Financial Markets and Institutions
Final Exam Questions
Course Introduction
This course offers an in-depth examination of the structure, function, and operation of financial markets and institutions. Students will explore the roles of financial intermediaries, deposit and non-deposit institutions, and regulatory agencies in facilitating the flow of funds within the economy. Key topics include the behavior and valuation of interest rates, instruments traded in money and capital markets, risk management, and the impact of monetary policy. The course emphasizes how financial markets and institutions contribute to economic development and stability, and addresses recent trends and global issues affecting the financial system.
Recommended Textbook Investments Analysis and Management 13th Edition by Charles P. Jones
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Page 2
Chapter 1: Understanding Investments
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Q1) Most financial advisors are registered with the Securities and Exchange Commission as:
A)registered representatives.
B)registered investment advisors.
C)registered financial planners.
D)registered securities consultants.
Answer: B
Q2) Which of the following statements is true regarding multi-national corporations?
A)Exxon Mobil earns the majority of its profits from its overseas operations.
B)Google currently derives the majority of its earnings from outside the U.S.
C)Wal-Mart earns the majority of its profits from outside the U.S.
D)Coca-Cola has no overseas operations and no earnings outside the U.S.
Answer: A
Q3) Risk is defined as the possibility of loss.
A)True
B)False
Answer: False
Q4) Define risk in the context of investments.
Answer: Risk is the chance that the actual return on an investment will differ from its expected return.
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Chapter 2: Investment Alternatives
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Q1) How is the total book value of equity affected by stock splits?
Answer: Stock splits do not affect total value of equity or the individual accounts,other than the number of shares outstanding and the par value.
Q2) The par value of Blaze,Inc.common stock is $0.50,the earnings per share is $4,the stock price is $60,and the dividend per share is $1.Calculate the payout ratio.
Answer: Payout rate = $1/$4 = 0.25 = 25%
Q3) Investors in high tax brackets would be unlikely to invest in municipal bonds.
A)True
B)False
Answer: False
Q4) An unsecured bond is known as a(n):
A)debenture.
B)indenture.
C)mortgage bond.
D)junk bond.
Answer: A
Q5) What are some advantages of asset-backed securities to investors?
Answer: High yields with manageable risk.
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Chapter 3: Indirect Investing
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Q1) Survivorship bias occurs when mutual funds are merged or liquidated,and only the performance of the surviving funds is reported.
A)True
B)False
Answer: True
Q2) A 12b-1 fee is a:
A)redemption fee.
B)sales charge.
C)distribution fee.
D)load fee.
Answer: C
Q3) You have a publication listing alternative growth funds with their most recent 12-month total returns.Is this a good predictor of future performance for the funds?
Answer: No.The best fund last year may or may not be in the rankings next year.The literature is divided on the usefulness of past performance in predicting fund performance in the future.Some investors prefer longer-run performance measures such as five-year or ten-year compounded returns,but none are sure-fire guides to future performance.
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Chapter 4: Securities Markets and Market Indexes
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Q1) Most trading of bonds in the secondary market takes place on:
A)the NYSE.
B)the American Stock Exchange.
C)the OTC.
D)the CME.
Q2) What are the major similarities and differences between a specialist and a dealer?
Q3) For a given percentage change in price,which of the following stocks would have the greatest impact on the Dow Jones Industrial Average (DJIA)?The stock with the:
A)largest market capitalization
B)highest stock price per share
C)largest number of shares outstanding
D)largest amount of free float
Q4) What impact does the increasing amount of institutional investing have on the securities markets today,and what role do you think institutional investors will play in the future?
Q5) An NYSE market maker awaits news of a merger involving one of the stocksin which she makes a market.Why does she set the bid-ask spread higher?
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Chapter 5: How Securities Are Traded
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Q1) "Circuit breakers" are program traders that attempt to bypass the exchange regulations.
A)True
B)False
Q2) "Street names" are the nicknames used for commonly-held securities,such as "IBM" for International Business Machines.
A)True
B)False
Q3) For an investor holding individual securities,which of the following generally requires a relatively large minimum investment,usually $100,000 or higher?
A)A cash account
B)An asset management account
C)A margin account
D)A wrap account
Q4) The NYSE is:
A)a free agent market.
