Security Analysis Exam Preparation Guide
Course Introduction
Security Analysis explores the fundamental principles and methodologies used to evaluate and value financial securities such as stocks, bonds, and other investment instruments. The course covers qualitative and quantitative analysis techniques, including financial statement analysis, industry and economic trend assessment, risk evaluation, and valuation models. Students will learn to interpret financial data, assess intrinsic value, and make informed investment decisions, while understanding market efficiency and behavioral factors that influence security prices. This course is essential for anyone interested in investment management, portfolio construction, or pursuing a career in finance.
Recommended Textbook
Investment Analysis and Portfolio Management 1st Canadian Edition by Frank K. Reilly
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Page 2
Chapter 1: The Investment Setting
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Sample Questions
Q1) Refer to Exhibit 1-8. Calculate the HPY for Stock 1.
A) 10%
B) 20%
C) 15%
D) 12%
E) 7%
Answer: B
Q2) The security market line (SML) graphs the expected relationship between
A) Business risk and financial risk
B) Systematic risk and unsystematic risk
C) Risk and return
D) Systematic risk and unsystematic return
E) None of the above
Answer: C
Q3) The rate of exchange between certain future dollars and certain current dollars is known as the pure rate of interest.
A)True
B)False
Answer: True
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Page 3
Chapter 2: The Asset Allocation Decision
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Sample Questions
Q1) One of the first steps in developing a financial plan is to purchase adequate life insurance.
A)True
B)False
Answer: True
Q2) For an investor with a time horizon of 6 to 10 years and higher risk tolerance, an appropriate asset allocation strategy would be
A) 100% stocks
B) 100% cash
C) 30% cash, 50% bonds, and 20% stocks
D) 10% cash, 30% bonds, and 60% stocks
E) 100% bonds
Answer: D
Q3) Important reasons for constructing a policy statement include:
A) Helps investors decide on realistic investment goals
B) Create a standard by which to judge the performance of the portfolio manager
C) Develop an instrument to judge risk
D) Choices a and b
E) All of the above
Answer: D
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Chapter 3: Selecting Investments in a Global Market
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Sample Questions
Q1) What is the original maturity of a Canadian Treasury note?
A) Zero years to five years.
B) Six months to ten years.
C) One year or less.
D) Over one year to ten years.
E) Over ten years.
Answer: D
Q2) Senior secured bonds are
A) The most senior bonds in a firm's capital structure.
B) Bonds with the lowest risk of default.
C) Bonds that are not backed by specific assets.
D) A and B
E) A and C
Answer: B
Q3) The U.S. equity and bond markets have grown in terms of their relative size of the world equity and bond market.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Securities Markets and the Economy
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Sample Questions
Q1) Secondary equity issues are new shares offered by firms that already have stock outstanding.
A)True
B)False
Q2) Investors can leverage their stock transactions with the use of
A) Margin orders
B) Stop loss orders
C) Limit orders
D) Market orders
E) Specialists
Q3) The over-the-counter market lists more stocks than the New York Stock Exchange.
A)True
B)False
Q4) Which of the following is not a characteristic of a good market for goods and services?
A) Timely and accurate information
B) Liquidity
C) Low transaction costs
D) External efficiency
E) All of the above are characteristics of a good market.
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Chapter 5: Efficient Capital Markets
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Sample Questions
Q1) Refer to Exhibit 5-6. What is the abnormal rate of return for Stock A when you consider its systematic risk measure (beta)?
A) -2.3%
B) -0.3%
C) 0.3%
D) 2.3%
E) 3.0%
Q2) The opportunity to take advantage of the downward pressure on stock prices that result from end-of-the-year tax selling is known as
A) The End-of-the-Year Effect.
B) The December Anomaly.
C) The End-of-the-Year Anomaly.
D) The January Anomaly.
E) The New Years Anomaly.
Q3) Studies concerning quarterly earnings reports indicate that information in quarterly statements is of value and can provide an above-average risk-adjusted return.
A)True
B)False
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Chapter 6: An Introduction to Portfolio Management
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Sample Questions
Q1) Refer to Exhibit 6-8. What is the standard deviation of this portfolio?
