Course Introduction
Security Analysis
Pre-Test Questions
Security Analysis explores the fundamental principles and techniques used to evaluate the value and risk associated with various financial securities, including stocks, bonds, and derivatives. The course covers qualitative and quantitative methods of analyzing companies and markets, focusing on key financial statements, valuation models, and industry trends. Students learn to assess intrinsic value, identify mispriced securities, and make informed investment decisions, while also considering broader economic and market factors. Emphasis is placed on both fundamental and technical analysis as well as the ethical considerations and regulatory environment influencing security valuation.
Recommended Textbook Essentials of Investments 8th Edition by Zvi Bodie
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22 Chapters
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Page 2
Chapter 1: Investments: Background and Issues
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Sample Questions
Q1) Real assets represent about ____ of total assets for financial institutions.
A) 1%
B) 15%
C) 25%
D) 40%
Answer: A
Q2) U.S.Treasury bonds pay interest every six months and repay the principal at maturity.The U.S.Treasury routinely sells individual interest payments on these bonds to investors.This is an example of ___________.
A) unbundling
B) bundling
C) securitization
D) security selection
Answer: A
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Page 3
Chapter 2: Asset Classes and Financial Instruments
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Sample Questions
Q1) A firm that has large securities holdings that wishes to raise money for a short length of time may be able to find the cheapest financing from which of the following?
A) Reverse repurchase agreement
B) Banker's acceptance
C) Commercial paper
D) Repurchase agreement
Answer: D
Q2) An investor in a T-bill earns interest by _________.
A) receiving interest payments every 90 days
B) receiving dividend payments every 30 days
C) converting the T-bill at maturity into a higher valued T-note
D) buying the bill at a discount from the face value received at maturity
Answer: D
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Chapter 3: Securities Markets
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Sample Questions
Q1) The __________ system enables exchange members to send orders directly to a specialist over computer lines.
A) FAX
B) Direct Plus
C) NASDAQ
D) SUPERDOT
Answer: D
Q2) An investor puts up $5,000 but borrows an equal amount of money from their broker to double the amount invested to $10,000.The broker charges 7% on the loan.The stock was originally purchased at $25 per share and in one year the investor sells the stock for $28.The investor's rate of return was ____.
A) 17%
B) 12%
C) 14%
D) 19%
Answer: A
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Page 5
Chapter 4: Mutual Funds and Other Investment Companies
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Sample Questions
Q1) The primary measurement unit used for assessing the value of one's stake in an investment company is ___________________.
A) Net Asset Value
B) Average Asset Value
C) Gross Asset Value
D) Total Asset Value
Q2) An official description of a particular mutual fund's planned investment policy can be found in the fund's _____________.
A) prospectus
B) indenture
C) investment statement
D) 12b-1 forms
Q3) Under SEC rules,the managers of certain funds are allowed to deduct charges for advertising,brokerage commissions,and other sales expenses,directly from the fund assets rather than billing investors.These fees are known as ____________.
A) direct operating expenses
B) back-end loads
C) 12b-1 charges
D) front-end loads
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Page 6
Chapter 5: Risk and Return: Past and Prologue
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Sample Questions
Q1) The holding period return on a stock was 25%.Its ending price was $18 and its beginning price was $16.Its cash dividend must have been _________.
A) $0.25
B) $1.00
C) $2.00
D) $4.00
Q2) Consider the following two investment alternatives.First,a risky portfolio that pays 15% rate of return with a probability of 40% or 5% with a probability of 60%.Second,a treasury bill that pays 6%.The risk premium on the risky investment is _________.
A) 1%
B) 3%
C) 6%
D) 9%
Q3) The geometric average of -12%,20% and 25% is _________.
A) 8.42%
B) 11.00%
C) 9.70%
D) 18.88%
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Chapter 6: Efficient Diversification
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Sample Questions
Q1) Which of the following statistics cannot be negative?
