Advanced Investments
Final Exam Questions
Course Introduction
Advanced Investments explores complex concepts and strategies in portfolio management, asset pricing, and risk assessment. The course covers a range of topics including derivative securities, fixed income analysis, hedge fund techniques, behavioral finance, and alternative investments. Emphasis is placed on quantitative methods, developing advanced modeling skills, and evaluating contemporary research to inform investment decisions. Students will apply theoretical frameworks through case studies, simulations, and real-world financial data, preparing them for higher-level decision-making roles in investment management, financial analysis, and related fields.
Recommended Textbook Fundamentals of Investments Valuation and Management 7th Edition by Bradford Jordan
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Page 2
Chapter 1: A Brief History of Risk and Return
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Q1) The additional return earned for accepting risk is called the:
A)inflated return.
B)capital gains yield.
C)real return.
D)riskless rate.
E)risk premium.
Answer: E
Q2) A stock produced annual returns of 5,-21,11,42,and 4 percent over the past five years,respectively.What is the geometric average return?
A)5.78 percent
B)6.03 percent
C)6.34 percent
D)7.21 percent
E)8.20 percent
Answer: C
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Page 3
Chapter 2: The Investment Process
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Sample Questions
Q1) Briefly describe the NYSE up-tick rule,the rationale for it and the current status of the rule.
Answer: The New York Stock Exchange Uptick Rule prohibited short sales unless the last price change was an "uptick" or increase.The NYSE originally enacted the rule to make it more difficult for speculators to drive down a stock's price by repeated short sales.Note that this rule applied only to trades on the NYSE,not on other trading venues.The rule was repealed in June 2007.A new rule was approved in 2010 which does not apply any short-selling constraints until a stock declines by 10 percent in a single day.If this decline occurs,then any subsequent short sale is subject to the uptick rule.
Q2) Stephen is purchasing 700 shares of KPT,Inc.,stock at a price per share of $28.00.What is the minimum amount the Federal Reserve will require Stephen to pay in cash for this purchase?
A)$4,488
B)$7,480
C)$9,800
D)$10,968
E)$11,960
Answer: C
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Page 4
Chapter 3: Overview of Security Types
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Q1) Which one of the following is classified as a fixed-income security?
A)U.S. Treasury bill
B)6-month municipal bond
C)common stock that pays regular quarterly dividends
D)2-year U.S. Treasury security
E)9-month bank certificate of deposit
Answer: D
Q2) If you want the right,but not the obligation,to sell a stock at a specified price you should:
A)buy a call.
B)sell a call.
C)buy a put.
D)sell a put.
E)either sell a call or buy a put.
Answer: C
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Chapter 4: Mutual Funds and Other Investment Companies
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Sample Questions
Q1) Which of the following will exempt a hedge fund from registering with the SEC?
A)offering shares to the general public
B)being in existence for more than two years
C)limiting sales to individual investors
D)locking up investor's money for at least two years
E)exceeding $25 million in assets
Q2) Which one of the following is NOT included in the fee table found in a mutual fund prospectus?
A)12b-1 fee
B)turnover rate
C)redemption fee percentage
D)management fee
E)front-end load
Q3) Which one of the following is a general characteristic of a tax-managed fund?
A)low turnover rate
B)concentration on income-producing securities
C)high level of realized capital gains
D)higher trading costs than average funds
E)matching of dividend income to capital gains
Q4) What are the primary differences between an ETF and an ETN?
Page 6
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Chapter 5: The Stock Market
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Q1) Which one of the following statements concerning the NYSE is correct?
A)The NYSE was created based on the Walnut Tree Agreement.
B)The average daily trading volume on the NYSE in 2007 was approximately one billion shares.
C)The NYSE and NASDAQ merged in 2007.
D)The NYSE is part of a firm that also operates a stock exchange in Amsterdam.
E)The NYSE merged with NASDAQ in 2007.
Q2) An index is valued on a daily basis.However,some stocks in this particular index have not traded recently.As a result,this index suffers from index:
A)fatigue.
B)devaluation.
C)flatness.
D)staleness.
E)weighting.
Q3) Describe the primary advantage and disadvantage of a limit sell order.
Q4) Describe some of the recent changes in the structure and operations of the NYSE.
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Chapter 6: Common Stock Valuation
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Q1) PT Boats plans to pay a $2.25 a share dividend at the end of each of the next 2 years.At the end of year 3,it will pay a final liquidating dividend of $15 a share.After that,the company plans to close its doors permanently.What is the current value of this stock at a discount rate of 15 percent?
A)$9.89
B)$10.26
C)$11.54
D)$12.47
E)$13.50
Q2) The Free Cash Flow Model:
I.can be used to value a company with negative earnings
II.is based on a firm having positive cash flows
III.requires that a firm pay a dividend
IV.directly estimates a value for a firm's equity
A)I only
B)I and II only
C)I and III only
D)I, II, and III only
E)I, II, III, and IV
Q3) Identify three causes for a decrease in a firm's sustainable rate of growth.
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Chapter 7: Stock Price Behavior and Market Efficiency
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Q1) Studies indicate that the Vanguard 500 Index fund tends to:
A)underperform most professional money managers.
