Investment Analysis
Final Exam
Course Introduction
Investment Analysis is a comprehensive course that explores the fundamental concepts, tools, and techniques used to evaluate investment opportunities across various asset classes. Students will learn to assess risk and return, analyze securities such as stocks and bonds, and understand portfolio diversification principles. The course covers financial statement analysis, valuation methods, market efficiency, and the factors influencing investment decisions. Through case studies and practical applications, students will gain skills necessary to make informed investment choices for personal or professional portfolios.
Recommended Textbook
Investments 11th Edition by Zvi Bodie
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2129 Verified Questions
2129 Flashcards
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Chapter 1: The Investment Environment
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Sample Questions
Q1) Although derivatives can be used as speculative instruments, businesses most often use them to
A) attract customers.
B) appease stockholders.
C) offset debt.
D) hedge risks.
E) enhance their balance sheets.
Answer: D
Q2) Security selection refers to
A) choosing which securities to hold based on their valuation.
B) investing only in "safe" securities.
C) the allocation of assets into broad asset classes.
D) top-down analysis.
Answer: A
Q3) New issues of securities are sold in the ________ market(s).
A) primary
B) secondary
C) over-the-counter
D) primary and secondary
Answer: A
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Chapter 2: Asset Classes and Financial Instruments
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Sample Questions
Q1) For a taxpayer in the 15% marginal tax bracket, a 15-year municipal bond currently yielding 6.2% would offer an equivalent taxable yield of
A) 6.2%.
B) 5.27%.
C) 8.32%.
D) 7.29%.
Answer: D
Q2) In order for you to be indifferent between the after-tax returns on a corporate bond paying 8.5% and a tax-exempt municipal bond paying 6.12%, what would your tax bracket need to be?
A) 33%
B) 72%
C) 15%
D) 28%
E) Cannot be determined from the information given.
Answer: D
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Chapter 3: How Securities Are Traded
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Sample Questions
Q1) Specialists on stock exchanges perform which of the following functions?
A) Act as dealers in their own accounts
B) Analyze the securities in which they specialize
C) Provide liquidity to the market
D) Act as dealers in their own accounts and analyze the securities in which they specialize
E) Act as dealers in their own accounts and provide liquidity to the market
Answer: E
Q2) Block transactions are transactions for more than _______ shares, and they account for about _____ percent of all trading on the NYSE.
A) 1,000; 5
B) 500; 10
C) 100,000; 50
D) 10,000; 30
E) 5,000; 23
Answer: D
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Chapter 4: Mutual Funds and Other Investment Companies
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Sample Questions
Q1) A mutual fund had year-end assets of $560,000,000 and liabilities of $26,000,000. There were 23,850,000 shares in the fund at year end. What was the mutual fund's net asset value?
A) $22.87
B) $22.39
C) $22.24
D) $17.61
E) $19.25
Q2) Of the following types of ETFs, an investor who wishes to invest in a diversified portfolio that tracks the MSCI Japan Index should choose
A) SPY.
B) EWJ.
C) QQQQ.
D) IWM.
E) VTI.
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Chapter 5: Risk, Return, and the Historical Record
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Sample Questions
Q1) If a distribution has "fat tails," it exhibits
A) positive skewness.
B) negative skewness.
C) a kurtosis of zero.
D) kurtosis.
E) positive skewness and kurtosis.
Q2) Skewness is a measure of
A) how fat the tails of a distribution are.
B) the downside risk of a distribution.
C) the symmetry of a distribution.
D) the dividend yield of the distribution.
E) None of the options are correct.
Q3) If the annual real rate of interest is 3.5%, and the expected inflation rate is 2.5%, the nominal rate of interest would be approximately
A) 3.5%.
B) 2.5%.
C) 1%.
D) 6.8%.
E) None of the options are correct.
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Page 7
Chapter 6: Capital Allocation to Risky Assets
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Sample Questions
Q1) To build an indifference curve, we can first find the utility of a portfolio with 100% in the risk-free asset, then
A) find the utility of a portfolio with 0% in the risk-free asset.
B) change the expected return of the portfolio and equate the utility to the standard deviation.
C) find another utility level with 0% risk.
D) change the standard deviation of the portfolio and find the expected return the investor would require to
E) change the risk-free rate and find the utility level that results in the same standard deviation.
