Finalterm Finance 630 (1)

7/28/2019 Finalterm Finance 630 (1)

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FINALTERM EXAMINATION

Spring 2010

FIN630- Investment Analysis & Portfolio ManagementQuestion No: 1 ( Marks: 1 ) - Please choose one__________ are those stocks whose results are tied with the overall state ofthenational economy. Growth stocks Income stocks Cyclical stocks Blue chip stocks

RefA cyclical stock is one whose fortune is directly tied to the state of the overall national

economy. (page no.25)Question No: 2 ( Marks: 1 ) - Please choose oneCompanies that have capitalization amounts between $500 million and $2billion areknown as _________. Small cap companies Mid cap companies Growth companies

Large cap companies RefAnalytical Services defines a mid-cap firm as one with capitalization between $800million and $2 billion.

Question No: 3 ( Marks: 1 ) - Please choose one

Current ratio is also known as: Working capital ratio Acid test ratio

Debt coverage ratio Dividend yield ratio

RefThe current ratio is also known as the working capital ratio and is normally presentedas a real ratio.Question No: 4 ( Marks: 1 ) - Please choose one

Which of the following is a basket of stocks that tracks a particular sector, investmentstyle, geographical area, or the market as a whole? Exchange traded fund

Open-end fund Closed-end fund Unit investment trust

RefAn ETF is a basket of stocks that tracks a particular sector, investment style,geographical area, or the market as a whole. (page no. 135)

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Question No: 5 ( Marks: 1 ) - Please choose onePositive abnormal returns for corporate insiders constitute a violation of:

Weak form efficiency Semi-strong form efficiency Strong-form efficiency Weak and strong form of efficiency

RefThe second reason for studying price reaction to directors' trading concerns whetheroutside investors can mimic the actions of insiders to also earn abnormal returns.This second issue would represent a violation of semi-strong form efficiency.http://people.exeter.ac.uk/ipt201/research/dirtradefinal3_EFM2002.pdfQuestion No: 6 ( Marks: 1 ) - Please choose oneWhich of the following states that investors with loss will increase their risk tolerance in

future transactions?

Loss aversion Prospect theory Illusion of control Anchoring

RefIllusion of control is the tendency for human beings to believe they can control, or atleast influence, outcomes that they demonstrably have no influence over. It has beendemonstrated in a succession of different experiments, and is thought to influencegambling behavior and belief in the paranormal.

Question No: 7 ( Marks: 1 ) - Please choose oneWhich of the following equity market indicator is composed of 30 blue-chip stocks?

NYSE Composite Index

Dow-Jones Industrial Average NASDAQ Composite Index

Standard & Poor's 500 IndexRef

Since 1928, 30 large blue chip companies have comprised the index. (page 159)Question No: 8 ( Marks: 1 ) - Please choose oneWhich of the following is NOT included in money market securities? Treasury Bill Certificate of deposit

Commercial paper Future

Money market securities means cash equivalents

Question No: 9 ( Marks: 1 ) - Please choose oneLSE captures _____________ of the market capitalization. 45% 50%


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53%

66%

Question No: 10 ( Marks: 1 ) - Please choose oneThe estimated percentage change in the value of a bond derived from the duration rule: Is less than the actual price change when the yield decreases

Is less than the actual price change when the yield increases

Is greater than the actual price change when the yield decreases Is always greater than the actual price change

REf

http://highered.mcgraw-hill.com/sites/0073405175/student_view0/chapter11/multiple_choice_quiz.html

Question No: 11 ( Marks: 1 ) - Please choose oneWhich of the following bonds are characterized by high yields and high risks?

Junk bonds

Convertible bonds Municipal bonds

Government bondsRef

Junk bonds are high-risk, high-yield bonds that carry ratings of BB (S&P) or Ba

(Moody's) or lower, with correspondingly higher yields. (page 167)Question No: 12 ( Marks: 1 ) - Please choose oneSystematic risk is also known as: Market risk General risk Un-diversifiable risk All of the given options

Page no 198Question No: 13 ( Marks: 1 ) - Please choose oneWhich of the following is the only way to protect investors from nonsystematic risk? Sector rotation Securitization Diversification


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Risk aversion

Ref

Investors can construct a diversified portfolio and eliminate part of the total risk, thediversifiable or non market, part. (page 216)Question No: 14 ( Marks: 1 ) - Please choose oneIf correlation coefficient (rmn) between two securities is -1.0, what does it represents? There is a positive relationship between security m and n There is a negative relationship between security m and n There is no relationship between security m and n The given data is not sufficient to arrive at any result

Ref

What if the correlation of A&B = -1 ? This is an unusual case, because it meansthat when A moves up, B always moves down. Take a mixture of .665 A and (1-.665)

B. sqrt(.6652*.152+(1-.665)2.32+2*0*(.665)*(1-.665)*.15*.3) = .075%, Which is veryclose to zero. In other words, A is nearly a perfect hedge for B. One of the few real-life

negative correlations you will find is a short position in a stock offsetting the longposition. In this case, since the mean returns are also the same, the expected return

will be zero. These extremes of correlation values allow us to describe an envelopewithin which all combinations of two assets will lie, regardless of their correlations.

http://viking.som.yale.edu/will/finman540/classnotes/class2.htmlQuestion No: 15 ( Marks: 1 ) - Please choose oneWhich of the following measure has values in the interval of [+1, -1]? Correlation coefficient Covariance

Regression

Standard deviationRef

(Page 209)Question No: 16 ( Marks: 1 ) - Please choose oneWho was the developer of CAPM? Gerald Appel

