Principles of Investments
Study Guide Questions
Course Introduction
Principles of Investments introduces students to the foundational concepts, tools, and techniques used in making informed investment decisions. The course covers the structure and functioning of financial markets, risk and return analysis, the valuation of stocks and bonds, portfolio theory, and the basics of asset allocation. Students will explore different types of investment vehicles, such as mutual funds and exchange-traded funds, and learn about the impact of economic and financial factors on investment choices. Emphasis is placed on developing analytical skills necessary to evaluate investment opportunities and strategies in a constantly evolving marketplace.
Recommended Textbook
Analysis of Investments and Mangement of Portfolios International 10th Edition by Reilly
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Chapter 1: An Overview of the Investment Process
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Q1) An investment is the current commitment of dollars over time to derive future payments to compensate the investor for the time funds are committed,the expected rate of inflation and the uncertainty of future payments.
A)True
B)False
Answer: True
Q2) Refer to Exhibit 1.3.What was your geometric mean annual yield for the investment in XMen?
A) 0.25
B) 0.40
C) 1.8
D) 0.1247
E) 0.1462
Answer: D
Q3) The holding period return (HPR)is equal to the holding period yield (HPY)stated as a percentage.
A)True
B)False
Answer: False
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Chapter 2: The Asset Allocation Decision
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Q1) For an investor with a time horizon of 4 years and higher risk tolerance,an appropriate asset allocation strategy would be
A) 100% cash
B) 30% cash, 50% bonds, and 20% stocks
C) 20% cash, 40% bonds, and 40% stocks
D) 10% cash, 40% bonds, and 50% stocks
E) 100% bonds
Answer: C
Q2) Which of the following is <b>not </b>considered to be an investment objective?
A) Capital preservation
B) Capital appreciation
C) Current income
D) Total return
E) None of the above (that is, all are considered investment objectives)
Answer: E
Q3) The portfolio mixes of institutional investors around the world are approximately the same.
A)True
B)False
Answer: False
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Chapter 3: The Global Market Investment Decision
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Sample Questions
Q1) Refer to Exhibit 3.1.What is the real return on long-term corporate bonds?
A) 1.02%
B) 3.68%
C) 4.71%
D) 11.27%
E) 13.33%
Answer: C
Q2) Certificates of ownership issued by a U.S.bank that represent indirect ownership of a certain number of shares of a specific foreign firm on deposit in a bank in the firm's home country are known as:
A) American Depository Receipts (ADRs)
B) Exchange Traded Funds (ETFs)
C) Warrants
D) Options
E) Futures
Answer: A
Q3) A call option is usually issued in conjunction with convertible bonds.
A)True
B)False
Answer: False
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Chapter 4: Securities Markets: Organization and Operation
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Q1) Which of the following is <b>not </b>a characteristic of shelf registrations? Shelf registrations:
A) Were introduced by Rule 415.
B) Allow large firms to register security issues and sell them piecemeal during the following six years.
C) Provide flexibility and reduce registration fees and expenses.
D) Are typically used for the sale of straight debentures rather than common stock or convertible issues.
E) All of the above are characteristics of shelf registrations.
Q2) Only the stocks of large companies are traded in the primary market. A)True B)False
Q3) The value of the stocks traded in the over-the-counter market is greater than the combined values of the stocks traded on the New York Stock Exchange and the American Stock Exchange combined. A)True B)False
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Chapter 5: Security-Market Indexes
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Q1) Refer to Exhibit 5.2.What is the divisor at the beginning of January 16th?
A) 1.9375
B) 3.0
C) 2.5
D) 2.2734
E) None of the above
Q2) A price-weighted index such as the DJIA is a geometric mean of current stock prices.
A)True
B)False
Q3) The Ryan Treasury Index is an example of a
A) Bond market indicator series.
B) Stock market indicator series.
C) Composite security market series.
D) World market series.
E) Commodity market series.
Q4) The NYSE series should have higher rates of return and risk measures than the AMEX and OTC series.
A)True
B)False
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Chapter 6: Efficient Capital Markets
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Q1) Researchers have found a positive relationship between default spread and stock returns in the long run because a large default spread implies
A) a high risk premium and higher expected returns.
B) a high risk premium and lower expected returns.
C) a low risk premium and higher expected returns.
D) a low risk premium and lower expected returns.
E) none of the above.
