Personal Financial Planning
Exam Questions
Course Introduction
Personal Financial Planning introduces students to the foundational principles and practical strategies of managing personal finances. The course covers essential topics such as budgeting, saving and investing, debt management, risk assessment, insurance, retirement planning, and an overview of tax implications on individual finances. Students will develop the skills to establish financial goals, create effective financial plans, and make informed decisions to achieve long-term financial security. Through case studies and real-life scenarios, participants will learn how to navigate financial challenges and optimize resources to support both short-term needs and future aspirations.
Recommended Textbook Investment Analysis and Portfolio Management 11th Edition by Frank K. Reilly
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22 Chapters
2045 Verified Questions
2045 Flashcards
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Page 2
Chapter 1: The Investment Setting
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Sample Questions
Q1) Investors are willing to forgo current consumption in order to increase future consumption for a nominal rate of interest.
A)True
B)False
Answer: False
Q2) The rate of exchange between future consumption and current consumption is the
A) nominal risk-free rate.
B) coefficient of investment exchange.
C) pure rate of interest.
D) consumption/investment paradigm.
E) expected rate of return.
Answer: C
Q3) Refer to Exhibit 1.3. What was your annual holding period yield (Annual HPY)?
A) 0.1462
B) 0.1247
C) 1.8
D) 0.40
E) 0.25
Answer: B
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Page 3
Chapter 1: The Investment Setting: Part A
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Sample Questions
Q1) Refer to Exhibit 1A.1. The expected return from this investment is
A) -0.0752.
B) -0.0040.
C) 0.00.
D) 0.0075.
E) 0.4545.
Answer: D
Q2) Refer to Exhibit 1A.1. 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 these are correct.
Answer: C
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4
Chapter 2: Asset Allocation and Security Selection
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Sample Questions
Q1) An example of a unique need in an investment policy statement is related to the legal responsibilities of a fiduciary or trustee.
A)True
B)False
Answer: False
Q2) Research has shown that the asset allocation decision explains ____% of the variation in fund returns across all funds and ____% of the variation in returns for a particular fund over time.
A) 90; 100
B) 100; 40
C) 90; 40
D) 40; 100
E) 40; 90
Answer: E
Q3) Average tax rate is defined as total tax payment divided by total income.
A)True
B)False
Answer: True
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Page 5
Chapter 2: Asset Allocation and Security Selection: Part A
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Sample Questions
Q1) What is the correlation coefficient for two assets with a covariance of .0032, if asset 1 has a standard deviation of 12 percent and asset 2 has a standard deviation of 9 percent?
A) 0.2963
B) 0.3456
C) 0.8721
D) 1.5980
Q2) Refer to Exhibit 2A.1. Calculate the coefficient of correlation.
A) -0.456
B) -0.354
C) 0.000
D) 0.456
E) 3.538
Q3) Refer to Exhibit 2A.1. Calculate the covariance.
A) -32.20
B) -23.32
C) 1.00
D) 23.32
E) 32.20
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Page 6
Chapter 3: Organization and Functioning of Securities Markets
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Sample Questions
Q1) Refer to Exhibit 3.7. At the end of one year, shares of RossCorp stock are selling for $35 per share and the company paid dividends of $0.85 per share. Assuming that you borrowed 25 percent of cost of the purchase, what is your rate of return?
A) 33.05 percent
B) -33.05 percent
C) -23.51 percent
D) -25.35 percent
E) -40.64 percent
Q2) Negotiation, competitive bids, and best efforts are three forms of underwriting arrangements.
A)True
B)False
Q3) It is required by law that a stock market must have a physical location.
A)True
B)False
Q4) A pure auction market is also referred to as a quote-driven market.
A)True
B)False
Page 7
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Chapter 4: Security Market Indexes and Index Funds
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Sample Questions
Q1) Refer to Exhibit 4.2. Calculate a price weighted average for January 14th.
A) 32
B) 30
C) 36.13
D) 34
E) 37
Q2) The general purpose of a market indicator series is to provide an overall indication of aggregate market changes or movements.
A)True
B)False
Q3) For an indexed portfolio, the fund manager will typically
A) attempt to replicate the composition of the particular index exactly.
B) not replicate the composition of the particular index.
C) not alter the weights when the index composition is changed.