Q2) An investor invests 30% of his wealth in a risky asset with an expected rate of return of 0.13 and a variance of 0.03 and 70% in a T-bill that pays 6%. His portfolio's expected return and standard deviation are __________ And __________, respectively.
A) 0.114; 0.128
B) 0.087; 0.063
C) 0.295; 0.125
D) 0.081; 0.052
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Chapter 7: Optimal Risky Portfolios
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Sample Questions
Q1) Consider the following probability distribution for stocks A and B: \[\begin{array} { c c c c }
\text { State } & \text { Probability } & \text { Return on Stock A } & \text { Return on Stock B } \\
1 & 0.10 & 10 \% & 8 \% \\
2 & 0.20 & 13 \% & 7 \% \\
3 & 0.20 & 12 \% & 6 \% \\
4 & 0.30 & 14 \% & 9 \% \\
5 & 0.20 & 15 \% & 8 \% \\ \hline
\end{array}\] The coefficient of correlation between A and B is
A) 0.46.
B) 0.60.
C) 0.58. D) 1.20.
Q2) Market risk is also referred to as
A) systematic risk or diversifiable risk. B) systematic risk or nondiversifiable risk.
C) unique risk or nondiversifiable risk.
D) unique risk or diversifiable risk.
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Page 9
Chapter 8: Index Models
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Sample Questions
Q1) Suppose you held a well-diversified portfolio with a very large number of securities, and that the single index model holds. If the of your portfolio was 0.24 and <sub>M</sub> was 0.18, the of the portfolio would be approximately
A) 0.64.
B) 1.33.
C) 1.25.
D) 1.56.
Q2) Rosenberg and Guy found that ___________ helped to predict firms' betas.
A) debt/asset ratios
B) market capitalization
C) variance of earnings
D) all of the options
E) None of the options are correct.
Q3) A single-index model uses __________ as a proxy for the systematic risk factor.
A) a market index, such as the S&P 500
B) the current account deficit
C) the growth rate in GNP
D) the unemployment rate.
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Chapter 9: The Capital Asset Pricing Model
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Sample Questions
Q1) The expected return-beta relationship of the CAPM is graphically represented by
A) the security-market line.
B) the capital-market line.
C) the capital-allocation line.
D) the efficient frontier with a risk-free asset.
E) the efficient frontier without a risk-free asset.
Q2) If investors do not know their investment horizons for certain,
A) the CAPM is no longer valid.
B) the CAPM underlying assumptions are not violated.
C) the implications of the CAPM are not violated as long as investors' liquidity needs are not priced.
D) the implications of the CAPM are no longer useful.
Q3) Which statement is not true regarding the market portfolio?
A) It includes all publicly-traded financial assets.
B) It lies on the efficient frontier.
C) All securities in the market portfolio are held in proportion to their market values.
D) It is the tangency point between the capital market line and the indifference curve.
E) All of the options are true.
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11
Chapter 10: Arbitrage Pricing Theory and Multifactor Models
of Risk and Return
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Sample Questions
Q1) Consider a one-factor economy. Portfolio A has a beta of 1.0 on the factor, and portfolio B has a beta of 2.0 on the factor. The expected returns on portfolios A and B are 11% and 17%, respectively. Assume that the risk-free rate is 6%, and that arbitrage opportunities exist. Suppose you invested $100,000 in the risk-free asset, $100,000 in portfolio B, and sold short $200,000 of portfolio A. Your expected profit from this strategy would be
A) -$1,000.
B) $0.
C) $1,000.
D) $2,000.
Q2) Multifactor models, such as the one constructed by Chen, Roll, and Ross, can better describe assets'returns by
A) expanding beyond one factor to represent sources of systematic risk.
B) using variables that are easier to forecast ex ante.
C) calculating beta coefficients by an alternative method.
D) using only stocks with relatively stable returns.
E) ignoring firm-specific risk.
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Page 12
Chapter 11: The Efficient Market Hypothesis
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Sample Questions
Q1) Studies of stock price reactions to news are called
A) reaction studies.
B) event studies.
C) drift studies.
D) reaction studies and event studies.
E) event studies and drift studies.
Q2) Work by Amihud and Mendelson (1986, 1991)
A) argues that investors will demand a rate of return premium to invest in less liquid stocks.
B) may help explain the small firm effect.
C) may be related to the neglected firm effect.
D) may help explain the small firm effect and may be related to the neglected firm effect.
E) All of the options are correct.
Q3) If stock prices follow a random walk,
A) it implies that investors are irrational.
