Principles of Investments
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Course Introduction
Principles of Investments introduces students to the fundamental concepts, tools, and techniques essential to investment decision-making. The course explores various investment vehicles such as stocks, bonds, mutual funds, and alternative assets, examining how markets function and the risk-return tradeoff. Students learn key principles of portfolio construction, diversification, valuation methods, and the impact of economic and financial factors on investment outcomes. Emphasis is placed on understanding investment strategies, analyzing securities, and making informed financial choices to optimize returns within varying risk tolerances.
Recommended Textbook Investments Concepts and Applications 5th Edition by Richard Heaney
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Page 2
Chapter 1: The Investment Decision
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Sample Questions
Q1) An investor purchased the investment above.If continuously compounded returns are used,what is the equal-weighted return on the portfolio?
A) \(-12.6 \%\)
B) \(-10.5 \%\)
C) \(-3.2 \%\)
D)\(2.3\%\)
Answer: C
Q2) The value of an investment at the end of each of four years is shown above.What is the geometric cumulative return over the four years?
A) \(15.1 \%\)
B) \(24.63 \%\)
C)\(18.7 \%\)
D) \(19.7 \%\)
Answer: B
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Chapter 2: Australian Financial Markets
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Sample Questions
Q1) In Australia,the main organized securities markets available to investors included:
A) ASX
B) \(\mathrm{ASX} 24\)
C) \(\text { Chi-X }\)
D) \(\text { All of the above }\)
Answer: D
Q2) Taxman Ltd currently has 4 500 000 shares on issue.Taxman Ltd makes a bonus issue on the basis of one share for every five shares currently held.Before the bonus issue,the company's shares trade at $8.50.What would be the expected ex-bonus price?
A) \(\$ 6.80\)
B) \(\$ 7.08\)
C) \(\$ 7.80\)
D) \(\$ 8.15\)
Answer: B
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4
Chapter 3: The International Investment Environment
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Sample Questions
Q1) Using the information contained in the table,for the AUD/USD exchange rate,what is the bid rate,assuming direct rates from an Australian perspective?
A) \( 0.9940 \)
B) \( 0.9945 \)
C) \( 1.0060 \)
D) \( 1.0055\)
Answer: D
Q2) In the Australian forex market,a rate of 1AUD = 0.6425-0.6465 EUR would be expressed as AUD/EUR 0.6425-0.6465.
A)True
B)False
Answer: False
Q3) An indirect quotation given in Sydney would involve foreign currencies being expressed in terms of the value of 1 Australian dollar.
A)True
B)False
Answer: True
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Page 5
Chapter 4: Financial Management: Derivative Instruments
and Information Sources
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Sample Questions
Q1) Repurchase agreements are traded:
A) over the counter (OTC)
B) on the SYCOM platform
C) over the counter (SYCOM)
D) on the \( \mathrm{A} S \mathrm{~S} \)
Q2) In which year did option trading begin in Australia?
A) 1973
B) 1976
C) 1978
D) 1989
Q3) The Consumer Price Index (CPI)is designed to capture price movements in the general economy.
A)True
B)False
Q4) With futures the All Ordinaries Index (AOI)can be traded as separate security.
A)True
B)False
Page 6
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Chapter 5: Money Market Securities
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Sample Questions
Q1) Given that the quoted yield for a 90-day dealer's bill is 4.14%,what is the price of the bill,if it has a face value of $100 000?
A) \( \$ 98 \quad 989 \)
B) \( \$ 94 \quad 771 \)
C) \( \$ 95 \quad 372 \)
D) \( \$ 97 \quad 938 \)
Q2) The yield of a $100 000 180-day bill decreases from 6% to 7%.What is the effect on the price of the bill?
A) \( -\$ 463.00 \)
B) \( -\$ 426.22 \)
C) \( \$ 463.00 \)
D) \( \$ 481.50 \)
Q3) The expectations theory implies that short-term yields are a function of the current interest rates and the expected future interest rates.
A)True
B)False
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Chapter 6: Bonds
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Q1) Calculate the convexity (measured in six-monthly periods)for a coupon-paying bond maturing in two years,where the bond has a face value of $100 000,yield of 5% p.a.and coupon rate of 7% p.a.Assume interest rates are paid half yearly and the last coupon payment has just been made.
A) \( 1.85 \)
B) \( 3.66 \)
C) \( 9.35 \)
D) \( 10.26 \)
Q2) Duration is a concept that is useful in assessing a bond's credit risk.
A)True
B)False
Q3) ______________ is an important characteristic of the relationship between bond prices and yields.
A)Convexity
B)Concavity
C)Complexity
D)Linearity
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8
Chapter 7: Investor Preferences and Portfolio Concepts
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Sample Questions
Q1) The slope coefficient from the market model can be used as an estimate of the risk-free rate.
