api.ning.comapi.ning.com/files/XBFuvuiJZm2e4mAvNN-rLGWc0GYUVacQT3Ara9dm7hNI83... · Come & Join Us at VUSTUDENTS.net For Assignment Solution, GDB, Online Quizzes, Helping Study material,

Come & Join Us at VUSTUDENTS.net

For Assignment Solution, GDB, Online Quizzes, Helping Study material, Past Solved Papers, Solved MCQs, Current Papers, E-Books & more.

Go to http://www.vustudents.net and click Sing up to register.

VUSTUENTS.NET is a community formed to overcome the disadvantages of distant learning and virtual environment, where pupils don’t have any formal contact with their mentors, This community provides its members with the solution to current as well as the past Assignments, Quizzes, GDBs, and Papers. This community also facilitates its members in resolving the issues regarding subject and university matters, by providing text e-books, notes, and helpful conversations in chat room as well as study groups. Only members are privileged with the right to access all the material, so if you are not a member yet, kindly SIGN UP to get access to the resources of VUSTUDENTS.NET » » Regards » » VUSTUDENTS.NET TEAM. Virtual University of Pakistan

Come and Join Us at www.vustudents.ning.com

www.vustudents.net

somimalik

vu

Fin-(630) [email protected] Final term Paper

Note: Solve these papers by yourself. I am not responsible for any solved content 0301-6133581, 0334-9602729

1

FINALTERM EXAMINATIONSpring 2009

FIN630- Investment Analysis & Portfolio Management (Session - 3)Marks: 81Question No: 1 ( Marks: 1 ) - Please choose oneShares of McDonald Corporation are an example of a (n):Standardized financial instrumentNon-standardized financial instrument since their prices can differ over timeStandardized financial liability instrumentOpen-end investmentQuestion No: 2 ( Marks: 1 ) - Please choose oneWhich of the following includes fixed income securities?BondsSharesDerivativesOptions(lesson #1 slide )Fixed Income Securities: e.g. bonds, preferred stockQuestion No: 3 ( Marks: 1 ) - Please choose oneCompanies that have capitalization amounts of less than $500 million are known as_________.Small cap companiesMid cap companiesGrowth companiesLarge cap companies(lesson #6 slide) Small-cap stocks : A firm with capitalization less than $500 million.Question No: 4 ( Marks: 1 ) - Please choose oneIn bar chart, which color indicates share prices are going down?BlueBlackWhiteRed(lesson # 7 slide) Blue color indicates market or share price is going up.Red color indicates market or share price is going downQuestion No: 5 ( Marks: 1 ) - Please choose oneWhat will be the resulting figure,when gross profit is divided by net sales?Gross marginOperating marginNet marginProfit margin(lesson # 12 slide) Gross Margin is the resulting percentage when Gross Profit isdivided by Net Sales.Gross Margin = Gross Profit/Net SalesQuestion No: 6 ( Marks: 1 ) - Please choose one


Somi

vu



2

In bottom-up approach of fundamental analysis, investors begin their analysis with:IndustryEconomyMarketCompany(page 90 )With the bottom-up approach, investors focus directly on a company’sbasics, or fundamentals. Analysis of such information as the company’s products, itscompetitive position, and its financial status leads to an estimate of the company’searnings potential and, ultimately, its value in the, market.Question No: 7 ( Marks: 1 ) - Please choose oneWhich of the following is EXCLUDED from Porter's competitive factors?Substitute products or servicesChanges in the economyBargaining power of buyersRivalry between existing competitorsQuestion No: 8 ( Marks: 1 ) - Please choose oneWhich of the following is defined as the gradual loss in value of equipment and othertangible assets over the course of its useful life?AppreciationDepreciationRevaluationAmortizationDepreciation is the gradual loss in value of equipment and other tangible assetsover the course of its useful life.http://nptel.iitm.ac.in/courses/IIT-MADRAS/Management_Science_II/Pdf/2_2.pdfQuestion No: 9 ( Marks: 1 ) - Please choose oneOn which of the following financial statements, revenues and expenses can be found?Balance sheetIncome statementStatement of cash flowsStatement of changes in equityQuestion No: 10 ( Marks: 1 ) - Please choose oneWhich of the following is an example of brokerage fee charged by a stockbroker?Margin profitInsurance premiumTransaction costCapital expenditureQuestion No: 11 ( Marks: 1 ) - Please choose one




3

Technical analysis is NOT applicable in which form of efficient market hypothesis?Weak form efficiencySemi-strong form efficiencyStrong-form efficiencyWeak and strong form of efficiency(Lesson # 23 slide # 23) Technical analysis: Not valuable if the weak form holds.• Fundamental analysis of intrinsic value.– Not valuable if semi-strong form holds.– Experience average results.Question No: 12 ( Marks: 1 ) - Please choose oneWhich of the following suggests that people express a different degree of emotiontowards gains than towards losses?Prospect theoryIllusion of controlAnchoringLoss aversionProspect theory suggests people express a different degree of emotion towardsgains than towards losses. Individuals are more stressed by prospective lossesthan they are happy from equal gains.Question No: 13 ( Marks: 1 ) - Please choose oneLSE 25 index was last reconstituted on_______ in line with regular review policy.20th December, 20021st July, 200625th July, 20071st July, 2008(Lesson # 25 , Slide # 25 )• LSE launched a new 25-Index on December 20, 2002, which replaced the 101-Index.The Index has a Base Figure of 1000. (The Index closed at 5442.69 on24th April, 2006).• LSE 25-Index includes the top 25 traded companies at LSE and captures 53% ofthe market capitalization and 98% of the total trading volume of LSE.• The Index was last reconstituted on July 1st 2006, in line with the regularreview policy.Question No: 14 ( Marks: 1 ) - Please choose oneWhich of the following is considered to be a characteristic of an equity security?Fixed incomeDebtPriceOwnershipAn equity security is described as a security representing an ownership interestsuch as common, preferred, or other capital stock.Question No: 15 ( Marks: 1 ) - Please choose one




4

Which of the following statement is TRUE about yield to maturity?Yield to maturity is inversely related to bond priceYield to maturity is always less than the yield to callYield to maturity will be less than the current yieldYield to maturity tends to fall with a rise in durationThe yield to maturity is inversely related to the bond price. Bond prices and marketinterest rates move in opposite directions. Why? As interest rates rise, new bonds willpay higher coupon rates than existing bonds. The prices of existing bonds fall in thesecondary market, so the yield to maturity rises. This negative relationship betweeninterest rate and value is true for all debt securities, not just coupon bonds.Question No: 16 ( Marks: 1 ) - Please choose oneThe yield to maturity is equal to the realized compound return if all coupon interestpayments:Are not reinvestedAre reinvested at the market rateAre reinvested at the bond's coupon rateAre reinvested at the bond's yield to maturityQ# 14) http://highered.mcgrawhill.com/sites/007338240x/student_view0/chapter10/multiple_choice_quiz.htmlQuestion No: 17 ( Marks: 1 ) - Please choose oneWhich of the following measures the sensitivity of an asset's price to interestrate movements, expressed as a number of years?DurationYield to maturityConvexityImmunizationBond duration — In finance, the duration of a financial asset measures thesensitivity of the asset s price to interest rate movements, expressed as a number ofyears.Question No: 18 ( Marks: 1 ) - Please choose oneWhich of the following statement is FALSE regarding bond duration?Duration is shorter than maturity for all bonds except zero coupon bondsDuration is equal to maturity for zero coupon bondsDuration is directly related to coupon yieldDuration is measured in yearsDuration is measured in years; however, do not confuse it with a bond’s maturity.For all bonds, duration is shorter than maturity except zero coupon bonds, whoseduration is equal to maturity. This is because all cash flows are received at


Somi

vu



5

maturity.Market Valuations and Duration - TreasuryDirectQuestion No: 19 ( Marks: 1 ) - Please choose oneWhich of the following statement is TRUE about duration of a bond?It is less than maturity for bonds paying coupon interestIt is directly related to coupon yieldIt decreases with maturityIt is greater than maturity for zero coupon bondsQuestion No: 20 ( Marks: 1 ) - Please choose oneWhich of the following statement is FALSE regarding bond duration?Bond duration is inversely related to coupon rateDuration of a zero-coupon bond equals its time to maturityHolding maturity constant, a bond s duration is higher when the coupon rate is lowerDuration is longer than maturity for all bonds except zero coupon bondsDuration is measured in years; however, do not confuse it with a bond’s maturity.For all bonds, duration is shorter than maturity except zero coupon bonds, whoseduration is equal to maturity. This is because all cash flows are received atmaturity.Market Valuations and Duration - TreasuryDirectQuestion No: 21 ( Marks: 1 ) - Please choose oneWhich of the following is known as speculative bond?Government bondMunicipal bondSovereign bondJunk bondQuestion No: 22 ( Marks: 1 ) - Please choose oneWhich of the following is referred to as risk-free bond?Government bondMunicipal bondSovereign bondJunk bond(page 798)Question No: 23 ( Marks: 1 ) - Please choose oneDiversification is the only way to protect investors from:Market riskNonsystematic riskSystematic riskGeneral riskRef: Diversification is the only way to protect a portfolio from unsystematic risk.Question No: 24 ( Marks: 1 ) - Please choose oneThe excess return that an individual stock or the overall stock market provides over arisk-free rate is known as _____________.




6

Equity risk premiumBond horizon premiumShare premiumLiquidity premium(page 163)Question No: 25 ( Marks: 1 ) - Please choose oneSystematic risk contains all of the following components EXCEPT:Purchasing power riskMarket riskBusiness riskInterest rate riskQuestion No: 26 ( Marks: 1 ) - Please choose oneWhich of the following bond redeems the principal amount at maturity and pays noperiodic income?Municipal bondCorporate bondJunk bondZero coupon bond(page 172) A zero coupon bond has a specific maturity date when it returns thebond principal, but it pays no periodic incomeQuestion No: 27 ( Marks: 1 ) - Please choose oneWhich of the following measures deviation of returns from the mean?VarianceStandard deviationGeometric meanCorrelation coefficient(page 81)Question No: 28 ( Marks: 1 ) - Please choose oneWhich of the following statement is FALSE?Each portfolio asset has a weight which represents the percent of the total portfolio valuePortfolio risk is not a weighted average of the risk of individual securities in the portfolioPortfolio risk is measured by variance or standard deviation of the portfolio's returnNone of the given options– Each portfolio asset has a weight, w, which represents the percent of the totalportfolio value– Portfolio risk is not a weighted average of the risk of the individual securities inthe portfolioPortfolio Risk




7

Portfolio risk not simply the sum of individual security risks - Emphasis on the riskof the entire portfolio and not on risk of individual securities in the portfolio -Individual stocks are risky only if they add risk to the total portfolioMeasured by the variance or standard deviation of the portfolio’s returnQuestion No: 29 ( Marks: 1 ) - Please choose oneWhich of the following is defined as a line that graphs the systematic, or market riskversus return of the whole market at a certain time and shows all risky marketablesecurities?Security market lineCapital market lineBudget lineValue lineQuestion No: 30 ( Marks: 1 ) - Please choose oneWhat is the other name used for optimal portfolio?Business portfolioMarket portfolioMutual fund portfolioSystematic portfolioQuestion No: 31 ( Marks: 1 ) - Please choose oneWhich of the following is FALSE regarding separation theorem?The firm's investment decision is independent of the preferences of the ownerThe investment decision is dependent on financial decisionRisky portfolios are not tailored to each individual s tasteIt is possible to separate investment decisions from financial decisionsRisky portfolios are not tailored to each individual’s tasteThe two central results of this two-stage budgeting has become known as theFisher Separation Theorem:(i) the firm's investment decision is independent of the preferences of theowner;(ii) the investment decision is independent of the financing decision.Question No: 32 ( Marks: 1 ) - Please choose oneWhich of the following is a measure of securities volatility or systematic riskin comparison to the market as a whole?BetaReturn on equityLiquidityRate of returnQuestion No: 33 ( Marks: 1 ) - Please choose oneA single-index model uses __________ as a proxy for the systematic risk factor.A market index, such as the S&P 500The current account deficitThe growth rate in GNPThe unemployment rate(page 213)The Single - Index Model:




8

William Sharpe, following Markowitz, developed the single-index model, whichrelates returns on each security to the returns on a common index. A broadmarket index of common stock returns is generally used for this purpose. Think ofthe S&P 500 as this index.Relates returns on each security to the returns on a common index, such as theS&P 500 Stock IndexQuestion No: 34 ( Marks: 1 ) - Please choose oneThe concept that two identical assets cannot be sold at different prices is associated withwhich of the following theory?Prospect TheoryModern Portfolio TheoryDow TheoryArbitrage Pricing Theory(page 223) APT is based on the law of one price, which states that two otherwiseidentical assets cannot sell at different prices.Question No: 35 ( Marks: 1 ) - Please choose oneWhich of the following is NOT an anomaly related to efficient market hypothesis?Low PE effectThe small firm effectThe neglected firm effectCommon size effect(page 150) Familiar anomalies include the low PE effect, the small firm effect, theneglected firm effect, the January effect, and the overreaction effectQuestion No: 36 ( Marks: 1 ) - Please choose oneWhich of the following is defined as an obligatory agreement to transact in the future,based on future price expectations?Forward contractFutures contractAnnuity contractSpread contractA forward contract is a legally enforceable agreement for delivery of goods or theunderlying asset on a specific date in future at a price agreed on the date ofcontract.Question No: 37 ( Marks: 1 ) - Please choose oneWhich of the following is defined as a user of the market, who enters into futurescontract to manage the risk of adverse price fluctuation in respect of his existing or future




9

asset?SpeculatorBrokerHedgerArbitragerHedger is a user of the market, who enters into futures contract to manage therisk of adverse price fluctuation in respect of his existing or future asset.Question No: 38 ( Marks: 1 ) - Please choose oneS & P 500 future stock index closes at $ 300 and spot price is $ 325. What is its basis?-25-302530Basis = Cash price - Futures priceQuestion No: 39 ( Marks: 1 ) - Please choose oneIn which of the following situation, the writers of call options expect profit?When the stock price declinesWhen the stock prices remain the sameWhen increase in stock price is less than premiumAll of the given optionsQuestion No: 40 ( Marks: 1 ) - Please choose oneWhich of the following is defined as an option whose payoff depends on whether or notthe underlying asset has reached or exceeded a predetermined price?Barrier optionForward start optionOver-the-counter optionsCompound optionsBarrier Option - Definition of Barrier Option on Investopedia - A type of optionwhose payoff depends on whether or not the underlying asset has reached orexceeded a predetermined price.Question No: 41 ( Marks: 1 ) - Please choose oneAn over-the-counter market can be defined as:A network of dealers connected electronicallyAn illegal secondary market for stocks used primarily by those attempting to evade taxesA primary market for stocksA form of centralized exchangeQuestion No: 1 ( Marks: 1 ) - Please choose oneWhich of the following is EXCLUDED from the reasons of investing?To obtain capital gainTo supplement their moneyTo gather market information


Somi

vu



10

To experience an excitementPage#3 THREE REASONS FOR INVESTING: 1) Income: 2) Appreciation 3)Excitement:Question No: 2 ( Marks: 1 ) - Please choose one__________ believe that securities are priced according to fundamental economic data.Fundamental analystsRatio analystsTechnical analystsResearch analystsPage#40 Fundamental analysts believe securities are priced according to fundamentaleconomicdata.Question No: 3 ( Marks: 1 ) - Please choose oneThe idea that money available at the present time is worth more than the same amount inthe future is called:Present valueTime value of moneyFuture valueAnnuity conceptTVM Mean?The idea that money available at the present time is worth more thanthe same amount in the future due to its potential earning capacity. This coreprinciple of finance holds that, provided money can earn interest, any amount ofmoney is worth more the sooner it is received.also see thisTwo key concepts provide the foundation for the field of finance. The first is Adollar today is worth more than a dollar tomorrow, and is often called the timevalue of money. The second is a safe dollar is worth more than a risky dollar.Anyone who studies finance learns the universal application of these statements andrational decision making. The tradeoffs between risk and return is the principlestheme( page#189)Question No: 4 ( Marks: 1 ) - Please choose oneWhich of the following statement is a characteristic of line charts?Can be used for comparing two or more valuesIt is efficient in showing more detailsIt is simplest and most familiar chartNone of the given choices




11

The line chart is the simplest and most familiar. Page#55Question No: 5 ( Marks: 1 ) - Please choose oneWhat does gross margin represents?The quality of a firm's operationsThe percentage of earnings paid to shareholdersA company's capital structureThe percentage of revenue remaining after cost of goodsTherefore, Gross Margin represents the percentage of revenue remaining after Costof Goods Sold is deducted. http://sim-u/help/manual/accounting_lesson.htmQuestion No: 6 ( Marks: 1 ) - Please choose oneIf ABC Furniture earned $5 million dollars of profit in a year, and the company had amarket capitalization of $85 million, what is the P/E Ratio?9141722Solution:P/E Ratio = Price/ Earnings= 85/5 = 17Question No: 7 ( Marks: 1 ) - Please choose oneWhich of the following items will reduce stockholders' equity?Purchase of equipmentPurchase of suppliesReceiving a loanPayment of salariesQuestion No: 8 ( Marks: 1 ) - Please choose oneWhich of the following is the annual net income from an average investment expressed asa percentage of average amount invested?Net asset valueReturn on equityReturn on average investment (ROI)Discounted valueQuestion No: 9 ( Marks: 1 ) - Please choose oneWhich of the following equity market indicator is price-weighted index?NASDAQ Composite IndexStandard & Poor's 500 IndexNikkie 225 averageNYSE Composite Index(lesson # 25 slide # 18)Nikkei 225 Average:Price-weighted index of 225 actively-traded stocks on the Tokyo Stock Exchange.French index CSE




12

London Stock ExchangeRef: A stock index in which each stock influences the index in proportion to its priceper share. The value of the index is generated by adding the prices of each of thestocks in the index and dividing them by the total number of stocks. Stocks with ahigher price will be given more weight and, therefore, will have a greater influenceover the performance of the index.Currently, the Nikkei is the most widely quoted average of Japanese equities,similar to the Dow Jones Industrial Average. In fact, it was known as the "NikkeiDow Jones Stock Average" from 1975 to 1985.Question No: 10 ( Marks: 1 ) - Please choose oneLahore stock of exchange is _____ based market indicator.VolumeCapitalizationPrice weightingProfit(Lesson 25 slide 26)LSE 25 is volume-basedLSE index is volume weightedKSE index is capitalized weightedQuestion No: 11 ( Marks: 1 ) - Please choose oneWhich of the following is defined as the transformation of illiquid, non-marketable riskyindividual loans into asset-backed securities?SecuritizationSector rotationDiversificationRisk aversionSecuritization refers to the transformation of illiquid, risky individual loans intomore liquid, less risky securities referred to as asset-backed securities (ABS).page#167Question No: 12 ( Marks: 1 ) - Please choose oneWhich of the following affects the price of the bond?Market interest rateRequired rate of returnInterest rate riskAll of the given options i think soSeveral things affect the value of bonds. The big one is interest ratesQuestion No: 13 ( Marks: 1 ) - Please choose oneBond is a type of Direct Claim Security whose value is NOT securedby __________.




