QUIZ 1

1. A multifactor model to evaluate style and size exposure of different mutual

funds would be most appropriately called a fundamental factor model.
2. In a multifactor fundamental model, sensitivities are not regression slopes,
but standardized attributes. TRUE
3. What is the risk associated with the capital market line (CML)? Total Risk
4. The covariance of the market’s returns is 0.005 and std. deviation of
market’s return is 0.05. What is the stock’s beta? beta=cov/variance (std
dev2) = 0.005/0.052 =2
5. Compared to investigating in a single security, diversification provides
investors a way to: decrease the volatility of returns
6. The capital allocation line is a straight line from the risk-free asset through:
optimal risky portfolio
7. Which of the following statement about risk-averse investors is most
accurate? A risk-averse investor: will take additional investment risk if
sufficiently compensated for the risk.
8. A portfolio was created by investing 25% of the funds A (std. dev.=15%) and
the balance of the funds in Asset B (std. dev.=10%). If the correlation
coefficient is 0.75, what is the portfolio’s std. dev.? 10.6%???
9. If you think of a gamble from flipping a coin in which, if it comes up heads,
you receive $100, and, if it comes up tails, you receive nothing, and you are
indifferent between this gamble and a certain payment of $50, then you are
most likely: risk-neutral.
10. WML factor in Carhart model is computed as: the return on a portfolio of
the past year’s winners minus the return on a portfolio of the past
year’s losers.
11. Portfolio diversification is least likely to protect against losses during
severe market turmoil.
12. An investment is said to be liquid if the investment: can easily be
converted in cash.
13. As the number of stocks in a portfolio increases, the portfolio’s systemic
risk: can increase or decrease.
14. Total risk equals: systematic + idiosyncratic risk
15. Which of the following statements id most correct: If funds are
contributed to a portfolio at a favourable time (just prior to a period of
relatively high returns), the money-weighted rate of return will be
higher than the time-weighted rate of return.
16. Which of the following statements about the SML and the CML is least
accurate: Securities that plot on the SML have no value to investors.
17. A mutual fund had the following total return over a 3-year period: +10%, -
5%, +7%. If you purchased $1000 of its shares at the beginning of the
period, then your HPR is equal to: 11.81%
18. An investor put 60% of his portfolio into a risky asset offering a 10% return
with a standard deviation of return of 8% and put the balance of his portfolio
in a risk-free asset offering 5%. What are the Expected return and std.
deviation of his portfolio? 8% and 4.8% respectively
19. Relatively to the CAPM, the least likely advantage of multifactor models is
that multifactor models help investors to: select an appropriate
proportion of the portfolio to allocate to the market portfolio
20. In which category of multifactor models, the factors do not lend themselves
well to economic interpretation? Statistical factor model
21. The financial intermediaries that connect buyers and sellers interested in
trading the same instruments who are the same place but at different times
are typically known as: DEALERS
22. The APT can be considered a special restrictive case of the CAPM in which
there is only one risk factor FALSE
23. According to the CAPM, what is the expected rate of return for a stock with
beta =1.2, when the risk-free rate is 6% and the market rate of return is 12?
E(R)=Rf+β×(E(Rm)−Rf)
KNOW: Rf=6% (0.06), β=1.2, E(Rm)=12%
E(R)=0.06+1.2×(0.12−0.06) =13.2%
24. Fama-French three-factor model is an extension of the Carhart model. False
25. The investment professionals who earn their living by managing other
people’s money are typically known as institutional investors.
26. Which of the following statements is most correct? Unlike the CAPM, the
APT does not require that one of the risk factors is the market portfolio.
27. The APT assumes that there are no market imperfections preventing
investors from exploiting arbitrage opportunities. TRUE
 28. Which of the following statements about covariance and correlations is least
accurate? If 2 assets have perfect negative correlation, the variance of
the returns for a portfolio that consists of these 2 assets will equal zero.
29. A portfolio that has the same factor sensitivities as the S&P500, but does
not hold all 500 stocks in the index, is best described as a: tracking
portfolio
30. Which of the following statements about correlation is least accurate? If the
correlation coefficient is zero, a zero-variance portfolio can be constructed.

EXAM MOCK
1. The Sharpe ratio is a measure of the excess return on a portfolio compared with the:

a. beta of portfolio returns

b. portfolio's tracking error
c. standard deviation of portfolio returns

2. In an efficient market, the change in a company's share price is most likely the result
of:

a. new information coming into the market

b. insiders' private information
c. the previous day's change in stock price

3. Which of the following is most likely an advantage of owning common stock?

a. Low risk
b. Finite life
c. Limited liability

4. A bond has an annual modified duration of 7.140 and annual convexity of 66.200.
The bond's yield to maturity is expected to increase by 50 basis points. The expected
percentage price change is closest to:

a. -3.49% ???
b. -3.57%
c. -3.40%

5. Technical analysts assume the markets are:

a. weak-form inefficient
b. semi-strong-form efficient
c. weak-form efficient
 6. If you expect market interest rate to rise, you should purchase:

a. short term, low coupon bonds

b. long term, high coupon bonds
c. short term, high coupon bonds

7. The long-term mix of assets that is expected to meet an investor's

objectives best describes:

a. tactical asset allocation

b. strategic asset allocation
c. diversification

8. With respect to the efficient market hypothesis, if security prices reflect only past prices
and trading volume information, then the market is:

a. strong-form efficient
b. weak-form efficient
c. semi-strong-form efficient

9. The discounted cash flow approach to valuation of a company's common shares most
likely considers the:

a. expected dividends on the shares

b. price-to-earnings ratios of comparable companies
c. current value of the company's assets