A)True
B)False
Q2) Arbitrage profits are generally defined to exist in situations where there are positive returns to be made from investments that have:
A) no-risk and zero gross investment
B) high-risk and zero gross investment
C) no-risk and zero net investment
D) high-risk and zero net investment
Q3) The share market is currently returning 18% p.a. ,while the risk-free asset return is 6%.If an investor wishes to earn a return of 10%,what weight should the investor hold in the risk-free asset?
A) \( 0.500 \)
B) \( 0.600 \)
C) \( 0.667 \)
D) \( 0.750 \)
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Page 9
Chapter 8: Risky Asset Pricing Models and the Capm
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Q1) Assume the CAPM is the correct asset pricing model,and the risk-free rate of return is 6% and the market has an expected return and a standard deviation of 16% and 0.10%,respectively.An investor has a portfolio consisting of equal amounts in assets A and B.Asset A has an expected return of 8%.If the portfolio has an expected return of 10%,what is the covariance between asset B and the market portfolio?
A) \( 2.000 \)
B) \( 3.000 \)
C) \( 6.000 \)
D)\( 7.000 \)
Q2) Where thin trading is present in a market index used for the approximation of a beta,the beta will be __________ for a thinly traded company,and __________ for a frequently traded stock.
A) understated; overstated
B) overstated; understated
C) understated; understated
D) overstated; overstated
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Chapter 9: Alternative Risky Asset Pricing Models
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Q1) The most significant conceptual difference between the arbitrage pricing theory (APT)and the capital asset pricing model (CAPM)is that the CAPM _____________.
A)places less emphasis on market risk
B)recognizes multiple unsystematic risk factors
C)recognizes only one systematic risk factor
D)recognizes multiple systematic risk factors
Q2) According to the Faff studies in 1992,which of the following models dominates in describing equity returns in the Australian market?
A) the CAPM
B) a three-factor APT model
C) a ten-factor APT model
D) none of the above
Q3) The arbitrage pricing theory was developed by _________.
A)Henry Markowitz
B)Stephen Ross
C)William Sharpe
D)Eugene Fama
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11
Chapter 10: Concepts and Applications of Market Efficiency
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Q1) Which of the following beliefs would not preclude charting as a method of portfolio management?
A)The market is strong form efficient.
B)The market is semi-strong form efficient.
C)The market is weak form efficient.
D)Stock prices follow recurring patterns.
Q2) An abnormal return is calculated as:
A) expected return less risk-free rate
B) expected return less market return
C) actual return less market return
D) actual return less expected return
Q3) According to Black (1986),informed traders are most unlikely to trade on 'noise'.
A)True
B)False
Q4) The Australian study by Easton in 1990 found an insignificant jump in stock returns around extraordinary item announcements.
A)True
B)False
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Chapter 11: Equity Valuation Models
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Q1) The consistent use of real or nominal figures in the calculation of share prices has an enormous effect on the valuation.
A)True B)False
Q2) Shares in Anza Ltd are currently trading at a P/E ratio of 17.0.If the current price of Anza Ltd shares is $8.60,what is expected future price of the share?
A) \( \$ 6.31 \)
B) \( \$ 9.11 \)
C) \( \$ 9.73 \)
D) \( \$ 16.54 \)
Q3) The correct price of a share with a cost of capital of 25% p.a.that pays $0.28 p.a.dividends in perpetuity is:
A) \( \$ 1.12 \)
B) \( \$ 1.20 \)
C) \( \$ 0.89 \)
D) \( \$ 0.07 \)
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Chapter 12: Macro- and Industry Analysis of Share Markets
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Q1) Fama and Schwert (1977)find that government bonds are __________ related to expected inflation and equities are __________ related to expected inflation.
A) positively; negatively
B) positively; positively
C) negatively; positively
D) negatively; negatively
Q2) The investment strategy of Siegel (1991)suggests that investors can profit by:
A) buying equities before a trough and bonds before a peaks
B) buying bonds before a trough
C) buying equities after a trough and bonds after a peak
D) buying equities after a trough and bonds before a peak
Q3) Layton (1994)models the Australian economy as a combination of periods of 'normal' and 'sluggish' growth.
A)True
B)False
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Page 14
Chapter 13: Qualitative Stock Selection
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Q1) The classification of a share into either the growth or value category:
A) does not, of itself imply anything about the merits of each group or about stock selection
B) primarily stems from market analysts in regards to the classification into growth and value
C) all of the above
D) none of these choices
Q2) BMIG Ltd has a current share price of $12.13.It is expected to pay $0.73 in dividends next period and it has a growth rate of 12%.What is the cost of equity capital for BMIG Ltd?