B)produce a return equal to that of professional managers.
C)outperform the average professional money manager, but only over the short-term.
D)outperform most professional money managers especially over longer-periods of time.
E)support the argument that the stock market is inefficient.
Q2) Research on semistrong-form efficient markets indicates which one of the following is correct?
A)Identifying a stock with repetitive price movements is generally the best method of active investing.
B)Future returns on large company stocks tend to closely follow past pricing patterns.
C)Buying and holding a broad market index is one of the best investment strategies.
D)Predicting future stock prices is relatively easy for academic researchers.
E)Trading costs have little, if any, impact on investment returns.
Q3) What are some of the key lessons to be learned from historical stock market crashes?
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Chapter 8: Behavioral Finance and the Psychology of Investing
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Q1) According to Elliott wave theory,market predictions should be based on which one of the following?
A)eight-week repetitive trading patterns
B)the tidal waves created by the gravitational pull of the moon
C)series of historical market price swings
D)an industry's historical rate of growth
E)market fads and trends
Q2) The increased cash flows into mutual funds that have recently had superior returns is most associated with which one of the following characteristics?
A)overconfidence
B)excess trading
C)clustering illusion
D)diversification
E)risk aversion
Q3) Draw a basic Elliott Wave Pattern.Identify each wave and indicate the waves that are "corrective" and those that are "impulsive".
Q4) Give some examples of how overconfidence affects investor behavior along with the results that might be expected based on that behavior.
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Chapter 9: Interest Rates
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Sample Questions
Q1) Write a short paragraph comparing a bank discount rate to a bond equivalent rate.
Q2) Which one of the following rates is used by brokerage firms as the basis for determining margin loan rates?
A)discount
B)Fed funds
C)prime
D)brokerage
E)call money
Q3) A Treasury bill has 40 days left to maturity.The bank discount yield on the bill is 3.75 percent.What is the effective annual rate?
A)3.55 percent
B)3.66 percent
C)3.77 percent
D)3.88 percent
E)3.99 percent
Q4) Identify and describe five interest rates that directly apply to the money market.
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11
Chapter 10: Bond Prices and Yields
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Sample Questions
Q1) Which one of the following does an issuer pay to redeem a bond prior to maturity?
A)par value
B)face value
C)put price
D)call price
E)discounted price
Q2) A $1,000 semiannual coupon bond matures in 15 years,has a coupon rate of 7.5 percent,and a market price of $982.What is the yield to maturity?
A)3.86 percent
B)4.01 percent
C)4.08 percent
D)7.53 percent
E)7.70 percent
Q3) Which one of the following statements applies to a par value bond?
A)The current yield is less than the coupon rate.
B)The yield-to-maturity equals the risk-free, or Treasury bill, rate.
C)The par value exceeds the market price.
D)The current yield, coupon rate, and yield-to-maturity are equal.
E)The dirty price equals the clean price.
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Page 12
Chapter 11: Diversification and Risky Asset Allocation
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Sample Questions
Q1) Alicia has a portfolio consisting of two stocks,X and Y,which is valued at $89,100.Stock X is worth $57,800.What is the portfolio weight of stock Y?
A).351
B).390
C).523
D).610
E).649
Q2) A stock fund has a standard deviation of 16 percent and a bond fund has a standard deviation of 4 percent.The correlation of the two funds is .11.What is the weight of the stock fund in the minimum variance portfolio?
A)3.47 percent
B)6.48 percent
C)11.92 percent
D)14.67 percent
E)18.22 percent
Q3) Foreign securities are generally considered to be more risky than domestic securities.Given this assumption,explain how adding foreign securities into a domestic portfolio can affect the Markowitz efficient portfolios.
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13
Chapter 12: Return, Risk, and the Security Market Line
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Q1) Explain the relationship between the security market line and market efficiency.
Q2) Which one of the following measures systematic risk?
A)beta
B)alpha
C)variance
D)standard deviation
E)correlation coefficient
Q3) Dinner Foods stock has a beta of 1.45 and an expected return of 13.43 percent.Edwards' Meals stock has a beta of .95 and an expected return of 10.27 percent.Assume that both stocks are correctly priced.Given this,the risk-free rate is _____ percent and the market rate of return is _____ percent.
A)4.02; 11.53
B)4.09; 12.35
C)4.10; 11.53
D)4.27; 10.59
E)4.41; 10.25
Q4) Identify and describe each of the three components of a security's expected return according to the capital asset pricing model.
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Page 14
Chapter 13: Performance Evaluation and Risk Management
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Sample Questions
Q1) A portfolio has a beta of 1.26,a standard deviation of 15.9 percent,and an average return of 15.07 percent.The market rate is 12.7 percent and the risk-free rate is 3.6 percent.What is the Sharpe ratio?
A).61
B).68
C).72
D).84
E).88
Q2) A fund has an alpha of 0.73 percent and a tracking error of 4.9 percent.What is the fund's information ratio?
A)0.112
B)0.135
C)0.149
D)0.208
E)0.229
Q3) Explain a key advantage and a key disadvantage of Jensen's alpha.
