Personal Financial Planning
Exam Questions
Course Introduction
Personal Financial Planning is a comprehensive course designed to introduce students to the fundamental principles and practices of managing personal finances. The course covers key concepts such as budgeting, saving, investing, credit management, insurance, tax planning, and retirement strategies. Through real-world examples, case studies, and interactive assignments, students learn how to set financial goals, develop effective financial plans, and make informed decisions to achieve long-term financial stability and security. Emphasis is placed on understanding financial products, analyzing risk, and adopting sound financial behaviors to navigate the complexities of personal finance in todays dynamic economic environment.
Recommended Textbook Investments 7th Canadian Edition by Zvi Bodie
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Chapter 1: Investments: Background and Issues
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Sample Questions
Q1) Important trends changing the contemporary investment environment are
A) globalization
B) securitization
C) bundling and unbundling
D) financial engineering
E) all of these
Answer: E
Q2) Which of the following is true about GNMA pass-throughs?
I.They separate individual home mortgages into heterogeneous pools.
II.The purchaser of a GNMA receives monthly interest and principal payments received from payments made on the pool.
III.The banks that originated the mortgages continue to service them.
IV.The banks that originated the mortgages maintain ownership of them.
A) II,III,and IV
B) II and III
C) I,II,and IV
D) I,III,and IV
E) I,II,III,and IV
Answer: B
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Page 3
Chapter 2: Asset Classes and Financial Instruments
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Sample Questions
Q1) What is the bond equivalent yield of a T-Bill that is selling for $9,453 and has 173 days remaining until maturity?
A) 11.54%
B) 12.21%
C) 12.04%
D) 11.38%
E) 12.15%
Answer: B
Q2) A form of short-term borrowing by dealers in government securities is
A) reserve requirements.
B) repurchase agreements
C) banker's acceptances.
D) commercial paper.
E) brokers' calls.
Answer: B
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Page 4
Chapter 3: Securities Markets
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Sample Questions
Q1) Which of the following orders instructs the broker to buy at the current market price?
A) Limit order
B) Discretionary order
C) Limit-loss order
D) Stop-buy order
E) Market order
Answer: E
Q2) The finalized registration statement for new securities approved by the OSC is called
A) a red herring
B) the preliminary statement
C) the prospectus
D) a best-efforts agreement
E) a firm commitment
Answer: C
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Page 5
Chapter 4: Mutual Funds and Other Investment Companies
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Sample Questions
Q1) If a portfolio had a return of 15%,the risk free asset return was 3%,and the standard deviation of the portfolio's excess returns was 34%,the risk premium would be _____.
A) 31%
B) 18%
C) 49%
D) 12%
E) 29%
Q2) Discuss some reasons why an investor with a long time horizon might choose to invest in common stocks,even though they have historically been riskier than government bonds or T-bills.
Q3) You purchase a share of Yestel stock for $90.One year later,after receiving a dividend of $3,you sell the stock for $92.What was your holding period return?
A) 5.56%
B) 2.22%
C) 3.33%
D) 1.11%
E) 40%
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Chapter 5: Risk and Return: Past and Prologue
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Sample Questions
Q1) According to the mean-variance criterion,which one of the following investments dominates all others?
A) E(r)= 0.15;Variance = 0.20
B) E(r)= 0.10;Variance = 0.20
C) E(r)= 0.10;Variance = 0.25
D) E(r)= 0.15;Variance = 0.25
E) none of these is dominates the other alternatives.
Q2) The presence of risk means that
A) Investors will lose money.
B) More than one outcome is possible.
C) the standard deviation of the payoff is larger than its expected value.
D) Final wealth will be greater than initial wealth.
E) Terminal wealth will be less than initial wealth.
Q3) Asset allocation
A) may involve the decision as to the allocation between a risk-free asset and a risky asset.
B) may involve the decision as to the allocation among different risky assets.
C) may involve considerable security analysis.
D) a and b.
E) a and c.
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Chapter 6: Efficient Diversification
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Sample Questions
Q1) For a two-stock portfolio,what would be the preferred correlation coefficient between the two stocks?
A) +1.00.
B) +0.50.
C) 0.00.
D) -1.00.
E) none of these.
Q2) Given an optimal risky portfolio with expected return of 13% and standard deviation of 26% and a risk free rate of 5%,what is the slope of the best feasible CAL?