D) generate high trading expense ratios.
E) generate high management expense ratios.
Q4) The most common way to test a portfolio manager's performance is to compare the portfolio return to a benchmark.
A)True
B)False
Page 8
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Chapter 5: Efficient Capital Markets, Behavioral Finance, and Technical Analysis
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Sample Questions
Q1) In order to confirm the weak-form efficient market hypothesis, an examination of stock price runs over time would reveal that stock price changes over time were
A) highly positively correlated.
B) moderately positively correlated.
C) highly negatively correlated.
D) moderately negatively correlated.
E) not correlated.
Q2) Which of the following would be inconsistent with an efficient market?
A) Information arrives randomly and independently.
B) Stock prices adjust rapidly to new information.
C) Price changes are independent.
D) Price changes are random.
E) Price adjustments are biased.
Q3) The relative strength index for a stock is equal to the price of the stock
A) divided by the value of a stock-market index.
B) multiplied by the value of a stock-market index.
C) divided by the value of a group of industry stocks.
D) multiplied by an industry peer group and divided by a market index.
E) divided by the 30-day moving average of prior stock movements.
Page 9
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Chapter 6: An Introduction to Portfolio Management
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Sample Questions
Q1) Refer to Exhibit 6.15. What is the expected return of a portfolio of two risky assets if the expected return E(R<sub>i</sub>), standard deviation ( \(\sigma\)i), covariance (COV<sub>i,j</sub>), and asset weight (W<sub>i</sub>) are as shown above?
A) 13.8%
B) 14.6%
C) 15.0%
D) 15.2%
E) 16.8%
Q2) Which of the following is NOT an assumption of the Capital Market Theory?
A) All investors are Markowitz efficient investors.
B) All investors have homogeneous expectations.
C) There are no taxes or transaction costs in buying or selling assets.
D) All investments are indivisible, so it is impossible to buy or sell fractional shares.
E) All investors have the same one period time horizon.
Q3) A risk-free asset is one in which the return is completely guaranteed; there is no uncertainty.
A)True
B)False
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Chapter 6: An Introduction to Portfolio Management: Part A
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Sample Questions
Q1) Refer to Exhibit 6A.1. What weight of security 1 gives the minimum portfolio variance when r<sub>1.2</sub> = .60, E( \(\sigma\)1) = .10 and E( \(\sigma\)2) = .16?
A) .0244
B) .3679
C) .5697
D) .6309
E) .9756
Q2) Refer to Exhibit 6A.1. Show the minimum portfolio variance for a two-stock portfolio when r<sub>1.2</sub> = 1.
A) E( \(\sigma\)2) \(\div\) [E( \(\sigma\)1) -E( \(\sigma\)2)]
B) E( \(\sigma\)2) \(\div\) [E( \(\sigma\)1) + E( \(\sigma\)2)]
C) E( \(\sigma\)1) \(\div\) [E( \(\sigma\)1) - E( \(\sigma\)2)]
D) E( \(\sigma\)1) \(\div\) [E( \(\sigma\)1) + E( \(\sigma\)2)]
E) None of these are correct.
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11
Chapter 6: An Introduction to Portfolio Management: Part B
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Sample Questions
Q1) Refer to Exhibit 6B.1. What is the value of W<sub>1</sub> when r<sub>1.2</sub> = -1 and E( \(\sigma\)1) = .10 and E( \(\sigma\)2) = .12?
A) 45.46 percent
B) 50.00 percent
C) 59.45 percent
D) 54.55 percent
E) 74.55 percent
Q2) Refer to Exhibit 6B.1. Show the minimum portfolio variance for a portfolio of two risky assets when r<sub>1.2</sub> = -1.
A) E( \(\sigma\)1) \(\div\) [E( \(\sigma\)1) + E( \(\sigma\)2)]
B) E( \(\sigma\)1) \(\div\) [E( \(\sigma\)1) - E( \(\sigma\)2)]
C) E( \(\sigma\)2) \(\div\) [E( \(\sigma\)1) + E( \(\sigma\)2)]
D) E( \(\sigma\)2) \(\div\) [E( \(\sigma\)1) - E( \(\sigma\)2)]
E) None of these are correct.
