Security Analysis and Investment Management | Set 1
1. A liquid asset may
Correct : B. be converted into cash with little chance of loss
2. A negatively sloped yield curve suggests that
Correct : A. short-term rates exceed long-term rates, and the Federal Reserve is following a tight monetary policy
3. The market price of a bond depends on the
Correct : D. coupon rate, terms of the indenture, and maturity date
4. While bond prices fluctuate,
Correct : B. coupons are constant
5. If interest rates rise, the price of preferred stock
Correct : C. falls
6. Municipal government debt
Correct : B. is often purchased by individuals with high incomes
7. The use of financial leverage by a firm may be measured by the
Correct : A. ratio of debt to total assets
8. An example of a depreciable asset is
Correct : D. Equipment
9. As the debt ratio increases,
Correct : C. More assets are debt-financed, and the ratio of debt-to-equity increases
10. The net asset value of a mutual fund investing in stock rises with
Correct : A. Higher stock prices
11. Which of the following helps determine the relationship between the expected return and risk for individual securities?
Correct : A. Security market line
12. A call is an option to
Correct : B. Buy stock at a specified price
13. Which of the following is on the horizontal axis of the Security Market Line?
Correct : B. Beta
14. You own a large orange grove and will be harvesting from November through April. To hedge against price risks you should
Correct : C. sell orange juice contracts with delivery dates between November and April
15. Financial leverage may increase a corporation’s risk because
Correct : B. the firm has fixed obligations to meet
16. What is the value of a call on the expiration date, if on that date the price of the stock is Rs.25 and the exercise price is Rs.26?
Correct : B. Rs 0
17. Equity does NOT include
Correct : A. cash and paid-in capital
18. What is the price of a stock estimated to pay a dividend of Rs.60 next year, if the dividend growth rate is 5% and the appropriate discount rate is 8%?
Correct : C. Rs.20
19. If you were confident that the price of stock X would drop dramatically within two Months ,which of the following investment transactions would yield the highest return on your investment?
Correct : D. Purchase a put on stock X
20. In a private limited company, the maximum number ofmembers are limited to:
Correct : B. 50
21. Shares which are not affected by market movements are known as:
Correct : C. Defensive shares
22. Exposure indicates
Correct : D. Sensitivity to changes in assets
23. Which of the following securities is most liquid?
Correct : B. Capital market instruments
24. Which of the following goals will be considered by the individuals who invest in upcoming companies and wait till the companies to grow and then harvest their profits and move on to other company?
Correct : C. Long-term high priority goals
25. A purely passive strategy is defined as
Correct : B. One that allocates assets in fixed proportions that do not vary with market conditions.
26. An industry in the expansion stage of its life cycle is indicated by its
Correct : D. High Default
27. Which of the following is true of municipal government debt?
Correct : B. It is often purchased by individuals with high incomes.
28. The net asset value of a mutual fund investing in stock rises with
Correct : B. Lower equity values
29. Which of the following is not among the important categories of real assets?
Correct : A. Land and house property
30. Which of the following statements is true of Insured Asset Allocation?
Correct : C. In this strategy long-term predictions regarding the capital markets are us
31. ______ are a fixed income security.
Correct : D. Bonds
32. Which of the following is/are true if a firm has a required rate of return equal to the ROE?
I. The amount of earnings retained by the firm does not affect market price or the P/E. II. The firm can increase market price and P/E by increasing the growth rate. III. The P/E ratio is inversely proportional to the ROE of the firm.
Correct : D. Both (II) and (III) above
33. Consider these two investment strategies: Strategy ___ is the dominant strategy because __________.
Correct : B. 1, it has the highest reward/risk ratio
34. Which of the following statements is/are not correct with respect to the ‘Constant Mix Strategies’ of asset allocation?
I. Investors adopting these strategies tend to maintain an exposure to stocks that are in constant proportion of their wealth. II. The risk-tolerance level of the investors varies proportionately with the level of theirwealth. III. Reversals in stock markets oppose constant mix strategies over the buy and hold IV. strategies.
