Introduction to Investments
Chapter Exam Questions
Course Introduction
Introduction to Investments offers a foundational overview of the key concepts, instruments, and strategies involved in the field of investing. Students will explore various types of investment vehicles such as stocks, bonds, mutual funds, and exchange-traded funds, as well as the principles of risk and return. The course covers topics including portfolio diversification, asset allocation, investment analysis, and the impact of economic and market factors on investment decisions. By the end of the course, students will have the knowledge necessary to make informed investment choices and understand the broader role of investments in personal financial planning and the global economy.
Recommended Textbook
Principles of Investments 1st Edition by Michael Drew
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Chapter 1: Investments: Background and Issues
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Q1) Suppose an investor is considering one of two investments which are identical in all respects except for risk. If the investor anticipates a fair return for the risk of the security they invest in they can expect to ________.
A)earn no more than the Treasury bond rate on either security
B)pay less for the security that has higher risk
C)pay less for the security that has lower risk
D)earn more if interest rates are lower
Answer: B
Q2) ________ is not a derivative security.
A)A share of common shares
B)A call option
C)A futures contract
D)All of the answers are derivative securities.
Answer: A
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Chapter 2: Asset Classes and Financial Instruments
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Q1) Which of the following does not approximate the performance of a buy and hold portfolio strategy?
A)An equally weighted index
B)A price weighted index
C)A value weighted index
D)Weights are not a factor in this situation
Answer: C
Q2) ________ is considered to be an emerging market country.
A)France
B)Norway
C)Brazil
D)Canada
Answer: C
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Chapter 3: Securities Markets
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Q1) You purchased XYZ share at $50 per share. The share is currently selling at $65. Your gains could be protected by placing a ________.
A)limit-buy order
B)limit-sell order
C)market order
D)stop-loss order
Answer: D
Q2) You short-sell 200 shares of Rock Creek Fly Fishing Co., now selling for $50 per share.
If you wish to limit your loss to $2 500, you should place a stop-buy order at ________.
A)$37.50
B)$62.50
C)$56.25
D)$59.75
Answer: B
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Chapter 4: Managed Funds and Other Investment Companies
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Q1) Investors who wish to liquidate their holdings in a closed-end fund may ________.
A)sell their shares back to the fund at a discount if they wish
B)sell their shares back to the fund at net asset value
C)sell their shares on the open market
D)sell their shares at a premium to net asset value if they wish
Q2) Net Asset Value is defined as ________.
A)book value of assets divided by shares outstanding
B)book value of assets minus liabilities divided by shares outstanding
C)market value of assets divided by shares outstanding
D)market value of assets minus liabilities divided by shares outstanding
Q3) Managed funds that hold both equities and fixed-income securities in relatively stable proportions are called ________.
A)income funds
B)balanced funds
C)asset allocation funds
D)index funds
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Chapter 5: Risk and Return: Past and Prologue
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Q1) The price of a share is $55 at the beginning of the year and $50 at the end of the year. If the share paid a $3 dividend and inflation was 3%, what is the real holding period return for the year?
A)-3.64%
B)-6.36%
C)-6.44%
D)-11.74%
Q2) If you want to measure the performance of your investment in a fund, including the timing of your purchases and redemptions you should calculate the ________.
A)geometric average return
B)arithmetic average return
C)dollar-weighted return
D)index return
Q3) The ________ measure of returns ignores compounding.
A)geometric average
B)arithmetic average
C)IRR
D)dollar-weighted
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Chapter 6: Efficient Diversification
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Q1) The standard deviation of return on investment A is .10 while the standard deviation of return on investment B is .04. If the correlation coefficient between the returns on A and B is -.50, the covariance of returns on A and B is ________.
A)-.0447
B)-.0020
C).0020
D).0447
Q2) On a standard expected return vs. standard deviation graph investors will prefer portfolios that lie to the ________ of the current investment opportunity set.
A)left and above
B)left and below
C)right and above
D)right and below
Q3) The correlation coefficient between two assets is equal to ________.
A)their covariance divided by the product of their variances
B)the product of their variances divided by their covariance
C)the sum of their expected returns divided by their covariance
D)their covariance divided by the product of their standard deviations
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Chapter 7: Capital Pricing and Arbitrage Pricing Theory
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Q1) What is the expected return on a share with a beta of 0.8, given a risk-free rate of 3.5% and an expected market return of 15.5%?
