Investment Analysis
Exam Answer Key
Course Introduction
Investment Analysis is a fundamental course designed to equip students with the essential concepts, tools, and analytical techniques required for evaluating investment opportunities in financial markets. Emphasizing both theoretical foundations and practical applications, the course covers topics such as risk and return, portfolio theory, asset pricing models, fundamental and technical analysis, valuation of equities and fixed income securities, market efficiency, and behavioral finance. Through case studies, real-world examples, and hands-on exercises, students develop the ability to critically assess investment options and make informed decisions aimed at optimizing portfolio performance within different economic environments.
Recommended Textbook
Investment Analysis and Portfolio Management 11th Edition by Frank K. Reilly
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22 Chapters
2045 Verified Questions
2045 Flashcards
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Chapter 1: The Investment Setting
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72 Verified Questions
72 Flashcards
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Sample Questions
Q1) Investors are willing to forgo current consumption in order to increase future consumption for a nominal rate of interest.
A)True
B)False
Answer: False
Q2) An individual who selects the investment that offers greater certainty when everything else is the same is known as a risk averse investor.
A)True
B)False
Answer: True
Q3) The rate of exchange between certain future dollars and certain current dollars is known as the pure rate of interest.
A)True
B)False
Answer: True
Q4) The expected return is the average of all possible returns.
A)True
B)False Answer: False
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Chapter 1: The Investment Setting: Part A
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6 Flashcards
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Sample Questions
Q1) Refer to Exhibit 1A.1. The coefficient of variation of this investment is
A) -0.06.
B) -0.65.
C) 6.60.
D) 16.53.
E) 165.10.
Answer: D
Q2) Refer to Exhibit 1A.2. The expected return for project X is
A) 0.0 percent.
B) 0.5 percent.
C) 2.5 percent.
D) 5.0 percent.
E) 7.5 percent.
Answer: C
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Chapter 2: Asset Allocation and Security Selection
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Sample Questions
Q1) An appropriate investment objective for a typical 25-year-old investor is a low-risk strategy, such as capital preservation or current income.
A)True
B)False
Answer: False
Q2) Refer to Exhibit 2.1. What is the tax liability for a married couple filing jointly with taxable income of $125,000?
A) $23,800
B) $18,427
C) $24,958
D) $16,867
E) $19,650
Answer: C
Q3) An example of a unique need in an investment policy statement is related to the legal responsibilities of a fiduciary or trustee.
A)True
B)False
Answer: False
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Chapter 2: Asset Allocation and Security Selection: Part A
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3 Flashcards
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Sample Questions
Q1) Refer to Exhibit 2A.1. Calculate the coefficient of correlation.
A) -0.456
B) -0.354
C) 0.000
D) 0.456
E) 3.538
Q2) What is the correlation coefficient for two assets with a covariance of .0032, if asset 1 has a standard deviation of 12 percent and asset 2 has a standard deviation of 9 percent?
A) 0.2963
B) 0.3456
C) 0.8721
D) 1.5980
Q3) Refer to Exhibit 2A.1. Calculate the covariance.
A) -32.20
B) -23.32
C) 1.00
D) 23.32
E) 32.20
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Page 6
Chapter 3: Organization and Functioning of Securities Markets
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Sample Questions
Q1) You own 50 shares of Auto Corporation that you purchased for $30 a share. The stock is currently selling for $50 a share, and you placed a stop loss order at $45. If the stock price drops to $35 a share what is your return on this investment?
A) -30.0 percent
B) 16.7 percent
C) 50.0 percent
D) 66.7 percent
E) 150.0 percent
Q2) An order that specifies the highest buy or lowest sell price is a
A) limit order.
B) short sale.
C) market order.
D) margin call.
E) stop loss.
Q3) Call markets can also be used at the opening for stocks on any exchange if there is an overnight buildup of buy and/or sell orders.
A)True
B)False
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Chapter 4: Security Market Indexes and Index Funds
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Sample Questions
Q1) There are no composite series currently available that will measure the performance of all securities (i.e. stocks and bonds) in a given country.
A)True
B)False
Q2) An aggregate market index can be used as a benchmark to judge the performance of professional money managers.
A)True
B)False
Q3) Refer to Exhibit 4.2. What is the divisor at the beginning of January 16th?
A) 1.9375
B) 3.0
C) 2.5
D) 2.2734
E) 3.2852
Q4) For an indexed portfolio, the fund manager will typically attempt to replicate the composition of the particular index exactly.
