Capital Markets Practice Exam
Course Introduction
This course offers a comprehensive overview of capital markets, focusing on their structure, functions, and the key financial instruments traded within them. Students will explore the roles of equity and debt markets, the process of issuing securities, and the mechanisms of trading and price discovery. The course also examines the regulatory environment governing capital markets, the impact of globalization, and the influence of economic factors on market dynamics. Through case studies and practical examples, participants will gain a deep understanding of market participants, investment vehicles, risk assessment, and the vital role capital markets play in economic development and financial intermediation.
Recommended Textbook
Investments 9th Edition by Zvi Bodie
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Page 2
Chapter 1: The Investment Environment
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Sample Questions
Q1) In 2009,____________ was the most significant financial asset of U.S.households in terms of total value.
A)real estate
B)mutual fund shares
C)debt securities
D)life insurance reserves
E)pension reserves
Answer: E
Q2) Which of the following portfolio construction methods starts with security analysis?
A)Top-down
B)Bottom-up
C)Middle-out
D)Buy and hold
E)Asset allocation
Answer: B
Q3) 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 maximum maturity of commercial paper that can be issued without SEC registration is ____________.
A)270 days
B)180 days
C)90 days
D)30 days
E)none of the above
Answer: A
Q2) Certificates of deposit are insured by the ____________.
A)SPIC
B)CFTC
C)Lloyds of London
D)FDIC
E)all of the above
Answer: D
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Chapter 3: How Securities are Traded
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Sample Questions
Q1) You sold short 100 shares of common stock at $45 per share.The initial margin is 50%.At what stock price would you receive a margin call if the maintenance margin is 35%?
A)$50
B)$65
C)$35
D)$40
E)none of the above
Answer: A
Q2) The finalized registration statement for new securities approved by the SEC is called
A)a red herring
B)the preliminary statement
C)the prospectus
D)a best-efforts agreement
E)a firm commitment
Answer: C
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5
Chapter 4: Mutual Funds and Other Investment Companies
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Sample Questions
Q1) A mutual fund had NAV per share of $19.00 on January 1,2009.On December 31 of the same year the fund's NAV was $19.14.Income distributions were $0.57 and the fund had capital gain distributions of $1.12.Without considering taxes and transactions costs,what rate of return did an investor receive on the fund last year?
A)11.26%
B)10.54%
C)7.97%
D)8.26%
E)9.63%
Q2) In 2009 the proportion of mutual funds (based on total assets)specializing in bonds was
A)16.3%
B)28.0%
C)54.1%
D)73.4%
E)63.5%
Q3) What is an Exchange-traded fund? Give two examples of specific ETFs.What are some advantages they have over ordinary open-end mutual funds? What are some disadvantages?
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Page 6
Chapter 5: Introduction to Risk,return,and the Historical Record
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Q1) Ceteris paribus,a decrease in the demand for loanable funds
A)drives the interest rate down.
B)drives the interest rate up.
C)might not have any effect on interest rates.
D)results from an increase in business prospects and a decrease in the level of savings.
E)none of the above.
Q2) What is the expected holding-period return for the stock?
A)11.67%
B)8.33%
C)9.56%
D)12.4%
E)None of the above
Q3) What is the expected variance for KMP stock?
A)66.04%
B)69.96%
C)77.04%
D)63.72%
E)78.45%
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) Asset allocation
A)may involve the decision as to the allocation between a risk-free asset and a risky asset.
B)may involve the decision as to the allocation among different risky assets.
C)may involve considerable security analysis.
D)A and B.
E)A and C.
Q2) The Capital Market Line
I.is a special case of the Capital Allocation Line.
II.represents the opportunity set of a passive investment strategy.
III.has the one-month T-Bill rate as its intercept.
IV.uses a broad index of common stocks as its risky portfolio.
A)I, III, and IV
B)II, III, and IV
C)III and IV
D)I, II, and III
E)I,II,III,and IV
Q3) In the utility function: U = E(r)- [-0.005As<sup>2</sup>],what is the significance of "A"?
