Introduction to Investments Exam Review
Course Introduction
Introduction to Investments provides students with a foundational understanding of the principles and practices of investing. The course explores the various types of investment vehicles including stocks, bonds, mutual funds, and exchange-traded funds and examines how financial markets function. Students learn about risk and return, portfolio diversification, investment strategies, and the role of financial analysis in decision-making. Emphasis is placed on developing critical thinking skills to evaluate investment opportunities and understanding the impact of economic factors on financial markets. This course equips students with the basic tools and concepts necessary to make informed investment decisions, both for personal finance and professional purposes.
Recommended Textbook
Principles of Investments 1st Edition by Michael Drew
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Page 2
Chapter 1: Investments: Background and Issues
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Sample Questions
Q1) Real assets are ________.
A)assets used to produce goods and services
B)always the same as financial assets
C)always equal to liabilities
D)claims on company's income
Answer: A
Q2) Which of the following is not a money market security?
A)Australian government bond
B)Six month maturity certificate of deposit
C)Common shares
D)Banker's acceptance
Answer: C
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Chapter 2: Asset Classes and Financial Instruments
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Sample Questions
Q1) The most actively traded money market security is
A)Treasury notes
B)Bankers' Acceptances
C)Certificates of Deposit
D)Common shares
Answer: A
Q2) A transaction where a dealer agrees to sell and subsequently repurchase a security from another deal is called ________.
A)a bank accepted bond
B)a repurchase agreement
C)a Treasury note
D)a time deposit
Answer: B
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4
Chapter 3: Securities Markets
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Sample Questions
Q1) The inside quotes on a limit order book would comprise the ________.
A)highest bid price and the lowest ask price
B)lowest bid price and the lowest ask price
C)lowest bid price and the highest ask price
D)highest bid price and the highest ask price
Answer: A
Q2) You short-sell 200 shares of Tuckerton Trading Co., now selling for $50 per share. What is your maximum possible loss?
A)$50
B)$150
C)$10 000
D)unlimited
Answer: D
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Chapter 4: Managed Funds and Other Investment Companies
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Sample Questions
Q1) The performance fees of managed funds is normally a percentage of the return above ________.
A)the one-year government yield
B)the guaranteed rate of return
C)the risk-free rate
D)the benchmark return
Q2) The aims of the ETF include all but which one of the following?
A)achieving the same return as the S&P/ASX 200
B)replicating the S&P/ASX 200
C)achieving guaranteed rates of return
D)keeping management fees very low
Q3) ETF is an example of ________.
A)commingled pool
B)unlisted investments
C)listed investments
D)money market fund
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Chapter 5: Risk and Return: Past and Prologue
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Sample Questions
Q1) The reward/variability ratio is given by ________.
A)the slope of the capital allocation line
B)the second derivative of the capital allocation line
C)the point at which the second derivative of the investor's indifference curve reaches zero
D)portfolio excess return
Q2) You purchased a share for $29. One year later you received $2.25 as dividend and sold the share for $28. Your holding-period return was ________.
A)-3.57%
B)-3.45%
C)4.31%
D)8.03%
Q3) You have calculated the historical dollar-weighted return, annual geometric average return and annual arithmetic average return. If you desire to forecast performance for next year, the best forecast will be given by the ________.
A)dollar-weighted return
B)geometric average return
C)arithmetic average return
D)index return
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Page 7
Chapter 6: Efficient Diversification
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Sample Questions
Q1) Market risk is also called ________ and ________.
A)systematic risk, diversifiable risk
B)systematic risk, nondiversifiable risk
C)unique risk, nondiversifiable risk
D)unique risk, diversifiable risk
Q2) 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
Q3) Reward-to-variability ratios are ________ on the ________ capital market line.
A)lower; steeper
B)higher; flatter
C)higher; steeper
D)the same; flatter
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8
Chapter 7: Capital Pricing and Arbitrage Pricing Theory
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Sample Questions
Q1) Research has identified two systematic factors that affect US stock (share) returns. The factors are growth in industrial production and changes in long term interest rates. Industrial production growth is expected to be 3% and long term interest rates are expected to increase by 1%. You are analysing a share that has a beta of 1.2 on the industrial production factor and 0.5 on the interest rate factor. It currently has an expected return of 12%. However, if industrial production actually grows 5% and interest rates drop 2% what is your best guess of the share's return?
