Quantitative Finance
Chapter Exam Questions
Course Introduction
Quantitative Finance is a course that explores the application of mathematical models, statistical techniques, and computational tools to analyze financial markets and securities. Students will learn essential concepts such as pricing of derivatives, risk management, portfolio optimization, and financial engineering. The course emphasizes the use of quantitative methods including stochastic calculus, time series analysis, and programming for modeling market behavior and making informed investment decisions. Real-world case studies and practical exercises reinforce the theoretical foundations, preparing students for careers in financial analysis, trading, risk management, and related fields.
Recommended Textbook Investments 9th Edition by Zvi Bodie
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Chapter 1: The Investment Environment
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Q1) _______ are examples of financial intermediaries.
A)Commercial banks
B)Insurance companies
C)Investment companies
D)Credit unions
E)All of the above
Answer: E
Q2) A disadvantage of using stock options to compensate managers is that
A)it encourages mangers to undertake projects that will increase stock price.
B)it encourages managers to engage in empire building.
C)it can create an incentive for mangers to manipulate information to prop up a stock price temporarily, giving them a chance to cash out before the price returns to a level reflective of the firm's true prospects.
D)all of the above.
E)none of the above.
Answer: C
Q3) Discuss securitization as it relates to the field of investments.
Answer: Securitization refers to aggregating underlying financial assets, su
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Chapter 2: Asset Classes and Financial Instruments
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Q1) If the market prices of each of the 30 stocks in the Dow Jones Industrial Average (DJIA)all change by the same percentage amount during a given day,which stock will have the greatest impact on the DJIA?
A)The stock trading at the highest dollar price per share.
B)The stock having the greatest amount of debt in its capital structure.
C)The stock having the greatest amount of equity in its capital structure.
D)The stock having the lowest volatility.
E)None of the above.
Answer: A
Q2) Commercial paper is a short-term security issued by ________ to raise funds.
A)the Federal Reserve Bank
B)commercial banks
C)large, well-known companies
D)the New York Stock Exchange
E)state and local governments
Answer: C
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Chapter 3: How Securities are Traded
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Q1) The minimum revenue required for an initial listing on the New York Stock Exchange is
A)$2,000,000
B)$25,000,000
C)$50,000,000
D)$75,000,000
E)100,000,000
Answer: D
Q2) The trading of stock that was previously issued takes place
A)in the secondary market.
B)in the primary market.
C)usually with the assistance of an investment banker.
D)A and B.
E)B and C.
Answer: A
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Chapter 4: Mutual Funds and Other Investment Companies
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Q1) Of the following types of mutual funds,an investor that wishes to invest in a diversified portfolio of stocks worldwide (including the U.S.)should choose
A)international funds.
B)global funds.
C)regional funds.
D)emerging market funds.
E)none of the above.
Q2) Most actively managed mutual funds,when compared to a market index such as the Wilshire 5000,
A)beat the market return in all years.
B)beat the market return in most years.
C)exceed the return on index funds.
D)do not outperform the market.
E)None of the above is a correct statement.
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) List and describe the more important types of mutual funds according to their investment policy and use.
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Chapter 5: Introduction to Risk,return,and the Historical Record
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Q1) You purchased a share of stock for $65.One year later you received $2.37 as a dividend and sold the share for $63.What was your holding-period return?
A)0.57%
B)-0.2550%
C)-0.89%
D)1.63%
E)none of the above
Q2) Historical records regarding return on stocks,Treasury bonds,and Treasury bills between 1926 and 2009 show that
A)stocks offered investors greater rates of return than bonds and bills.
B)stock returns were less volatile than those of bonds and bills.
C)bonds offered investors greater rates of return than stocks and bills.
D)bills outperformed stocks and bonds.
E)treasury bills always offered a rate of return greater than inflation.
Q3) Discuss why common stocks must earn a risk premium.
Q4) Discuss the relationships between interest rates (both real and nominal),expected inflation rates,and tax rates on investment returns.
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Chapter 6: Risk Aversion and Capital Allocation to Risky Assets
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Q1) Consider a risky portfolio,A,with an expected rate of return of 0.15 and a standard deviation of 0.15,that lies on a given indifference curve.Which one of the following portfolios might lie on the same indifference curve?
