Security Analysis Exam Preparation Guide
Course Introduction
Security Analysis is a comprehensive course that delves into the fundamental and technical analysis of financial securities, including stocks, bonds, and other investment vehicles. Students learn to evaluate the intrinsic value of assets, assess risk and return, interpret financial statements, and apply various valuation models to make informed investment decisions. The course explores topics such as efficient market hypothesis, portfolio management, quantitative analysis, and the role of macroeconomic and industry factors in security pricing. By the end of the course, students will be equipped with the analytical tools and critical thinking skills necessary for effective investment analysis and portfolio management in dynamic financial markets.
Recommended Textbook Investments 11th Edition by Zvi Bodie
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Chapter 1: The Investment Environment
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Q1) The Sarbanes-Oxley Act
A) requires corporations to have more independent directors.
B) requires the firm's CFO to personally vouch for the firm's accounting statements.
C) prohibits auditing firms from providing other services to clients.
D) requires corporations to have more independent directors and requires the firm's CFO to personally vouch for the firm's accounting statements.
E) All of the above.
Answer: E
Q2) New issues of securities are sold in the ________ market(s).
A) primary
B) secondary
C) over-the-counter
D) primary and secondary
Answer: A
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Chapter 2: Asset Classes and Financial Instruments
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Sample Questions
Q1) Consider the following three stocks: \[\begin{array} { l c c }
\text { Stock } & \text { Price } & \text { Number of shares } \\
\text { Stock A } & \$ 40 & 200 \\
\text { Stock B } & \$ 70 & 500 \\
\text { Stock C } & \$ 10 & 600 \\
\hline
\end{array}\] The value-weighted index constructed with the three stocks using a divisor of 100 is
A) 1.2.
B) 1200.
C) 490.
D) 4900.
E) 49.
Answer: C
Q2) A U.S. dollar-denominated bond that is sold in Singapore is a(n)
A) Eurobond.
B) Yankee bond.
C) Samurai bond.
D) Bulldog bond.
Answer: A
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Chapter 3: How Securities Are Traded
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Sample Questions
Q1) Shares for short transactions
A) are usually borrowed from other brokers.
B) are typically shares held by the short seller's broker in street name.
C) are borrowed from commercial banks.
D) are typically shares held by the short seller's broker in street name and are borrowed from commercial banks.
Answer: B
Q2) A program trade is
A) a trade of 10,000 (or more) shares of a stock.
B) a trade of many shares of one stock for one other stock.
C) a trade of analytic programs between financial analysts.
D) a coordinated purchase or sale of an entire portfolio of stocks.
E) not feasible with current technology but is expected to be popular in the near future.
Answer: D
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Chapter 4: Mutual Funds and Other Investment Companies
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Sample Questions
Q1) Which one of the following statements regarding open-end mutual funds is false?
A) The funds redeem shares at net asset value.
B) The funds offer investors professional management.
C) The funds offer investors a guaranteed rate of return.
D) The funds redeem shares at net asset value and offer investors professional management.
Q2) Pinnacle Fund had year-end assets of $825,000,000 and liabilities of $25,000,000. If Pinnacle's NAV was $32.18, how many shares must have been held in the fund?
A) 21,619,346.92
B) 22,930,546.28
C) 24,860,161.59
D) 25,693,645.25
Q3) 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.
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Chapter 5: Risk, Return, and the Historical Record
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Q1) Which of the following statement(s) is(are) true?
A) Inflation has no effect on the nominal rate of interest.
B) The realized nominal rate of interest is always greater than the real rate of interest.
C) Certificates of deposit offer a guaranteed real rate of interest.
D) None of the options are true.
Q2) If the annual real rate of interest is 2.5%, and the expected inflation rate is 3.7%, the nominal rate of interest would be approximately
A) 3.7%.
B) 6.2%.
C) 2.5%.
D) -1.2%.
Q3) When comparing investments with different horizons, the ____________ provides the more accurate comparison.
A) arithmetic average
B) effective annual rate
C) average annual return
D) historical annual average
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Chapter 6: Capital Allocation to Risky Assets
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Sample Questions
Q1) You invest $1,000 in a risky asset with an expected rate of return of 0.17 and a standard deviation of 0.40 and a T-bill with a rate of return of 0.04.
