Personal Financial Planning
Exam Solutions
Course Introduction
Personal Financial Planning is a comprehensive course designed to introduce students to the fundamental concepts and techniques used in managing personal finances. Through topics such as budgeting, saving, investing, credit management, insurance, retirement planning, and tax strategies, students learn how to set financial goals, analyze their financial situation, and make informed decisions to secure their financial future. The course emphasizes practical tools and real-world applications to help students develop lifelong skills for managing money effectively and achieving financial well-being.
Recommended Textbook
Fundamentals of Investments 3rd Canadian Edition by Bradford Jordan
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20 Chapters
2255 Verified Questions
2255 Flashcards
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Page 2
Chapter 1: A Brief History of Risk and Return
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93 Verified Questions
93 Flashcards
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Sample Questions
Q1) What are the two most important lessons from capital market history?
Answer: First, risky assets earn a risk premium on average. This is the reward for bearing risk. Second, the greater the potential reward from a risky investment, the greater is the risk.
Q2) The fact that higher returns are associated with higher standard deviation is known as the:
A) Real return factor
B) Geometric relationship
C) Risk-return tradeoff
D) Market variance
E) Market capitalization
Answer: C
Q3) An asset had returns of 14%, 26%, - 13%, 8%, and 12% over the past five years. What was the variance of the returns?
A) .01287
B) .01614
C) .02018
D) .02632
E) .03512
Answer: C
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Chapter 2: Diversification and Risky Asset Allocation
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96 Verified Questions
96 Flashcards
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Sample Questions
Q1) What is the standard deviation of Stock R?
A) 17.10%
B) 26.82%
C) 21.85%
D) 14.28%
E) 23.43%
Answer: A
Q2) If the risk-rate is 5.8 percent, what is the risk premium of Stock F?
A) 15.9%
B) 5.25%
C) 4.87%
D) 4.30%
E) 5.06%
Answer: D
Q3) What assumptions are made about an investor when considering how they wish to allocate assets and construct their investment portfolio?
Answer: It is assumed that 1) investors prefer more return to less and that 2) investors prefer less risk to more risk.
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Chapter 3: The Investment Process
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119 Verified Questions
119 Flashcards
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Sample Questions
Q1) The return on an investment expressed on an annualized basis is called the
A) Earned return
B) Leveraged return
C) Holding-period percentage return
D) Annual percentage rate
E) Effective annual return
Answer: E
Q2) You purchased 100 shares of a stock for $22 a share and sold them 7 months later for $26 a share. The initial margin was 70% and the maintenance margin was 35%. You received no dividend income. Your holding period return was _____ while it would have been ____ if not used margin for the purchase. Ignore interest and trading costs.
A) 10.29%; 6.99%
B) 18.18%; 25.97%
C) 25.97%; 18.18%
D) 11.90%; 17.87%
E) 10.45%; 11.90%
Answer: C
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Chapter 4: Overview of Security Types
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120 Verified Questions
120 Flashcards
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Sample Questions
Q1) Which of the following is a difference between an American and a European option?
A) A European option can be exercised any time until maturity.
B) A call option is a European option while a put option is an American option.
C) European options have a higher price than American options.
D) European options can only be exercised at maturity.
E) A put option is a European option while a call option is an American option.
Q2) The right, but not the obligation, to purchase an asset at a specified price is called a ____ option.
A) European
B) Put
C) Call
D) American
E) Bermudan
Q3) Investing in futures contracts
A) Is the only means of investing in tangible assets
B) Can be very risky
C) Is a means of locking in a pre-determined amount of profit
D) Is a method used to avoid losses
E) All of the above
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Chapter 5: Mutual Funds
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Sample Questions
Q1) A company that pools funds of individual investors and invests them on a group basis is called a(n) ___________ company.
A) Trust
B) Investment
C) Brokerage
D) Mutual
E) Financial
Q2) The net asset value of a money market mutual fund
A) Generally fluctuates on a daily basis
B) Is guaranteed to be $10
C) Can be equal to or greater than $10, but not less than $10
D) Can fall below $10
E) Is protected by the CDIC
Q3) Hedge funds are:
A) high-risk investments.