13

Real assetsIntangible assetsFixed assetsTangible assetsBond is a type of Direct Claim Security (a legal contractual paper) whose value issecured by Real Assets owned by the IssuerQuestion No: 14 ( Marks: 1 ) - Please choose oneWhich of the following measure that how much a bond price-yield curve deviates from astraight line?Bond durationBond convexityBond valuationAll of the given optionsConvexity is the price measure of how much a bond's price/yield curve deviates from astraight lineQuestion No: 15 ( Marks: 1 ) - Please choose oneWhich of the following is known as speculative bond?Government bondMunicipal bondSovereign bondJunk bondWhat Does Junk Bond Mean?A bond rated 'BB' or lower because of its high default risk. Also known as a "high-yieldbond" or "speculative bond". http://www.investopedia/terms/j/junkbond.aspQuestion No: 16 ( Marks: 1 ) - Please choose oneThe risk inherent to the entire market or entire market segment is known as:Systematic riskIssuer riskSpecific riskNonsystematic riskWhat Does Systematic Risk Mean?The risk inherent to the entire market or entire market segmentQuestion No: 17 ( Marks: 1 ) - Please choose oneThe excess return that an individual stock or the overall stock market provides over arisk-free rate is known as _____________.Equity risk premiumBond horizon premiumShare premiumLiquidity premiumWhat Does Equity Risk Premium Mean?




14

The excess return that an individual stock or the overall stock market provides over arisk-free rate.Question No: 18 ( Marks: 1 ) - Please choose oneThe risk stemming from the lack of marketability of an investment that cannot be boughtor sold quickly enough to prevent or minimize a loss is known as:Interest rate riskMarket riskLiquidity riskDefault riskWhat Does Liquidity Risk Mean?The risk stemming from the lack of marketability of an investment that cannot be boughtor sold quickly enough to prevent or minimize a loss.Question No: 19 ( Marks: 1 ) - Please choose oneWhich of the following may be exchanged for common stock of the same corporation?WarrantExchangeable bondDebentureConvertible bondQuestion No: 20 ( Marks: 1 ) - Please choose oneWhich of the following statement is FALSE?Securities move together only because of their common relationship to the market indexThe importance of each individual security s risk decreases as the number ofsecurities increasesRisk and return tends to be lowest for investors who trade frequentlyThe importance of covariance increases with an increase in number of securitiesRationale: There is rule of thumb more you trade more will be risk. Plus sometime a daytrader makes more money compared to an investor.Question No: 21 ( Marks: 1 ) - Please choose oneThe average value of beta for all stocks in the market is:0.51.01.52.0Question No: 22 ( Marks: 1 ) - Please choose oneA single-index model uses __________ as a proxy for the systematic risk factor.A market index, such as the S&P 500The current account deficitThe growth rate in GNPThe unemployment rateWeb quiz ##### 3. A single-index model uses __________ as a proxy for the




15

systematic risk factor.A) a market index, such as the S&P 500B) the current account deficitC) the growth rate in GNPD) the unemployment rateE) none of the aboveAnswer: A Difficulty: EasyRationale: The single-index model uses a market index, such as the S&P 500,as a proxy for the market, and thus for systematic risk.Question No: 23 ( Marks: 1 ) - Please choose oneThe anomalies literature ____________.Provides a conclusive rejection of market efficiencyProvides a conclusive support of market efficiencySuggests that several strategies would have provided superior returnsProvides a conclusive acceptance of market efficiency34.The anomalies literature ____________.A) provides a conclusive rejection of market efficiencyB) provides a conclusive support of market efficiencyC) suggests that several strategies would have provided superior returnsD) A and CE) none of the aboveAnswer: C Difficulty: ModerateQuestion No: 24 ( Marks: 1 ) - Please choose oneThe ____________ gives the number of shares for which each convertible bond can beexchanged.Conversion ratioCurrent ratioP/E ratioConversion premium19.The _________ gives the number of shares for which each convertible bond canbe exchanged.A) conversion ratioB) current ratioC) P/E ratioD) conversion premiumE) convertible floorAnswer: A Difficulty: EasyRationale: The conversion premium is the amount for which the bond sellsabove conversion value; the price of bond as a straight bond provides thefloor. The other terms are not specifically relevant to convertible bonds.Question No: 25 ( Marks: 1 ) - Please choose oneWhich of the following is a financial instrument that conveys the right, but notthe obligation, to engage in a future transaction on some underlying security, or in a




16

futures contract?OptionsFuturesSwapsForwardsOption – a financial instrument that conveys the right, but not the obligation, toengage in a future transaction on some underlying security, or in a futures contract.Question No: 26 ( Marks: 1 ) - Please choose oneWhich of the following is an agreement to exchange two currencies on one date and toreverse the transaction at a future date?Interest rate swapForeign currency swapTotal return swapCredit default swapForeign Currency Swap An agreement to exchange two currencies on one dateand to reverse the transaction at a future date.Question No: 27 ( Marks: 1 ) - Please choose oneWhich of the following is a derivative in which one party exchanges a stream of interestpayments for another party's stream of cash flows?Foreign currency swapTotal return swapCredit default swapInterest rate swapAn interest rate swap is a derivative in which one party exchanges a stream of interestpayments for another party's stream of cash flows.Question No: 28 ( Marks: 1 ) - Please choose oneWhich of the following is defined as a market for the immediate sale and delivery ofassets?Forward marketLaissez-faire marketFuture marketSpot marketSpot Market :The market for assets that involves the immediate sale and deliveryof the asset.Question No: 29 ( Marks: 1 ) - Please choose oneWhich of the following is defined as a trader, who trades or takes position without havingexposure in the physical market, with the sole intention of earning profit?




17

HedgerArbitragerSpeculatorBrokerWho is speculator? Ans. A trader, who trades or takes position without havingexposure in the physical market, with the sole intention of earning profit is aspeculator. Question No: 30 ( Marks: 1 ) - Please choose oneWhich of the following refers to the simultaneous purchase and sale in two markets sothat the selling price is higher than the buying price by more than the transaction cost?HedgingArbitrageSpeculationBrokerage52. What is arbitrage? Arbitrage refers to the simultaneous purchase and sale in two markets sothat the selling price is higher than the buying price by more than the transaction cost, resulting inrisk-less profit. to the arbitrageur. http://www.fmc.gov.in/htmldocs/faq/faq3.htmlQuestion No: 31 ( Marks: 1 ) - Please choose oneWhich of the following is defined as the difference between spot price and future orforward price?BetaROIAlphaBasisThe difference between the price of the underlying asset in the spot market and thefutures market is called ‘Basis’.( Question No: 32 ( Marks: 1 ) - Please choose oneWhich of the following is TRUE regarding short hedge?Price realized=S2+ (F1 F2)Price realized= S2 (F1+F2)Price realized= S2 (F2 F1)Price realized= S2+ (F1F2)(Lesson 43 slide 24)Short HedgePrice Realized=S2+ (F1 – F2) = F1 + BasisQuestion No: 33 ( Marks: 1 ) - Please choose oneWhile calculating cost of asset under long hedge, what does F2 indicate?Initial asset priceInitial futures priceFinal asset price




18

Final futures price(lesson 43 slide 23)Long HedgeSuppose thatF1 : Initial Futures PriceF2 : Final Futures PriceS2 : Final Asset PriceQuestion No: 34 ( Marks: 1 ) - Please choose oneS & P 500 future stock index closes at $ 275 and spot price is $ 230. What is its basis?40455055Explanation:Basis is the difference between spot and future price. So,275$-230$=45Question No: 35 ( Marks: 1 ) - Please choose oneIn which of the following situation, the writers of call options expect profit?When the stock price declinesWhen the stock prices remain the sameWhen increase in stock price is less than premiumAll of the given optionsQuestion No: 36 ( Marks: 1 ) - Please choose oneWhich of the following contributes to the smooth operation of an option market?American Stock ExchangeOver the Counter OptionsChicago Board Options ExchangeOptions Clearing CorporationThe Options Clearing Corporation (OCC) contributes substantially to the smoothoperation of the options market. Question No: 37 ( Marks: 1 ) - Please choose oneWhich of the following is defined as an option whose payoff depends on whether or notthe underlying asset has reached or exceeded a predetermined price?Barrier optionForward start optionOver-the-counter optionsCompound optionsBarrier option: an option whose payoff depends on whether or not theunderlying asset has reached or exceeded a predetermined price is known abarrier option.Question No: 38 ( Marks: 1 ) - Please choose oneWhich of the following is an option which is paid for now, but will start at someprespecified date in the future?Barrier option




19

Forward start optionOver-the-counter optionsCompound optionsForward-start OptionAn option which is paid for now, but will start at some prespecified date in thefutureQuestion No: 39 ( Marks: 1 ) - Please choose oneThe direct trade between large institutional investors takes place in which ofthe following market?Primary marketSecondary marketThird marketFourth marketDirect trades between large institutional investors comprise the fourthmarket... Handouts page#12Question No: 40 ( Marks: 1 ) - Please choose oneWhich of the following statement is TRUE about value investors?They are patientThey seek rapidly growing companiesThey are speculatorsThey seek slow growing companiesRef from wikipedia: a value investor must be able and willing to be patient for the restof the market to recognize and correct whatever pricing issue created the momentaryvalue.Question No: 41 ( Marks: 1 ) - Please choose oneAn investor will purchase shares of companies in the development stage for:Current incomeCurrent income and capital gainsPassive losses to offset other incomeCapital gains onlyAn investor will purchase shares of companies in the development stage for:A) Current income onlyB) Current income and capital gainsC) Capital gains onlyD) Passive losses to offset other incomeAnswer: CQuestion No: 42 ( Marks: 1 ) - Please choose oneWhich of the following items from the Income Statement is typically used to judge thesuccess of a company?Earnings from continuing operationsAfter-tax net incomeOperating incomeDiluted net income per share


Somi

vu



20

Earnings from continuing operations typically are used to judge the company's successand are almost always the earnings reported in the financial press.

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 stocksRef: PG#25A cyclical stock is one whose fortune is directly tied to the state of the overallnational economy.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 companiesRef: Slide (Lecture#6)• Mid-cap stocks: Capitalization between $500 million and $2billion.Question No: 3 (Marks: 1) - Please choose oneCurrent ratio is also known as:► Working capital ratio► Acid test ratio► Debt coverage ratio► Dividend yield ratioRef: PG#82The current ratio is also known as the working capital ratio and is normallypresented as a real ratio.Question No: 4 ( Marks: 1 ) - Please choose oneWhich 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 trustRef: PG#135An 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:




21

► Weak form efficiency► Semi-strong form efficiency► Strong-form efficiency► Weak and strong form of efficiencyQuestion 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 (review)► AnchoringRef;Illusion of control is the tendency for human beings to believe they cancontrol, or at least influence, outcomes that they demonstrably have no influenceover. It has been demonstrated in a succession of different experiments, and isthought to influence gambling 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: PG#158_1591. Dow Jones Averages:Since 1928, 30 large blue chip companies have comprised the index.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► FutureMoney Market InstrumentsTreasury BillsCertificates Of DepositCommercial PaperQuestion No: 9 ( Marks: 1 ) - Please choose oneLSE captures _____________ of the market capitalization.► 45%► 50%► 53%► 66%(lesson # 25 , slide # 25) LSE 25-Index includes the top 25 traded companies at




22

LSE and captures 53% of the market capitalization and 98% of the total tradingvolume of LSE.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 changeQuestion 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: PG#166) Junk bonds are high-risk, high-yield bondsQuestion No: 12 ( Marks: 1 ) - Please choose oneSystematic risk is also known as:► Market risk► General risk► Un-diversifiable risk► All of the given options(lesson 34 slide #15 and 16)• Two general types:– Systematic Risk– Non-systematic Risk• Systematic (general) Risk is a risk that influences a large number of assets.Systematic risk also known as systemic risk, market risk and un-diversifiable risk is riskwhich applies to whole market or market segment.Undiversifiable - Also known as "systematic" or "market risk",Question No: 13 ( Marks: 1 ) - Please choose oneWhich of the following is the only way to protect investors from nonsystematic risk?► Sector rotation► Securitization► Diversification► Risk aversion(Lesson 32 slide 17)Diversification is the only way to protect yourself from unsystematic riskQuestion 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




23

► There is no relationship between security m and n► The given data is not sufficient to arrive at any resultREF: PG#208Correlation Coefficient:ρij = -1.0= perfect negative (inverse) correlation(Slide Lesson#34)�mn = -1.0 = perfect negative (inverse) correlation� What if the correlation of A&B = -1 ? This is an unusual case, because it meansthat when A moves up, B always moves down. correlations.Question 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 208) relative measure of association that is bounded by +1.0'and—1.0, withQuestion No: 16 ( Marks: 1 ) - Please choose oneWho was the developer of CAPM?► Gerald Appel► Markowitz► Joseph Granville► John BollingerThe CAPM Model was developed by Harry Markowitz in 1962, and was responsible forhis winning the Nobel Prize some years later.Question No: 17 ( Marks: 1 ) - Please choose oneThe average value of beta for all stocks in the market is:► 0.5► 1.0► 1.5► 2.0Question No: 18 ( Marks: 1 ) - Please choose oneWhich of the following involves dividing an investment portfolio among different financialassets?► Securitization► Sector rotation► Asset allocation► Risk aversionRef: PG#215The asset allocation decision refers to the allocation of portfolio assets to broadasset markets; in other words, how much of the portfolio's funds are to be,




24

invested in stocks, in bonds, money market assets, and so forth. (page 215)Asset allocation involves dividing an investment portfolio among differentasset categories, such as stocks, bonds, and cash.Question No: 19 ( Marks: 1 ) - Please choose oneWhich of the following are regulated by Commodity Futures Trading Commission(CFTC)?► Options► Futures► Swaps► ForwardsRef: Slide #28) (Lesson#41)Futures contracts are regulated by the Commodity Futures Trading Commission(CFTC).Question No: 20 ( Marks: 1 ) - Please choose oneWhich of the following is defined as a market for the immediate sale and delivery ofassets?► Laissez-faire market► Future market► Spot market► Forward marketRef: PG#246Spot markets are markets for immediate: delivery.Slide (Lesson#41)• Spot or cash market:– Price refers to item available for immediate delivery.Spot Market The market for assets that involves the immediate sale and deliveryof the asset. 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 marketRefFutures contracts are standardized and easily traded. (page 248)Slide(lect#41)• A forward contract is functionally similar to a futures contract, however:– There is no marking to market.– Forward contracts are not marketable.While futures contracts are traded on the exchange, forwards contracts are traded




25

over-the-counter market. Incase of futures contracts the exchange specifies thestandardized features of the contract, while no pre determined standards are therein the forward contracts.Futures contractThis process is known as marking to marketDear Student,The question is about "forward contract" not "future contract"Forwards do not have standards and are not traded on stock exchange. Now thethird option is excluded because it is not related to forwards, it is about futures sothe right option will be based on the slide’s information that isThere is no marking to market.Question No: 22 ( Marks: 1 ) - Please choose oneProgram trading calls for which of the following?► 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► 55REF:275-230=45The difference between the spot price and the futures price is called the basis.Question No: 24 ( Marks: 1 ) - Please choose oneThe 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► BetaMoving Average - Technical analysis term meaning the average price of a securityover a specified time period, used in order to spot pricing trends by flattening outlarge fluctuations.Question No: 25 ( Marks: 1 ) - Please choose oneWhich of the formula is TRUE for calculating retained earnings?




26

► Retained Earnings = Net Earnings – Dividends► Retained Earnings = Net Earnings + Long term debt► Retained Earnings = Net Earnings + Short term debt► Retained Earnings = Net Earnings + DividendREF:The formula calculates retained earnings by adding net income to (orsubtracting any net losses from) beginning retained earnings and subtracting anydividends paid to shareholders:Question No: 26 ( Marks: 1 ) - Please choose oneThe Dow Jones Industrial Average (DJIA) is an example of which of the following index?► Price weighting index► Capitalization weighting index► Volume based index► Fixed income indexPage#157A price-weighted index is composed of a single share of each of the indexcomponent,regardless of the price of the share or the size of the underlyingcompany: the Dow Jones Industrial Average (DJIA) is an example of such an index.The first step the 30 industrial companies comprising the 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“beta,” which is a measure of stock price volatility.Question No: 28 ( Marks: 1 ) - Please choose oneActive 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 securitiesActive portfolio managers try to construct a risky portfolio with ________.A) a higher Sharpe measure than a passive strategyB) a lower Sharpe measure than a passive strategyC) the same Sharpe measure as a passive strategyD) very few securitiesE) none of the aboveAnswer: A Difficulty: ModerateRationale: A higher Sharpe measure than a passive strategy is indicative ofthe benefits of active managementQuestion No: 29 ( Marks: 1 ) - Please choose one




27

Which of the following is the CORRECT formula for calculating the buying power ofinvestors?► Assets – liabilities► Equity – debt► Short term debt – long tem debt► Current assets – current liabilitiesRef : Page#31Buying power = equity – debt balanceQuestion No: 30 ( Marks: 1 ) - Please choose oneWhen a company’s 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 ratioPrice-to-sales ratio (lesson 12 slide 12)– Ratio of a company’s total market value (price times number of shares)divided by sales.Market valuation of a firm’s revenuesQuestion 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.► Earnings per share relate income with ownership.► It is a liquidity measure.(4th option)Economic earnings per share is not a liquidity measure(lesson 12 slide 26)Earnings per share (EPS) (profitability ratio)(1st option)The net income earned by each share of outstanding common stock. (p.254).(3rd option)Earnings per share (EPS) is a way to relate income to ownership on a pershare basis, and is used in evaluating share price.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 optionsRef3. Strong-form efficient markets. The strong form of the EMH states that stock pricesfully reflect all information from public and private sources. The strong form includes all




28

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.The three forms of the efficient markets hypothesis are: 1) Weak form. Market pricesreflect information contained in historical prices. Investors are unable to earn abnormalreturns using historical prices to predict future price movements. 2) Semi-strong form. Inaddition to historical data, market prices reflect all publicly-available information.Investors with insider, or private information, are able to earn abnormal returns. 3) Strongform. Market prices reflect all information, public or private. Investors are unable to earnabnormal returns using insider information or historical prices to predict future pricemovements.Question No: 33 ( Marks: 1 ) - Please choose oneA straight-line would have convexity of:► -1► 0► +1► +2Question No: 34 ( Marks: 1 ) - Please choose oneBonds that are NOT contracted to make periodic payments are called:► Deferred coupon bonds► Eurobonds► Corporate bonds► Zero-coupon bondsRefZero-Coupon Bonds Not all bonds make periodic coupon payments. Bonds that are notcontracted to make periodic coupon payments are called zero-coupon bonds.(page 37)Question 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.► They have no credit risk.