Markowitz Joseph Granville

John Bollinger

Refhttp://en.wikipedia.org/wiki/Capital_asset_pricing_modelQuestion No: 17 ( Marks: 1 ) - Please choose one

The average value of beta for all stocks in the market is:

0.5 1.0 1.5

2.0


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Which of the following involves dividing an investment portfolio among differentfinancial assets? Securitization

Sector rotation Asset allocation Risk aversion

RefThe asset allocation decision refers to the allocation of portfolio assets to broad assetmarkets; in other words, how much of the portfolio's funds are to be, invested in

stocks, in bonds, money market assets, and so forth. (page 215)Question No: 19 ( Marks: 1 ) - Please choose oneWhich of the following are regulated by Commodity Futures Trading Commission

(CFTC)? Options Futures Swaps

ForwardsRef

The Commodity Futures Trading Commission (CFJC), a federal regulatory agency, isresponsible for regulating trading in all domestic futures markets. In practice, theNational Futures Association, a self-regulating body, has assumed some of the duties

previously performed by the CFTC. In addition, each futures exchange has asupervisory body to oversee its members. (page 248)


Which of the following is defined as a market for the immediate sale and delivery ofassets? Laissez-faire market

Future market Spot market Forward market

RefSpot markets are markets for immediate: delivery. (page 247)Question No: 21 ( Marks: 1 ) - Please choose oneWhich of the following statement is FALSE regarding forward contracts? Forward contracts are traded on over- the-counter market

There is no surety/guarantee of the trade settlement

There are no pre determined standards in future contracts Forward contracts involve a process known as marking to market

RefFutures contracts are standardized and easily traded. (page 248)Question No: 22 ( Marks: 1 ) - Please choose oneProgram trading calls for which of the following?


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Computerized trigger points for trades

The use of short hedge position

The use of only call option The use of long hedge positionQuestion No: 23 ( Marks: 1 ) - Please choose oneS & P 500 future stock index closes at $ 275 and spot price is $ 230. What is its basis? 40 45 50

55


The average price of a security or currency over a specified time period used to spotpricing trends by smoothing out the large fluctuations is known as: Moving Average Standard deviation

Variance Beta

Refhttp://www.metaglossary.com/meanings/801519/

Question No: 25 ( Marks: 1 ) - Please choose oneWhich of the formula is TRUE for calculating retained earnings? Retained Earnings = Net Earnings Dividends

Retained Earnings = Net Earnings + Long term debt Retained Earnings = Net Earnings + Short term debt Retained Earnings = Net Earnings + DividendQuestion No: 26 ( Marks: 1 ) - Please choose one

The Dow Jones Industrial Average (DJIA) is an example of which of the followingindex?

Price weighting index Capitalization weightingindex Volume based index Fixed income index

Question No: 27 ( Marks: 1 ) - Please choose oneWhich of the following is a measure of the volatility of stock prices or returns? ROR Beta ROI Risk premium


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Active portfolio managers try to construct a risky portfolio with ______________. A higher Sharpe measure than a passive strategy

A lower Sharpe measure than a passive strategy The same Sharpe measure as a passive strategy

Very few securitiesRefhttp://webcache.googleusercontent.com/search?q=cache:_5ju4iWWWXoJ:www2.cob.ilstu.edu/gnnaidu/Tb/Chap027.RTF+Active+portfolio+managers+try+to+construct+a+risky+portfolio+with&cd=1&hl=en&ct=clnk

Question No: 29 ( Marks: 1 ) - Please choose oneWhich of the following is the CORRECT formula for calculating the buying power of

investors? Assets liabilities Equity debt Short term debt long tem debt

Current assets current liabilities Ref (page no 31)Question No: 30 ( Marks: 1 ) - Please choose oneWhen a companys market value is divided by sales, it is known as: Net income margin

Price-to-market value ratio Price-to-book value ratio Price-to-sales ratio

Question No: 31 ( Marks: 1 ) - Please choose oneWhich of the following statements is FALSE about Earnings per Share?

It is calculated by dividing Net income over number of shares outstanding. Earnings per share is a ratio, which is used for share price evaluation.(my opinion) Earnings per share relate income with ownership.

It is a liquidity measure.

Question No: 32 ( Marks: 1 ) - Please choose oneWhich form of the Efficient Market Hypothesis implies that an investor can achievepositive abnormal returns on average by using technical analysis?

Strong form Weak form Semi-strong form

None of the given optionsRef


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3. Strong-form efficient markets. The strong form of the EMH states that stock prices

fully reflect all information from public and private sources. The strong form includes all

types of information: market, nonmarket public, and private (inside) information. Thismeans that no group of investors has monopolistic access to information relevant to theformation of prices, and none should be able to consistently achieve abnormal returns.

http://www.cafewriter.com/finance/efficient-market-hypothesis.htmlQuestion No: 33 ( Marks: 1 ) - Please choose oneA straight-line would have convexity of: -1 0

+1 +2


Bonds that are NOT contracted to make periodic payments are called: Deferred coupon bonds Eurobonds

Corporate bonds

Zero-coupon bonds RefZero-Coupon Bonds Notall bonds make periodiccouponpayments. Bonds that are notcontracted to make periodiccouponpayments are calledzero-coupon bonds.http://books.google.com/books?id=5qj02oqoTFsC&pg=PA37&lpg=PA37&dq=Bonds+that+are+NOT+contracted+to+make+periodic+payments+are+called&source=bl&ots=IpJOh5WVZQ&sig=S73icJ-gxhtrlG-

fJZVDQ844yOo&hl=en&ei=0L1fTNuCKYuOvQO369nYAg&sa=X&oi=book_result&ct=result&resnum=3&ved=0CCAQ6AEwAg#v=onepage&q=Bonds%20that%20are%20NOT%20contracted%20to%20make%20periodic%20payments%20are%20called&f=falseQuestion No: 35 ( Marks: 1 ) - Please choose oneWhich of the following statements about exchange traded derivatives is LEASTaccurate? They are liquid.

