Security Analysis
Test Questions
Course Introduction
Security Analysis is a comprehensive course that explores the fundamental and advanced concepts of evaluating various investment securities, including equities, bonds, and alternative assets. The course covers methods for analyzing financial statements, assessing intrinsic value, and understanding risk and return trade-offs. Students will learn to apply both quantitative and qualitative analysis techniques, explore valuation models such as discounted cash flow and price multiples, and examine macroeconomic and industry factors affecting security prices. Through case studies and real-world applications, the course prepares students to make informed investment decisions and develop critical analytical skills necessary for careers in finance and investment management.
Recommended Textbook
Investments 7th Canadian Edition by Zvi Bodie
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Chapter 1: Investments: Background and Issues
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Q1) ____________ of an investment bank.
A) BMO Nesbitt Burns is an example
B) CIBC is an example
C) Scotia Capital is an example
D) a and b are examples
E) a and c are examples
Answer: E
Q2) Discuss the agency problem in detail.
Answer: Managers are the agents of the shareholders,and should act on their behalf to maximize shareholder wealth (the value of the stock).A conflict (the agency conflict)arises when managers take self-interested actions to the detriment of shareholders.The roles of the board of directors selected by the shareholders are to oversee management and to minimize agency problems.However,often these boards are figureheads,and individual shareholders do not own large enough blocks of the shares to override management actions.One potential resolution of an agency problem occurs when inefficient management actions cause the price of the stock to be depressed.The firm may then become a takeover target.If the acquisition is successful,managers may be replaced and potentially,stockholders benefit.
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Chapter 2: Asset Classes and Financial Instruments
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Q1) The bid price of a T-bill in the secondary market is
A) the price at which the dealer in T-bills is willing to sell the bill.
B) the price at which the dealer in T-bills is willing to buy the bill.
C) greater than the asked price of the T-bill.
D) the price at which the investor can buy the T-bill
E) never quoted in the financial press.
Answer: B
Q2) In the event of the firm's bankruptcy
A) the most shareholders can lose is their original investment in the firm's stock.
B) common shareholders are the first in line to receive their claims on the firm's assets.
C) bondholders have claim to what is left from the liquidation of the firm's assets after paying the shareholders.
D) the claims of preferred shareholders are honored before those of the common shareholders.
E) a and d.
Answer: E
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Chapter 3: Securities Markets
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Q1) Assume you sell short 100 shares of common stock at $45 per share,with initial margin at 50%.What would be your rate of return if you repurchase the stock at $40/share? The stock paid no dividends during the period,and you did not remove any money from the account before making the offsetting transaction.
A) 20%
B) 25%
C) 22%
D) 77%
E) none of these
Answer: C
Q2) Assume you purchased 100 shares of common stock at $50 per share.The initial margin is 40%.Your investment was
A) $3,000
B) $5000
C) $2000
D) $9000
E) $7800
Answer: C
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Chapter 4: Mutual Funds and Other Investment Companies
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Q1) If the annual real rate of interest is 5% and the expected inflation rate is 4%,the nominal rate of interest would be approximately A) 1%.
B) 9%.
C) 20%.
D) 15%.
E) none of these.
Q2) You purchased a share of stock for $30.One year later you received $1.50 as a dividend and sold the share for $32.25.What was your holding-period return?
A) 12.5%
B) 12.0%
C) 13.6%
D) 11.8%
E) 14.1%
Q3) Discuss some reasons why an investor with a long time horizon might choose to invest in common stocks,even though they have historically been riskier than government bonds or T-bills.
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Chapter 5: Risk and Return: Past and Prologue
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Q1) Consider the following two investment alternatives.First,a risky portfolio that pays a 15 percent rate of return with a probability of 60% or a 5 percent return with a probability of 40%,and second,a T-bill that pays 6 percent.The risk premium on the risky investment is A) 11 percent.
B) 1 percent.
C) 9 percent.
D) 5 percent.
E) none of these.
Q2) Discuss the differences between investors who are risk averse,risk neutral,and risk loving.
Q3) The utility score an investor assigns to a particular portfolio,other things equal, A) will decrease as the rate of return increases.
B) will decrease as the standard deviation increases.
C) will decrease as the variance increases.
D) will increase as the variance increases.
E) will increase as the rate of return increases.
Q4) Discuss the differences between the asset allocation decision and the security selection decision.
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Chapter 6: Efficient Diversification
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Q1) The individual investor's optimal portfolio is designated by:
A) The point of tangency with the indifference curve and the capital allocation line.
B) The point of highest reward to variability ratio in the opportunity set.
C) The point of tangency with the opportunity set and the capital allocation line.
D) The point of the highest reward to variability ratio in the indifference curve.
E) None of these.