B) it means that the market cannot be efficient.
C) price levels are not random.
D) price changes are random.
E) price movements are predictable.
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Chapter 12: Behavioral Finance and Technical Analysis
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Sample Questions
Q1) Barber and Odean (2001) report that men trade __________ frequently than women and the frequent trading leads to __________ returns.
A) less; superior
B) less; inferior
C) more; superior
D) more; inferior
Q2) ____________ may be responsible for the prevalence of active versus passive investments management.
A) Forecasting errors
B) Overconfidence
C) Mental accounting
D) Conservatism
E) Regret avoidance
Q3) Single men trade far more often than women. This is due to greater ________ among men.
A) framing
B) regret avoidance
C) overconfidence
D) conservatism
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Page 14
Chapter 13: Empirical Evidence on Security Returns
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Sample Questions
Q1) Which of the following statements is true about models that attempt to measure the empirical performance of the CAPM?
A) The conventional CAPM works better than the conditional CAPM with human capital.
B) The conventional CAPM works about the same as the conditional CAPM with human capital.
C) The conditional CAPM with human capital yields a better fit for empirical returns than the conventional CAPM.
D) Adding firm size to the model specification dramatically improves the fit.
E) Adding firm size to the model specification worsens the fit.
Q2) In the empirical study of a multifactor model by Chen, Roll, and Ross, a factor (the factors) that appeared to have significant explanatory power in explaining security returns was (were)
A) the change in the expected rate of inflation.
B) the risk premium on corporate bonds.
C) the unexpected change in the rate of inflation.
D) industrial production.
E) the risk premium on corporate bonds, the unexpected change in the rate of inflation, and industrial production.
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Chapter 14: Bond Prices and Yields
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Sample Questions
Q1) Subordination clauses in bond indentures
A) may restrict the amount of additional borrowing the firm can undertake.
B) are always bad for investors.
C) provide higher priority to senior creditors in the event of bankruptcy.
D) may restrict the amount of additional borrowing the firm can undertake and provide higher priority to senior creditors in the event of bankruptcy.
E) All of the options are true.
Q2) Accrued interest
A) is quoted in the bond price in the financial press.
B) must be paid by the buyer of the bond and remitted to the seller of the bond.
C) must be paid to the broker for the inconvenience of selling bonds between maturity dates.
D) is quoted in the bond price in the financial press and must be paid by the buyer of the bond and remitted to the seller of the bond.
E) is quoted in the bond price in the financial press and must be paid to the broker for the inconvenience of selling bonds between maturity dates.
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Chapter 15: The Term Structure of Interest Rates
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Sample Questions
Q1) Treasury STRIPS are
A) securities issued by the Treasury with very long maturities.
B) extremely risky securities.
C) created by selling each coupon or principal payment from a whole Treasury bond as a separate cash flow.
D) created by pooling mortgage payments made to the Treasury.
Q2) An upward-sloping yield curve
A) may be an indication that interest rates are expected to increase.
B) may incorporate a liquidity premium.
C) may reflect the confounding of the liquidity premium with interest rate expectations.
D) All of the options are correct.
E) None of the options are correct.
Q3) When computing yield to maturity, the implicit reinvestment assumption is that the interest payments are reinvested at the A) coupon rate.
B) current yield.
C) yield to maturity at the time of the investment.
D) prevailing yield to maturity at the time interest payments are received.
E) the average yield to maturity throughout the investment period.
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Page 17
Chapter 16: Managing Bond Portfolios
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Sample Questions
Q1) A 9%, 16-year bond has a yield to maturity of 11% and duration of 9.25 years. If the market yield changes by 32 basis points, how much change will there be in the bond's price?
A) 1.85%
B) 2.01%
C) 2.67%
D) 6.44%
Q2) The duration of a perpetuity with a yield of 6% is
A) 13.50 years.
B) 12.11 years.
C) 17.67 years.
D) Cannot be determined
Q3) Which of the following bonds has the longest duration?
A) An 8-year maturity, 0% coupon bond
B) An 8-year maturity, 5% coupon bond
C) A 10-year maturity, 5% coupon bond
D) A 10-year maturity, 0% coupon bond
E) Cannot tell from the information given
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18
Chapter 17: Macroeconomic and Industry Analysis
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Sample Questions
Q1) The "real," or inflation-adjusted, exchange rate is
A) the balance of trade.
B) the budget deficit.
C) -the purchasing-power ratio.