10. The option premium is:

a. the market price of the option
b. the difference between the strike price and the underlying price of the security
c. the fee charged by the options exchanges for executing transactions

11. Relative to a futures contract, an advantage of a forward contract is:

a. greater liquidity
b. the ability to customise the contract
c. lower counterparty risk

12. If a market is semi-strong-form efficient, the risk-adjusted returns of a passively

managed portfolio relative to an actively managed portfolio are most likely:

a. higher
b. lower
c. the same
 13. Based on the concept of bond duration, which of the following statements is correct?
a. Higher yields to maturity lead to longer durations.
b. Longer durations mean greater volatility.
c. Lower coupons results in shorter durations.

14. The interest rate used to determine the present value of future cash flows is called the:
Select one:
a. annual percentage rate.
b. discount rate.
c. effective annual rate.

15. Which of the following is a measure of central tendency?

a. Mean
b. Range
c. Standard deviation

16. Which of the following options would be described as being in the money?

a. A put option in which the underlying’s price is higher than the exercise price
b. A call option in which the underlying’s price is lower than the exercise price
c. A put option in which the underlying’s price is lower than the exercise price

17. Systematic risk is the portion of total risk that:

a. is related to a certain company or security
b. is created by general economic conditions
c. results from a lack of portfolio diversification

18. The value of a derivatives contract is most likely to be directly affected by the:
a. price of the underlying
b. demand for the underlying
c. supply of the underlying

19. A characteristic of a normal distribution is that the distribution of data is:

a. negatively skewed.
b. symmetrical.
c. positively skewed.

20. An analyst is comparing the returns of two investment portfolios. The two portfolios
have the same mean return. The portfolio with the higher standard deviation most likely:
a. is more risky.
b. is less risky.
c. has a smaller range.

21. Mc DT bought at BSOE 10 ISM December 2021 70 American calls for a price of
$1.50/share, at a time when the spot price of the underlying stock (ISM) was $70/share. A
few days prior the expiration date of the option, the spot price of the underlying increases
at $72/share. Assume a contract size of 1,000 shares. Which of the following statements
is most correct?

a. Exercising the calls is a rational choice since the option is at-the-money.

b. If Mc DT decides to write some calls, the minimum price he should ask is $3/share of
underlying.
c. Mc DT's net result from trading these options is a total net profit of $5000.

22. Standard deviation is a measure of the variability of a fund's return:

a. below its average return
b. relative to its average return
c. relative to a benchmark return

23. Passive managers will most likely:

a. sell securities that are expected to outperform
b. sell securities that are expected to underperform
c. match the return and risk of a broad market index

24. An investor's investment policy statement:

a. should be reviewed only when the client's circumstances change.
b. ensures that investment plan objectives are met.
c. outlines what is required of an acceptable in the investment portfolio.

25. Which of the following is a measure of dispersion used to assess the risk of an
investment?
a. Standard deviation
b. Geometric mean
c. Arithmetic mean

26. A call option contract on shares of Company A has an exercise price of $50. The option
is in the money when the share price of company A is:
a. $55
b. $45
c. $50

27. Beta measures the portion of the investment fund's return attributable to:
 Select one:
a. broad market movements
b. randomness
c. the fund manager's judgment

28. A put option on shares of Company B has an exercise price of $40. The option is out of
the money when the share price of Company B is:
a. $45
b. $40
c. $35

29. Swap contracts:

a. are not susceptible to counterparty risk
b. have an initial value of zero
c. are mostly traded on exchanges

30. Which of the following statements is most accurate? Dealers

a. serve as trade negotiators
b. match buyers and sellers
c. provide liquidity in securities markets

31. Which of the following parties to an option contract on a company's shares has the right
to buy shares at the exercise price?
a. Call seller
b. Call buyer
c. Put seller

32. The investment industry benefits the economy by:

a. increasing efficiency
b. increasing risk
c. decreasing liquidity

33. All else being equal, the fixed coupon rate on a convertible bond compared with a
straight bond is most likely:
a. higher
b. the same
c. lower

34. An investor expects a share to pay dividends of $3.00 and $3.15 at the end of Years 1
and 2, respectively. At the end of the second year, the investor expects the shares to trade at
$40.00. The required rate of return on the shares is 8 percent. If the investor's forecasts are
 accurate and the market price of the shares is currently $30, the most likely conclusion is
that the shares are:

a. undervalued
b. fairly valued
c. overvalued

35. If there is no relationship between two variables, the correlation coefficient is closest to:
a. 0.
b. +1.
c. -1.

36. An investor with a long time horizon will most likely have a:
a. higher tolerance for risk
b. lower ability to invest in illiquid investments
c. reduced investment return expectation

37. The consistent outperformance of an investment fund compared with its benchmark
is best described as:
a. tracking error
b. beta
c. alpha

38. A fund manager who uses analytical and trading skills to try to beat a benchmark
is best described as a(n):
a. index replicator
b. active manager
c. passive manager

39. The preferred measure of central tendency for investment returns is the:

Select one:
a. mode.
b. geometric mean.
c. arithmetic mean.