Q2) The line representing all combinations of portfolio expected returns and standard deviations that can be constructed from two available assets is called the
A) risk/reward tradeoff line
B) Capital Allocation Line
C) efficient frontier
D) portfolio opportunity set
E) Security Market Line
Q3) Theoretically,the standard deviation of a portfolio can be reduced to what level?
Explain.Realistically,is it possible to reduce the standard deviation to this level? Explain.
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Chapter 7: Capital Asset Pricing and Arbitrage Pricing
Theory
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Q1) According to the Capital Asset Pricing Model (CAPM)a well diversified portfolio's rate of return is a function of
A) market risk
B) unsystematic risk
C) unique risk.
D) reinvestment risk.
E) none of these.
Q2) Discuss the differences between the capital market line and the security market line.
Q3) The Security Market Line (SML)is
A) the line that describes the expected return-beta relationship for well-diversified portfolios only.
B) also called the Capital Allocation Line.
C) the line that is tangent to the efficient frontier of all risky assets.
D) the line that represents the expected return-beta relationship.
E) the line that represents the relationship between an individual security's return and the market's return.
Q4) List and discuss two of the assumptions of the CAPM.
Q5) Discuss the mutual fund theorem.
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Chapter 8: The Efficient Market Hypothesis
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Q1) Consider a well-diversified portfolio,A,in a two-factor economy.The risk-free rate is 6%,the risk premium on the first factor portfolio is 4% and the risk premium on the second factor portfolio is 3%.If portfolio A has a beta of 1.2 on the first factor and .8 on the second factor,what is its expected return?
A) 7.0%
B) 8.0%
C) 9.2%
D) 13.0%
E) 13.2%
Q2) A _________ portfolio is a well-diversified portfolio constructed to have a beta of 1 on one of the factors and a beta of 0 on any other factor.
A) factor
B) market
C) index
D) a and b
E) a,b,and c
Q3) Discuss the similarities and the differences between the CAPM and the single-factor model.
Q4) Discuss the security characteristic line (SCL).
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Chapter 9: Behavioral Finance and Technical Analysis
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Q1) Jaffe (1974)found that stock prices _______ after insiders intensively bought shares while a later study by Seyhun (1986)found _________.
A) decreased,buying on insider trading did not yield abnormal returns.
B) decreased,buying on insider trading produced significant abnormal returns.
C) increased,buying on insider trading did not yield abnormal returns.
D) increased,buying on insider trading produced significant abnormal returns.
E) remained stable,buying on insider trading produced significant abnormal returns.
Q2) The weak form of the efficient market hypothesis asserts that
A) stock prices do not rapidly adjust to new information contained in past prices or past data
B) future changes in stock prices cannot be predicted from past prices
C) technicians cannot expect to outperform the market
D) a and b
E) b and c
Q3) With regard to market efficiency,what is meant by the term "anomaly"? Give three examples of market anomalies and explain why each is considered to be an anomaly.
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Chapter 10: Bond Prices and Yield
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Q1) If a person gives too much weight to recent information compared to prior beliefs,they would make ________ errors.
A) framing
B) selection bias
C) overconfidence
D) conservatism
E) forecasting
Q2) _____________ on the Dow theory.
A) The Elliot wave theory is a recent variation
B) the theory of Kondratieff waves is a recent variation
C) both the Elliot wave theory and the theory of Kondratieff waves are recent variations
D) neither the Elliot wave theory and theory of Kondratieff waves are recent variations
Q3) A long term movement of prices,lasting from several months to years is called __________.
A) a minor trend
B) an intermediate trend
C) a primary trend
D) none of these
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Chapter 11: Managing Bond Portfolios
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Q1) Fama and French (2000)studied the equity premium puzzle by breaking their sample into subperiods and found that
A) the equity premium was largest throughout the entire 1872-1999 period.
B) the equity premium was largest during the 1872-1949 subperiod.
C) the equity premium was largest during the 1950-1999 subperiod.
D) the differences in equity premiums for the three time periods were statistically insignificant.
E) the constant-growth dividend-discount model never works.
Q2) Strongest evidence in support of the CAPM has come from demonstrating that
A) the market beta is equal to 1.0.
B) non-systematic risk has significant explanatory power in estimating security returns.
C) The average return-beta relationship is highly significant.
D) The intercept in tests of the excess returns-beta relationship is exactly zero.
E) professional investors do not generally out-perform market indexes,demonstrating that the market is efficient.
Q3) Describe some of the ways the CAPM is applied in practice.
Q4) Discuss Roll's critique of the CAPM.
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Chapter 12: Macroeconomic and Industry Analysis
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Q1) To earn a high rating from the bond rating agencies,a firm should have
A) a low times interest earned ratio
B) a low debt to equity ratio
C) a high quick ratio
D) a and c
E) b and c
Q2) A 12% coupon bond,semiannual payments,is callable in 5 years.The call price is $1,120;if the bond is selling today for $1,110,what is the yield to call?