B) suitable only for the super-wealthy.
C) involved with active portfolio management.
D) constructed with a special fee scheme.
E) all of the above.
Q4) Are ETFs only for stocks?
Page 7
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Chapter 6: The Stock Market
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Sample Questions
Q1) Which of the following best describes a "leveraged buyout".
A) The use of borrowed funds to take a company private.
B) Buying a majority share in a small, relatively risky company.
C) The private debt-financing of company with a known history.
D) The purchase of "on going concerns" that is family owned and operated.
E) Debt financing of a start-up firm with no assets to provide as collateral.
Q2) A ___________ commitment underwriting is an arrangement where the underwriter pays the issuer a stated amount whether or not the underwriter can sell all of the shares in the issue to investors.
A) Standby
B) Fixed
C) Variable
D) Best effort
E) Clean sweep
Q3) The majority of all capital market transactions occur in the
A) Primary market
B) Secondary market
C) Third market
D) Fourth market
E) Direct placement market
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Chapter 7: Common Stock Valuation
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126 Flashcards
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Sample Questions
Q1) A company pays a dividend of $0.64 per share. The equity per share is $9.50, earnings per share are $3.25, and assets per share are $14.25. What is the sustainable growth rate?
A) 19.69%
B) 22.18%
C) 25.14%
D) 27.47%
E) 18.32%
Q2) A stock just paid an annual dividend of $0.80 a share, and the dividend is expected to grow at 8 percent for 2 years and 3 percent thereafter. The required return is 9 percent. What is the stock price?
A) $15.36
B) $15.64
C) $15.97
D) $15.06
E) $15.21
Q3) What is the process of fundamental analysis?
Q4) Dividend discount models use three basic variables to arrive at a stock price. What are these variables, and how can an analyst arrive at values for these variables?
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Chapter 8: Stock Price Behaviour and Market Efficiency
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Sample Questions
Q1) If the market is semistrong-form efficient is it also weak form efficient? If the market is weak-form efficient is it also semistrong-form efficient?
Q2) Stocks A, B, and C have identical risks. Stock A earns an annual return of 9.9 percent as compared to 9.6 percent returns on stocks B and C. Given this, you can correctly assume that:
A) Stock A is overpriced.
B) the market return is 9.75 percent.
C) Stock A represents the smallest-sized firm.
D) Stock A has a positive excess return.
E) Stocks B and C represent firms that are in the process of merging.
Q3) The hypothesis that investors cannot consistently earn positive excess returns is known as the __________ hypothesis.
A) Technical analysis
B) Market efficiency
C) Risk-return
D) Fundamental analysis
E) Market breadth
Q4) Describe an example of a market which is weak-form but not strong-form efficient.
Q5) List and discuss the three forms of market efficiency.
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Chapter 9: Behavioural Finance and the Psychology of Investing
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104 Verified Questions
104 Flashcards
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Sample Questions
Q1) Last week, Alicia stated that ABC stock was only worth $16 a share and since it was selling for $23 a share, she declared it overpriced refusing to buy. After inheriting 1,000 shares of ABC stock from her grandmother, Alicia is suddenly saying that ABC stock is a great buy at $23 and is probably worth at least $31 a share. This is an example of the:
A) endowment effect.
B) money illusion.
C) regret aversion.
D) myopic loss aversion.
E) sunk cost fallacy.
Q2) Martha refuses to invest her retirement money in stocks or bonds as she is afraid that if she does, she will lose money this year. Martha is displaying a characteristic known as:
A) frame dependence.
B) regret aversion.
C) mental accounting.
D) house money.
E) myopic loss aversion.
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11
Chapter 10: Interest Rates
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112 Verified Questions
112 Flashcards
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Sample Questions
Q1) When future interest rate movements are known with certainty and bonds are fairly priced,
A) all yields-to-maturity will be the same.
B) all bonds are sold for the same price.
