Security Analysis Review
Questions
Course Introduction
Security Analysis is an in-depth course that explores the fundamental principles and techniques used to evaluate the value and risk of different types of financial securities, including stocks, bonds, and derivative instruments. Students will learn how to analyze financial statements, assess market trends, and apply various valuation models such as discounted cash flow and relative valuation. The course also covers topics related to portfolio construction, risk management, and the impact of macroeconomic factors on security prices. By integrating both qualitative and quantitative analysis, students develop the critical skills needed to make informed investment decisions and navigate the complexities of financial markets.
Recommended Textbook Fundamentals of Investments 3rd Canadian Edition by Bradford Jordan
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Chapter 1: A Brief History of Risk and Return
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Sample Questions
Q1) The standard deviation is a measure of:
A) Volatility.
B) Return.
C) Performance.
D) Capital gains.
E) The risk premium.
Answer: A
Q2) A stock had a price at the beginning of the year of $48.20. The end of year stock price was $43.12 and your total return was - 8.15%. What dividend did the stock pay during the year?
A) $0.87
B) $0.96
C) $1.09
D) $1.15
E) $1.23
Answer: D
Q3) What are the two most important lessons from capital market history?
Answer: First, risky assets earn a risk premium on average. This is the reward for bearing risk. Second, the greater the potential reward from a risky investment, the greater is the risk.
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Chapter 2: Diversification and Risky Asset Allocation
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Sample Questions
Q1) Stock X has an expected return of 10 percent and a standard deviation of 38 percent. Stock Y has an expected return of 13 percent and a standard deviation of 48 percent. The weight of Stock X in the minimum variance portfolio of the two assets is __________ than the weight of Stock Y.
A) greater
B) less
C) the same
D) less only if the correlation is negative
E) greater only if the correlation is positive
Answer: A
Q2) Stock J has a standard deviation of 67 percent and Stock K has a standard deviation of 51 percent. The correlation between the two stocks is -0.10. What is the standard deviation of a portfolio of the two assets with 35 percent invested in Stock J?
A) 46.23%
B) 38.64%
C) 41.07%
D) 35.19%
E) 43.82%
Answer: B
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Chapter 3: The Investment Process
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Sample Questions
Q1) You purchase 900 shares of stock at a price of $45 and an initial margin of 60 percent. The call money rate is 6.3 percent and you pay a spread of 2.1 percent. One year later, you close your position at a stock price of $53. If the stock paid an annual dividend of $0.78 per share, what was your return?
A) 29.01%
B) 26.92%
C) 30.62%
D) 27.89%
E) 24.03%
Answer: B
Q2) A brokerage account in which the broker can make buy and sell decisions for the account holder without notification is called a(n) ______ account.
A) asset management
B) discretionary
C) wrap
D) advisory
E) cash
Answer: D
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Chapter 4: Overview of Security Types
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Sample Questions
Q1) Using an option contract to buy or sell the underlying asset is called ________ the option.
A) Writing
B) Exercising
C) Making
D) Converting
E) Maturing
Q2) Suppose you purchased 5 of the December Treasury bond futures contracts at the lifetime low and sold them at the close on this day. What was your profit on this transaction?
A) $38,746.00
B) $29,187.50
C) $33,485.75
D) $31,400.00
E) $34,894.50
Q3) Explain what a call option is and describe the circumstances under which you will exercise that option.
Q4) Why do corporate bonds have a higher estimated rate of return than the Treasury bonds?
Q5) How do commodity and financial futures differ with respect to carrying costs?
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Chapter 5: Mutual Funds
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Sample Questions
Q1) Which of the following types of mutual funds will likely have the most stable net asset value?
A) Long-term growth funds.
B) Money market funds.
C) Government bond funds.
D) Growth and income funds.
E) International stock funds.