A) 0.60
B) 0.14
C) 0.08
D) 0.36
E) 0.31
Q3) State Markowitz's mean-variance criterion.Give some numerical examples of how the criterion would be applied.
Q4) Theoretically,the standard deviation of a portfolio can be reduced to what level?
Explain.Realistically,is it possible to reduce the standard deviation to this level? Explain.
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Chapter 7: Capital Asset Pricing and Arbitrage Pricing
Theory
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Sample Questions
Q1) The amount that an investor allocates to the market portfolio is negatively related to I.the expected return on the market portfolio.
II.the investor's risk aversion coefficient.
III.the risk-free rate of return.
IV.the variance of the market portfolio
A) I and II
B) II and III
C) II and IV
D) II,III,and IV
E) I,III,and IV
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 these.
Q3) List and discuss two of the assumptions of the CAPM.
Q4) Discuss the mutual fund theorem.
Page 9
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Chapter 8: The Efficient Market Hypothesis
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Sample Questions
Q1) In a factor model,the return on a stock in a particular period will be related to
A) firm-specific events
B) macroeconomic events
C) the error term
D) both a and b
E) neither a nor b
Q2) A zero-investment portfolio with a positive expected return arises when _________.
A) an investor has downside risk only
B) the law of prices is not violated
C) the opportunity set is not tangent to the capital allocation line
D) a risk-free arbitrage opportunity exists
E) none of these
Q3) Multifactor models seek to improve the performance of the single-index model by
A) modeling the systematic component of firm returns in greater detail.
B) incorporating firm-specific components into the pricing model.
C) allowing for multiple economic factors to have differential effects
D) all of these are true.
E) none of these are true.
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Chapter 9: Behavioral Finance and Technical Analysis
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Sample Questions
Q1) Fama and French (1988)found that the return on the aggregate stock market
A) is higher when the dividend yield is high
B) is lower when the dividend yield is high
C) is unrelated to the dividend yield
D) is higher when bank failures are high
E) is unrelated to the economy
Q2) On November 22,1991 the stock price of K-Mart was $39.50 and the retailer stock index was 600.30.On November 25,1991 the stock price of K-mart was $40.25 and the retailer stock index was 605.20.Consider the ratio of K-Mart to the retailer index at November 22 and November 25.K-Mart is _______ the retail industry and technical analysts who follow relative strength would advise _______ the stock.
A) outperforming,buying
B) outperforming,selling
C) underperforming,buying
D) underperforming,selling
E) equally performing,neither buying nor selling
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.
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Page 11
Chapter 10: Bond Prices and Yield
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Sample Questions
Q1) A daily fluctuation of little importance is called __________.
A) a minor trend
B) an intermediate trend
C) a primary trend
D) none of these
Q2) At the end of July,the average yields on 10 top-rated corporate bonds and 10 intermediate-grade bonds were 7.65% and 8.48% respectively.At the end of August,the average yields on 10 top-rated corporate bonds and 10 intermediate-grade bonds were 6.31% and 6.71% respectively.The confidence index __________ during August and technical analysts are likely to be ________.
A) increased,bullish
B) increased,bearish
C) decreased,bullish
D) decreased,bearish
Q3) Technical analysis focuses on _______________________.
A) finding opportunities for risk-free investing
B) changing attitudes regarding economic and political forces
C) changing prospects for earnings or growth of particular firms or industries
D) regulatory issues
Q4) How do you distinguish between fundamental analysis and technical analysis?
Page 12
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Chapter 11: Managing Bond Portfolios
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Sample Questions
Q1) The CAPM is not testable unless
A) the exact composition of the true market portfolio is known and used in the tests.
B) all individual assets are included in the market proxy.
C) the market proxy and the true market portfolio are highly negatively correlated.
D) a and b.
E) b and c.
Q2) Which of the following statements is true about models that attempt to measure the empirical performance of the CAPM?
A) The conventional CAPM works better than the conditional CAPM with human capital.
B) The conventional CAPM works about the same as the conditional CAPM with human capital.
C) The conditional CAPM with human capital yields a better fit for empirical returns than the conventional CAPM.
D) Adding firm size to the model specification dramatically improves the fit.
E) Adding firm size to the model specification worsens the fit.
Q3) Discuss Roll's critique of the CAPM.