They are standardized contracts. They carry significant default risk. (plz depict from ref, as I am not

sure) They have no credit risk.

RefExchange-traded derivative contracts (ETD) are those derivatives instruments that

are traded via specialized derivatives exchanges or other exchanges. A derivativesexchange is a market where individuals trade standardized contracts that have beendefined by the exchange. A derivatives exchange acts as an intermediary to all related


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transactions, and takes Initial margin from both sides of the trade to act as a

guarantee. The world's largest derivatives exchanges (by number of transactions) are

the Korea Exchange (which lists KOSPI Index Futures & Options), Eurex (which lists awide range of European products such as interest rate & index products), and CMEGroup (made up of the 2007 merger of the Chicago Mercantile Exchange and the

Chicago Board of Trade and the 2008 acquisition of the New York Mercantile Exchange).According to BIS, the combined turnover in the world's derivatives exchanges totaled

USD 344 trillion during Q4 2005. Some types of derivative instruments also may tradeon traditional exchanges. For instance, hybrid instruments such as convertible bondsand/or convertible preferred may be listed on stock or bond exchanges. Also, warrants(or "rights") may be listed on equity exchanges. Performance Rights, Cash xPRTs andvarious other instruments that essentially consist of a complex set of options bundledinto a simple package are routinely listed on equity exchanges. Like other derivatives,these publicly traded derivatives provide investors access to risk/reward and volatility

characteristics that, while related to an underlying commodity, nonetheless aredistinctive.http://en.wikipedia.org/wiki/Derivative_%28finance%29Question No: 36 ( Marks: 1 ) - Please choose oneWhich of the following is LEAST likely to a purpose served by the derivative markets? Arbitrage opportunities Price discovery

Risk management Market efficiency

Refhttp://en.wikipedia.org/wiki/Derivatives_market


The MOST likely reason derivative markets have flourished is that: Derivatives are easy to understand and use. Derivatives have relatively low transaction costs. The pricing of derivatives is relatively straightforward. Derivative markets are very strong all over the world.

RefThe most likelyreason derivative markets have flourished is that:A. Derivatives are easy to understand.B. Derivatives have relatively low transaction costs.C. The pricing of derivatives is relatively straightforward.D. Strong regulation ensures that transacting parties are protected from fraud.http://www.econ.washington.edu/user/larinad/e426/Student/Intro_Students_sp09.pdf

Question No: 38 ( Marks: 1 ) - Please choose oneAs the number of stocks in a portfolio increases, the portfolios systematic risk: Can increase or decrease Decrease at a decreasing rate Decrease at an increasing rate

Increase at an increasing rate


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Ref

Variability in a security's total returns that is directly associated with overall movements

in the general market or economy is called systematic (market) risk.Virtually all securities have some systematic risk, whether bonds or stocks, becausesystematic risk directly encompasses the interest rate, market, and inflation risks.

(PAGE NO. 198)Question No: 39 ( Marks: 1 ) - Please choose oneWhich of the following is LEAST likely a component of an investors required rate ofreturn on a stock? The real risk-free rate The expected inflation rate A growth premium A risk premium

Ref

First of all, investors can earn a riskless rate of return by investing in riskless assetssuch as Treasury bills. This nominal risk-free rate of return is designated RF throughoutthis text. (page no. 135) read the full paragraph to make it sure

Question No: 40 ( Marks: 1 ) - Please choose oneAn industry has the following characteristics: Sales growth is near the average growth rate of the economy. Profit margins are narrow. Return on equity is close to the economy wide average.This industry is MOST likely in which phase (s) of its life cycle? Deceleration of growth and decline

Stabilization and market maturity Mature growth

PioneeringRef

Industries at this stage continue to move along, but typically the industry growth ratematches the growth rate for the economy as a whole. (page no. 99)

Question No: 41 ( Marks: 1 ) - Please choose oneWhich of the following statements regarding life cycle of an industry is MOST accurate? In the pioneering phase, profits are small or negative. In the mature growth phase, sales growth falls below normal for the first time. During the stabilization phase, growth rates are still above the growth rates ineconomy. The growth of the substitute products increases total market share & causes

profits to increase in the deceleration phase.Ref

Profit margins and profits are often small or negative (page no. 98)Question No: 42 ( Marks: 1 ) - Please choose one

Which of the following is LEAST likely an assumption underlying technical analysis?


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The laws of the supply and demand drive stock prices.

Stock prices move in trends that persist for long time periods.

Shifts in supply and demand can be observed in market price behavior. Supply is driven by the rational behavior of the firms offering their shares while

demand is driven by the irrational behaviors of the investors.RefCharts can be used to predict changes in supply and demand (page no. 54)Question No: 43 ( Marks: 3 )Describe how bond duration is related to coupons?Duration

The term duration has a special meaning in the context of bonds. It is ameasurement of how long, in years, it takes for the price of a bond to be repaid by its

internal cash flows. It is an important measure for investors to consider, as bonds with

higher durations carry more risk and have higher price volatility than bonds with lowerdurations.Zero-coupon Bond duration = its time to maturity

Refhttp://www.investopedia.com/university/advancedbond/advancedbond5.aspQuestion No: 44 ( Marks: 3 )What is the advantage of Markowitz diversification?Question No: 45 ( Marks: 3 )Define call options.A call option, often it is simply labeled a "call", is a financial contract between twoparties, the buyer and the seller of this type of option.

