Financial Management Exam Practice
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Course Introduction
Financial Management is a comprehensive course that introduces students to the fundamental principles and practices involved in managing an organizations financial resources. The course covers essential topics such as financial analysis, planning and forecasting, budgeting, capital structure, and working capital management. Students learn how to evaluate investment opportunities, understand the cost of capital, and make informed decisions aimed at maximizing shareholder value. Through case studies and practical examples, the course equips students with vital skills in interpreting financial statements, designing financial strategies, and navigating real-world financial challenges faced by businesses today.
Recommended Textbook Investments Analysis and Management 12th Edition by Charles
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Page 2
P. Jones
Chapter 1: Understanding Investments
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Sample Questions
Q1) Investment decision making traditionally consists of two steps:
A)investment banking and security analysis
B)buying and selling
C)risk and expected return.
D)security analysis and portfolio management.
Answer: D
Q2) Both 401(k)plans and IRAs are self-directed retirement plans.
A)True
B)False
Answer: True
Q3) Investors enjoyed the best 5 consecutive years in the stock market history over the period 1996-2000.
A)True
B)False
Answer: False
Q4) Due to the Internet,institutional investors have gained in importance.
A)True
B)False Answer: False
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Chapter 2: Investment Alternatives
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Sample Questions
Q1) How is the earnings retention rate related to the dividend payout rate?
Answer: Earnings retention rate = 1 - dividend payout rate
Q2) Rank (lowest to highest)the following securities in terms of the risk-expected return tradeoff from the investors' viewpoint: common stock,corporate bonds,U.S.Treasury bonds,options,preferred stock..
Answer: U.S.Treasury bonds,corporate bonds,preferred stock,common stock,options
Q3) Treasury bills are traded in the --------------------- .
A)money market.
B)capital market.
C)government market.
D)regulated market.
Answer: A
Q4) Each point on a bond quote represents:
A)$100
B)1 percent of $100
C)1 percent of $1000
D)$1000
Answer: C
Q5) What are some advantages of asset-backed securities to investors?
Answer: High yields with manageable risk.
Page 4
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Chapter 3: Indirect Investing
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Sample Questions
Q1) What are the main differences between a closed-end and an open-end investment company?
Answer: A closed-end investment company has a fixed number of shares,and the price depends on supply and demand.An open-end fund's shares increase as long as new investors contribute money,and the price is the net asset value of the securities owned.
Q2) The major advantage of Separately Managed Accounts (SMA)is control and the direct owner may be able to specify investment restrictions.
A)True
B)False
Answer: True
Q3) Single-country funds have traditionally:
A)outperformed international funds.
B)underperformed international funds.
C)been open-end.
D)been closed-end.
Answer: D
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Chapter 4: Securities Markets and Market Indexes
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Sample Questions
Q1) What is Instinet and what does it offer for investors?
Q2) According to its website,NYSE Euronext accounts for nearly what percent of the world's publicly traded equity securities?
A)nearly 25%
B)nearly 33%
C)nearly 40%
D)nearly 50%
Q3) NASDAQ stocks:
A)are generally foreign stocks.
B)trade via the Blue Sheets.
C)are not generally listed on organized exchanges.
D)represent less than 1,000 companies.
Q4) The Dow-Jones Industrial Average has historically consisted of high quality stocks that were considered to be:
A)OTC stocks
B)cyclical stock
C)blue-chip stocks
D)defensive stocks
Q5) What are the major similarities and differences between a specialist and a dealer?
6
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Chapter 5: How Securities Are Traded
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Sample Questions
Q1) If an investor is attempting to buy a stock that is very volatile,it would be best to use a:
A)market order
B)limit order
C)stop-loss order
D)contingency order
Q2) "Street names" are the nicknames used for commonly-held securities,such as "IBM" for International Business Machines.
A)True
B)False
Q3) Which of the following statements regarding arbitration of broker-client disputes is not true?
A)There is a cost to arbitration.
B)Arbitration is a binding process that can determine damages.
C)It is advised that investors hire a lawyer for the arbitration process.
D)Arbitration rulings are frequently appealed.
Q4) An investor who short sold 120 shares of stock at $150 per share wishes to realize a gross profit of $2400.At what price must the investor cover the short sale?
Q5) The SIPC limit for insurance coverage on cash is _____________________.
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Chapter 6: The Risks and Returns From Investing
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Sample Questions
Q1) If the Dow Jones Industrials had a price appreciation of 6 percent one year and yet total return for the year was 9 percent,the difference would be due to:
A)the tax treatment of capital gains.