40. The factor most likely to contribute to the success of active management is the:
Select one:
a. existence of trading costs
b. inability for active managers to consistently access better information than other investors
c. existence of inefficient markets

41. What is the time value of a put with a strike price of $30 when the option price is $500
and the underlying stock sells for $27?
a. $300
b. $400
c. $200

42. Which of the following parties to an option contract on a company's shares is obligated
to buy shares at the option strike price if the option is exercised?

a. Call seller
b. Put buyer
c. Put seller

43. The investment needs of individual investors are most likely:

a. unique to each individual's circumstances and requirements
b. similar in many respects to those of institutional investors
c. the same among investors of similar ages and wealth

44. Active investment managers are most likely than passive investment managers to:
a. try to time a market
b. seek to minimise tracking error
c. use strategic asset allocation

45. The benefits of risk reduction are most likely to be greater by combining securities
whose expected returns have a:
a. perfectly positive correlation
b. low correlation
c. high, but less than perfect, correlation

46. Compared with a preferred shareholder, a common shareholder most likely has:
a. cash flow rights
b. voting rights
c. limited liability

47. The price of an out-of-the-money option is:

a. equal to its time value
b. greater than its time value
c. less than its time value

48. A farmer will harvest his corn crop in six months but wants to lock in a price today. The
farmer will most likely:
a. buy a corn forward contract
b. sell a corn futures contract
c. buy a corn futures contract

49. When investment managers identify attractive securities based on fundamental values,
the investment managers are performing which of the following activities?
a. Portfolio construction
b. Asset allocation
c. Investment analysis

50. In a multifactor fundamental model, sensitivities are not regression slopes, but
standardized attributes.
a. True
b. False

READING QUESTIONS
CHAPTER 1 INVESTMENT INDUSTRY
1. The financial services industry benefits the economy by providing a link between
providers of capital and:
A savers.
B lenders.
C borrowers

2. The investment industry benefits the economy by:

A increasing risk.
B decreasing liquidity.
C increasing efficiency.

3. 3 A major benefit of competition in financial markets for the individual investor is:
A risk transfer.
B lower prices.
C greater integrity.

4. Which of the following would most likely assist individuals in defining their investment
goals?
A Dealers
B Financial planners
C Investment bankers
5. Which of the following is most likely to facilitate trading and help reduce transaction
costs?
A Brokers
B Analysts
C Asset managers

6. An institutional investor that invests a government’s surpluses is a(n):

A foundation.
B endowment fund.
C sovereign wealth fund

7. A broker will act as a(n):

A agent.
B principal.
C proprietary trader.

8. A sell-side analyst typically works for a(n):

A pension plan.
B investment bank.
C endowment fund.

9. Which of the following forces that drive the investment industry promotes
transparency of financial markets?
A Regulation
B Competition
C Computerisation

10. A force driving the investment industry that has led to decreased trade processing costs
is:
A regulation.
B technology.
C globalisation.

11. Globally, regulation of the investment industry has:

A increased.
B decreased.
C remained stable

CHAPTER 13 STRUCTURE OF THE INVESTMENT INDUSTRY

1. Investment professionals who create savings and investment plans appropriate for their
clients’ needs are most likely:
A dealers.
B financial planners.
C investment research providers.

2. Investment managers that determine the proportion of a client’s money that should be
invested in cash, equities, and fixed income are performing which of the following
activities?
A Asset allocation
B Investment analysis
C Portfolio construction

3. When investment managers identify attractive securities based on fundamental values,

the investment managers are performing which of the following activities?
A Asset allocation
B Investment analysis
C Portfolio construction

4. Passive managers will most likely:

A sell securities that are expected to outperform.
B sell securities that are expected to underperform.
C match the return and risk of a broad market index.

5. Credit rating agencies are best described as providing:

A custodial service.
B financial planning services.
C investment information services.

6. Real-time data about companies and market conditions are usually supplied by:
A data vendors.
B credit rating agencies.
C investment research providers.

7. Credit rating agencies provide:

A historical accounting data.
B opinions about an issuer’s credit quality.
C real-time news about companies and markets.

8. Which of the following statements is most accurate? Brokers trade:

A with clients by buying and selling the traded securities.
B on behalf of clients in exchange for a commission that typically depends on
the value or quantity traded.
C on behalf of clients in exchange for a fee that is usually based on assets
under management.

9. Which of the following parties most likely arranges trades on behalf of clients
who want to trade large blocks of securities?
A Block brokers
B Prime brokers
C Primary dealers

10. Which of the following services is most likely provided by brokers?

A Finding counterparties for their clients’ trades
B Collecting interest and dividends for clients’ securities
C Eliminating settlement risk by acting as a settlement intermediary

11. Which of the following parties most likely acts as a custodian and as a monitor?
A Depositories
B Clearing houses
C Primary dealers

12. Which of the following statements is most accurate? Dealers:

A match buyers and sellers.
B serve as trade negotiators.
C provide liquidity in securities markets.
13. Sell-side firms are best described as firms that:
A sell insurance products to retail clients.
B sell investment data, research, and consulting services.
C provide investment products and services.