Q2) Refer to Exhibit 6.3.What is the abnormal rate of return for Elliot during period t using only the aggregate market return (ignore differential systematic risk)?
A) 1.50
B) 1.10
C) -1.50
D) -5.10
E) -8.00
Q3) The weak form of the efficient market hypothesis contends that stock prices fully reflect all public and private information.
A)True
B)False
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Chapter 7: An Introduction to Portfolio Management
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Q1) Refer to Exhibit 7.14.What is the standard deviation of the stock A and B portfolio?
A) 0.0%
B) 0.5%
C) 4.1%
D) 6.9%
E) 20.3%
Q2) Consider two securities,A and B.Security A and B have a correlation coefficient of 0.65.Security A has standard deviation of 12,and security B has standard deviation of 25.Calculate the covariance between these two securities.
A) 300
B) 461.54
C) 261.54
D) 195
E) 200
Q3) In a three asset portfolio the standard deviation of the portfolio is one third of the square root of the sum of the individual standard deviations.
A)True
B)False
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Chapter 8: An Introduction to Asset Pricing Models
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Q1) Refer to Exhibit 8.2.What are the expected (required)rates of return for the three stocks (in the order X,Y,Z)?
A) 16.50%, 5.50%, 22.00%
B) 9.25%, 10.5%, 7.5%
C) 21.25%, 8.33%, 11.43%
D) 6.20%, 2.20%, 8.20%
E) 15.00%, 3.50%, 7.30%
Q2) There can be only one zero-beta portfolio.
A)True
B)False
Q3) Refer to Exhibit 8.2.What are the estimated rates of return for the three stocks (in the order X,Y,Z)?
A) 21.25%, 8.33%, 11.43%
B) 6.20%, 2.20%, 8.20%
C) 16.50%, 5.50%, 22.00%
D) 9.25%, 10.5%, 7.5%
E) 15.00%, 3.50%, 7.30%
Q4) The market portfolio consists of all risky assets.
A)True
B)False
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Chapter 9: Multifactor Models of Risk and Return
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Q1) A study by Chen,Roll,and Ross in 1986 examined all of the following factors in applying the Arbitrage Pricing Theory (APT)<b>except</b> the
A) Return on a market value-weighted return.
B) Monthly growth rate in U.S. industrial production.
C) Change in the consumer price index (CPI).
D) Expected change in the bond credit spread.
E) All of the above factors were used in their 1986 study.
Q2) Under the following conditions,what are the expected returns for stocks X and Y? \(\begin{array}{ll}
\lambda^{0}=0.05 & b_{x, 1}=0.90 \\
k_{1}=0.03 & b_{x, 2}=1.60 \\
k_{2}=0.04 & b_{\mathrm{y}, 1}=1.50 \\ & b_{\mathrm{v}, 2}=0.85
\end{array}\)
A) 14.1% and 12.9%
B) 12.5% and 19.5%
C) 19.5% and 18.5%
D) 21.2% and 18.5%
E) None of the above
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Chapter 10: Analysis of Financial Statements
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Sample Questions
Q1) Bond rating agencies include the analysis of financial ratios in arriving at corporate bond ratings.
A)True
B)False
Q2) An estimate of the discounted value of future lease payments can be obtained by:
A) Discounting future lease payments at the firm's cost of debt.
B) Discounting future lease payments at the firm's cost of capital.
C) Applying a multiple to forthcoming minimum lease payments.
D) a or b.
E) a or c.
Q3) Refer to Exhibit 10.9.Calculate the total asset turnover ratio for the firm.
A) 0.76
B) 1.31
C) 1.64
D) 2.81
E) 3.24
Q4) Some factors that determine business risk include sales variability and debt to equity ratio.
A)True
B)False
Page 12
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Chapter 11: Security Valuation Principles
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Q1) What is the value of a preferred stock that has a par value of $100,a required rate of return of 11%,and pays a 7 percent annual dividend?
A) $63.64
B) $157.14
C) $909.09
D) $1,428.57
E) $2,500.00
Q2) A company has a dividend payout ratio of 35 percent.If the company's return on equity is 15 percent,what is the expected growth rate if no new outside financing is used?
A) 4.50%
B) 5.25%
C) 7.75%
D) 8.25%
E) 9.75%
Q3) The risk premium is impacted by business risk,financial risk,and liquidity risk. A)True B)False
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Chapter 12: Macroanalysis and Microvaluation of the Stock Market
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Q1) In well developed economies,markets are not affected by changes in expected inflation.
