Financial Markets and Institutions
Exam Practice Tests
Course Introduction
This course provides an in-depth exploration of the structure, functions, and roles of financial markets and institutions within the global economy. Students will examine the operations and interrelationships of key financial intermediaries, such as commercial banks, investment banks, insurance companies, mutual funds, and pension funds. Topics include the regulation of financial institutions, the functioning of money and capital markets, interest rate determination, risk management, and the impact of financial innovation and technology. The course also addresses the effects of monetary policy, globalization, and current events on financial markets and the broader economy, equipping students with a comprehensive understanding of the financial systems crucial role in economic development.
Recommended Textbook
Investments 7th Canadian Edition by Zvi Bodie
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23 Chapters
1542 Verified Questions
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Page 2
Chapter 1: Investments: Background and Issues
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Sample Questions
Q1) In what roles do investment bankers perform?
A) design securities with desirable properties
B) market new stock and bond issues for firms
C) provide advice to the firms as to market conditions,price,etc.
D) none of these
E) all of these
Answer: E
Q2) Firms that specialize in helping companies raise capital by selling securities are called ________.
A) chartered banks
B) investment banks
C) trust companies
D) credit unions
E) all of these.
Answer: B
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Page 3
Chapter 2: Asset Classes and Financial Instruments
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Sample Questions
Q1) At what price could an investor purchase the following T-Bill? \[\begin{array}{l} \text { }&\\ \begin{array} { l l l l l l }
\text {Days to Maturity }&\text {Bid }&\text { Asked}&\text {Chg. }&\text { Ask Yield}\\585&6.01&5.97&+0.01&6.11 \end{array} \end{array}\]
A) $9,897.16
B) $9,903.17
C) $9,903.82
D) $9,901.56
E) $9,905.43
Answer: C
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4
Chapter 3: Securities Markets
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Sample Questions
Q1) Restrictions on trading involving insider information apply to the following except
A) corporate officers and directors.
B) relatives of corporate directors and officers.
C) major stockholders.
D) all of these.
E) none of these.
Answer: E
Q2) The U.S.over-the-counter market
A) has been growing in recent years.
B) is an automated market.
C) contains some firms that qualify for NYSE listing.
D) a and b.
E) a,b,and c.
Answer: E
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Page 5
Chapter 4: Mutual Funds and Other Investment Companies
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Sample Questions
Q1) If the nominal return is constant,the after-tax real rate of return
A) declines as the inflation rate increases.
B) increases as the inflation rate increases.
C) declines as the inflation rate declines.
D) increases as the inflation rate decreases.
E) a and d.
Q2) The holding-period return (HPR)for a stock is equal to
A) the real yield minus the inflation rate.
B) the nominal yield minus the real yield.
C) the capital gains yield minus the tax rate.
D) the capital gains yield minus the dividend yield.
E) the dividend yield plus the capital gains yield.
Q3) An investor purchased a bond 45 days ago for $985.He received $15 in interest and sold the bond for $980.What is the holding period return on his investment?
A) 1.52%
B) 0.50%
C) 1.02%
D) 0.01%
E) 0.10%
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Page 6
Chapter 5: Risk and Return: Past and Prologue
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Sample Questions
Q1) According to the mean-variance criterion,which one of the following investments dominates all others?
A) E(r)= 0.15;Variance = 0.20
B) E(r)= 0.10;Variance = 0.20
C) E(r)= 0.10;Variance = 0.25
D) E(r)= 0.15;Variance = 0.25
E) none of these is dominates the other alternatives.
Q2) The standard deviation of a portfolio that has 40% of its value invested in a risk-free asset and 60% of its value invested in a risky asset with a standard deviation of 30% is A) 18%.
B) 14%.
C) 21%.
D) 24%.
E) 20%.
Q3) Discuss the differences between investors who are risk averse,risk neutral,and risk loving.
Q4) What is a fair game? Explain how the term relates to a risk-averse investor's attitude toward speculation and risk and how the utility function reflects this attitude.
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Page 7
Chapter 6: Efficient Diversification
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Sample Questions
Q1) Which of the following is not a source of systematic risk?
A) the business cycle.
B) interest rates.
C) personnel changes
D) the inflation rate.
E) exchange rates.
Q2) The standard deviation of a two-asset portfolio is a linear function of the assets' weights when
A) the assets have a correlation coefficient less than zero.
B) the assets have a correlation coefficient equal to zero.
C) the assets have a correlation coefficient greater than zero.
D) the assets have a correlation coefficient equal to one.
E) the assets have a correlation coefficient less than one.
