Personal Financial Planning Review
Questions
Course Introduction
Personal Financial Planning introduces students to the fundamental principles and techniques for managing personal finances effectively. The course covers key topics such as budgeting, saving, investing, credit management, insurance, tax planning, retirement preparation, and estate planning. Through practical exercises and real-life scenarios, students learn how to develop financial goals, make informed decisions about financial products, and create comprehensive financial plans to achieve short- and long-term objectives. Emphasis is placed on understanding the impact of financial decisions on individual and family wellbeing, as well as navigating the changing financial landscape.
Recommended Textbook Fundamentals of Investment Management, 10e by Geoffrey A. Hirt
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Chapter 1: The Investment Setting
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Sample Questions
Q1) Those who attempt to engage in short-term market tactics are termed traders.
A)True
B)False Answer: True
Q2) Which of the following investments would theoretically always carry the highest risk premium?
A)U.S. treasury bill
B)Common stock
C)Preferred stock
D)Corporate bond
E)Any one of the above Answer: B
Q3) Diamonds represent a form of real assets, but cattle do not.
A)True
B)False Answer: False
Q4) Common stock represents a direct equity claim.
A)True
B)False Answer: True
Page 3
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Chapter 2: Security Markets
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Sample Questions
Q1) Because of the 1987 market collapse, the SEC put circuit breakers into effect.
A)True
B)False
Answer: True
Q2) The Intercontinental Exchange (ICE) is now operating 24 hours per day using a computerized trading system.
A)True
B)False
Answer: True
Q3) A difference between the primary market and the secondary market is: A)liquidity.
B)that primary markets allow corporations, government units, and others to raise needed funds for the expansion of their capital base.
C)that price competition in the secondary markets between different risk-return classes enables the primary market to price new issues at higher prices to reflect existing risk-return relationships.
D)that the secondary market is much more competitive than the primary market.
Answer: C
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4
Chapter 3: Participating in the Market
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Sample Questions
Q1) Long-term capital gains are taxed as ordinary income.
A)True
B)False
Answer: False
Q2) You buy 100 shares of stock at $50 per share on margin of 40 percent. If the price of the stock declines to $35, what is your percentage loss?
Answer: 75% loss
Explanation: \(\begin{array} { l r r r } \text { Purchase: }&\text { 100 shares @ \$ 50} &\$ 5,000\\
\text { Borrow } & \$ 5,000 ( 1 - .40 ) &\underline{3.000 } \\ \text { Equity } &&\$2,000 & \text { Initial Position } \end{array}\)
\(\begin{array} { l r }\text { Stock selling at \(\$ 35\) per share} & \$ 3,500\\ \text { Loan } & \underline{3,000} \\ \text { Equity } & \$ 500 \end{array}\) Change in equity/initial equity = return ($500 - $2,000)/$2,000 = 75% loss
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Investment Trusts
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Sample Questions
Q1) Money market funds are usually load funds.
A)True
B)False
Q2) Good performance by a mutual fund in the past is highly indicative of good performance in the future.
A)True
B)False
Q3) The chief disadvantage of front-end load funds is that the investor has less money to invest after commissions.
A)True
B)False
Q4) Which of the following is not a disadvantage of investing in mutual funds?
A)They do not outperform the market as a group
B)Some mutual funds may be expensive to purchase
C)Sector funds are riskier than diversified funds
D)With 5,000 funds to choose from, the selection of a fund is just as difficult as selecting an individual stock
Chapter 5: Economic Activity
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Sample Questions
Q1) A federal deficit will always expand the money supply.
A)True
B)False
Q2) The primary purpose of fundamental stock valuation is:
A)to eliminate stocks of those companies that are potential losers from the portfolio.
B)to identify for purchase those companies that are fundamentally undervalued.
C)to learn to identify peaks and troughs of the business cycle.
D)Two of the above.
Q3) High interest rates in the United States relative to foreign interest rates have a tendency to attract foreign investors to the U.S. money markets.
A)True
B)False
Q4) The Federal Reserve Bank's buying and selling of securities for its own portfolio is known as open-market operations.
A)True
B)False
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Chapter 6: Industry Analysis
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Sample Questions
Q1) The crossover point on the life cycle curve is the point where:
A)the company issues stock in an initial public offering (IPO).
B)the company gets listed on an organized exchange.
C)the company's industry moves from the growth stage to the expansion stage.