14. Practitioners most likely use the term buy side to refer to:
A dealers who provide investment products and services.
B investors who purchase investment products and services from the sell side.
C firms that only provide investment data, research, and consulting services.

15. An example of a middle office activity is:

A sales.
B accounting.
C risk management.

16. Front office activities within a sell-side firm most likely include:
A core activities of the firm.
B administrative and support activities.
C client-facing, revenue-producing activities.

17. Which of the following titles best describes the person responsible for leading
the legal department and interpreting regulations?
A Chief risk officer
B General counsel
C Chief compliance officer
18. Which of the following titles best describes the person in a firm responsible for
providing independent assessments of the firm’s operational systems?
A Chief risk officer
B Chief audit executive
C Chief operating officer

CHAPTER 14 INVESTMENT VEHICLES

1. The investment most likely to be purchased by an investor with a preference for

direct investments is a share in:
A a company.
B a mutual fund.
C an exchange-traded fund (ETF).

2 Relative to indirect investments, direct investments:

A are less expensive to trade.
B offer more control to investors.
C allow small investors to share in the purchase of large assets.

3 Direct investments allow retail investors to:

A own diversified pools of risk.
B use the services of professional managers.
C choose when to buy or sell to minimise tax liabilities.
4 Compared with shares of closed-end funds, shares of open-end mutual funds:
A are not redeemable.
B are exchange traded.
C trade at net asset value.

5 Exchange-traded funds (ETFs) most likely:

A trade continuously.
B are actively managed.
C have relatively high management fees.

6 An index that gives each security’s weight according to the proportion of its
market capitalisation is:
A a price-weighted index.
B a value-weighted index.
C an equal-weighted index

7 The process of adding and removing securities included in a security market

index is called:
A churning.
B rebalancing.
C reconstitution.

8 Rebalancing is most likely to be associated with an index that is:

A price weighted.
B equal weighted.
C capitalisation weighted.

9 From the perspective of an investor, index funds are popular because they are
generally:
A broadly diversified.
B tax-free investments.
C not subject to management fees.

10 An index fund will sell securities if:

A the value of the benchmark index falls.
B withdrawal requests are greater than new receipts from investors.
C dividends, interest, and investor contributions are greater than withdrawals.

11 Hedge funds are most likely to:

A impose capital lock-up periods.
B raise capital from retail investors.
C have relatively low management and performance fees.

12 Increasing the hurdle rate for a hedge fund manager will usually lead to total
fees that are:
A lower.
B unchanged.
C higher.

13 An unfavourable feature of hedge funds for most investors is the:

A hurdle rate.
B lock-up period.
C high-water mark.

14.A high-water mark is incorporated in a hedge fund fee structure to benefit:

A investors.
B fund managers.
C both investors and fund managers.

15 The ability to defer taxes in tax-advantaged accounts will be most beneficial for
investors who expect their tax rates in the future to:
A increase.
B decrease.
C remain unchanged

CHAPTER 15 The Functioning of Financial Markets

1. A company sells new shares to the public in the:

A call market.
B primary market.
C secondary market.

2. The market where an investor sells shares of a publicly traded company she
bought in an initial public offering (IPO) three years ago is known as the:
A primary market.
B secondary market.
C private placement.

3. Compared with a regular public offering, in a shelf registration, a company:

A sells the shares in a single transaction.
B faces lower public disclosure requirements.
C can sell shares over a longer period of time.

4. An investment bank is exposed to the greatest risk with:

A a rights offering.
B a best efforts offering.
C an underwritten offering.

5. The proportional ownership of shareholders who fail to exercise their options

under a rights offering will:
A decrease.
B remain the same.
C increase.

6. Relative to public offerings, private placements provide:

A slower access to capital and less regulatory oversight.
B quicker access to capital and less regulatory oversight.
C quicker access to capital and higher regulatory compliance costs

7. Compared with exchanges, alternative trading systems:

A may be less transparent.
B require the use of brokers.
C exercise regulatory authority over their subscribers.

8. Dealers arrange all trades in:

A a brokered market.
B a quote-driven market.
C an order-driven market.

9. Stock exchanges most likely use trading systems that are:

A price-driven.
B order-driven.
C quote-driven.

10. Unique assets, such as real estate, are most likely traded in:
A a dealer market.
B a brokered market.
C an order-driven market.

11. An investor’s loss is limited to the amount of the initial investment in a:

A long position
B short position
C leveraged position

12. An investor takes a short position in a security by:

A buying the security.
B lending the security to another trader.
C borrowing the security and then selling it to another trader.

13. If the price of a security falls, the loss experienced by an investor who bought
the security on margin relative to the loss experienced by an investor who did
not use leverage will most likely be:
A lower.
B higher.
C the same.

14. Which of the following orders will most likely be executed immediately?
A Stop order
B Limit order
C Market order

15. From the investor’s perspective, the main drawback to using a limit order to buy
shares is that it may:
A not execute.
B execute immediately.
C execute at an unacceptable price.