A)15.9%
B)12.9%
C)13.2%
D)12.0%
Q2) Using the index model, the alpha of a share is 3.0%, the beta if 1.1 and the market return is 10%. What is the residual given an actual return of 15%?
A)0.0%
B)1.0%
C)2.0%
D)3.0%
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Page 9
Chapter 8: The Efficient Market Hypothesis and Behavioral Finance
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Sample Questions
Q1) According to recent research securities markets fully adjust to earnings announcements ________.
A)instantly
B)in 1 day
C)in 1 week
D)gradually over time
Q2) Value shares may provide investors with better returns than growth shares if ________.
I. value shares are out of favor with investors
II. prices of growth shares include premiums for overly optimistic growth levels
III. value shares are likely to generate positive earnings surprises.
A)I only
B)II only
C)I and III only
D)I, II and III
Q3) According to technical analysts, a shift in market fundamentals will ________.
A)be reflected in share prices immediately
B)lead to a gradual price change that can be recognised as a trend
C)lead to high volatility in share market prices
D)leave prices unchanged
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Chapter 9: Bond Prices and Yields
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Sample Questions
Q1) You buy a TIPS at issue at par for $1 000. The bond has a 3% coupon. Inflation turns out to be 2%, 3% and 4% over the next three years. The total annual coupon income you will receive in year three is ________.
A)$30.00
B)$33.00
C)$32.78
D)$30.90
Q2) One-, two- and three-year maturity, default-free, zero-coupon bonds have yields-to-maturity of 7%, 8% and 9% respectively. What is the implied one-year forward rate, one year from today?
A)2.0%
B)8.0%
C)9.0%
D)11.1%
Q3) When discussing bonds, convexity relates to the ________.
A)shape of the bond price curve with respect to interest rates
B)shape of the yield curve with respect to maturity
C)slope of the yield curve with respect to liquidity premiums
D)size of the bid-ask spread
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Page 11
Chapter 10: Managing Bond Portfolios
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Sample Questions
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) You have purchased a Guaranteed Investment contract (GIC) from an insurance firm that promises to pay you a 5% compound rate of return per year for 6 years. If you pay $10 000 for the GIC today and receive no interest along the way you will get ________ in 6 years (to the nearest dollar).
A)$12 565
B)$13 000
C)$13 401
D)$13 676
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Chapter 11: Equity Valuation
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Sample Questions
Q1) A company with an expected earnings growth rate which is greater than that of the typical company in the same industry, most likely has ________.
A)a dividend yield which is greater than that of the typical company
B)a dividend yield which is less than that of the typical company
C)less risk than the typical company
D)less sensitivity to market trends than the typical company
Q2) Value shares are more likely to have a PEG ratio ________.
A)less than one
B)equal to one
C)greater than one D)less than zero
Q3) If a firm increases its plowback ratio this will probably result in a(n) ________ P/E ratio.
A)higher
B)lower
C)unchanged
D)Unable to determine
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Page 13
Chapter 12: Macroeconomic and Industry Analysis
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Sample Questions
Q1) An industry analysis for manufacturers of a small personal care gadget observed the following characteristics: 1) Industry sales have grown at 15-20% per year in recent years and are expected to grow at 10-15% per year over the next three years, still well above the economic growth rate. 2) Some US manufacturers are attempting to enter fast-growing non-US markets, which remain largely unexploited. 3) Some manufacturers have created a new niche in the industry by selling directly to customers through mail order. Sales for this industry segment are growing at 40% per year. 4) The current penetration rate in the US is 60% of households and will be difficult to increase. 5) Manufacturers compete fiercely on the basis of price, and price wars within the industry are common. 6) Some manufacturers are able to develop new, unexploited niche markets in the US based on company reputation, quality and service. 7) Several manufacturers have recently merged, and it is expected that consolidation in the industry will increase. 8) New manufacturers continue to enter the market. Characteristics 4 and 5 would indicate that the industry is in the ________ stage.