D)the industry's products begin to be accepted by the marketplace.
E)the company goes into decline, and can no longer compete within the industry.
Q2) Firms in the development stage finance their growth from internal cash flows. A)True
B)False
Q3) Competitive strategies of individual firms do not have an impact on the outlook for the industry as a whole.
A)True
B)False
Q4) Stock prices increase as companies reach the crossover point, since the company's earnings are now more predictable.
A)True
B)False
Q5) When monopolies exist, they are almost always found in mature industries.
A)True
B)False
8
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Chapter 7: Valuation of the Individual Firm
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Sample Questions
Q1) In order for any dividend valuation model to reflect a valid stock price for a company,
A)the company must pay dividends.
B)the dividend growth rate must remain constant.
C)the required rate of return (discount rate) must remain constant.
D)More than one of the above is true
Q2) The best time period for use in the combined earnings and dividend valuation model is:
A)2 years.
B)5 years.
C)10 years.
D)Any time period is acceptable
Q3) The final value calculated in dividend valuation models is typically very accurate.
A)True
B)False
Q4) All things being equal, the less debt that a firm has, the more likely it is to be highly valued in the marketplace.
A)True
B)False
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Chapter 8: Financial Statement Analysis
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Sample Questions
Q1) The ________ does not represent continuing operations in any way but is simply a snapshot of the total worth of a firm at a given point in time.
A)income statement
B)balance sheet
C)source and use of funds statement
D)statement of cash flows
E)none of the above
Q2) The tax ratio for forest product companies may be low because of the tax treatment given timber cuttings.
A)True
B)False
Q3) The Financial Accounting Standards Board (FASB) 85 requires that the Statement of Cash Flows be divided into three sections: cash flows from operations, investments, and financing.
A)True
B)False
Q4) The liquidity ratios measure how quickly a firm can dispose of inventory.
A)True
B)False
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Chapter 9: Efficient Markets and Anomalies
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Sample Questions
Q1) Prominent research on the small firm effect has been done by:
A)Fama and Roll.
B)Fama and French.
C)French and Roll.
D)Banz and Reinganum.
Q2) The stock price of an acquisition candidate changes dramatically prior to announcement because of:
A)the candidate's estimated cost of capital.
B)the high premium offered for the stock of the candidate.
C)information leaks.
D)More than one of the above
Q3) There is rarely a significant change in stock price when an OTC stock becomes listed on a national exchange.
A)True
B)False
Q4) Studies have shown that the best time to sell an unseasoned issue is:
A)prior to announcement of a merger.
B)shortly after the initial distribution.
C)after one year of trading.
D)More than one of the above
11
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Chapter 10: Behavioral Finance and Technical Analysis
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Sample Questions
Q1) The short interest ratio is the total short sales position, divided by average daily exchange volume for the month.
A)True
B)False
Q2) Smart Money Rules include:
A)Barron's Confidence Index.
B)short sales by individuals.
C)short sales by specialists.
D)Both A and C
Q3) According to the Dow Theory, daily fluctuations and secondary movements in the market are used to help identify:
A)a key indicator.
B)a primary trend.
C)shifts in demand and supply.
D)More than one of the above
Q4) The essence of the contrary opinion rule is that it is easier to figure out who is right than who is wrong.
A)True
B)False
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Chapter 11: Bond and Fixed-Income Fundamentals
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Sample Questions
Q1) What is the dollar value of a U.S. government bond quoted at 98 8/32?
Q2) A provision in which semiannual or annual contributions are made by a corporation into a fund administered by a trustee for purposes of debt retirement is referred to as a:
A)call provision.
B)put provision.
C)sinking-fund provision.
D)serial payment.
Q3) An important feature of the GNMA (GinnieMae) pass-through certificate is that there is no principal balance at maturity.
A)True
B)False
Q4) For the major bond-rating agencies, the lowest level of an investment grade bond is:
A)AA (investment grade includes AAA and AA).
B)A (investment grade includes AAA, AA and A).
C)BBB (investment grade includes AAA, AA, A, and BBB).
D)B (investment grade includes AAA, AA, A, BBB, BB and B).
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Page 13
Chapter 12: Principles of Bond Valuation and Investment
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Sample Questions
Q1) Interest rate changes affect low-quality issues to a greater degree than high-quality issues.
A)True
B)False
Q2) An ascending term structure reflects the view that rates will increase in the future.