16. Which activity is a clearing activity?

A Exchanging cash for securities
B Confirming the terms of the trade
C Reporting the trade to the company’s transfer agent

17. Which of the following statements about the settlement cycle is correct?
A The settlement cycle is the same across markets.
B A long settlement cycle reduces counterparty risk.
C The settlement cycle refers to the timing of the procedures used to settle
trades.

18. The price concessions that occur as large-trade buyers push prices up and
largetrade sellers push prices down are called:
A price impact
B bid–ask spreads.
C opportunity costs.

19. The costs associated with orders failing to execute are best described as:
A opportunity costs.
B price impact costs.
C brokerage commissions.

20. Markets that can absorb large orders without substantial price impacts are classified
as:
A operationally efficient.
B allocationally efficient.
C informationally efficient.

21. An economy that uses resources where they are most valuable can be described as
being:
A operationally efficient.
B allocationally efficient.
C informationally efficient

CHAPTER 8 QUANTITATIVE CONCEPTS

1. Interest is paid by the borrower to compensate the lender:

A for opportunity cost and risk.
B for forgoing future consumption.
C for increases in future purchasing power.

2. A company obtains a loan from a local bank for $50 million. From the company’s
perspective, interest is best defined as the:
A risk of default.
B cost of borrowing.
C value of the next best alternative.

3. The greater the risk associated with a borrower’s ability to repay a loan, the
greater the:
A opportunity cost for the borrower.
B interest rate demanded by the lender.
C risk of purchasing power increasing over the life of the loan.

4. To maintain purchasing power, lenders demand an interest rate that reflects the:
A likelihood of default.
B current rate of inflation.
C expected rate of inflation.

5. If interest is paid and compounded annually, the compound interest rate is most
likely to be:
A higher than the simple interest rate.
B the same as the simple interest rate.
C lower than the simple interest rate.

6. Compared with compound interest, simple interest assumes that interest is:
A paid annually.
B calculated using only the original amount invested.
C reinvested and added to the original amount invested.

7. Which of the following is associated with the concept of interest on interest?

A Simple interest
B Compound interest
C Annual percentage rate

8. If $1,000 is deposited to an account with an annual interest rate of 3% and is left

on deposit for three years, the amount of money in the account at the end of
three years will be:
A lower using simple interest compared with using compound interest.
B the same using either simple interest or compound interest.
C greater using simple interest compared with using compound interest.

9. The interest rate used to determine the present value of future cash flows is
called the:
A discount rate.
B effective annual rate.
C annual percentage rate.

10. The most effective way to compare investments with the same initial outflow
that have different cash flows at different points in time is to determine each
investment’s:
A discount rate.
B present value.
C future cash flows.

11. The present value of €100 that will be received two years from today is:
A less than €100.
B equal to €100.
C more than €100.

12. All else being equal, given a choice of when to pay for a purchase, an individual
would most likely prefer to pay £100:
A today.
B one year from today.
C two years from today.

13. Assuming a discount rate of 10%, which of the following projects will have the
highest present value?
A A €10,000 lump-sum payment received today
B A €10,000 lump-sum payment received in one year
C A €5,000 payment received today plus €5,000 to be received in one year

14. Given an interest rate of 10% and assuming that interest is reinvested, which of
the following will have the highest future value?
A €10,000 invested today for 5 years.
B €10,000 invested today for 10 years.
C €10,000 invested today for 15 years.

15. When evaluating an investment, if the discount rate increases while holding all
other factors constant, the present value will:
A increase.
B decrease.
C remain unchanged.

16. When choosing among investments that have different initial costs and future
cash flows, the best choice is the investment with the highest:
A discount rate.
B net present value.
C present value of future cash flows.

17. Which of the following investments is unacceptable? An investment with a net

present value of:
A negative $5.
B $0.
C positive $5.

18. If an individual makes an initial payment to an insurance company in exchange

for a fixed number of future payments of a certain amount from the insurance
company, the individual has:
A received a loan.
B obtained a mortgage.
C purchased an annuity

19. In a mortgage transaction, the amount of each fixed payment made by the borrower
that represents interest:
A decreases over time.
B remains the same over time.
C increases over time.

20. Which of the following is a measure of central tendency?

A Mean
B Range
C Standard deviation

21. If the data in a set are continuous and skewed, which of the following gives the
best measure of central tendency?
A Mean
B Mode
C Median

22. The preferred measure of central tendency for investment returns is the:
A mode.
B arithmetic mean.
C geometric mean.

23. An analyst is comparing the returns of two investment portfolios. The two
portfolios have the same mean return. The portfolio with the higher standard
deviation most likely:
A is less risky.
B is more risky.
C has a smaller range.

24. Which of the following is a measure of dispersion?

A Mode
B Range
C Median
 25. Which of the following is a measure of dispersion used to assess the risk of an
investment?
A Arithmetic mean
B Geometric mean
C Standard deviation

26. Which of the following characteristics most likely represents a normal

distribution?
A The values of the mean and median are identical.
B There are more observations to the right of the mean than to the left.
C There are more observations to the left of the mean than to the right.

27. A characteristic of a normal distribution is that the distribution of data is:

A symmetrical.
B positively skewed.
C negatively skewed.

28. For a normal distribution, the height and width of the distribution is determined by
the distribution’s:
A mean.
B median.
C standard deviation.

