Security Analysis
Exam Materials
Course Introduction
Security Analysis is a fundamental course designed to provide students with an in-depth understanding of the principles and techniques used to evaluate the value and potential of financial securities, including stocks, bonds, and other investment instruments. The course covers key topics such as financial statement analysis, valuation models, risk assessment, industry and economic analysis, and market efficiency. Through a combination of theoretical frameworks and practical case studies, students learn how to interpret financial data, assess intrinsic value, and make informed investment decisions. Emphasizing both qualitative and quantitative approaches, Security Analysis equips students with the analytical skills necessary to critique financial markets and develop strategies for portfolio management.
Recommended Textbook
Investment Analysis and Portfolio Management 1st Canadian Edition by Frank
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K. Reilly
Chapter 1: The Investment Setting
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Sample Questions
Q1) The ability to sell an asset quickly at a fair price is associated with A) Business risk.
B) Liquidity risk.
C) Exchange rate risk.
D) Financial risk.
E) Market risk.
Answer: B
Q2) Refer to Exhibit 1-4. Compute the coefficient of variation for your portfolio.
A) 0.043
B) 0.12
C) 1.40
D) 0.69
E) 1.04
Answer: E
Q3) 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
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Page 3
Chapter 2: The Asset Allocation Decision
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Sample Questions
Q1) An investment fund, when it is registered like RRSP, will give an investor less after tax dollars at the end of an assumed 20-year time horizon.
A)True
B)False
Answer: False
Q2) ____ gains are taxable and occur when an asset is sold for more than its basis (the value of the asset when it was purchased by the original owner, or inherited by the heirs of the original owner).
A) Realized capital
B) Income
C) Portfolio
D) Nominal
E) Real
Answer: A
Q3) Return is the only important consideration when establishing investment objectives.
A)True
B)False
Answer: False
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Chapter 3: Selecting Investments in a Global Market
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Sample Questions
Q1) Warrants are options often issued in connection with the sale of fixed income securities.
A)True
B)False
Answer: True
Q2) Which of the following is not an international bond?
A) Eurobond
B) Maple bond
C) International domestic bond
D) Guaranteed investment security
E) Yankee bond
Answer: D
Q3) Which of the following are ways to invest in real estate?
A) Real Estate Investment Trusts (REITs)
B) Raw Land purchase
C) Land Development
D) Rental Properties
E) All of the above.
Answer: E
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Page 5
Chapter 4: Securities Markets and the Economy
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Sample Questions
Q1) Refer to Exhibit 4-8. What is your total dollar return on this investment?
A) $1,000
B) $900
C) $850
D) $670
E) $520
Q2) Refer to Exhibit 4-2. What is Heidi's profit if RC's price rises to $80?
A) $55,000
B) $50,000
C) $60,000
D) $68,270
E) $28,570
Q3) The member of the Exchange who acts as a dealer on assigned stocks is known as a A) Margin broker.
B) Commission broker.
C) Registered broker.
D) Non-registered broker.
E) Specialist.
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6
Chapter 5: Efficient Capital Markets
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Sample Questions
Q1) Refer to Exhibit 5-4. What is the abnormal rate of return for Stock A during period t using only the aggregate market return (ignore differential systematic risk)?
A) 3.34
B) 1.75
C) -1.75
D) -3.70
E) -1.70
Q2) The strong form of the efficient market hypothesis contends that only insiders can earn abnormal returns.
A)True
B)False
Q3) The opportunity to take advantage of the downward pressure on stock prices that result from end-of-the-year tax selling is known as
A) The End-of-the-Year Effect.
B) The December Anomaly.
C) The End-of-the-Year Anomaly.
D) The January Anomaly.
E) The New Years Anomaly.
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7
Chapter 6: An Introduction to Portfolio Management
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Sample Questions
Q1) Risk is defined as the uncertainty of future outcomes.
A)True
B)False
Q2) Refer to Exhibit 6-14. What is the standard deviation of the stock A and B portfolio?