B)the cumulative wealth effect.
C)dividends.
D)profits.
Q2) The recent housing bubble and resulting credit crisis of 2008 is a perfect example of:
A)nonsystematic risk
B)systematic risk
C)inflation risk
D)political risk
Q3) If you deposit $1,000 today at 12 percent,how much will you have in 10 years?
Q4) The best return measure to use if you are trying to measure the total effect of returns over time given some stated beginning amount is the:
A)total return
B)return relative
C)cumulative wealth index
D)total yield
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Chapter 7: Portfolio Theory
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Sample Questions
Q1) When returns are perfectly positively correlated,the risk of the portfolio is:
A)zero
B)the weighted average of the individual securities risk
C)equal to the correlation coefficient between the securities
D)infinite
Q2) Investments in commodities such as precious metals may provide additional diversification opportunities for portfolios consisting primarily of stocks and bonds.
A)True
B)False
Q3) The expected value is the:
A)inverse of the standard deviation
B)correlation between a security's risk and return.
C)weighted average of all possible outcomes.
D)same as the discrete probability distribution.
Q4) An efficiently diversified portfolio still has _____________________ risk.
Q5) In the case of a four-security portfolio,there will be 8 covariances.
A)True B)False
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Chapter 8: Portfolio Selection
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Sample Questions
Q1) Systematic risk is also called:
A)diversifiable risk
B)market risk
C)random risk
D)company-specific risk
Q2) A portfolio which lies below the efficient frontier is described as
A)optimal
B)unattainable
C)dominant
D)dominated
Q3) Explain what is efficient about the efficient frontier.
Q4) Portfolios lying on the upper right portion of the efficient frontier are likely to be chosen by
A)aggressive investors
B)conservative investors
C)risk-averse investors
D)defensive investors
Q5) Discuss the importance of the asset allocation decision for portfolio performance.
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Chapter 9: Asset Pricing Models
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Sample Questions
Q1) None of the asset-pricing models assume that the market is perfect.
A)True
B)False
Q2) When markets are in equilibrium,the CML will be upward sloping
A)because it shows the optimum combination of risky securities.
B)because the price of risk must always be positive.
C)because it contains all securities weighted by their market values.
D)because the CML indicates the required return for each portfolio risk level.
Q3) Positive theory refers to a theory that
A)explains how economic participants should act
B)describes how economic participants act
C)is optimistic
D)has been shown to have high explanatory power as a result of empirical testing
Q4) If the risk free lending rate is lower than the borrowing rate,what would the shape of the CML and efficient frontier look like?
Q5) A security that plots above the SML would be a good security to sell short.
A)True
B)False
Q6) What is the formula for the slope of the CML? What does it represent?
Page 11
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Chapter 10: Common Stock Valuation
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Sample Questions
Q1) EVA analysis reflects an emphasis on risk-adjusted return on capital.
A)True
B)False
Q2) All of the following are interchangeable terms except for:
A)discount rate
B)coupon rate
C)required rate of return
D)capitalization rate
Q3) Unlike discounted cash flow techniques,relative valuation does not require comparatively strong assumptions about the inputs that lead to an estimate of stock value.
A)True
B)False
Q4) You would expect a lower PSR for a retail company than for a biotechnology company.
A)True
B)False
Q5) What variables must be estimated to use the dividend discount model? The P/E model?
Q6) Why did investors favor large cap stocks in the mid to late 1990s?
Page 12
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Chapter 11: Common Stocks: Analysis
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Sample Questions
Q1) How can investors reasonably justify buy actively managed funds instead of index funds?
A)higher management fees usually suggests better performance
B)the fund consistently outperformed the market,net of fees,and is expected to continue to do so
C)the fund outperformed the S&P 500 by 4% last year
D)the portfolio manager is new and considered a star analyst
Q2) The primary emphasis in fundamental security analysis is on expected sales of the company.
A)True
B)False
Q3) A general guideline is that investors should probably have at least 20 percent of their portfolio invested in emerging markets.
A)True
B)False
Q4) Compare and contrast the passive strategies of buy-and-hold and buying index funds.
Q5) How could one invest indirectly in sectors and practice sector rotation?
Q6) How is the required rate of return utilized in stock analysis?
Page 13
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Chapter 12: Market Efficiency
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Sample Questions
Q1) Nike Inc.reports first quarter earnings of $2.00 per share.As an investor using the SUE technique,you had estimated earnings to be $1.50 per share,with a standard error of estimate (SEE)of 0.15.