A) Covariance
B) Variance
C) E[r]
D) Correlation coefficient
Q2) Rational risk-averse investors will always prefer portfolios _____________.
A) located on the efficient frontier to those located on the capital market line
B) located on the capital market line to those located on the efficient frontier
C) at or near the minimum variance point on the efficient frontier
D) that are risk-free to all other asset choices
Q3) Asset A has an expected return of 15% and a reward-to-variability ratio of .4.Asset B has an expected return of 20% and a reward-to-variability ratio of .3.A risk-averse investor would prefer a portfolio using the risk-free asset and ______.
A) asset A
B) asset B
C) no risky asset
D) can't tell from the data given
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Chapter 7: Capital Asset Pricing and Arbitrage Pricing
Theory
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Sample Questions
Q1) Consider the CAPM.The risk-free rate is 6% and the expected return on the market is 18%.What is the expected return on a stock with a beta of 1.3?
A) 6%
B) 15.6%
C) 18%
D) 21.6%
Q2) Consider the multi-factor APT with two factors.Portfolio A has a beta of 0.5 on factor 1 and a beta of 1.25 on factor 2.The risk premiums on the factors 1 and 2 portfolios are 1% and 7% respectively.The risk-free rate of return is 7%.The expected return on portfolio A is __________ if no arbitrage opportunities exist.
A) 13.5%
B) 15.0%
C) 16.25%
D) 23.0%
Q3) What is the beta for a portfolio with an expected return of 12.5%?
A) 0
B) 1
C) 1.5
D) 2
Page 9
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Chapter 8: The Efficient Market Hypothesis
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Sample Questions
Q1) The small firm in January effect is strongest ________.
A) early in the month
B) in the middle of the month
C) late in the month
D) in even numbered years
Q2) Which of the following is not a method employed by fundamental analysts?
A) Analyzing the Fed's next interest rate move
B) Relative strength analysis
C) Earnings forecasting
D) Estimating the economic growth rate
Q3) Which of the following is not a topic related to the debate over market efficiency?
A) IPO results
B) Lucky event issue
C) Magnitude issue
D) Selection bias
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Chapter 9: Behavioral Finance and Technical Analysis
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Sample Questions
Q1) From day one to day four the Confidence Index has _____.This is _____.
A) increased; bullish
B) decreased; bullish
C) increased; bearish
D) decreased; bearish
Q2) Short interest is a ______ indicator.
A) sentiment
B) flow of funds
C) market structure
D) fundamental
Q3) Which of the following is considered a sentiment indicator?
A) A 200-day moving average
B) Short interest
C) Credit balances in brokerage accounts
D) Relative strength
Q4) According to the Dow Theory,primary trends are _________________.
A) points of trend reversals
B) daily fluctuations which are of little importance
C) short-term deviations from the underlying price trend line
D) long-term price movements lasting from months to years
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Chapter 10: Bond Prices and Yields
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Sample Questions
Q1) Everything else equal the __________ the maturity of a bond and the __________ the coupon the greater the sensitivity of the bond's price to interest rate changes.
A) longer; higher
B) longer; lower
C) shorter; higher
D) shorter; lower
Q2) Which of the following bonds would most likely sell at the lowest yield?
A) A callable debenture
B) A putable mortgage bond
C) A callable mortgage bond
D) A putable debenture
Q3) Yields on municipal bonds are generally lower than yields on similar corporate bonds because of differences in _________.
A) marketability
B) risk
C) taxation
D) call protection
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Chapter 11: Managing Bond Portfolios
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Sample Questions
Q1) Bond portfolio immunization techniques balance ________ and ________ risk.
A) price; reinvestment
B) price; liquidity
C) credit; reinvestment
D) credit; liquidity
Q2) ______________ is an important characteristic of the relationship between bond prices and yields.