A)True
B)False
Q2) Diffusion indexes indicate the spread in interest rates between major economies.
A)True
B)False
Q3) A microeconomic estimate of the market earnings multiple requires an estimate for which of the following variables?
A) Dividend payout ratio
B) Return on equity
C) Real RFR
D) All of the above
E) None of the above
Q4) There is a negative relationship between the capacity utilization rate and the profit margin.
A)True
B)False
Page 14
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Chapter 13: Industry Analysis
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Q1) Which of the following statements about the business cycle is <b>false</b>?
A) Toward the end of a recession, financial stocks typically increase in value as investment and borrowing activities accelerate.
B) Once the economy hits a trough and begins to recover, consumer durable stocks become attractive investments.
C) Once the economy has recovered and current levels of consumption are sustainable, businesses may consider modernizing or expanding, thus stocks of capital goods industries become attractive investments.
D) As the business cycle reaches a peak, inflation rates decrease.
E) None of the above (that is, all are true statements)
Q2) Refer to Exhibit 13.1.Calculate the per share EBIT for the year 2004.
A) $95.33
B) $70.42
C) $85.56
D) $95.89
E) $75.32
Q3) Structural changes do have a cyclical pattern.
A)True
B)False
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Chapter 14: Company Analysis and Stock Valuation
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Q1) When a firm seeks to identify itself as unique in its industry in an area that is important to buyers it is known as a
A) Defensive strategy
B) Differentiation strategy
C) Low-cost strategy
D) Focused strategy
E) Value strategy
Q2) In a(n)____ strategy,a firm seeks to identify itself as unique within its industry.
A) Defensive
B) Offensive
C) Low-cost
D) Differentiation
E) None of the above
Q3) Porter contends that ____ and ____ are two important competitive strategies.
A) Low cost leadership, barrier to entry
B) New entrant deterrent, differentiation
C) Low cost leadership, differentiation
D) Differentiation, monopolistic
E) Monopolistic simulation, differentiation
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Chapter 15: Equity Portfolio Management Stragtegies
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Q1) Active equity portfolio management is a long-term buy-and-hold strategy.
A)True
B)False
Q2) Style investing involves constructing portfolios in such a way as to capture one or more of the characteristics of equity securities.
A)True
B)False
Q3) Growth oriented investors focus on the price component of the Price/Earnings ratio. A)True
B)False
Q4) A contrarian investment strategy is based on the belief that A) Stock returns are mean reverting.
B) The best time to buy is when other investors are bullish.
C) Rising stocks will continue to rise.
D) Passive management is preferred to active management.
E) A long/short portfolio will outperform a long only portfolio.
Q5) Growth stocks consistently outperform value stocks. A)True
B)False
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Chapter 16: Technical Analysis
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Q1) A type of charting which normally disregards both time and volume is the
A) Bar chart.
B) Point and figure chart.
C) Pie chart.
D) Histogram.
E) A linear regression graph.
Q2) Advances and declines are associated with market
A) Efficiency.
B) Position.
C) Diffusion.
D) Depth.
E) Breadth.
Q3) A rise in the Confidence Index published by Barron's is an indication investors will purchase more lower-quality bonds.
A)True
B)False
Q4) A high put/call ratio indicates a pervasive bearish attitude by sophisticated investors so it is a bearish indicator.
A)True
B)False
Page 18
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Chapter 17: Bond Fundamentals
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Q1) Refer to Exhibit 17.1.What is the capital gains/loss yield on this bond?
A) -0.038%
B) 0.456%
C) 0.038%
D) -0.456%
E) None of the above
Q2) Bonds can have different types of collateral and can be either secured,unsecured or registered bonds.
A)True
B)False
Q3) The following are participating investors in bond markets:
A) U.S. Treasury.
B) Life insurance companies.
C) Commercial banks.
D) a and b.
E) b and c.
Q4) Public bonds differ from other debt because they are sold to the public rather than to a single investor.
A)True
B)False
Page 19
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Chapter 18: The Analysis and Valuation of Bonds
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Q1) Refer to Exhibit 18.3.Calculate the current price of the bond.
A) $964.90
B) $965.35
C) $981.41
D) $1035.45
E) $1035.85
Q2) Consider a bond with a 9% coupon and a current yield of 8 1/2%.What is this bond's price?