A) 0.0%
B) 0.5%
C)
Q3) A basic assumption of the Markowitz model is that investors base decisions solely on expected return and risk.
A)True
B)False
Q4) The slope of the efficient frontier is calculated as follows
A) E(Rportfolio)/E(sportfolio)
B) E(sportfolio)/E(Rportfolio)
C) DE(Rportfolio)/DE(sportfolio)
D) DE(sportfolio)/DE(Rportfolio)
E) None of the above
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Chapter 7: Asset Pricing Models: Capm and Apt
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Sample Questions
Q1) All portfolios on the capital market line are
A) Perfectly positively correlated.
B) Perfectly negatively correlated.
C) Unique from each other.
D) Weakly correlated.
E) Unrelated except that they contain the risk free asset.
Q2) Studies have shown the beta is more stable for portfolios than for individual securities.
A)True
B)False
Q3) The portfolios on the capital market line are combinations of the risk-free asset and the market portfolio.
A)True
B)False
Q4) Which of the following is not a relaxation of the assumptions for the CAPM?
A) Differential lending and borrowing rates
B) A zero beta model
C) Transaction costs
D) Taxes
E) Homogeneous expectations and fixed planning periods
Page 9
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Chapter 8: Economic and Industry Analysis
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Sample Questions
Q1) While there is substantial dispersion in industry risk over periods of time, there is consistency in the industry risk during a period of time.
A)True
B)False
Q2) The way to reduce the rivalry between existing competitors in an industry is to reduce the barrier to entry to the industry.
A)True
B)False
Q3) Which of the following industries do not have a strong, consistent industry component?
A) Gold
B) Steel
C) Railroads
D) Tobacco
E) Paper
Q4) In the rapid accelerating growth stage, profit margins are typically very high.
A)True
B)False
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Page 10
Chapter 9: Company Analysis and Stock Valuation
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Sample Questions
Q1) Which of the following is a financial tenet of Warren Buffett?
A) Long term prospects.
B) Resistance to institutional imperative.
C) Creation of one dollar of market value for every dollar retained.
D) Purchase at discount to intrinsic value.
E) Product is not faddish.
Q2) Price-to-book value ratio cannot be used to estimate the value of firms with negative earnings or negative cash flows.
A)True
B)False
Q3) Present value of free cash flow to equity resembles the present value of earnings concept except that it includes the capital expenditures required to maintain and grow the firm and the change in working capital required for a growing firm.
A)True
B)False
Q4) The constant growth dividend growth model is not appropriate for the valuation of growth companies.
A)True
B)False
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Chapter 10: Technical Analysis
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Sample Questions
Q1) The use of trading rules requires a great deal of subjective judgment.
A)True
B)False
Q2) To technician that believed in the importance of volume, a bullish signal would occur when
A) Prices increase on light volume.
B) Prices decrease on light volume.
C) Prices increase on heavy volume.
D) Prices decrease on heavy volume.
E) None of the above.
Q3) Technical analysts believe that security prices do not adjust rapidly.
A)True
B)False
Q4) A resistance level is the price range at which the technician would expect an increase in the demand of stock and a price reversal.
A)True
B)False
Q5) The breadth of the market measures the daily volume for a particular market. A)True
B)False
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Chapter 11: Bond Fundamentals
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Sample Questions
Q1) Refer to Exhibit 11-1. What annual dollar coupon amount will investors receive?
A) $4.75
B) $47.50
C) $4.808
D) $48.08
E) $62
Q2) A 6.5% coupon bond issued by the provincial government of Ontario sells for $1,000. What coupon rate on a corporate bond selling at $1,000 par value would produce the same after tax return to the investor as the tax-free municipal bond if the investor is in the 26% marginal tax bracket?
A) 1.69%
B) 11.25%
C) 8.78%
D) 14.63%
E) 25%
Q3) High-yield bonds are considered "investment" grade.