A)start-up
B)consolidation
C)maturity
D)relative decline
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Page 14
Chapter 13: Financial Statement Analysis
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Sample Questions
Q1) Which of the following transactions will result in a decrease in cash flow from operations?
A)Increase in accounts receivable
B)Decrease in inventories
C)Decrease in taxes payable
D)Decrease in bonds outstanding
Q2) One of the biggest impediments to a global capital market is ________.
A)volatile exchange rates
B)the lack of common accounting standards
C)lower disclosure standards in the US than abroad
D)the lack of transparent reporting standards across the EU
Q3) Operating ROA can be found as the product of ________.
A)Return on sales x ATO
B)Tax burden x Interest burden
C)Interest burden x Leverage ratio
D)ROE x Dividend payout ratio
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Chapter 14: Options and Risk Management
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Sample Questions
Q1) Which one of the following will increase the value of a put option?
A)A decrease in the exercise price
B)A decrease in time to expiration of the put
C)An increase in the volatility of the underlying share
D)An increase in share price
Q2) The value of a listed put option on a share is lower when ________.
I. the exercise price is higher
II. the contract approaches maturity
III. the share decreases in value
IV. a share split occurs
A)II only
B)II and IV only
C)I, II and III only
D)I, II, III and IV
Q3) Advantages of exchange traded options over OTC options include all but which one of the following?
A)Ease and low cost of trading
B)Anonymity of participants
C)Contracts that are tailored to meet the needs of market participants
D)No concerns about counterparty credit risk
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Chapter 15: Futures and Risk Management
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Sample Questions
Q1) You are currently long in a futures contract. You then instruct a broker to enter the short side of a futures contract to close your position. This is called ________.
A)a cross hedge
B)a reversing trade
C)a speculation
D)marking to market
Q2) The daily settlement of obligations on futures positions is called ________.
A)a margin call
B)marking to market
C)a variation margin check
D)initial margin requirement
Q3) A long hedger will ________ from an increase in the basis a short hedger will
A)be hurt; be hurt
B)be hurt; profit
C)profit; be hurt
D)profit; profit
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Chapter 16: Investors and the Investment Process
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Sample Questions
Q1) If an investor wishes to invest 100% of her portfolio in safe assets but does not wish to manage her portfolio, she should invest in ________.
A)a money market fund
B)a growth share fund
C)several different money market instruments
D)several different shares
Q2) Empirical evidence suggests that investors become ________ as they approach retirement.
A)greedier
B)less interested in investments
C)more risk averse
D)more risk tolerant
Q3) In 1937 the Eli Lilly family donated millions of dollars in stock to fund a not-for-profit charitable organisation. Such organisations are typically called ________.
A)annuities
B)endowments
C)mutual funds
D)personal trusts
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Chapter 17: Hedge Funds
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Sample Questions
Q1) Assuming 2% management fee, what is the expected management compensation per share if the fund net asset value exceeds the stated benchmark?
A)$4.24
B)$4.00
C)$3.84
D)$2.20
Q2) Market neutral hedge funds may experience considerable volatility. The source of volatile returns is the use of ________.
A)pure play
B)leverage
C)directional bests
D)net short positions
Q3) How much is the portfolio expected to be worth 3 months from now?
A)$15 000 000
B)$15 450 000
C)$15 600 000
D)$16 000 000
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Chapter 18: Portfolio Performance Evaluation
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Sample Questions
Q1) What is the contribution of security selection to relative performance?
A)-0.15%
B)0.15%
C)-0.3%
D)0.3%
Q2) Consider the theory of active portfolio management. Shares A and B have the same positive alpha and the same non-systematic risk. Share A has a higher beta than share B. You should want ________ in your active portfolio.
A)equal proportions of Shares A and B
B)more of Share A than Share B
C)more of Share B than Share A
D)more information is needed to answer this question
Q3) The portfolio that contains the benchmark asset allocation against which a manager will be measured is often called ________.
A)the bogey portfolio
B)the Vanguard Index
C)Jensen's alpha
D)the Treynor measure
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