B)an agency auction market.
C)a negotiated market.
D)a dealer market.
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Chapter 6: The Risks and Returns From Investing
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Q1) The most common measure of inflation is the Producer Price Index.
A)True
B)False
Q2) In order to determine the compound growth rate of an investment over some period,an investor would calculate the:
A)arithmetic mean.
B)geometric mean.
C)calculus mean.
D)arithmetic median.
Q3) Which of the following statements about the expected equity risk premium is true?
A)It is occasionally negative.
B)There is no direct way to measure it.
C)It decreases as investor uncertainty increases.
D)It increases as the risk-free rate increases.
Q4) Return and risk are inversely related.
A)True
B)False
Q5) What is the best measure of risk for a sole proprietorship?
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Chapter 7: Portfolio Theory
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Q1) Provide an example of two industries that might have low correlation with one another.Give an example that might exhibit high correlation.
Q2) An efficiently diversified portfolio still has _____________________ risk.
Q3) Which of the following is true regarding random diversification?
A)Investment characteristics are considered important in random diversification.
B)The net benefit of random diversification eventually disappears as more securities are added.
C)Random diversification,if done correctly,can eliminate all risk in a portfolio.
D)Random diversification eventually removes all company specific risk from a portfolio.
Q4) When returns are perfectly positively correlated,the risk of the portfolio is: A)zero.
B)the weighted average of the individual security's risk. C)equal to the correlation coefficient between the securities. D)infinite.
Q5) Conventional wisdom has long held that diversification of a stock portfolio should be across industries.Does the correlation coefficient indirectly recommend the same thing?
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Chapter 8: Portfolio Selection
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Q1) Real estate has never been shown to be positively correlated with the performance of stocks.
A)True
B)False
Q2) A major assumption of the Markowitz model is that investors base their decisions strictly on expected return and risk.
A)True
B)False
Q3) Under the Markowitz model,investors:
A)are assumed to be risk-seekers.
B)are not allowed to use leverage.
C)are assumed to be institutional investors.
D)are always better off if they select portfolios consisting of multiple securities.
Q4) Based on recent history,an investor would have a lower risk level with a portfolio consisting of:
A)all stocks.
B)all bonds.
C)some stocks and some bonds.
D)Impossible to tell.
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Chapter 9: Asset Pricing Models
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Q1) Which of the following might be used as a factor in an APT factor model?
A)The risk-free rate
B)Expected inflation
C)Unanticipated deviations from expected inflation
D)Loss by fire at a company's manufacturing plant
Q2) For which of the following models is beta the slope term?
A)Risk-free model
B)CAPM
C)CML
D)Market model
Q3) If markets are efficient and in equilibrium:
A)all securities would lie on the SML.
B)any security that plots below the SML would be considered undervalued.
C)any security that plots above the SML would be considered overvalued.
D)no security would lie on the SML.
Q4) How are securities chosen and in what proportions are they represented in the market portfolio M?
Q5) The CML indicates the required return for each portfolio risk level.
A)True
B)False
11
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Chapter 10: Common Stock Valuation
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Q1) Which of the following is a component of the formula used to derive a firm's enterprise value?
A)EBITDA
B)Accounts receivable
C)Bonds
D)Fixed assets
Q2) What is used as "earnings" in the price/earnings ratio?
A)The net income shown in the company's most recent annual report
B)Earnings from the firm's last four published quarterly income statements
C)The firm's estimated earnings for the next 12 months
D)All of these definitions of earnings are used by analysts
Q3) If a stock's dividend growth rate or discount rate changes even a small amount,the change in the price calculated by the constant growth model can be very large.
A)True
B)False
Q4) The P/B ratio is considered relatively useful for firms with high levels of intangible assets.
A)True
B)False
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Chapter 11: Common Stocks: Analysis and Strategy
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Q1) Historically,sell-side equity research has tended to assign:
A)very unfavorable ratings to target companies.
B)unfavorable ratings to target companies.
C)favorable ratings to target companies.
D)neutral ratings to target companies.
Q2) A significant advantage of index funds is their:
A)lower market price than other types of funds.
B)superior sector rotation approach.
C)tax efficiency.
D)minimization of risk.