29

(2nd option)Exchange-traded derivative contracts: Standardized derivative contractsQuestion 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 efficiencyPurposes of derivative markets: Price discovery, Risk management, Marketcompleteness, Market efficiency & Trading efficiency.Question No: 37 ( Marks: 1 ) - Please choose oneThe 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.RefIN page#38 See point 11(B)Question No: 38 ( Marks: 1 ) - Please choose oneAs the number of stocks in a portfolio increases, the portfolio’s systematic risk:► Can increase or decrease► Decrease at a decreasing rate► Decrease at an increasing rate► Increase at an increasing rateRefVariability in a security's total returns that is directly associated with overall movementsin 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. (PAGENO. 198)Question No: 39 ( Marks: 1 ) - Please choose oneWhich of the following is LEAST likely a component of an investor’s required rate ofreturn on a stock?► The real risk-free rate► The expected inflation rate► A growth premium► A risk premium(lesson 21, slide 22)• Risk-free rate• RF =Real ROR + Inflation premium• The risk premium


Somi

vu



30

– Reflects all uncertainty in the asset.– Nominal RF must contain premium for expected inflation.Question No: 40 ( Marks: 1 ) - Please choose oneThis industry is MOST likely in which phase (s) of its life cycle?► Deceleration of growth and decline► Stabilization and market maturity► Mature growth► PioneeringQuestion 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 & causesprofits 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 oneWhich of the following is LEAST likely an assumption underlying technical analysis?► 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 behaviour► Supply is driven by the rational behavior of the firms offering their shares whiledemand is driven by the irrational behaviors of the investors.Ref; Charts can be used to predict changes in supply and demand (page no. 54)The Underlying Assumptions of Technical AnalysisUnderlying all of technical analysis are the following assumptions:Values and prices are determined by supply and demand.Supply and demand are driven by both rational and irrational behavior.Security prices move in trends that persist for long periods.The shift in supply and demand can be observed in market price behavior.Technical Analysis looks for signs that the price has moved, and bases its strategy onthe premise that price changes will occur over a long period. When we recognize aprice movement opposite to its long period supposed movement we can analyze where isit moving next.Question No: 1 ( Marks: 1 ) - Please choose oneA 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




31

► None of the given options► Capital Asset Pricing ModelA procedure for valuing the price of a stock by using predicted dividends anddiscounting them back to present value. The idea is that if the value obtained fromthe DDM is higher than what the shares are currently trading at, then the stock isundervalued. Question No: 2 ( Marks: 1 ) - Please choose oneAccording to Dow Theory, primary trend is a:Short term trend ►► Long term trendMedium term trend ► None of the given options ► Ref: Primary Trend Called “the tide” by Dow.This is the trend that defines the long-term direction (up to several years).Question No: 3 ( Marks: 1 ) - Please choose oneWhich of the following functions do mutual fund companies perform for their investors?► Record keeping and administration► Professional management► Diversification and divisibility► All of the given optionsQuestion No: 4 ( Marks: 1 ) - Please choose oneThe 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 theoryEfficient Market Hypothesis - EMH Mean?An investment theory that states it is impossible to "beat the market" because stockmarket efficiency causes existing share prices to always incorporate and reflect allrelevant information.Question No: 5 ( Marks: 1 ) - Please choose oneWhich of the following is the minimum expected rate of return needed to induceinvestment?► Expected return► Return on equity► Required rate of return► Return on assetsRequired Rate of Return: Minimum expected rate of return needed to induce




32

investmentCommon Stock: Analysis and StrategyQuestion No: 6 ( Marks: 1 ) - Please choose oneIn 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(lesson # 23 , slide # 12) Weak Form: Prices reflect all past price and volume data.• Technical analysis, which relies on the past history of prices, is of little orno value in assessing future changes in price.Question No: 7 ( Marks: 1 ) - Please choose oneWhich of the following is a concept in economics, finance, and psychology related to thebehavior of consumers and investors under uncertainty?► Illusion of control► Anchoring► Mental accounting► Risk AversionRisk aversion is a concept in economics, finance, and psychology related to thebehaviour of consumers and investors under uncertainty.Question No: 8 ( Marks: 1 ) - Please choose oneWhich of the following is an example of a non-marketable security?► Treasury bill► Negotiated CD► U.S. Government savings bond► Banker’s acceptanceQuestion No: 9 ( Marks: 1 ) VuSchool - Please choose oneWhich 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 rateRef: Coupon - Also called "coupon rate" or "coupon percent rate", is the interestrate stated on a bond, note, or other fixed income security when it is issued. Ingeneral, the coupon is paid semiannually and expressed as a percentage of theface value.Question No: 10 ( Marks: 1 ) - Please choose one




33

Which of the following is a measure of bond’s lifetime that accounts for the entirepattern of cash flows over the life of the bond?► Duration► Coupon► Convexity► Yield to maturityRef: A measure of a bond’s lifetime, stated in years, that accounts for the entirepattern (both size and timing) of the cash flows over the life of the bondBond Yields and PricesQuestion No: 11 ( Marks: 1 ) - Please choose oneWhich of the following factor contributes to the price volatility of a bond?► Maturity► Coupon► Yield to maturity► All of the given options(page 185) Using the bond valuation model, he showed the changes that occur in theprice of a bond (i.e., its volatility), given a change in yields, as a result of bondvariables such as time to maturity and coupon(lesson 29 slide # 11)• As maturity increases, price sensitivity increases at a decreasing rate.• Price sensitivity is inversely related to a bond’s coupon rate.• Price sensitivity is inversely related to the yield to maturity at which thebond is selling(Lesson 29 slide #20) Measuring Bond Price Volatility: Duration• Important considerations:– Different effects of yield changes on the prices and rates of returnfor different bonds.– Maturity– It May not have an identical economic lifetime.– A measure is needed that accounts for both size and timing of cashflows.– Maturity is an inadequate measure of volatility.Question No: 12 ( Marks: 1 ) - Please choose oneWhich of the following is defined as the point at which revenues equal costs?► Yield to maturity► Break-even► Margin► Leverage pointAnalysis.topicArticleId-21248,articleId-21229.htmlQuestion No: 13 ( Marks: 1 ) - Please choose oneWhich of the following is rated as “‘BB” or lower because of its high default risk?► Convertible bonds► Municipal bonds► Government bonds




34

► Junk bonds(page 166) 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.Ref: Junk Bond - A bond rated 'BB' or lower because of its high default risk.Also known as a "high-yield bond" or "speculative bond".Question No: 14 ( Marks: 1 ) - Please choose oneBond 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► None of the given options� Bond horizon premium is the difference between long- and short-termgovernment securitiesQuestion No: 15 ( Marks: 1 ) - Please choose oneWhich of the following statement is FALSE?► Each portfolio asset has a weight which represents the percent of the totalportfolio value► Portfolio risk is not a weighted average of the risk of individual securities in theportfolio► Portfolio risk is measured by variance or standard deviation of the portfolio’sreturn► None of the given options– Each portfolio asset has a weight, w, which represents the percent of the totalportfolio value– Portfolio risk is not a weighted average of the risk of the individual securities inthe portfolioPortfolio RiskPortfolio risk not simply the sum of individual security risks - Emphasis on the riskof the entire portfolio and not on risk of individual securities in the portfolio -Individual stocks are risky only if they add risk to the total portfolioMeasured by the variance or standard deviation of the portfolio’s returnQuestion No: 16 ( Marks: 1 ) - Please choose oneWhich of the following indicates that the returns on the two securities (m and n) tend tomove in the same direction at the same time?► rmn = +1.0► rmn = -1.0► rmn =0► All of the given options(Lesson # 34 slide # 22)




35

• Statistical measure of association.• �mn = correlation coefficient between securities m and n– �mn = +1.0 = perfect positive correlation– �mn = -1.0 = perfect negative (inverse) correlation– �mn = 0.0 = zero correlationQuestion No: 17 ( Marks: 1 ) - Please choose oneWho was the developer of CAPM?► Gerald Appel► Markowitz► Joseph Granville► John BollingerRef:The CAPM Model was developed by Harry Markowitz in 1962.(lesson # 36 , slide # 15)• CAPM focuses on the equilibrium relationship between the risk andexpected return on risky assets.• It builds on Markowitz portfolio theoryQuestion No: 18 ( Marks: 1 ) - Please choose oneWhich 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 returnRef: 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 pricingmodel (CAPM), a model that calculates the expected return of an asset based onAlso known as "beta coefficient"Question No: 19 ( Marks: 1 ) - Please choose oneThe ____________ gives the number of shares for which each convertible bond can beexchanged.► Conversion ratio► Current ratio► P/E ratio► Conversion premium(Q# 19)Question No: 20 ( Marks: 1 ) - Please choose oneThe ____________ 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




36

► CAPM, APT► CAPM, OPMQuestion No: 21 ( Marks: 1 ) - Please choose oneWhich of the following involves dividing an investment portfolio among different financialassets?► Securitization► Sector rotation► Asset allocation► Risk aversionRef: 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 thatworks best for you at any given point in your life will depend largely on your timehorizon and your ability to tolerate risk.Asset allocation involves dividing an investment portfolio among different assetclasses based on an investor's financial requirements.Question No: 22 ( Marks: 1 ) - Please choose oneWhich of the following is the practice of using derivatives as building blocks to createspecialized products?► Financial engineering► Risk management► Income generation► Portfolio management(lesson 44 slide 16)Financial engineering refers to the practice of usingderivatives as building blocks in the creation of some specialized productFinancial Engineering is the practice of using derivatives as building blocks tocreate specialized products. As the field of financial engineering has grown, theuse of options to create synthetic positions and to hedge cash positions hastremendously expanded.Question No: 23 ( Marks: 1 ) - Please choose oneWhich of the following is defined as an investment transaction that is intended toprovide protection against a decline in the value of an asset?► Short hedge► Long hedge► Natural hedge► Cross hedge




37

Short hedge: By definition, a short hedge is an investment transaction which isintended to provide protection against a decline in the value of an asset.Question No: 24 ( Marks: 1 ) - Please choose oneIn the formula, cost of asset= S2– (F2–F1), what does S2 indicate?► Initial asset price► Initial futures price► Final asset price► Final futures price• Suppose thatF1 : Initial Futures PriceF2 : Final Futures PriceS2 : Final Asset Price• Cost of Asset = S2 – (F2 – F1) = F1 + Basis• You hedge the future purchase of an assetby entering into a long futures positionQuestion No: 25 ( Marks: 1 ) - Please choose oneS & P 500 future stock index closes at $ 300 and spot price is $ 325. What is its basis?► -25► -30► 25► 30Basis = spot price –closing price= 325-300= 25Question No: 26 ( Marks: 1 ) - Please choose oneWhich 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(lesson 42 , slide 22)Hedger: A person who uses derivatives to reduce risk that theymay face in futureFor investors, hedging is the practice of purchasing securities in a combination thatreduces portfolio risk.Question No: 27 ( Marks: 1 ) - Please choose oneWhich 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 pricesQuestion No: 28 ( Marks: 1 ) - Please choose oneWho introduced Moving Average Convergence/Divergence (MACD)?




38

► Gerald Appel► Joseph Granville► John Bollinger► Welles WilderThe MACD was developed by Gerald Appel,MACD (Moving Average Convergence-Divergence has long been one of the mostpopular and widely available technical indicators since it was developed by GeraldAppel in the late 1970’s.Question No: 29 ( Marks: 1 ) - Please choose oneWhich 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 levelQuestion No: 30 ( Marks: 1 ) - Please choose oneWhich of the following is a measure of the volatility of stock prices or returns?► ROR► Beta► ROI► Risk premiumBeta: A measure of the volatility of a stock relative to the overall market. A betaof less than one indicates lower risk than the market; a beta of more than oneindicates higher risk than the market. NASDAQ uses the S&P 500 as theunderlying index to measure the overall market for beta.Beta measures a stock's volatility, the degree to which its price fluctuates in relationto the overall market.Question No: 31 ( Marks: 1 ) - Please choose oneWhich 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, ata specified price?► Option contract► Forward contract► Future contract► Annuity contractFutures Contract :A futures contract is a standardized contract, traded on a futuresexchange, to buy or sell a standardized quantity of a specified commodity orunderlying at a certain date in the future, at a price determined in advance. The




39

future date is called the delivery date or final settlement date.Question No: 32 ( Marks: 1 ) - Please choose oneWhich 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 derivativeslesson # 26 slide # 28 & 29)Equity SecuritiesDenote an ownership interest in a corporationPreferred StocksMore like bonds.Hybrid security because features of both debt and equity.Preferred stockholders paid after debt but before common stockholders.Dividend known, fixed in advance.May be cumulative if dividend omitted.Often convertible into common stock.May carry variable dividend rateQuestion No: 33 ( Marks: 1 ) - Please choose oneWhich 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 companiesLesson # 6 slide # 10)Growth InvestmentInvestors want quick return.A Growth investor seeks rapidly growing companies.Growth investors believes that a body in motion tends to stay in motion. Strongcompanies tend to get stronger.Growth company might not have historical perspective in background but it will find aplace in the future depending on the product or industry belong.Oil Exploration is one of the most key element in any progress in a countryQuestion No: 34 ( Marks: 1 ) - Please choose oneWhich 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 shareQuestion No: 35 ( Marks: 1 ) - Please choose oneWhich 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.


Somi

vu



40

► T-bills have maturities of less than one year and make explicit interest payments.U.S. Treasury bill (T-bill) - A short-term U.S. government debt instrument issued bythe U.S. Treasury.Commercial paper - Short-term, unsecured debt issued by the largest corporationsA Pure Discount Security is an interest-bearing asset:It makes a single payment of face value at maturity.It makes no payments before maturity.Question No: 36 ( Marks: 1 ) - Please choose oneWhich of the following 5-year bond has the highest interest rate risk?► A floating-rate bond► A zero-coupon bond► A 5% fixed-coupon bond► A 10% fixed-coupon bondQuestion No: 37 ( Marks: 1 ) - Please choose oneWhich of the following statements regarding debentures is MOST accurate?► Debentures are free from default risk if issued by federally related or governmentsponsored 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.ReferenceQuestion No: 38 ( Marks: 1 ) - Please choose oneA futures contract is LEAST likely:► Exchange traded► A contingent claim► Adjusted for profits and losses daily► A standardized instrumentQuestion No: 39 ( Marks: 1 ) - Please choose oneWhich of the following is NOT a risk measure?► Beta► Standard deviation► Variance► Geometric mean( Lesson 39 , slide 24)• Total risk measured by the standard deviation of portfolio returns.• Non-diversifiable risk measured by a security’s beta.– Estimates may vary, be unstable, and change over time.9. The variance or standard deviation of a stocks return is a measure of Total RiskQuestion No: 40 ( Marks: 1 ) - Please choose oneWhich of the following is LEAST likely an example of a portfolio constraint?




41

► Tax concern► Liquidity needs► Total return requirement of 15%► Regularity requirementWhich of the following is least likely an example of a portfolio constraint?A. Tax concerns.B. Liquidity needs.C. Total rerurn requirement of 15%.D. Legal and regulatory requirements1. C Return objectives are part of a policy statement's objectives, not constraints.Question No: 41 ( Marks: 1 ) - Please choose oneWhich 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 growthcompany’s stock will earn above average returns.A growth company is one that consistently selects projects that earn higherreturns than required for their level of risk.A growth stock is one that earns above-normal risk-adjusted returnsRationale: A growth stock is one that earns below-average risk adjusted returnsQuestion No: 42 ( Marks: 1 ) - Please choose oneThe 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► Determination of the stability of securities for an investor’s portfolio► Identification of the industry effects of changes in demographics, lifestyles,politics etcQuestion No: 1 ( Marks: 1 ) - Please choose oneThe price at which a security dealer sells a security is known as:Bid priceMarket priceOffer priceOrder priceQuestion No: 2 ( Marks: 1 ) - Please choose one__________ is a temporary restriction on program trading in a particular securityormarket, usually to reduce dramatic price movements.SuperDotNYSE directTrading curb




42

Ticker tapeA temporary restriction on program trading in a particular security or market,usually to reduce dramatic price movements. Also known as a collar or circuitbreaker..Question No: 3 ( Marks: 1 ) - Please choose oneA brokerage account in which broker lends the customer cash to purchasesecurities iscalled:Margin accountCash accountIRA accountOption accountQuestion No: 4 ( Marks: 1 ) - Please choose oneThe Dow theory use _______ to follow three major types of market movements.Charting ( not sure )Key indicatorsFundamental analysisTechnical analysisQuestion No: 5 ( Marks: 1 ) - Please choose oneWhich of the following is defined as a procedure for valuing the price of a stock byusing predicted dividends and discounting them back to present value?Relative Strength IndexOn Balance VolumeDividend Discount ModelBollinger bandsQuestion No: 6 ( Marks: 1 ) - Please choose oneWhen inflation and interest rates are low, Price per Earning (P/E) ratio tend to be:HighLowMinimumAverage(Page 94) P/E ratios are generally depressed when the interest rates and the rates ofinflation are high, such as around 1980-81. P/E ratios tend to be high when inflationand interest rates are low, such as the period of the mid –to-late-1990s, when P/Eratios were at quite high levels by historical standards.Question No: 7 ( Marks: 1 ) - Please choose oneWhich of the following is EXCLUDED from Porter s competitive factors?Substitute products or services




43

Changes in the economyBargaining power of buyersRivalry between existing competitorsQuestion No: 8 ( Marks: 1 ) - Please choose oneWhich of the following is a basket of stocks that tracks a particular sector,investmentstyle, geographical area, or the market as a whole?Exchange traded fundOpen-end fundClosed-end fundUnit investment trust(page 135) An ETF is a basket of stocks that tracks a particular sector,investment style, geographical area, or the market as a whole.Question No: 9 ( Marks: 1 ) - Please choose oneIf an investor wants to avoid transaction costs, which of the following strategyshould he select?Active strategyDefensive strategyBuy and hold strategySector rotation(page 138)Buy-And-Hold Strategy:A buy-and-hold strategy means exactly that an investor buys stocks andbasically holds them until some future time in order to meet some objective.The emphasis is on avoiding transaction costs, additional search costs, andso forth.Question No: 10 ( Marks: 1 ) - Please choose oneWhich of the following is the annual net income from an average investmentexpressed as a percentage of average amount invested?Net asset valueReturn on equityReturn on average investment (ROI)Discounted valueRef: Return On Investment (ROI) is the average annual net income from an outlayexpressed as a percentage of average amount invested.(page 291)Question No: 11 ( Marks: 1 ) - Please choose oneWhich of the following would justify an investor preference for cash dividends?Illusion of controlAnchoringMental accountingAsset segregationQ#5




44

Mental accounting holds that investors segregate funds into mental accounts (e.g.,dividends and capital gains), maintain a set of separate mental accounts, and do notcombine outcomes; a loss in one account is treated separately from a loss in anotheraccount. Mental accounting leads to an investor preference for dividends overcapital gains and to an inability or failure to consider total return.Question No: 12 ( Marks: 1 ) - Please choose oneWhich of the following is NOT a "value-weighted" index?NYSE Composite IndexDow-Jones Industrial AverageNASDAQ Composite IndexStandard & Poor's 500 IndexRef: page 159 & 160 )The S&P 500 Composite is probably the most widely used.This value-weighted index contains 500 NYSE-traded securities.The S&P 500 Composite Index is a value-weighted index created by Standard & Poor’s.Examples of cap-weighted indexes include the Standard & Poor's 500 Index and theNASDAQ Composite Index.Ironically, the most widely quoted index, the Dow Jones Industrial Average, relies on themost curious method of calculation. The Dow, as it is widely referred to, is priceweighted.Thus, higher-priced stocks receive more weight in this index than lower-pricedstocks.The NYSE Composite Index - (NYSE) is a market value-weighted indexNASDAQ Composite Index -The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The Indexis market-value weighted.Question No: 13 ( Marks: 1 ) - Please choose oneWhich of the following focuses on how investors interpret and act on information to makeinformed investment decisions?Dividend discount modelEfficient market hypothesisDow TheoryBehavioral financeQuestion No: 14 ( Marks: 1 ) - Please choose oneWhich of the following is expressed as index number relative to a base index value of10?