A) 4.51%
B) 5.94%
C) 6.75%
D) 7.09%
E) 8.62%
Q2) The optimal portfolio is identified at the point of tangency between the efficient frontier and the
A) highest possible utility curve.
B) lowest possible utility curve.
C) middle range utility curve.
D) steepest utility curve.
E) flattest utility curve.
Q3) Refer to Exhibit 6-13. Calculate the expected return for Magnum Oil.
A) 5.0
B) 10.3%
C) 13.7%
D) 17.5%
E) 20.0%
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Page 8
Chapter 7: Asset Pricing Models: Capm and Apt
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Sample Questions
Q1) Calculate the expected return for A Industries which has a beta of 1.75 when the risk free rate is 0.03 and you expect the market return to be 0.11.
A) 11.13%
B) 14.97%
C) 16.25%
D) 22.25%
E) 17.0%
Q2) Refer to Exhibit 7-8. The new prices now for stocks X, Y, and Z that will not allow for arbitrage profits are
A) $53.55, $54.4, $55.25
B) $45.35, $54.4, $55.25
C) $55.55, $56.35, $57.15
D) $50, $50, $50
E) $51.35, $47.79, $51.58.
Q3) There can be only one zero-beta portfolio.
A)True
B)False
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Chapter 8: Economic and Industry Analysis
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Sample Questions
Q1) Which of the following is needed to forecast the performance of the stock market using P/E?
A) The future earnings per share for the stock market
B) The earnings multiplier for the stock market
C) The earnings multiplier for the key industries
D) Choices a and b
E) None of the above.
Q2) "Downsizing" of corporate America in the 1990s is an example of structural change.
A)True
B)False
Q3) Refer to Exhibit 8-1. Calculate the industry year 2010 EBITDA per share.
A) $95.05
B) $89.15
C) $92.56
D) $94.73
E) $86.23
Q4) In the rapid accelerating growth stage, profit margins are typically very high.
A)True B)False
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Chapter 9: Company Analysis and Stock Valuation
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Sample Questions
Q1) Market value-added is a measure of ____ performance.
A) External
B) Internal
C) Competitive
D) Economic
E) None of the above.
Q2) A firm's competitive strategy can be either defensive or offensive.
A)True
B)False
Q3) To benefit from cost leadership a firm must command prices near the industry average.
A)True
B)False
Q4) The price/cash flow ratio has grown in prominence and use for valuing firms because many analysts contend that a firm's cash flow is less subject to manipulation than the firm's earnings per share.
A)True
B)False
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Chapter 10: Technical Analysis
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Sample Questions
Q1) Two major classes of technicians include the contrarians and those who "follow the smart money".
A)True
B)False
Q2) Which of the following is not an advantage of technical analysis identified by technicians?
A) Fundamental analysis depends heavily on financial accounting statements.
B) The majority of investors can not consistently process new information correctly.
C) Fundamental analysis may not time the investment properly when trading under- or over-valued securities.
D) The majority of investors cannot process new information quickly enough.
E) All of the above are advantages identified by technicians.
Q3) Candlestick charts indicate the price change from open to close by shading whether the market went down or up for the day.
A)True
B)False
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Chapter 11: Bond Fundamentals
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Sample Questions
Q1) Alternative institutions favour different sectors of the bond market based on A) The level of interest rates.
B) The tax code applicable to the institution.
C) The nature of the institution's asset structure
D) Choices a and b.
E) Choices b and c.
Q2) A nonrefunding provision prohibits a call and premature retirement of an issue from the proceeds of a lower-coupon refunding bond.
A)True
B)False
Q3) Which of the following is not a major rating agency for bonds?
A) Moody's
B) Standard & Poor's
C) Fitch Investor Services
D) Value Line
E) Dominion Bond Rating Service
Q4) All U.S. municipalities are required to buy insurance when they issue bonds.
A)True
B)False
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Chapter 12: The Analysis and Valuation of Bonds
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Sample Questions
Q1) Option adjusted duration can be calculated as
A) Duration of noncallable bond - duration of call option on the bond.
