Course Introduction
Security Analysis Exam
Solutions
Security Analysis is a foundational course that focuses on the evaluation and valuation of financial securities, including stocks, bonds, and derivatives. Students will learn key concepts and analytical frameworks used by professional investors to assess the intrinsic value of securities, analyze financial statements, evaluate risks and returns, and make informed investment decisions. The course covers fundamental and technical analysis techniques, industry and company analysis, and introduces tools for portfolio construction and management. Emphasis is placed on practical application through case studies and real-world examples, preparing students for careers in investment banking, asset management, and financial advisory services.
Recommended Textbook
Investment Analysis and Portfolio Management 1st Canadian Edition by Frank K. Reilly
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1829 Verified Questions
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Chapter 1: The Investment Setting
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Sample Questions
Q1) The expected return is the average of all possible returns.
A)True
B)False
Answer: False
Q2) The risk premium is a function of the volatility of operating earnings, sales volatility and inflation.
A)True
B)False
Answer: False
Q3) Refer to Exhibit 1-5. If next year the real rates all rise by 10% while inflation climbs from 1.5% to 2.5%, what will be the nominal rate of return on each security?
A) 1.24% and 1.52%
B) 1.35% and 3.52%
C) 3.89% and 6.11%
D) 3.52% and 3.89%
E) 1.17% and 6.11%
Answer: C
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Chapter 2: The Asset Allocation Decision
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Sample Questions
Q1) Risk tolerance is exclusively a function of an individual's psychological makeup.
A)True
B)False
Answer: False
Q2) The cash surrender value of the life insurance policy cannot be used for retirement purpose.
A)True
B)False
Answer: False
Q3) Someone in the 15% tax bracket can earn 8% annually on his investments in a tax-exempt RRSP account. What will be the value of a $10,000 investment after 5 years (assuming annual compounding)?
A) $6,805
B) $14,693
C) $15,528
D) $20,114
E) $50,000
Answer: B
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Chapter 3: Selecting Investments in a Global Market
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Sample Questions
Q1) Warrants are options often issued in connection with the sale of fixed income securities.
A)True
B)False
Answer: True
Q2) Which of the following are ways to invest in real estate?
A) Real Estate Investment Trusts (REITs)
B) Raw Land purchase
C) Land Development
D) Rental Properties
E) All of the above.
Answer: E
Q3) The total domestic return on German bonds is the return that would be experienced by a Canadian investor who owned German bonds.
A)True
B)False
Answer: False
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Chapter 4: Securities Markets and the Economy
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Sample Questions
Q1) Which of the following statements about a market is true?
A) It is not necessary for the market to have a physical location.
B) The market does not necessarily own the goods or services involved.
C) A market can deal in any variety of goods and services.
D) All of the above
E) None of the above
Q2) If transaction prices are volatile, but long-term prices are stable, this is referred to as price continuity.
A)True
B)False
Q3) The value of the stocks traded in the over-the-counter market is greater than the values of the stocks traded on the New York Stock Exchange.
A)True
B)False
Q4) Informational efficiency is where the cost of acquiring information is very cheap.
A)True
B)False
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Chapter 5: Efficient Capital Markets
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Sample Questions
Q1) The January anomaly refers to the phenomenon where stock prices
A) Decline in December.
B) Decline in January.
C) Rise in January.
D) Decline in December and rise in January.
E) Rise in December and decline in January.
Q2) A portfolio manager without superior analytical skills should
A) Determine and quantify the risk preferences of a client.
B) Minimize transaction costs.
C) Maintain the specified risk level.
D) Ensure that the portfolio is completely diversified.
E) All of the above.
Q3) Results of initial public offering (IPOs) studies tend to support the semi-strong EMH, because it appears that prices adjusted rapidly after initial underpricing.
A)True
B)False
Q4) The random walk hypothesis contends that stock prices occur randomly.
A)True
B)False
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Chapter 6: An Introduction to Portfolio Management
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Sample Questions
Q1) What will happen to the return, if equal risk is added moving along the envelope curve containing the best possible combinations?
A) Decrease at an increasing rate.
B) Decrease at a decreasing rate.
C) Increase at an increasing rate.
D) Increase at a decreasing rate.
E) Remain constant.
Q2) The slope of the utility curves for a strongly risk-averse investor, relative to the slope of the utility curves for a less risk-averse investor, will
A) Be steeper.
B) Be flatter.
C) Be vertical.
D) Be horizontal.
E) None of the above.
Q3) If the covariance of two stocks is positive, these stocks tend to move together over time.
A)True
B)False
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Chapter 7: Asset Pricing Models: Capm and Apt
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Sample Questions
Q1) Refer to Exhibit 7-9. Suppose that you know that the prices of stocks A, B, and C will be $10.95, 22.18, and $30.89, respectively. Based on this information
A) All three stocks are overvalued.