29. If there is no relationship between two variables, the correlation coefficient is

closest to:
A +1.
B 0.
C –1.

30. Assume the correlation between the unemployment rate and the inflation rate is
close to –1. Based on this information if the unemployment rate is expected to
increase, then the inflation rate will most likely:
A increase.
B decrease.
C remain unchanged.

CHAPTER 16 INVESTORS AND THEIR NEEDS

1. The investment needs of individual investors are most likely:

A the same among investors of similar ages and wealth.
B similar in many respects to those of institutional investors.
C unique to each individual’s circumstances and requirements.
 2. Which of the following types of investors is most likely to be identified as an
individual investor?
A Insurance company
B Sovereign wealth fund
C Ultra-high-net-worth investor

3. Which of the following types of institutional investors is most likely to have the
shortest investment time horizon?
A Life insurer
B Endowment fund
C Property and casualty insurer

4. If investments underperform expectations in a defined benefit pension plan,

additional contributions may be required from the:
A plan sponsor.
B plan beneficiaries.
C investment manager.

5. If the investment returns of a defined benefit pension plan exceed projections,

pension benefits will most likely:
A decrease.
B remain the same.
C increase.

6. Asset allocation and investment decisions in a defined contribution pension plan are
made by the:
A plan sponsor.
B plan member.
C investment manager.

7. An investor with a long time horizon will most likely have a:

A higher tolerance for risk.
B reduced investment return expectation.
C lower ability to invest in illiquid investments.

8. The return requirement for an investor should be:

A specified in nominal terms.
B achievable within the relevant constraints.
C higher for investors with low risk tolerances.

9. When an investor’s willingness and ability to take risk differ, the investment adviser
should counsel the investor to use a risk level based on the:
A ability to take risk only.
B willingness to take risk only.
C lesser of the two risk levels.

10. An investor’s investment policy statement:

A ensures that investment plan objectives are met.
B should be reviewed only when the client’s circumstances change.
C outlines what is required of and acceptable in the investment portfolio.

11. A difference in investment policy statements for institutional investors and individual
investors most likely relates to the inclusion of:
A client constraints.
B investment objectives.
C procedural and governance issues

CHAPTER 17 INVESTMENT MANAGEMENT

1. Systematic risk is the portion of total risk that:

A is related to a certain company or security.
B is created by general economic conditions.
C results from a lack of portfolio diversification.

2. An investor currently owns a portfolio of five securities. If the investor adds another
security to the portfolio that is less than perfectly positively correlated with the other
five securities, the portfolio’s:
A total risk will likely increase.
B specific risk will likely decrease.
C systematic risk will likely decrease.

3. The benefits of risk reduction are most likely to be greater by combining securities
whose expected returns have a:
A low correlation.
B perfectly positive correlation.
C high, but less than perfect, correlation.

4. The long-term mix of assets that is expected to meet an investor’s objectives best
describes:
A diversification.
B tactical asset allocation.
C strategic asset allocation.

5. The act of an investment manager adjusting his or her portfolio to take advantage
of short-term fluctuations in asset class returns most likely describes:
A rebalancing.
B tactical asset allocation.
C strategic asset allocation.

6. Which of the following statements best describes passive management? Passive

investment managers:
A attempt to outperform the benchmark.
B tend to earn higher returns than the benchmark.
C seek to match the risk and return of the benchmark.

7. Active investment managers are more likely than passive investment managers to:
A try to time a market.
B use strategic asset allocation.
C seek to minimise tracking error.

8. Active investment management is most likely to be favoured over passive

management:
A for real estate investments.
B when markets are informationally efficient.
C when transaction costs are high.

9. The factor most likely to contribute to the success of active management is the:
A existence of trading costs.
B existence of inefficient markets.
C inability for active managers to consistently access better information than
other investors.

10. Active managers that focus on sentiment to identify investment opportunities most
likely use:
A behavioural analysis.
B quantitative analysis.
C fundamental analysis.

11. Analysts who review share price and trading volume trends in an effort to identify
shares that might outperform are most likely:
A technical analysts.
B fundamental analysts.
C quantitative analysts.

CHAPTER 19 PERFORMANCE EVALUATION

1. The first step of performance evaluation is:

A attributing performance.
B measuring relative returns.
C measuring absolute returns

2. The Sharpe ratio is used in the performance evaluation process to:

A adjust return for risk.
B attribute performance.
C measure absolute returns.

3. The measurement of relative returns involves comparing the fund manager’s

holding-period return with:
A a measure of risk.
B the return on a benchmark.
C the fund manager’s past performance.

4. The measure that best reflects the variability of returns around the mean return is
the:
A standard deviation.
B reward-to-risk ratio.
C downside deviation.

5. The measure that is best suited for investors who dislike losses more than they like
equivalent gains is the:
A Sharpe ratio.
B standard deviation.
C downside deviation.

6. Standard deviation is a measure of the variability of a fund’s return:

A relative to its average return.
B relative to a benchmark return.
C below its average return.

7. The Sharpe ratio is a measure of:

A historical volatility.
B downside deviation.
C risk-adjusted performance.

8. The Sharpe ratio is a measure of the excess return on a portfolio compared with the:
A beta of portfolio returns.
B portfolio’s tracking error.
C standard deviation of portfolio returns.