B) Duration of noncallable bond + duration of call option on the bond.
C) Duration of callable bond - duration of call option on the bond.
D) Duration of callable bond + duration of call option on the bond.
E) None of the above.
Q2) The yield to call is a more conservative yield measure whenever the price of a callable bond is quoted at a value
A) Equal to or greater than par plus one year's interest.
B) Equal to par.
C) Equal to par less one year's interest.
D) Less than par.
E) Five percent over par.
Q3) Refer to Exhibit 12-2. What is the Modified duration of the Talmart corporate bonds?
A) 3.43
B) 3.64
C) 3.76 D) 3.85 E) 4.11
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Page 14
Chapter 13: An Introduction to Derivative Markets and Securities
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Sample Questions
Q1) Refer to Exhibit 13-9. Calculate the payoffs of a long straddle at a stock price at expiration of $20 and a stock price at expiration of $45.
A) $6.35, $18.85
B) $29.65, $42.15
C) $21.65, $34.15
D) $8, $8
E) -$8, -$8
Q2) Refer to Exhibit 13-1. Calculate the return on a cash investment in the S&P 500 stock index over the same time period
A) 1.87%
B) -0.68%
C) -14.90%
D) 10.36%
E) None of the above
Q3) The initial value of a future contract is the price agreed upon in the contract.
A)True
B)False
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Page 15
Chapter 14: Derivatives: Analysis and Valuation
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Sample Questions
Q1) The conversion price parity for a convertible bond is defined as:
A) Market Price of Convertible Bond / Conversion Ration.
B) Market Price of Convertible Bond ´ Conversion Ration.
C) Market Price of Convertible Bond - Conversion Ration.
D) Market Price of Convertible Bond + Conversion Ration.
E) None of the above.
Q2) Options can be used to
A) Modify an equity portfolio's systematic risk.
B) Modify an equity portfolio's unsystematic risk.
C) Manage currency exposures in international equity portfolios.
D) Change a portfolio's exposure to a particular asset
E) All of the above
Q3) Which of the following is not true about interest rate swaps?
A) Payments are based on a notional principal.
B) Floating rate payers profit if interest rates fall.
C) Payments can be quarterly as well as semi-annually.
D) Parities exchange debt obligations.
E) Default risk is a possibility in the swaps market.
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Chapter 15: Equity Portfolio Management Strategies
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Sample Questions
Q1) Which of the following statements regarding 130/30 strategies is false?
A) Analyst can make full use of their knowledge of undervalued and overvalued stocks.
B) Long positions up to 130% of the value of the portfolio cab be made.
C) Short positions up to 30% of the value of the portfolio can be made.
D) 130/30 strategies are not very popular due to the increased risk of hedging.
E) The use of short positions creates leverage.
Q2) Active equity portfolio management is a long-term buy-and-hold strategy.
A)True
B)False
Q3) Refer to Exhibit 15-1. The expected utilities of Portfolios A, B and C for Tom Luck are
A) Portfolio A = 9.95, Portfolio B = 7.27, Portfolio C = 4.73
B) Portfolio A = 4.5, Portfolio B = 5.33, Portfolio C = 4.0
C) Portfolio A = 7.95, Portfolio B = 5.33, Portfolio C = 4.73
D) Portfolio A = 3.5, Portfolio B = 7.27, Portfolio C = 4.73
E) Portfolio A = 5.33, Portfolio B = 7.27, Portfolio C = 6.75
Q4) Growth stocks consistently outperform value stocks.
A)True
B)False
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Page 17
Chapter 16: Bond Portfolio Management Strategies
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Sample Questions
Q1) A pure yield pickup swap involves a switch from a low-coupon bond to a higher-coupon bond of similar quality and maturity.
A)True
B)False
Q2) Refer to Exhibit 16-8. 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% in Bond C and 50% in Bond D
B) 64% in Bond C and 36% in Bond D
C) 36% in Bond C and 64% in Bond D
D) 100% in Bond D
E) None of the above
Q3) Refer to Exhibit 16-5. The interest on one coupon for the candidate bond is
A) $70.00
B) $3.58
C) $3.85
D) $8.35
E) $5.38
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Chapter 17: Professional Money Management, Alternative
Assets, and Industry Ethics
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Sample Questions
Q1) The closed-end fund index is
A) Value weighted and based on market values.