Q4) Explain the similarities and differences between the Sharpe and Treynor ratios.Also,explain the most appropriate application for each.
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Chapter 14: Futures Contracts
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Sample Questions
Q1) An investor who shifts risk is referred to as which one of the following?
A)hedger
B)short seller
C)speculator
D)broker
E)dealer
Q2) Futures contracts exist for which of the following?
I.pork bellies
II.S&P 500 index
III.Eurodollars
IV.cocoa
A)I and IV only
B)II and III only
C)I, II, and IV only
D)I, III, and IV only
E)I, II, III, and IV
Q3) You are a wheat farmer with a crop that will be ready to harvest in approximately three months.How can you hedge this crop and what are the advantages and disadvantages of doing so?
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Page 16
Chapter 15: Stock Options
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Q1) Which one of the following options is in-the-money?
A)call with a $45 strike and an underlying stock price of $42
B)put with a $35 strike and an underlying stock price of $36
C)call with a $15 strike and an underlying stock price of $15
D)put with a $45 strike and an underlying stock price of $42
E)call with a $30 strike and an underlying stock price of $29
Q2) Which of the following has the obligation to purchase stock at the strike price when an option is exercised?
A)call holder
B)call writer
C)put holder
D)put writer
E)call writer and put holder
Q3) The maximum:
A)profit from buying a put is the stock price.
B)loss from writing a put is the option premium.
C)profit from writing a call is the strike price.
D)loss from buying a call is $0.
E)profit from writing a put is the option premium.
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Page 17
Chapter 16: Option Valuation
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Q1) Which one of the following is an argument against repricing employee stock options?
A)ESO's are originally issued with positive intrinsic value so there's no reason to reprice.
B)Employees have more incentive when options are "under-water".
C)Repricing is a reward for failure.
D)It is unnecessary to reprice as ESOs expire quickly.
E)Repricing affects the market price of the firm's stock for all shareholders.
Q2) Stock prices and call option prices are:
A)unrelated.
B)negatively correlated.
C)directly related.
D)perfectly related.
E)inversely related.
Q3) An employee stock option is which one of the following?
A)call option
B)covered call
C)put option
D)protective put
E)index option
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18
Chapter 17: Projecting Cash Flow and Earnings
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Q1) Glassmakers,Inc.purchased $137,600 of new equipment this year and also increased the inventory by $36,800.Thirty-three thousand dollars worth of old equipment was sold.What is the investment cash flow for the year?
A)-$49,300
B)-$98,000
C)-$104,600
D)-$125,500
E)-$133,300
Q2) Winter's Clothing has a loan payable to a bank which is due 18 months from now.How is this loan classified on the firm's financial statements?
A)fixed asset
B)current liability
C)long-term debt
D)equity
E)expense
Q3) Why is the expected rate of sales growth so critical to pro forma statements?
Q4) What value does the Statement of Cash Flows add to the financial statements of a firm?
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19
Chapter 18: Corporate and Government Bonds
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Q1) Which one of the following is the clause which prevents a bond issuer from issuing new debt that has seniority over current debt?
A)first-in-line
B)sinking fund
C)call provision
D)affirmation
E)negative pledge
Q2) Which one of the following is an unsecured bond issued by a corporation?
A)indenture
B)general obligation bond
C)plain vanilla bond
D)debenture
E)trust bond
Q3) A moral obligation bond is which type of a bond?
A)municipal revenue
B)municipal GO
C)municipal hybrid
D)U.S. Treasury
E)U.S. agency
Q4) Explain how the imputed interest is computed on a U.S.Treasury bill.
Page 20
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Chapter 19: Global Economic Activity and Industry Analysis
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Q1) The process of moving investments between sectors of the economy over time is called.
A)sector rotation
B)sector selection
C)rotational investing
D)sector exchange
E)sector swapping
Q2) The so-called "M1" money supply includes which of the following?
A)currency and checking deposits
B)currency and money markets
C)currency and time deposits
D)currency, time deposits and money markets
E)checking and time deposits
Q3) Which of the following interest rates is directly controlled by the Federal Reserve?
A)the fed funds rate
B)the discount rate
C)the prime rate
D)mortgage rates
E)credit card rates
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Page 21
Chapter 20: Mortgage-Backed Securities
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Q1) A mortgage-backed security that has only a subordinate claim to principal payments is referred to as which type of bond?
A)subsidiary
B)sequential
C)PAC support
D)secondary
E)subordinate
Q2) Which one of the following will maximize the value of an IO strip?
A)prepaying all mortgages in the underlying mortgage pool
B)minimizing the duration of the underlying mortgage pool
C)maximizing the value of the PO strip
D)amortizing the bonds in the underlying pool faster than anticipated
E)creating conditions where no prepayments occur in the underlying mortgage pool
Q3) Mortgage prepayments are best defined by which one of the following?
A)reducing the mortgage according to a schedule over the life of the mortgage
B)paying a monthly mortgage payment before the regular due date
C)paying off the principal faster than required by the amortization schedule
D)paying a cash deposit when purchasing a property
E)paying each mortgage payment as scheduled
Q4) Explain what a reverse mortgage is,how it works,and who it is intended to help.
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