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12
Chapter 7: Asset Pricing Models
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152 Flashcards
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Sample Questions
Q1) The error caused by NOT using the true market portfolio has become known as the A) portfolio deviation.
B) CAPM shift.
C) benchmark error.
D) market error.
E) beta error.
Q2) Calculate the expected return for F Inc., which has a beta of 1.3 when the risk-free rate is 0.06 and you expect the market return to be 0.125.
A) 12.65 percent
B) 13.55 percent
C) 14.45 percent
D) 15.05 percent
E) 16.34 percent
Q3) If an individual owns only one security the most appropriate measure of risk is
A) standard deviation.
B) correlation.
C) beta.
D) covariance.
E) the risk-free rate.
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Page 13
Chapter 8: Equity Valuation
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Sample Questions
Q1) Refer to Exhibit 8.2. How much should you be willing to pay for the stock if you feel that the 7 percent growth rate can be maintained indefinitely and you require a 16 percent return?
A) $11.15
B) $14.44
C) $14.86
D) $18.90
E) $19.24
Q2) In dividend discount models (DDM) with supernormal growth, supernormal growth may continue indefinitely.
A)True
B)False
Q3) Refer to Exhibit 8.3. The dividends for years 1, 2, and 3 are
A) $2, $2.08, and $2.16.
B) $2, $2.05, and $2.10.
C) $2.16, $2.24, and $2.32.
D) $2.16, $2.33, and $2.52.
E) $2.07, $2.14, and $2.21.
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Chapter 9: The Top-Down Approach to Market, Industry, and Company Analysis
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Sample Questions
Q1) With a differentiation strategy, a firm seeks to identify itself as unique in its industry in an area that is important to buyers.
A)True
B)False
Q2) Which of the following is NOT a determinant of the aggregate gross profit margin?
A) unit labor costs of production
B) rate of inflation
C) unemployment rate
D) level of foreign competition
E) growth rate of M2 money supply
Q3) Refer to Exhibit 9.3. What is the expected sustainable growth rate?
A) 5.85
B) 7.15
C) 4.05
D) 6.75
E) 8.25
Q4) An increase in the retention ratio will cause a decrease in the growth rate.
A)True
B)False
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Chapter 10: The Practice of Fundamental Investing
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Sample Questions
Q1) The declaration date is the date that a dividend is announced by the board of directors.
A)True
B)False
Q2) Disadvantages of a company going public include all of the following, EXCEPT that
A) there are direct costs associated with compliance.
B) management may have to disclose more of its strategy.
C) publicly traded stock provides valuable signaling information.
D) management will spend significant time meeting with analysts.
E) management must answer to outside shareholders.
Q3) Corporations can use many tools in order to prevent takeovers, including A) poison pills.
B) non-staggered boards.
C) retaining the most profitable part of the company.
D) requiring a minority of shareholder votes to approve selling the firm.
E) staging a walk out.
Q4) The sell-side refers to firms that facilitate securities transactions.
A)True
B)False
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Chapter 11: Equity Portfolio Management Strategies
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Sample Questions
Q1) Fund XYZ had a pretax return of 10.2 percent and a tax-adjusted return of 9.5 percent.
Calculate Fund XYZ's tax cost ratio.
A) 0.006
B) 0.106
C) 0.116
D) 0.342
E) 0.635
Q2) A benchmark portfolio is defined as a passive portfolio whose average characteristics match the client's risk-return objectives.
A)True
B)False
Q3) Which of the following is NOT considered an investment style?
A) value
B) growth
C) market-oriented
D) benchmark
E) small-cap
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Chapter 12: Bond Fundamentals and Valuation
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Sample Questions
Q1) The three major theories explaining the term structure of interest rates are the expectations hypothesis, the liquidity differential hypothesis, and the segmented quality hypothesis.
A)True
B)False
Q2) According to the segmented market hypothesis, yields for a particular maturity segment depend on supply and demand within the maturity segment.
A)True
B)False
Q3) The major problem facing a bond analyst is the ability to forecast the basic interest rate level because yield spreads are generally inconsequential.
A)True
B)False
Q4) A bond that only pays a principal payment at maturity date is known as a(n)
A) blank bond.
B) maturity bond.
C) interest free bond.
D) mini-coupon bond.
E) zero coupon bond.