A) Convexity
B) Concavity
C) Complexity
D) Linearity
Q3) You have purchased a Guaranteed Investment contracts (GICs)from an insurance firm that promises to pay you a 5% compound rate of return per year for 6 years.If you pay $10,000 for the GIC today and receive no interest along the way you will get __________ in 6 years (to the nearest dollar).
A) $12,565
B) $13,000
C) $13,401
D) $13,676
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Page 13
Chapter 12: Macroeconomic and Industry Analysis
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Sample Questions
Q1) Cash cows are typically found in the _________ stage of the industry life cycle.
A) startup
B) consolidation
C) maturity
D) relative decline
Q2) Supply side economics tends to focus on _______________.
A) government spending
B) price controls
C) monetary policy
D) increasing productive capacity
Q3) To obtain an approximate estimate of the real interest rate,one must _________ the __________ the nominal risk-free rate.
A) add; default premium to the
B) subtract; default premium from the
C) add; expected inflation to
D) subtract; expected inflation from
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14
Chapter 13: Equity Valuation
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Sample Questions
Q1) Todd Mountain development Corporation is expected to pay a dividend of $2.50 in the upcoming year.Dividends are expected to grow at the rate of 8% per year.The risk-free rate of return is 5% and the expected return on the market portfolio is 12%.The stock of Todd Mountain Development Corporation has a beta of 0.75.Using the CAPM,the return you should require on the stock is _________.
A) 7.25%
B) 10.25%
C) 14.75%
D) 21.00%
Q2) Next year's earnings are estimated to be $6.00.The company plans to reinvest 33% of its earnings at 12%.If the cost of equity is 8%,what is the present value of growth opportunities?
A) $6.00
B) $25.00
C) $44.44
D) $75.00
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Chapter 14: Financial Statement Analysis
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Sample Questions
Q1) Refer to the financial statements of Burnaby Mountain Trading Company.The firm's asset turnover ratio for 2008 is _________.Please keep in mind that when a ratio involves both income statement and balance sheet numbers,the balance sheet numbers for the beginning and end of the year must be averaged.
A) 1.30
B) 1.50
C) 1.69
D) 2.83
Q2) The term quality of earnings refers to ________.
A) how well reported earnings conform to GAAP
B) the realism and sustainability of reported earnings
C) whether actual earnings matched expected earnings
D) how well reported earnings fit a trend line of earnings growth
Q3) Which of the following transactions will result in a decrease in cash flow from investments?
A) Acquisition of another business
B) Capital gain from sale of a subsidiary
C) Decrease in net investments
D) Sale of equipment
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Page 16
Chapter 15: Options Markets
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Sample Questions
Q1) A writer of a call option will want the value of the underlying asset to __________ and a buyer of a put option will want the value of the underlying asset to _________.
A) decrease, decrease
B) decrease, increase
C) increase, decrease
D) increase, increase
Q2) To establish a bull money spread with calls you would _______________.
A) buy the 55 call and sell the 45 call
B) buy the 45 call and buy the 55 call
C) buy the 45 call and sell the 55 call
D) sell the 45 call and sell the 55 call
Q3) Exercise prices for listed stock options usually occur in increments of ____,and bracket the current stock price.
A) $1
B) $5
C) $20
D) $25
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Chapter 16: Option Valuation
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Sample Questions
Q1) Suppose the desired put options with X = 50 were traded.What would be the hedge ratio for the option?
A) -1.0
B) -0.5
C) 0.5
D) 1.0
Q2) If a stock price increases,the price of a put option on the stock will __________ and the price of a call option on the stock will __________.
A) decrease; decrease
B) decrease; increase
C) increase; decrease
D) increase; increase
Q3) The value of a put option increases with all of the following except ___________. A) stock price
B) time to maturity
C) volatility
D) dividend yield
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18
Chapter 17: Futures Markets and Risk Management
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Sample Questions
Q1) The S&P500 index futures contract is an example of a(n)______ delivery contract.The pork bellies contract is an example of a(n)______ delivery contract.