A) $1058.82
B) $1009.00
C) $1085.00
D) $1062.44
E) $1077.96
Q3) If the coupon payments are not reinvested during the life of the issue then the
A) Promised yield is greater than realized yield.
B) Promised yield is less than realized yield.
C) Nominal yield declines.
D) Nominal yield is greater than promised yield.
E) Current yield equals the yield to maturity.
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Chapter 19: Bond Portfolio Management Strategies
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Q1) The duration of a perpetual bond is always equal to its term to maturity.
A)True
B)False
Q2) Interest rate anticipation is the most conservative management strategy.
A)True
B)False
Q3) For a bond investor selecting a buy-and-hold strategy,which of the following would be the least important consideration?
A) Term to maturity
B) Indenture provisions
C) Coupon levels
D) Liquidity
E) Quality
Q4) Refer to Exhibit 19.1.The interest on one coupon for the candidate bond is
A) $2.97
B) $2.03
C) $1.80
D) $1.37
E) $3.49
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Chapter 20: An Introduction to Derivative Markets and Securities
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Q1) Forward contracts do not require an upfront premium.
A)True
B)False
Q2) Derivative instruments exist because
A) They help shift risk from risk-averse investors to risk-takers.
B) They help in forming prices.
C) They have lower investment costs.
D) Choices a and b
E) All of the above
Q3) According to put/call parity
A) Stock price + Call Price = Put Price + Risk Free Bond Price
B) Stock price + Put Price = Call Price + Risk Free Bond Price
C) Put price + Call Price = Stock Price + Risk Free Bond Price
D) Stock price - Put Price = Call Price + Risk Free Bond Price
E) Stock price + Call Price = Put Price - Risk Free Bond Price
Q4) The forward market has low liquidity relative to the futures market.
A)True
B)False
22
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Chapter 21: Forward and Futures Contracts
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Q1) The Chicago Board of Trade (CBT)uses conversion factors to correct for differences in deliverable bonds.
A)True
B)False
Q2) Refer to Exhibit 21.3.If 90-day LIBOR rises to the levels "predicted" by the implied forward rates,what will the dollar level of the bank's interest receipt be at the end of the third quarter?
A) $35,250.00
B) $36,375.00
C) $38,250.00
D) $41,005.50
E) None of the above
Q3) Refer to Exhibit 21.5.If the futures contract was currently available for 1250,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 the above.
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Chapter 22: Option Contracts
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Q1) Refer to Exhibit 22.1.If the spot rate at expiration is $0.85 and the put option was purchased,what is the dollar gain or loss?
A) $340 loss
B) $125 gain
C) $750 gain
D) $750 loss
E) $200 loss
Q2) Options on futures contracts are very popular because
A) They require the holder to purchase at a future date
B) Of their ability to create leverage
C) The seller of the futures contract is under no obligation
D) The amount of the underlying commodity is negotiable
E) None of the above
Q3) It is a violation of the securities laws to combine option contracts to achieve a customized payoff.
A)True B)False
Q4) Risk management is the driving force behind the futures options market. A)True B)False
Page 24
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Chapter 23: Swap Contracts,convertible Securities,and
Other Embedded Derivatives
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Q1) The conversion premium for a convertible bond is calculated as:
A) (Market Price + Minimum Value)/Minimum Value.
B) (Market Price/Minimum Value) × Minimum Value.
C) (Market Price + Minimum Value) × Minimum Value.
D) (Market Price - Minimum Value)/Minimum Value.
E) (Market Price × Minimum Value)/Minimum Value.
Q2) Suppose the premium on a three year,four percent floor is equal to the premium on a three year,eight percent cap.This combination is referred to as
A) Zero-cost warrant
B) Zero-premium strap
C) Zero-cost collar
D) Zero-premium swap
E) Zero-cost FRA
Q3) Risk management strategies involving interest rate agreements can be classified as forward-based or option-based.
A)True
B)False
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Chapter 24: Professional Money Management, alternative
Assets, and Industry Ethics
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Q1) Funds that normally contain a combination of common stock and fixed income securities are known as
A) Section 401(k) plans.
B) Balanced funds.
C) Contractual plans.
D) Income funds.
E) Flexible funds.
Q2) Fund of funds give investors access to hedge fund managers that might otherwise be unavailable to them.
A)True
B)False
Q3) In the case of open-end investment companies,shares of the company
A) Trade on the secondary market.
B) Can be bought from or sold to the investment company at the NAV.