A)E(r) = 0.15; Standard deviation = 0.20
B)E(r) = 0.15; Standard deviation = 0.10
C)E(r) = 0.10; Standard deviation = 0.10
D)E(r) = 0.20; Standard deviation = 0.15
E)E(r)= 0.10; Standard deviation = 0.20
Q2) Which of the following statements is (are)false?
I.Risk-averse investors reject investments that are fair games.
II.Risk-neutral investors judge risky investments only by the expected returns.
III.Risk-averse investors judge investments only by their riskiness.
IV.Risk-loving investors will not engage in fair games.
A)I only
B)II only
C)I and II only
D)II and III only
E)III,and IV only
Q3) Discuss the differences between investors who are risk averse,risk neutral,and risk loving.
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Chapter 7: Optimal Risky Portfolios
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Q1) Discuss how the investor can use the separation theorem and utility theory to produce an efficient portfolio suitable for the investor's level of risk tolerance.
Q2) 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?
Q3) When borrowing and lending at a risk-free rate are allowed,which Capital Allocation Line (CAL)should the investor choose to combine with the efficient frontier?
I.The one with the highest reward-to-variability ratio.
II.The one that will maximize his utility.
III.The one with the steepest slope.
IV.The one with the lowest slope.
A)I and III
B)I and IV
C)II and IV
D)I only
E)I,II,and III
Q4) State Markowitz's mean-variance criterion.Give some numerical examples of how the criterion would be applied.
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Chapter 8: Index Models
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Q1) A single-index model uses __________ as a proxy for the systematic risk factor.
A)a market index, such as the S&P 500
B)the current account deficit
C)the growth rate in GNP
D)the unemployment rate
E)none of the above
Q2) Consider the single-index model.The alpha of a stock is 0%.The return on the market index is 16%.The risk-free rate of return is 5%.The stock earns a return that exceeds the risk-free rate by 11% and there are no firm-specific events affecting the stock performance.The of the stock is _______.
A)0.67
B)0.75
C)1.0
D)1.33
E)1.50
Q3) Discuss the advantages of the single-index model over the Markowitz model in terms of numbers of variable estimates required and in terms of understanding risk relationships.
Q4) Discuss the security characteristic line (SCL).
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Chapter 9: The Capital Asset Pricing Model
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Q1) According to the Capital Asset Pricing Model (CAPM),underpriced securities
A)have positive betas.
B)have zero alphas.
C)have negative betas.
D)have positive alphas.
E)none of the above.
Q2) According to the Capital Asset Pricing Model (CAPM)a well diversified portfolio's rate of return is a function of
A)systematic risk.
B)unsystematic risk.
C)unique risk.
D)reinvestment risk.
E)none of the above.
Q3) Discuss the differences between the capital market line and the security market line.
Q4) Discuss the assumptions of the capital asset pricing model,and how these assumptions relate to the "real world" investment decision process.
Q5) Discuss the mutual fund theorem.
Q6) List and discuss two of the assumptions of the CAPM.
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Chapter 10: Arbitrage Pricing Theory and Multifactor Models of
Risk and Return
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Q1) Suppose you are working with two factor portfolios,Portfolio 1 and Portfolio 2.The portfolios have expected returns of 15% and 6%,respectively.Based on this information,what would be the expected return on well-diversified portfolio A,if A has a beta of 0.80 on the first factor and 0.50 on the second factor? The risk-free rate is 3%.
A)15.2%
B)14.1%
C)13.3%
D)10.7%
E)8.4%
Q2) Consider a well-diversified portfolio,A,in a two-factor economy.The risk-free rate is 5%,the risk premium on the first factor portfolio is 4% and the risk premium on the second factor portfolio is 6%.If portfolio A has a beta of 0.6 on the first factor and 1.8 on the second factor,what is its expected return?
A)7.0%
B)8.0%
C)18.2%
D)13.0%
E)13.2%
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Chapter 11: The Efficient Market Hypothesis
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Q1) When Maurice Kendall first examined stock price patterns in 1953,he found that
A)certain patterns tended to repeat within the business cycle.
B)there were no predictable patterns in stock prices.