45

Dow-Jones Industrial AverageNASDAQ Composite IndexStandard & Poor's 500 IndexNYSE Composite Index� Standard & Poor’s Composite Index� Composed of 500 “large” firm stocks� Expressed as index number relative to a base index value of 10Securities Markets (slide 12)The Standard & Poor's 500 Index is calculated using a base-weighted aggregatemethodology; that means the level of the Index reflects the total market capitalization ofall 500 component stocks relative to a particular base period. The S&P 500's base periodis 1941-43. The actual total market value of the stocks in the Index during the base periodhas been set equal to an indexed value of 10. This is often indicated by the notation 1941-43=10.Question No: 15 ( Marks: 1 ) - Please choose oneWhich of the following is NOT included in money market securities?Treasury BillCertificate of depositCommercial paperFuture(page 113) money market holdings, short-term government bonds or Treasurybills, marketable securities and commercial paperRef: Money-market securities are liquid, marketable, safe investments that havematurities of one year or less. They are used, generally, for emergency fundsinvestments and short-term cash. Examples of this type of investment are certificates ofdeposits (CDs), money-market mutual funds, treasury bills, commercial papers, banker’sacceptances, and purchase agreements.Question No: 16 ( Marks: 1 ) - Please choose oneWhich of the following is an example of a non-marketable security?Treasury billNegotiated CDU.S. Government savings bondBanker s acceptanceRef:Government Bond Basics, II.Non-marketable securities include U.S. Savings Bonds, Government Account Series,and State and Local Government Series.Slide 1 - Cameron School of Business




46

Question No: 17 ( Marks: 1 ) - Please choose oneWhich of the following statement is TRUE about yield to maturity?Yield to maturity is inversely related to bond priceYield to maturity is always less than the yield to callYield to maturity will be less than the current yieldYield to maturity tends to fall with a rise in durationThe inverse relationshipA bond’s price and a bond’s yield are inversely related; that is to say, when a bond’sprice falls its yield rises and vice-versa. Question No: 18 ( Marks: 1 ) - Please choose oneWhich of the following statement is TRUE about yield to maturity?Yield to maturity is inversely related to bond priceYield to maturity is always less than the yield to callYield to maturity will be less than the current yield for bonds purchased at a discountYield to maturity tends to fall with a rise in durationThe inverse relationshipA bond’s price and a bond’s yield are inversely related; that is to say, when a bond’sprice falls its yield rises and vice-versa. Question No: 19 ( Marks: 1 ) - Please choose oneWhich of the following statement is TRUE regarding bond prices?Bond prices are expressed as a percentage of discounted valueBond prices are expressed as a percentage of par valueBond prices are expressed as a percentage of future valueBond prices are expressed as a percentage of intrinsic valueBond pricing is expressed as a percentage of par.Question No: 20 ( Marks: 1 ) - Please choose oneThe value of the bond is NOT directly tied to the value of which of the following assets?Real assets of the businessLiquid assets of the businessFixed assets of the businessLong term assets of the businessQuestion No: 21 ( Marks: 1 ) - Please choose oneWhich of the following is known as speculative bond?Government bondMunicipal bondSovereign bondJunk bondRef: Junk BondA bond rated 'BB' or lower because of its high default risk. Also known as a "highyieldbond" or "speculative bond".Question No: 22 ( Marks: 1 ) - Please choose one




47

Bond horizon premium is the difference between which of the following types ofsecurities?Long- and short-term government securitiesStock and risk-free returnsEquity and shot-term government securitiesNone of the given options(lesson 32 slide 31) Bond horizon premium is the difference between long-andshort-term government securities.Bond horizon premium is the difference between long- and short-term governmentsecuritiesQuestion No: 23 ( Marks: 1 ) - Please choose oneThe market value of a company stock has declined due to competition in the market.The investors of this company are faced with what type of risk?Financial riskMarket riskInterest rate riskBusiness riskQuestion No: 24 ( Marks: 1 ) - Please choose oneWhich of the following bond redeems the principal amount at maturity and pays noperiodic income?Municipal bondCorporate bondJunk bondZero coupon bondZero coupon bonds pay no periodic interest. The bonds are purchased at a discountand redeemed for the full face value at maturity. Generally, investors must payincome tax on interest accrued annually on zero coupon bonds even though no cashinterest payments are received. Investors should consult a tax professional foradditional information.Question No: 25 ( Marks: 1 ) - Please choose oneDiversifying without looking at relevant investment characteristics is known as:Random diversificationNon-random diversificationHorizontal diversificationVertical diversificationRandom diversification– Diversifying without looking at relevant investment characteristics




48

– Marginal risk reduction gets smaller and smaller as more securities are addedhttp://golum.riv.csu.edu.au/~hskoko/subjects/fin221/lect03.pdfQuestion No: 26 ( Marks: 1 ) - Please choose oneWhich of the following statement is FALSE about efficient portfolio?An efficient portfolio provides greatest expected return for a given level of riskInvestors can identify efficient portfolios by specifying an expected portfolio returnInvestors can identify efficient portfolios by maximizing the portfolio riskEfficient portfolio risks are measured by the standard deviationInvestors can identify efficient portfolios by specifying an expected portfolio returnand minimizing the portfolio risk at this level of return. Alternatively, they canspecify a portfolio risk level they are willing to assume and maximize the expectedreturn on the portfolio for this level of risk.Question No: 27 ( Marks: 1 ) - Please choose oneWhich of the following statement is CORRECT?One hundred stocks are required to eliminate the bulk of the diversifiable risk from aportfolioStandard deviation measures diversifiable riskThe number of stocks needed to highly diversify a portfolio is constant over timeA fully diversified portfolio still contains undiversifiable riskthe risk of a well-diversified portfolio is market risk, or systematic risk, whichis non-diversifiable.(page 197)Systematic Risk is an investor can construct a diversified portfolioand eliminate pan of the total risk, the diversifiable or non-market part.Question No: 28 ( Marks: 1 ) - Please choose oneWhich of the following statement is TRUE regarding efficient frontier?It is a downward sloping curved lineIt is an upward sloping straight lineIt is a downward sloping straight lineIt is an upward sloping curved lineQuestion No: 29 ( Marks: 1 ) - Please choose oneWhen beta of a security >1.0, it indicates that:Security is more risky than the marketSecurity is less risky than the marketSecurity is as risky as the marketSecurity is not risky at all(Handout page 137) A stock with a beta lower than 1.0 has a required rate ofreturn below kM, because its risk (beta) is less than that of the market. On theother hand, a stock with a beta greater than 1.0 has a required rate of return




49

greater than that of the market.Question No: 30 ( Marks: 1 ) - Please choose oneA bond will sell at a discount when __________.The coupon rate is greater than the current yield and the current yield is greater thanyield to maturityThe coupon rate is greater than yield to maturityThe coupon rate is less than the current yield and the current yield is greater than theyield to maturityThe coupon rate is less than the current yield and the current yield is less thanyield to maturityBond sell at:Discount = Coupon Rate < Current Yield < YTMNote that for bonds selling at a discount, the yield to maturity will always begreater than the current yield because of the capital gain an investor receiveswhen the bond matures at par value.Question No: 31 ( Marks: 1 ) - Please choose oneThe _________ is a measure of the average rate of return an investor will earn if theinvestor buys the bond now and holds until maturity.Current yieldDividend yieldP/E ratioYield to maturity(Q#11)Question No: 32 ( Marks: 1 ) - Please choose oneNominal rate of interest - inflation is equal to which of the following?Interest amountNominal interestRisk premiumReal rate of interestThe "real interest rate" is approximately the nominal interest rate minus theinflation rateQuestion No: 33 ( Marks: 1 ) - Please choose oneThe APT was developed in 1976 by ____________.LintnerModigliani and MillerRossSharpe(page 5) Arbitrage Pricing Theory (APT) was developed by Ross (1976) andenhanced by others.Question No: 34 ( Marks: 1 ) - Please choose oneWhich of the following is a financial instrument whose return is derived from the return


Somi

vu



50

on another instrument?Derivative securityFixed income securityEquity securityMoney market security(lesson 40 slide 20)A derivative is a financial instrument whose return is derivedfrom the return on another instrument.A derivative is a financial instrument that offers a return based on the return ofsome other underlying asset. In this sense, its return is derived from anotherinstrumentQuestion No: 35 ( Marks: 1 ) - Please choose oneWhich of the following is a derivative in which one party exchanges a stream of interestpayments for another party's stream of cash flows?Foreign currency swapTotal return swapCredit default swapInterest rate swapAn interest rate swap is a derivative in which one party exchanges a stream ofinterest payments for another party's stream of cash flows.Question No: 36 ( Marks: 1 ) - Please choose oneWhich of the following is a commodity/security market in which goods are sold anddelivered immediately?Spot marketForward marketLaissez-faire marketFuture marketgoods are sold for cash and delivered immediately.Question No: 37 ( Marks: 1 ) - Please choose oneWhich of the following statement is FALSE regarding forward contracts?Forward contracts are traded on over- the-counter marketThere is no surety/guarantee of the trade settlementThere are no pre determined standards in future contractsForward contracts involve a process known as making to market(Lesson 40 and 41 slides )• A forward contract is functionally similar to a futures contract, however:– There is no marking to market.– Forward contracts are not marketable.• Forward Contract:– Traded in Over-the-Counter Market.– It is an agreement to buy or sell an asset at a certain future time fora certain price.




51

Forwards FuturesPrivate contract between 2 parties Exchange tradedNon-standard contract Standard contractUsually one specified delivery date Range of delivery datesSettled at end of contract Settled dailyDelivery or final cashsettlement usually occursContract usually closed outprior to maturitySome credit risk Virtually no credit riskQuestion No: 38 ( Marks: 1 ) - Please choose oneWhich of the following refers to the simultaneous purchase and sale in two markets sothat the selling price is higher than the buying price by more than the transaction cost?HedgingArbitrageSpeculationBrokerageRef: Arbitrage refers to the simultaneous purchase and sale in two markets sothat the selling price is higher than the buying price by more than the transactioncost, so that the arbitrageur makes risk-less profit.Question No: 39 ( Marks: 1 ) - Please choose oneWhich of the following statement is FALSE regarding short hedge?The value of short hedge contracts is equal the value of the stock portfolioA short futures hedge is appropriate when you know you will purchase an asset inthe future and want to lock in the priceA short futures hedge is appropriate when you know you will sell an asset in the future &want to lock in the priceA short hedge reduces or possibly eliminates the risk taken in a long positionA long futures hedge is appropriate when you know you will purchase anasset in the future and want to lock in the priceA short futures hedge is appropriate when you know you will sell an assetin the future & want to lock in the price(Handout page 251)A short hedge reduces, or possibly eliminates, the risktaken in a long positionQuestion No: 40 ( Marks: 1 ) - Please choose oneS & P 500 future stock index closes at $ 300 and spot price is $ 325. What is its basis?-25-3025




52

30Basis = spot price – future price= 325 -300= 25Question No: 41 ( Marks: 1 ) - Please choose oneSecondary trend in Dow Theory is known as __________.TriangleWaveTideRounded bottom• Secondary Trend– Called “the waves” by Dow, this is shorter-term departures from theprimary trend (weeks to months).Question No: 42 ( Marks: 1 ) - Please choose oneWhich of the following is TRUE about profitability ratios?Profitability ratios are designed to measure a business's ability to generateearningsProfitability ratios are designed to measure the quality of a company's operationsProfitability ratios are designed to measure a company's ability to cover its short termobligationsProfitability ratios are designed to measure the percentage of earnings paid toshareholders• Profitability is often measured in percentage terms in order to facilitatemaking comparisons of a company's financial performance against pastyear's performance and against the performance of other companies.Profitability ratios are designed to evaluate the firm's ability to generate earnings.Analysis of profit is of vital concern to stockholders since they derive revenue in the formof dividends.Which of the following is an example of a financial asset?FactoriesOptionsCommercial propertiesGoldThe price at which a security dealer sells a security is known as:Bid priceMarket priceOffer priceOrder priceSlide (lect#2)Bid price – highest price at which anyone is willing to buy.Offer (Ask) price – lowest price at which anyone is willing to sell.Difference between the two prices is the spread.Ask price




53

A dealer's price to sell a security; also called the offer price.__________ is a temporary restriction on program trading in a particular securityor market, usually to reduce dramatic price movements.SuperDotNYSE directTrading curbTicker tapeWhat Does Trading Curb Mean?A temporary restriction on program trading in a particular security or market, usually toreduce dramatic price movements. Also known as a collar or circuit breaker.___________ might not have historical perspective in background but it will find aplace in the future depending on the product or industry.Growth companyValue companyLarge cap companySmall cap companySlide (Lesson#6)Growth company might not have historical perspective in background but it will find aplace in the future depending on the product or industry belong.The primary purpose of the liquidity ratios is to determine:The amount of working capital tied up in inventoryThe ability of a firm to pay off short-term obligationsThe relative level of short-term debtThe amount of earnings paid to shareholdersWhich of the following statement is TRUE?SIC codes have 10 divisionsSIC codes have 11 divisionsSIC codes have 15 divisionsSIC codes have 9 divisionsPage#97SIC codes have 11 divisions,Mutual funds pool the funds of savers and can be used to buy _____________.Shares in mutual savings banks onlyA variety of financial instrumentsShares in the Federal Reserve SystemNone of the given optionsThe concept that it is not possible to consistently outperform the market by usingany information that the market already knows, except through luck refers to whichof the following?




54

Dow theoryDividend discount modelEfficient market hypothesisProspect theoryThe efficient market hypothesis states that it is not possible to consistently outperform themarket by using any information that the market already knows, except through luck.Which of the following index is computed by adding the collective marketcapitalizations of its members and dividing it by the number of securities in theindex?Price Weighted-IndexCapitalization Weighted-IndexUnweighted IndexVolume Weighted IndexCapitalization-Weighted Index� A type of market index whose individual components are weighted accordingtotheir market capitalization, so that larger components carry a larger percentageweighting. The value of a capitalization-weighted index can be computed byadding up the collective market capitalizations of its members and dividing itby the number of securities in the index.Which of the following statement is CORRECT?The sensitivity of a coupon bond price to a change in its yield is constant whether yield tomaturity increases or decreasesThe sensitivity of a coupon bond price to a change in its yield is inversely related tothe bond's yield to maturityThe sensitivity of a coupon bond price to a change in its yield is directly related to thebond's yield to maturityThe sensitivity of a coupon bond price to a change in its yield is greater for increases inyield to maturityWhich of the following measures the sensitivity of an asset's price to interest ratemovements, expressed as a number of years?DurationYield to maturityConvexityImmunizationBond duration — In finance, the duration of a financial asset measures the sensitivity of




55

the asset s price to interest rate movements, expressed as a number of years. The reasonfor expressing this sensitivity in years is that the time that will elapse until a…Which of the following statement is FALSE regarding bond duration?Bond duration is inversely related to coupon rateDuration of a zero-coupon bond equals its time to maturityHolding maturity constant, a bond’s duration is higher when the coupon rate is lowerDuration is longer than maturity for all bonds except zero coupon bonds• Duration is shorter than maturity for all bonds except zero coupon bondsRule 1 The duration of a zero-coupon bond equals its time to maturityRule 2 Holding maturity constant, a bond’s duration is higher when the couponrate is lowerWhich of the following is referred to as risk-free bond?Government bondMunicipal bondSovereign bondJunk bondGovernment bonds are usually referred to as risk-free bonds,The risk inherent to the entire market or entire market segment is known as:Systematic riskIssuer riskSpecific riskNonsystematic riskSystematic Risk - The risk inherent to the entire market or entire market segment.Which of the following measures the compound growth rate over time?Geometric meanStandard deviationArithmetic meanCorrelation coefficientThe geometric mean can compute this compounded growth rate over multiple periodsAll of the following statements concerning unsystematic risk are correct EXCEPT:It cannot be reduced by diversificationIt is the portion of total risk unique to the particular firmIt may be affected by the competence of the firm’s managementSuch risk may be independent of factors affecting other industriesThe amount of unsystematic risk can be reduced through appropriate diversification.Which of the following risk is avoidable through proper diversification?Portfolio riskSystematic riskNonsystematic riskTotal risk




56

The amount of unsystematic risk can be reduced through appropriate diversification.Q#1Markowitz diversification is based on:Random diversificationNon-random diversificationHorizontal diversificationVertical diversificationWhich of the following is defined as a line that graphs the systematic, or market,risk versus return of the whole market at a certain time and shows all riskymarketable securities?Security market lineCapital market lineBudget lineValue lineWhat Does Security Market Line - SML Mean?A line that graphs the systematic, or market, risk versus return of the whole market at acertain time and shows all risky marketable securities.When beta of a security >1.0, it indicates that:Security is more risky than the marketSecurity is less risky than the marketSecurity is as risky as the marketSecurity is not risky at allWhen beta of a security <1.0, it indicates that:Security is more risky than the marketSecurity is less risky than the marketSecurity is as risky as the marketSecurity is not risky at allThe exploitation of security mispricing in such a way that risk-free economic profitsmay be earned is called ___________.ZeroNegativeAll of the given optionsPositiveThe exploitation of security mispricing in such a way that risk-free economic profits maybe earned is called ___________.A) arbitrageB) capital asset pricingC) factoringD) fundamental analysisE) none of the aboveAnswer: A Difficulty: Easy




57

Rationale: Arbitrage is earning of positive profits with a zero (risk-free)investment.Other refThe APT was developed in 1976 by ____________.LintnerModigliani and MillerRossSharpeThe ____________ 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, CAPMAPT, OPMCAPM, APTCAPM, OPMREF:12. The ____________ provides an unequivocal statement on the expected return-betarelationship for all assets, whereas the _____________ implies that this relationship holdsfor all but perhaps a small number of securities.A. APT, CAPMB. APT, OPMC. CAPM, APTD. CAPM, OPME. none of the aboveThe CAPM is an asset-pricing model based on the risk/return relationship of all assets.The APT implies that this relationship holds for all well-diversified portfolios, and for allbut perhaps a few individual securities.Difficulty: ModerateWhich of the following is a strategy of monitoring and offsetting various risk factorsin an investment portfolio with the aim of stabilizing investment returns?Portfolio managementProject managementRisk managementInvestment managementRiskmanagementThe monitoring and controlling of various risk factors in an investment portfolio with theaim of minimising volatility of investment returns.