Correct : C. Only (III) above
35. The tracking error of an optimized portfolio can be expressed in terms of the ____________ of the portfolio and thus reveal ____________.
Correct : C. beta; portfolio performance
36. A portfolio comprises of two stocks A and B. Stock A gives a return of 8%and stock B gives a return of 7%. Stock A has a weight of 60% in the portfolio. What is the portfolio return?
Correct : D. 8%
37. Price movement between two Information Technology stocks would generally have a ______ co-variance.
Correct : D. none
38. The two types of investments that provide the highest and lowest yields in the Ibbotson study of Stocks, Bonds, Bills and Inflation are
Correct : B. Large company stocks; Long-term government bonds
39. Which of the following is not a form of a financial asset?
Correct : C. Warrants
40. Historically, the real rate of return in the U.S. economy has been
Correct : D. 4-5%
41. Which of the following is not a form of real asset?
Correct : B. Baseball cards
42. Under the Economic Growth and Tax Reconciliation Act of 2001, when will estate taxes be eliminated?
Correct : D. 2019
43. Program trading decreases market efficiency by exaggerating price discrepancies between the cash and futures markets
Correct : D. none
44. Capital Market Line is firstly initiated by
Correct : B. Linter
45. Most favourable portfolio is proficient portfolio with the
Correct : D. least investment
46. Ambiguity introduced by way by which organization finances its investments is
Correct : C. financial risk
47. If generally interest rates in nation increase, a corporate bond with a fixed interest rate will usually
Correct : C. decrease in value.
48. Inferior investment alternatives are identified when:
Correct : C. β > 1.
49. Systematic risk is higher when:
Correct : A. α > 0.
50. In the stock-price beta estimation for the Coca-Cola Company, the dependent variable is the:
Correct : D. value of the S&P 500 Index.
51. If the beta of a stock is 1.8 and the overall market declines 20%, the expected return is:
Correct : A. -36%
52. Total risk for common stocks is:
Correct : A. the sum of systematic risk and diversifiable risk.
53. The SML depicts the tradeoff between risk and required return for:
Correct : A. inefficient portfolios.
54. Alpha is:
Correct : B. the intercept of the CML line.
55. In the stock-price beta estimation for the Coca-Cola Company, the independent variable is the:
Correct : D. price of Coca-Cola stock.
56. The chance of loss due to fluctuations in the stock market is:
Correct : B. interest rate risk.
57. Empirical research concludes that betas for:
Correct : A. individual securities and large portfolios are unstable.
58. Future on fixed Income securities are known as
Correct : D. Stock market futures
59. Serials bonds are
Correct : B. Small bond issues carrying many maturity dates.
60. Indenture is a
Correct : B. Abbreviated version of a securities contract
61. Tax sheltered variable annuity is
Correct : D. A device for earning tax deduction.
62. REITs stand for
Correct : C. Real estate investment trusts
63. The person within the brokerage office with whom an investor will have the most contact is
Correct : C. Authorized person
64. The commission received by investment banker is known as
Correct : B. Differential
65. The __________ is the indicated dividend divided by the closing price of the stock.
Correct : B. Share
66. __________ refers to the highest priced transaction for an issue on a particular day.
Correct : C. Large
67. As diversification increases, the total variance of a portfolio approaches ____________.
Correct : C. The variance of the market portfolio
68. The Security Risk Evaluation book published by Merrill Lynch uses the __________ as a proxy for the market portfolio.
Correct : C. S&P 500 Index
69. The market portfolio has a beta of
Correct : B. 1.
70. If a firm's beta was calculated as 0.6 in a regression equation, Merrill Lynch would state the adjusted beta at a number
Correct : B. Between 0.6 and 1.0.
71. Rosenberg and Guy found that __________helped to predict a firm's beta.
Correct : D. A, B andC all helped to predict betas.
72. A stock has an expected return of 15 percent. The market risk premium is 10 percent and the risk-free rate is 4 percent. What is the stock's beta? (C)
Correct : C. 1.1
73. What is the beta of a portfolio that is invested 25 percent in the market portfolio, 25 percent in an asset with twice as much systematic risk as the market portfolio and the rest in a risk-free asset?