C)stocks whose prices had increased consistently for one week tended to have a net decrease the following week.
D)stocks whose prices had increased consistently for one week tended to have a net increase the following week.
E)the direction of change in stock prices was unpredictable,but the amount of change followed a distinct pattern.
Q2) The Food and Drug Administration (FDA)just announced yesterday that they would approve a new cancer-fighting drug from King.You observe that King had an abnormal return of 0% yesterday.This suggests that
A)the market is not efficient.
B)King stock will probably rise in value tomorrow.
C)King stock will probably fall in value tomorrow.
D)the approval was already anticipated by the market.
E)none of the above.
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Chapter 12: Behavioral Finance and Technical Analysis
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Q1) The CAPM applies to
A)portfolios of securities only.
B)individual securities only.
C)efficient portfolios of securities only.
D)efficient portfolios and efficient individual securities only.
E)all portfolios and individual securities.
Q2) The risk-free rate is 7 percent.The expected market rate of return is 15 percent.If you expect a stock with a beta of 1.3 to offer a rate of return of 12 percent,you should
A)buy the stock because it is overpriced.
B)sell short the stock because it is overpriced.
C)sell the stock short because it is underpriced.
D)buy the stock because it is underpriced.
E)none of the above,as the stock is fairly priced.
Q3) A "fairly priced" asset lies
A)above the security market line.
B)on the security market line.
C)on the capital market line.
D)above the capital market line.
E)below the security market line.
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Chapter 13: Empirical Evidence on Security Returns
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Q1) In the results of the earliest estimations of the security market line by Lintner (1965)and by Miller and Scholes (1972),it was found that the average difference between a stock's return and the risk-free rate was ________ to its nonsystematic risk. A)positively related B)negatively related C)unrelated D)related in a nonlinear fashion
E)none of the above
Q2) In the 1972 empirical study by Black,Jensen,and Scholes,they found that the estimated slope of the security market line was _______ what the CAPM would predict. A)higher than B)equal to C)less than D)twice as much as E)more information is required to answer this question
Q3) Discuss Roll's critique of the CAPM.
Q4) Describe some of the ways the CAPM is applied in practice.
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Chapter 14: Bond Prices and Yields
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Q1) A coupon bond pays annual interest,has a par value of $1,000,matures in 12 years,has a coupon rate of 8.7%,and has a yield to maturity of 7.9%.The current yield on this bond is
A)8.39%
B)8.43%
C)8.83%
D)8.66%
E)none of the above
Q2) Which one of the following statements about convertibles is true?
A)The longer the call protection on a convertible, the less the security is worth.
B)The more volatile the underlying stock, the greater the value of the conversion feature.
C)The smaller the spread between the dividend yield on the stock and the yield-to-maturity on the bond, the more the convertible is worth.
D)The collateral that is used to secure a convertible bond is one reason convertibles are more attractive than the underlying stock.
E)Convertibles are not callable.
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Chapter 15: The Term Structure of Interest Rates
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Q1) What should the purchase price of a 2-year zero coupon bond be if it is purchased at the beginning of year 2 and has face value of $1,000?
A)$877.54
B)$888.33
C)$883.32
D)$894.21
E)$871.80
Q2) What is,according to the expectations theory,the expected forward rate in the third year?
A)7.23
B)9.37%
C)9.00%
D)10.9%
E)none of the above
Q3) What is the yield to maturity of a 3-year zero coupon bond?
A)7.00%
B)9.00%
C)6.99%
D)4%
E)none of the above
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Chapter 16: Managing Bond Portfolios
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Q1) Duration measures
A)weighted average time until a bond's half-life.
B)weighted average time until cash flow payment.
C)the time required to make excessive profit from the investment.
D)A and C.
E)B and C.
Q2) Which of the following offers a bond index?
A)Merrill Lynch
B)Salomon
C)Barclays Capital
D)All of the above
E)All but Merrill Lynch
Q3) The duration of a perpetuity with a yield of 6% is
A)13.50 years.
B)12.11 years.
C)17.67 years.
D)cannot be determined.
E)none of the above.
Q4) Discuss rate anticipation swaps as a bond portfolio management strategy.