A) 12.03%.
B) 10.86%.
C) 10.95%.
D) 9.14%.
E) none of these.
Q3) You purchased a zero-coupon bond that has a face value of $1,000,five years to maturity and a yield to maturity of 7.3%.It is one year later and similar bonds are offering a yield to maturity of 8.1%.You will sell the bond now.You have a tax rate of 40% on regular income and 15% on capital gains.Calculate the following for this bond:
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Chapter 13: Equity Valuation
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Q1) Forward rates ____________ future short rates because ___________.
A) are equal to;they are both extracted from yields to maturity.
B) are equal to;they are perfect forecasts.
C) differ from;they are imperfect forecasts.
D) differ from;forward rates are estimated from dealer quotes while future short rates are extracted from yields to maturity.
E) are equal to;although they are estimated from different sources they both are used by traders to make purchase decisions.
Q2) The most recently issued Treasury securities are called
A) on the run.
B) off the run.
C) on the market.
D) off the market.
E) none of these
Q3) Term structure of interest rates is the relationship between what variables? What is assumed about other variables? How is term structure of interest rates depicted graphically?
Q4) Explain what the following terms mean: spot rate,short rate,and forward rate.Which of these is(are)observable today?
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Chapter 14: Financial Statement Analysis
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Q1) You manage a portfolio for Ms.Angel Foodcake,who has instructed you to be sure her portfolio has a value of at least $350,000 at the end of six years.The current value of Ms.Foodcake's portfolio is $250,000.You can invest the money at a current interest rate of 8%.You have decided to use a contingent immunization strategy. What amount would need to be invested today to achieve the goal,given the current interest rate?
Suppose that four years have passed and the interest rate is 9%.What is the trigger point for Angel's portfolio at this time? (That is,how low can the value of the portfolio be before you will be forced to immunize to be assured of achieving the minimum acceptable return?)
Illustrate the situation graphically. If the portfolio's value after 4 years is $291,437 what should you do?
Q2) Discuss duration.Include in your discussion what duration measures,how duration relates to maturity,what variables affect duration,and how duration is used as a portfolio management tool (include some of the problems associated with the use of duration as a portfolio management tool).
Q3) Discuss rate anticipation swaps as a bond portfolio management strategy.
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Chapter 15: Options Markets
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Q1) High Tech Chip Company paid a dividend last year of $2.50.The expected ROE for next year is 12.5%.An appropriate required return on the stock is 11%.If the firm has a plowback ratio of 60%,the dividend in the coming year should be
A) $1.00
B) $2.50
C) $2.69
D) $2.81
E) none of these
Q2) Dominion Tool Company is expected to pay a dividend of $2 in the upcoming year.The risk-free rate of return is 4% and the expected return on the market portfolio is 14%.Analysts expect the price of Dominion Tool Company shares to be $22 a year from now.The beta of Dominion Tool Company's stock is 1.25.The market's required rate of return on Dominion's stock is ____.
A) 14.0%
B) 17.5%
C) 16.5%
D) 15.25%
E) none of these
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Chapter 16: Option Valuation
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Q1) Refer to the financial statements of Mt.Prevost Machine Corp.The firm's fixed asset turnover ratio for 2001 is ____.
A) 1.60
B) 3.16
C) 3.31
D) 4.64
E) none of these
Q2) Refer to the financial statements of Lake Somenos Furniture Co.The firm's quick ratio for 2001 is ____.
A) 0.78
B) 1.71
C) 1.00
D) 2.07
E) none of these
Q3) Return on total assets is a function of ______.
A) interest rates and pre-tax profits
B) the debt-equity ratio
C) the after-tax profit margin and the asset turnover ratio
D) sales and fixed assets
E) none of these
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Chapter 17: Futures Markets and Risk Management
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Q1) A collar with a net outlay of approximately zero is an options strategy that
A) combines a put and a call to lock in a price range for a security.
B) uses the gains from sale of a call to purchase a put.
C) uses the gains from sale of a put to purchase a call.
D) both a and b.
E) both a and c.
Q2) Buyers of call options __________ required to post margin deposits and sellers of put options __________ required to post margin deposits.
A) are;are not
B) are;are
C) are not;are
D) are not;are not
E) are always;are sometimes
Q3) Call options on RIM listed stock options are
A) issued by RIM Corporation.
B) created by investors.
C) traded on various exchanges.
D) a and c.
E) b and c.
Q4) Describe the protective put.What are the advantages of such a strategy?
Page 19
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Chapter 18: Performance Evaluation and Active Portfolio Management
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Q1) All the inputs in the Black-Scholes Option Pricing Model are directly observable except
A) the price of the underlying security.