Refhttp://en.wikipedia.org/wiki/Call_optionQuestion No: 46 ( Marks: 5 )Describe the general types of risk in detail.general types: those that are pervasive in nature, such as market risk or interest raterisk (page no. 270)Question No: 47 ( Marks: 5 )Describe the mechanics of trading in future market.

Question No: 48 ( Marks: 5 )The correlation coefficient between the returns of the stock and the market is 0.85.

The variance of stocks returns is 0.75 and variance of market returns is 0.22. Calculate

the covariance of market and stocks returns.Formula to calculate the covariance is AB = AB A B . (page no. 210)



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Spring 2010

FIN630- Investment Analysis & Portfolio Management (Session - 4)

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A procedure for valuing the price of a stock by using predicted dividends anddiscounting them back to present value is known as.

Dividend Discount Model

The Residual Earning Model

None of the given options

Capital Asset Pricing Model


According to Dow Theory, primary trend is a:

Short term trend

Long term trendMedium term trend



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Ref: Primary Trend Called the tide by Dow.

This is the trend that defines the long-term direction (up to several years).


Which of the following functions do mutual fund companies perform for theirinvestors?

Record keeping and administration

Professional management

Diversification and divisibility

All of the given options

Reference


The concept that it is impossible to beat the market because stock market efficiencycauses existing share prices to always incorporate and reflect all relevant informationrefers to which of the following?

Dow Theory

Dividend discount model

Efficient market hypothesis

Prospect theory www.vuzs.net


Which of the following is the minimum expected rate of return needed to induce

investment?

Expected return

Return on equity

Required rate of return


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Return on assets

Ref: The rate of return needed to induce investors or companies to invest in something.For example, if you invest in a stock, your required return might be 10% per year. Yourreasoning is that if you don't receive 10% return, then you'd be better off paying downyour outstanding mortgage, on which you are paying 10% interest.


In which of the following form of efficient market hypothesis security prices reflect onlypast stock information?

Weak form

Semi strong form

Strong form

Both weak and strong form

Ref: Weak EMH claims that prices on traded assets (e.g.,stocks, bonds, or property)already reflect all past publicly availableinformation.


Which of the following is a concept in economics, finance, and psychology related tothe behavior of consumers and investors under uncertainty?

Illusion of control

Anchoring

Mental accounting

Risk Aversion

Reference


Which of the following is an example of a non-marketable security?


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Treasury bill

Negotiated CD

U.S. Government savings bond

Bankers acceptance

Ref: Any type of security that is difficult to buy or a sell because it does not trade on a

normal market or exchange. These types of securities trade over the counter (OTC) orin a private transaction. Some examples of non-marketable securities are savings

bonds, series (A, B, EE, etc.) bonds and private shares. The U.S. government offersboth marketable and non-marketable securities to the public.

Question No: 9 ( Marks: 1 ) vuzs - Please choose one

Which of the following is defined as the interest rate stated on a bond, note or otherfixed income security, expressed as a percentage of the principal?

Interest free rate

Coupon rate

Discount rate

Bank rate

Ref: Coupon - Also called "coupon rate" or "coupon percent rate", is the interest ratestated on a bond, note, or other fixed income security when it is issued. In general, thecoupon is paid semiannually and expressed as a percentage of the face value.


Which of the following is a measure of bonds lifetime that accounts for the entirepattern of cash flows over the life of the bond?

Duration

Coupon

Convexity


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Yield to maturity

Ref: A measure of a bonds lifetime, stated in years, that accounts for the entirepattern (both size and timing) of the cash flows over the life of the bond


Which of the following factor contributes to the price volatility of a bond?

Maturity

Coupon

Yield to maturity



Which of the following is defined as the point at which revenues equal costs?

Yield to maturity

Break-even

Margin

Leverage point


Which of the following is rated as BB or lower because of its high default risk?

Convertible bonds

Municipal bonds

Government bonds

Junk bonds


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Ref: Junk Bond - A bond rated 'BB' or lower because of its high default risk.

Also known as a "high-yieldbond" or "speculative bond".


Bond horizon premium is the difference between which of the following types ofsecurities?

Long- and short-term government securities

Stock and risk-free returns

Equity and shot-term government securities


Reference


Which of the following statement is FALSE?

Each portfolio asset has a weight which represents the percent of the total portfolio value

Portfolio risk is not a weighted average of the risk of individual

securities in the portfolio

Portfolio risk is measured by variance or standard deviation of the portfoliosreturn


Question No: 16 ( Marks: 1 ) - Please choose vuzs one

Which of the following indicates that the returns on the two securities (m and n) tendto move in the same direction at the same time?

rmn = +1.0

rmn = -1.0


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rmn =0



Who was the developer of CAPM?

Gerald Appel

Markowitz

Joseph Granville

John Bollinger

Ref:The CAPM Model was developed by Harry Markowitz in 1962.


Which of the following is a measure of securities volatility or systematic risk incomparison to the market as a whole?

Beta

Return on equity

Liquidity

Rate of return

Ref: A measure of the volatility, or systematic risk, of a security or a portfolio incomparison to the market as a whole. Beta is used in the capital asset pricing model(CAPM), a model that calculates the expected return of an asset based onAlso known as "beta coefficient"


The ____________ gives the number of shares for which each convertible bond can beexchanged.

Conversion ratio


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Current ratio

P/E ratio

Conversion premium

Reference


The ____________ provides an unequivocal statement on the expected return-beta

relationship for all assets, whereas the _____________ implies that this relationshipholds for all but perhaps a small number of securities.