58

Which of the following are regulated by Commodity Futures Trading Commission(CFTC)?OptionsFuturesSwapsForwardsRef: Slide (Lesson#41)Futures contracts are regulated by the Commodity Futures Trading Commission (CFTC).Which of the following is defined as a trader, who trades or takes position withouthaving exposure in the physical market, with the sole intention of earning profit?HedgerArbitragerSpeculatorBrokerA trader, who trades or takes position without having exposure in the physicalmarket, with the sole intention of earning profit is a speculator.Program trading calls for which of the following?Computerized trigger points for tradesThe use of short hedge positionThe use of only call optionThe use of long hedge position(Page 255) Program trading involves the use of computer-generated orders tocoordinate buy and sell orders for entire portfolios based on arbitrageopportunities.Which of the following statement is FALSE regarding short hedge?The value of short hedge contracts is equal the value of the stock portfolioA short futures hedge is appropriate when you know you will purchase an asset inthe future and want to lock in the priceA short futures hedge is appropriate when you know you will sell an asset in the future &want to lock in the priceA short hedge reduces or possibly eliminates the risk taken in a long positionwww.pro-prosperity/UIC/Ch03HullFundamentals5thEd.pptA long futures hedge is appropriate when you know you will purchase anasset in the future and want to lock in the priceA short futures hedge is appropriate when you know you will sell an assetin the future & want to lock in the price(Handout page 251)A short hedge reduces, or possibly eliminates, the risktaken in a long position




59

Which of the following hedge involves an additional source of basis risk due to thedifference between the asset being hedged and the asset underlying the futures?Long hedgeShort hedgeCross hedgeStack hedge(page 625)S & P 500 future stock index closes at $ 275 and spot price is $ 230. What is itsbasis?40455055Basis is the difference between spot and future price. So,275$-230$=45At the NYSE, the auction process for each listed stock is assigned to which of thefollowing?SpecialistBrokerDealerMember(page 8) The specialist system is a distinctive feature of the NYSE and theAMEXAn investor will purchase shares of companies in the development stage for:Current incomeCurrent income and capital gainsPassive losses to offset other incomeCapital gains onlyCreditor's claim on the assets of a company is known as:LiabilityEquityCommon StockDividendClaims are divided into two categories:� Creditors' claims that are called liabilities� Owners' claims that are called equityWhich of the formula is TRUE for calculating retained earnings?Retained Earnings = Net Earnings – DividendsRetained Earnings = Net Earnings + Long term debtRetained Earnings = Net Earnings + Short term debtRetained Earnings = Net Earnings + Dividend(Slide # 41) Retained Earnings:• Retained earnings are the amount of money that a company keeps


Somi

vu



60

for future use or investment.• Another way to look at it is as the earnings left over after dividendsare paid out.Retained Earnings = Net Earnings - DividendsWhich of the following is NOT a test of semi-strong form efficiency?Stock splitsAccounting changesDividend announcementsInsider transactions(Slide 16 lesson 23)Semi-strong Form EvidenceAnnouncements and news:– Little impact on price after release.Initial public offerings:– Only issues purchased at offer price yield abnormal returns.Accounting changes:– Quick reaction to real change in value.Stock splits:– Implications of split reflected in price immediately following theannouncement(page 146) Studies have investigated the extent to which people can profit by actingon various corporate announcements such as stock splits, cash dividends, and stockdividendsWhen the bond approaches its maturity, the market value of the bond approachesto which of the following?Intrinsic valueBook valuePar valueHistoric costPage#163The par value (face value) of most bonds is 'will use this number as the amount to berepaid at maturity.The value of a bond is directly derived from which of the following?Cash flowsCoupon receiptsPar recovery at maturityAll of the given optionsA coupon bond is a bond that?Pays interest on a regular basisDoes not pay interest on a regular basis but pays a lump sum at maturityCan always be converted into a specific number of shares of common stock in the issuingcompany




61

Can always be converted into a specific number of shares of preffered stock in the issuingCompanyThe smaller the coupon of a bond,(other things being equal), the duration of bondwill be:EqualThere is no connection between twoGreaterSmallerDuration is inversely related to the coupon of a bond- the higher the coupon, thelower the duration for a given maturity.The percentage of the purchase price of securities that an investor must pay with hisor her own cash is known as:Margin callMaintenance marginInitial marginSPAN marginWhich of the following is a characteristic of line chart?It is efficient in showing more detailsIt is simplest and most familiar chartIt show the highest degree of accuracyIt can be used for comparing three valuesWhich of the following is LEAST likely an assumption behind the semi-strong formof the EMH?In regard to timings, news and announcements are independent of each other.All information is cost free and available to everyone at the same time.Investors adjust their expectations rapidly when confronted with new information.Investors cannot achieve abnormal returns using fundamental analysis.The implication of the Weak-form EMH is that:All public and private information is rapidly incorporated into security pricesTechnical analyst can make excess returns on filter rules but not runs rulesThere should not be any relation between past price changes & future price changesThe investors cannot achieve abnormal returns using fundamental analysis(Q#1)Question 1Autocorrelation tests & tests of predictive power of earnings surprises apply towhich forms of the EMH?Autocorrelation Earnings surprises1. Semi-strong Strong2. Weak Semi-strong




62

3. Semi-strong Weak4. Strong Weak1234Autocorrelation testsMostly support the weak-form EMH and indicate that price changes are randomSome studies using more securities and more complicated tests cast some doubtLecture Presentation for Investments, 6eWhich form of the Efficient Market Hypothesis implies that an investor can achievepositive abnormal returns on average by using technical analysis?Strong formWeak formSemi-strong formNone of the given options(Handout page 268)The three forms of the efficient markets hypothesis are: 1) Weak form. Market prices reflectinformation contained in historical prices. Investors are unable to earn abnormal returns usinghistorical prices to predict future price movements. 2) Semi-strong form. In addition tohistorical data, market prices reflect all publicly-available information. Investors withinsider, or private information, are able to earn abnormal returns. 3) Strong form. Marketprices reflect all information, public or private. Investors are unable to earn abnormal returnsusing insider information or historical prices to predict future price movements.Compared to a public offering, a private placement of the debt securities LIKELYhas:More liquidity and a lower yieldLess liquidity and lower yieldLess liquidity and a higher yieldMore liquidity and a higher yieldCompared to a public offering, a private placement of debt securities likelyhas:A.. more liquidity and a lower yield.B. more liquidity and a higher yield.e. less liquidity and a lower yield.D. less liquidity and a higher yield




63

11. D Investors require a higher yield to compensate for the facr thatprivately placed debt is not registered for public sale and is therefore lessliquid than debt registered for public sale.Which of the following statements about the risks of the bond investing is MOSTaccurate?A bond rated AAA has no credit risk.A bond with call protection has volatility risk.A U.S. Treasury bond has no reinvestment risk.A zero-coupon bond has less interest rate risk13. B A Treasury bond pays semiannual coupon interest and, therefore, hasreinvestment risk. A triple-A rated bond can lose its AAA rating, so it hasdowngrade risk, a component of credit risk. Any bond can have exchange rate riskif the security holder's returns are measured in a different currency. A bond with acall feature has volatility risk even when the call cannot be exercised immediately.The call feature still has value (to the issuer), and its value will be affected byvolatility changesWhich of the following statements about exchange traded derivatives is LEASTaccurate?They are liquid.They are standardized contracts.They carry significant default risk.They have no credit risk.Derivatives are LEAST likely to provide or improve:LiquidityPrice informationInflation reductionHedging(page 165)http://up.m-ec.A futures contract is LEAST likely:Exchange tradedA contingent claimAdjusted for profits and losses dailyA standardized instrumentCompared to forward contracts, future contacts are LEAST likely to be:StandardizeLarge in sizeLess subject to default riskSettled dailyWhich of the following statements about covariance and the correlation coefficientis LEAST accurate?




64

The correlation coefficient is a measure of the linear association between two variables.Covariance is a measure of the how the returns of the two assets tend to move together.The correlation coefficient is computed by dividing the returns covariance of the assetsby the individual return variances for the two assets.The returns covariance between two assets is equal to the correlation betweenreturns of the two assets, times the product of their returns standard deviation.Correlation Coefficient is computed by dividing the covariance by theproduct of the standard deviation of the two variablesIn determining the appropriate asset allocation for client’s investment accounts, themanager should:Consider only the investor’s risk toleranceRely on forecasts of future economic conditionsConsider the investor’s risk tolerance and future needs, but not market conditionsShould consider only the unique needs of the investorsFactors to consider in making the asset allocation decision include the investor'sreturn requirements (current income versus future income), the investor's risktolerance, and the time horizon. This is done in conjunction with the investmentmanager's expectations about the Capital markets and about individual assets.Which of the following statements regarding company and stock analysis is LEASTaccurate?A defensive company has earnings relatively insensitive to downturns in economy.Cyclical stocks have betas greater than one.A growth stock is the stock of a firm with rapidly increasing earnings.Speculative companies have highly risky assets but have potential to produce hugeearnings.The most attractive investment opportunities when the economy is slowing andentering a recession are:Commodities and commodity-producer stocksStocks and commercial propertyBonds and interest-sensitive stocksCyclical stocks and bondsRecovery




65

• Cyclicals, commodities and commodity linked equities– Early expansion• Stocks in general and real estate– Late expansion• Bonds and interest sensitive stocks– Slowing, entering recession• Bonds and interest sensitive stocks– Recession• Commodities and stocks- Question No: 1 __________ 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 overallnational economy. (page no.25)- Question No: 2 Companies that have capitalization amounts between $500 million and $2billionare 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$800 million and $2 billion.- Question No: 3 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 normallypresented as a real ratio.- Question No: 4 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 Ref




66

An 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 Positive abnormal returns for corporate insiders constitute a violation of: ► Weak form efficiency ► Semi-strong form efficiency ► Strong-form efficiency (Corrected by Fuad) ► Weak and strong form of efficiency RefCorrect Line of Reference: The behaviour of stock price returns around the tradesof company directors at any frequency is interesting for two reasons. First, theextent to which insiders tradeprotably on private information to generate abnormal returns would be aviolationof strong-form market efficiency.The second reason for studying price reaction to directors' trading concernswhether outside investors can mimic the actions of insiders to also earn abnormalreturns.This second issue would represent a violation of semi-strong form efficiency.- Question No: 6 Which of the following states that investors with loss will increase their risktolerance 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 at least influence, outcomes that they demonstrably have no influence over. Ithas been demonstrated in a succession of different experiments, and is thought toinfluence gambling behavior and belief in the paranormal.- Question No: 7 Which of the following equity market indicator is composed of 30 blue-chipstocks? ► 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 Which of the following is NOT included in money market securities? ► Treasury Bill ► Certificate of deposit ► Commercial paper ► Future




67

Money market securities means cash equivalents

- Question No: 9

LSE captures _____________ of the market capitalization. ► 45% ► 50% ► 53% ► 66%Ref. by Gul GLSE captures 53% of the market capitalization and98% of the trading volume.(LEC #25 )Also PPT slide No. 25- Question No: 10 The estimated percentage change in the value of a bond derived from the durationrule: ► 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- Question No: 11 Which of the following bonds are characterized by high yields and high risks? ► Junk bonds ► Convertible bonds ► Municipal bonds ► Government bonds RefJunk 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 Systematic risk is also known as: ► Market risk ► General risk ► Un-diversifiable risk ► All of the given options- Question No: 13 Which of the following is the only way to protect investors from nonsystematicrisk? ► Sector rotation ► Securitization ► Diversification ► Risk aversion RefInvestors can construct a diversified portfolio and eliminate part of the total risk,the diversifiable or non market, part. (page 216)- Question No: 14




68

If correlation coefficient (rmn) between two securities is -1.0, what does itrepresents? ► 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

means that 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 very close 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 long position. 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 envelope within which all combinations of two assets will

lie, regardless of their correlations.- Question No: 15 Which of the following measure has values in the interval of [+1, -1]? ► Correlation coefficient ► Covariance ► Regression ► Standard deviation Ref(Page 209)- Question No: 16 Who was the developer of CAPM? ► Gerald Appel ► Markowitz ► Joseph Granville ► John Bollinger- Question No: 17 The average value of beta for all stocks in the market is: ► 0.5 ► 1.0 ► 1.5 ► 2.0- Question No: 18 Which of the following involves dividing an investment portfolio amongdifferent financial assets? ► Securitization ► Sector rotation ► Asset allocation ► Risk aversion Ref




69

The asset allocation decision refers to the allocation of portfolio assets to broadasset markets; 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 Which of the following are regulated by Commodity Futures TradingCommission (CFTC)? ► Options ► Futures ► Swaps ► Forwards RefThe Commodity Futures Trading Commission (CFJC), a federal regulatoryagency, is responsible for regulating trading in all domestic futures markets. Inpractice, the National Futures Association, a self-regulating body, has assumedsome of the duties previously performed by the CFTC. In addition, each futuresexchange has a supervisory body to oversee its members. (page 248)- Question No: 20 Which of the following is defined as a market for the immediate sale and deliveryof assets? ► Laissez-faire market ► Future market ► Spot market ► Forward market RefSpot markets are markets for immediate: delivery. (page 247)- Question No: 21 Which 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 marketCorrect ref from wikipedia by fuadA closely related contract is a futures contract; they differ in certainrespects. Forward contracts are very similar to futures contracts, except theyare not exchange-traded, or defined on standardized assets. Forwards alsotypically have no interim partial settlements or "true-ups" in margin requirementslike futures - such that the parties do not exchange additional property securingthe party at gain and the entire unrealized gain or loss builds up while the contractis open. However, being traded OTC, forward contracts specification can becustomized and may include mark-to-market and daily margining. Hence, aforward contract arrangement might call for the loss party to pledge collateral oradditional collateral to better secure the party at gain.RefFutures contracts are standardized and easily traded. (page 248)- Question No: 22 Program trading calls for which of the following?


Somi

vu



70

► Computerized trigger points for trades ► The use of short hedge position ► The use of only call option ► The use of long hedge position- Question No: 23 S & P 500 future stock index closes at $ 275 and spot price is $ 230. What is itsbasis? ► 40 ► 45 ► 50 ► 55basis = spot – close- Question No: 24 The average price of a security or currency over a specified time period used tospot pricing trends by smoothing out the large fluctuations is known as: ► Moving Average ► Standard deviation ► Variance ► Beta- Question No: 25 Which 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 + Dividend- Question No: 26 The Dow Jones Industrial Average (DJIA) is an example of which of thefollowing index? ► Price weighting index ► Capitalization weighting index ► Volume based index ► Fixed income index- Question No: 27 Which of the following is a measure of the volatility of stock prices or returns? ► ROR ► Beta ► ROI ► Risk premium- Question No: 28 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 securities- Question No: 29




71

Which of the following is the CORRECT formula for calculating the buyingpower of investors? ► Assets – liabilities ► Equity – debt ► Short term debt – long tem debt ► Current assets – current liabilities- Question No: 30 When a company’s 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 Which 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. (myopinion) ► Earnings per share relate income with ownership. ► It is a liquidity measure.Corrected & from lectures 12Liquidity Ratios includes:-

Current Ratio

Acid Test RatioProfitability Ratios includes:-

Gross profit Margin

Operating Margin

Net Profit Margin

Earnings per share- Question No: 32 Which form of the Efficient Market Hypothesis implies that an investor canachieve positive abnormal returns on average by using technical analysis? ► Strong form ► Weak form ► Semi-strong form ► None of the given optionsThe three forms of the efficient markets hypothesis are:

I. 1)Weak form.Market prices reflect information contained in historical prices. Investors areunable to earn abnormal returns using historical prices to predict future pricemovements.

I. 2)Semi-strong form.In addition to historical data, market prices reflect all publicly-availableinformation. Investors with insider, or private information, are able to earnabnormal returns.




72

I. 3)Strong form.Market prices reflect all information, public or private. Investors are unableto earn abnormal returns using insider information or historical prices topredict future price movements.

- Question No: 33 A straight-line would have convexity of: ► -1 ► 0 (not sure) ► +1 ► +2- Question No: 34 Bonds that are NOT contracted to make periodic payments are called: ► Deferred coupon bonds ► Eurobonds ► Corporate bonds ► Zero-coupon bonds RefZero-Coupon Bonds Not all bonds make periodic coupon payments. Bonds thatare not contracted to make periodic coupon payments are called zero-coupon bonds.- Question No: 35 Which of the following statements about exchange traded derivativesis LEAST accurate? ► They are liquid. ► They are standardized contracts. ► They carry significant default risk. ► They have no credit risk.RefExchange-traded derivative contracts (ETD) are those derivatives instrumentsthat are traded via specialized derivatives exchanges or other exchanges. Likeother derivatives, these publicly traded derivatives provide investors access torisk/reward and volatility characteristics that, while related to an underlyingcommodity, nonetheless are distinctive.- Question No: 36 Which of the following is LEAST likely to a purpose served by the derivative

markets? ► Arbitrage opportunities ► Price discovery ► Risk management ► Market efficiency

Corrected &Purposes of Derivative Markets are:-

Price discovery.

Market completeness.




73

Risk management.

Market efficiency.