Q2) You are going to invest in the AIC Stock Fund that has A, B, and C share classes. All share classes have a thirty basis point management fee. The A shares have a five percent front-end load and no annual administrative fee. The B shares have a three percent back-end load and a seventy-five basis point annual administrative fee. The C shares have no load and a one hundred basis point annual administrative fee. If your investment horizon is thirty years, the ___________ shares would be the best alternative.
A) A
B) B
C) C
D) All are the same.
E) Insufficient information.
Q3) Are ETFs only for stocks?
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Chapter 6: The Stock Market
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Sample Questions
Q1) The index divisor
A) For the DJIA is 30
B) Remain constant once it is established
C) Tends to increase over time
D) Is equal to the number of stocks in the index
E) Decreases in response to stock splits
Q2) A preliminary prospectus not yet approved by the OSC is referred to as a(n)
A) Primary prospectus
B) Red herring
C) Best effort document
D) Initial prospectus
E) Draft
Q3) An order to buy and sell only at a particular price or better is called a(n)
order.
A) Stop
B) Broker
C) Market
D) Limit
E) Transfer
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Chapter 7: Common Stock Valuation
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Sample Questions
Q1) The annual dividends paid by a certain stock are expected to grow at 3.5 percent per year forever. The required return on the stock is 13.5 percent, and the current stock price is $24.40. You own 300 shares of this stock, what is the total amount of dividend income you should expect next year?
A) $621
B) $810
C) $732
D) $514
E) $706
Q2) The model used to value a stock that has a short-term growth rate that varies from its long-term growth rate is called the _____ dividend growth model.
A) Flexible
B) Increasing
C) Two-stage
D) Stepped up
E) Geometric
Q3) Dividend discount models use three basic variables to arrive at a stock price. What are these variables, and how can an analyst arrive at values for these variables?
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Chapter 8: Stock Price Behaviour and Market Efficiency
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Sample Questions
Q1) Moving money in and out of the market based on your market expectations is called __________ and tends to lead to returns that are __________ than the overall market return, assuming that the market is efficient.
A) asset allocation; higher
B) asset allocation; lower C) market timing; higher
D) market timing; lower E) security selection; higher
Q2) If financial markets are highly efficient:
A) technical analysis will produce superior results.
B) fundamental analysis will provide better results.
C) market efficiency will be increased by analysts trying to analyze securities.
D) stock prices will always rise instantaneously with the release of new information.
E) none of the above.
Q3) Describe an example of a market which is weak-form but not strong-form efficient.
Q4) If the market is semistrong-form efficient is it also weak form efficient?
If the market is weak-form efficient is it also semistrong-form efficient?
Q5) List and discuss the three forms of market efficiency.
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Chapter 9: Behavioural Finance and the Psychology of Investing
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Sample Questions
Q1) If you suffer from money illusion, you:
A) are obsessed with earning high returns and gathering great wealth.
B) believe that your meager savings will support your retirement even though that is totally unrealistic.
C) do not understand the difference between nominal and real buying power.
D) refuse to recognize that you have incurred losses which will probably not be offset for an extended period of time.
E) believe that everyone else has more money than you do, even though that is untrue.
Q2) Martha refuses to invest her retirement money in stocks or bonds as she is afraid that if she does, she will lose money this year. Martha is displaying a characteristic known as:
A) frame dependence.
B) regret aversion.
C) mental accounting.
D) house money.
E) myopic loss aversion.
Q3) Present some arguments for and against the usefulness of technical analysis as a means of predicting future market prices.
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Chapter 10: Interest Rates
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Sample Questions
Q1) According to modern term structure theory, which of the following factors is most likely to determine whether the term structure of interest rates is upward or downward sloping?
A) The default premium.
B) The inflation premium.
C) The interest rate risk premium.
D) The nominal interest rate.
E) The liquidity premium.
Q2) The highest historical interest rates in Canada occurred during the:
A) 1940s.
B) 1950s.
C) 1960s.
D) 1970s.
E) 1980s.
Q3) Canadian T-bills rates are quoted using:
A) bank discount yield.
B) annual percentage rate.
C) effective annual rate.