APT, CAPM

APT, OPM

CAPM, APT

CAPM, OPM

Reference


Which of the following involves dividing an investment portfolio among differentfinancial assets?

Securitization

Sector rotation

Asset allocation

Risk aversion

Ref: Asset allocation involves dividing an investment portfolio among different assetcategories, such as stocks, bonds, and cash. The process of determining which mix ofassets to hold in your portfolio is a very personal one. The asset allocation that worksbest for you at any given point in your life will depend largely on your time horizon and

your ability to tolerate risk.


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20/46

Hassan

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Which of the following is the practice of using derivatives as building blocks to createspecialized products?

Financial engineering

Risk management

Income generation

Portfolio management

Reference: Financial Engineering is the practice of using derivatives as building blocksto create specialized products.


Which of the following is defined as an investment transaction that is intended to

provide protection against a decline in the value of an asset?

Short hedge

Long hedge

Natural hedge

Cross hedge

Reference


In the formula, cost of asset= S2 (F2F1), what does S2 indicate?

Initial asset price

Initial futures price

Final asset price

Final futures price


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21/46

Hassan

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Reference


S & P 500 future stock index closes at $ 300 and spot price is $ 325. What is its basis?

-25

-30

25

30

Basis = spot price closing price

= 325-300

= 25


Which of the following statement regarding hedging is TRUE?

Hedging is adding securities to a portfolio to increase the overall return

Hedging is a strategy used by investors to reduce the risk of a portfolio

Hedging is a strategy used to increase both the risk and return of a portfolio

Hedging is a strategy used to increase portfolio volatility

Reference


Which of the following statement is FALSE regarding options?

Option trading thrives under volatile pricing conditions and uncertainty

Option contracts expire on the last Friday of the month


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22/46

Hassan

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Option contracts are adjusted for stock splits and stock dividends

A put writer exposes himself to the risk of declining stock prices

Ref: The expiration date for all listed stock options in the U.S. is the third Friday of the

expiration month (except when it falls on a holiday, in which case it is on Thursday).


Who introduced Moving Average Convergence/Divergence (MACD)?

Gerald Appel

Joseph Granville

John Bollinger

Welles Wilder

Ref: MACD was developed by Gerald Appel as a way to keep track of a movingaverage crossover system.


Which of the following is the reason stock prices behave the way they do at resistance

lines?

Many investors want to buy at this price

Market makers resist moving prices lower than this price

Many investors want to sell at this price

Market makers support prices at this level


Which of the following is a measure of the volatility of stock prices or returns?

ROR

Beta


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23/46

Hassan

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ROI

Risk premium


Which of the following is defined as a standardized contract traded on a futuresexchange, to buy or sell a certain underlying instrument at a certain date in the future,at a specified price?

Option contract

Forward contract

Future contract

Annuity contract

Ref: In finance, a futures contract is a standardized contract between two parties tobuy or sell a specified asset of standardized quantity and quality at a specified futuredate at a price agreed today (the futures price). The contracts are traded on a futuresexchange.


Which of the following securities do NOT ensures ownership in a corporation?

Bonds and common stock

Bonds and preferred stock

Preferred stock and common stock

Common stock and derivatives

Question No: 33 vuzs ( Marks: 1 ) - Please choose one

Which of the following statement is TRUE about growth investors?

They are patient

They invest in large capitialization companies only


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24/46

Hassan

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They seeks rapidly growing companies

They seeks slowly growing companies

Answer provided with reference.

Dividend and earnings growth rates are important to both value and growth investors,

but especially to the growth investor. (page no. 48)


Which of the following is TRUE regarding price earning ratio?

P/E=Earnings available to common stockholders/outstanding shares

P/E=Market price per share/dividend per share

P/E=Market price per share/earning per share

P/E=Dividend per share/earning per share


Which of the following statements about debt securities is MOST likely correct?

Secured bonds are referred to as debentures.

Like T-bills commercial paper is issued as a pure discount security.

Bearer bonds are much popular in the United States.

T-bills have maturities of less than one year and make explicit interestpayments.

Reference


Which of the following 5-year bond has the highest interest rate risk?

A floating-rate bond


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25/46

Hassan

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A zero-coupon bond

A 5% fixed-coupon bond


Ref: zero-coupon bond has the highest interest rate risk because it delivers allits cashflows at maturity. Since a zero-coupon bond has a 0.00% coupon, a low couponequates to high price volatility.


Which of the following statements regarding debentures is MOST accurate?

Debentures are free from default risk if issued by federally related orgovernment sponsored entities

Debentures are commonly issued by government sponsored entities such asFannie and Freddie Mac

Debentures may not be issued by government sponsored entities.

Debentures are often called first mortgage bonds.

Reference


A futures contract is LEAST likely:

Exchange traded

A contingent claim

Adjusted for profits and losses daily

A standardized instrument

Ref: They adjusted profits only not losses.



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26/46

Hassan

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Which of the following is NOT a risk measure?

Beta

Standard deviation

Variance

Geometric mean


Which of the following is LEAST likely an example of a portfolio constraint?

Tax concern

Liquidity needs

Total return requirement of 15%

Regularity requirement

Ref: Constraints and Preferences:

o Liquidity

o Time horizono Laws and regulationso Taxeso Unique preferences and circumstances


Which of the following statements regarding growth companies & growth stocksis LEAST accurate?

A growth stock is one that earns above-average risk adjusted returns.

A growth stock does not have to be the stock of a growth company.

Management of the growth companies has the ability to choose projects withabove average returns.


