Course Introduction
Security Analysis Test
Preparation
Security Analysis is a comprehensive course focused on the methodologies and tools used for evaluating the intrinsic value of financial securities, including stocks and bonds. The course emphasizes both fundamental and technical analysis, teaching students how to interpret financial statements, assess economic and industry trends, and apply valuation techniques such as discounted cash flow and ratio analysis. Through case studies and practical exercises, students learn to identify undervalued and overvalued securities, manage investment risks, and construct sound investment portfolios aligned with financial objectives. This course is essential for those aspiring to careers in investment analysis, asset management, or financial consulting.
Recommended Textbook
Investments 9th Edition by Zvi Bodie
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2307 Flashcards
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Chapter 1: The Investment Environment
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Sample Questions
Q1) Which of the following are mechanisms that have evolved to mitigate potential agency problems?
I.Compensation in the form of the firm's stock options
II.Hiring bickering family members as corporate spies
III.Underperforming management teams being forced out by boards of directors
IV.Security analysts monitoring the firm closely
V.Takeover threats
A)II and V
B)I, III, and IV
C)I, III, IV, and V
D)III, IV, and V
E)I,III,and V
Answer: C
Q2) Discuss securitization as it relates to the field of investments.
Answer: Securitization refers to aggregating underlying financial assets, su
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Chapter 2: Asset Classes and Financial Instruments
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Sample Questions
Q1) The smallest component of the bond market is A)Treasury
B)other asset-backed
C)corporate
D)tax-exempt
E)mortgage-backed
Answer: B
Q2) The ____ index represents the performance of the Hong Kong stock market.
A)DAX
B)FTSE
C)Nikkei
D)Hang Seng
E)None of the above
Answer: D
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Page 4
Chapter 3: How Securities are Traded
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Sample Questions
Q1) The securities act of 1934 ____________.
I.requires full disclosure of relevant information relating to the issue of new securities
II.requires registration of new securities
III.requires issuance of a prospectus detailing financial prospects of the firm
IV.established the SEC
V.requires periodic disclosure of relevant financial information
VI.empowers SEC to regulate exchanges,OTC trading,brokers,and dealers
A)I, II and III
B)I, II, III, IV, V, and VI
C)I, II and V
D)I, II and IV
E)IV,V,and VI
Answer: E
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Chapter 4: Mutual Funds and Other Investment Companies
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Sample Questions
Q1) Which of the following is true regarding equity mutual funds?
I.They invest primarily in stock.
II.They may hold fixed-income securities as well as stock.
III.Most hold money market securities as well as stock.
IV.Two types of equity funds are income funds and growth funds.
A)I and IV
B)I, III, and IV
C)I, II, and IV
D)I, II, and III
E)I,II,III,and IV
Q2) Which of the following functions do investment companies perform for their investors?
A)Record keeping and administration
B)Diversification and divisibility
C)Professional management
D)Lower transaction costs
E)All of the above.
Q3) List and describe the more important types of mutual funds according to their investment policy and use.
Q4) Discuss the taxation of mutual fund income.
Page 6
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Chapter 5: Introduction to Risk,return,and the Historical Record
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Sample Questions
Q1) You purchased a share of stock for $30.One year later you received $1.50 as a dividend and sold the share for $32.25.What was your holding-period return?
A)12.5%
B)12.0%
C)13.6%
D)11.8%
E)none of the above
Q2) What is the expected holding-period return for KMP stock?
A)10.40%
B)9.32%
C)11.63%
D)11.54%
E)10.88%
Q3) What is the expected standard deviation for GM stock?
A)16.91%
B)16.13%
C)13.79%
D)15.25%
E)14.87%
Q4) Discuss why common stocks must earn a risk premium.
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Chapter 6: Risk Aversion and Capital Allocation to Risky Assets
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Sample Questions
Q1) To maximize her expected utility,which one of the following investment alternatives would she choose?
A)A portfolio that pays 10 percent with a 60 percent probability or 5 percent with 40 percent probability.
B)A portfolio that pays 10 percent with 40 percent probability or 5 percent with a 60 percent probability.
C)A portfolio that pays 12 percent with 60 percent probability or 5 percent with 40 percent probability.