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Chapter 17: Options Markets: Introduction
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Q1) Fiscal policy generally has a _______ direct impact than monetary policy on the economy,and the formulation and implementation of fiscal policy is ______ than that of monetary policy.
A)more, quicker
B)more, slower
C)less, quicker
D)less, slower
E)Cannot tell from the information given.
Q2) Demand-side economics is concerned with _______.
A)government spending and tax levels
B)monetary policy
C)fiscal policy
D)A and B
E)A,B,and C
Q3) If the economy is strong,the after-tax profit of Firm A will be _______.
A)$0
B)$6,000
C)$36,000
D)$60,000
E)none of the above
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Chapter 18: Option Valuation
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Q1) Medtronic Company has an expected ROE of 16%.The dividend growth rate will be ________ if the firm follows a policy of paying 70% of earnings in the form of dividends.
A)3.0%
B)6.0%
C)7.2%
D)4.8%
E)none of the above
Q2) You are considering acquiring a common stock that you would like to hold for one year.You expect to receive both $3.50 in dividends and $42 from the sale of the stock at the end of the year.The maximum price you would pay for the stock today is _____ if you wanted to earn a 10% return.
A)$23.91
B)$24.11
C)$26.52
D)$27.50
E)none of the above
Q3) Discuss the Gordon,or constant discounted dividend,model of common stock valuation.Include in your discussion the advantages,disadvantages,and assumptions of the model.
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Chapter 19: Futures Markets
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Q1) Refer to the financial statements of Black Barn Company.The firm's quick ratio for 2009 is _____.
A)1.69
B)1.52
C)1.23
D)1.07
E)1.00
Q2) Refer to the financial statements of Black Barn Company.The firm's fixed asset turnover ratio for 2009 is _____.
A)2.04
B)2.58
C)2.97
D)1.58
E)none of the above
Q3) Common size balance sheets make it easier to compare firms ____________.
A)with different degree of leverage
B)of different sizes
C)in different industries
D)that use different inventory valuation methods (FIFO vs.LIFO)
E)none of the above
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Chapter 20: Futures, swaps, and Risk Management
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Q1) The price that the writer of a put option receives to sell the option is called the A)premium
B)exercise price
C)execution price
D)acquisition price
E)strike price
Q2) An American call option can be exercised
A)any time on or before the expiration date.
B)only on the expiration date.
C)any time in the indefinite future.
D)only after dividends are paid.
E)none of the above.
Q3) Describe the protective put.What are the advantages of such a strategy?
Q4) Binary Options
A)are based on two possible outcomes - yes or no.
B)may make a payoff of a fixed amount if a specified event happens.
C)may make a payoff of a fixed amount if a specified event does not happen.
D)A and B only.
E)A,B,and C.
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Chapter 21: Macroeconomic and Industry Analysis
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Q1) Discuss the relationship between option prices and time to expiration,volatility of the underlying stocks,and the exercise price.
Q2) A put option is currently selling for $6 with an exercise price of $50.If the hedge ratio for the put is -0.30 and the stock is currently selling for $46,what is the elasticity of the put?
A)2.76
B)2.30
C)-7.67
D)-2.76
E)-2.30
Q3) If the hedge ratio for a stock call is 0.30,the hedge ratio for a put with the same expiration date and exercise price as the call would be ________.
A)0.70
B)0.30
C)-0.70
D)-0.30
E)-.17
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Chapter 22: Equity Valuation Models
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Q1) Metals and energy currency futures contracts are actively traded on A)copper.
B)platinum.
C)weather.
D)A and B.
E)all of the above.
Q2) Which of the following is false about profits from futures contracts?
A)The person with the long position gets to decide whether to exercise the futures contract and will only do so if there is a profit to be made.
B)It is possible for both the holder of the long position and the holder of the short position to earn a profit.
C)The clearinghouse makes most of the profit.
D)The amount that the holder of the long position gains must equal the amount that the holder of the short position loses.
E)A,B,and C
Q3) Describe the differences between futures and forward contracts.
Q4) Distinguish between the short and long positions in futures transactions.
Q5) Discuss marking to market and margin accounts in the futures market.
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Chapter 23: Financial Statement Analysis
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Q1) E-Minis typically have a value of ____________ percent of the standard contract and exist for ____________.