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27/46

Hassan

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If growth opportunities are already incorporated into its prices, a growth

companys stock will earn above average returns.

Rationale: A growth stock is one that earns below-average risk adjusted returns


The top-down approach to security selection is LEAST likely to include:

Analysis of the global & national economic environment

Use of financial ratios & cash flow analysis to compare firms within theindustry

Determination of the stability of securities for an investors portfolio

Identification of the industry effects of changes in demographics, lifestyles,politics etc

Question No: 43 ( Marks: 3 )

What is the main purpose of diversification?


What are the causes of risk?


What do you mean by financial reengineering?


Why is yield to maturity important?



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28/46

Hassan

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Can risk be completely eliminated if we add more and more stock to portfolio?Justify

your answer with reasons.


Describe the role of clearing house in futures market.


Spring 2010

FIN630- Investment Analysis & Portfolio Management

Question No: 1 ( Marks: 1 ) - Please choose one__________ are those stocks whose results are tied with the overall state of thenational economy.

Growth stocks Income stocks Cyclical stocks Blue chip stocks

RefA cyclical stock is one whose fortune is directly tied to the state of the overall nationaleconomy. (page no.25)Question No: 2 ( Marks: 1 ) - Please choose oneCompanies that have capitalization amounts between $500 million and $2billion are

known as _________. Small cap companies Mid cap companies Growth companies

Large cap companies RefAnalytical Services defines a mid-cap firm as one with capitalization between $800million and $2 billion.Question No: 3 ( Marks: 1 ) - Please choose oneCurrent ratio is also known as: Working capital ratio Acid test ratio

Debt coverage ratio Dividend yield ratio

RefThe current ratio is also known as the working capital ratio and is normally presentedas a real ratio.Question No: 4 ( Marks: 1 ) - Please choose one


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29/46

Hassan

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Which of the following is a basket of stocks that tracks a particular sector, investment

style, geographical area, or the market as a whole?

Exchange traded fund Open-end fund

Closed-end fund Unit investment trust

RefAn ETF is a basket of stocks that tracks a particular sector, investment style,geographical area, or the market as a whole. (page no. 135)Question No: 5 ( Marks: 1 ) - Please choose onePositive abnormal returns for corporate insiders constitute a violation of:

Weak form efficiency

Semi-strong form efficiency Strong-form efficiency

Weak and strong form of efficiencyRef

The second reason for studying price reaction to directors' trading concerns whetheroutside investors can mimic the actions of insiders to also earn abnormal returns.This second issue would represent a violation of semi-strong form efficiency.http://people.exeter.ac.uk/ipt201/research/dirtradefinal3_EFM2002.pdfQuestion No: 6 ( Marks: 1 ) - Please choose oneWhich of the following states that investors with loss will increase their risk tolerance infuture transactions?

Loss aversion Prospect theory Illusion of control

AnchoringRef

Illusion of control is the tendency for human beings to believe they can control, or atleast influence, outcomes that they demonstrably have no influence over. It has beendemonstrated in a succession of different experiments, and is thought to influencegambling behavior and belief in the paranormal.Question No: 7 ( Marks: 1 ) - Please choose oneWhich of the following equity market indicator is composed of 30 blue-chip stocks? NYSE Composite Index

Dow-Jones Industrial Average NASDAQ Composite Index

Standard & Poor's 500 Index

RefSince 1928, 30 large blue chip companies have comprised the index. (page 159)Question No: 8 ( Marks: 1 ) - Please choose oneWhich of the following is NOT included in money market securities? Treasury Bill Certificate of deposit


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30/46

Hassan

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Commercial paper

Future

Money market securities means cash equivalentsQuestion No: 9 ( Marks: 1 ) - Please choose one

LSE captures _____________ of the market capitalization. 45%

50% 53% 66%


The estimated percentage change in the value of a bond derived from the duration rule: Is less than the actual price change when the yield decreases

Is less than the actual price change when the yield increases Is greater than the actual price change when the yield decreases Is always greater than the actual price change


Spring 2010

FIN630- Investment Analysis & Portfolio Management (Session - 4)

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Top Confidential


A procedure for valuing the price of a stock by using predicted dividends anddiscounting them back to present value is known as.


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31/46

Hassan

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Dividend Discount Model

The Residual Earning Model


Capital Asset Pricing Model


According to Dow Theory, primary trend is a:

Short term trend

Long term trendMedium term trend


Ref: Primary Trend Called the tide by Dow.This is the trend that defines the long-term direction (up to several years).


Which of the following functions do mutual fund companies perform for theirinvestors?

Record keeping and administration

Professional management

Diversification and divisibility


Reference provided by .



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32/46

Hassan

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The concept that it is impossible to beat the market because stock market efficiency

causes existing share prices to always incorporate and reflect all relevant information

refers to which of the following?

Dow Theory

Dividend discount model

Efficient market hypothesis

Prospect theory www.vuzs.net


Which of the following is the minimum expected rate of return needed to induceinvestment?

Expected return

Return on equity

Required rate of return

Return on assets

Ref: The rate of return needed to induce investors or companies to invest in something.For example, if you invest in a stock, your required return might be 10% per year. Yourreasoning is that if you don't receive 10% return, then you'd be better off paying downyour outstanding mortgage, on which you are paying 10% interest.


In which of the following form of efficient market hypothesis security prices reflect onlypast stock information?

Weak form

Semi strong form

Strong form

Both weak and strong form


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33/46

Hassan

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Ref: Weak EMH claims that prices on traded assets (e.g.,stocks, bonds, or property)

already reflect all past publicly availableinformation.