A)True
B)False
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Chapter 5: Efficient Capital Markets, Behavioral Finance, and Technical Analysis
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162 Verified Questions
162 Flashcards
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Sample Questions
Q1) Refer to Exhibit 5.3. What is the abnormal rate of return for Elliot when you consider its systematic risk measure (beta)?
A) -2.10 percent
B) -2.00 percent
C) 5.20 percent
D) 14.10 percent
E) 3.00 percent
Q2) Refer to Exhibit 5.8. Calculate the final value of the cumulative advance-decline line at the end of the fifth day.
A) -3,883
B) 9,540
C) -2,354
D) 13,356
E) 7,953
Q3) The weak-form efficient market hypothesis assumes all publicly available information is reflected in current stock prices.
A)True
B)False
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Chapter 6: An Introduction to Portfolio Management
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114 Verified Questions
114 Flashcards
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Sample Questions
Q1) The Markowitz model is based on several assumptions regarding investor behavior. Which of the following is NOT such any assumption?
A) Investors consider each investment alternative as being represented by a probability distribution of expected returns over some holding period.
B) Investors maximize one-period expected utility.
C) Investors estimate the risk of the portfolio on the basis of the variability of expected returns.
D) Investors base decisions solely on expected return and risk.
E) None of these are correct (that is, all are assumptions of the Markowitz model).
Q2) All of the following questions remain to be answered in the real world EXCEPT
A) What is a good proxy for the market portfolio?
B) What happens when you cannot borrow or lend at the risk-free rate?
C) How good is the capital asset model as a predictor?
D) What is the beta of the market portfolio of risky assets?
E) What is the stability of beta for individual stocks?
Q3) The market portfolio consists of all risky assets.
A)True
B)False
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Chapter 6: An Introduction to Portfolio Management: Part A
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Sample Questions
Q1) Refer to Exhibit 6A.1. Show the minimum portfolio variance for a two-stock portfolio when r<sub>1.2</sub> = 1.
A) E( \(\sigma\)2) \(\div\) [E( \(\sigma\)1) -E( \(\sigma\)2)]
B) E( \(\sigma\)2) \(\div\) [E( \(\sigma\)1) + E( \(\sigma\)2)]
C) E( \(\sigma\)1) \(\div\) [E( \(\sigma\)1) - E( \(\sigma\)2)]
D) E( \(\sigma\)1) \(\div\) [E( \(\sigma\)1) + E( \(\sigma\)2)]
E) None of these are correct.
Q2) Refer to Exhibit 6A.1. What weight of security 1 gives the minimum portfolio variance when r<sub>1.2</sub> = .60, E( \(\sigma\)1) = .10 and E( \(\sigma\)2) = .16?
A) .0244
B) .3679
C) .5697
D) .6309
E) .9756
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11
Chapter 6: An Introduction to Portfolio Management: Part B
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Sample Questions
Q1) Refer to Exhibit 6B.1. Show the minimum portfolio variance for a portfolio of two risky assets when r<sub>1.2</sub> = -1.
A) E( \(\sigma\)1) \(\div\) [E( \(\sigma\)1) + E( \(\sigma\)2)]
B) E( \(\sigma\)1) \(\div\) [E( \(\sigma\)1) - E( \(\sigma\)2)]
C) E( \(\sigma\)2) \(\div\) [E( \(\sigma\)1) + E( \(\sigma\)2)]
D) E( \(\sigma\)2) \(\div\) [E( \(\sigma\)1) - E( \(\sigma\)2)]
E) None of these are correct.
Q2) Refer to Exhibit 6B.1. What is the value of W<sub>1</sub> when r<sub>1.2</sub> = -1 and E( \(\sigma\)1) = .10 and E( \(\sigma\)2) = .12?
A) 45.46 percent
B) 50.00 percent
C) 59.45 percent
D) 54.55 percent
E) 74.55 percent
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12
Chapter 7: Asset Pricing Models
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152 Verified Questions
152 Flashcards
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Sample Questions
Q1) If an individual owns only one security the most appropriate measure of risk is A) standard deviation.
B) correlation.
C) beta.
D) covariance.
E) the risk-free rate.
Q2) Refer to Exhibit 7.3. The covariance between Radtron and the proxy index is A) 57.30.
B) 86.50.
C) 88.00.
D) 92.50.
E) 107.90.
Q3) The capital asset pricing model (CAPM) extends capital market theory in a way that allows investors to evaluate the risk-return trade-off for both diversified portfolios and individual securities.