Q3) Discuss the characteristics of indifference curves,and the theoretical value of these curves in the portfolio building process
Q4) State Markowitz's mean-variance criterion.Give some numerical examples of how the criterion would be applied.
Q5) Draw a graph of a typical efficient frontier.Explain why the efficient frontier is shaped the way it is.
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Chapter 7: Capital Asset Pricing and Arbitrage Pricing
Theory
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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 these are true.
Q2) Discuss the mutual fund theorem.
Q3) In equilibrium,the marginal price of risk for a risky security must be
A) equal to the marginal price of risk for the market portfolio.
B) greater than the marginal price of risk for the market portfolio.
C) less than the marginal price of risk for the market portfolio.
D) adjusted by its degree of nonsystematic risk.
E) none of these are true.
Q4) What is the expected return of a zero-beta security?
A) The market rate of return.
B) Zero rate of return.
C) A negative rate of return.
D) The risk-free rate.
E) None of these.
Page 9
Q5) List and discuss two of the assumptions of the CAPM.
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Chapter 8: The Efficient Market Hypothesis
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Sample Questions
Q1) As diversification increases,the total variance of a portfolio approaches
A) 0
B) 1
C) the variance of the market portfolio
D) infinity
E) none of these
Q2) Consider the single-factor APT.Stocks A and B have expected returns of 15% and 18%,respectively.The risk-free rate of return is 6%.Stock B has a beta of 1.0.If arbitrage opportunities are ruled out,stock A has a beta of __________.
A) 0.67
B) 1.00
C) 1.30
D) 1.69
E) none of these
Q3) Discuss arbitrage opportunities in the context of violations of the law of one price.
Q4) Discuss the advantages of arbitrage pricing theory (APT)over the capital asset pricing model (CAPM)relative to diversified portfolios.
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10
Chapter 9: Behavioral Finance and Technical Analysis
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Sample Questions
Q1) In an efficient market,__________.
A) security prices react quickly to new information
B) security prices are seldom far above or below their justified levels
C) security analysts will not enable investors to realize superior returns consistently
D) one cannot make money
E) a,b,and c
Q2) A market decline of 23% on a day when there is no significant macroeconomic event ______ consistent with the EMH because ________.
A) would be,because it was a clear response to macroeconomic news.
B) would be,because it was not a clear response to macroeconomic news.
C) would not be,because it was a clear response to macroeconomic news.
D) would not be,because it was not a clear response to macroeconomic news.
E) We cannot tell based on the information given.
Q3) Chartists practice
A) technical analysis.
B) fundamental analysis.
C) regression analysis.
D) insider analysis.
E) psychoanalysis.
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Page 11
Chapter 10: Bond Prices and Yield
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Sample Questions
Q1) How do technicians and professionals try to defend the importance of technical analysis?
Q2) Technical traders view mutual fund investors as __________ market timers.
A) excellent
B) mediocre
C) neutral
D) poor
Q3) Dow theory is a technique that attempts to identify _________________.
A) long-term trends in stock market prices
B) short-term trends in stock market prices
C) long-term and short-term trends in stock market prices
D) risk-free trading opportunities
Q4) If a person gives too much weight to recent information compared to prior beliefs,they would make ________ errors.
A) framing
B) selection bias
C) overconfidence
D) conservatism
E) forecasting
Q5) How do you distinguish between fundamental analysis and technical analysis?
Page 12
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Chapter 11: Managing Bond Portfolios
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Sample Questions
Q1) Petkova and Zhang (2005)examine the relationship between beta and the market risk premium and find
A) a countercyclical beta.
B) the beta of the HML portfolio is negative in good economies and positive in bad economies.
C) a cyclical beta.
D) the beta of the HML portfolio is positive in good economies and negatives in bad economies.
E) a countercyclical beta and the beta of the HML portfolio is negative in good economies and positive in bad economies.
Q2) Describe some of the ways the CAPM is applied in practice.
Q3) Given the results of the early studies by Lintner (1965)and Miller and Scholes (1972),one would conclude that
A) high beta stocks tend to outperform the predictions of the CAPM
B) low beta stocks tend to outperform the predictions of the CAPM
C) there is no relationship between beta and the predictions of the CAPM
D) a and b
E) none of these
Q4) Discuss Roll's critique of the CAPM.
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Chapter 12: Macroeconomic and Industry Analysis
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Sample Questions
Q1) A coupon bond is reported as having an ask price of 113% of the $1,000 par value.If the last interest payment was made two months ago and the coupon rate is 12%,the invoice price of the bond will be ____________.