B) All three stocks are undervalued.
C) Stock a is undervalued, stock b is properly valued, stock c is undervalued.
D) Stock a is undervalued, stock b is properly valued, stock c is overvalued.
E) Stock a is overvalued, stock b is overvalued, stock c is undervalued.
Q2) A risk-free asset is one in which the return is completely guaranteed, there is no uncertainty.
A)True
B)False
Q3) Studies have shown that a well diversified investor needs as few as five stocks.
A)True B)False
Q4) One of the assumptions of capital market theory is that investors can borrow or lend at the risk free rate.
A)True
B)False
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Chapter 8: Economic and Industry Analysis
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Sample Questions
Q1) Structural changes do have a cyclical pattern.
A)True
B)False
Q2) The micro approach to estimating the industry multiple would entail examining specific variables such as: return on equity, earnings growth, and profit margin trend.
A)True
B)False
Q3) Which of the following statements about the business cycle is false?
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)
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Chapter 9: Company Analysis and Stock Valuation
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Sample Questions
Q1) Assuming that you expected the stock price in the prior question to increase to $42 during the investment period, your expected rate of return and decision would be:
A) 10% - do not buy
B) 12% - do not buy
C) 14% - buy
D) 16% - buy
E) 18% - buy
Q2) Given Gitech's beta of 1.55 and a risk free rate of 8%, what is the expected rate of return assuming a 14% market return?
A) 12.4%
B) 14.3%
C) 17.3%
D) 20.4%
E) 29.7%
Q3) A firm's competitive strategy can be either defensive or offensive.
A)True
B)False
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Chapter 10: Technical Analysis
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Sample Questions
Q1) Which of the following assumptions regarding price movements summarized by Levy (1966) are controversial?
A) Supply and demand determine the market value of any good or service.
B) Supply and demand are governed by numerous rational and irrational factors.
C) The prices for individual securities and the overall value of the market tend to move in trends.
D) All of the above.
E) None of the above.
Q2) The use of trading rules requires a great deal of subjective judgment.
A)True
B)False
Q3) The Dow Theory describes stock prices as moving in trends analogous to the movement of water. Which of the following statements is not true?
A) Major trends resemble tides.
B) Intermediate trends resemble waves.
C) Short-run movements are like ripples.
D) Waves are the most important.
E) None of the above (that is, all are true statements)
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Chapter 11: Bond Fundamentals
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Sample Questions
Q1) You purchase a 10 3/8s 2009 Feb. $10,000 par Treasury Note at 103:11 and hold it for exactly one year at which time you sell it. What is your rate of return if your selling price is 101:13?
A) 8.14%
B) 8.16%
C) 8.22%
D) 8.32%
E) 8.47%
Q2) Bonds rated BB or above are considered to be investment grade bonds.
A)True
B)False
Q3) A bond that only pays a principal payment at maturity date is known as a:
A) Blank bond.
B) Maturity bond.
C) Interest free bond.
D) Mini-coupon bond.
E) Zero coupon bond.
Q4) In the Eurozone, the government sector is the largest bond market segment.
A)True
B)False
Page 13
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Chapter 12: The Analysis and Valuation of Bonds
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Sample Questions
Q1) 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.
Q2) Refer to Exhibit 12-2. What is the Macaulay duration of the Talmart corporate bonds?
A) 3.43
B) 3.64
C) 3.76
D) 3.85
E) 4.11
Q3) 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.
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Page 14
Chapter 13: An Introduction to Derivative Markets and Securities
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Sample Questions
Q1) Futures contracts are slower to absorb new information than forward contracts. A)True
B)False
Q2) A portfolio containing a share of stock and a put option will have the same value as a portfolio containing a call option and the risk-free discount bond. A)True
B)False
Q3) An option buyer must exercise the option on or before the expiration date. A)True
B)False
Q4) A one year call option has a strike price of 50, expires in 6 months, and has a price of $4.74. If the risk free rate is 3%, and the current stock price is $45, what should the corresponding put be worth?
A) $12.74
B) $10.48
C) $5.00
D) $9.00
E) $8.30
15
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Chapter 14: Derivatives: Analysis and Valuation
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Sample Questions
Q1) Refer to Exhibit 14-10. Assume that one year later the fixed rate on a new 3-year receive fixed pay floating LIBOR swap has fallen to 7% per year. Settlement is on a semiannual basis. Calculate the market value of the FRN based on $100 face value.
A) $102.66
B) $100.00
C) $95.56
D) $89.63
E) $70.77
Q2) Refer to Exhibit 14-9. At present, what would be the minimum value of the bond?
A) $600.00
B) $796.83
C) $889.82
D) $900.00
E) $1000.00
Q3) It is a violation of the securities laws to combine option contracts to achieve a customized payoff.