A) cash; cash
B) cash; actual
C) actual; cash
D) actual; actual
Q2) Investors who take short positions in futures contract agree to ___________ delivery of the commodity on the delivery date,and those who take long positions agree to __________ delivery of the commodity.
A) make; make
B) make; take
C) take; make
D) take; take
Q3) If an asset price declines,the investor with a _______ is exposed to the largest potential loss.
A) long call option
B) long put option
C) long futures contract
D) short futures contract
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Page 19
Chapter 18: Portfolio Performance Evaluation
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Sample Questions
Q1) Which one of the following is largely based on forecasts of macroeconomic factors?
A) Security selection
B) Passive investing
C) Market efficiency
D) Market timing
Q2) If these portfolios are subcomponents which make up part of a well diversified portfolio then portfolio ______ is preferred.
A) A
B) B
C) C
D) S&P500
Q3) A portfolio generates an annual return of 16%,a beta of 1.2 and a standard deviation of 19%.The market index return is 12% and has a standard deviation of 16%.What is Jensen's alpha of the portfolio if the risk free rate is 6%?
A) .017
B) .028
C) .036
D) .078
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Chapter 19: Globalization and International Investing
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Sample Questions
Q1) You invest in various broadly diversified international mutual funds as well as your U.S.portfolio.The one risk you probably don't have to worry about affecting your returns is
A) business cycle risk
B) beta risk
C) inflation risk
D) currency risk
Q2) The __________ index is a widely used index of non-U.S.stocks.
A) CBOE
B) Dow Jones
C) EAFE
D) Lehman Index
Q3) In the PRS country composite risk ratings a score of ______ represents the least risky and a score of _____ represents the most risky.
A) 0; 100
B) 0; 50
C) 50; 0
D) 100; 0
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21
Chapter 20: Hedge Funds
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Sample Questions
Q1) Hedge fund managers receive incentive bonuses when they increase portfolio assets beyond a stipulated benchmark but lose nothing when they fail to perform.This equivalent to __________.
A) writing a call option
B) receiving a free call option
C) writing a put option
D) receiving a free put option
Q2) Market neutral hedge funds may experience considerable volatility.The source of volatile returns is the use of _________.
A) pure play
B) leverage
C) directional bests
D) net short positions
Q3) Higher returns of equity hedge funds as compared to the S&P 500 index reflect positive compensation for __________ risk.
A) market
B) liquidity
C) systematic
D) interest rate
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Page 22
Chapter 21: Taxes,inflation,and Investment Strategy
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Sample Questions
Q1) What is John's effective salary reduction if he is in the 25% tax bracket?
A) $2,100
B) $2,800
C) $5,600
D) $8,400
Q2) In 2009,the income cap on social security taxes was set at _____ with an exemption of _____.
A) $200,000; $10,000
B) $153,600; $7,600
C) $106,800; $0
D) $96,000; $10,000
Q3) In planning for retirement,an investor decides she will save $2,000 every year for 25 years.At a 7% return on her investment,how much money will she have at the end of 25 years?
A) $119,015
B) $125,316
C) $126,498
D) $128,420
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Chapter 22: Investors and the Investment Process
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Sample Questions
Q1) In a defined contribution pension plan,the _____ bears all of the fund's investment performance risk.
A) employer
B) employee
C) fund manager
D) government
Q2) A portfolio is comprised of three index funds: an equity index,a bond index and an international index.The portfolio manager changes the weights periodically according to forecasts for each sector.This is an example of __________.
A) a passively managed core with an actively managed component
B) a totally passively managed fund
C) passive asset allocation with active security selection
D) active asset allocation with passive security selection
Q3) If an investor wishes to invest 100% of her portfolio in safe assets but does not wish to manage her portfolio,she should invest in __________.
A) a money market fund
B) a growth stock fund
C) several different money market instruments
D) several different stocks
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Page 24