Advanced Investments Practice Exam
Course Introduction
Advanced Investments delves into the theories, strategies, and practical tools used by professional investors to analyze, manage, and optimize investment portfolios. The course covers a range of topics, including asset pricing models, portfolio construction techniques, risk management, fixed income analysis, derivatives, alternative investments, and behavioral finance. Emphasis is placed on evaluating and applying quantitative methods for security valuation, measuring risk-adjusted performance, and assessing market efficiency. Students will engage in the use of financial databases and investment simulation tools to develop real-world analytical skills, preparing them for complex decision-making in dynamic financial markets.
Recommended Textbook Investment Analysis and Portfolio Management 1st Canadian Edition by Frank K. Reilly
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Chapter 1: The Investment Setting
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Q1) A decrease in the expected real growth in the economy, all other things constant, will cause the security market line to
A) Shift up
B) Shift down
C) Have a steeper slope
D) Have a flatter slope
E) Remain unchanged
Answer: B
Q2) 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) ____ is an appropriate objective for investors who want their portfolio to grow in real terms, i.e., exceed the rate of inflation.
A) Capital preservation
B) Capital appreciation
C) Portfolio growth
D) Value additivity
E) Nominal preservation
Answer: B
Q2) The asset allocation decision must involve a consideration of A) Cultural differences.
B) The objectives stated in the investor's policy statement.
C) The types of assets that are appropriate for the investor.
D) The risk associated with different investments.
E) All of the above.
Answer: E
Q3) Long-term, high-priority goals include some form of financial independence.
A)True
B)False
Answer: True
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Chapter 3: Selecting Investments in a Global Market
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Sample Questions
Q1) The performance of the Canadian bond market ranked higher than the U.S. bond market.
A)True
B)False
Answer: True
Q2) Which of the following statements regarding real estate investments is false?
A) The large number of transactions and national data sources provide accurate readily available estimates of historical returns.
B) S&P/TSX had higher returns than 90-day Treasury-bill from 1993 to 2009.
C) S&P/TSX had lower returns than 90-day Treasury-bill from 1993 to 2009.
D) S&P/TSX had higher volatility than 90-day Treasury-bill from 1993 to 2009.
E) All of the above are false.
Answer: A
Q3) It is very important when diversifying that the correlation between rates of return for various countries be high and very stable over time.
A)True
B)False
Answer: False
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Chapter 4: Securities Markets and the Economy
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Sample Questions
Q1) The NYSE has dominated the other U.S. exchanges in trading volume.
A)True
B)False
Q2) Refer to Exhibit 4-6. Suppose at the end of one year XCorp is selling at $90 per share and you cover your short position at this price. What is your rate of return on the investment? (Assume a 1.25% commission on the purchase.)
A) -40.64%
B) -25.53%
C) 5.21%
D) 72.7%
E) -71.2%
Q3) Which of the following is not a secondary equity market?
A) Treasury market
B) Toronto stock exchange
C) Regional exchanges
D) Over-the-counter market
E) All of the above are secondary equity markets.
Q4) A good secondary market is important to the efficiency of the primary market.
A)True
B)False
6
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Chapter 5: Efficient Capital Markets
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Sample Questions
Q1) When considering markets in Europe, it is inappropriate to assume a level of efficiency similar to that for Canadian markets.
A)True
B)False
Q2) Investigators have tested the strong form EMH by examining the performance of the following type of investor
A) Corporate insiders.
B) Stock exchange specialists.
C) Security analysts.
D) Professional money managers.
E) All of the above.
Q3) The weak form of the efficient market hypothesis contends that stock prices fully reflect all public and private information.
A)True
B)False
Q4) The strong form of the efficient market hypothesis contends that only insiders can earn abnormal returns.
A)True
B)False
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Chapter 6: An Introduction to Portfolio Management
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Sample Questions
Q1) Refer to Exhibit 6-8. What is the expected return of a portfolio of two risky assets if the expected return E(R<sub>i</sub>), standard deviation (?<sub>i</sub>), covariance (COV<sub>i,j</sub>), and asset weight (W<sub>i</sub>) are as shown above?
A) 6.4%
B) 9.1%
C) 10.2%
D) 10.8%
E) 11.2%
Q2) The combination of two assets that are completely negatively correlated provides maximum returns.
A)True
B)False
Q3) A positive relationship between expected return and expected risk is consistent with
A) investors being risk seekers.
B) investors being risk avoiders.
C) investors being risk averse.
D) all of the above.
E) none of the above.
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Chapter 7: Asset Pricing Models: Capm and Apt
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Q1) Beta is a measure of unsystematic risk.
A)True
B)False
Q2) Refer to Exhibit 7-3. What is the average proxy return?
A) 1%
B) 2%
C) 3%
D) 4%
E) 5%
Q3) Findings by Fama and French that stocks with high Book Value to Market Price ratios tended to produce larger risk adjusted returns than stocks with low Book Value to Market Price ratios challenge the efficacy of the CAPM.