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Chapter 12: Macroeconomic and Industry Analysis
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Sample Questions
Q1) Consider the following $1,000 par value zero-coupon bonds: \[\begin{array} { l c c }
\text { Bond } &\text { Years to Maturity } & \text { Price } \\
\hline \text { A } & 1 & \$ 909.09 \\
\text { B } & 2 & \$ 811.62 \\
\text { C } & 3 & \$ 711.78 \\
\text { D } & 4 & \$ 635.52 \end{array}\]
The yield to maturity on bond B is _________.
A) 10%
B) 11%
C) 12%
D) 14%
E) none of these
Q2) To earn a high rating from the bond rating agencies,a firm should have
A) a low times interest earned ratio
B) a low debt to equity ratio
C) a high quick ratio
D) a and c
E) b and c
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Page 14
Chapter 13: Equity Valuation
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Sample Questions
Q1) When computing yield to maturity,the implicit reinvestment assumption is that the interest payments are reinvested at the:
A) Coupon rate.
B) Current yield.
C) Yield to maturity at the time of the investment.
D) Prevailing yield to maturity at the time interest payments are received.
E) The average yield to maturity throughout the investment period.
Q2) 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?
Q3) Which of the following is not proposed as an explanation for the term structure of interest rates:
A) The expectations theory.
B) The liquidity preference theory.
C) The market segmentation theory.
D) Modern portfolio theory.
E) A,b,and c.
Q4) 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 14: Financial Statement Analysis
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Sample Questions
Q1) The duration of a coupon bond
A) does not change after the bond is issued.
B) can accurately predict the price change of the bond for any interest rate change.
C) will decrease as the yield to maturity decreases.
D) all of these are true.
E) none of these are true.
Q2) Which of the following researchers have contributed significantly to bond portfolio management theory?
I.Sidney Homer
II.Harry Markowitz
III.Burton Malkiel
IV.Martin Liebowitz
V.Frederick Macaulay
A) I and II
B) III and V
C) III,IV,and V
D) I,III,IV,and V
E) I,II,III,IV,and V
Q3) Discuss rate anticipation swaps as a bond portfolio management strategy.
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Page 16
Chapter 15: Options Markets
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Sample Questions
Q1) According to Peter Lynch,a rough rule of thumb for security analysis is that
A) the growth rate should be equal to the plowback rate.
B) the growth rate should be equal to the dividend payout rate.
C) the growth rate should be low for emerging industries.
D) the growth rate should be equal to the P/E ratio.
E) none of these.
Q2) Bonded Paper Company has a balance sheet which lists $85 million in assets,$40 million in liabilities and $45 million in common shareholders' equity.It has 1,400,000 common shares outstanding.The replacement cost of the assets is $115 million.The market share price is $90.What is Bonded Paper's Tobin's Q ratio?
A) 0.98
B) 2.80
C) 32.14
D) 60.71
E) none of these
Q3) The price/earnings ratio,or multiplier approach,may be used for stock valuation.Explain this process and describe how the "multiplier" varies from the one available in the stock market quotation pages.
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Page 17
Chapter 16: Option Valuation
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Sample Questions
Q1) Refer to the financial statements of Lake Somenos Furniture Co.The firm's leverage ratio for 2001 is _______.
A) 1.56
B) 1.62
C) 0.64
D) 2.07
E) none of these
Q2) The level of real income of a firm can be distorted by the reporting of depreciation and interest expense.During periods of high inflation,the level of reported depreciation tends to __________ income,and the level of interest expense reported tends to __________ income.
A) understate,overstate
B) understate,understate
C) overstate,understate
D) overstate,overstate
E) There is no discernable pattern.
Q3) In an increasingly globalized investment environment,comparability problems become even greater.Discuss some of the problems for the investor who wishes to have an internationally diversified portfolio.
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Page 18
Chapter 17: Futures Markets and Risk Management
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Sample Questions
Q1) Suppose you purchase one IBM May 100 call contract at $5 and write one IBM May 105 call contract at $2.If,at expiration,the price of a share of IBM stock is $103,your profit would be
A) $500.
B) $300.
C) zero.
D) $100.
E) none of these.
Q2) Suppose the price of a share of IBM stock is $100.An April call option on IBM stock has a premium of $5 and an exercise price of $100.Ignoring commissions,the holder of the call option will earn a profit if the price of the share
A) increases to $104.
