Equity Analysis
Chapter Exam Questions
Course Introduction
Equity Analysis equips students with the fundamental concepts and practical techniques used to evaluate and value publicly traded companies. The course covers topics such as financial statement analysis, ratio analysis, industry and competitive analysis, discounted cash flow (DCF) modeling, relative valuation methods, and qualitative assessment of management and corporate strategy. Students learn to interpret key financial indicators, assess risk factors, and understand market trends to make informed investment decisions. Through real-world case studies and analytical tools, participants gain the skills necessary to prepare and present professional equity research reports.
Recommended Textbook
Investment Analysis and Portfolio Management 1st Canadian Edition by Frank K. Reilly
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Page 2
Chapter 1: The Investment Setting
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Q1) Refer to Exhibit 1-6. Calculate the risk premium for the market portfolio
A) 4.5%
B) 8.25%
C) 4.75%
D) 3.5%
E) None of the above
Answer: C
Q2) Modern portfolio theory assumes that most investors are
A) Risk averse
B) Risk neutral
C) Risk seekers
D) Risk tolerant
E) None of the above
Answer: A
Q3) The risk premium is a function of the volatility of operating earnings, sales volatility and inflation.
A)True
B)False
Answer: False
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Page 3
Chapter 2: The Asset Allocation Decision
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Q1) Refer to Exhibit 2-1. What is the tax liability for a married couple filing jointly with taxable income of $125,000?
A) $23,800
B) $18,427
C) $24,958
D) $16,867
E) $19,650
Answer: C
Q2) The first step in the investment process is the development of a(n)
A) Objective statement.
B) Policy statement.
C) Financial statement.
D) Statement of cash needs.
E) Statement of cash flows.
Answer: B
Q3) It is not a good idea to get too specific when constructing your policy statement.
A)True
B)False
Answer: False
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Page 4
Chapter 3: Selecting Investments in a Global Market
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Sample Questions
Q1) Which of the following is not considered a capital market instrument?
A) Canadian Treasury notes and bonds.
B) Canadian Treasury bills.
C) Canadian government agency securities.
D) Municipal bonds.
E) Corporate bonds.
Answer: B
Q2) A return series has an arithmetic mean of 12.8% and standard deviation of 7.8%.
Assuming the returns are normally distributed, what is the range of returns that an investor would expect to receive 95% of the time?
A) 12.8% to 20.6%
B) -10.6% to 36.2%
C) -2.8% to 28.4%
D) -12.8% to 20.6%
E) 10.6% to 36.2%
Answer: B
Q3) Diversification with foreign securities can help reduce portfolio risk.
A)True
B)False
Answer: True
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Chapter 4: Securities Markets and the Economy
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Q1) A market where prices adjust rapidly to new information is considered to be internally efficient.
A)True
B)False
Q2) The NASDAQ National Market System is an order driven market.
A)True
B)False
Q3) Refer to Exhibit 4-2. What is Heidi's profit if RC's price rises to $80?
A) $55,000
B) $50,000
C) $60,000
D) $68,270
E) $28,570
Q4) A corporation wishing to raise funds will normally want the investment banker to use a "best efforts" arrangement rather than a negotiated basis.
A)True
B)False
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Chapter 5: Efficient Capital Markets
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Q1) Which of the following assumptions imply capital markets will be efficient?
A) A large number of independent profit-maximizing participants analyze securities.
B) New information regarding securities comes to the market in a random fashion.
C) Investors adjust security prices rapidly to reflect the effect of new information.
D) Both b and c only.
E) All of the above are assumptions that imply a market will be efficient.
Q2) Refer to Exhibit 5-3. What is the abnormal rate of return for Elliot during period t using only the aggregate market return (ignore differential systematic risk)?
A) 1.50
B) 1.10
C) -1.50
D) -5.10
E) -8.00
Q3) If the efficient market hypothesis is true price changes are independent and biased.
A)True
B)False
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Chapter 6: An Introduction to Portfolio Management
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Q1) Refer to Exhibit 6-12. Calculate the expected return and expected standard deviation of a two-stock portfolio when r?,? = -.60 and w? = .75.
A) .13 and .0024
B) .13 and .0455
C) .12 and .0585
D) .12 and .5585
E) .13 and .6758
Q2) The purpose of calculating the covariance between two stocks is to provide a(n) ____ measure of their movement together.
A) Absolute
B) Relative
C) Indexed
D) Loglinear
E) Squared
Q3) An investor is risk neutral if she chooses the asset with lower risk given a choice of several assets with equal returns.
A)True
B)False
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Chapter 7: Asset Pricing Models: Capm and Apt
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Q1) If the market portfolio is mean-variance efficient it has the lowest risk for a given level of return among the attainable set of portfolios.
A)True
B)False
Q2) The standard deviation for the risk-free security is equal to zero.
A)True
B)False
Q3) When identifying undervalued and overvalued assets, which of the following statements is false?
A) An asset is properly valued if its estimated rate of return is equal to its required rate of return.
B) An asset is considered overvalued if its estimated rate of return is below its required rate of return.