A)True
B)False
Q4) Refer to Exhibit 7-1. The equation of the characteristic line for RA is
A) R<sub>RA</sub> = 11.63 + 1.2195R<sub>MI</sub>
B) R<sub>RA</sub> = -7.98 + 1.1023R<sub>MI</sub>
C) R<sub>RA</sub> = -9.41 + 1.3893R<sub>MI</sub>
D) R<sub>RA</sub> = -4.92 - 0.7715R<sub>MI</sub>
E) R<sub>RA</sub> = 4.92 + 0.7715R<sub>MI</sub>
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Chapter 8: Economic and Industry Analysis
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Sample Questions
Q1) Which of the following statements regarding global portfolio is true?
A) Decrease the asset allocation to the country with pessimistic economic scenario .
B) Increase the asset allocation to the country with pessimistic economic scenario.
C) Increase the asset allocation to the country with optimistic economic scenario.
D) Both a and c are true
E) All of the above are true
Q2) Refer to Exhibit 8-1. Estimate the industry growth rate in sales per share.
A) 10.5%
B) 11%
C) 12.16%
D) 9.5%
E) 8.73%
Q3) The rates of returns for firms within an industry vary which indicates that company analysis is necessary after industry analysis.
A)True
B)False
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Chapter 9: Company Analysis and Stock Valuation
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Q1) The price/cash flow ratio has grown in prominence and use for valuing firms because many analysts contend that a firm's cash flow is less subject to manipulation than the firm's earnings per share.
A)True
B)False
Q2) In SWOT analysis, one examines all of the following factors, except A) Strengths.
B) Weaknesses.
C) Opportunities.
D) Threats.
E) Turnarounds.
Q3) Refer to Exhibit 9-7. Calculate the required rate of return on equity.
A) 5%
B) 9.2%
C) 10.2%
D) 10%
E) 4.3%
Q4) The best known measure of relative value for common stock is the P/E ratio. A)True
B)False
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Chapter 10: Technical Analysis
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Sample Questions
Q1) Two major classes of technicians include the contrarians and those who "follow the smart money".
A)True
B)False
Q2) How might a technical analyst use credit balances in brokerage accounts?
A) Sell stock when credit balances rise
B) Buy stock when credit balances rise
C) Sell stock when credit balances decline
D) Choices b and c
E) None of the above.
Q3) Which of the following is not considered an assumption of technical analysis?
A) Market value is determined solely by supply and demand.
B) Supply and demand are governed by both rational and irrational factors.
C) Security prices tend to move in trends that persist for an appreciable length of time.
D) Stock prices follow a random walk.
E) Changes in trend are caused by the shifts in supply and demand relationships.
Q4) The use of trading rules requires a great deal of subjective judgment.
A)True
B)False
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Chapter 11: Bond Fundamentals
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Sample Questions
Q1) High-yield bonds are considered "investment" grade.
A)True
B)False
Q2) You purchase a 9 3/4s 2009 Feb. $10,000 par Treasury Note at 101:11 and hold it for exactly one year at which time you sell it. What is your rate of return if your selling price is 101:17?
A) 8.14%
B) 8.75%
C) 9.75%
D) 9.81%
E) 10.47%
Q3) The face value of a Canadian government agency security
A) Is always $1000.
B) Ranges from $1000 to $5000.
C) Ranges from $1000 to $100,000.
D) Ranges from $1000 to $50,000.
E) Is always $10,000.
Q4) All U.S. municipalities are required to buy insurance when they issue bonds.
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) 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.
Q2) Calculate the Macaulay duration for a 5-year $1,000 par value bond, with a 6% coupon and a yield to maturity of 8%. Interest is paid annually.
A) 6.44 years
B) 5.25 years
C) 4.44 years
D) 2.50 years
E) None of the above
Q3) For a bond the present value model incorporates both the coupon receipts and the capital gain or loss.
A)True
B)False
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Chapter 13: An Introduction to Derivative Markets and Securities
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Sample Questions
Q1) In the forward market both parties are required to post collateral or margin. A)True
B)False
Q2) A stock currently trades at $110. June call options on the stock with a strike price of $105 are priced at $4. Calculate the arbitrage profit that you can earn.
A) $0
B) $1
C) $5
D) $4
E) None of the above
Q3) The forward market has low liquidity relative to the futures market. A)True
B)False
Q4) A money spread involves buying and selling call options in the same stock with A) The same time period and exercise price.
B) The same time period but different exercise price.
C) A different time period but same exercise price.
D) A different time period and different exercise price.
E) Options in different markets.
15
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Chapter 14: Derivatives: Analysis and Valuation
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Sample Questions
Q1) Refer to Exhibit 14-9. Calculate the conversion value of the bond if the stock price is $27.00 per share.
A) $600.00
B) $700.00
C) $800.00
D) $900.00
E) $1,000.00
Q2) A ____ contract can be viewed as a prepackaged series of forward rate agreements to buy or sell LIBOR at the same fixed rate.
A) Swap
B) Cap
C) Floor
D) Collar
E) None of the above.