The slope of the capital allocation line formed with the risky asset and the risk-free asset is equal to
A) 0.325.
B) 0.675.
C) 0.912.
D) 0.407.
E) Cannot be determined.
Q2) In the mean-standard deviation graph, the line that connects the risk-free rate and the optimal risky portfolio, P, is called
A) the security market line.
B) the capital allocation line.
C) the indifference curve.
D) the investor's utility line.
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Chapter 7: Optimal Risky Portfolios
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Sample Questions
Q1) In words, the covariance considers the probability of each scenario happening and the interaction between
A) securities' returns relative to their variances.
B) securities' returns relative to their mean returns.
C) securities' returns relative to other securities' returns.
D) the level of return a security has in that scenario and the overall portfolio return.
E) the variance of the security's return in that scenario and the overall portfolio variance.
Q2) For a two-stock portfolio, what would be the preferred correlation coefficient between the two stocks?
A) +1.00
B) +0.50
C) 0.00
D) -1.00
E) None of the options are correct.
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Chapter 8: Index Models
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Sample Questions
Q1) If a firm's beta was calculated as 1.6 in a regression equation, a commonly-used adjustment technique would provide an adjusted beta of A) less than 0.6 but greater than zero. B) between 0.6 and 1.0. C) between 1.0 and 1.6. D) greater than 1.6. E) zero or less.
Q2) Suppose the following equation best describes the evolution of over time: <sub>t</sub> = 0.25 + 0.75 <sub>t</sub> <sub>- 1</sub>.
If a stock had a of 0.6 last year, you would forecast the to be _______ in the coming year.
A) 0.45
B) 0.60
C) 0.70
D) 0.75
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Chapter 9: The Capital Asset Pricing Model
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Q1) Assume that a security is fairly priced and has an expected rate of return of 0.17. The market expected rate of return is 0.11, and the risk-free rate is 0.04. The beta of the stock is
A) 1.25.
B) 1.86.
C) 1.
D) 0.95.
Q2) The expected return-beta relationship
A) is the most familiar expression of the CAPM to practitioners.
B) refers to the way in which the covariance between the returns on a stock and returns on the market measures the contribution of the stock to the variance of the market portfolio, which is beta.
C) assumes that investors hold well-diversified portfolios.
D) All of the options are true.
E) None of the options are true.
Q3) In a well-diversified portfolio,
A) market risk is negligible.
B) systematic risk is negligible.
C) unsystematic risk is negligible.
D) nondiversifiable risk is negligible.
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Chapter 10: Arbitrage Pricing Theory and Multifactor Models
of Risk and Return
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Sample Questions
Q1) <sup> </sup>In a multifactor APT model, the coefficients on the macro factors are often called
A) systematic risk.
B) factor sensitivities.
C) idiosyncratic risk.
D) factor betas.
E) factor sensitivities and factor betas.
Q2) Consider a single factor APT. Portfolio A has a beta of 2.0 and an expected return of 22%. Portfolio B has a beta of 1.5 and an expected return of 17%. The risk-free rate of return is 4%. If you wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio __________ and a long position in portfolio
A) A; A
B) A; B
C) B; A
D) B; B
E) A; the riskless asset
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Chapter 11: The Efficient Market Hypothesis
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Sample Questions
Q1) QQAG has a beta of 1.7. The annualized market return yesterday was 13%, and the risk-free rate is currently 3%. You observe that QQAG had an annualized return yesterday of 20%. Assuming that markets are efficient, this suggests that
A) bad news about QQAG was announced yesterday.
B) good news about QQAG was announced yesterday.
C) no significant news about QQAG was announced yesterday.
D) interest rates rose yesterday.
E) interest rates fell yesterday.
Q2) Which of the following are used by fundamental analysts to determine proper stock prices? I) Trendlines II) Earnings
III. Dividend prospects
IV. Expectations of future interest rates
V. Resistance levels
A) I, IV, and V
B) I, II, and III
C) II, III, and IV
D) II, IV, and V
E) All of the items are used by fundamental analysts.
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Chapter 12: Behavioral Finance and Technical Analysis
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Q1) Conventional theories presume that investors ____________, and behavioral finance presumes that they ____________.
A) are irrational; are irrational
B) are rational; may not be rational
C) are rational; are rational
D) may not be rational; may not be rational
E) may not be rational; are rational
Q2) Information processing errors consist of I) forecasting errors. II) overconfidence.