B) Value weighted and based on NAVs.
C) Price weighted and based on market values.
D) Price weighted and based on NAVs.
E) Equally weighted and based on market values.
Q2) What type of funds are typically no-load funds that impose no penalty for early withdrawal and generally allow holders to write checks against their account?
A) Mutual funds
B) Open-end funds
C) Closed-end funds
D) Money market funds
E) Balanced funds
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) Choices a and c.
E) Choices b and c.
19
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Chapter 18: Evaluation of Portfolio Performance
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Sample Questions
Q1) Portfolio managers who anticipate an increase in interest rates should
A) Act to keep the duration constant.
B) Decrease the portfolio duration.
C) Increase the portfolio duration.
D) Assume higher risk in the market.
E) Invest in junk bonds.
Q2) A more recent adjustment to the Sharpe measurement for portfolio evaluation is
A) To divide the portfolio risk premium by total risk rather than the portfolio's beta.
B) To divide the portfolio risk premium by standard deviation rather than the portfolio's beta.
C) To divide the portfolio risk premium by the excess portfolio return rather than total risk.
D) To divide the excess portfolio return by the portfolio's standard deviation.
E) To divide the excess portfolio return by the portfolio's beta.
Q3) Investors want their portfolio managers to completely diversify their portfolio, that is, eliminate all systematic risk.
A)True
B)False
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Chapter 19: Analysis of Financial Statements
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Sample Questions
Q1) Refer to Exhibit 19-5. Calculate the financial leverage.
A) 1.05
B) 5.32
C) 2.15
D) 1.54
E) 2.31
Q2) Traditional cash flow and Free cash flow are equivalent concepts.
A)True
B)False
Q3) Bond rating agencies include the analysis of financial ratios in arriving at corporate bond ratings.
A)True
B)False
Q4) Refer to Exhibit 19-3. Calculate the cash conversion cycle.
A) 27
B) 46
C) 26
D) 55
E) 22
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Chapter 20: An Introduction to Security Valuation
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Q1) Refer to Exhibit 20-7. What is the future price of the stock in year 3?
A) $81.75
B) $84.81
C) $92.56
D) $101.85
E) $111.16
Q2) Refer to Exhibit 20-2. What is the current value of these securities?
A) $900.18
B) $1151.92
C) $972.52
D) $1113.63
E) $904.00
Q3) What is the value of a 10% semi-annual coupon bond with a par value of $1,000 that matures in 5 years and has a required rate of return of 9%?
A) $1,021.95
B) $1,038.90
C) $1,039.56
D) $1,064.18
E) $1,078.23
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Page 22
Chapter 21: Web Appendix: A Review of Statistics and the
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Q1) 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) The coefficient of variation of this investment is
A) -0.06
B) -0.65
C) 6.60
D) 16.53
E) 165.10
Q3) The expected return from this investment is
A) -0.0752
B) -0.0040
C) 0.00
D) 0.0075
E) 0.4545
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Chapter
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Sample Questions
Q1) 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) The expected return from this investment is
A) -0.0752
B) -0.0040
C) 0.00
D) 0.0075
E) 0.4545
Q3) The coefficient of variation of this investment is
A) -0.06
B) -0.65
C) 6.60
D) 16.53
E) 165.10
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Chapter 23: Appendix: Objectives and Constraints of Institutional Investors
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Q1) Banks typically
A) Have low liquidity needs.
B) Face very few federal and state regulatory constraints.
C) Don't have to compete for funds.
D) Have high liquidity needs and a short time horizons constraint.
E) Low investment risk.
Q2) Cash flows for nonlife insurance companies, such as property and casualty, are similar to cash flows of life insurance companies.
A)True
B)False
Q3) Banks have high liquidity needs and therefore, have a short time horizon. A)True
B)False
Q4) 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