Q3) The Black-Scholes model assumes that stock price movements can be described by
A) Geometric moving averages.
B) Arithmetic moving averages.
C) Regression towards the mean.
D) Geometric Brownian motion.
E) Stochastic time lags.
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Chapter 15: Equity Portfolio Management Strategies
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Sample Questions
Q1) The following are examples of a fundamental active equity portfolio management strategy.
A) Contrarian investing.
B) Earnings momentum investing.
C) Low P/E and low P/BV investing.
D) Bottom up investing.
E) Investing on the basis of calendar effects.
Q2) Style investing involves constructing portfolios in such a way to capture one or more of the characteristics of equity securities.
A)True
B)False
Q3) An active portfolio manager sold $90 million of stocks in a year. If the portfolio had an average value of $110 million in assets under management, what is the portfolio turnover ratio?
A) 22.2%
B) 81.8%
C) 90.0%
D) 110.0%
E) 122.2%
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Chapter 16: Bond Portfolio Management Strategies
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Q1) In a ladder strategy
A) One half of funds are invested in short duration bonds and the test in long duration bonds.
B) Seventy five percent of funds are invested in short duration bonds and the test in long duration bonds.
C) Twenty five percent of funds are invested in short duration bonds and the test in long duration bonds.
D) An equal amount of funds are invested in a wide range of maturities.
E) None of the above.
Q2) A portfolio of bonds is immunized from interest rate risk if the duration of the portfolio is always equal to the desired investment horizon.
A)True
B)False
Q3) The substitution swap is generally long term and relies heavily on interest rate expectations.
A)True
B)False
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Chapter 17: Professional Money Management, Alternative
Assets, and Industry Ethics
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Sample Questions
Q1) All investment companies charge an annual
A) Redemption fee.
B) Marketing and distribution.
C) Management fee.
D) Maintenance fee.
E) Market adjustment.
Q2) On January 2, 2007, you invest $100,000 in Righteous, a load fund that charges a fee of 7%. The fund's returns were 12.8% in 2007, 13.9% in 2008, and 7.9% in 2009. On December 31, 2009, you redeem all your Righteous shares. The dollar value is
A) $12,800.00
B) $12,892.50
C) $100,000.00
D) $128,925.00
E) $10,000.00
Q3) Closed-end investment companies never sell at discounts to their NAV.
A)True
B)False
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Chapter 18: Evaluation of Portfolio Performance
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Sample Questions
Q1) Which measure of portfolio performance allows analysts to determine the statistical significance of abnormal returns?
A) Sharpe measure
B) Jensen measure
C) Fama measure
D) Information Ratio
E) Treynor measure
Q2) Refer to Exhibit 18-7. Calculate TI's selectivity.
A) 0.0113
B) 0.1200
C) 0.0687
D) 0.0530
E) 0.0696
Q3) Treynor showed that rational, risk averse investors always prefer portfolio possibility lines that have
A) Zero slopes.
B) Slightly negative slopes.
C) Highly negative slopes.
D) Slightly positive slopes.
E) Highly positive slopes.
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Chapter 19: Analysis of Financial Statements
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Q1) A common-size income statement expresses all income statement items
A) As a percentage of Current Assets.
B) As a percentage of Fixed Assets.
C) As a percentage of Total Assets.
D) As a percentage of Net Income.
E) As a percentage of Sales
Q2) Which of the following factors would be indicative of a high quality balance sheet?
A) Book value is greater than market value.
B) The presence of off-balance sheet liabilities
C) Market value is greater than book value.
D) Very little unused borrowing capacity.
E) None of the above.
Q3) Refer to Exhibit 19-5. Calculate the financial leverage.
A) 1.05
B) 5.32
C) 2.15
D) 1.54
E) 2.31
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Chapter 20: An Introduction to Security Valuation
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Q1) According to the dividend growth model, if a company were to declare that it would never pay dividends, its value would be
A) Based on earnings.
B) Based on expectations regarding.
C) Higher than similar firms since it could reinvest a greater amount in new projects.
D) Zero.
E) Based on the capital asset pricing model.
Q2) 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.
Q3) The required rate of return is determined by 1) the real risk free rate, 2) the expected rate of inflation and 3) liquidity risk.
A)True
B)False
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Chapter 21: Web Appendix: A Review of Statistics and the
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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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Chapter
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Q1) The expected return from this investment is
A) -0.0752
B) -0.0040
C) 0.00
D) 0.0075
E) 0.4545
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 coefficient of variation of this investment is
A) -0.06
B) -0.65
C) 6.60
D) 16.53
E) 165.10
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Q1) Banks have high liquidity needs and therefore, have a short time horizon.
A)True
B)False
Q2) Banks typically have short-term investment horizons because
A) They have a strong need for liquidity.
B) They offer short-term deposit accounts.
C) They are required to by federal and state laws.
D) Choices a and b
E) All of the above
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.
Q4) Banks face regulatory constraints at both the state and federal level.
A)True
B)False
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