D)A portfolio that pays 12 percent with 40 percent probability or 5 percent with 60 percent probability.
E)none of the above.
Q2) Which of the following statements regarding risk-averse investors is true?
A)They only care about the rate of return.
B)They accept investments that are fair games.
C)They only accept risky investments that offer risk premiums over the risk-free rate.
D)They are willing to accept lower returns and high risk.
E)A and B.
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Chapter 7: Optimal Risky Portfolios
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Sample Questions
Q1) Security M has expected return of 17% and standard deviation of 32%.Security S has expected return of 13% and standard deviation of 19%.If the two securities have a correlation coefficient of 0.78,what is their covariance?
A)0.038
B)0.049
C)0.047
D)0.045
E)0.054
Q2) The risk-free portfolio that can be formed with the two securities will earn _____ rate of return.
A)8.5%
B)9.0%
C)8.9%
D)9.9%
E)none of the above
Q3) State Markowitz's mean-variance criterion.Give some numerical examples of how the criterion would be applied.
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Chapter 8: Index Models
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Sample Questions
Q1) Discuss the advantages of the single-index model over the Markowitz model in terms of numbers of variable estimates required and in terms of understanding risk relationships.
Q2) Assume that stock market returns do follow a single-index structure.An investment fund analyzes 175 stocks in order to construct a mean-variance efficient portfolio constrained by 175 investments.They will need to calculate ________ estimates of expected returns and ________ estimates of sensitivity coefficients to the macroeconomic factor.
A)175; 15,225
B)175; 175
C)15,225; 175
D)15,225; 15,225
E)none of the above
Q3) The intercept in the regression equations calculated by beta books is equal to A) in the CAPM
B) + rf(1 + )
C) + rf(1 - )
D)1 -
E)none of the above
Q4) Discuss the security characteristic line (SCL).
Page 10
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Chapter 9: The Capital Asset Pricing Model
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Sample Questions
Q1) The expected return - beta relationship of the CAPM is graphically represented by
A)the security market line.
B)the capital market line.
C)the capital allocation line.
D)the efficient frontier with a risk-free asset.
E)the efficient frontier without a risk-free asset.
Q2) One of the assumptions of the CAPM is that investors exhibit myopic behavior.What does this mean?
A)They plan for one identical holding period.
B)They are price-takers who can't affect market prices through their trades.
C)They are mean-variance optimizers.
D)They have the same economic view of the world.
E)They pay no taxes or transactions costs.
Q3) In equilibrium,the marginal price of risk for a risky security must be
A)equal to the marginal price of risk for the market portfolio.
B)greater than the marginal price of risk for the market portfolio.
C)less than the marginal price of risk for the market portfolio.
D)adjusted by its degree of nonsystematic risk.
E)none of the above are true.
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Page 11
Chapter 10: Arbitrage Pricing Theory and Multifactor Models
of Risk and Return
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Sample Questions
Q1) Consider the one-factor APT.Assume that two portfolios,A and B,are well diversified.The betas of portfolios A and B are 1.0 and 1.5,respectively.The expected returns on portfolios A and B are 19% and 24%,respectively.Assuming no arbitrage opportunities exist,the risk-free rate of return must be ____________.
A)4.0%
B)9.0%
C)14.0%
D)16.5%
E)none of the above
Q2) An arbitrage opportunity exists if an investor can construct a __________ investment portfolio that will yield a sure profit.
A)positive
B)negative
C)zero
D)all of the above
E)none of the above
Q3) Discuss the advantages of arbitrage pricing theory (APT)over the capital asset pricing model (CAPM)relative to diversified portfolios.
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Chapter 11: The Efficient Market Hypothesis
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Sample Questions
Q1) Why might the degree of market efficiency differ across various markets? State three reasons why this might occur and explain each reason briefly.
Q2) If you believe in the _________ form of the EMH,you believe that stock prices reflect all available information,including information that is available only to insiders.
A)semistrong
B)strong
C)weak
D)all of the above
E)none of the above
Q3) Google has a beta of 1.0.The annualized market return yesterday was 11%,and the risk-free rate is currently 5%.You observe that Google had an annualized return yesterday of 14%.Assuming that markets are efficient,this suggests that
A)bad news about Google was announced yesterday.