D) unimportant to the U.S. economy.
E) None of the options are correct.
Q2) In the decline stage of the industry life cycle,
A) the product may have reached obsolescence.
B) the industry will grow at a rate less than the overall economy.
C) the industry may experience negative growth.
D) the product may have reached obsolescence, and the industry will grow at a rate less than the overall economy.
E) -the product may have reached obsolescence, the industry will grow at a rate less than the overall economy, and the industry may experience negative growth.
Q3) If the economy is growing, firms with low operating leverage will experience
A) higher increases in profits than firms with high operating leverage.
B) similar increases in profits as firms with high operating leverage.
C) -smaller increases in profits than firms with high operating leverage.
D) no change in profits.
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Page 19
Chapter 18: Equity Valuation Models
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Sample Questions
Q1) Seaman had a FCFE of $4.6B last year and has 113.2M shares outstanding. Seaman's required return on equity is 11.6%, and WACC is 10.4%. If FCFE is expected to grow at 5% forever, the intrinsic value of Seaman's shares is
A) $646.48.
B) $64.66.
C) $6,464.80
D) $6.46.
Q2) The growth in dividends of ABC, Inc. is expected to be 15% per year for the next three years, followed by a growth rate of 8% per year for two years. After this five-year period, the growth in dividends is expected to be 3% per year, indefinitely. The required rate of return on ABC, Inc. is 13%. Last year's dividends per share were $1.85. What should the stock sell for today?
A) $8.99
B) $25.21
C) $40.00
D) $27.74
E) None of the options are correct.
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Page 20
Chapter 19: Financial Statement Analysis
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Sample Questions
Q1) Suppose that Chicken Express, InC. has an ROA of 7% and pays a 6% coupon on its debt. Chicken Express has a capital structure that is 70% equity and 30% debt. Relative to a firm that is 100% equity-financed, Chicken Express's net profit will be ________, and its ROE will be ________.
A) lower; lower
B) higher; higher
C) higher; lower
D) lower; higher
E) It is impossible to predict.
Q2) A study by Speidell and Bavishi (1992) found that when accounting statements of foreign firms were restated on a common accounting basis,
A) the original and restated P/E ratios were quite similar.
B) the original and restated P/E ratios varied considerably.
C) most variation was explained by tax differences.
D) most firms were consistent in their treatment of goodwill.
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Chapter 20: Options Markets: Introduction
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Sample Questions
Q1) The current market price of a share of TSCO stock is $75. If a put option on this stock has a strike price of $79, the put
A) is out of the money.
B) is in the money.
C) can be exercised profitably.
D) is out of the money and can be exercised profitably.
E) is in the money and can be exercised profitably.
Q2) You buy one Home Depot June 60 call contract and one June 60 put contract. The call premium is $5 and the put premium is $3. Your maximum loss from this position could be
A) $500.
B) $300.
C) $800.
D) $200.
E) None of the options are correct.
Q3) A European call option can be exercised
A) any time in the future.
B) only on the expiration date.
C) if the price of the underlying asset declines below the exercise price.
D) immediately after dividends are paid.
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Chapter 21: Option Valuation
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Sample Questions
Q1) A portfolio consists of 100 shares of stock and 1500 calls on that stock. If the hedge ratio for the call is 0.7, what would be the dollar change in the value of the portfolio in response to a $1 decline in the stock price?
A) +$700
B) +$500
C) $1,150
D) $520
Q2) Before expiration, the time value of an at-the-money put option is always A) equal to zero.
B) equal to the stock price minus the exercise price.
C) negative.
D) positive.
E) None of the options are correct.
Q3) The intrinsic value of an at-the-money put option is equal to A) the stock price minus the exercise price.
B) the put premium.
C) zero.
D) the exercise price minus the stock price.
E) None of the options are correct.
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23
Chapter 22: Futures Markets
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Sample Questions
Q1) Foreign currency futures contracts are actively traded on the A) euro.
B) British pound.
C) drachma.
D) euro and British pound.
E) All of the options are correct.
Q2) On January 1, the listed spot and futures prices of a Treasury bond were 93.8 and 93.13. You purchased $100,000 par value Treasury bonds and sold one Treasury bond futures contract. One month later, the listed spot price and futures prices were 94 and 94.09, respectively. If you were to liquidate your position, your profits would be a
A) $125 loss.
B) $125 profit.
C) $12.50 loss.
D) $1,250 loss.