C) An asset is considered undervalued if its estimated rate of return is above its required rate of return.
D) An asset is considered overvalued if its required rate of return is below its estimated rate of return.
E) None of the above (that is, all are true statements)
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Chapter 8: Economic and Industry Analysis
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Q1) Refer to Exhibit 8-1. Calculate personal consumption expenditures for the year 2010.
A) $7,500 billion
B) $7,000 billion
C) $7140 billion
D) $7,550.5 billion
E) $6,825.75 billion
Q2) A number of economic variables affect both the economy and industries. Which of the following statements is false?
A) Industries with high levels of operating and financial leverage should benefit from lower inflation rates.
B) Banks generally benefit from volatile interest rates, while stable interest rates reduce margins.
C) Consumers who are optimistic about the economy will spend money on high-priced items, such as autos and houses.
D) The abundance or scarcity of input components can affect the perceived attractiveness of an industry.
E) None of the above (that is, all are true statements)
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Chapter 9: Company Analysis and Stock Valuation
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Q1) Refer to Exhibit 9-1. In the listing above, which three factors influence the earnings multiple for a stock?
A) 1, 4, and 5
B) 1, 4, and 6
C) 2, 4, and 6
D) 2, 5, and 6
E) 4, 5, and 6
Q2) Turnarounds are firms with valuable assets that are hidden on the balance sheet.
A)True
B)False
Q3) Refer to Exhibit 9-8. Calculate the weighted average cost of capital (WACC).
A) 8.2%
B) 9.4%
C) 9.0%
D) 10.3%
E) 7.3%
Q4) Price-to-book value ratio cannot be used to estimate the value of firms with negative earnings or negative cash flows.
A)True
B)False
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Chapter 10: Technical Analysis
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Q1) The Confidence Index increases as the yield on lower grade bonds decreases, everything else being constant.
A)True
B)False
Q2) Based on the daily closings for the S&P/TSX Composite Index given in the table below, calculate a four-day moving average for Day 4. \[\begin{array} { c c } \text { Day } & \text { Price } \\ \hline 1 & 10500 \\ 2 & 10025 \\ 3 & 10125 \\ 4 & 10210 \end{array}\]
A) 10,500
B) 10,210
C) 10,215
D) 10,000
E) 11,000
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Chapter 11: Bond Fundamentals
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Sample Questions
Q1) The annual interest paid on a bond relative to its prevailing market price is called its
A) Promised yield.
B) Yield to maturity.
C) Coupon rate.
D) Effective yield.
E) Current yield.
Q2) At what point would an investor be indifferent between a Drifton corporate bond yielding 12.5% and a tax-free municipal bond of equal financial strength if the investor's marginal tax rate is 25%?
A) 6.05%
B) 7.10%
C) 8.15%
D) 9.38%
E) 16.27%
Q3) A bond's maturity is affected by: call features, non-refunding provisions, and sinking fund provisions.
A)True
B)False
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Chapter 12: The Analysis and Valuation of Bonds
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Q1) The realized yield measures the expected rate of return of a bond that you expect to sell prior to its maturity.
A)True
B)False
Q2) Consider a 10%, 15 year bond that pays interest annually quarterly, and its current price is $1060. What is the promised yield to maturity?
A) 10.23%
B) 18.45%
C) 2.31%
D) 17.77%
E) 9.26%
Q3) Which of the following is not a risk premium component of bonds?
A) Bond quality
B) Term to maturity of the bond
C) Indenture provisions
D) Foreign bond risk
E) All of the above are risk premium components of bonds.
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Chapter 13: An Introduction to Derivative Markets and Securities
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Q1) What is equivalent to buying a bear spread?
A) Selling a bull spread.
B) Buying an out-of-the-money call and selling an in-the-money call on the same stock with the same exercise date.
C) Selling an out-of-the-money call and buying an in-the-money call on the same stock with a different exercise price.
D) Choices a and b
E) None of the above
Q2) According to put/call parity
A) Stock price + Call Price = Put Price + Risk Free Bond Price
B) Stock price + Put Price = Call Price + Risk Free Bond Price
C) Put price + Call Price = Stock Price + Risk Free Bond Price
D) Stock price - Put Price = Call Price + Risk Free Bond Price
E) Stock price + Call Price = Put Price - Risk Free Bond Price
Q3) A forward contract gives its holder the option to conduct a transaction involving another security or commodity.
A)True
B)False
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Chapter 14: Derivatives: Analysis and Valuation
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Q1) It is always theoretically possible to use options as a perfect hedge against fluctuations in value of the underlying asset.
A)True
B)False
Q2) There is an inverse relationship between the market interest rate and the value of a call option.
A)True
B)False
Q3) Refer to Exhibit 14-10. Assuming that one year after the swap was initiated the fixed rate on a new 3-year receive fixed pay floating LIBOR swap has risen to 9% per year, calculate the market value of the 8% fixed rate bond based on $100 face value. Settlement is on a semiannual basis.
A) $76.45
B) $101.24
C) $100.0
D) $97.42
E) $70.77
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Chapter 15: Equity Portfolio Management Strategies
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Q1) Which of the following statements about investment style is false?