B) decreases to $90.
C) increases to $107.
D) decreases to $96.
E) none of these.
Q3) Discuss the differences in writing covered and naked calls.Are risks involved in the two strategies similar or different? Explain.
Q4) List two types of exotic options and describe their characteristics.
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Chapter 18: Performance Evaluation and Active Portfolio Management
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Q1) The elasticity of a stock put option is always A) positive.
B) smaller than one.
C) negative
D) infinite
E) none of these.
Q2) An American-style call option with six months to maturity has a strike price of $35.The underlying stock now sells for $43.The call premium is $12.If the risk-free rate is 6%,what should be the value of a put option on the same stock with the same strike price and expiration date?
A) $3.00
B) $2.02
C) $12.00
D) $5.25
E) $8.00
Q3) Discuss the relationship between option prices and time to expiration,volatility of the underlying stocks,and the exercise price.
Q4) What is an option hedge ratio? How does the hedge ratio for a call differ from that of a put (or are the two equivalent)? Explain.
Page 20
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Chapter 19: Globalization and International Investing
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Sample Questions
Q1) Some of the newer futures contracts include
I.fashion futures.
II.weather futures.
III.electricity futures.
IV.entertainment futures.
A) I and II
B) II and III
C) III and IV
D) I,II,and III
E) I,III,and IV
Q2) A short hedge is
A) a short position in the spot market and a simultaneous short position in the futures market.
B) a long position in the spot market and a simultaneous short position in the futures market.
C) a long position in the futures market and a simultaneous long position in the spot market.
D) a short position in the spot market and a simultaneous long position in the futures market.
E) none of these.
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Page 21
Chapter 20: Taxes, Inflation, and Investment Strategy
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Sample Questions
Q1) Sharpe's measure
A) is an assessment of mutual fund performance.
B) is a common criterion for tracking the performance of professionally managed portfolios.
C) measures excess returns per unit of risk,as measured by beta.
D) a and b.
E) a,b,and c.
Q2) 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.
Q3) The M<sup>2</sup> measure was developed by
A) Merton and Miller.
B) Miller and Miller.
C) Modigliani and Miller.
D) Modigliani and Modigliani.
E) the M&M Mars Company.
Q4) Discuss the origins,the use of,and the principle behind the Sharpe measure.
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Chapter 21: Investors and the Investment Process
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Q1) A position in stocks and options that is hedged with respect to fluctuations in the price of the underlying asset is said to be
A) stable.
B) delta neutral.
C) volatility neutral.
D) riskless.
E) none of these.
Q2) The critical variable in the determination of the success of the active portfolio is
A) alpha/systematic risk
B) alpha/nonsystematic risk
C) gamma/systematic risk
D) gamma/nonsystematic risk
E) none of these
Q3) The Treynor-Black model
A) considers both macroeconomic and microeconomic risks.
B) considers security selection only.
C) is relatively easy to implement.
D) a and c.
E) b and c.
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Page 23
Chapter
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Sample Questions
Q1) ______ uses quantitative techniques and often automated trading systems to seek out many temporary misalignments among securities.
A) Covered interest arbitrage
B) Locational arbitrage
C) Triangular arbitrage
D) Statistical arbitrage
E) All arbitrage
Q2) If the yield on mortgage-backed securities was abnormally low compared to Treasury bonds,a hedge fund pursuing a relative value strategy would ______.
A) short sell the Treasury and short sell the mortgage-backed securities
B) short sell the Treasury and buy the mortgage-backed securities
C) buy the Treasury and buy the mortgage-backed securities
D) buy the Treasury and short sell the mortgage-backed securities
E) C only since short sales are prohibited
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?
Q4) Discuss the tax status of the major categories of institutional investors described in the text.
Page 24
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Chapter 23: International Finance and Investments: Understanding Foreign
Markets and Risks
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Q1) The __________ index is a widely used index of non-U.S.stocks.
A) CBOE
B) Dow Jones
C) EAFE
D) all of these
E) none of these
Q2) Discuss performance evaluation of international portfolio managers in terms of potential sources of abnormal returns.
Q3) In 2007,the Canadian equity market represented __________ of the world equity market.
A) 2.7%
B) 2.9%
C) 3.5%
D) 4.7%
E) none of these
Q4) Discuss some of the accounting comparability problems involved in international investing.
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