Investment Analysis
Textbook Exam Questions
Course Introduction
Investment Analysis is a comprehensive course that introduces students to the essential concepts, tools, and techniques used in evaluating various investment opportunities. The curriculum covers the fundamental principles of risk and return, portfolio theory, asset pricing models, security valuation, and market efficiency. Students will analyze stocks, bonds, and other financial instruments, utilizing quantitative and qualitative methods to assess their performance and potential. Through case studies and real-world applications, participants develop critical skills in constructing and managing investment portfolios, making informed investment decisions, and understanding the broader forces that influence financial markets.
Recommended Textbook Fundamentals of Investing 11th Edition by
Lawrence J. Gitman
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15 Chapters
1588 Verified Questions
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Page 2
Chapter 1: The Investment Environment
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Sample Questions
Q1) Under current tax law, dividend income is taxed at the same rate as A) ordinary income.
B) short-term capital gains.
C) long-term capital gains.
D) interest income.
Answer: C
Q2) Institutional investors manage money for businesses and nonprofit organizations, but not for individuals.
A)True
B)False
Answer: False
Q3) Speculation refers to high-risk investments which offer highly uncertain returns and future value.
A)True
B)False
Answer: True
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Page 3
Chapter 2: Securities Markets and Transactions
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Sample Questions
Q1) The NYSE and AMEX are examples of dealer markets.
A)True
B)False
Answer: False
Q2) The Securities Exchange Act of 1934
A) requires full disclosure of information on all new security issues.
B) authorized the SEC to regulate mutual funds.
C) established trade associations such as the NASD.
D) created the SEC as the regulator of the securities exchanges.
Answer: D
Q3) The Sarbanes-Oxley Act of 2002 focuses on
A) insider trading.
B) IPOs.
C) accounting and other public disclosures of information.
D) regulation of the OTC markets.
Answer: C
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Page 4
Chapter 3: Investment Information and Securities Transactions
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Sample Questions
Q1) What is the advantage of charting the price of a security over a period of time?
Answer: Charting provides a visual view of price movements and trends which are not as obvious when only viewing the raw price data.Charts can also visually compare the performance of a security against another security or against an index.
Q2) Over-the-counter market activity is reflected in the
A) Standard & Poor's composite index.
B) Nasdaq index.
C) AMEX composite index.
D) financials index.
Answer: B
Q3) It is generally a good idea to use limit orders when purchasing IPOs on-line.
A)True
B)False
Answer: True
Q4) Investment clubs are legal partnerships.
A)True
B)False
Answer: True
Page 5
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Chapter 4: Return and Risk
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Sample Questions
Q1) David has purchased an investment that he expects to produce an annual cash flow of $3,000 for five years.He requires an 8% rate of return compounded annually.What is the maximum amount that David can pay and still earn the required rate of return?
Q2) Lower risk investments are associated with higher expected rates of return.
A)True
B)False
Q3) The holding period return is an excellent method for comparing a short-term investment to a long-term investment.
A)True
B)False
Q4) Internal factors such as the quality of management and the level of corporate debt affect the rate of return on an individual stock.
A)True
B)False
Q5) If the risk-free rate of return is less than the inflation rate, the real rate of return is negative.
A)True
B)False
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Chapter 5: Modern Portfolio Concepts
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Sample Questions
Q1) Historical betas are always reliable predictors of future return fluctuations.
A)True
B)False
Q2) Explain the relationship between correlation, diversification, and risk reduction.
Q3) Investors are rewarded for assuming A) total risk.
B) diversifiable risk.
C) nondiversifiable risk.
D) any type of risk.
Q4) The market rate of return increased by 8% while the rate of return on XYZ stock increased by 4%.The beta of XYZ stock is
A) -2.0.
B) -0.40.
C) 0.50.
D) 2.0.
Q5) Maximum international diversification can be achieved by investing solely in U.S.multinational corporations.
A)True
B)False
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Chapter 6: Common Stocks
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Sample Questions
Q1) Since 2003, most dividends are taxed
A) at a higher rate than capital gains.
B) at a lower rate than capital gains.
C) at the same rate as ordinary income.
D) at the same rate as capital gains.
Q2) Mid-cap stocks are generally classified as those with a market capitalization between $1 and $5 billion.
A)True
B)False
Q3) ADRs
A) represent ownership in unlisted domestic stocks.
B) pay dividends in U.S. dollars.
C) receive company dividends only in U.S. dollars.
D) are subject to taxation only by the U.S. government.
Q4) Companies with strong earnings but limited growth opportunities
A) do not generally pay any dividends.
B) are called blue-chip stocks.
C) generally pay high dividends.
D) are speculative stocks.
Q5) Describe the bear market of 2008 through 2009 and put it in historical context.
Page 8
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Chapter 7: Analyzing Common Stocks
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Sample Questions
Q1) Which of the following tend to increase security market prices?
I.An increase in industrial production
II.An increase in corporate profits
III.An increase in the federal deficit when the economy is strong
IV.An increase in interest rates
A) I and II only
B) II and III only
C) I, II and III only
D) I, II, III and IV
Q2) The measure that indicates how efficiently assets are being used to support sales is called the
A) total asset turnover.
B) current ratio.
C) book value.
D) net profit margin.
Q3) Cash flow from operations
A) represents the amount of cash generated by the company.
B) is the least important section of the Statement of Cash Flows.
C) is the amount of cash acquired from the borrowing activities of the firm.
D) represents the cash flows from the purchase and sale of long-term assets.
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Chapter 8: Stock Valuation
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Sample Questions
Q1) In applying the variable-growth dividend valuation model to a company's stock, analysts frequently define the growth rate, g, as equal to
A) ROE multiplied by the firm's retention rate.