A) Growth stocks generally have smaller capitalizations than value stocks.
B) Value stocks have P/E and P/B ratios significantly lower than those of growth stocks.
C) Value stocks dividend yields are much higher than those of growth stocks.
D) Growth and levels of earnings is higher in growth stocks.
E) Value stocks have a higher risk premium.
Q2) In ____ strategy, certain economic sectors or industries are overweighted relative to the benchmark in anticipation of the next phase of the business cycle.
A) Sector rotation
B) Price momentum
C) Earnings momentum
D) Return rotation
E) None of the above
Q3) The three basic techniques for constructing a passive index are: full replication, sampling and linear programming.
A)True
B)False
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Chapter 16: Bond Portfolio Management Strategies
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Sample Questions
Q1) Refer to Exhibit 16-10. Calculate the Modified Duration for Bond B.
A) 1.44
B) 2.47
C) 2.55
D) 2.70
E) 2.78
Q2) For a bond investor selecting a buy-and-hold strategy, which of the following would be the least important consideration?
A) Term to maturity
B) Indenture provisions
C) Coupon levels
D) Liquidity
E) Quality
Q3) A pure yield pickup swap involves a switch from a low-coupon bond to a higher-coupon bond of similar quality and maturity.
A)True
B)False
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Page 18
Chapter 17: Professional Money Management, Alternative
Assets, and Industry Ethics
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Q1) Investing in emerging markets can be viewed as a global application of
A) Fixed-income arbitrage.
B) Convertible arbitrage.
C) Merger arbitrage.
D) Distressed opportunistic strategies.
E) Equity market neutral.
Q2) Refer to Exhibit 17-1. What is the offering price for the fund if the NAV is $25.25 and a the load is 6%?
A) $26.19
B) $23.74
C) $25.25
D) $26.77
E) $24.13
Q3) A low-load fund allows to
A) Charge a redemption fee.
B) Deduct 7 to 8% commission at the initial offering.
C) Deduct 3% of the average net assets per year.
D) Charge a contingent deferred sales load.
E) Switch from closed-end to open-end.
19
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Chapter 18: Evaluation of Portfolio Performance
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Q1) An appropriate composite risk measure that indicates the relative price volatility for a bond compared to interest rate changes is the bond's yield to maturity.
A)True
B)False
Q2) The major requirements of a portfolio manager include the following, except
A) Follow the client's policy statement.
B) Completely diversify the portfolio to eliminate all unsystematic risk..
C) The ability to derive above-average risk adjusted returns.
D) Completely diversify the portfolio to eliminate all systematic risk.
E) None of the above (that is, all are requirements of a portfolio manager)
Q3) Selectivity measures how well a portfolio performed relative to a A) Market portfolio (S&P 400).
B) Portfolio of the same securities in the previous period.
C) Naively selected portfolio of equal risk.
D) Naively selected portfolio of equal return.
E) World market portfolio.
Q4) Sharpe's performance assumes that all portfolios are completely diversified.
A)True
B)False
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Chapter 19: Analysis of Financial Statements
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Q1) Cash flow from operations = Net Income + Non cash revenue and expensesChanges in net working capital.
A)True
B)False
Q2) Refer to Exhibit 19-1. What was BMC'S current ratio at year-end 2009?
A) 0.852
B)
Q3) The market liquidity of a security can be measured using A) Trading turnover.
B) Bid-Ask spread.
C) Price of the security.
D) Choices a and b.
E) Choices b and c.
Q4) Some factors the determine business risk include sales variability and debt to equity ratio.
A)True B)False
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Chapter 20: An Introduction to Security Valuation
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Q1) Empirical studies have shown that the market factor has increased over time and now accounts for the majority of an individual stock's price variance.
A)True
B)False
Q2) Refer to Exhibit 20-7. What is the price of the stock today (P?)?
A) $84.81
B) $87.81
C) $91.09
D) $94.32
E) $97.61
Q3) The importance of an industry's performance on an individual stock's performance varies across industries.
A)True B)False
Q4) An example of a relative valuation technique is the Price/Cash Flow ratio. A)True B)False
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Chapter 21: Web Appendix: A Review of Statistics and the
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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 coefficient of variation of this investment is
A) -0.06
B) -0.65
C) 6.60
D) 16.53
E) 165.10
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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Chapter
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Q1) The retirement plan that promises to pay a specific benefit to its beneficiaries is
A) A defined contribution plan.
B) A defined benefit pension plan.
C) A non-contribution pension plan.
D) An actuarial pension plan.
E) Choices a and c.
Q2) Endowment funds
A) Are formed from the contributions to charitable and educational institutions.
B) Are attractive investments for individuals with low liquidity needs.
C) Usually have very short investment horizons.
D) Provide retirement benefits for public employees.
E) Provide death benefits for its contributor's survivors.
Q3) Many endowments are tax-exempt.
A)True
B)False
Q4) Banks have high liquidity needs and therefore, have a short time horizon.
A)True
B)False
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