A) $1,100
B) $1,110
C) $1,150
D) $1,160
E) none of these
Q2) A US Treasury bond quoted at 107:16 107:18 has a bid price of _______ and an asked price of _____.
A) $107.16,$107.18
B) $1,071.60,$1,071.80
C) $1,075.00,$1,075.63
D) $1,071.80,$1,071.60
E) $1,070.50,$1,070.56
Q3) 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.
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Page 14
Chapter 13: Equity Valuation
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Sample Questions
Q1) If forward rates are known with certainty and all bonds are fairly priced
A) all bonds would have the same yield to maturity.
B) all short-maturity bonds would have lower prices than all long-maturity bonds.
C) all bonds would have the same price.
D) all bonds would provide equal 1-year rates of return.
E) none of these.
Q2) The yield curve
A) is a graphical depiction of term structure of interest rates.
B) is usually depicted for Canada bonds in order to hold risk constant across maturities and yields.
C) is usually depicted for corporate bonds of different ratings.
D) a and b.
E) a and c.
Q3) Explain what the following terms mean: spot rate,short rate,and forward rate.Which of these is(are)observable today?
Q4) Although the expectations of increases in future interest rates can result in an upward sloping yield curve;an upward sloping yield curve does not in and of itself imply the expectations of higher future interest rates.Explain.
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Page 15
Chapter 14: Financial Statement Analysis
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Sample Questions
Q1) The duration of a perpetuity with a yield of 8% is
A) 13.50 years.
B) 12.11 years.
C) 6.66 years.
D) cannot be determined.
E) none of these.
Q2) The curvature of the price-yield curve for a given bond is referred to as the bond's A) modified duration.
B) immunization.
C) sensitivity.
D) convexity.
E) tangency.
Q3) The process of unbundling and repackaging the cash flows from one or more bonds into new securities is called
A) speculation.
B) immunization.
C) reverse hedging.
D) interest rate arbitrage.
E) financial engineering.
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Page 16
Chapter 15: Options Markets
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Sample Questions
Q1) According to James Tobin,the long run value of Tobin's Q should tend toward
A) 0.
B) 1.
C) 2.
D) infinity.
E) none of these.
Q2) Historically,P/E ratios have tended to be ________.
A) higher when inflation has been high
B) lower when inflation has been high
C) uncorrelated with inflation rates but correlated with other macroeconomic variables
D) uncorrelated with any macroeconomic variables including inflation rates
E) none of these
Q3) If Dominion's intrinsic value is $21.00 today,what must be its growth rate?
A) 0.0%
B) 10%
C) 4%
D) 6%
E) 7%
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17
Chapter 16: Option Valuation
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Sample Questions
Q1) If you wish to compute economic earnings and are trying to decide how to account for inventory,______.
A) FIFO is better than LIFO
B) LIFO is better than FIFO
C) FIFO and LIFO are equally good
D) FIFO and LIFO are equally bad
E) none of these
Q2) Publicly traded firms must prepare audited financial statements according to generally accepted accounting principles (GAAP).How do comparability problems arise?
Q3) Refer to the financial statements of Mt.Prevost Machine Corp.The firm's fixed asset turnover ratio for 2001 is ____.
A) 1.60
B) 3.16
C) 3.31
D) 4.64
E) none of these
Q4) The duPont system decomposes ROE into the following components:
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18
Chapter 17: Futures Markets and Risk Management
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Sample Questions
Q1) The trading volume on the Chicago Board Options Exchange is dominated by
A) the S&P 100 index option.
B) the S&P 500 index option.
C) the Russell 2000 index option.
D) all of these.
E) both a and b.
Q2) Suppose you purchase one IBM May 100 call contract at $5 and write one IBM May 105 call contract at $2.The maximum potential profit of your strategy is
A) $600.
B) $500.
C) $200.
D) $300.
E) $100.
Q3) The Option Clearing Corporation is owned by
A) the Bank of Canada.
B) the exchanges on which stock options are traded.
C) the provincial securities commissions.
D) the Federal Deposit Insurance Corporation.
E) none of these.
Q4) List two types of exotic options and describe their characteristics.
Page 19
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Chapter 18: Performance Evaluation and Active Portfolio Management
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Sample Questions
Q1) A hedge ratio for a put is always
A) equal to one.
B) greater than one.
C) between zero and one.
D) between minus one and zero.
E) of no restricted value.
Q2) Prior to expiration
A) the intrinsic value of a call option is greater than its actual value.
B) the intrinsic value of a call option is always positive.