A)True
B)False
Q3) Short-term rates are more volatile than long-term rates.
A)True
B)False
Q4) The approximate yield to maturity method tends to understate the true yield for bonds trading at a discount.
A)True
B)False
Q5) A drop in interest rates causes proportionally greater gains than increases in rates will cause losses.
A)True
B)False
Q6) What would be the current yield of a 6% coupon bond priced at $950?
Page 14
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Chapter 13: Convertible Securities and Warrants
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Sample Questions
Q1) Which of the following statements explains the premium paid over the intrinsic value of a warrant?
A)The higher the price volatility of the common stock, the greater the premium
B)The market value may fall below the intrinsic value because of the downside risk
C)The greater the time period over which the option may be exercised, the higher the premium
D)More than one of the above are true
Q2) The value of a warrant is the market value of the stock minus the option price of the warrant divided by the number of shares it will buy.
A)True
B)False
Q3) Corporations may use warrants for which of the following reasons?
A)To issue debt under normal circumstances
B)To use as an 'add-on' in a merger or acquisition agreement
C)To lower the cost of the bonds to the corporation
D)None of the above
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Chapter 14: Put and Call Options
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Sample Questions
Q1) An Arthur Corp. 25 put option is selling for $3 when the stock is trading at $22.
A)The intrinsic value is $3 and the speculative premium is 0
B)The intrinsic value is $3 and the speculative premium is $3
C)The time to expiration must be very close
D)A and C
Q2) If you buy one option and write one option on the same underlying stock, you are creating a "spread."
A)True
B)False
Q3) An option can be defined as the right, acquired for a consideration, to buy or sell something at a fixed price within a specified period of time.
A)True
B)False
Q4) A put is an option to buy 100 shares of common stock at a specified price for a given period of time.
A)True
B)False
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Page 16
Chapter 15: Commodities and Financial Futures
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Sample Questions
Q1) An investor may be asked to put up more margin if:
A)the price of the commodity goes up in a long position.
B)the price of the commodity goes down in a short position.
C)the price of the commodity goes up in a short position.
D)the contract has less than one week to run.
Q2) The primary difference between options and futures is that:
A)the option premium is the full liability of the purchaser, while a futures contract may call for additional margin to hold the position.
B)options are more speculative than futures.
C)futures require the physical transfer of goods, while options do not.
D)More than one of the above
Q3) Commodity trading is based on the use of margin rather than actual cash dollars.
A)True B)False
Q4) Given a 5,000 bushel futures contract on grain at a price of $3.25 per bushel, a margin requirement of 5%, and a maintenance margin of 80%, your customer wants to know (for a single contract) how much would the price per bushel have to fall before additional margin would be required?
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Page 17
Chapter 16: Stock Index Futures and Options
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Sample Questions
Q1) Stock index futures and options are sometimes referred to as derivative products because they:
A)are often used as part of program trading.
B)make the market less volatile.
C)have intrinsic characteristics.
D)derive their existence from actual market indexes.
Q2) A combination of a futures and options contract is an option to purchase the futures contract.
A)True
B)False
Q3) Investing in stock index futures is one way to reduce or eliminate unsystematic risk.
A)True
B)False
Q4) Stock index futures provide the portfolio manager a realistic alternative to selling either a part or the entirety of a portfolio in a declining market.
A)True
B)False
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Chapter 17: A Basic Look at Portfolio Management and Capital Market Theory
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Sample Questions
Q1) The expected value for a portfolio is a weighted average of the individual securities' expected values.
A)True
B)False
Q2) Unsystematic risk cannot be diversified away.
A)True
B)False
Q3) An investment has the following range of outcomes and probabilities. \(\begin{array}{cc}
\underline{\text { Outcomes (Percent)}}&\underline{\text { Probabilities of Outcomes }}\\
5 \% & .25 \\
7 \% & .50 \\
12 \% & .25
\end{array}\)
Calculate the expected value and the standard deviation (round to two places after the decimal point where necessary).
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Chapter 18: Duration and Bond Portfolio Management
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Sample Questions
Q1) A terminal wealth table generates the ending value of the investment at the end of the year, assuming that the bond:
A)has a maturity date corresponding to that year.
B)has a maturity date corresponding to the next year.
C)is a zero-coupon bond.
D)None of the above
Q2) Duration equals maturity if:
A)all cash flows are paid at the end of the year.
B)the coupon rate equals the market rate.