A)True
B)False
Q4) The APT assumes that security returns are normally distributed. A)True
B)False
Page 13
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Chapter 8: Equity Valuation
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83 Flashcards
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Sample Questions
Q1) As an analyst performs ratio analysis, he hopes to determine whether earnings represent cash flows and whether those cash flows will recur.
A)True
B)False
Q2) The process of fundamental valuation requires estimates of all the following factors, EXCEPT for the
A) time pattern of returns.
B) economy's real risk-free rate.
C) risk premium for the asset.
D) times series of stock prices.
E) expected rate of inflation.
Q3) The gross margin is defined as Gross Profit/Sales.
A)True
B)False
Q4) An equity investor's required rate of return is influenced by the economy's real risk-free rate, the expected rate of inflation, and a risk premium.
A)True
B)False
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Chapter 9: The Top-Down Approach to Market, Industry, and Company Analysis
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216 Verified Questions
216 Flashcards
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Sample Questions
Q1) In Berkshire Hathaway annual reports, Warren Buffet highlights financial tenets that he believes are important. Which of the following is NOT a financial tenet of Warren Buffet?
A) focus on return on equity (ROE) not earnings per share (EPS)
B) calculate owner earnings similar to free cash flow after capital expenditures
C) high profit margins relative to the industry
D) Company should create at least one dollar of market value for every dollar retained.
E) All of these are correct.
Q2) Stock prices move coincidentally with the economy.
A)True
B)False
Q3) A stock with low systematic risk is considered to be a defensive stock.
A)True
B)False
Q4) A cyclical company's sales and earnings are heavily influenced by aggregate business activity.
A)True
B)False
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Chapter 10: The Practice of Fundamental Investing
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60 Verified Questions
60 Flashcards
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Sample Questions
Q1) A stock pitch is like a book report or a news report.
A)True
B)False
Q2) A company goes public for many reasons, including that the original investors and the management team would like liquidity.
A)True
B)False
Q3) From 1980 to 2016, the average IPO in the United States closed _____higher than the IPO price.
A) 18 percent
B) 30 percent
C) 25 percent
D) 66 percent
E) 55 percent
Q4) Kaplan (2013) argues that the market for top executives is competitive, and compensation of other professionals is growing even faster.
A)True
B)False
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Page 16
Chapter 11: Equity Portfolio Management Strategies
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65 Verified Questions
65 Flashcards
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Sample Questions
Q1) In equity portfolio management, tracking error occurs when
A) the managed portfolio outperforms the benchmark portfolio.
B) the managed portfolio under performs the benchmark portfolio.
C) the return volatility of the managed portfolio is positively correlated with the return volatility of the benchmark portfolio.
D) the return volatility of the managed portfolio is negatively correlated with the return volatility of the benchmark portfolio.
E) the return volatility of the managed portfolio is not correlated with the return volatility of the benchmark portfolio.
Q2) Active equity portfolio management is a long-term buy-and-hold strategy.
A)True
B)False
Q3) Which of the following is NOT considered an active management strategy?
A) sector rotation
B) use of factor models
C) quantitative screens
D) full replication
E) linear programming
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Chapter 12: Bond Fundamentals and Valuation
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138 Verified Questions
138 Flashcards
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Sample Questions
Q1) Suppose you have a 15 percent, 25-year bond traded at $975. If it is callable in 5 years at $1050, what is the bond's yield to call? Interest is paid annually.
A) 15 percent
B) 16.5 percent
C) 7.65 percent
D) 8.52 percent
E) 9.64 percent
Q2) When homeowners pay off mortgages when they sell their homes, or when homeowners refinance home mortgages, they effectively
A) make the maturities of GNMA securities longer.
B) make the maturities of GNMA securities shorter.
C) make the maturities of U.S. Treasury securities longer.
D) make the maturities of U.S. Treasury securities shorter.
E) default on their mortgages.
Q3) Bonds can have different types of collateral and can be secured, unsecured, or registered bonds.
A)True
B)False
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18
Chapter 13: Bond Analysis and Portfolio Management Strategies
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Sample Questions
Q1) Refer to Exhibit 13.12. Assume that your investment horizon is 6 years and your portfolio consists only of Bond C and Bond D. Indicate the proportions invested in each bond so that the portfolio is immunized.
A) 50 percent in Bond C and 50 percent in Bond D
B) 64 percent in Bond C and 36 percent in Bond D
C) 36 percent in Bond C and 64 percent in Bond D
D) 100 percent in Bond D
E) 100 percent in Bond C
Q2) The active strategies for bond management include all of the following EXCEPT
A) interest rate anticipation.