Which of the following is a concept in economics, finance, and psychology related tothe behavior of consumers and investors under uncertainty?

Illusion of control

Anchoring

Mental accounting

Risk Aversion

Reference


Which of the following is an example of a non-marketable security?

Treasury bill

Negotiated CD

U.S. Government savings bond

Bankers acceptance

Ref: Any type of security that is difficult to buy or a sell because it does not trade on anormal market or exchange. These types of securities trade over the counter (OTC) orin a private transaction. Some examples of non-marketable securities are savingsbonds, series (A, B, EE, etc.) bonds and private shares. The U.S. government offersboth marketable and non-marketable securities to the public.


Which of the following is defined as the interest rate stated on a bond, note or otherfixed income security, expressed as a percentage of the principal?

Interest free rate


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mailto:[email protected]://en.wikipedia.org/wiki/Assetshttp://en.wikipedia.org/wiki/Stockshttp://en.wikipedia.org/wiki/Bondshttp://en.wikipedia.org/wiki/Informationhttp://mskwebs.com/blog/?cat=5mailto:[email protected]://root/convert/apache-tomcat-6.0.20/temp/www.vuclub.nethttp://en.wikipedia.org/wiki/Assetshttp://en.wikipedia.org/wiki/Stockshttp://en.wikipedia.org/wiki/Bondshttp://en.wikipedia.org/wiki/Informationhttp://mskwebs.com/blog/?cat=5mailto:[email protected]://root/convert/apache-tomcat-6.0.20/temp/www.vuclub.netmailto:[email protected]


34/46

Hassan

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Coupon rate

Discount rate

Bank rate

Ref: Coupon - Also called "coupon rate" or "coupon percent rate", is the interest ratestated on a bond, note, or other fixed income security when it is issued. In general, thecoupon is paid semiannually and expressed as a percentage of the face value.


Which of the following is a measure of bonds lifetime that accounts for the entirepattern of cash flows over the life of the bond?

Duration

Coupon

Convexity

Yield to maturity

Ref: A measure of a bonds lifetime, stated in years, that accounts for the entirepattern (both size and timing) of the cash flows over the life of the bond


Which of the following factor contributes to the price volatility of a bond?

Maturity

Coupon

Yield to maturity



Which of the following is defined as the point at which revenues equal costs?


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35/46

Hassan

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Yield to maturity

Break-even

Margin

Leverage point


Which of the following is rated as BB or lower because of its high default risk?

Convertible bonds

Municipal bonds

Government bonds

Junk bonds

Ref: Junk Bond - A bond rated 'BB' or lower because of its high default risk.Also known as a "high-yieldbond" or "speculative bond".


Bond horizon premium is the difference between which of the following types ofsecurities?

Long- and short-term government securities

Stock and risk-free returns

Equity and shot-term government securities


Reference



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mailto:[email protected]://en.mimi.hu/business/junk_bond.htmlhttp://en.mimi.hu/business/bond.htmlhttp://en.mimi.hu/business/yield.htmlhttp://en.mimi.hu/business/bond.htmlhttp://en.mimi.hu/business/bond.htmlhttp://vuzs.net/faculty.tamucc.edu/sfriday/Courses/INV%20-%203331/.../ch06.pptmailto:[email protected]://root/convert/apache-tomcat-6.0.20/temp/www.vuclub.nethttp://en.mimi.hu/business/junk_bond.htmlhttp://en.mimi.hu/business/bond.htmlhttp://en.mimi.hu/business/yield.htmlhttp://en.mimi.hu/business/bond.htmlhttp://en.mimi.hu/business/bond.htmlhttp://vuzs.net/faculty.tamucc.edu/sfriday/Courses/INV%20-%203331/.../ch06.pptmailto:[email protected]://root/convert/apache-tomcat-6.0.20/temp/www.vuclub.netmailto:[email protected]


36/46

Hassan

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Which of the following statement is FALSE?

Each portfolio asset has a weight which represents the percent of the total portfolio value

Portfolio risk is not a weighted average of the risk of individual

securities in the portfolio

Portfolio risk is measured by variance or standard deviation of the portfoliosreturn



Which of the following indicates that the returns on the two securities (m and n) tendto move in the same direction at the same time?

rmn = +1.0

rmn = -1.0

rmn =0



Who was the developer of CAPM?

Gerald Appel

Markowitz

Joseph Granville

John Bollinger

Ref:The CAPM Model was developed by Harry Markowitz in 1962.



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37/46

Hassan

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Which of the following is a measure of securities volatility or systematic risk in

comparison to the market as a whole?

Beta

Return on equity

Liquidity

Rate of return

Ref: A measure of the volatility, or systematic risk, of a security or a portfolio incomparison to the market as a whole. Beta is used in the capital asset pricing model(CAPM), a model that calculates the expected return of an asset based on

Also known as "beta coefficient"


The ____________ gives the number of shares for which each convertible bond can beexchanged.

Conversion ratio

Current ratio

P/E ratio

Conversion premium

Reference


The ____________ provides an unequivocal statement on the expected return-betarelationship for all assets, whereas the _____________ implies that this relationshipholds for all but perhaps a small number of securities.

APT, CAPM

APT, OPM

CAPM, APT


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38/46

Hassan

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CAPM, OPM

Reference


Which of the following involves dividing an investment portfolio among different

financial assets?

Securitization

Sector rotation

Asset allocation

Risk aversion

Ref: Asset allocation involves dividing an investment portfolio among different asset

categories, such as stocks, bonds, and cash. The process of determining which mix ofassets to hold in your portfolio is a very personal one. The asset allocation that works

best for you at any given point in your life will depend largely on your time horizon andyour ability to tolerate risk.