B) ROE divided by the dividend payout ratio.
C) the dividend payout ratio multiplied by the firm's retention rate.
D) P/E multiplied by the dividend payout ratio.
Q2) A firm with a price to sales ratio of 1 would usually be considered A) overvalued.
B) correctly valued.
C) near bankruptcy.
D) undervalued.
Q3) The intrinsic value of an asset equals the present value of all future cash flows at a given discount rate.
A)True
B)False
Q4) A stock's internal rate of return (IRR)is the discount rate that cause the present value of future dividends to equal the price of the stock.
A)True
B)False
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Chapter 9: Market Efficiency, Behavioral Finance, and Technical Analysis
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Sample Questions
Q1) If stock prices move randomly, charting and technical analysis are useful investment tools.
A)True
B)False
Q2) Explain why technical analysts use charts so extensively.
Q3) Technical analysis primarily monitors shifts in the ________ in the market.
A) level of risk
B) supply and demand forces
C) volume of trading
D) rate of return
Q4) Resources for technical analysis are readily available on the internet.
A)True
B)False
Q5) The advance/decline line is be used to time both the purchase and the sale of securities.
A)True
B)False
Q6) Market volume is a function of market demand for and supply of stocks.
A)True
B)False Page 11
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Chapter 10: Fixed-Income Securities
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Sample Questions
Q1) Which one of the following variables has the greatest effect on bond prices?
A) economic growth
B) interest rates
C) inflation
D) stock market returns
Q2) A type of bond that is issued and traded outside the United States and which is denominated in U.S.dollars but is not registered with the SEC is
A) a Yankee bond.
B) an issue of the World Bank.
C) an issue of the InterAmerican Bank.
D) a Eurodollar bond.
Q3) Which one of the following is the most junior in terms of its claim on earnings and assets?
A) subordinated debenture
B) mortgage bond
C) collateral trust bond
D) equipment trust certificate
Q4) Mortgage-backed securities are self-liquidating.
A)True
B)False
Page 13
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Chapter 11: Bond Valuation
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Sample Questions
Q1) Yield to call on a bond with a coupon rate of 8% paid semi-annually, 10 years to maturity, a par value of $1,000 and a selling price of $1,071, callable after 5 years at $1,010 is
A) 3.5%.
B) 6.49%.
C) 7.0%.
D) 8.16%
Q2) Bond yields are set by the bond issuer.
A)True
B)False
Q3) Downward sloping or flat yield curves often indicate
A) a recession in the near future.
B) an economic expansion in the near future.
C) higher inflation in the near future
D) a weaker dollar in the foreign exchange markets.
Q4) The mathematical link between a bond's price and interest rate changes is the A) Macaulay duration.
B) modified duration.
C) yield to market.
D) yield-to-call.
Page 14
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Chapter 12: Mutual Funds: Professionally Managed Portfolios
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Sample Questions
Q1) Investors in hedge funds have the legal status of A) shareholders.
B) limited partners.
C) general partners.
D) trustees.
Q2) Mutual fund investors are primarily exposed to ________ and ________ risks.
A) market; financial
B) market; inflation
C) business; financial
D) business; inflation
Q3) Mutual funds often report returns as the growth of $10,000 over a period of time.These returns assume that
A) all dividends and capital gains are reinvested.
B) all dividends and capital gains are withdrawn.
C) all dividends and capital gains are reinvested after deductions for income taxes.
D) the investor contributes money to the fund on a regular basis through an automatic investment plan.
Q4) What are the primary disadvantages of owning mutual fund shares?
Q5) Explain why closed-end funds can sell at prices other than the fund's NAV.
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Chapter 13: Managing Your Own Portfolios
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Sample Questions
Q1) Returns for periods greater than one year should be measured using the internal rate of return.
A)True
B)False
Q2) A constant plan allows for speculative gains while limiting potential losses.
A)True
B)False
Q3) Before analyzing needs and objectives, investors should first construct a portfolio.
A)True
B)False
Q4) A Jensen measure of 2.5% means that a security earned 2.5% more than the overall market.
A)True
B)False
Q5) Holding period return (HPR)captures total return performance by considering current income and capital gains and is most appropriate for holding periods of one year or less.
A)True
B)False
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Chapter 14: Options: Puts and Calls
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Sample Questions
Q1) Options can provide a lot of price action for a limited dollar investment.
A)True
B)False
Q2) One reason that writing options can be a viable and profitable investment strategy is that
A) the option writer collects the quarterly dividends.
B) most options expire unexercised.
C) an option writer determines when the option is exercised.
D) an option writer can exercise the option to avoid a potential loss.
Q3) The two provisions which investors should carefully consider when evaluating stock options are the
A) strike price and the exchange ratio.
B) time until expiration and the strike price.
C) leverage ratio and the time to maturity.
D) premium and the discount.
Q4) Puts and calls are issued by the same corporation that issued the underlying stock.
A)True
B)False
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Chapter 15: Commodities and Financial Futures
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Sample Questions
Q1) The purchaser of a futures contract
A) is required to obtain a margin loan equal in amount to the cost of the contract minus the cash down payment.
B) is generally required to make a cash deposit of 10 to 20% of the contract price at the time the contract is entered.
C) does not have to worry about margin calls since margin loans are not required. D) is affected by the daily procedure known as mark-to-the-market.
Q2) A successful hedge results in a guaranteed sales price to the producers of commodities.
A)True
B)False
Q3) The owner of a futures contract has the right, but not the obligation, to buy or sell at the contracted price.
A)True
B)False
Q4) The maximum loss on a futures contract is the price paid for the contract.
A)True
B)False
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