A)3.8%
B)13.1%
C)15.6%
D)19.1%
Q2) The risk premium for exposure to aluminum commodity prices is 4% and the firm has a beta relative to aluminum commodity prices of 0.6. The risk premium for exposure to GDP changes is 6% and the firm has a beta relative to GDP of 1.2. If the risk-free rate is 4.0%, what is the expected return on this share?
A)10.0%
B)11.5%
C)13.6%
D)14.0%
Q3) The measure of risk used in the Capital Asset Pricing Model is ________.
A)specific risk
B)the standard deviation of returns
C)reinvestment risk
D)beta
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Chapter 8: The Efficient Market Hypothesis and Behavioral Finance
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Q1) Even if the markets are efficient, professional portfolio management is still important because it provides investors with ________.
I. low cost diversification
II. a portfolio with a specified risk level
III. better risk-adjusted returns than an index
A)I only
B)I and II only
C)II and III only
D)I, II and III
Q2) Fama and French have suggested that many market anomalies can be explained as manifestations of ________.
A)regulatory effects
B)high trading costs
C)information asymmetry
D)varying risk premiums
Q3) The primary objective of fundamental analysis is to identify ________.
A)well run firms
B)poorly run firms
C)mis-priced shares
D)high P/E shares
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Chapter 9: Bond Prices and Yields
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Q1) You can be sure that a bond will sell at a premium to par when its coupon rate is
A)greater than its yield to maturity
B)less than its yield to maturity
C)equal to its yield to maturity
D)less than its conversion value
Q2) A coupon bond which pays interest of $60 annually, has a par value of $1 000, matures in 5 years, and is selling today at a $75.25 discount from par value. The current yield on this bond is ________.
A)6.00%
B)6.49%
C)6.73%
D)7.00%
Q3) The ________ of a bond is computed as the ratio of coupon payments to market price.
A)nominal yield
B)current yield
C)yield to maturity
D)yield to call
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Chapter 10: Managing Bond Portfolios
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Q1) A bank has $50 million in assets, $47 million in liabilities and $3 million in shareholders' equity. If the duration of its liabilities are 1.3 and the bank wants to immunise its net worth against interest rate risk and thus set the duration of equity equal to zero, it should select assets with an average duration of ________.
A)1.22
B)1.50
C)1.60
D)2.00
Q2) Immunisation of coupon paying bonds is not a passive strategy because
I. the portfolio must be rebalanced every time interest rates change II. the portfolio must be rebalanced over time even if interest rates don't change
III. convexity implies duration based immunisation strategies don't work
A)I only
B)I and II only
C)II only
D)I, II and III
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Page 12
Chapter 11: Equity Valuation
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Q1) Earnings yields tend to ________ when Treasury yields fall.
A)fall
B)rise
C)remain unchanged
D)fluctuate wildly
Q2) Which one of the following statements about market and book value is correct?
A)All firms sell at a market-to-book ratio above 1.
B)All firms sell at a market-to-book ratio greater than or equal to 1.
C)All firms sell at a market-to-book ratio below 1.
D)Most firms have a market-to-book ratio above 1, but not all.
Q3) Westsyde Tool Company is expected to pay a dividend of $2.00 in the upcoming year. The risk-free rate of return is 6% and the expected return on the market portfolio is 12%. Analysts expect the price of Westsyde Tool Company shares to be $29 a year from now. The beta of Westsyde Tool Company's shares is 1.20. Using a one-period valuation model, the intrinsic value of Westsyde Tool Company shares today is ________.
A)$24.29
B)$27.39
C)$31.13
D)$34.52
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Chapter 12: Macroeconomic and Industry Analysis
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Q1) Which of the following affects a firm's sensitivity of its earnings to the business cycle?
i. Financial leverage II. Operating leverage
III. Type of product
A)II only
B)I and II only
C)I and III only
D)I, II and III
Q2) Whenever OPEC attempts to influence the price of oil by significantly altering production, economists refer to this type of event as a ________.
A)demand shock
B)equilibrium event
C)expanding commodity event
D)supply shock
Q3) A big increase in government spending is an example of ________.