Correct : C. 0.75
74. Which statement is not true regarding the market portfolio?
Correct : D. It is the tangency point between the capital market line and the indifference curve.
75. Which statement is not true regarding the Capital Market Line (CML)?
Correct : C. The CML is also called the security market line.
76. The market risk, beta, of a security is equal to
Correct : A. the covariance between the security's return and the market return divided by the variance of the market's returns.
77. The Security Market Line (SML) is
Correct : D. the line that represents the expected return-beta relationship.
78. According to the Capital Asset Pricing Model (CAPM), over priced securities
Correct : C. have negative betas.
79. In a well diversified portfolio
Correct : C. unsystematic risk is negligible.
80. Empirical results regarding betas estimated from historical data indicate that
Correct : D. betas appear to regress toward one over time.
81. What is the expected return of a zero-beta security?
Correct : D. The risk-free rate.
82. Standard deviation and beta both measure risk, but they are different in that
Correct : B. beta measures only systematic risk while standard deviation is a measure of total risk.
83. If investors do not know their investment horizons for certain
Correct : C. the implications of the CAPM are not violated as long as investors' liquidity needs are not pric
84. One of the assumptions of the CAPM is that investors exhibit myopic behavior. What does this mean?
Correct : A. They plan for one identical holding period.
85. Passive management is a process of holding a well diversified portfolio for
Correct : B. Long term with buy and hold approach
86. Aggressive portfolio consists of bonds: stock in the ratio of
Correct : C. 40:60
87. Expected value is the:
Correct : C. Weighted average of all possible outcomes
88. Which of the following statement(s) is/are true?
I. A unique characteristic line is plotted for each security to determine the beta. II. For a characteristic line, the X-axis represents betas for different securities. III. The slope of the characteristic line is the difference between the market returns andrisk-free returns.
Correct : A. Only (I) above
89. Which of the following statements is true?
Correct : B. Testing CAPM is done ex-post while CAPM measures required rate of returns
90. Which of the following statements is false about the Security Market Lines (SML)?
Correct : C. SML is same as the characteristic line for any security
91. According to the Capital Asset Pricing Model (CAPM), the expected return of a well- diversified portfolio with abeta of 1.0 and positive ex-ante alpha (a) is
Correct : D. r+ a
92. Which of the following assumptions is common between the pricing models of CAPM and APT?
Correct : D. Investors have homogeneous expectations and are expected-utility-of-wealth maximizers.
93. Which of the following statements is/are true with respect Capital Market Line (CML)?
I. It is the line passing from risk-free rate through market portfolio. II. The slope of CML is called market price of risk. III. CML fails to express equilibrium pricing relationship between expected return and standard deviation for all efficient portfolios lying along the line.
Correct : D. Both (I) and (II) above
94. Which of the statements is/are false regarding Arbitrage Pricing Theory (APT)?
I. APT assumes that return on any asset can be expressed as a linear function of a set of market factors or indexes. II. The arbitrage price line indicates relation between unsystematic risk and the expected return of an asset. III. While deriving the APT model, APT assumes that the error term can be reduced to zero through appropriate diversification.
Correct : B. Only (II) above
95. If the risk free rate of return (Rf) is 7%, expected return on the market [E(Rm)] is 15%, and the return on stock X is 16%, the beta for the stock X using CAPM is
Correct : C. 1.14
96. At the prevailing environment, the Capital Market Line (CML) equation for a portfolio is given as E(ri),% = 8 + 0.36 ?i The ex-ante SML equation for the same portfolio i is E(ri),% = 8 + 5.50 ?i Therefore, the variance of market portfolio is approximately
Correct : D. 233(%)2
97. A company's __________ provide the most accurate information to its management and shareholders about its operations.
Correct : B. financial statements
98. A ________ provides an account of the total revenue generated by a firm during a period (usually a financial year, or a quarter)
Correct : D. profit& loss statement
99. The balance sheet of a company is a snapshot of the ______ of the firm at a point in time.
Correct : A. the sources and applications of funds of the company.
100. Which of the following accounting statements form the backbone of financial analysis of a company?