Q3) From 1989 to 2015,the Japanese stock market lost what percent of its value?
A)20
B)30
C)40
D)50
Q4) How is the required rate of return utilized in stock analysis?
Q5) A common asset allocation for a number of institutional investors using only two asset classes is 60 percent equities and 40 percent bonds.
A)True
B)False
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Chapter 12: Market Efficiency
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Q1) Financial economists have tested various technical trading rules and found they fail to earn consistent abnormal returns.
A)True
B)False
Q2) If a public company reports earnings substantially lower than expected,the stock should subsequently earn a positive abnormal return.
A)True
B)False
Q3) In an efficient market,the expected abnormal return on a security is:
A)equal to zero.
B)equal to the risk-free rate of return.
C)equal to the security's required return.
D)greater than the security's required return.
Q4) Which of the following is not an investor trading bias?
A)Loss aversion
B)Framing
C)Overconfidence
D)Mean reversion
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Page 14
Chapter 13: Economy Market Analysis
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Q1) The Dow Jones Industrial Average provides the best representation of the performance of U.S.stocks.
A)True
B)False
Q2) The relationship between the stock market and the business cycle is generally considered reliable,but the stock market tends to give false signals about:
A)business cycle peaks (booms).
B)business cycle troughs (recessions).
C)business cycle inflection points between peaks and troughs.
D)ex post stock market returns.
Q3) The stock market is a leading indicator of the economy because investors discount future cash flows.
A)True
B)False
Q4) On average,the typical business cycle in the United States leads the stock market's turning point by a few months.
A)True
B)False
Q5) Why is there an inverse relationship between P/Es and dividend yield?
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Chapter 14: Industry Analysis
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Q1) Give several examples of government effects on industries.
Q2) What industries do you think will be the growth industries of the next decade?
Q3) Which of the following industries would you have most liked to have been invested in over the past 25 years?
A)Steelworks
B)Consumer durables
C)Mining and minerals
D)Food
Q4) The food industry would be considered a:
A)growth industry.
B)defensive industry.
C)cyclical industry.
D)countercyclical industry.
Q5) The North American Industry Classification System (NAICS)was developed using a production-oriented approach,resulting in companies being classified into industries based on the activity in which they are primarily engaged.
A)True
B)False
Q6) Differentiate between defensive industries and countercyclical industries.
Page 16
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Chapter 15: Company Analysis
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Q1) Since extraordinary items affecting earnings are typically non-recurring,investors should disregard their impact on earnings when evaluating the stock.
A)True
B)False
Q2) If business risk decreases for Megabucks,Inc. ,its P/E should:
A)increase.
B)stay the same.
C)decrease.
D)increase or decrease depending on the level of interest rates.
Q3) Low P/E stocks are generally associated with:
A)mature companies.
B)cyclical companies.
C)young fast-growing companies.
D)growth companies.
Q4) The last step in top-down fundamental analysis is to:
A)analyze individual industries.
B)analyze individual companies.
C)analyze individual securities.
D)perform technical analysis
Q5) What are "earnings surprises?"How do they affect stock prices?
Page 17
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Chapter 16: Technical Analysis
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Q1) Historical tests of filter rules indicate that:
A)several filters were profitable before commissions,but not after.
B)several filters were profitable before and after commissions.
C)no filters were profitable even before commissions.
D)all filters were profitable before commissions,but not after.
Q2) One of the primary tools of a technical analyst is:
A)sell-side research.
B)buy-side research.
C)Value Line earnings estimates.
D)charts of stock price and volume.
Q3) The two primary tools of a technical analyst are:
A)level of the market index and volume.
B)economic indicators and level of the market index.
C)price and earnings.
D)price and volume.
Q4) 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.
Page 18
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Chapter 17: Bond Yields
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Q1) What is meant by the real risk-free rate of interest?It is the:
A)opportunity cost of foregoing consumption.
B)rate actually used in the market,not in textbooks.
C)rate quoted on long-term Treasury bonds.
D)the nominal risk-free interest rate,multiplied by 1 minus the marginal tax rate.
Q2) The yield-to-maturity calculation assumes that coupon payments are reinvested at the:
A)coupon rate on the bond.
B)bond's current yield.