B)good news about Google was announced yesterday.
C)no news about Google was announced yesterday.
D)interest rates rose yesterday.
E)interest rates fell yesterday.
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13
Chapter 12: Behavioral Finance and Technical Analysis
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Sample Questions
Q1) The capital asset pricing model assumes
A)all investors are price takers.
B)all investors have the same holding period.
C)investors have homogeneous expectations.
D)both A and B are true.
E)A,B and C are all true.
Q2) According to the Capital Asset Pricing Model (CAPM),underpriced securities
A)have positive betas.
B)have zero alphas.
C)have negative betas.
D)have positive alphas.
E)none of the above.
Q3) Your opinion is that Boeing has an expected rate of return of 0.112.It has a beta of 0.92.The risk-free rate is 0.04 and the market expected rate of return is 0.10.According to the Capital Asset Pricing Model,this security is
A)underpriced.
B)overpriced.
C)fairly priced.
D)cannot be determined from data provided.
E)none of the above.
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Chapter 13: Empirical Evidence on Security Returns
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Sample Questions
Q1) Benchmark error
A)refers to the use of an incorrect market proxy in tests of the CAPM.
B)can result in inconclusive tests of the CAPM.
C)can result in incorrect evaluation measures for portfolio managers.
D)A and B.
E)A,B,and C.
Q2) Kandel and Stambaugh (1995)expanded Roll's critique of the CAPM by arguing that tests rejecting a positive relationship between average return and beta are demonstrating
A)the inefficiency of the market proxy used in the tests.
B)that the relationship between average return and beta is not linear.
C)that the relationship between average return and beta is negative.
D)the need for a better way of explaining security returns.
E)none of the above
Q3) According to Roll,the only testable hypothesis associated with the CAPM is
A)the number of ex post mean-variance efficient portfolios.
B)the exact composition of the market portfolio.
C)whether the market portfolio is mean-variance efficient.
D)the SML relationship.
E)none of the above.
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Chapter 14: Bond Prices and Yields
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Sample Questions
Q1) A coupon bond that pays interest of $100 annually has a par value of $1,000,matures in 5 years,and is selling today at a $72 discount from par value.The yield to maturity on this bond is __________.
A)6.00%
B)8.33%
C)12.00%
D)60.00%
E)none of the above
Q2) You purchased an annual interest coupon bond one year ago with 6 years remaining to maturity at the time of purchase.The coupon interest rate is 10% and par value is $1,000.At the time you purchased the bond,the yield to maturity was 8%.If you sold the bond after receiving the first interest payment and the bond's yield to maturity had changed to 7%,your annual total rate of return on holding the bond for that year would have been _________.
A)7.00%
B)8.00%
C)9.95%
D)11.95%
E)none of the above
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Page 16
Chapter 15: The Term Structure of Interest Rates
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Sample Questions
Q1) What is the price of a 4-year maturity bond with a 10% coupon rate paid annually? (Par value = $1,000)
A)$742.09
B)$1,222.09
C)$1,035.66
D)$1,141.84
E)none of the above
Q2) An inverted yield curve is one A)with a hump in the middle.
B)constructed by using convertible bonds.
C)that is relatively flat.
D)that plots the inverse relationship between bond prices and bond yields.
E)that slopes downward.
Q3) What is the yield to maturity of a 5-year bond?
A)4.6%
B)4.9%
C)5.2%
D)5.5%
E)5.8%
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Chapter 16: Managing Bond Portfolios
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Sample Questions
Q1) Which of the following is true?
A)Holding other things constant,the duration of a bond decreases with time to maturity.
B)Given time to maturity,the duration of a zero-coupon increases with yield to maturity.
C)Given time to maturity and yield to maturity,the duration of a bond is higher when the coupon rate is lower.
D)Duration is a better measure of price sensitivity to interest rate changes than is time to maturity.
E)C and D.
Q2) Holding other factors constant,the interest-rate risk of a coupon bond is lower when the bond's:
A)term-to-maturity is higher.
B)coupon rate is lower.
C)yield to maturity is higher.
D)A and B.
E)All of the above.
Q3) Discuss rate anticipation swaps as a bond portfolio management strategy.