Page 8
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Chapter 7: Optimal Risky Portfolios
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Q1) Which of the following statement(s)is (are)true regarding the selection of a portfolio from those that lie on the Capital Allocation Line?
A)Less risk-averse investors will invest more in the risk-free security and less in the optimal risky portfolio than more risk-averse investors.
B)More risk-averse investors will invest less in the optimal risky portfolio and more in the risk-free security than less risk-averse investors.
C)Investors choose the portfolio that maximizes their expected utility.
D)A and C.
E)B and C.
Q2) For a two-stock portfolio,what would be the preferred correlation coefficient between the two stocks?
A)+1.00.
B)+0.50.
C)0.00.
D)-1.00.
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) A single-index model uses __________ as a proxy for the systematic risk factor.
A)a market index, such as the S&P 500
B)the current account deficit
C)the growth rate in GNP
D)the unemployment rate
E)none of the above
Q2) Assume that stock market returns do follow a single-index structure.An investment fund analyzes 200 stocks in order to construct a mean-variance efficient portfolio constrained by 200 investments.They will need to calculate ________ estimates of expected returns and ________ estimates of sensitivity coefficients to the macroeconomic factor.
A)200; 19,900
B)200; 200
C)19,900; 200
D)19,900; 19.900
E)none of the above
Q3) 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.
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) Your opinion is that security A has an expected rate of return of 0.145.It has a beta of 1.5.The risk-free rate is 0.04 and the market expected rate of return is 0.11.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.
Q2) A security has an expected rate of return of 0.15 and a beta of 1.25.The market expected rate of return is 0.10 and the risk-free rate is 0.04.The alpha of the stock is A)1.7%.
B)-1.7%.
C)8.3%.
D)3.5%.
E)none of the above.
Q3) Discuss the assumptions of the capital asset pricing model,and how these assumptions relate to the "real world" investment decision process.
Q4) Discuss the mutual fund theorem.
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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) The following factors might affect stock returns:
A)the business cycle.
B)interest rate fluctuations.
C)inflation rates.
D)all of the above.
E)none of the above.
Q2) Which of the following is false about the security market line (SML)derived from the APT?
A)The SML has a downward slope.
B)The SML for the APT shows expected return in relation to portfolio standard deviation.
C)The SML for the APT has an intercept equal to the expected return on the market portfolio.
D)The benchmark portfolio for the SML may be any well-diversified portfolio.
E)A,B,and C are false.
Q3) Discuss the advantages of the multifactor APT over the single factor APT and the CAPM.What is one shortcoming of the multifactor APT and how does this shortcoming compare to CAPM implications?
Q4) Discuss arbitrage opportunities in the context of violations of the law of one price.
Page 12
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Chapter 11: The Efficient Market Hypothesis
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Sample Questions
Q1) Studies of negative earnings surprises have shown that there is
A)a negative abnormal return on the day negative earnings surprises are announced.
B)a positive drift in the stock price on the days following the earnings surprise announcement.
C)a negative drift in the stock price on the days following the earnings surprise announcement.
D)both A and B are true.
E)both A and C are true.
Q2) Matthews Corporation has a beta of 1.2.The annualized market return yesterday was 13%,and the risk-free rate is currently 5%.You observe that Matthews had an annualized return yesterday of 17%.Assuming that markets are efficient,this suggests that
A)bad news about Matthews was announced yesterday.
B)good news about Matthews was announced yesterday.
C)no news about Matthews 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) Studies of liquidity spreads in security markets have shown that
A)liquid stocks earn higher returns than illiquid stocks.
B)illiquid stocks earn higher returns than liquid stocks.
C)both liquid and illiquid stocks earn the same returns.
D)illiquid stocks are good investments for frequent, short-term traders.
E)None of the above are true.
Q2) Which statement is not true regarding the market portfolio?
A)It includes all publicly traded financial assets.
B)It lies on the efficient frontier.
C)All securities in the market portfolio are held in proportion to their market values.
D)It is the tangency point between the capital market line and the indifference curve.
E)All of the above are true.
Q3) According to the Capital Asset Pricing Model (CAPM),fairly priced securities
A)have positive betas.