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Chapter 13: Bond Analysis and Portfolio Management Strategies
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Sample Questions
Q1) Modified duration is determined by making small adjustments to the Macaulay duration.
A)True
B)False
Q2) Refer to Exhibit 13.12. Assume that your investment horizon is 6 years and your portfolio consists only of Bond C and Bond D. Indicate the proportions invested in each bond so that the portfolio is immunized.
A) 50 percent in Bond C and 50 percent in Bond D
B) 64 percent in Bond C and 36 percent in Bond D
C) 36 percent in Bond C and 64 percent in Bond D
D) 100 percent in Bond D
E) 100 percent in Bond C
Q3) Interest rate anticipation is the most conservative management strategy.
A)True
B)False
Q4) The price-yield curve is a concave curve representing the relationship of bond prices and yields.
A)True
B)False
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Chapter 14: An Introduction to Derivative Markets and Securities
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Sample Questions
Q1) Futures differ from forward contracts because
A) futures have more liquidity risk.
B) futures have more credit risk.
C) futures have more maturity risk.
D) futures do not require collateral.
E) None of these are correct.
Q2) The CBOE brought numerous innovations to the option market. Which of the following is NOT such an innovation?
A) creation of a central marketplace
B) creation of a non-liquid secondary option market
C) introduction of a Clearing Corporation
D) standardization of all expiration dates
E) standardization of all exercise prices
Q3) The price at which the stock can be acquired or sold is the exercise price.
A)True
B)False
Q4) Investment costs are generally higher in the derivative markets than in the corresponding cash markets.
A)True
B)False
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Chapter 15: Forward, Futures, and Swap Contracts
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Sample Questions
Q1) The forward rate agreement is the most complicated of the OTC interest rate contracts.
A)True
B)False
Q2) In the absence of arbitrage opportunities, the forward price should be equal to the spot price plus the cost of carry.
A)True
B)False
Q3) Stock index futures are useful in providing a hedge against movements in an underlying financial asset.
A)True
B)False
Q4) Refer to Exhibit 15.9. If the futures contract was currently available for 1050, indicate the appropriate strategy that would earn an arbitrage profit.
A) long futures and short the index
B) short futures and long the index
C) long futures and long the index
D) short futures and short the index
E) None of these are correct.
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Chapter 16: Option Contracts
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Sample Questions
Q1) Refer to Exhibit 16.1. If the spot rate at expiration is $0.90 and the call option was purchased, what is the dollar gain or loss?
A) $0
B) $3750 gain
C) $3660 gain
D) $4650 loss
E) $2680 loss
Q2) Refer to Exhibit 16.3. Calculate the price of the put option.
A) $1.086
B) $0.862
C) $6.234
D) $0.623
E) $2.317
Q3) It is always theoretically possible to use options as a perfect hedge against fluctuations in value of the underlying asset.
A)True
B)False
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Chapter 17: Professional Money Management, Alternative
Assets, and Industry Ethics
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Sample Questions
Q1) A money market fund would be likely to invest in a portfolio containing all of the following EXCEPT
A) commercial paper.
B) banker's acceptances.
C) U.S. Treasury bills.
D) bank certificates of deposit.
E) U.S. Treasury notes.
Q2) Soft dollars are generated when
A) a manager commits to paying a higher than normal brokerage fee in exchange for additional bundled services.
B) a manager commits to paying a higher than normal brokerage fee in exchange for secretarial services.
C) a manager commits to paying a higher than normal brokerage fee in exchange for office equipment.
D) a manager commits to paying a higher than normal brokerage fee in exchange for research services.
E) All of these are correct.
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Chapter 18: Evaluation of Portfolio Performance
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Sample Questions
Q1) Refer to Exhibit 18.3. Compute the Sharpe Measure for the AAA fund.
A) 4.49
B) 2.74
C) 1.57
D) 1.70
E) 1.27
Q2) Portfolio managers are often evaluated using a boxplot of returns for a universe of investors over a specific period of time which is known as a(n)
A) return adjusted comparison.
B) efficient frontier comparison.
C) time plot comparison.
D) peer group comparison.
E) None of these are correct.
Q3) Refer to Exhibit 18.10. Calculate TI's risk.
A) 0.0113
B) 0.1200
C) 0.0670
D) 0.0530
E) 0.0696
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Page 24