C) Are determined by supply and demand.
D) a and c.
E) b and c.
Q4) In an investment company,the invested funds belong to many individuals.
A)True
B)False
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Chapter 25: Evaluation of Portfolio Performance
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Q1) Under the performance attribution analysis method,the ____ measures the manager's decision to over- or underweight a particular market segment in terms of that segment's return performance relative to the overall return to the benchmark.
A) Selection effect
B) Allocation effect
C) Distribution effect
D) Diversification effect
E) Attribution effect
Q2) Under the performance attribution analysis method,the ____ measures the manager's ability to form specific market segment portfolios that generate superior returns relative to the way in which the comparable market segment is defined in the benchmark portfolio weighted by the manager's actual market segment investment proportions.
A) Selection effect
B) Allocation effect
C) Distribution effect
D) Diversification effect
E) Attribution effect
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Chapter 26: Investment Return and Risk Analysis Questions
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Q1) 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 the above
Q2) An investment has a standard deviation of 12 percent and an expected return of 7 percent.What is the coefficient of variation for this investment?
A) 1.714
B) 1.372
C) 0.714
D) 0.583
E) 0.500
Q3) Refer to Exhibit 1A.2.The expected return for project X is
A) 0.0 percent
B) 0.5 percent
C) 2.5 percent
D) 5.0 percent
E) 7.5 percent
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Chapter 27: Investment and Retirement Plans
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Q1) Cash flows for nonlife insurance companies,such as property and casualty,are similar to cash flows of life insurance companies.
A)True
B)False
Q2) Endowment funds
A) Are formed from the contributions to charitable and educational institutions.
B) Are attractive investments for individuals with low liquidity needs.
C) Usually have very short investment horizons.
D) Provide retirement benefits for public employees.
E) Provide death benefits for its contributor's survivors.
Q3) Banks typically have short-term investment horizons because
A) They have a strong need for liquidity.
B) They offer short-term deposit accounts.
C) They are required to by federal and state laws.
D) Choices a and b
E) All of the above
Q4) Defined contribution pension plans promise to pay retirees a specific income stream after retirement.
A)True
B)False
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Chapter 28: Calculating Covariance and Correlation
Coefficient of Assets
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Q1) Refer to Exhibit 3A.1.Calculate the coefficient of correlation.
A) -0.456
B) -0.354
C) 0.000
D) 0.456
E) 3.538
Q2) Refer to Exhibit 3A.1.Calculate the covariance.
A) -32.20
B) -23.32
C) 1.00
D) 23.32
E) 32.20
Q3) 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
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Chapter 29: Portfolio Variance and Stock Weight
Calculations
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Q1) Refer to Exhibit 7A.1.Show the minimum portfolio variance for a two stock portfolio when r<sub>1.2</sub> = 1.
A) E(?<sub>2</sub>) ¸ [E(?<sub>1</sub>) - E(?<sub>2</sub>)]
B) E(?<sub>2</sub>) ¸ [E(?<sub>1</sub>) + E(?<sub>2</sub>)]
C) E(?<sub>1</sub>) ¸ [E(?<sub>1</sub>) - E(?<sub>2</sub>)]
D) E(?<sub>1</sub>) ¸ [E(?<sub>1</sub>) + E(?<sub>2</sub>)]
E) None of the above
Q2) Refer to Exhibit 7A.1.What weight of security 1 gives the minimum portfolio variance when r<sub>1.2 </sub>= .60,E(?<sub>1</sub>)= .10 and E(?<sub>2</sub>)= .16?
A) .0244
B) .3679
C) .5697
D) .6309
E) .9756
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Chapter 30: Portfolio Optimization with Negative
Correlation: Finding Minimum Variance and Weight
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Source URL: https://quizplus.com/quiz/24349
Sample Questions
Q1) Refer to Exhibit 7B.1.What is the value of W when r . = -1 and E(s )= .10 and E(s )= .12?
A) 45.46%
B) 50.00%
C) 59.45%
D) 54.55%
E) 74.55%
Q2) Refer to Exhibit 7B.1.Show the minimum portfolio variance for a portfolio of two risky assets when r . = -1.
A) E( 1) ¸ [E( 1) + E( 2)]
B) E( 1) ¸ [E( 1) - E( 2)]
C) E( 2) ¸ [E( 1) + E( 2)]
D) E( 2) ¸ [E( 1) - E( 2)]
E) None of the above
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