C)bond's yield to maturity.
D)forward interest rate.
Q3) The three most prominent theories proposed to explain the term structure of interest rates are:
Q4) Which of the following is included in the "realized compound yield"?
A)The bond coupon payments,only.
B)The bond coupon and principal payments,only.
C)The bond principal payment,only.
D)The bond coupon and principal payments and the reinvestment income.
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Chapter 18: Bonds: Analysis and Strategy
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Q1) Interest rate risk is composed of:
A)market risk and default risk.
B)price risk and credit risk.
C)price risk and reinvestment risk.
D)default risk and liquidity risk.
Q2) The size of yield spreads tends to remain constant over time.
A)True
B)False
Q3) Immunization is intended to protect a portfolio against interest rate risk.What should be done?How does it work?
Q4) If two coupon bonds are equivalent in all other respects,which will have the higher convexity?
A)The bond with the higher coupon.
B)The bond with the longer maturity.
C)The bond with the greater yield.
D)The bond with the lower credit rating.
Q5) One of the most cost-effective methods of passive bond investing is buying into a bond ETF.
A)True
B)False
20
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Chapter 19: Options
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Q1) An option is a wasting asset because as its expiration date approaches,its:
A)intrinsic value approaches zero.
B)time value approaches zero.
C)intrinsic value approaches its time value.
D)price approaches zero.
Q2) LEAPS are typically:
A)more expensive than short-term options.
B)cheaper than short-term options.
C)only available for major indexes,not individual stocks.
D)long-term options,with maturities between 5 and 10 years.
Q3) An investor wants to hedge the Apple stock he holds in his portfolio.How can he use a covered call to do this?
Q4) The Options Clearing Corporation does not ensure fulfillment of option obligations. A)True
B)False
Q5) What are the variables in the Black-Scholes option pricing model?How is each related to the price of the call option?
Q6) What type of equity derivatives are created by corporations?
Q7) What is meant by portfolio insurance?
Page 21
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Chapter 20: Futures
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Q1) Explain the difference between a forward contract and a futures contract.
Q2) The initial margin requirement on an SSF contract is 50 percent.
A)True
B)False
Q3) What is the focus of speculators who spread stock-index futures?
Q4) What economic functions are fulfilled by futures?
Q5) One difference between a hedger and a speculator is that the hedger:
A)may experience either a profit or a loss.
B)may not close out his position by taking an opposite position.
C)does not have to put up margin.
D)faces a risk without the futures contract.
Q6) Futures are essentially standardized forward contracts.
A)True
B)False
Q7) Which of the following is a characteristic of futures contracts?
A)They are marked to market daily.
B)They can be sold short but only on an uptick.
C)They are handled by specialists on futures exchanges.
D)They have no daily price limits.
Q8) What is meant by the term "marked to market"?
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Chapter 21: Portfolio Management
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Q1) Under the life cycle approach,the lowest risk and lowest return should come during the spending and gifting stages.
A)True
B)False
Q2) In order to arrive at an investment policy,it is necessary to determine whether the market is headed for a bull or bear market.
A)True
B)False
Q3) To avoid problems of underperformance,passive investing through the use of indexed mutual funds and ETFs is generally the way to go for most individuals.
A)True
B)False
Q4) The spending phase of the life cycle is avoided by investors who follow the prudent man rule.
A)True
B)False
Q5) How does the prudent investor rule affect asset allocation?
Q6) What are the steps in the portfolio management process?
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Chapter 22: Evaluation of Investment Performance
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Q1) To claim GIPS compliance in reporting portfolio performance,the standards require:
A)a 5-year performance record,or since inception if the fund is less than 5-years old.
B)that the majority of the firm's funds meet GIPS standards.
C)that the majority of the firm's portfolios are included in the performance record.
D)a firm build toward a minimum record of 20 years of reported performance.
Q2) Performance attribution separates return performance into the following two sources:
A)security analysis and portfolio management.
B)money market and capital market securities.
C)traditional assets and alternative assets.
D)asset allocation and security selection.
Q3) What are some of the problems associated with using risk-adjusted portfolio performance measures?
Q4) Time-weighted,as opposed to money-weighted,return captures the rate of return actually earned by the fund manager.
A)True
B)False
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