E) None of the options are correct.
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Chapter 23: Futures, Swaps, and Risk Management
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Sample Questions
Q1) The most common short-term interest rate used in the swap market is
A) the U.S. discount rate.
B) the U.S. prime rate.
C) the U.S. fed funds rate.
D) LIBOR.
E) None of the options are correct.
Q2) If a stock index futures contract is overpriced, you would exploit this situation by
A) selling both the stock index futures and the stocks in the index.
B) selling the stock index futures and simultaneously buying the stocks in the index.
C) buying both the stock index futures and the stocks in the index.
D) buying the stock index futures and selling the stocks in the index.
E) None of the options are correct.
Q3) One reason swaps are desirable is that
A) they are free of credit risk.
B) they have no transactions costs.
C) they increase interest rate volatility.
D) they increase interest rate risk.
E) they offer participants easy ways to restructure their balance sheets.
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Chapter 24: Portfolio Performance Evaluation
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Sample Questions
Q1) Suppose you buy 100 shares of Abolishing Dividend Corporation at the beginning of year 1 for $80. Abolishing Dividend Corporation pays no dividends. The stock price at the end of year 1 is $100, $120 at the end of year 2, and $150 at the end of year 3. The stock price declines to $100 at the end of year 4, and you sell your 100 shares. For the four years, your geometric average return is
A) 0.0%.
B) 1.0%.
C) 5.7%.
D) 9.2%.
E) 34.5%.
Q2) Suppose the risk-free return is 6%. The beta of a managed portfolio is 1.5, the alpha is 3%, and the average return is 18%. Based on Jensen's measure of portfolio performance, you would calculate the return on the market portfolio as A) 12%.
B) 14%.
C) 15%.
D) 16%.
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Chapter 25: International Diversification
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Sample Questions
Q1) WEBS portfolios
A) are passively managed.
B) are shares that can be sold by investors.
C) are free from brokerage commissions.
D) are passively managed and are shares that can be sold by investors.
E) All of the options are correct.
Q2) The straightforward generalization of the simple CAPM to international stocks is problematic because
A) inflation-risk perceptions by different investors in different countries will differ as consumption baskets differ.
B) investors in different countries view exchange-rate risk from the perspective of different domestic currencies.
C) taxes, transaction costs, and capital barriers across countries make it difficult for investors to hold a world-index portfolio.
D) All of the options are correct.
E) None of the options are correct.
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Chapter 26: Hedge Funds
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Sample Questions
Q1) Hedge funds often have ______ provisions as long as ______, which preclude redemption.
A) crackdown; 2 months
B) lock-up; 2 months
C) crackdown; several years
D) lock-up; several years
E) None of the options are correct.
Q2) Hedge fund incentive fees are essentially
A) put options on the portfolio with a strike price equal to the current portfolio value.
B) put options on the portfolio with a strike price equal to the expected future portfolio value.
C) call options on the portfolio with a strike price equal to the expected future portfolio value.
D) call options on the portfolio with a strike price equal to the current portfolio value times one plus the benchmark return.
E) straddles.
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28
Chapter 27: The Theory of Active Portfolio Management
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Q1) ____________ can be used to measure forecast quality and guide in the proper adjustment of forecasts.
A) Regression analysis
B) Exponential smoothing
C) ARIMA
D) Moving average models
E) GAUSS
Q2) The Treynor-Black model is a model that shows how an investment manager can use security analysis and statistics to construct
A) a market portfolio.
B) a passive portfolio.
C) an active portfolio.
D) an index portfolio.
E) a balanced portfolio.
Q3) Active portfolio management consists of
A) market timing.
B) security analysis.
C) indexing.
D) market timing and security analysis.
E) None of the options are correct.
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Chapter 28: Investment Policy and the Framework of the
Cfa Institute
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Q1) Deferral of capital gains tax I) means that the investor doesn't need to pay taxes until the investment is sold.
II) allows the investment to grow at a faster rate.
III) means that you might escape the capital gains tax if you live long enough.
IV) provides a tax shelter for investors.
A) II and III
B) I, II, IV
C) I, III, and V
D) II, III, and IV
Q2) For an individual investor, the value of home ownership is likely to be viewed
A) as a hedge against increases in rental rates.
B) as a guarantee of availability of a particular residence.
C) as a hedge against inflation.
D) as a hedge against increases in rental rates and as a guarantee of availability of a particular residence.
E) All of the options are correct.
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