B)have zero alphas.
C)have negative betas.
D)have positive alphas.
E)none of the above.
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Chapter 13: Empirical Evidence on Security Returns
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Sample Questions
Q1) In developing their test of a multifactor model,Chen,Roll,and Ross hypothesized that __________ for systematic factors.
A)the monthly growth rate in industrial production might be a proxy
B)unexpected inflation might be a proxy
C)expected inflation might be a proxy
D)A and B
E)A,B,and C
Q2) Fama and French (1992)found that
A)firm size had better explanatory power than beta in describing portfolio returns.
B)beta had better explanatory power than firm size in describing portfolio returns.
C)beta had better explanatory power than book-to-market ratios in describing portfolio returns.
D)macroeconomic factors had better explanatory power than beta in describing portfolio returns.
E)none of the above is true.
Q3) Describe some of the ways the CAPM is applied in practice.
Q4) Discuss Roll's critique of the CAPM.
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15
Chapter 14: Bond Prices and Yields
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Sample Questions
Q1) If you are buying a coupon bond between interest paying dates,is the amount you would pay to your broker for the bond more or less than the amount quoted in the financial quotation pages? Discuss the differences and how these differences arise.
Q2) The invoice price of a bond that a buyer would pay is equal to
A)the asked price plus accrued interest.
B)the asked price less accrued interest.
C)the bid price plus accrued interest.
D)the bid price less accrued interest.
E)the bid price.
Q3) A Treasury bill with a par value of $100,000 due two months from now is selling today for $98,039,with an effective annual yield of _________.
A)12.40%
B)12.55%
C)12.62%
D)12.68%
E)none of the above
Q4) Discuss the taxation ramifications of zero coupon bonds.How has this taxation procedure changed over the years? How has this change affected the demand for these bonds?
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Chapter 15: The Term Structure of Interest Rates
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Sample Questions
Q1) The term structure of interest rates is:
A)The relationship between the rates of interest on all securities.
B)The relationship between the interest rate on a security and its time to maturity.
C)The relationship between the yield on a bond and its default rate.
D)All of the above.
E)None of the above.
Q2) An inverted yield curve implies that:
A)Long-term interest rates are lower than short-term interest rates.
B)Long-term interest rates are higher than short-term interest rates.
C)Long-term interest rates are the same as short-term interest rates.
D)Intermediate term interest rates are higher than either short- or long-term interest rates.
E)none of the above.
Q3) ______ can occur if _____.
A)arbitrage; the Law of One Price is not violated
B)arbitrage; the Law of One Price is violated
C)riskless economic profit; the Law of One Price is not violated
D)riskless economic profit; the Law of One Price is violated
E)B and D
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Page 17
Chapter 16: Managing Bond Portfolios
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Sample Questions
Q1) A 9%,16-year bond has a yield to maturity of 11% and duration of 9.25 years.If the market yield changes by 32 basis points,how much change will there be in the bond's price?
A)1.85%
B)2.01%
C)2.67%
D)6.44%
E)none of the above
Q2) Duration is important in bond portfolio management because
I.it can be used in immunization strategies.
II.it provides a gauge of the effective average maturity of the portfolio.
III.it is related to the interest rate sensitivity of the portfolio.
IV.it is a good predictor of interest rate changes.
A)I and II
B)I and III
C)III and IV
D)I, II, and III
E)I,II,III,and IV
Q3) Discuss rate anticipation swaps as a bond portfolio management strategy.
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Chapter 17: Options Markets: Introduction
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Sample Questions
Q1) If the currency of your country is depreciating,the result should be to ______ exports and to _______ imports.
A)stimulate, stimulate B)stimulate, discourage C)discourage, stimulate D)discourage, discourage E)not affect,not affect
Q2) Calculate firm A's degree of operating leverage.
A)11.0
B)2.86
C)9.09
D)1.00
E)none of the above.