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18
Chapter 17: Options Markets: Introduction
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Sample Questions
Q1) The industry with the highest return in 2009 was
A)home construction.
B)travel and tourism.
C)health care.
D)brokerage.
E)banking.
Q2) If the economy were going into a recession,an attractive industry to invest in would be the ________ industry.
A)automobile
B)medical services
C)construction
D)A and C
E)B and C
Q3) The process of estimating the dividends and earnings that can be expected from the firm based on determinants of value is called
A)business cycle forecasting.
B)macroeconomic forecasting.
C)technical analysis.
D)fundamental analysis.
E)none of the above.
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Chapter 18: Option Valuation
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Sample Questions
Q1) The market capitalization rate on the stock of Flexsteel Company is 12%.The expected ROE is 13% and the expected EPS are $3.60.If the firm's plowback ratio is 75%,the P/E ratio will be ________.
A)7.69
B)8.33
C)9.09
D)11.11
E)none of the above
Q2) A firm has a return on equity of 14% and a dividend payout ratio of 60%.The firm's anticipated growth rate is _________.
A)5.6%
B)10%
C)14%
D)20%
E)none of the above
Q3) Discuss the Gordon,or constant discounted dividend,model of common stock valuation.Include in your discussion the advantages,disadvantages,and assumptions of the model.
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20
Chapter 19: Futures Markets
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Sample Questions
Q1) Refer to the financial statements of Midwest Tours.The firm's quick ratio for 2009 is
A)1.71
B)0.78
C)0.85
D)1.56
E)none of the above
Q2) Refer to the financial statements of Midwest Tours.The firm's return on equity ratio for 2009 is __________.
A)12.24%
B)14.63%
C)15.50%
D)14.50%
E)16.9%
Q3) An example of a liquidity ratio is _______.
A)fixed asset turnover
B)current ratio
C)acid test or quick ratio
D)A and C
E)B and C
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Chapter 20: Futures, swaps, and Risk Management
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Sample Questions
Q1) The current market price of a share of CSCO stock is $22.If a put option on this stock has a strike price of $20,the put
A)is out of the money.
B)is in the money.
C)sells for a higher price than if the strike price of the put option was $25.
D)A and C.
E)B and C.
Q2) The current market price of a share of CAT stock is $76.If a call option on this stock has a strike price of $76,the call A)is out of the money.
B)is in the money.
C)is at the money.
D)A and C.
E)B and C.
Q3) List three types of exotic options and describe their characteristics.
Q4) What is the Option Clearing Corporation (OCC)and how does this organization facilitate option trading?
Q5) Describe the protective put.What are the advantages of such a strategy?
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Chapter 21: Macroeconomic and Industry Analysis
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Sample Questions
Q1) Other things equal,the price of a stock put option is negatively correlated with the following factors
A)the stock price.
B)the time to expiration.
C)the stock volatility.
D)the exercise price.
E)B,C,and D.
Q2) A call option has an intrinsic value of zero if the option is A)at the money.
B)out of the money.
C)in the money.
D)A and C.
E)A and B.
Q3) A hedge ratio for a call is always A)equal to one.
B)greater than one.
C)between zero and one.
D)between minus one and zero.
E)of no restricted value.
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Page 23
Chapter 22: Equity Valuation Models
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Sample Questions
Q1) If you determine that the DAX-30 index futures is under priced relative to the spot DAX-30 index you could make an arbitrage profit by
A)buying all the stocks in the DAX-30 and selling put options on the DAX-30 index.
B)selling short all the stocks in the DAX-30 and buying DAX-30 futures.
C)selling all the stocks in the DAX-30 and buying call options on the DAX-30 index.
D)buying DAX-30 index futures and selling all the stocks in the DAX-30.
E)none of the above.
Q2) Describe the types of traders that are active in the futures markets.Explain why each type is in the markets and how their goals differ.Give an example of how each might use the market.
Q3) Agricultural futures contracts are actively traded on A)milk.
B)orange juice.
C)lumber.
D)A and B.
E)all of the above.
Q4) Describe the differences between futures and forward contracts.
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Page 24
Chapter 23: Financial Statement Analysis
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Sample Questions
Q1) Suppose that the risk-free rate is 4% and the market risk premium is 6%.You are interested in a cocoa futures contract.The beta of cocoa is -0.291.