D) bond equivalent yield.
E) bid yield.
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Chapter 11: Bond Prices and Yields
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Sample Questions
Q1) Josh is saving money to purchase a home in 9 years. Explain why Josh should create a coupon bond portfolio with a duration of 9 years, rather than purchasing coupon bonds that mature in 9 years.
Q2) A callable bond is most likely to be called when:
A) The stock price increases.
B) The stock price decreases.
C) Interest rates increase.
D) Interest rates decrease.
E) Debt for the company is given a lower credit rating.
Q3) A 12-year zero coupon bond with par value of $1,000 and yield-to-maturity of 7% has a duration of
A) 12.00 years.
B) zero year.
C) 8.56 years.
D) 13.15 years.
E) 5.74 years.
Q4) Why do low coupon bonds change more in price than high coupon bonds?
Q5) What are the five bond pricing theorems described by Burton Malkiel?
Q6) Explain the concept of duration and its role in bond portfolio management.
Q7) Discuss the possible impact of default risk on duration?
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Chapter 12: Return, Risk and Security Management
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Sample Questions
Q1) The graphical representation of the Capital Asset Pricing Model outlining the linear relationship between systematic risk and the expected return of an asset is shown by:
A) covariance.
B) beta.
C) the market risk premium.
D) the reward-to-risk ratio.
E) the security market line.
Q2) Which one of the following must be equal for two individual securities with differing betas if those securities are correctly priced according to the capital asset pricing model?
A) standard deviation
B) rate of return
C) beta
D) risk premium
E) reward-to-risk ratio
Q3) Can a risky asset ever have a negative beta? (Hint: Yes) What would the expected return be on such an asset? Why would you want to buy such an asset?
Q4) Explain what beta is and why it is important.
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Chapter 13: Performance Evaluation and Risk Management
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Sample Questions
Q1) Which of the following performance measures is zero for the market?
I. Treynor ratio
II. Sharpe ratio
III. Jensen's alpha
A) II only
B) I and III only
C) I and II only
D) III only
E) I, II, and III
Q2) The best performance measure overall is:
A) the Treynor ratio.
B) the raw return.
C) the Sharpe ratio.
D) Jensen's alpha.
E) There is no best performance measure in all situations.
Q3) Assuming the market is efficient, what do you know about Jensen's alpha for all assets in the market? Will this always hold in an efficient market? Why or why not?
Q4) What is main difference between passive and active portfolio management strategy?
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Chapter 14: Options
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Sample Questions
Q1) When you write a covered call, you:
A) Forfeit upside potential gains in exchange for current income
B) Risk of having to buy shares of the underlying security at the market price
C) Risk selling your underlying shares at a currently unknown price
D) Are basically offering to buy shares in exchange for receiving the option premium
E) Accept unlimited risk
Q2) Employee stock options
A) Can be resold as long as they are "at-the-money"
B) Are generally issued underwater
C) Have no value unless the intrinsic value is positive
D) Are only issued to corporate officers
E) Help align manager's interests with those of the shareholders
Q3) A short straddle
A) Involves exercising two or more options simultaneously.
B) Increases downside risk.
C) Allows you to profit if a stock price remains constant.
D) Requires a bull market if you are to profit.
E) Involves selling shares you are currently own.
Q4) Explain how a credit default swap is used to manage risk.
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Chapter 15: Option Valuation
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Sample Questions
Q1) How many options values at expiration would you have to calculate in a four-period binomial option pricing model?
A) 1
B) 2
C) 3
D) 4
E) 5
Q2) A put option with a price of $10.21 has a delta of-0.51. If the underlying stock price increases by $1.30, what is the new put price?
A) $10.87
B) $9.70
C) $10.72
D) $9.55
E) $10.61
Q3) Create a stock price tree for three periods for a stock that is currently valued at $10 a share. The up amount per period is 1.15 and the down amount per period is .90. Show all dollar amounts to 3 decimal places.