Q3) The emerging stock market exhibiting the highest U.S.dollar return in 2009 was A)Brazil
B)Argentina
C)Poland
D)Mexico
E)China
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Page 19
Chapter 18: Option Valuation
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Sample Questions
Q1) Other things being equal,a low ________ would be most consistent with a relatively high growth rate of firm earnings and dividends.
A)dividend payout ratio
B)degree of financial leverage
C)variability of earnings
D)inflation rate
E)none of the above
Q2) If a firm has a required rate of return equal to the ROE
A)the firm can increase market price and P/E by retaining more earnings.
B)the firm can increase market price and P/E by increasing the growth rate.
C)the amount of earnings retained by the firm does not affect market price or the P/E.
D)A and B.
E)none of the above.
Q3) _________ is equal to (common shareholders' equity/common shares outstanding).
A)Book value per share
B)Liquidation value per share
C)Market value per share
D)Tobin's Q
E)none of the above
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Chapter 19: Futures Markets
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Sample Questions
Q1) Refer to the financial statements of Midwest Tours.The firm's average collection period for 2009 is __________.
A)69.35
B)69.73
C)68.53
D)67.77
E)68.52
Q2) Refer to the financial statements for Snapit Company.The firm's current ratio for 2009 is ___________.
A)1.98
B)2.47
C)0.65
D)1.53
E)none of the above
Q3) In an increasingly globalized investment environment,comparability problems become even greater.Discuss some of the problems for the investor who wishes to have an internationally diversified portfolio.
Q4) Many different debt,or financial leverage,ratios are reported.Explain the relationship between total assets/equity and debt/equity.
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Chapter 20: Futures, swaps, and Risk Management
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Q1) The value of a stock put option is positively related to A)the time to expiration.
B)the striking price.
C)the stock price.
D)all of the above.
E)A and B.
Q2) You write one AT&T February 50 put for a premium of $5.Ignoring transactions costs,what is the breakeven price of this position?
A)$50
B)$55
C)$45
D)$40
E)none of the above
Q3) All of the following factors affect the price of a stock option except A)the risk-free rate.
B)the riskiness of the stock.
C)the time to expiration.
D)the expected rate of return on the stock.
E)none of the above.
Q4) 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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Q1) If the company unexpectedly announces it will pay its first-ever dividend 3 months from today,you would expect that
A)the call price would increase.
B)the call price would decrease.
C)the call price would not change.
D)the put price would decrease.
E)the put price would not change.
Q2) Prior to expiration
A)the intrinsic value of a put option is greater than its actual value.
B)the intrinsic value of a put option is always positive.
C)the actual value of a put option is greater than the intrinsic value.
D)the intrinsic value of a put option is always greater than its time value.
E)none of the above.
Q3) What is the intrinsic value of the call?
A)$12
B)$8
C)$0
D)$23
E)none of the above.
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Page 23
Chapter 22: Equity Valuation Models
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Q1) An investor with a long position in Treasury notes futures will profit if
A)interest rates decline.
B)interest rate increase.
C)the prices of Treasury notes increase.
D)the price of the long bond increases.
E)none of the above.
Q2) You sold one silver future contract at $3 per ounce.What would be your profit (loss)at maturity if the silver spot price at that time is $4.10 per ounce? Assume the contract size is 5,000 ounces and there are no transactions costs.
A)$5.50 profit
B)$5,500 profit
C)$5.50 loss
D)$5,500 loss
E)none of the above.
Q3) Who guarantees that a futures contract will be fulfilled?
A)the buyer
B)the seller
C)the broker
D)the clearinghouse
E)nobody
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Chapter 23: Financial Statement Analysis
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Q1) Let R<sub>US</sub> be the annual risk free rate in the United States,R<sub>J</sub> be the risk free rate in Japan,F be the futures price of $/yen for a 1-year contract,and E the spot exchange rate of $/yen.Which one of the following is true?
A)if R<sub>US</sub> > R<sub>J</sub>, then E < F
B)if R<sub>US</sub> < R<sub>J</sub>, then E < F
C)if R<sub>US</sub> > R<sub>J</sub>, then E > F
D)if R<sub>US</sub> < R<sub>J</sub>, then F = E
E)There is no consistent relationship that can be predicted.
