6%).What happens to duration?
A)It increases substantially.
B)It increases only a little amount.
C)It decreases substantially.
D)It decreases only a little amount
Q4) If interest rates rise,reinvestment rates rise,whereas bond prices decline.
A)True
B)False
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Chapter 19: Options
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Sample Questions
Q1) The writer of a call,like the buyer of a put,is bearish about the stock price.
A)True
B)False
Q2) There is an positive relationship between the price of a put option and the volatility of the underlying common stock.
A)True
B)False
Q3) The exercise price on an option is also known as the:
A)premium.
B)strike price.
C)theoretical value.
D)spot price.
Q4) Stock market index options are available on all of the following EXCEPT
A)the Standard and Poor's 500 Index.
B)the Major Market Index.
C)the National OTC Index.
D)the Shearson Lehman Hutton Index.
Q5) List five options exchanges.
Q6) What is meant by portfolio insurance?
Q7) What is a hedge ratio?
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Chapter 20: Futures
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Q1) An investor with a bond portfolio wishes to protect the value of his position by using futures contracts.This investor should use a
A)long hedge.
B)short hedge.
C)time spread.
D)money spread.
Q2) When trading futures,margin
A)is seldom used.
B)indicates that credit is being extended.
C)is a down payment.
D)in effect,is a performance bond.
Q3) Do options on futures serve any economic purpose or are they just sophisticated games?
Q4) Spot markets are for immediate delivery.Forward prices are:
A)The price agreed upon today for an asset for deferred delivery in the future.
B)The price in the future for an asset delivered in the future.
C)The price today for a forward price in the future.
D)Based on current spot market prices.
Q5) What is the difference between hedgers and speculators in the futures markets?
Page 22
Q6) What economic functions are fulfilled by futures?
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Chapter 21: Portfolio Management
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Sample Questions
Q1) Portfolio performance evaluation is an important determinant of your success in financial planning.
A)True
B)False
Q2) Portfolio objectives are always going to center on _______and_______,because these are the two aspects of most interest to investors.
A)accumulation; consolidation.
B)return; taxes.
C)return; risk.
D)spending; gifting.
Q3) The stages of the life cycle for setting individual investment objectives are:
A)Accumulation Phase,Consolidation Phase,Retirement Phase,Estate Phase.
B)Accumulation Phase,Consolidation Phase,Retirement Phase,Gifting Phase.
C)Accumulation Phase,Consolidation Phase,Spending Phase,Retirement Phase,Gifting Phase.
D)Accumulation Phase,Consolidation Phase,Spending Phase,Gifting Phase.
Q4) How does the prudent man rule affect asset allocation?
Q5) What is difference between strategic asset allocation and tactical asset allocation?
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Chapter 22: Evaluation of Investment
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Sample Questions
Q1) Superior portfolio performance can result from
A)the ability to select undervalued securities.
B)the ability to time market turns.
C)superior selectivity or timing performance.
D)neither superior selection nor timing.The market is too efficient.
Q2) One approach to style analysis which uses the stocks in a portfolio to describe the fund's allocation among asset classes is known as:
A)returns-based style analysis.
B)asset allocation style analysis.
C)holdings-based style analysis.
D)mix-based style analysis.
Q3) Treynor's measure is a ratio of excess return to systematic risk.
A)True
B)False
Q4) If we are to assess performance carefully,we must do so on what kind of basis?
A)quarterly
B)annual
C)attribution-weighted
D)risk-adjusted
Q5) What is the major difference between the Sharpe and Treynor models?
Page 24
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