III) conservatism.
IV) framing.
A) I and II
B) I and III
C) III and IV
D) IV only
E) I, II, and III
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Chapter 13: Empirical Evidence on Security Returns
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Q1) Studies by Chan, Karceski, and Lakonishok (2003) and La Porta, Lakonishok, Shleifer, and Vishny (1997) report that
A) the value premium is a manifestation of market irrationality.
B) the value premium is a rational risk premia.
C) the value premium is a statistical artifact found only in the U.S.
D) All of the options are correct.
E) None of the options are correct.
Q2) Tests of the CAPM that use regression techniques are subject to inaccuracies because
A) the statistical results used are almost always incorrect.
B) the slope coefficient of the regression equation is biased downward.
C) the slope coefficient of the regression equation is biased upward.
D) the intercept of the regression equation is biased downward.
E) the intercept of the regression equation is equal to the risk free rate.
Q3) The Fama and French three factor model uses ___, ___, and ___ as factors.
A) industrial production; term spread; default spread
B) industrial production; inflation; default spread
C) firm size; book to market ratio; market index
D) firm size; book to market ratio; default spread
E) None of the options are correct.
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Chapter 14: Bond Prices and Yields
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Sample Questions
Q1) A Treasury bond due in one year has a yield of 4.3%; a Treasury bond due in five years has a yield of 5.06%. A bond issued by Boeing due in five years has a yield of 7.63%; a bond issued by Caterpillar due in one year has a yield of 7.16%. The default risk premiums on the bonds issued by Boeing and Caterpillar, respectively, are
A) 3.33% and 2.10%.
B) 2.57% and 2.86%.
C) 1.2% and 1.0%.
D) 0.76% and 0.47%.
E) None of the options are correct.
Q2) A bond will sell at a discount when
A) the coupon rate is greater than the current yield, and the current yield is greater than yield to maturity.
B) the coupon rate is greater than yield to maturity.
C) the coupon rate is less than the current yield, and the current yield is greater than the yield to maturity.
D) the coupon rate is less than the current yield, and the current yield is less than yield to maturity.
E) None of the options are true.
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Chapter 15: The Term Structure of Interest Rates
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Q1) Calculate the price at the beginning of year 1 of an 8% annual coupon bond with face value $1,000 and 5 years to maturity. \(\begin{array}{lr}
&\text { 1-Year } \\
&\text { Forward }\\
\text { Year } & \text { Rate } \\
1 & 5 \% \\
2 & 5.5 \% \\
3 & 6.0 \% \\
4 & 6.5 \% \\
5 & 7.0 \%
\end{array}\)
A) $1,105.47
B) $1,131.91
C) $1,084.25
D) $1,150.01
E) $719.75
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Chapter 16: Managing Bond Portfolios
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Sample Questions
Q1) Which of the following bonds has the longest duration?
A) A 12-year maturity, 0% coupon bond.
B) A 12-year maturity, 8% coupon bond.
C) A 4-year maturity, 8% coupon bond.
D) A 4-year maturity, 0% coupon bond.
E) Cannot tell from the information given
Q2) The duration of a par-value bond with a coupon rate of 6.5% and a remaining time to maturity of 4 years is
A) 3.65 years.
B) 3.45 years.
C) 3.85 years.
D) 4.00 years.
Q3) When interest rates decline, the duration of a 10-year bond selling at a premium
A) increases.
B) decreases.
C) remains the same.
D) increases at first, then declines.
E) decreases at first, then increases.
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Chapter 17: Macroeconomic and Industry Analysis
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Q1) An example of a negative demand shock is
A) a decrease in the money supply.
B) a decrease in government spending.
C) an increase in foreign export demand.
D) a decrease in the price of imported oil.
E) -a decrease in the money supply and a decrease in government spending.
Q2) Two firms, C and D, both produce coat hangers. The price of coat hangers is $1.20 each. Firm C has total fixed costs of $750,000 and variable costs of 30¢ per coat hanger. Firm D has total fixed costs of $400,000 and variable costs of 50¢ per coat hanger. The corporate tax rate is 40%. If the economy is strong, each firm will sell 2,000,000 coat hangers. If the economy enters a recession, each firm will sell 1,400,000 coat hangers. If the economy is strong, the tax of firm C will be
A) -$420,000.