A)True
B)False
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Chapter 15: Equity Portfolio Management Strategies
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Sample Questions
Q1) 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
Q2) In equity portfolio management, tracking error occurs when
A) The managed portfolio outperforms the benchmark portfolio.
B) The managed portfolio under performs the benchmark portfolio.
C) The return volatility of the managed portfolio is positively correlated with the return volatility of the benchmark portfolio.
D) The return volatility of the managed portfolio is negatively correlated with the return volatility of the benchmark portfolio.
E) The return volatility of the managed portfolio is not correlated with the return volatility of the benchmark portfolio.
Q3) The goal of a passive portfolio is to track the index as closely as possible.
A)True
B)False
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17
Chapter 16: Bond Portfolio Management Strategies
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Sample Questions
Q1) Which of the following is a passive bond portfolio strategy?
A) Indexing
B) Buy-and-Hold
C) Classical immunization
D) Choices a and b
E) None of the above
Q2) Refer to Exhibit 16-3. The interest on one coupon for the candidate bond is
A) $2.40
B) $2.75
C) $9.60
D) $11.00
E) $50.00
Q3) Refer to Exhibit 16-4. The value of the swap is ____ basis points in one year.
A) 26.91
B) 26.25
C) 31.25
D) 41.25
E) 51.25
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Chapter 17: Professional Money Management, Alternative
Assets, and Industry Ethics
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Sample Questions
Q1) The following are examples of mutual fund companies
A) Common stock funds.
B) Bond funds.
C) Hedge funds.
D) Choices a and b.
E) Choices a, b and c.
Q2) All investment companies charge an annual
A) Redemption fee.
B) Marketing and distribution.
C) Management fee.
D) Maintenance fee.
E) Market adjustment.
Q3) An open-end investment company functions like any other public firm.
A)True
B)False
Q4) Income distributions and capital gains distributions are the only source of returns for mutual funds.
A)True
B)False
Page 19
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Chapter 18: Evaluation of Portfolio Performance
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Sample Questions
Q1) In the Characteristic Selectivity (CS) performance measure,
A) Portfolio performance is measured by assessing the quality of services provided by money managers by looking at adjustments made to the content of their portfolios.
B) Portfolio performance is measured by examining both unsystematic and systematic risk.
C) Portfolio performance is measured by comparing the returns of each stock in the portfolio to the return of a benchmark portfolio. With the same aggregate investment characteristics as the security in question.
D) Portfolio performance is measured on the basis of return per unit of risk.
E) Portfolio performance is measured on the basis of historic average differential return per unit of historic variability of differential return.
Q2) Refer to Exhibit 18-6. Calculate CI's selectivity.
A) 0.1225
B) 0.1000
C) 0.0525
D) 0.0475
E) 0.0325
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Chapter 19: Analysis of Financial Statements
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Sample Questions
Q1) Refer to Exhibit 19-5. Calculate the return on equity (ROE).
A) 15%
B) 12%
C) 32%
D) 9%
E) 7%
Q2) Limitations on the use of ratios include
A) Accounting comparability.
B) Company homogeneity.
C) Consistent results.
D) A reasonable range within the industry.
E) All of the above
Q3) According to the DuPont system ROE (return on equity) can be decomposed into the profit margin ratio and the total asset turnover ratio.
A)True
B)False
Q4) The growth of business depends on the percentage of earnings reinvested and the return on equity.
A)True
B)False
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Chapter 20: An Introduction to Security Valuation
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Sample Questions
Q1) 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
Q2) Refer to Exhibit 20-1. What will be the value of these securities in one year if the required return is 7%?
A) $970.14
B) $388.13
C) $1031.15
D) $1035.81
E) $972.52
Q3) Which of the following factors influence an investor's required rate of return?
A) The economy's real risk-free rate (RFR)
B) The expected rate of inflation (I)
C) A risk premium
D) All of the above.
E) None of the above.
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Page 22
Chapter 21: Web Appendix: A Review of Statistics and the
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Sample Questions
Q1) The coefficient of variation of this investment is
A) -0.06
B) -0.65
C) 6.60
D) 16.53
E) 165.10
Q2) 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
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 coefficient of variation of this investment is
A) -0.06
B) -0.65
C) 6.60
D) 16.53
E) 165.10
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 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
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Sample Questions
Q1) Which of the following is not true regarding defined contribution pension plans?
A) Employees make regular contributions to the plan.
B) Employers make regular contributions to the plan.
C) The employer bears all of the investment risk.
D) Benefits are directly related to the earnings of the funds investments.
E) The number of defined contribution plans is increasing.
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) In a defined contribution pension plan,
A) The plan does not promise to pay the retiree a specific income stream after retirement.
B) The plan does promise to pay the retiree a specific income stream after retirement.
C) The employee's retirement income is not an obligation of the firm.
D) The company carries the risk of paying future pension benefits to retirees.
E) Choices a and c.
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