(a)Calculate the SUE for Nike.
(b)Would this stock be a good buy on the basis of this SUE?
Q2) Which of the following is true regarding the size anomaly?
A)As much as 50% of small cap outperformance is associated with the January effect.
B)Small cap stocks underperform large cap stocks in recent years.
C)Small cap stock outperformance is a NASDAQ phenomenon,not NYSE.
D)Small cap stock outperformance is unaffected by micro-cap,commission,or liquidity (i.e.,bid-ask spread)concerns.
Q3) Select the FALSE statement concerning efficient markets.
A)The current price of a stock reflects all known information.
B)Investors will use all relevant data in making their decisions.
C)A perfect adjustment in price follows any new information.
D)Following any adjustment,the new price does not have to be the new equilibrium price.
Q4) Insider trading is illegal in the U.S.How is this related to the strong form EMH?
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Chapter 13: Economy Market Analysis
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Sample Questions
Q1) If the economy is prospering,investors expect corporate earnings to rise.
A)True
B)False
Q2) Why do stock investors pay attention to the bond market?
Q3) The ability of the market to predict economic recoveries is remarkably good.Stock prices almost always turn up how many months before recovery?
A)3-5,with 4 typical.
B)3-7,with 5 typical.
C)4-8,with 6 typical.
D)5-9,with 7 typical.
Q4) Use the constant-growth dividend discount model to explain why stock prices have an inverse relationship to interest rates.
Q5) Many market participants believe that when the dividend yield on the Standard and Poor's 500 is ____,the market is in for a downward correction.
A)above 6 percent
B)below 6 percent
C)above 3 percent
D)below 3 percent
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Chapter 14: Industry Analysis
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Sample Questions
Q1) Standard & Poor's industry analysis has been shown to be less accurate in predicting expected performance than the Value Line Investment Survey.
A)True
B)False
Q2) The North American Industry Classification System (NAICS)was developed using a production-oriented approach,with the result companies are classified into industries based on the activity in which they are primarily engated.
A)True
B)False
Q3) Which of the following sectors was adversely affected by the recent accounting changes requiring the expensing of stock options?
A)manufacturing
B)technology
C)energy
D)utilities
Q4) How can historical performance help the analyst assess the future prospects for an industry?
Q5) What are the five competitive factors identified in the Michael Porter model?
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Chapter 15: Company Analysis
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Sample Questions
Q1) One way to calculate EPS is:
A)ROA x Book value per share.
B)ROE x Book value per share.
C)ROA/ Book value per share.
D)ROE/ Book value per share.
Q2) Free cash flow represents money left after all the bills are paid and dividend payments are made.
A)True
B)False
Q3) How is EPS computed? After-tax net income divided by
A)current common shares outstanding.
B)previous years common shares outstanding.
C)treasury shares outstanding.
D)average common shares outstanding.
Q4) Can an investor that wants to use the approach of projected earnings and P/Es find help in Value Line?
Q5) What is meant by "quality of earnings," and how does it affect the equity analyst's job?
Q6) What three variables affect the P/E ratio? How does each affect it?
Q7) How could unexpected inflation affect the P/E ratio?
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Chapter 16: Technical Analysis
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Sample Questions
Q1) In order to have confirmation of a major market trend under the Dow Theory,the:
A)industrial and utility averages must confirm each other.
B)transportation and utility averages must confirm each.other.
C)utility average must lead the transportation average.
D)transportation and industrial average must confirm each other.
Q2) Explain how profit taking and support levels are related.
Q3) Secondary movements are often termed technical corrections.
A)True
B)False
Q4) If an investor buys a stock when its price has increased 15 percent from its previous low,the investor is employing:
A)a contrarian indicator.
B)a filter rule.
C)a sentiment indicator.
D)relative strength analysis.
Q5) The cash position of mutual funds is a contrarian indicator.
A)True
B)False
Q6) Explain three specific buy signals using a moving average.
Q7) What four factors should be considered in testing technical trading rules?
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Chapter 17: Bond Yields
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Sample Questions
Q1) Both stocks and bonds are valued by summing the discounted future flows of interest (or dividends),and the repayment of principal (or sale of the stock).
A)True
B)False
Q2) What happens to the price of bonds,if interest rates go up?
A)The price of bonds goes up.
B)The price of bonds stays the same.
C)The price of bonds goes down.
D)The relationship between interest rates and bond prices cannot be determined.