Which of the following is the practice of using derivatives as building blocks to createspecialized products?

Financial engineering

Risk management

Income generation

Portfolio management

Reference: Financial Engineering is the practice of using derivatives as building blocksto create specialized products.



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39/46

Hassan

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Which of the following is defined as an investment transaction that is intended to

provide protection against a decline in the value of an asset?

Short hedge

Long hedge

Natural hedge

Cross hedge

Reference


In the formula, cost of asset= S2 (F2F1), what does S2 indicate?

Initial asset price

Initial futures price

Final asset price

Final futures price

Reference


S & P 500 future stock index closes at $ 300 and spot price is $ 325. What is its basis?

-25

-30

25

30

Basis = spot price closing price

= 325-300


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= 25


Which of the following statement regarding hedging is TRUE?

Hedging is adding securities to a portfolio to increase the overall return

Hedging is a strategy used by investors to reduce the risk of a portfolio

Hedging is a strategy used to increase both the risk and return of a portfolio

Hedging is a strategy used to increase portfolio volatility

Reference


Which of the following statement is FALSE regarding options?

Option trading thrives under volatile pricing conditions and uncertainty

Option contracts expire on the last Friday of the month

Option contracts are adjusted for stock splits and stock dividends

A put writer exposes himself to the risk of declining stock prices

Ref: The expiration date for all listed stock options in the U.S. is the third Friday of theexpiration month (except when it falls on a holiday, in which case it is on Thursday).


Who introduced Moving Average Convergence/Divergence (MACD)?

Gerald Appel

Joseph Granville

John Bollinger

Welles Wilder


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Ref: MACD was developed by Gerald Appel as a way to keep track of a moving

average crossover system.


Which of the following is the reason stock prices behave the way they do at resistancelines?

Many investors want to buy at this price

Market makers resist moving prices lower than this price

Many investors want to sell at this price

Market makers support prices at this level


Which of the following is a measure of the volatility of stock prices or returns?

ROR

Beta

ROI

Risk premium


Which of the following is defined as a standardized contract traded on a futures

exchange, to buy or sell a certain underlying instrument at a certain date in the future,at a specified price?

Option contract

Forward contract

Future contract

Annuity contract


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Ref: In finance, a futures contract is a standardized contract between two parties to

buy or sell a specified asset of standardized quantity and quality at a specified future

date at a price agreed today (the futures price). The contracts are traded on a futuresexchange.


Which of the following securities do NOT ensures ownership in a corporation?

Bonds and common stock

Bonds and preferred stock

Preferred stock and common stock

Common stock and derivatives

Question No: 33 vuzs ( Marks: 1 ) - Please choose one

Which of the following statement is TRUE about growth investors?

They are patient

They invest in large capitialization companies only

They seeks rapidly growing companies

They seeks slowly growing companies

Answer provided by with reference.

Dividend and earnings growth rates are important to both value and growth investors,but especially to the growth investor. (page no. 48)


Which of the following is TRUE regarding price earning ratio?

P/E=Earnings available to common stockholders/outstanding shares

P/E=Market price per share/dividend per share


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P/E=Market price per share/earning per share

P/E=Dividend per share/earning per share


Which of the following statements about debt securities is MOST likely correct?

Secured bonds are referred to as debentures.

Like T-bills commercial paper is issued as a pure discount security.

Bearer bonds are much popular in the United States.

T-bills have maturities of less than one year and make explicit interest

payments.

Reference


Which of the following 5-year bond has the highest interest rate risk?

A floating-rate bond

A zero-coupon bond



Ref: zero-coupon bond has the highest interest rate risk because it delivers allits cashflows at maturity. Since a zero-coupon bond has a 0.00% coupon, a low couponequates to high price volatility.


Which of the following statements regarding debentures is MOST accurate?

Debentures are free from default risk if issued by federally related orgovernment sponsored entities


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Debentures are commonly issued by government sponsored entities such as

Fannie and Freddie Mac

Debentures may not be issued by government sponsored entities.

Debentures are often called first mortgage bonds.

Reference

provided by


A futures contract is LEAST likely:

Exchange traded

A contingent claim

Adjusted for profits and losses daily

A standardized instrument

Ref: They adjusted profits only not losses.


Which of the following is NOT a risk measure?

Beta

Standard deviation

Variance

Geometric mean


Which of the following is LEAST likely an example of a portfolio constraint?


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Tax concern

Liquidity needs

Total return requirement of 15%

Regularity requirement

Ref: Constraints and Preferences:

o Liquidityo Time horizono Laws and regulations

o Taxeso Unique preferences and circumstances


Which of the following statements regarding growth companies & growth stocksis LEAST accurate?

A growth stock is one that earns above-average risk adjusted returns.

A growth stock does not have to be the stock of a growth company.

Management of the growth companies has the ability to choose projects withabove average returns.

If growth opportunities are already incorporated into its prices, a growthcompanys stock will earn above average returns.

Rationale: A growth stock is one that earns below-average risk adjusted returns


The top-down approach to security selection is LEAST likely to include:

Analysis of the global & national economic environment

Use of financial ratios & cash flow analysis to compare firms within the

industry


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Determination of the stability of securities for an investors portfolio

Identification of the industry effects of changes in demographics, lifestyles,politics etc


What is the main purpose of diversification?


What are the causes of risk?


What do you mean by financial reengineering?


Why is yield to maturity important?


Can risk be completely eliminated if we add more and more stock to portfolio?Justifyyour answer with reasons.


Describe the role of clearing house in futures market.
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