B) credit analysis.
C) spread analysis.
D) classical immunization.
E) bond swaps.
Q3) Refer to Exhibit 13.3. Calculate the current price of the bond.
A) $964.90
B) $965.35
C) $981.41
D) $1035.45
E) $1035.85
Page 19
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Chapter 14: An Introduction to Derivative Markets and Securities
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Sample Questions
Q1) Refer to Exhibit 14.2. Assuming no commissions or taxes, what is the annualized percentage gain if the stock reaches $50 in four months and a call was purchased?
A) 161.54 percent gain
B) 53.85 percent gain
C) 161.54 percent loss
D) 11.11 percent gain
E) 53.85 percent loss
Q2) A stock currently sells for $150 per share. A call option on the stock with an exercise price of $155 currently sells for $2.50. The call option is
A) at-the-money.
B) in-the-money.
C) out-of-the-money.
D) at breakeven.
E) above-the-money.
Q3) Forward and future contracts, as well as options, are types of derivative securities.
A)True
B)False
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Page 20
Chapter 15: Forward, Futures, and Swap Contracts
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148 Verified Questions
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Sample Questions
Q1) Refer to Exhibit 15.4. If you expected the yield curve to steepen, the appropriate NOTE AGAINST BOND futures spread strategy would be
A) go long the T-bond and short the T-note.
B) go short the T-bond and long the T-note.
C) go long the T-bond and long the T-note.
D) go short the T-bond and short the T-note.
E) None of these are correct.
Q2) The Eurodollar futures contract is a popular hedging vehicle because it is based on the three-month LIBOR.
A)True
B)False
Q3) Refer to Exhibit 15.18. Suppose that three-month LIBOR is 4.0 percent on the rate determination day, and the contract specified settlement in advance, describe the transaction that occurs between the dealer and TexMex.
A) The dealer is obligated to pay TexMex $61,881.
B) The dealer is obligated to pay TexMex $61,500.
C) TexMex is obligated to pay the dealer $247,524.
D) TexMex is obligated to pay the dealer $246,000.
E) TexMex is obligated to pay the dealer $56,000.
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Page 21
Chapter 16: Option Contracts
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Sample Questions
Q1) In convertible bonds, the value of the common stock price upon immediate conversion is the
A) put-call parity price.
B) conversion parity price.
C) cash equivalent price.
D) convertible price.
E) redemption price.
Q2) The Chicago Board Options Exchange has the largest share of stock option trading.
A)True
B)False
Q3) A money spread involves buying and selling call options in the same stock with
A) the same time period and exercise price.
B) the same time period but different exercise price.
C) a different time period but same exercise price.
D) a different time period and different exercise price.
E) options in different markets.
Q4) Index options are settled by delivery of the stocks that make up the index. A)True B)False
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Chapter 17: Professional Money Management, Alternative Assets, and Industry Ethics
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109 Verified Questions
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Sample Questions
Q1) Funds that normally contain a combination of common stock and fixed income securities are known as
A) section 401(k) plans.
B) balanced funds.
C) contractual plans.
D) income funds.
E) flexible funds.
Q2) All investment firms charge annual management fees to compensate the professional manager of the fund.
A)True
B)False
Q3) On January 2, 2017, you invest $10,000 in Megabucks Mutual Fund, a load fund that charges a fee of 2 percent. The fund's returns were 13 percent in 2017, 11 percent in 2018, and 8 percent in 2019. On December 31, 2019, you redeem all your shares. The dollar value is
A) $13,600.00.
B) $13,275.51.
C) $13,297.67.
D) $13,995.75.
E) $10,000.00.
Page 23
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Chapter 18: Evaluation of Portfolio Performance
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Sample Questions
Q1) Refer to Exhibit 18.12. Calculate the percentage return that can be attributed to the security selection decision.
A) 0.105 percent
B) 0.925 percent
C) 0.20 percent
D) 0.96 percent
E) 0.94 percent
Q2) Refer to Exhibit 18.7. Compute the Jensen Measure for the B fund.
A) 1.16%
B) 2.31%
C) 6.90%
D) 9.60%
E) 10.13%
Q3) Information ratio portfolio performance measures
A) adjust portfolio risk to match benchmark risk.
B) compare portfolio returns to expected returns under CAPM.
C) evaluate portfolio performance on the basis of return per unit of risk.
D) indicate historic average differential return per unit of historic variability of differential return.
E) the average market beta per unit of risk.
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