9. The criterion that a benchmark should be made up of assets that can be bought or
sold by the fund manager is known as:
A investability.
B compatibility.
C pre-specification.

10. A fund manager who uses analytical and trading skills to try to beat a benchmark is
best described as a(n):
A active manager.
B index replicator.
C passive manager.

11. Tracking error for a passive investment fund is most likely:

A lower than the tracking error for an active investment fund.
B equal to the tracking error for an active investment fund.
C higher than tracking error for an active investment fund.

12. The consistent outperformance of an investment fund compared with its benchmark
is best described as:
A beta.
B alpha.
C tracking error.

13. Beta measures the portion of the investment fund’s return attributable to:
A randomness.
B broad market movements.
C the fund manager’s judgment.

14. The process of decomposing a fund manager’s performance to identify the

source(s) of that performance is best described as:
A attribution analysis.
B risk-adjusted analysis.
C relative performance analysis.

CHAPTER 7 FINANCIAL STATEMENTS

1. Accounting standard setters help ensure the consistency of reported financial

information by:
A recognising and enforcing financial reporting standards.
B establishing how financial reports should be prepared and presented.
C expressing an opinion on the application of financial reporting standards.

2. The financial statement that provides information about a company’s financial

position at a specific point in time is the:
A balance sheet.
B income statement.
C cash flow statement.
 3. Which of the following best shows the accounting equation?
A Total assets = Total liabilities + Total shareholders’ equity
B Total assets + Total liabilities = Total shareholders’ equity
C Total shareholders’ equity – Total assets = Total liabilities

4. The values of assets on the balance sheet are reported:

A only at historical cost.
B only at fair market value.
C at a mix of historical cost and fair market value.

5. Which of the following accounts is most likely classified as a current asset?

A Goodwill
B Inventory
C Property, plant, and equipment

6. Shareholders’ equity, as reported on the balance sheet, includes:

A cash.
B common stock.
C long-term debt.

7. Accounts payable are classified as:

A assets.
B liabilities.
C shareholders’ equity.

8. Net property, plant, and equipment is included in:

A shareholders’ equity.
B long-term debt.
C non-current assets.

9. The profit or loss generated by a company over a year is presented in the:

A balance sheet.
B income statement.
C cash flow statement.

10. Which of the following is an example of an operating expense?

A Dividends paid to shareholders
B Interest payments made on a bank loan
C Depreciation expenses for plant and equipment

11. Gross profit represents revenue minus:

A all expenses.
B cost of sales.
C operating expenses.

12. Income that is available to reinvest in the company or distribute to owners is:
A net income.
B operating income.
C earnings before taxes.

13. Which financial statement is not prepared on an accrual basis?

A Income statement
B Cash flow statement
C Profit and loss statement

14. Net cash flow is most likely:

A equal to net income over a reporting period.
B equal to operating income over a reporting period.
C different from profit depending on the timing of the cash flows.

15. Operating income and cash flow from operating activities are reported, respectively,
on the:
A income statement and the balance sheet.
B balance sheet and the cash flow statement.
C profit and loss statement and the cash flow statement.

16. The statement of cash flows presents:

A revenues and expenses over a period of time.
B sources and uses of cash over a period of time.
C assets, liabilities, and owners’ equity at a point in time.

17. Which of the following is best described as an investing activity on the cash
flow statement?
A Cash inflow from the issuance of new shares of equity
B Cash outflow from the payment of dividends to stockholders
C Cash outflow from the purchase of property, plant, and equipment

18. Dividends:
A increase shareholders’ equity.
B are a distribution of net income.
C are an expense on the income statement.

19. A net loss during an accounting period will cause shareholders’ equity to:
A increase.
B decrease.
C remain unchanged.
 20. Which of the following sentences is most accurate?
A The income statement and cash flow statement are unrelated.
B Net income is often the starting point for the cash flow statement.
C The income statement presents information for a period of time, whereas
the cash flow statement presents information at a point in time.

21. If a company is profitable, then its cash flow from operating activities:
A is positive.
B is negative.
C can be positive or negative.

22. Cash paid for salaries would be included as a component of cash flows from:
A financing activities.
B investing activities.
C operating activities.

23. Cash flow from financing activities is most likely related to:
A the payment for inventory.
B the purchase of a machine.
C the issuance of long-term debt.

24. A manufacturing company recently sold one of its buildings. The proceeds from
the sale are classified as a cash flow from:
A financing activities.
B investing activities.
C operating activities.

25. Ratio analysis is used to:

A compare companies of different sizes.
B identify the uses of cash during the period.
C determine profit or loss associated with operations.

26. The ratio that best measures a company’s ability to meet its short-term obligations
is:
A the quick ratio.
B the asset turnover ratio.
C the debt-to-equity ratio.

27. Ratio analysis provides analysts:

A information about only the past financial performance of a company.
B information about only the valuation of a company based on the market
price of its shares.
C information about both the past financial performance of a company and
the valuation of a company based on the market price of its shares.
28. The return on equity for a company and the industry in which it operates are 10.3% and
9.6%, respectively. The company is most likely performing:
A better than the industry.
B the same as the industry.
C worse than the industry.