C) the actual value of call option is greater than the intrinsic value.
D) the intrinsic value of a call option is always greater than its time value.
E) none of these.
Q3) A portfolio consists of 400 shares of stock and 200 calls on that stock.If the hedge ratio for the call is 0.6,what would be the dollar change in the value of the portfolio in response to a one dollar decline in the stock price?
A) +$700
B) +$500
C) -$580
D) -$520
E) none of these
Page 20
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Chapter 19: Globalization and International Investing
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Sample Questions
Q1) Describe the differences between futures and forward contracts.
Q2) The terms of futures contracts such as the quality and quantity of the commodity and the delivery date are
A) specified by the buyers and sellers.
B) specified only by the buyers.
C) specified by the futures exchanges.
D) specified by brokers and dealers.
E) none of these.
Q3) Trading in stock index futures
A) now exceeds buying and selling of shares in most markets.
B) reduces transactions costs as compared to trading in stocks.
C) increases leverage as compared to trading in stocks.
D) generally results in faster execution than trading in stocks.
E) all of these.
Q4) To exploit an expected increase in interest rates,an investor would most likely
A) sell Treasury bond futures.
B) take a long position in wheat futures.
C) buy S&P 500 index futures.
D) take a long position in Treasury bond futures.
E) none of these.
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Chapter 20: Taxes, Inflation, and Investment Strategy
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Q1) The M<sup>2</sup> measure was developed by
A) Merton and Miller.
B) Miller and Miller.
C) Modigliani and Miller.
D) Modigliani and Modigliani.
E) the M&M Mars Company.
Q2) Suppose you purchase one share of the stock of Cereal Correlation Company at the beginning of year 1 for $50.At the end of year 1,you receive a $1 dividend,and buy one more share for $72.At the end of year 2,you receive total dividends of $2 (i.e. ,$1 for each share),and sell the shares for $67.20 each.The dollar-weighted return on your investment is _________.
A) 10.00%
B) 8.78%
C) 19.71
D) 20.36%
E) none of these
Q3) You invested $1,000 through your broker three years ago.Your account balance at the beginning of each period is shown in the table below.
Q4) Explain why mean-variance analysis is inadequate for valuing market timing.
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Chapter 21: Investors and the Investment Process
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Sample Questions
Q1) Passive portfolio management consists of _________.
A) market timing
B) security analysis
C) indexing
D) market timing and security analysis
E) None of these is true.
Q2) According to the Treynor-Black model,the weight of a security in the active portfolio depends on the ratio of __________ to _________.
A) the degree of mispricing;the nonsystematic risk of the security
B) the degree of mispricing;the systematic risk of the security
C) the market sensitivity of the security;the nonsystematic risk of the security
D) the nonsystematic risk of the security;the systematic risk of the security
E) the total return on the security;the nonsystematic risk of the security
Q3) Perfect timing ability is equivalent to having __________ on the market portfolio.
A) a call option
B) a futures contract
C) a put option
D) a commodities contract
E) None of these is true.
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Page 23
Chapter
and More
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Sample Questions
Q1) ______ bias arises because hedge funds only report returns to database publishers if they want to.
A) Survivorship
B) Backfill
C) Omission
D) Incubation
E) none of these
Q2) Patty O'Furniture purchased 100 shares of Green Isle mutual fund at a net asset value of $42 per share.During the year Patty received dividend income distributions of $2.00 per share and capital gains distributions of $4.30 per share.At the end of the year the shares had a net asset value of $40 per share.What was Patty's rate of return on this investment?
A) 5.43%
B) 10.24%
C) 7.19%
D) 12.44%
E) 9.18%
Q3) List and describe the more important types of mutual funds according to their investment policy and use.
24
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Chapter 23: International Finance and Investments: Understanding Foreign Markets and Risks
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Q1) Exchange rate risk
A) results from changes in the exchange rates in the currencies of the investor and the country in which the investment is made.
B) can be hedged by using a forward or futures contract in foreign exchange.
C) cannot be eliminated.
D) a and c.
E) a and b.
Q2) Of developed countries,the __________ equity market had the highest beta with the U.S.index between 1999 and 2008.
A) Japanese
B) German
C) U.K.
D) Canadian
E) none of these
Q3) Aunt Gunda holds her portfolio 100% in Canadian securities.She tells you that she believes foreign investing can be extremely hazardous to her portfolio.She's not sure about the details,but has "heard some things".Discuss this idea with Aunt Gunda by listing three objections you have heard from your clients who have similar fears.Explain each of the objections is subject to faulty reasoning.
Page 25
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