C)the bond is a zero-coupon bond.
D)More than one of the above
Q3) The duration of a 20-year, $1,000 bond at a COUPON rate of 8% is _________ the duration of an identical bond at a coupon rate of 6%.
A)greater than B)less than C)equal to
D)there is not enough information to tell
Q4) Compute the duration for a bond with an 8% coupon rate, maturing in five years. A discount rate of 10% should be applied.
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Chapter 19: International Securities Markets
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Sample Questions
Q1) Which of the following are benefits of diversification into foreign securities?
A)Diversification offers opportunities for higher returns than a single-country portfolio
B)Diversification reduces portfolio volatility
C)Returns between countries are not highly correlated
D)All of the above
Q2) There are several reasons why some analysts think that financial markets have become more highly correlated in recent years. Which one does not belong?
A)The development of a global economy has made companies and those economies more connected and less diverse
B)The new European Central Bank has coordinated economic policy across the European Union, making that region more coordinated
C)U.S. companies operating abroad, like Coca Cola, McDonalds, and ExxonMobil, are highly correlated with U.S. markets
D)Every time we have a world event such as September 11, 2001, a currency crisis, or a market collapse somewhere, the international stock markets seem to fall together, making them look like they are highly correlated
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Chapter 20: Investments in Real Assets
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Sample Questions
Q1) Which of the following allow the individual to invest in gold without actually owning gold?
A)Gold stock
B)Gold futures
C)Options on gold futures
D)All of the above
Q2) Under an equity participation arrangement, the lender not only provides the borrowed capital, but part of the equity ownership funds as well.
A)True
B)False
Q3) Collectible items are considered to be real assets.
A)True
B)False
Q4) A real estate loan that brings in a new lender is the:
A)adjustable rate mortgage.
B)graduate payment mortgage.
C)second mortgage.
D)None of the above
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Page 22
Chapter 21: Alternative Investments: Private Equity and Hedge Funds
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Sample Questions
Q1) Limited partners in venture capital investment funds typically receive ____ of the profits.
A)20%
B)100%
C)50%
D)80%
Q2) A strategy that buys a convertible security for the income and then sells the common stock short is called:
A)convertible arbitrage.
B)no-bias arbitrage.
C)long/short bias.
D)merger arbitrage.
Q3) Other types of hedge funds deal in areas like:
A)collectible football cards.
B)artwork masterpieces.
C)currencies and commodities.
D)collectible muscle cars.
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Page 23
Chapter 22: Measuring Risks and Returns of Portfolio Managers
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Sample Questions
Q1) A fund manager has almost total control over the beta of his portfolio.
A)True
B)False
Q2) A mutual fund with excess returns very similar to those of the market will have an R<sup>2</sup> (coefficient of determination) of:
A)slightly less than 1.
B)slightly greater than 1.
C)greater than or less than one.
D)There is not enough information to tell
Q3) To achieve effective diversification, a fund must have 80 to 100 different securities.
A)True
B)False
Q4) Excess returns are equal to the:
A)total portfolio return minus the beta.
B)total portfolio return minus the return on the S&P 500.
C)total portfolio return minus the risk-free rate.
D)total portfolio return minus the standard deviation.
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Chapter 23: A Comprehensive Analysis for Real Estate
Investment Decisions
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Sample Questions
Q1) An apartment complex has net operating income of $15,000, depreciation of $8,000, and interest expense of $13,000. The tax rate is 30%. a) What is taxable income or loss?
B) What is the tax shield benefit or tax owed?
Q2) A duplex was purchased for $120,000, and depreciation of $3,300 has been taken for the last seven years. The net proceeds from the sale of the property were $135,000. A) Assuming the property qualifies for capital gains treatment at a 15% rate, what is the tax owed?
B) What are the net funds from the sale?
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25
Chapter 24: The Makeup of Institutional Investors
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Sample Questions
Q1) ___________ represent permanent capital funds that are donated to universities, churches, or civic organizations.
A)Trusts
B)Endowments
C)Commingled funds
D)Annuities
Q2) The largest category of institutional investors is:
A)foundations.
B)personal trusts.
C)mutual savings banks.
D)pension funds.
Q3) Pension funds represent a declining segment of the institutional market.
A)True
B)False
Q4) Organizations responsible for bringing together large pools of capital for purposes of reinvestment are called:
A)individual investors.
B)institutional investors.
C)social security clubs.
D)B and C
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