- What is the required annual rate of return on the cocoa contract?
- You plan to hold the contract for three months,then take delivery of the cocoa.At that time you expect the spot price of cocoa to be $900 per ton.What is the present value of this three-month deferred claim?What would the proper price be for this contract?
Q2) A swap
A)obligates two counterparties to exchange cash flows at one or more future dates. B)allows participants to restructure their balance sheets.
C)allows a firm to convert outstanding fixed rate debt to floating rate debt.
D)A and B.
E)A,B,and C.
Q3) Why are commodity futures prices different from other futures prices? Explain the difference and give an example of a commodity and the factors involved.
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Chapter 24: Portfolio Performance Evaluation
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Sample Questions
Q1) Suppose the risk-free return is 4%.The beta of a managed portfolio is 1.2,the alpha is 1%,and the average return is 14%.Based on Jensen's measure of portfolio performance,you would calculate the return on the market portfolio as
A)11.5%
B)14%
C)15%
D)16%
E)none of the above
Q2) Suppose you purchase 100 shares of GM stock at the beginning of year 1,and purchase another 100 shares at the end of year 1.You sell all 200 shares at the end of year 2.Assume that the price of GM stock is $50 at the beginning of year 1,$55 at the end of year 1,and $65 at the end of year 2.Assume no dividends were paid on GM stock.Your dollar-weighted return on the stock will be __________ your time-weighted return on the stock.
A)higher than B)the same as C)less than D)exactly proportional to E)more information is necessary to answer this question
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Page 26
Chapter 25: International Diversification
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Q1) If you invested 50% of your money in the Canadian stock market and 50% in the U.S.stock market,the standard deviation of return of your portfolio would be
A)12.53%
B)15.21%
C)17.50%
D)18.75%
E)none of the above
Q2) The average country equity market share is
A)less than 2%
B)between 3% and 4%
C)between 5% and 7%
D)between 7% and 8%
E)greater than 8%
Q3) Calculate Quantitative's country selection return contribution.
A)12.5%
B)-12.5%
C)11.25%
D)-1.25%
E)1.25%
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Chapter 26: Hedge Funds
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Q1) ______ are the dominant form of investing in securities markets for most individuals but ______ have enjoyed a far greater growth rate in the last decade.
A)Hedge funds; hedge funds
B)Mutual funds; hedge funds
C)Hedge funds; mutual funds
D)Mutual funds; mutual funds
E)none of the above
Q2) Hedge fund strategies can be classified as ______.
A)directional and nondirectional
B)stock or bond
C)arbitrage or speculation
D)B and C
E)A and B
Q3) Explain the five major differences between hedge funds and mutual funds.
Q4) Statistical arbitrage is a version of a ______ strategy.
A)market neutral
B)directional
C)relative value
D)divergence
E)convergence
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Chapter 27: The Theory of Active Portfolio Management
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Q1) If a portfolio manager consistently obtains a high Sharpe measure,the manager's forecasting ability __________.
A)is above average
B)is average
C)is below average
D)does not exist
E)cannot be determined based on the Sharpe measure
Q2) The critical variable in the determination of the success of the active portfolio is
A)alpha/systematic risk
B)alpha/nonsystematic risk
C)gamma/systematic risk
D)gamma/nonsystematic risk
E)none of the above
Q3) The Treynor-Black model requires estimates of ________.
A)alpha/beta
B)alpha/beta/residual variance
C)beta/residual variance
D)alpha/residual variance
E)none of the above
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Chapter 28: Investment Policy and the Framework of the
CFA Institute Appendices
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Q1) The risk management section of an Investment Policy Statement for individual investors typically contains ________.
A)relevant constraints
B)other relevant considerations
C)performance measurement accountabilities, metrics for risk measurement, and the rebalancing process
D)A and B
E)all of the above
Q2) U.S.mutual funds are restricted to holding no more than __________ of any publicly traded corporation.
A)1%
B)5%
C)10%
D)25%
E)There is no restriction on percentage ownership.
Q3) Discuss the tax status of the major categories of institutional investors described in the text.
Q4) Discuss investments as a hedge against inflation
Q5) Discuss some of the advantages "personal funds" have over mutual funds.
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