29. Which of the following is used to evaluate how a company is financing its assets?
A Current ratio
B Debt-to-equity ratio
C Return on assets

30. Which of the following values of a company’s quick ratio indicates the best
liquidity?
A 0.50
B 1.00
C 1.50

31. A company’s return on equity (ROE) can be broken down into which of the
following components?
A Asset turnover, liquidity, and financial leverage
B Net profit margin, liquidity, and financial leverage
C Net profit margin, asset turnover, and financial leverage

CHAPTER 10 EQUITY SECURITIES

1. Which of the following securities most likely provides voting rights to investors?
A Common shares
B Preferred shares
C Depositary receipts

2. The right to elect members of the board of directors of a company belongs to that
company’s:
A senior management.
B common shareholders.
C preferred shareholders.

3. Which of the following is most likely an advantage of owning common stock?

A Low risk
B Finite life
C Limited liability
 4. The key difference between cumulative preferred stock and non-cumulative
preferred stock relates to:
A voting rights.
B the treatment of missed dividends.
C the company’s ability to buy back the preferred shares.

5. Compared with a preferred shareholder, a common shareholder most likely has:

A voting rights.
B limited liability.
C cash flow rights.

6. All else being equal, the fixed coupon rate on a convertible bond compared with
a straight bond is most likely:
A lower.
B the same.
C higher

7. Compared with preferred shareholders, the ranking of common shareholders in

the priority of claims on the company’s net assets upon liquidation is:
A equal.
B lower.
C higher.

8. A security representing an economic interest in a foreign company that trades like a

common stock on a local stock exchange is most likely a:
A warrant.
B convertible bond.
C depositary receipt.

9. Depositary receipts are issued by:

A governments.
B financial institutions.
C the company whose shares are represented by the depositary receipts.

10. If the price of a company’s common shares increases significantly, the conversion
value of a convertible bond issued by that company most likely:
A increases.
B decreases.
C remains unchanged.

11. Stock options issued by a company to its employees as a form of compensation are
an example of:
A warrants.
B convertible bonds.
C depositary receipts.

12. Compared with common shares, an investment in preferred shares is most likely to
be:
A less risky.
B more risky.
C equally risky.

13. Compared with the expected return on an investment in preferred shares, the
expected return on an investment in common shares is most likely to be:
A equal.
B lower.
C higher.

14. The discounted cash flow approach to valuation of a company’s common shares
most likely considers the:
A expected dividends on the shares.
B current value of the company’s assets.
C price-to-earnings ratios of comparable companies.

15. The approach to valuing common shares that uses price multiples of other
comparable, publicly traded companies best describes:
A relative valuation.
B asset-based valuation.
C discounted cash flow valuation.

16. A company that needs to raise capital in a public market for the first time would
most likely:
A repurchase shares.
B conduct an initial public offering.
C conduct a seasoned equity offering.

17. The process of a publicly traded company raising additional capital by selling new
shares to the public best describes a:
A stock dividend.
B share repurchase.
C seasoned equity offering.

18. Which of the following corporate actions would decrease a company’s number of
outstanding shares?
A Share repurchase
B Exercise of warrants
C Seasoned equity offering
 19. After a company conducts a stock split, a common shareholder’s proportional
ownership will most likely:
A increase.
B decrease.
C remain unchanged.

20. The process of a company creating a new company from an existing subsidiary best
describes a:
A spinoff.
B stock split.
C reverse stock split.

21. The corporate action most likely taken to mitigate the effects of exercised warrants
is:
A a stock dividend.
B an issuance of new shares.
C a share repurchase program.

CHAPTER 11 DERIVATIVES

1. The value of a derivatives contract is most likely to be directly affected by the:

A price of the underlying.
B supply of the underlying.
C demand for the underlying.

2. Counterparty risk is most likely lowest for:

A swap contracts.
B futures contracts.
C forward contracts.

3. A farmer will harvest his corn crop in six months but wants to lock in a price
today. The farmer will most likely:
A buy a corn futures contract.
B sell a corn futures contract.
C buy a corn forward contract.

4. Forward contracts and futures contracts, with otherwise identical terms, are similar
with respect to:
A counterparty risk.
B payoffs at maturity.
C customisation of contracts.

5. Relative to a futures contract, an advantage of a forward contract is:

A greater liquidity.
B lower counterparty risk.
C the ability to customise the contract.

6. Which of the following parties to an option contract on a company’s shares has the
right to buy shares at the exercise price?
A Put seller
B Call seller
C Call buyer

7. Which of the following parties to an option contract on a company’s shares is

obligated to buy shares at the option strike price if the option is exercised?
A Put seller
B Put buyer
C Call seller

8. Which of the following options would be described as being in the money?

A A put option in which the underlying’s price is lower than the exercise price.
B A call option in which the underlying’s price is lower than the exercise price.
C A put option in which the underlying’s price is higher than the exercise price.

9. A call option contract on shares of Company A has an exercise price of €50. The
option is in the money when the share price of Company A is:
A €45.
B €50.
C €55.

10. A put option on shares of Company B has an exercise price of £40. The option is out
of the money when the share price of Company B is:
A £35.
B £40.
C £45.

11. Swap contracts:

A are mostly traded on exchanges.
B have an initial net value of zero.
C are not susceptible to counterparty risk.