Q3) Which of the following bonds will be most sensitive to changes in market interest rates?
A)8 percent semiannual coupon with 8 years to maturity.
B)6 percent semiannual coupon with 8 years to maturity.
C)8 percent semiannual coupon with 6 years to maturity.
D)6 percent semiannual coupon with 6 years to maturity.
Q4) If interest rates rise,then price risk and reinvestment risk decline.
A)True
B)False
Q5) Yield spreads vary inversely with the: ______________________________.
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Chapter 18: Bonds: Analysis and Strategy
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Sample Questions
Q1) One of the most cost-effective methods of passive bond investing is buying into a bond ETF.
A)True
B)False
Q2) James wants to invest in bonds and has a 10 year investment horizon.To immunize his portfolio,he must buy bonds with durations of ________ 10 years.These bonds will have maturities ________ 10 years.
A)greater than; less than B)equal to; less than
C)less than; equal to D)equal to; greater than
Q3) Which of the following is considered to have the biggest impact on bond yields?
A)economic growth
B)business cycles
C)inflation
D)Federal Reserve actions
Q4) A bond swap involves the simultaneous selling of one bond and buying another.
A)True
B)False
Q5) Why is immunization considered to be a hybrid strategy?
Page 20
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Chapter 19: Options
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Sample Questions
Q1) How could an investor create 100 shares of artificial stock (i.e.,a portfolio with the same payoffs as 100 shares of common stock)?
Q2) What is a hedge ratio?
Q3) One important reason for the existence of derivatives is that they:
A)help lower transactions costs.
B)have valuable tax benefits.
C)contribute to market completeness.
D)are risk-free.
Q4) What is the put-call parity? How is it related to arbitrage?
Q5) Put and call options on gold are considered:
A)Commodity derivatives
B)Financial derivatives
C)Forward contracts
D)Futures contracts
Q6) What organizational feature of options trading prevents individual traders from having to worry about defaults if options are exercised?
Q7) What type of equity derivatives are created by corporations?
Q8) List five options exchanges.
Q9) What is meant by portfolio insurance?
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Chapter 20: Futures
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Sample Questions
Q1) An anticipatory hedge is when an investor anticipates a falling market and liquidates his position.
A)True
B)False
Q2) Assume that an investor buys one June NYSE Composite Index Futures Contract on May 1 at a price of 72.The position is closed out after four days.The prices on the three days after purchase were 72.5,72.1 and 72.2.The initial margin is $3500.
(a)Calculate the current equity on each of the next three days.
(b)Calculate the excess equity for those three days.
(c)Calculate the final gain or loss on this position.
Q3) Futures exchange members:
A)trade strictly for their own accounts.
B)trade strictly for others.
C)can trade for their own accounts or for others.
D)are all controlled by commodity firms.
Q4) Futures contracts are handled by specialists on futures exchanges.
A)True
B)False
Q5) What is the difference between hedgers and speculators in the futures markets?
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Chapter 21: Portfolio Management
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Sample Questions
Q1) Which of the following is not among the usual constraints and preferences considered when formulating an investment policy?
A)Avoidance of so-called "sin" stocks (alcohol,tobacco,firearms,etc.)
B)Liquidity needs
C)Economic assessment
D)Time horizon
Q2) The consolidation phase of the life cycle begins when the investor reaches retirement.
A)True
B)False
Q3) The annual average compound rate of return for stocks from the period 1926-2007 was:
A)8.50%
B)9.55%
C)10.05%
D)12%
Q4) The Prudent Man Rule,which applies to fiduciaries,is a relatively new concept in investment management.
A)True
B)False
Page 23
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Chapter 22: Evaluation of Investment
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Sample Questions
Q1) The higher the RVAR,the better the risk-adjusted portfolio performance.
A)True
B)False
Q2) GIPS presentation standards require
A)a 5-year performance record,or since inception if the fund is less than 5-years old.
B)inclusion of terminated portfolios.
C)cash accounting.
D)exclusion of cash and cash equivalents.
Q3) What is the major difference between the Sharpe and Treynor models?
Q4) Which of the following measures uses the standard deviation,and evaluates portfolio performance on the basis of both return and diversification.
A)Jensen's Alpha.
B)Treynor's Reward to Volatility.
C)M2.
D)Sharpe Ratio.
Q5) Jensen's measure of performance is based on the CAPM.
A)True
B)False
Q6) Discuss how constraints on portfolio managers affect the portfolio results.
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