A) \( 12.13 \% \)
B) \( 14.71 \% \)
C) \( 16.08 \% \)
D) \( 18.02 \% \)
Q3) Blue-chip shares usually move against the market and therefore they have a relatively low level of risk.
A)True
B)False
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15
Chapter 14: Quantitative Company Analysis
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Sample Questions
Q1) You are able to obtain the items in the table from a company's balance sheet and profit and loss for 2009 and 2010.Given this information,calculate an appropriate measure of business risk for the firm in 2010.
A) \( 0.1024 \)
B) \( 0.1140 \)
C) \( 0.1176 \)
D) \( 0.1180 \)
Q2) One problem with ratio analysis is that it relies upon:
A) the accuracy of the investor calculating them
B) the accuracy of financial reports
C) the competence of financial brokerage services
D) all of these choices
Q3) A firm has an ROE of 20% and a market-to-book ratio of 2.38.Its P/E ratio is
C)17.62
D)47.6
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Chapter 15: Futures and Forward Contracts
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Q1) Which of the following best represents the phenomenon of contango?
A) the futures price is the same as the expected spot price
B) the futures price is less than the spot price
C) the futures price is greater than the expected spot price
D) the futures price is greater than the spot price
Q2) The use of standardised derivative contracts ensures a homogenous product but this does not help promote trading activity.
A)True
B)False
Q3) Studies of the performance of cost-of-carry models have concluded that:
A) the volatility of mispricing has decreased over time
B) the volatility of mispricing has increased over time
C) the average level of mispricing has decreased over time
D) the average level of mispricing has increased over time
Q4) Swaps,like futures contracts,are generally written with zero value.
A)True
B)False
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Chapter 16: Option Contracts
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Sample Questions
Q1) A combination of purchasing a call and put option with the same exercise price and time to expiry is called:
A) a straddle
B) a written straddle
C) a bought straddle
D) all of the above
Q2) A put option has a price of $2.50 with exercise price of $14.00 and underlying asset price of $12.00.If the time to maturity is 30 days and the risk-free return is 7% p.a. ,what is the pricing bounds error?
A) \( 0\)
B) \( 0.42 \)
C) \( 1.67 \)
D) \( 2.50 \)
Q3) In relation to hedging when the short futures position is combined with the long asset position,the net effect is that wealth is not altered with changes in price.
A)True
B)False
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Page 18
Chapter 17: Advanced Issues in Options
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Q1) Which of the following are features of LEPOs?
A) they are traded on the ASX
B) the exercise price is typically \( \$ 0.01 \)
C) they are European-type options
D) all of these choices
Q2) In Australia,options that are heavily traded on the ASX 24 futures contracts include:
A) Three-year Treasury bond futures contract
B) The 10-year Treasury bond futures contract
C) The 90-day bank-accepted bill futures contract
D) All of these choices
Q3) Which of the following provides insurance to a portfolio manager against declines in value without limiting the increase in portfolio value?
A) protective call
B) protective put
C) butterfly spread
D) none of the aboye
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Page 19
Chapter 18: Alternative Investments
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Q1) Moskowitz and Vissing-Jørgensen (2002)estimate that,for those households that hold private equity,that investment represents 41% of household wealth.
A)True
B)False
Q2) After five years post listing,non-venture-backed IPOs earn a cumulative return of:
A) \( 16 \% \)
B) \( 23 \% \)
C) \( 39 \% \)
D \( 45 \% \)
Q3) At which funding round does the business appear to have a good product but it is not generating sufficient income?
A) start-up capital
B) development capital
C) expansion capital
D) exit
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Chapter 19: Portfolio Management
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Q1) A major disadvantage of passive over active portfolio management strategies is the minimisation of transactions costs.
A)True
B)False
Q2) An example of duration risk is where the yield curve is initially flat,but then shifts in an upward direction.
A)True
B)False
Q3) __________ involves purchasing a portfolio of bonds that produce cash flows matching closely those cash flows of the underlying liability.
A) Cash matching
B) Immunisation
C) Hedging
D) none of these choices
Q4) Superannuation involves only personal superannuation schemes.
A)True
B)False
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Chapter 20: Performance Evaluation of Managed Funds
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Q1) The major criticism of the Sharpe index is that it relies on:
A) the CML
B) the risk premium per unit
C) an efficiency measure
D) standard deviation
Q2) Which of the following is based upon the capital market line?
A) Jensen's alpha
B) Sharpe index
C) Treynor index
D) none of these choices
Q3) The window of superior performance is:
A) research that states, a single asset is always subject to periods of underperformance
B) high beta portfolios
C) usually short-up to three years
D) research that states, active management does appear to enhance value
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