A)True
B)False
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Chapter 12: The Analysis and Valuation of Bonds
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Sample Questions
Q1) Estimate the percentage price change for a 5-year $1,000 par value bond, with a 6% coupon, if the yield rises from 8% to 8.5%. Interest is paid semiannually.
A) 2.1%
B) -2.1%
C) 4.4%
D) -4.4%
E) None of the above
Q2) The price-yield curve is a concave curve representing the relationship of bond prices and yields.
A)True
B)False
Q3) Suppose the current 6 year rate is 9% and the current 5 year rate is 7%. What is the one year forward rate for five years?
A) 19.57%
B) 18.62%
C) 15.80%
D) 14.65%
E) 12.67%
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14
Chapter 13: An Introduction to Derivative Markets and Securities
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Sample Questions
Q1) Refer to Exhibit 13-9. A short straddle is an appropriate strategy if
A) An investor wishes to generate additional income.
B) An investor wished to insure against a decline in share values.
C) An investor expected share prices to be volatile.
D) An investor expected share prices to remain in a trading range.
E) An investor expected share prices to be volatile, but was inclined to be bullish.
Q2) A stock currently sells for $15 per share. A put option on the stock with an exercise price $15 currently sells for $1.50. The put option is
A) At-the-money.
B) In-the-money.
C) Out-of-the-money.
D) At breakeven.
E) None of the above.
Q3) A portfolio containing a share of stock and a put option will have the same value as a portfolio containing a call option and the risk-free discount bond.
A)True
B)False
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Page 15
Chapter 14: Derivatives: Analysis and Valuation
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Sample Questions
Q1) A real option is a reference to
A) Options on physical assets.
B) Options on commodity futures.
C) The value of flexibility embedded in a real asset.
D) Choices a and b.
E) Choices b and c.
Q2) Which of the following is not true about interest rate swaps?
A) Payments are based on a notional principal.
B) Floating rate payers profit if interest rates fall.
C) Payments can be quarterly as well as semi-annually.
D) Parities exchange debt obligations.
E) Default risk is a possibility in the swaps market.
Q3) It is a violation of the securities laws to combine option contracts to achieve a customized payoff.
A)True
B)False
Q4) The forward rate agreement is the most complicated of the OTC interest rate contracts.
A)True
B)False
Page 16
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Chapter 15: Equity Portfolio Management Strategies
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Sample Questions
Q1) The three basic techniques for constructing a passive index are: full replication, sampling and linear programming.
A)True
B)False
Q2) Style investing allows control of the total portfolio to be shared between investment managers and pension fund managers.
A)True
B)False
Q3) 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.
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Chapter 16: Bond Portfolio Management Strategies
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Sample Questions
Q1) A pure yield pickup swap involves a switch from a low-coupon bond to a higher-coupon bond of similar quality and maturity.
A)True
B)False
Q2) Which of the following would not normally be a reason for a bond swap?
A) Increasing current yield
B) Improving the quality of the portfolio
C) Taking advantage of interest rate shifts
D) Tax savings
E) Realigning the portfolio's duration
Q3) Refer to Exhibit 16-9. Assume that your investment horizon is 5 years and your portfolio consists only of Bond Y and Bond X. Indicate the proportions invested in each bond, so that the portfolio is immunized.
A) 50% in Bond Y and 50% in Bond X
B) 76% in Bond Y and 24% in Bond X
C) 36% in Bond Y and 64% in Bond X
D) 100% in Bond X
E) 100% in Bond Y
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Chapter 17: Professional Money Management, Alternative
Assets, and Industry Ethics
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Sample Questions
Q1) All investment companies charge an annual
A) Redemption fee.
B) Marketing and distribution.
C) Management fee.
D) Maintenance fee.
E) Market adjustment.
Q2) In the case of investment companies
A) Investors deal with a fund company and do not have separate accounts tailored to their specific needs.
B) Investors deal with a fund company and have separate accounts tailored to their specific needs.