B) $750,000.
C) $510,000.
D) $204,000.
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Page 19
Chapter 18: Equity Valuation Models
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Sample Questions
Q1) The goal of fundamental analysts is to find securities
A) whose intrinsic value exceeds market price.
B) with a positive present value of growth opportunities.
C) with high market capitalization rates.
D) All of the options are correct.
E) None of the options are correct.
Q2) A firm's earnings per share increased from $10 to $12, dividends increased from $4.00 to $4.80, and the share price increased from $80 to $90. Given this information, it follows that
A) the stock experienced a drop in the P/E ratio.
B) the firm had a decrease in dividend-payout ratio.
C) the firm increased the number of shares outstanding.
D) the required rate of return decreased.
Q3) See Candy had a FCFE of $6.1M last year and has 2.32M shares outstanding. See's required return on equity is 10.6%, and WACC is 9.3%. If FCFE is expected to grow at 6.5% forever, the intrinsic value of See's shares is
A) $108.00.
B) $68.30.
C) $26.35.
D) $14.76.
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Chapter 19: Financial Statement Analysis
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Sample Questions
Q1) Common size financial statements make it easier to compare firms
A) of different sizes.
B) in different industries.
C) with different degrees of leverage.
D) that use different inventory valuation methods (FIFO vs. LIFO).
Q2) FOX Company has a ratio of (total debt/total assets) that is above the industry average, and a ratio of (long term debt/equity) that is below the industry average. These ratios suggest that the firm
A) utilizes assets effectively.
B) has too much equity in the capital structure.
C) has relatively high current liabilities.
D) has a relatively low dividend-payout ratio.
E) None of the options are correct.
Q3) Common size balance sheets make it easier to compare firms
A) with different degrees of leverage.
B) of different sizes.
C) in different industries.
D) that use different inventory valuation methods (FIFO vs. LIFO).
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Chapter 20: Options Markets: Introduction
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Q1) The current market price of a share of a stock is $80. If a put option on this stock has a strike price of $75, the put A) is in the money.
B) is out of the money.
C) sells for a lower price than if the market price of the stock is $75. D) is in the money and sells for a lower price than if the market price of the stock is $75.
E) is out of the money and sells for a lower price than if the market price of the stock is $75.
Q2) Top Flight Stock currently sells for $53. A one-year call option with strike price of $58 sells for $10, and the risk-free interest rate is 5.5%. What is the price of a one-year put with strike price of $58?
A) $10.00
B) $12.12
C) $16.00
D) $11.98
E) $14.13
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Chapter 21: Option Valuation
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Sample Questions
Q1) A hedge ratio for a call option is ________, and a hedge ratio for a put option is ______.
A) negative; positive
B) negative; negative
C) positive; negative
D) positive; positive
E) zero; zero
Q2) Portfolio A consists of 150 shares of stock and 300 calls on that stock. Portfolio B consists of 575 shares of stock. The call delta is 0.7. Which portfolio has a higher dollar exposure to a change in stock price?
A) Portfolio B
B) Portfolio A
C) The two portfolios have the same exposure.
D) Portfolio A if the stock price increases and portfolio B if it decreases
E) Portfolio B if the stock price increases and portfolio A if it decreases
Q3) Prior to expiration,
A) the intrinsic value of a put option is greater than its actual value.
B) the intrinsic value of a put option is always positive.
C) the actual value of a put option is greater than the intrinsic value.
D) the intrinsic value of a put option is always greater than its time value.
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Chapter 22: Futures Markets
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Q1) Which of the following statements regarding delivery is false? I) Most futures contracts result in actual delivery.
II) Only 1% to 3% of futures contracts result in actual delivery.
III) Only 15% of futures contracts result in actual delivery.
A) I only
B) II only
C) III only
D) I and II
E) I and III
Q2) Financial futures contracts are actively traded on which of the following indices?
A) The All ordinary index
B) The DAX 30 Index
C) The CAC 40 Index
D) The Toronto 35 Index
E) All of the options are correct.