Q2) If interest rate parity does not hold
A)covered interest arbitrage opportunities will exist
B)covered interest arbitrage opportunities will not exist
C)arbitragers will be able to make risk-free profits
D)A and C
E)B and C
Q3) Explain how a firm that has issued $1 million of long-term bonds with a fixed 6% interest rate can convert its fixed-rate debt into floating-rate debt.Give two numerical examples that show the possible outcomes,one favorable and one unfavorable.
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Chapter 24: Portfolio Performance Evaluation
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Q1) Discuss,in general,the performance attribution procedures.
Q2) The total excess return on the Aggie managed portfolio was __________.
A)1%
B)3%
C)4%
D)5%
E)none of the above
Q3) __________ developed a popular method for risk-adjusted performance evaluation of mutual funds.
A)Eugene Fama
B)Michael Jensen
C)William Sharpe
D)Jack Treynor
E)B,C,and D
Q4) Calculate Treynor's measure of performance for Wildcat Fund.
A)1.00%
B)8.80%
C)44.00%
D)50.00%
E)none of the above
26
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Chapter 25: International Diversification
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Q1) The __________ equity market had the lowest average U.S.dollar excess return between 2000 and 2009.
A)Russian
B)Finnish
C)Columbian
D)Irish
E)none of the above
Q2) The __________ equity market had the highest average U.S.dollar standard deviation of excess returns between 2000 and 2009.
A)Turkish
B)Finnish
C)Indonesian
D)U.S.
E)none of the above
Q3) 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%
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Chapter 26: Hedge Funds
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Q1) Like mutual funds,hedge funds
A)allow private investors to pool assets to be managed by a fund manager.
B)are commonly organized as private partnerships.
C)are subject to extensive SEC regulations.
D)are typically only open to wealthy or institutional investors.
E)B and D
Q2) Shares in hedge funds are priced
A)at NAV
B)a significant premium to NAV
C)a significant discount from NAV
D)B or C
E)none of the above
Q3) Assume newly issued 30-year-on-the-run bonds sell at higher yields (lower prices)than 29 ½ year bonds with a nearly identical duration.A hedge fund that sells 29 ½ year bonds and buys 30 year bonds is taking a ______.
A)market neutral position
B)conservative position
C)bullish position
D)bearish position
E)none of the above
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Chapter 27: The Theory of Active Portfolio Management
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Q1) The Treynor-Black model assumes that
A)the objective of security analysis is to form an active portfolio of a limited number of mispriced securities.
B)the cost of less than full diversification comes from the nonsystematic risk of the mispriced stock.
C)the optimal weight of a mispriced security in the active portfolio is a function of the degree of mispricing, the market sensitivity of the security, and its degree of nonsystematic risk.
D)all of the above are true.
E)none of the above are true.
Q2) The beta of an active portfolio is 1.45.The standard deviation of the returns on the market index is 22%.The nonsystematic variance of the active portfolio is 3%.The standard deviation of the returns on the active portfolio is __________.
A)36.30%
B)5.84%
C)19.60%
D)24.17%
E)26.0%
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Chapter 28: Investment Policy and the Framework of the
CFA Institute Appendices
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Sample Questions
Q1) Suppose that the pre-tax holding period returns on two stocks are the same.Stock A has a high dividend payout policy and stock B has a low dividend payout policy.If you are an individual in a high marginal tax bracket and do not intend to sell the stocks during the holding period,__________.
A)stock A will have a higher after-tax holding period return than stock B
B)the after-tax holding period returns on stocks A and B will be the same
C)stock B will have a higher after-tax holding period return than stock A
D)it is impossible to determine which stock will have a higher after-tax holding period return given the information available
E)none of the above
Q2) Target-date retirement funds are not
A)funds of funds diversified across stocks and bonds
B)designed to change their asset allocation as time passes
C)a simple but useful strategy
D)designed to function much like hedge funds
E)A,B,and C
Q3) Discuss some of the advantages "personal funds" have over mutual funds.
Q4) Discuss four factors you would need to include if you were constructing a retirement planning worksheet.
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