C) Investors deal with an asset manager and do not have separate accounts tailored to their specific needs.
D) Investors deal with an asset manager have separate accounts tailored to their specific needs.
E) None of the above.
Q3) A closed-end investment company is normally referred to as a mutual fund.
A)True
B)False
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Chapter 18: Evaluation of Portfolio Performance
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Sample Questions
Q1) Duration is considered a good measure of risk for a bond portfolio because it indicates the relative volatility of the bond or portfolio due to interest rate changes and also the rating of the bonds.
A)True
B)False
Q2) The typical proxy for the market portfolio is the S&P/TSX Composite Index because it is diversified and price weighted.
A)True
B)False
Q3) Sharpe's performance assumes that all portfolios are completely diversified.
A)True
B)False
Q4) Excess return 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) None of the above.
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Chapter 19: Analysis of Financial Statements
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Sample Questions
Q1) Refer to Exhibit 19-3. Calculate the cash conversion cycle.
A) 27
B) 46
C) 26
D) 55
E) 22
Q2) Some factors that determine financial risk include interest coverage and cash flow coverage.
A)True
B)False
Q3) Operating performance is divided into which two subcategories of ratios?
A) Efficiency and profitability
B) Efficiency and debt
C) Profitability and growth
D) Debt and equity
E) Liquidity and leverage
Q4) The growth of business depends on the percentage of earnings reinvested and the return on equity.
A)True
B)False
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Chapter 20: An Introduction to Security Valuation
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Sample Questions
Q1) The process of fundamental valuation requires estimates of all the following factors, except
A) The time pattern of returns.
B) The economy's real risk-free rate.
C) The risk premium for the asset.
D) The times series of stock prices.
E) The expected rate of inflation.
Q2) Refer to Exhibit 20-7. What are the dividends for years 1, 2, and 3?
A) $1.5, $2.0, $2.05
B) $1.64, $1.78, $1.94
C) $1.64, $1.94, $2.24
D) $1.5, $2.40, $3.30
E) $2.07, $2.14, $2.21
Q3) Refer to Exhibit 20-8. If the required return is 14%, what is the value of Fast Grow Corporation common stock today?
A) $40.26
B) $42.38
C) $46.70
D) $52.63
E) $62.78
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Chapter 21: Web Appendix: A Review of Statistics and the
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Sample Questions
Q1) The expected return from this investment is
A) -0.0752
B) -0.0040
C) 0.00
D) 0.0075
E) 0.4545
Q2) The standard deviation of your expected return from this investment is
A) 0.001
B) 0.004
C) 0.124
D) 1.240
E) None of the above
Q3) The coefficient of variation of this investment is
A) -0.06
B) -0.65
C) 6.60
D) 16.53
E) 165.10
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Chapter
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Sample Questions
Q1) The coefficient of variation of this investment is
A) -0.06
B) -0.65
C) 6.60
D) 16.53
E) 165.10
Q2) The expected return from this investment is
A) -0.0752
B) -0.0040
C) 0.00
D) 0.0075
E) 0.4545
Q3) The standard deviation of your expected return from this investment is
A) 0.001
B) 0.004
C) 0.124
D) 1.240
E) None of the above
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Sample Questions
Q1) Banks must compete for funds (savings deposits, CDs, etc.) in order to make loans and other types of investments.
A)True
B)False
Q2) The retirement plan that promises to pay a specific benefit to its beneficiaries is
A) A defined contribution plan.
B) A defined benefit pension plan.
C) A non-contribution pension plan.
D) An actuarial pension plan.
E) Choices a and c.
Q3) Endowment funds
A) Are formed from the contributions to charitable and educational institutions.
B) Are attractive investments for individuals with low liquidity needs.
C) Usually have very short investment horizons.
D) Provide retirement benefits for public employees.
E) Provide death benefits for its contributor's survivors.
Q4) Banks have high liquidity needs and therefore, have a short time horizon.
A)True
B)False
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