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Chapter 23: Futures, Swaps, and Risk Management
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Q1) You are given the following information about a portfolio you are to manage. For the long term, you are bullish, but you think the market may fall over the next month.
\[\begin{array} { l r r }
\text { Portfolio Value } & \$ \quad 1 \text { million } \\
\text { Portfolio's Beta } & 0.86 \\
\text { Current S\&P500 Value } & 990 \\
\text { Anticipated S\&P500 Value } & 915 \\
\end{array}\] If the anticipated market value materializes, what will be your expected loss on the portfolio?
A) 7.58%
B) 6.52%
C) 15.43%
D) 8.57%
E) 6.42%
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Chapter 24: Portfolio Performance Evaluation
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Q1) The following data are available relating to the performance of Long Horn Stock Fund and the market portfolio: \[\begin{array} { l c c }
& & \text { Market } \\ & \text { Long Horn}& \text { Portfolio } \\
\text { Average return } & 19 \% & 12 \% \\
\text { Standard deviations of returns } & 35 \% & 15 \% \\
\text { Beta } & 1.5 & 1.0 \\
\text { Residual standard deviation } & 3.0 \% & 0.0 \% \\
\end{array}\] The risk-free return during the sample period was 6%. What is the Sharpe measure of performance evaluation for Long Horn Stock Fund?
A) 1.33%
B) 4.00%
C) 8.67%
D) 31.43%
E) 37.14%
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Chapter 25: International Diversification
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Q1) The yield on a 1-year bill in the U.K. is 7%, and the present exchange rate is 1 pound = U.S. $1.65. If you expect the exchange rate to be 1 pound = U.S. $1.45 a year from now, the return a U.S. investor can expect to earn by investing in U.K. bills is
A) 6.7%.
B) 3.2%.
C) 8%.
D) 5.97%.
E) None of the options
Q2) International investing
A) cannot be measured against a passive benchmark, such as the S&P 500.
B) can be measured against a widely-used index of non-U.S. stocks, the EAFE Index (Europe, Australia, Far East).
C) can be measured against international indexes.
D) can be measured against a widely-used index of non-U.S. stocks, the EAFE Index (Europe, Australia, Far East), and against international indexes.
E) None of the options are correct.
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Chapter 26: Hedge Funds
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Q1) Statistical arbitrage is a version of a ______ strategy.
A) market neutral
B) directional
C) relative value
D) divergence
E) convergence
Q2) Hedge funds differ from mutual funds in terms of
A) transparency.
B) investors.
C) investment strategy.
D) liquidity.
E) All of the options are correct.
Q3) Hedge funds may invest or engage in A) distressed firms.
B) convertible bonds.
C) currency speculation.
D) merger arbitrage.
E) All of the options are correct.
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Page 28
Chapter 27: The Theory of Active Portfolio Management
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Q1) Consider the Treynor-Black model. The alpha of an active portfolio is 2%. The expected return on the market index is 16%. The variance of return on the market portfolio is 4%. The nonsystematic variance of the active Portfolio is 1%. The risk-free rate of return is 8%. The beta of the active portfolio is 1. The optimal proportion to Invest in the active portfolio is A) 0%.
B) 25%.
C) 50%.
D) 100%.
Q2) Passive portfolio management consists of A) market timing.
B) security analysis.
C) indexing.
D) market timing and security analysis.
E) None of the options are correct.
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Chapter 28: Investment Policy and the Framework of the
Cfa Institute
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Questions
Q1) Alan Barnett is 43 years old and has accumulated $78,000 in his self directed defined contribution pension plan. Each year he contributes $1,500 to the plan, and his employer contributes an equal amount. Alan thinks he will retire at age 60 and figures he will live to age 83. The plan allows for two types of investments. One offers a 4% risk free real rate of return. The other offers an expected return of 10% and has a standard deviation of 34%. Alan now has 40% of his money in the risk free investment and 60% in the risky investment. He plans to continue saving at the same rate and keep the same proportions invested in each of the investments. His salary will grow at the same rate as inflation. How much does Alan currently have in the safe account; how much in the risky account?
A) $31,200; $46,800
B) $39,000; $39,000
C) $15,900; $62,100
D) $45,300; $32,700
E) $64,000; $14,000
Q2) The first step a pension fund should take before beginning to invest is to
A) establish investment objectives.
B) develop a list of investment managers with superior records to interview.
C) establish asset allocation guidelines.
D) decide between active and passive management.
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