Trading efficiency- Question No: 37 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 likely reason 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.- Question No: 38 As the number of stocks in a portfolio increases, the portfolio’s systematic risk: ► Can increase or decrease ► Decrease at a decreasing rate ► Decrease at an increasing rate ► Increase at an increasing rate RefVariability in a security's total returns that is directly associated with overallmovements in the general market or economy is called systematic (market) risk.Virtually all securities have some systematic risk, whether bonds or stocks,because systematic risk directly encompasses the interest rate, market, andinflation risks. (PAGE NO. 198)- Question No: 39 Which of the following is LEAST likely a component of an investor’s required

rate of return on a stock? ► The real risk-free rate ► The expected inflation rate ► A growth premium ► A risk premiumCorrected &There are Five Major components:

1. The Real Risk-Free Interest Rate2. An Inflation Premium3. A Liquidity Premium4. Default Risk Premium5. Maturity Premium

- Question No: 40 An industry has the following characteristics:§ Sales growth is near the average growth rate of the economy.




74

§ 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 ► PioneeringRefIndustries at this stage continue to move along, but typically the industry growthrate matches the growth rate for the economy as a whole. (page no. 99)- Question No: 41 Which of the following statements regarding life cycle of an industryis MOST accurate? ► In the pioneering phase, profits are small or negative. ► In the mature growth phase, sales growth falls below normal for the firsttime. ► During the stabilization phase, growth rates are still above the growth ratesin economy. ► The growth of the substitute products increases total market share &causes profits to increase in the deceleration phase.RefProfit margins and profits are often small or negative (page no. 98)- Question No: 42 Which of the following is LEAST likely an assumption underlying technical

analysis? ► 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 pricebehavior. ► Supply is driven by the rational behavior of the firms offering their shareswhile 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 byits internal cash flows. It is an important measure for investors to consider, asbonds with higher durations carry more risk and have higher price volatilitythanbonds with lower durations.Zero-coupon Bond duration = its time to maturityRef- Question No: 44 ( Marks: 3 )What is the advantage of Markowitz diversification? - Question No: 45 ( Marks: 3 )




75

Define call options.A call option, often it is simply labeled a "call", is a financial contract betweentwo parties, the buyer and the seller of this type of option.RefA 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- Question No: 2 According to Dow Theory, primary trend is a:

Short term trend Long term trend Medium term trend None of the given options

Ref: Primary Trend Called “the tide” by Dow.This is the trend that defines the long-term direction (up to several years).- Question No: 3 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- Question No: 4 The concept that it is impossible to “beat the market” because stock marketefficiency causes existing share prices to always incorporate and reflect allrelevant information refers to which of the following? ► Dow Theory ► Dividend discount model ► Efficient market hypothesis ► Prospect theory - Question No: 5 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 assetsRef: The rate of return needed to induce investors or companies to invest insomething. For example, if you invest in a stock, your required return might be10% per year. Your reasoning is that if you don't receive 10% return, then you'dbe better off paying down your outstanding mortgage, on which you are paying10% interest.- Question No: 6




76

In which of the following form of efficient market hypothesis security pricesreflect only past stock information? ► Weak form ► Semi strong form ► Strong form ► Both weak and strong formRef: Weak EMH claims that prices on traded assets (e.g.,stocks, bonds, orproperty) already reflect all past publicly available information.- Question No: 7 Which of the following is a concept in economics, finance, and psychologyrelated to the behavior of consumers and investors under uncertainty? ► Illusion of control ► Anchoring ► Mental accounting ► Risk AversionRef from wikipedia by fuad.Risk aversion is a concept in psychology, economics, and finance, based on thebehavior of humans (especiallyconsumers and investors) whilst exposed touncertainty.- Question No: 8 Which of the following is an example of a non-marketable security? ► Treasury bill ► Negotiated CD ► U.S. Government savings bond ► Banker’s acceptanceRef: Any type of security that is difficult to buy or a sell because it does not tradeon a normal market or exchange. These types of securities trade over the counter(OTC) or in a private transaction. Some examples of non-marketable securitiesare savings bonds, series (A, B, EE, etc.) bonds and private shares.The U.S. government offers both marketable and non-marketable securities to thepublic.- Question No: 9 Which of the following is defined as the interest rate stated on a bond, note orother fixed income security, expressed as a percentage of the principal? ► Interest free rate ► Coupon rate ► Discount rate ► Bank rateRef: Coupon - Also called "coupon rate" or "coupon percent rate", is the interestrate stated on a bond, note, or other fixed income security when it is issued. Ingeneral, the coupon is paid semiannually and expressed as a percentage of theface value.- Question No: 10 Which of the following is a measure of bond’s lifetime that accounts for theentire pattern of cash flows over the life of the bond? ► Duration




77

► Coupon ► Convexity ► Yield to maturityRef: A measure of a bond’s lifetime, stated in years, that accounts for the entirepattern (both size and timing) of the cash flows over the life of the bond- Question No: 11 Which of the following factor contributes to the price volatility of a bond? ► Maturity ► Coupon ► Yield to maturity ► All of the given options- Question No: 12 Which of the following is defined as the point at which revenues equal costs? ► Yield to maturity ► Break-even ► Margin ► Leverage point- Question No: 13 Which of the following is rated as “‘BB” or lower because of its high defaultrisk? ► Convertible bonds ► Municipal bonds ► Government bonds ► Junk bondsRef: Junk Bond - A bond rated 'BB' or lower because of its high default risk. Alsoknown as a "high-yield bond" or "speculative bond".- Question No: 14Bond 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 ► None of the given optionsfrom PPT slide of Lecture 32

Risk Premiums Premium is additional return earned or expected for additional risk

I. oCalculated for any two asset classes

Equity Risk Premium

Bond Horizon Premium

Equity risk premium is the difference between stock and risk-free

returns.

Bond horizon premium is the difference between long- and short-term

government securities Equity Risk Premium, (ERP) = [ (1+ TRCS) / 1+RF ] - 1




78

Bond Horizon Premium, (BHP) = [ (1+TRGB) / 1+ TRTB ] -1- Question No: 15 Which of the following statement is FALSE? ► Each portfolio asset has a weight which represents the percent of the totalportfolio value ► Portfolio risk is not a weighted average of the risk of individual securitiesin the portfolio ► Portfolio risk is measured by variance or standard deviation of theportfolio’s return ► None of the given optionsCorrected & . (PPT Slide of Lecture 33)Portfolio Expected Return

Weighted average of the individual security expected returns.

I. oEach portfolio asset has a weight, w, which represents the percent of the

total portfolio value.Portfolio Expected ReturnAsset ManagementPortfolio Risk

Portfolio risk not simply the sum of individual security risks.

Emphasis on the rate of risk of the entire portfolio and not on risk of

individual securities in the portfolio.

Individual stocks are risky only if they add risk to the total portfolioExample

Measured by the variance or standard deviation of the portfolio’s return.

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

securities in the portfolio.- Question No: 16 - Please choose oneWhich of the following indicates that the returns on the two securities (m and n)tend to move in the same direction at the same time? ► rmn = +1.0 ► rmn = -1.0 ► rmn =0 ► All of the given optionsCorrected byPage No. 208 , Lecture 34Correlation Coefficient:As used in portfolio theory, the correlation coefficient ρij (pronounced "rho") is astatisticalmeasure of the relative comovernents between security returns. It measures theextent towhich the returns on any two securities are related, however, it denotes onlyassociation, not




79

causation. It is a relative measure of association that is bounded by +1.0 'and—1.0, with;ρij = +1.0= perfect positive correlationρij = -1.0= perfect negative (inverse) correlationρij = 0.0= zero correlation

- Question No: 17 Who was the developer of CAPM? ► Gerald Appel ► Markowitz ► Joseph Granville ► John BollingerRef:The CAPM Model was developed by Harry Markowitz in 1962.

- Question No: 18 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 returnRef: 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 pricingmodel (CAPM), a model that calculates the expected return of an asset based onAlso known as "beta coefficient"- Question No: 19 The ____________ gives the number of shares for which each convertible bondcan be exchanged. ► Conversion ratio ► Current ratio ► P/E ratio ► Conversion premium

from investopedia : The number of common shares received at the time ofconversion for each convertible security. The conversion premium is theamount for which the bond sells above conversion value; the price of bond as astraight bond provides the floor. The other terms are not specifically relevant toconvertible bonds.- Question No: 20 The ____________ provides an unequivocal statement on the expected return-beta relationship for all assets, whereas the _____________ implies that thisrelationship holds for all but perhaps a small number of securities. ► APT, CAPM


Somi

vu



80

► APT, OPM ► CAPM, APT ► CAPM, OPM- Question No: 21 Which of the following involves dividing an investment portfolio among differentfinancial assets? ► Securitization ► Sector rotation ► Asset allocation ► Risk aversionRef: Asset allocation involves dividing an investment portfolio among differentasset categories, such as stocks, bonds, and cash. The process of determiningwhich mix of assets to hold in your portfolio is a very personal one. The assetallocation that works best for you at any given point in your life will dependlargely on your time horizon and your ability to tolerate risk.- Question No: 22 Which of the following is the practice of using derivatives as building blocks tocreate specialized products? ► Financial engineering ► Risk management ► Income generation ► Portfolio managementReference: Financial Engineering is the practice of using derivatives as buildingblocks to create specialized products.- Question No: 23 Which of the following is defined as an investment transaction that is intended toprovide protection against a decline in the value of an asset? ► Short hedge ► Long hedge ► Natural hedge ► Cross hedge- Question No: 24 In the formula, cost of asset= S2– (F2–F1), what does S2 indicate?

► Initial asset price ► Initial futures price ► Final asset price ► Final futures price- Question No: 25 S & P 500 future stock index closes at $ 300 and spot price is $ 325. What is itsbasis? ► -25 ► -30 ► 25 ► 30Ref. Basis = spot price –closing price = 325-300




81

= 25- Question No: 26 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 aportfolio ► Hedging is a strategy used to increase both the risk and return of aportfolio ► Hedging is a strategy used to increase portfolio volatility- Question No: 27 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 pricesRef: The expiration date for all listed stock options in the U.S. is the third Fridayof the expiration month (except when it falls on a holiday, in which case it is onThursday).- Question No: 28 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 amoving average crossover system.- Question No: 29 Which of the following is the reason stock prices behave the way they do atresistance 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- Question No: 30 Which of the following is a measure of the volatility of stock prices or returns? ► ROR ► Beta ► ROI ► Risk premium- Question No: 31 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 thefuture, at a specified price? ► Option contract ► Forward contract ► Future contract




82

► Annuity contractRef: In finance, a futures contract is a standardized contract between two partiesto buy or sell a specified asset of standardized quantity and quality at a specifiedfuture date at a price agreed today (the futures price). The contracts are traded ona futures exchange.- Question No: 32 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 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 companiesAnswer provided by Banjara with reference.Dividend and earnings growth rates are important to both value and growthinvestors, but especially to the growth investor. (page no. 48)- Question No: 34 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- Question No: 35 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.- Question No: 36 Which of the following 5-year bond has the highest interest rate risk? ► A floating-rate bond ► A zero-coupon bond ► A 5% fixed-coupon bond ► A 10% fixed-coupon bondRef: zero-coupon bond has the highest interest rate risk because it delivers all itscash flows at maturity. Since a zero-coupon bond has a 0.00% coupon, a lowcoupon equates to high price volatility.- Question No: 37 - Please choose oneWhich of the following statements regarding debentures is MOST accurate?

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




83

► Debentures are commonly issued by government sponsored entities suchas Fannie and Freddie Mac ► Debentures may not be issued by government sponsored entities. ► Debentures are often called first mortgage bonds.- Question No: 38 A futures contract is LEAST likely: ► Exchange traded ► A contingent claim ► Adjusted for profits and losses daily ► A standardized instrumentOption 1 :Exchange-traded derivative contracts are standardized derivativecontracts (e.g. futures contracts and options) that are transacted on an organizedfutures exchange.Option 3:INVESTOPEDIA:Profit And Loss - Cash SettlementThe profits and losses of a futures contract depend on the daily movements of themarket for that contract and are calculated on a daily basis.Option 3 :Derivatives contracts can be divided into two general families:

1. Contingent claims, i.e., options

2. Forward claims, which include exchange-traded futures, forward

contracts and swapsOption 4 :A futures contract is a standardised contractual agreement made between twoparties agreeing to buy or sell a commodity or financial instrument at a pre-determined time in the future at a mutually agreed price- Question No: 39 Which of the following is NOT a risk measure? ► Beta ► Standard deviation ► Variance ► Geometric mean- Question No: 40 Which of the following is LEAST likely an example of a portfolio constraint?

► Tax concern ► Liquidity needs ► Total return requirement of 15% ► Regularity requirementRef: Constraints and Preferences:o Liquidityo Time horizon




84

o Laws and regulationso Taxeso Unique preferences and circumstances- Question No: 41 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 projectswith above average returns. ► If growth opportunities are already incorporated into its prices, agrowth company’s stock will earn above average returns.Raf: A growth stock is one that earns below-average risk adjusted returnsLike wiseYou will find all the options true except last one in this reference.- Question No: 42 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 withinthe industry ► Determination of the stability of securities for an investor’s 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?Diversification:The insurance principle illustrates the concept of attempting to diversify the riskinvolved in a portfolio of assets (or liabilities). In fact, diversification is the key tothe management of portfolio risk, because it allows investors; significantly tolower portfolio risk withoutadversely affecting return. The purpose of diversification is to allow the companyto enter lines of business that are different from current operations. When the newventure is strategically related to the existing lines of business it is calledconcentric diversification- Question No: 1Which of the following is EXCLUDED from the reasons of investing?To obtain capital gainTo supplement their moneyTo gather market informationTo experience an excitement- Question No: 2__________ believe that securities are priced according to fundamental economicdata.Fundamental analystsRatio analystsTechnical analysts




85

Research analysts- Question No: 3The idea that money available at the present time is worth more than the sameamount in the future is called:Present valueTime value of moneyFuture valueAnnuity concept- Question No: 4Which of the following statement is a characteristic of line charts?Can be used for comparing two or more valuesIt is efficient in showing more detailsIt is simplest and most familiar chartNone of the given choices- Question No: 5What does gross margin represents?The quality of a firm's operationsThe percentage of earnings paid to shareholdersA company's capital structureThe percentage of revenue remaining after cost of goodsRef: It is a measure of how well each dollar of a company's revenue is utilized tocover the costs of goods sold.- Question No: 6If ABC Furniture earned $5 million dollars of profit in a year, and the companyhad a market capitalization of $85 million, what is the P/E Ratio?9141722Solution:P/E Ratio = Price/ Earnings = 85/5 = 17- Question No: 7Which of the following items will reduce stockholders' equity?Purchase of equipmentPurchase of suppliesReceiving a loanPayment of salaries,The payment of salaries is an expense that reduces stockholders' equity. Thepurchase of equipment and supplies for cash would result in an exchange of oneasset for another. If the equipment and supplies are acquired on credit, therewould be an increase in assets and liabilities. Receiving a loan results in anincrease in assets and liabilities- Question No: 8




86

Which of the following is the annual net income from an average investmentexpressed as a percentage of average amount invested?Net asset valueReturn on equityReturn on average investment (ROI)Discounted value- Question No: 9Which of the following equity market indicator is price-weighted index?NASDAQ Composite IndexStandard & Poor's 500 IndexNikkie 225 averageNYSE Composite IndexRef: A stock index in which each stock influences the index in proportion to itsprice per share. The value of the index is generated by adding the prices of eachof the stocks in the index and dividing them by the total number of stocks. Stockswith a higher price will be given more weight and, therefore, will have a greaterinfluence over the performance of the index.Currently, the Nikkei is the most widely quoted average of Japanese equities,similar to the Dow Jones Industrial Average. In fact, it was known as the "NikkeiDow Jones Stock Average" from 1975 to 1985.- Question No: 10Lahore Stock of Exchange is _____ based market indicator.VolumeCapitalizationPrice weightingProfitPPT Slide No. 25- Question No: 11Which of the following is defined as the transformation of illiquid, non-marketable risky individual loans into asset-backed securities?SecuritizationSector rotationDiversificationRisk aversionRef:The Transformation of Illiquid Financial Assets into Liquid Capital MarketSecurities. A typical example of securitization is a mortgage-backed security(MBS), which is a type of asset-backed security that is secured by a collection ofmortgages.- Question No: 12Which of the following affects the price of the bond?Market interest rateRequired rate of returnInterest rate riskAll of the given options- Question No: 13




87

Bond is a type of Direct Claim Security whose value is NOT secured by__________.Real assetsIntangible assetsFixed assetsTangible assets- Question No: 14Which of the following measure that how much a bond price-yield curve deviatesfrom a straight line?Bond durationBond convexityBond valuationAll of the given optionsRef: It measures the sensitivity of the yield to maturity (YTM) of a bond tochanges in duration of the bond.