Q4) Why does the value of an option increase as the volatility of the underlying asset increases?
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Chapter 16: Futures Contracts
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Sample Questions
Q1) Margin requirements on long and short positions are
A) higher on shorts
B) higher on longs
C) rarely the same
D) generally the same
E) influenced by the customer's net worth
Q2) You purchased eight March S&P Midcap futures at a price of 482.15 and sold them at the low price of the day. What was your dollar return?
A) $60,400
B) $59,860
C) $62,560
D) $61,440
E) $61,840
Q3) In Canada, who is responsible for standardizing a financial futures contract?
A) Winnipeg Commodity Exchange.
B) Toronto Stock Exchange.
C) Vancouver Exchange.
D) Montreal Exchange.
E) All of the above.
Q4) Compare the pros and cons of a futures hedge with an option hedge.
Page 18
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Chapter 17: Projecting Cash Flow and Earnings
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Sample Questions
Q1) Which of the following is false regarding interest? Interest payments:
A) are not discretionary.
B) are tax-deductible.
C) do not directly appear in the statement of cash flows.
D) appear on the income statement.
E) none of the above.
Q2) Items that reduce the net income of a firm, but do not affect the firms' cash flows are called _________ item.
A) expense
B) intangible
C) noncash
D) paid-in
E) financing
Q3) Simonz Co. had a ROE of 12% last year, and the ROE increased to 40% this year. At the same time, the profit margin decreased. How is this possible?
Q4) When examining ROE and ROA, which is the most important? Why?
Q5) Explain why an income statement and a statement of cash flows will differ for the same company.
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Chapter 18: Corporate Bonds
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Sample Questions
Q1) Which of the following is false concerning corporate bonds?
A) Coupon and principal payments are stated in advance when the bond is first issued.
B) Bonds represent a creditor's claim on the corporation.
C) Most corporate bonds are callable.
D) The yield to maturity is constant throughout a bond's life.
E) Canadian corporate bonds generally have a $1,000 face value.
Q2) Some companies issue bonds without a credit rating. Given that many institutions have prudent investment guidelines and cannot invest in unrated bonds, why would a company issue unrated bonds?
Q3) The _________ is the difference between the promised yields of risky bond issues at a given time relative to yields on Treasury issues of equal maturity.
A) yield margin
B) bid-ask spread
C) yield spread
D) yield-to-worst
E) current yield
Q4) Under what conditions are callable bonds most apt to be called and who tends to benefit if they are called?
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Chapter 19: Government Bonds and Mortgaged-Backed Securities
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Sample Questions
Q1) Which of the following bid types are permitted at auction for Canada Treasury securities?
I. Competitive.
II. Noncompetitive.
III. Stop-out.
A) I only
B) III only
C) I and III only
D) I, II, and III
E) I and II only
Q2) VRDOs frequently carry a provision allowing the issuer to
A) Convert the issue into a fixed-rate issue
B) Delay payments under certain circumstances
C) Convert the issue from GO bonds to revenue bonds
D) Repay the entire issue at any time with 30-day notice
E) Eliminate the call premium if the entire issue is called
Q3) Evaluate this claim: "Treasury bonds have no risk."
Q4) What are the pros and cons of investing in municipal bonds?
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Q5) Why would an investor buy government-issued inflation-indexed bonds when other government bonds pay a higher coupon rate?
Chapter 20: International Portfolio Investment
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Sample Questions
Q1) Shares of companies are simultaneously sold in more than one stock exchange. Such a process is called _________
A) cross-listing
B) crowd-trading
C) head-hunting
D) spin-off
E) market dumping
Q2) Which of the following are benefits of investing in international markets: I) Exposure to high returns provided by some emerging market
II) Increased diversification due to low correlation amongst international markets
III) Protection from foreign exchange risk
A) I only
B) I and III only
C) I, II and III
D) I and II only
E) None of these are benefits
Q3) Why do foreign investors often use currency forward or futures contracts to hedge against exchange-rate risk?
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