C) all bond equivalent yields will be the same.
D) all of the above.
E) none of the above.
Q2) The yield curve shows the rates that a __________ will pay for various maturity ranges.
A) Large corporation
B) Municipal government
C) Bank's best customer
D) High-risk borrower
E) Default-free borrower
Q3) An inverted yield curve is:
A) upward sloping.
B) flat.
C) downward sloping.
D) humped.
E) U-shaped.
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Chapter 11: Bond Prices and Yields
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124 Flashcards
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Sample Questions
Q1) A callable bond is most likely to be called when:
A) The stock price increases.
B) The stock price decreases.
C) Interest rates increase.
D) Interest rates decrease.
E) Debt for the company is given a lower credit rating.
Q2) A bond has a yield-to-maturity that is equal to the coupon rate. Knowing this, you also know that the
A) Time to maturity can be any value
B) Market value is greater than the face value
C) Bond must pay daily interest
D) Maturity value is greater than the current market value
E) Bond must pay interest annually
Q3) A(n) ______ bond has a market price that is less than par value.
A) Undervalued
B) Discount
C) Par
D) Premium
E) Callable
Q4) Why do low coupon bonds change more in price than high coupon bonds?
Page 13
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Chapter 12: Return, Risk and Security Management
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106 Verified Questions
106 Flashcards
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Sample Questions
Q1) Compared with the capital pricing model (CAPM), one major advantage of the arbitrage pricing model (APT) is that
A) APT can deal with both portfolios and individual securities.
B) APT has an accurate risk measure.
C) APT does not require observing the market portfolio.
D) APT does not depend on expected returns.
E) none of the above
Q2) You have a portfolio of 10 stocks that are held in equal amounts. The current beta of this portfolio is 1.55 and the beta of Stock A is 2. If Stock A is sold, what does the beta of the replacement stock have to be to ensure a new portfolio beta of 1.46?
A) 1.10
B) 1.37
C) 1.27
D) 1.00
E) Undermined
Q3) Explain what beta is and why it is important.
Q4) According to the CAPM, the expected return on a risky asset depends on three factors. List each factor, how each factor is measured and explain its role in determining the expected return.
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Chapter 13: Performance Evaluation and Risk Management
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114 Verified Questions
114 Flashcards
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Sample Questions
Q1) In an efficient market, which of the following will be the same for every asset?
I. Treynor ratio
II. Sharpe ratio
III. Jensen's alpha
A) II only
B) I and III only
C) II and III only
D) I only
E) I, II, and III
Q2) A strategy of passive management is one in which, once established, the portfolio is
A) Readjusted on a regular basis
B) Only readjusted if prices decline
C) Largely left alone
D) Only readjusted if prices rise
E) Readjusted at the manager's discretion
Q3) Assuming the market is efficient, what do you know about Jensen's alpha for all assets in the market? Will this always hold in an efficient market? Why or why not?
Q4) What is the importance of value-at-risk?
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Chapter 14: Options
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137 Flashcards
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Sample Questions
Q1) A(n) _________ option gives the owner the right, but not the obligation, to sell an asset within the option period.
A) call
B) put
C) American
D) European
E) index
Q2) You wrote a put with a strike price of $20 and a premium of $1. Draw a graph depicting your profits or losses for stock prices ranging from $0 to $40. Be sure to completely label your graph.
Q3) The Canadian Derivatives Clearing Corporation (CDCC) has created the _________ system to ensure the integrity of all option trading.
A) Intermediary
B) Commission
C) Book-order
D) Option pricing
E) Auction
Q4) When the price on a call option has risen, does it necessarily imply the option becomes less attractive now?
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Chapter 15: Option Valuation
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Sample Questions
Q1) A call option has a delta of 0.48 and sells for $6.59. What is the estimate of the new call price if the stock price increases by $0.75?
A) $6.83
B) $6.72
C) $7.01
D) $7.07
E) $6.95
Q2) Why does the value of an option increase as the volatility of the underlying asset increases?
Q3) What is the price of the put option?