- Question No: 15Which of the following is known as speculative bond?Government bondMunicipal bondSovereign bondJunk bond- Question No: 16The risk inherent to the entire market or entire market segment is known as:Systematic riskIssuer riskSpecific riskNonsystematic riskRef:Interest rates, recession and wars all represent sources of systematic riskbecause they affect the entire market and cannot be avoided throughdiversification. The risk inherent to the entire market or entire market segmentalso known as "un-diversifiable risk" or "market risk."- Question No: 17The excess return that an individual stock or the overall stock market providesover a risk-free rate is known as _____________.Equity risk premiumBond horizon premiumShare premiumLiquidity premiumRef:This excess return compensates investors for taking on the relatively higherrisk of the equity market. The size of the premium will vary as the risk in aparticular stock, or in the stock market as a whole, changes; high-risk investmentsare compensated with a higher premium.Also referred to as "equity premium".- Question No: 18The risk stemming from the lack of marketability of an investment that cannot bebought or sold quickly enough to prevent or minimize a loss is known as:




88

Interest rate riskMarket riskLiquidity riskDefault riskInvestopedia Says:Risk that a bank will have to sell assets at a loss to meet cash demands, forexample, depositors' demands for funds. Liquidity risk is generally explained as aratio comparing available liquidity to the demand for funds.Usually reflected in awide bid-ask spread or large price movements.- Question No: 19Which of the following may be exchanged for common stock of the samecorporation?WarrantExchangeable bondDebentureConvertible bondRef: A corporate bond, usually a junior debenture, that can be exchanged, at theoption of the holder, for a specific number of shares of the company's preferredstock or common stock.- Question No: 20Which of the following statement is FALSE?Securities move together only because of their common relationship to the marketindexThe importance of each individual security s risk decreases as the number ofsecurities increasesRisk and return tends to be lowest for investors who trade frequentlyThe importance of covariance increases with an increase in number of securitiesRationale: There is rule of thumb more you trade more will be risk. Plussometime a day trader makes more money compared to an investor. (zh, )- Question No: 21The average value of beta for all stocks in the market is:0.51.01.52.0- Question No: 22A single-index model uses __________ as a proxy for the systematic risk factor.A market index, such as the S&P 500The current account deficitThe growth rate in GNPThe unemployment rateRef: Confirmed from web quiz file.- Question No: 23The anomalies literature ____________.Provides a conclusive rejection of market efficiencyProvides a conclusive support of market efficiency




89

Suggests that several strategies would have provided superior returnsProvides a conclusive acceptance of market efficiency- Question No: 24The ____________ gives the number of shares for which each convertible bondcan be exchanged.Conversion ratioCurrent ratioP/E ratioConversion premiumRationale: The conversion premium is the amount for which the bond sells

above conversion value; the price of bond as a straight bond provides the floor.The other terms are not specifically relevant to convertible bonds.- Question No: 25Which of the following is a financial instrument that conveys the right, but notthe obligation, to engage in a future transaction on some underlying security, or ina futures contract?OptionsFuturesSwapsForwardsRef: This is the definition of options. Traders use options to speculate, which is arelatively risky practice, while hedgers use options to reduce the risk of securities.- Question No: 26Which of the following is an agreement to exchange two currencies on one dateand to reverse the transaction at a future date?Interest rate swapForeign currency swapTotal return swapCredit default swapRef: An agreement to exchange two currencies on one date and to reverse thetransaction at a future date. Entering into a currency swap is equivalent toborrowing in one currency and lending in another, allowing management of cross-currency cash flows. The swap market can be a more efficient way of borrowingand lending currency amounts than accessing the relevant currency moneymarkets directly.- Question No: 27Which of the following is a derivative in which one party exchanges a stream ofinterest payments for another party's stream of cash flows?Foreign currency swapTotal return swapCredit default swapInterest rate swapRef from wikipedia: A swap is a derivative in which one party exchanges a streamof interest payments for another party's stream of cash flows. Interest rate swapscan be used by hedgers to manage their fixed or floating assets and liabilities.- Question No: 28




90

Which of the following is defined as a market for the immediate sale and deliveryof assets?Forward marketLaissez-faire marketFuture marketSpot market- Question No: 29Which of the following is defined as a trader, who trades or takes position withouthaving exposure in the physical market, with the sole intention of earning profit?HedgerArbitragerSpeculatorBroker- Question No: 30Which of the following refers to the simultaneous purchase and sale in twomarkets so that the selling price is higher than the buying price by more than thetransaction cost?HedgingArbitrageSpeculationBrokerageExplanation: A risk-free type of trading where the same instrument is bought andsold simultaneously in two different markets in order to cash in on the differencein these markets.- Question No: 31Which of the following is defined as the difference between spot price and futureor forward price?BetaROIAlphaBasisRef: The difference between the price of the underlying asset in the spot marketand the futures market is called Basis. As spot market is a market for immediatedelivery The basis is usually negative, which means that the price of the asset inthe futures market is more than the price in the spot market.- Question No: 32Which of the following is TRUE regarding short hedge?Price realized=S2+ (F1 F2) (Probably this option has a typing mistake , itshould be : S2+ (F1 - F2)Price realized= S2 (F1+F2)Price realized= S2 (F2 F1)Price realized= S2+ (F1+F2)There is something wrong with these options , Correct option is not there or maybe some typing mistake ..well correct answer isShort Hedge




91

• Suppose that– F1: Initial Futures Price– F2: Final Futures Price– S2: Final Asset Price• You hedge the future sale of an asset byentering into a short futures contract• Price Realized=S2+ (F1–F2)= F1+ Basis- Question No: 33While calculating cost of asset under long hedge, what does F2 indicate?Initial asset priceInitial futures priceFinal asset priceFinal futures price- Question No: 34S & P 500 future stock index closes at $ 275 and spot price is $ 230. What is itsbasis?40455055Explanation:Basis is the difference between spot and future price. So,275$-230$=45- Question No: 35In which of the following situation, the writers of call options expect profit?When the stock price declinesWhen the stock prices remain the sameWhen increase in stock price is less than premiumAll of the given options- Question No: 36Which of the following contributes to the smooth operation of an option market?American Stock ExchangeOver the Counter OptionsChicago Board Options ExchangeOptions Clearing CorporationRef: OCC. The organization that handles clearing of the options trades for thevarious options exchanges and regulates the listing of new options.- Question No: 37Which of the following is defined as an option whose payoff depends on whetheror not the underlying asset has reached or exceeded a predetermined price?Barrier optionForward start optionOver-the-counter optionsCompound optionsRef: An option that whose payoff depends on whether the price of the underlyingasset crosses a predetermined barrier. There are two kinds of barrier options -




92

Knock in and Knock out. Knock in options get activated only when the barrier isbreached whereas knock out options get deactivated when the barrier is breached.- Question No: 38Which of the following is an option which is paid for now, but will start at someprespecified date in the future?Barrier optionForward start optionOver-the-counter optionsCompound optionsRef: An option which is paid for now, but will start at some prespecified date inthe future. This date is called the issue date. At the issue date, a call or put optionis issued with the strike price being determined by the spot price of the underlyingon this date. Generally such options are issued at the money.- Question No: 39The direct trade between large institutional investors takes place in which ofthe following market?Primary marketSecondary marketThird marketFourth marketExplanation: The direct trading of large blocks of securities between institutionalinvestors through a computer network, rather than on an exchange.- Question No: 40Which of the following statement is TRUE about value investors?They are patientThey seek rapidly growing companiesThey are speculatorsThey seek slow growing companies Ref from wikipedia: a value investor must be able and willing to be patient forthe rest of the market to recognize and correct whatever pricing issue created themomentary value.- Question No: 41An investor will purchase shares of companies in the development stage for:Current incomeCurrent income and capital gainsPassive losses to offset other incomeCapital gains only- Question No: 42Which of the following items from the Income Statement is typically used tojudge the success of a company?Earnings from continuing operationsAfter-tax net incomeOperating incomeDiluted net income per share




93

Ref: operations are usually the primary means by which revenues and cashare generated. Thus, results from continuing operations usually have greatersignificance for predicting future performance.FINALTERM EXAMINATIONSpring 2010Question No: 1 ( Marks: 1 ) - Please choose one__________ are those stocks whose results are tied with the overall state of the national economy.► Growth stocks► Income stocks► Cyclical stocks► Blue chip stocksRefA cyclical stock is one whose fortune is directly tied to the state of the overall national economy. (pageno.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 companiesRefAnalytical Services defines a mid-cap •firm as one with capitalization between $800 million 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 ratioRefThe current ratio is also known as the working capital ratio and is normally presented as a real ratio.Question No: 4 ( Marks: 1 ) - Please choose oneWhich of the following is a basket of stocks that tracks a particular sector, investment style, geographicalarea, or the market as a whole?► Exchange traded fund► Open-end fund► Closed-end fund► Unit investment trustRef




94

An ETF is a basket of stocks that tracks a particular sector, investment style, geographical area, or themarket 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 whether outsideinvestors can mimic the actions of insiders to also earn abnormal returns.This second issue would represent a violation of semi-strong form efficiency.Question No: 6 ( Marks: 1 ) - Please choose oneWhich of the following states that investors with loss will increase their risk tolerance in futuretransactions?► Loss aversion► Prospect theory► Illusion of control► AnchoringRef;Illusion of control is the tendency for human beings to believe they can control, or at leastinfluence, outcomes that they demonstrably have no influence over. It has been demonstrated in asuccession of different experiments, and is thought to influence gambling behavior and belief in theparanormal.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► FutureMoney market securities means cash equivalentsQuestion No: 9 ( Marks: 1 ) - Please choose oneLSE captures _____________ of the market capitalization.




95

► 45%► 50%► 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 changeQuestion 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) orlower, 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 optionsPage 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► Risk aversionRef; Investors can construct a diversified portfolio and eliminate part of the total risk, the diversifiableor 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 resultRef; � What if the correlation of A&B = -1 ? This is an unusual case, because it means that when A




96

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 very close to zero. In other words, A is nearly aperfect hedge for B. One of the few real-life negative correlations you will find is a short position in astock offsetting the long position. In this case, since the mean returns are also the same, the expectedreturn will be zero. These extremes of correlation values allow us to describe an envelope within whichall 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 BollingerQuestion No: 17 ( Marks: 1 ) - Please choose oneThe average value of beta for all stocks in the market is:► 0.5► 1.0► 1.5► 2.0Question No: 18 ( Marks: 1 ) - Please choose oneWhich of the following involves dividing an investment portfolio among different financial assets?► Securitization► Sector rotation► Asset allocation► Risk aversionRefThe asset allocation decision refers to the allocation of portfolio assets to broad asset markets; in otherwords, 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 one




97

Which of the following are regulated by Commodity Futures Trading Commission (CFTC)?► Options► Futures► Swaps► ForwardsRefThe Commodity Futures Trading Commission (CFJC), a federal regulatory agency, is responsible forregulating trading in all domestic futures markets. In practice, the National Futures Association, a selfregulatingbody, has assumed some of the duties previously performed by the CFTC. In addition, eachfutures exchange has a supervisory body to oversee its members. (page 248)Question No: 20 ( Marks: 1 ) - Please choose oneWhich of the following is defined as a market for the immediate sale and delivery of assets?► Laissez-faire market► Future market► Spot market► Forward marketRefSpot 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 marketRefFutures contracts are standardized and easily traded. (page 248)Question No: 22 ( Marks: 1 ) - Please choose oneProgram trading calls for which of the following?► 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► 55Question No: 24 ( Marks: 1 ) - Please choose one




98

The average price of a security or currency over a specified time period used to spot pricing trends bysmoothing out the large fluctuations is known as:► Moving Average► Standard deviation► Variance► BetaQuestion 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 oneThe Dow Jones Industrial Average (DJIA) is an example of which of the following index?► Price weighting index► Capitalization weighting index► Volume based index► Fixed income indexQuestion 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 premiumQuestion No: 28 ( Marks: 1 ) - Please choose oneActive 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 securitiesQuestion 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 liabilitiesRef (page no 31)Question No: 30 ( Marks: 1 ) - Please choose oneWhen a company’s market value is divided by sales, it is known as:► Net income margin► Price-to-market value ratio




99

► Price-to-book value ratio► Price-to-sales ratioQuestion 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 achieve positive abnormalreturns on average by using technical analysis?► Strong form► Weak form► Semi-strong form► None of the given optionsRef3. Strong-form efficient markets. The strong form of the EMH states that stock prices fully reflect allinformation from public and private sources. The strong form includes all types of information: market,nonmarket public, and private (inside) information. This means that no group of investors hasmonopolistic access to information relevant to the formation of prices, and none should be able toconsistently achieve abnormal returns.http://www.cafewriter/finance/efficient-market-hypothesis.htmlQuestion No: 33 ( Marks: 1 ) - Please choose oneA straight-line would have convexity of:► -1► 0► +1► +2Question No: 34 ( Marks: 1 ) - Please choose oneBonds that are NOT contracted to make periodic payments are called:► Deferred coupon bonds► Eurobonds► Corporate bonds► Zero-coupon bondsRefZero-Coupon Bonds Not all bonds make periodic coupon payments. Bonds that are not contracted tomake periodic coupon payments are called zero-coupon bonds.Question No: 35 ( Marks: 1 ) - Please choose one


Somi

vu



100

Which of the following statements about exchange traded derivatives is LEAST accurate?► 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 viaspecialized derivatives exchanges or other exchanges. A derivatives exchange is a market whereindividual’s trade standardized contracts that have been defined by the exchange. A derivativesexchange acts as an intermediary to all related transactions, and takes Initial margin from both sides ofthe 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 a wide range ofEuropean products such as interest rate & index products), and CME Group (made up of the 2007

merger of the Chicago Mercantile Exchange and the Chicago Board of Trade and the 2008 acquisition ofthe New York Mercantile Exchange). According to BIS, the combined turnover in the world's derivativesexchanges totaled USD 344 trillion during Q4 2005. Some types of derivative instruments also may tradeon traditional exchanges. For instance, hybrid instruments such as convertible bonds and/or convertiblepreferred may be listed on stock or bond exchanges. Also, warrants (or "rights") may be listed on equityexchanges. Performance Rights, Cash xPRTs and various other instruments that essentially consist of acomplex set of options bundled into a simple package are routinely listed on equity exchanges. Likeother derivatives, these publicly traded derivatives provide investors access to risk/reward and volatilitycharacteristics that, while related to an underlying commodity, nonetheless are distinctive.Question 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




101

► Market efficiencyQuestion No: 37 ( Marks: 1 ) - Please choose oneThe 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 likely reason 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.pdfQuestion No: 38 ( Marks: 1 ) - Please choose oneAs the number of stocks in a portfolio increases, the portfolio’s systematic risk:► Can increase or decrease► Decrease at a decreasing rate► Decrease at an increasing rate► Increase at an increasing rateRefVariability in a security's total returns that is directly associated with overall movements in the generalmarket or economy is called systematic (market) risk.Virtually all securities have some systematic risk, whether bonds or stocks, because systematic riskdirectly 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 investor’s required rate of return on a stock?► The real risk-free rate► The expected inflation rate► A growth premium► A risk premiumRefFirst of all, investor’s can earn a riskless rate of return by investing in riskless assets such as Treasurybills. This nominal risk-free rate of return is designated RF throughout this text. (page no. 135) read thefull paragraph to make it sureQuestion 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.




102

§ 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► PioneeringRefIndustries at this stage continue to move along, but typically the industry growth rate matches the growthrate 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 in economy.► The growth of the substitute products increases total market share & causes profits to increase inthe deceleration phase.Ref; Profit margins and profits are often small or negative (page no. 98)

Question No: 42 ( Marks: 1 ) - Please choose oneWhich of the following is LEAST likely an assumption underlying technical analysis?► 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 drivenby the irrational behaviors of the investors.Ref; Charts 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?DurationThe term duration has a special meaning in the context of bonds. It is a measurement 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 measurefor investors to consider, as bonds with higher durations carry more risk and have higher price volatilitythan bonds with lower durations.Zero-coupon Bond duration = its time to maturityQuestion No: 44 ( Marks: 3 )What is the advantage of Markowitz diversification?Question No: 45 ( Marks: 3 )




103

Define call options.A call option, often it is simply labeled a "call", is a financial contract between two parties, the buyer andthe seller of this type of option.Question 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 rate risk (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 ofstock’s returns is 0.75 and variance of market returns is 0.22. Calculate the covariance of market andstock’s returns.Formula to calculate the covariance is σ AB = ρAB σA σB . (page no. 210)FINALTERM EXAMINATIONSpring 2010(Session - 4)Question No: 1 ( Marks: 1 ) - Please choose oneA procedure for valuing the price of a stock by using predicted dividends and discounting them back topresent value is known as.► Dividend Discount Model► The Residual Earning Model► None of the given options► Capital Asset Pricing ModelQuestion No: 2 ( Marks: 1 ) - Please choose oneAccording to Dow Theory, primary trend is a:Short term trend ►► Long term trendMedium term trend ► None of the given options ► Ref: Primary Trend Called “the tide” by Dow.This is the trend that defines the long-term direction (up to several years).Question No: 3 ( Marks: 1 ) - Please choose oneWhich of the following functions do mutual fund companies perform for their investors?► Record keeping and administration► Professional management► Diversification and divisibility► All of the given options.Question No: 4 ( Marks: 1 ) - Please choose one




104

The concept that it is impossible to “beat the market” because stock market efficiency causes existingshare 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 Question No: 5 ( Marks: 1 ) - Please choose oneWhich of the following is the minimum expected rate of return needed to induce investment?► Expected return► Return on equity

► Required rate of return► Return on assetsRef: The rate of return needed to induce investors or companies to invest in something. For example, ifyou invest in a stock, your required return might be 10% per year. Your reasoning is that if you don'treceive 10% return, then you'd be better off paying down your outstanding mortgage, on which you arepaying 10% interest.Question No: 6 ( Marks: 1 ) - Please choose oneIn which of the following form of efficient market hypothesis security prices reflect only past stockinformation?► Weak form► Semi strong form► Strong form► Both weak and strong formRef: Weak EMH claims that prices on traded assets (e.g.,stocks, bonds, or property) already reflect allpast publicly availableinformation.Question No: 7 ( Marks: 1 ) - Please choose oneWhich of the following is a concept in economics, finance, and psychology related to the behavior ofconsumers and investors under uncertainty?► Illusion of control► Anchoring► Mental accounting► Risk AversionReferenceQuestion No: 8 ( Marks: 1 ) - Please choose oneWhich of the following is an example of a non-marketable security?► Treasury bill




105

► Negotiated CD► U.S. Government savings bond► Banker’s acceptanceRef: Any type of security that is difficult to buy or a sell because it does not trade on a normal market orexchange. These types of securities trade over the counter (OTC) or in a private transaction. Someexamples of non-marketable securities are savings bonds, series (A, B, EE, etc.) bonds and privateshares. The U.S. government offers both marketable and non-marketable securities to the public.Question No: 9 ( Marks: 1 ) - Please choose oneWhich of the following is defined as the interest rate stated on a bond, note or other fixed incomesecurity, expressed as a percentage of the principal?► Interest free rate► Coupon rate► Discount rate► Bank rateRef: Coupon - Also called "coupon rate" or "coupon percent rate", is the interest rate stated on a bond,note, or other fixed income security when it is issued. In general, the coupon is paid semiannually andexpressed as a percentage of the face value.Question No: 10 ( Marks: 1 ) - Please choose oneWhich of the following is a measure of bond’s lifetime that accounts for the entire pattern of cash flowsover the life of the bond?► Duration► Coupon► Convexity► Yield to maturityRef: A measure of a bond’s lifetime, stated in years, that accounts for the entire pattern (both size andtiming) of the cash flows over the life of the bondQuestion No: 11 ( Marks: 1 ) - Please choose oneWhich of the following factor contributes to the price volatility of a bond?► Maturity► Coupon► Yield to maturity► All of the given optionsQuestion No: 12 ( Marks: 1 ) - Please choose oneWhich of the following is defined as the point at which revenues equal costs?► Yield to maturity► Break-even► Margin




106

► Leverage pointQuestion No: 13 ( Marks: 1 ) - Please choose oneWhich 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-yield bond" or "speculative bond".Question No: 14 ( Marks: 1 ) - Please choose oneBond horizon premium is the difference between which of the following types of securities?► Long- and short-term government securities► Stock and risk-free returns► Equity and shot-term government securities► None of the given optionsReferenceQuestion No: 15 ( Marks: 1 ) - Please choose oneWhich 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 portfolio’s return► None of the given optionsQuestion No: 16 ( Marks: 1 ) - Please choose oneWhich of the following indicates that the returns on the two securities (m and n) tend to move in thesame direction at the same time?► rmn = +1.0► rmn = -1.0► rmn =0► All of the given optionsQuestion No: 17 ( Marks: 1 ) - Please choose oneWho was the developer of CAPM?► Gerald Appel► Markowitz► Joseph Granville► John BollingerRef:The CAPM Model was developed by Harry Markowitz in 1962.Question No: 18 ( Marks: 1 ) - Please choose oneWhich of the following is a measure of securities volatility or systematic risk in comparison to the marketas a whole?