A)50; individual stocks and commodities
B)50; stock indexes and foreign currencies
C)40; stock indexes and commodities
D)20; individual stocks and commodities
E)20; stock indexes and foreign currencies
Q2) Which one of the following stock index futures has a multiplier of 25 euros times the index?
A)FTSE 100
B)DJ Euro Stoxx - 50
C)Nikkei
D)DAX-30
E)A and B
Q3) How many contracts should you buy or sell to hedge your position?
A)sell 3.477
B)buy 3.477
C)sell 4.236
D)buy 4.236
E)sell 11.235
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Chapter 24: Portfolio Performance Evaluation
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Q1) Suppose two portfolios have the same average return,the same standard deviation of returns,but Buckeye Fund has a higher beta than Gator Fund.According to the Treynor measure,the performance of Buckeye Fund
A)is better than the performance of Gator Fund.
B)is the same as the performance of Gator Fund.
C)is poorer than the performance of Gator Fund.
D)cannot be measured as there is no data on the alpha of the portfolio.
E)none of the above is true.
Q2) Suppose you purchase one share of the stock of Cereal Correlation Company at the beginning of year 1 for $50.At the end of year 1,you receive a $1 dividend,and buy one more share for $72.At the end of year 2,you receive total dividends of $2 (i.e.,$1 for each share),and sell the shares for $67.20 each.The time-weighted return on your investment is __________.
A)10.0%
B)8.7%
C)19.7%
D)17.6%
E)none of the above
Q3) Discuss,in general,the performance attribution procedures.
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Chapter 25: International Diversification
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Q1) Using the S&P500 portfolio as a proxy of the market portfolio
A)is appropriate because U.S.securities represent more than 60% of world equities.
B)is appropriate because most U.S.investors are primarily interested in U.S.securities.
C)is appropriate because most U.S.and non-U.S.investors are primarily interested in U.S.securities.
D)is inappropriate because U.S.securities make up less than 40% of world equities.
E)is inappropriate because the average U.S.investor has less than 20% of her portfolio in non-U.S.equities.
Q2) The __________ equity market had the lowest average U.S.dollar standard deviation of excess returns between 2000 and 2009.
A)Turkish
B)U.S.
C)Indonesian
D)U.K.
E)none of the above
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Chapter 26: Hedge Funds
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Q1) An example of a ______ strategy is the mispricing of a futures contract that must be corrected by contract expiration.
A)market neutral
B)directional
C)relative value
D)divergence
E)convergence
Q2) ______ 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
Q3) Explain the five major differences between hedge funds and mutual funds.
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Chapter 27: The Theory of Active Portfolio Management
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Q1) One property of a risky portfolio that combines an active portfolio of mispriced securities with a market portfolio is that,when optimized,its squared Sharpe measure increases by the square of the active portfolio's A)Sharpe ratio.
B)information ratio.
C)alpha.
D)Treynor measure.
E)none of the above.
Q2) Even low-quality forecasts have proven to be valuable because R-squares of only ____________ in regressions of analysts' forecasts can be used to substantially improve portfolio performance.
A)0.656
B)0.452
C)0.258
D)0.153
E)0.001
Q3) Discuss the Treynor-Black model.
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Chapter 28: Investment Policy and the Framework of the
CFA Institute Appendices
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Q1) The scope and purpose section of an Investment Policy Statement for individual investors typically consists of defining the ________.
A)return, distribution, and risk requirements
B)process for review of the IPS
C)appropriate metrics for risk measurement
D)relevant constraints
E)context,investor,and structure
Q2) Assume that at retirement you have accumulated $825,000 in a variable annuity contract.The assumed investment return is 5.5% and your life expectancy is 18 years.What is the hypothetical constant benefit payment?
A)$73,358.93.
B)$33,333.33.
C)$51,481.38.
D)$52,452.73.
E)Cannot tell without additional information.
Q3) Discuss some of the advantages "personal funds" have over mutual funds.
Q4) Discuss four factors you would need to include if you were constructing a retirement planning worksheet.
Q5) Discuss investments as a hedge against inflation
To view all questions and flashcards with answers, click on the resource link above. Page 30