B) the risk free rate of interest.
C) the time to expiration.
D) the variance of returns of the underlying asset return.
E) none of these.
Q2) Discuss the relationship between option prices and time to expiration,volatility of the underlying stocks,and the exercise price.
Q3) What is an option hedge ratio? How does the hedge ratio for a call differ from that of a put (or are the two equivalent)? Explain.
Q4) An American-style call option with six months to maturity has a strike price of $35.The underlying stock now sells for $43.The call premium is $12.What is the time value of the call?
A) $8
B) $12
C) $0
D) $4
E) cannot be determined without more information.
Page 20
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Chapter 19: Globalization and International Investing
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Q1) The value of a futures contract for storable commodities can be determined by the _______ and the model __________ consistent with parity relationships.
A) CAPM,will be
B) CAPM,will not be
C) APT,will not be
D) APT,will be
E) a and d
Q2) Who guarantees that a futures contract will be fulfilled?
A) the buyer
B) the seller
C) the broker
D) the clearinghouse
E) nobody
Q3) Hedging a position using futures on another commodity is called
A) surrogate hedging.
B) cross hedging.
C) alternative hedging.
D) correlative hedging.
E) proxy hedging.
Q4) Describe the differences between futures and forward contracts.
Page 21
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Chapter 20: Taxes, Inflation, and Investment Strategy
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Q1) If an investor invested $1,000 in 30-day commercial paper on January 1,1927 and rolled over the proceeds into commercial paper every 30 days until December 31,1978,the investor would have earned approximately ___________ at the end of 1978.
A) $3,600
B) $67,500
C) $3,640,000
D) $5,360,000,000
E) none of these
Q2) Trading activity by mutual funds just prior to quarterly reporting dates is known as
A) insider trading
B) program trading
C) passive security selection
D) window dressing
E) none of these
Q3) Discuss,in general,the performance attribution procedures.
Q4) Explain why mean-variance analysis is inadequate for valuing market timing.
Q5) What is the problem with using the Sharpe measure for evaluation of an active portfolio management strategy?
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Chapter 21: Investors and the Investment Process
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Q1) To determine the optimal risky portfolio in the Treynor-Black Model,macroeconomic forecasts are used for the _________ and composite forecasts are used for the
A) passive index portfolio;active portfolio
B) active portfolio;passive index portfolio
C) expected return;standard deviation
D) expected return;beta coefficient
E) alpha coefficient;beta coefficient
Q2) You hold a $10 million bond portfolio with a modified duration of 8 years.How would you,using T-bond futures,hedge this portfolio? Assume that the bond to be delivered has a modified duration of 9 years and that the futures price is currently $92 for $100 par value.
A) Sell approximately 97 contracts
B) Buy approximately 97 contracts
C) Sell approximately 90 contracts
D) Buy approximately 90 contracts
E) None of these
Q3) Describe how one might hedge against systematic risk.
Q4) Discuss the relationship between hedging demands,the capital asset pricing model,and arbitrage pricing theory.
Page 23
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Chapter
and More
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Q1) What is an Exchange-traded fund? Give two examples of specific ETFs.What are some advantages they have over ordinary open-end mutual funds? What are some disadvantages?
Q2) Explain the five major differences between hedge funds and mutual funds.
Q3) Investors in closed-end funds who wish to liquidate their positions must
A) sell their shares through a broker.
B) sell their shares to the issuer at a discount to Net Asset Value.
C) sell their shares to the issuer at a premium to Net Asset Value.
D) sell their shares to the issuer for Net Asset Value.
E) hold their shares to maturity.
Q4) At issue,offering prices of open-end funds will often be
A) less than NAV due to loads and commissions.
B) greater than NAV due to loads and commissions.
C) less than NAV due to limited demand.
D) greater than NAV due to excess demand.
E) less than or greater than NAV with no apparent pattern.
Q5) Discuss the consistency of mutual fund performance results,as studied by Goetzmann and Ibbotson (1994)and Malkiel (1995).
Q7) Discuss the taxation of mutual fund income. Page 24
Q6) Discuss the relationships between investor objectives,constraints,and policies.
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Chapter 23: International Finance and Investments: Understanding Foreign Markets and Risks
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Q1) __________ refers to the possibility of expropriation of assets,changes in tax policy,and the possibility of restrictions on foreign exchange transactions.
A) default risk
B) foreign exchange risk
C) market risk
D) political risk
E) none of these
Q2) __________ are mutual funds that invest in one country only.
A) ADRs
B) ECUs
C) single-country funds
D) all of these
E) none of these
Q3) Calculate Da Gama's stock selection return contribution.
A) 1.0%
B) -1.0%
C) 3.0%
D) 0.25%
E) none of these.
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