A) $8.50
B) $5.94
C) $6.43
D) $6.22
E) $5.97
Q4) Identify the five factors of the Black-Scholes option pricing model and identify whether each factor must increase or decrease to cause the price of a call option to increase.
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Chapter 16: Futures Contracts
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122 Flashcards
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Sample Questions
Q1) A(n) _________ market occurs when a positive basis is observed.
A) Parity
B) Inverted
C) Basis
D) Arbitrage
E) Carrying-charge
Q2) The delivery procedures for a futures contract are set by:
A) the exchange the futures is traded on.
B) the buyer.
C) the seller.
D) the Bank of Canada.
E) an agreement between buyers and sellers.
Q3) In all futures contracts, even commodity futures, only 1% to 3% of futures contracts are delivered. That is, at expiration, the party that originally purchased a futures contract has sold a futures contract to offset their position. Since most market participants do not deliver or receive delivery of the contract, does this mean that most futures markets participants are speculators?
Q4) You are a bond portfolio manager. What is your greatest risk and how can you eliminate that risk?
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Chapter 17: Projecting Cash Flow and Earnings
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Sample Questions
Q1) Which of the following are major liability categories?
I Other Liabilities
II Current Liabilities
III Fixed Liabilities
IV Long Term Debt
A) I only
B) II only
C) I and II only
D) I, II and IV only
E) I, II, III and IV
Q2) Which of the following is false regarding interest? Interest payments:
A) are not discretionary.
B) are tax-deductible.
C) do not directly appear in the statement of cash flows.
D) appear on the income statement.
E) none of the above.
Q3) Why is the expected rate of sales growth so critical to pro forma statements?
Q4) Why is it so critical that you review the cash flows of a firm rather than rely strictly on balance sheet and income statement analysis?
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Chapter 18: Corporate Bonds
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Sample Questions
Q1) A bond indenture clause that prohibits a company from issuing new debt that has seniority over current debt is the _________ clause.
A) sinking fund
B) first-in-line
C) debt prohibition
D) negative pledge
E) affirmation
Q2) A call provision associated with a preferred stock issue
A) Is generally advantageous to investors because it provides increased marketability for the security.
B) Will never influence the market price of the security.
C) Will tend to prevent the market price of the preferred stock from falling below its preset call price.
D) Is likely to be used by the company at a time when investors will have to reinvest at lower interest rates.
E) Is unimportant since preferred stocks never have call features.
Q3) What are some of the advantages and disadvantages of owning convertible bonds?
Q4) How do investors benefit when a bond has a put provision?
Q5) How is the minimal value for a convertible bond determined?
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Chapter 19: Government Bonds and Mortgaged-Backed Securities
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Sample Questions
Q1) What is the largest purchase price you could pay if you can afford a mortgage payment of $1,300 per month for 30 years and the interest rate is 5.9 percent?
A) $216,132
B) $220,108
C) $219,025
D) $218,432
E) $217,857
Q2) Canada savings bonds are exempt from ________ taxes.
A) Federal
B) Non-resident withholding
C) Provincial and federal
D) Provincial
E) None of the above
Q3) Canadian Treasury bonds are quoted
A) On a discount basis
B) On a percentage of par in 32<sup>nd</sup>s of one percent
C) On a percentage of face value in decimals
D) On a percentage of the initial cost in decimals
E) None of the above
Q4) What are the pros and cons of investing in municipal bonds?
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Chapter 20: International Portfolio Investment
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Sample Questions
Q1) What will the annual percentage return be on foreign exchange measured with Canadian dollars for this investor?
A) -0.50%
B) -0.20%
C) -0.10%
D) -0.40%
E) -0.30%
Q2) How much does this investor have to pay in Canadian funds for those American stocks now?
A) $2,605.80
B) $1,541.20
C) $2,595.40
D) $2,302.50
E) None of the above
Q3) Regarding political risk, foreign investors care
A) Foreign fund transfers
B) Expropriation
C) Withholding interests
D) Exchange rate controls
E) All of the above
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