A)a positive demand shock
B)a positive supply shock
C)a negative demand shock
D)a negative supply shock
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Chapter 13: Financial Statement Analysis
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Q1) A firm has a ROE of 20% and a market-to-book ratio of 2.38. Its P/E ratio is
A)8.40
B)11.90
C)17.62
D)47.60
Q2) Common-size balance sheets are prepared by dividing all quantities by ________.
A)total assets
B)total liabilities
C)shareholder's equity
D)fixed assets
Q3) A firm has a ROE equal to the industry average but its price-to-book ratio is below the industry average. You know that the firm's ________.
A)earnings yield is above the industry average
B)P/E ratio is above the industry average
C)dividend payout ratio is too high
D)interest burden must be below the industry average
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Chapter 14: Options and Risk Management
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Q1) Research suggests that option pricing models that allow for the possibility of ________ provide more accurate pricing than does the basic Black-Scholes option pricing model.
I. early exercise
II. changing expected returns of the share
III. time varying share price volatility
A)II only
B)I and III only
C)II and III only
D)I, II and III
Q2) A European put option gives its holder the right to ________.
A)buy the underlying asset at the exercise price on or before the expiration date
B)buy the underlying asset at the exercise price only at the expiration date
C)sell the underlying asset at the exercise price on or before the expiration date
D)sell the underlying asset at the exercise price only at the expiration date
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Chapter 15: Futures and Risk Management
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Q1) You believe that the spread between the September T-bond contract and the June T-bond futures contract is too large and will soon correct. This market exhibits positive cost of carry for all contracts. To take advantage of this you should ________.
A)buy the September contract and sell the June contract
B)sell the September contract and buy the June contract
C)sell the September contract and sell the June contract
D)buy the September contract and buy the June contract
Q2) A market timer now believes that the economy will soften over the rest of the year as the housing market slump continues and he also believes that foreign investors will stop buying US fixed income securities in such large quantities as they have in the past. One way the timer could take advantage of this forecast is to ________.
A)buy T-bond futures and sell stock index futures
B)sell T-bond futures and but stock index futures
C)buy stock index futures and buy T-bond futures
D)sell stock index futures and sell T-bond futures
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Chapter 16: Investors and the Investment Process
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Q1) When used in the context of investment decision making, the term 'liquidity' refers to
A)the ease and speed with which an asset can be sold at any value possible
B)the ease and speed with which an asset can be sold without having to discount the value
C)an aspect of monetary policy
D)the proportion of short-term to long-term investments held in an investor's portfolio
Q2) Personal trusts are typically allowed to engage in which of the following investment activities?
I. Buying and selling futures contracts
II. Short selling securities
III. Purchasing and writing options
IV. Buying shares on margin
A)I only
B)II and III only
C)II and IV only
D)None of the given activities are allowed
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Chapter 17: Hedge Funds
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Q1) Consider a hedge fund with $250 million in assets at the start of the year. If the gross return on assets is 18% and the total expense ratio is 2.5% of the year end value, what is the rate of return on the fund?
A)15.05%
B)15.50%
C)17.25%
D)18.00%
Q2) Assume the risk-free interest rate is 10% and is equal to fund's benchmark, the portfolio net asset value is $100 and the fund's standard deviation is 20%. Also assume time horizon of 1 year. What is the exercise price on the incentive fee?
A)$100
B)$105
C)$110
D)$115
Q3) The incentive fee of hedge funds is typically ________ but can be higher.
A)5%
B)10%
C)20%
D)30%
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Chapter 18: Portfolio Performance Evaluation
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Q1) Your return will generally be higher using the ________ if you time your transactions poorly and your return will generally be higher using the ________ if you time your transactions well.
A)dollar-weighted return method; dollar-weighted return method
B)dollar-weighted return method; time-weighted return method
C)time-weighted return method; dollar-weighted return method
D)time-weighted return method; time-weighted return method
Q2) What is the contribution of asset allocation to relative performance?
A)-0.18%
B)0.18%
C)-0.15%
D)0.15%
Q3) An attribution analysis will NOT likely contain which of the following components?
A)Asset allocation
B)Index returns
C)Risk-free returns
D)Security selection
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