107

► Beta► Return on equity► Liquidity► Rate of returnRef: A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the marketas a whole. Beta is used in the capital asset pricing model (CAPM), a model that calculates the expectedreturn of an asset based onAlso known as "beta coefficient"Question No: 19 ( Marks: 1 ) - Please choose oneThe ____________ gives the number of shares for which each convertible bond can be exchanged.► Conversion ratio► Current ratio► P/E ratio► Conversion premiumReferenceQuestion No: 20 ( Marks: 1 ) - Please choose oneThe ____________ provides an unequivocal statement on the expected return-beta relationship for allassets, whereas the _____________ implies that this relationship holds for all but perhaps a smallnumber of securities.► APT, CAPM► APT, OPM► CAPM, APT► CAPM, OPMReferenceQuestion No: 21 ( Marks: 1 ) - Please choose oneWhich of the following involves dividing an investment portfolio among different financial assets?► Securitization► Sector rotation► Asset allocation► Risk aversionRef: Asset allocation involves dividing an investment portfolio among different asset categories, such asstocks, bonds, and cash. The process of determining which mix of assets to hold in your portfolio is avery personal one. The asset allocation that works best for you at any given point in your life will dependlargely on your time horizon and your ability to tolerate risk.Question No: 22 ( Marks: 1 ) - Please choose oneWhich of the following is the practice of using derivatives as building blocks to create specialized




108

products?► Financial engineering

► Risk management► Income generation► Portfolio managementReference: Financial Engineering is the practice of using derivatives as building blocks to createspecialized products.Question No: 23 ( Marks: 1 ) - Please choose oneWhich of the following is defined as an investment transaction that is intended to provide protectionagainst a decline in the value of an asset?► Short hedge► Long hedge► Natural hedge► Cross hedgeReferenceQuestion No: 24 ( Marks: 1 ) - Please choose oneIn the formula, cost of asset= S2– (F2–F1), what does S2 indicate?► Initial asset price► Initial futures price► Final asset price► Final futures priceReferenceQuestion No: 25 ( Marks: 1 ) - Please choose oneS & P 500 future stock index closes at $ 300 and spot price is $ 325. What is its basis?► -25► -30► 25► 30Basis = spot price –closing price= 325-300= 25Question No: 26 ( Marks: 1 ) - Please choose oneWhich 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 volatilityReferenceQuestion No: 27 ( Marks: 1 ) - Please choose oneWhich 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




109

► Option contracts are adjusted for stock splits and stock dividends► A put writer exposes himself to the risk of declining stock pricesRef: 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).Question No: 28 ( Marks: 1 ) - Please choose oneWho introduced Moving Average Convergence/Divergence (MACD)?► Gerald Appel► Joseph Granville► John Bollinger► Welles WilderRef: MACD was developed by Gerald Appel as a way to keep track of a moving average crossoversystem.Question No: 29 ( Marks: 1 ) - Please choose oneWhich 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 levelQuestion No: 30 ( Marks: 1 ) - Please choose oneWhich of the following is a measure of the volatility of stock prices or returns?► ROR► Beta► ROI► Risk premiumQuestion No: 31 ( Marks: 1 ) - Please choose oneWhich of the following is defined as a standardized contract traded on a futures exchange, to buy or sella 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 to buy or sell aspecified 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 futures exchange.Question No: 32 ( Marks: 1 ) - Please choose oneWhich of the following securities do NOT ensures ownership in a corporation?► Bonds and common stock► Bonds and preferred stock► Preferred stock and common stock


Somi

vu



110

► Common stock and derivativesQuestion No: 33 ( Marks: 1 ) - Please choose oneWhich 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 companiesAnswer provided by Banjara with reference.Dividend and earnings growth rates are important to both value and growth investors, but especially tothe growth investor. (page no. 48)Question No: 34 ( Marks: 1 ) - Please choose oneWhich 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 shareQuestion No: 35 ( Marks: 1 ) - Please choose oneWhich 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.ReferenceQuestion No: 36 ( Marks: 1 ) - Please choose oneWhich of the following 5-year bond has the highest interest rate risk?► A floating-rate bond► A zero-coupon bond► A 5% fixed-coupon bond► A 10% fixed-coupon bondRef: zero-coupon bond has the highest interest rate risk because it delivers all its cash flows at maturity.Since a zero-coupon bond has a 0.00% coupon, a low coupon equates to high price volatility.Question No: 37 ( Marks: 1 ) - Please choose oneWhich of the following statements regarding debentures is MOST accurate?► Debentures are free from default risk if issued by federally related or government sponsoredentities► Debentures are commonly issued by government sponsored entities such as Fannie and FreddieMac► Debentures may not be issued by government sponsored entities.► Debentures are often called first mortgage bonds.Reference




111

provided by BanjaraQuestion No: 38 ( Marks: 1 ) - Please choose oneA futures contract is LEAST likely:► Exchange traded► A contingent claim► Adjusted for profits and losses daily► A standardized instrumentRef: They adjusted profits only not losses.Question No: 39 ( Marks: 1 ) - Please choose oneWhich of the following is NOT a risk measure?► Beta► Standard deviation► Variance► Geometric meanQuestion No: 40 ( Marks: 1 ) - Please choose oneWhich of the following is LEAST likely an example of a portfolio constraint?► Tax concern► Liquidity needs► Total return requirement of 15%► Regularity requirementRef: Constraints and Preferences:o Liquidityo Time horizon

o Laws and regulationso Taxeso Unique preferences and circumstancesQuestion No: 41 ( Marks: 1 ) - Please choose oneWhich of the following statements regarding growth companies & growth stocks is 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 with above averagereturns.► If growth opportunities are already incorporated into its prices, a growth company’s stock will earnabove average returns.Rationale: A growth stock is one that earns below-average risk adjusted returnsQuestion No: 42 ( Marks: 1 ) - Please choose oneThe 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► Determination of the stability of securities for an investor’s portfolio




112

► Identification of the industry effects of changes in demographics, lifestyles, politics etcQuestion No: 43 ( Marks: 3 )What is the main purpose of diversification?Question No: 44 ( Marks: 3 )What are the causes of risk?Question No: 45 ( Marks: 3 )What do you mean by financial reengineering?Question No: 46 ( Marks: 5 )Why is yield to maturity important?Question No: 47 ( Marks: 5 )Can risk be completely eliminated if we add more and more stock to portfolio?Justify your answer withreasons.Question No: 48 ( Marks: 5 )Describe the role of clearing house in futures market.

FINALTERM EXAMINATIONSpring 2009(Session - 1)Marks: 81Question No: 1 ( Marks: 1 ) - Please choose oneThe price at which a security dealer sells a security is known as:Bid priceMarket priceOffer priceOrder priceQuestion No: 2 ( Marks: 1 ) - Please choose one__________ is a temporary restriction on program trading in a particular security ormarket, usually to reduce dramatic price movements.SuperDotNYSE directTrading curbTicker tapeQuestion No: 3 ( Marks: 1 ) - Please choose oneA brokerage account in which broker lends the customer cash to purchase securities iscalled:Margin accountCash accountIRA accountOption accountQuestion No: 4 ( Marks: 1 ) - Please choose oneThe Dow theory use _______ to follow three major types of market movements.




113

ChartingKey indicatorsFundamental analysisTechnical analysisQuestion No: 5 ( Marks: 1 ) - Please choose oneWhich of the following is defined as a procedure for valuing the price of a stock by usingpredicted dividends and discounting them back to present value?Relative Strength IndexOn Balance VolumeDividend Discount ModelBollinger bandsQuestion No: 6 ( Marks: 1 ) - Please choose oneWhen inflation and interest rates are low, Price per Earning (P/E) ratio tend to be:HighLowMinimumAverageQuestion No: 7 ( Marks: 1 ) - Please choose oneWhich of the following is EXCLUDED from Porter s competitive factors?Substitute products or servicesChanges in the economyBargaining power of buyersRivalry between existing competitorsQuestion No: 8 ( Marks: 1 ) - Please choose oneWhich of the following is a basket of stocks that tracks a particular sector, investmentstyle, geographical area, or the market as a whole?Exchange traded fundOpen-end fundClosed-end fundUnit investment trustQuestion No: 9 ( Marks: 1 ) - Please choose oneIf an investor wants to avoid transaction costs, which of the following strategy should he select?Active strategyDefensive strategyBuy and hold strategySector rotationRef : Others have advocated buy and hold on purely cost-based grounds, without resort to theEMH. Costs such as brokerage and bid/offer spreadare incurred on all transactions, and buy-andholdinvolves the fewest transactions for a given amount invested in the market, all other things




114

being equal.Question No: 10 ( Marks: 1 ) - Please choose oneWhich of the following is the annual net income from an average investment expressed as apercentage of average amount invested?Net asset value

Return on equityReturn on average investment (ROI)Discounted valueRef: Return On Investment (ROI)financial benefits flowing from an investment, typically expressed as an annual percentage of theamount invested.Question No: 11 ( Marks: 1 ) - Please choose oneWhich of the following would justify an investor preference for cash dividends?Illusion of controlAnchoringMental accountingAsset segregationQuestion No: 12 ( Marks: 1 ) - Please choose oneWhich of the following is NOT a "value-weighted" index?NYSE Composite IndexDow-Jones Industrial AverageNASDAQ Composite IndexStandard & Poor's 500 IndexRef: A stock index in which each stock affects the index in proportion to its market value.Examples include Nasdaq Composite Index, S&P 500, Wilshire 5000 Equity Index, Hang SengIndex, and EAFE Index. also called capitalization weighted index.The Dow Jones IndustrialAverage is a price-weighted index of 30 blue-chip companies traded in the United States.Question No: 13 ( Marks: 1 ) - Please choose oneWhich of the following focuses on how investors interpret and act on information to make informedinvestment decisions?Dividend discount modelEfficient market hypothesisDow TheoryBehavioral financeRef: http://www.bim.edu/pdf/lead_article/Full%20Paper-role-BIM.pdfQuestion No: 14 ( Marks: 1 ) - Please choose one




115

Which of the following is expressed as index number relative to a base index value of 10?Dow-Jones Industrial AverageNASDAQ Composite IndexStandard & Poor's 500 IndexNYSE Composite IndexQuestion No: 15 ( Marks: 1 ) - Please choose oneWhich of the following is NOT included in money market securities?Treasury BillCertificate of depositCommercial paperFutureRef: Money-market securities are liquid, marketable, safe investments that have maturities of one year orless. They are used, generally, for emergency funds investments and short-term cash. Examples of thistype of investment are certificates of deposits (CDs), money-market mutual funds, treasury bills,commercial papers, banker’s acceptances, and purchase agreements.Question No: 16 ( Marks: 1 ) - Please choose oneWhich of the following is an example of a non-marketable security?Treasury billNegotiated CDU.S. Government savings bondBanker s acceptanceRef: Some examples of non-marketable securities are savings bonds, series (A, B, EE, etc.) bondsand private shares. The U.S. government offers both marketable and non-marketable securities to thepublic. Marketable securities, such as treasury bills and bonds can be purchased and resold to thepublic. But non-marketable securities, such as savings bonds must be held by the holder until maturityand can't be resold to another party.Question No: 17 ( Marks: 1 ) - Please choose oneWhich of the following statement is TRUE about yield to maturity?Yield to maturity is inversely related to bond priceYield to maturity is always less than the yield to callYield to maturity will be less than the current yieldYield to maturity tends to fall with a rise in durationQuestion No: 18 ( Marks: 1 ) - Please choose oneWhich of the following statement is TRUE about yield to maturity?Yield to maturity is inversely related to bond priceYield to maturity is always less than the yield to callYield to maturity will be less than the current yield for bonds purchased at a discount




116

Yield to maturity tends to fall with a rise in durationQuestion No: 19 ( Marks: 1 ) - Please choose oneWhich of the following statement is TRUE regarding bond prices?

Bond prices are expressed as a percentage of discounted valueBond prices are expressed as a percentage of par valueBond prices are expressed as a percentage of future valueBond prices are expressed as a percentage of intrinsic valueQuestion No: 20 ( Marks: 1 ) - Please choose oneThe value of the bond is NOT directly tied to the value of which of the following assets?Real assets of the businessLiquid assets of the businessFixed assets of the businessLong term assets of the businessQuestion No: 21 ( Marks: 1 ) - Please choose oneWhich of the following is known as speculative bond?Government bondMunicipal bondSovereign bondJunk bondRef: A bond rated 'BB' or lower because of its high default risk. Also known as a "high-yield bond" or"speculative bond".Question No: 22 ( Marks: 1 ) - Please choose oneBond horizon premium is the difference between which of the following types of securities?Long- and short-term government securitiesStock and risk-free returnsEquity and shot-term government securitiesNone of the given optionsReferenceQuestion No: 23 ( Marks: 1 ) - Please choose oneThe market value of a company stock has declined due to competition in the market. The investors ofthis company are faced with what type of risk?Financial riskMarket riskInterest rate riskBusiness riskQuestion No: 24 ( Marks: 1 ) - Please choose oneWhich of the following bond redeems the principal amount at maturity and pays no periodic income?Municipal bondCorporate bondJunk bond




117

Zero coupon bondQuestion No: 25 ( Marks: 1 ) - Please choose oneDiversifying without looking at relevant investment characteristics is known as:Random diversificationNon-random diversificationHorizontal diversificationVertical diversificationRef: Random or naive diversification refers to the act of randomly diversifying without regard to relevantinvestment characteristics such as expected return and industry classification.Question No: 26 ( Marks: 1 ) - Please choose oneWhich of the following statement is FALSE about efficient portfolio?An efficient portfolio provides greatest expected return for a given level of riskInvestors can identify efficient portfolios by specifying an expected portfolio returnInvestors can identify efficient portfolios by maximizing the portfolio riskEfficient portfolio risks are measured by the standard deviationQuestion No: 27 ( Marks: 1 ) - Please choose oneWhich of the following statement is CORRECT?One hundred stocks are required to eliminate the bulk of the diversifiable risk from a portfolioStandard deviation measures diversifiable riskThe number of stocks needed to highly diversify a portfolio is constant over timeA fully diversified portfolio still contains undiversifiable riskQuestion No: 28 ( Marks: 1 ) - Please choose oneWhich of the following statement is TRUE regarding efficient frontier?It is a downward sloping curved lineIt is an upward sloping straight lineIt is a downward sloping straight lineIt is an upward sloping curved lineQuestion No: 29 ( Marks: 1 ) - Please choose oneWhen beta of a security >1.0, it indicates that:Security is more risky than the marketSecurity is less risky than the marketSecurity is as risky as the marketSecurity is not risky at allQuestion No: 30 ( Marks: 1 ) - Please choose one

A bond will sell at a discount when __________.The coupon rate is greater than the current yield and the current yield is greater than yield to maturityThe coupon rate is greater than yield to maturityThe coupon rate is less than the current yield and the current yield is greater than the yield to maturityThe coupon rate is less than the current yield and the current yield is less than yield to maturity




118

Rationale: In order for the investor to earn more than the current yield the bond must be selling for adiscount. Yield to maturity will be greater than current yield as investor will have purchased the bond atdiscount and will be receiving the coupon payments over the life of the bond.Question No: 31 ( Marks: 1 ) - Please choose oneThe _________ is a measure of the average rate of return an investor will earn if the investor buys thebond now and holds until maturity.Current yieldDividend yieldP/E ratioYield to maturityQuestion No: 32 ( Marks: 1 ) - Please choose oneNominal rate of interest - inflation is equal to which of the following?Interest amountNominal interestRisk premiumReal rate of interestQuestion No: 33 ( Marks: 1 ) - Please choose oneThe APT was developed in 1976 by ____________.LintnerModigliani and MillerRossSharpeRef: Arbitrage pricing theory (APT) as developed by Ross and enhanced byOthers.Question No: 34 ( Marks: 1 ) - Please choose oneWhich of the following is a financial instrument whose return is derived from the return on anotherinstrument?Derivative securityFixed income securityEquity securityMoney market securityRef: In financial terms, a derivative is a financial instrument - or more simply, an agreement between twopeople or two parties - that has a value determined by the price of something else (called the underlying).Question No: 35 ( Marks: 1 ) - Please choose oneWhich of the following is a derivative in which one party exchanges a stream of interest payments foranother party's stream of cash flows?Foreign currency swapTotal return swapCredit default swap




119

Interest rate swapRef: A swap is a derivative in which one party exchanges a stream of interest payments for anotherparty's stream of cash flows. Interest rate swaps can be used by hedgers to managetheir fixed or floating assets and liabilities. They can also be used by speculators to replicate unfundedbond exposures to profit from changes in interest rate.Question No: 36 ( Marks: 1 ) - Please choose oneWhich of the following is a commodity/security market in which goods are sold and deliveredimmediately?Spot marketForward marketLaissez-faire marketFuture marketRef: Spot markets are markets for immediate: delivery. The spot price refers to-the current market priceof an item available for immediate delivery.Question No: 37 ( Marks: 1 ) - Please choose oneWhich of the following statement is FALSE regarding forward contracts?Forward contracts are traded on over- the-counter marketThere is no surety/guarantee of the trade settlementThere are no pre determined standards in future contractsForward contracts involve a process known as marking to marketQuestion No: 38 ( Marks: 1 ) - Please choose oneWhich of the following refers to the simultaneous purchase and sale in two markets so that the sellingprice is higher than the buying price by more than the transaction cost?HedgingArbitrageSpeculationBrokerage

Ref: Arbitrage refers to the simultaneous purchase and sale in two markets so that the selling price ishigher than the buying price by more than the transaction cost, so that the arbitrageur makes risk-lessprofit.Question No: 39 ( Marks: 1 ) - Please choose oneWhich of the following statement is FALSE regarding short hedge?The value of short hedge contracts is equal the value of the stock portfolioA short futures hedge is appropriate when you know you will purchase an asset in the future andwant to lock in the priceA short futures hedge is appropriate when you know you will sell an asset in the future & want to lock in


Somi

vu



120

the priceA short hedge reduces or possibly eliminates the risk taken in a long positionQuestion No: 40 ( Marks: 1 ) - Please choose oneS & P 500 future stock index closes at $ 300 and spot price is $ 325. What is its basis?-25-302530Basis = spot price – future price= 325 -300= 25Question No: 41 ( Marks: 1 ) - Please choose oneSecondary trend in Dow Theory is known as __________.TriangleWaveTideRounded bottomQuestion No: 42 ( Marks: 1 ) - Please choose oneWhich of the following is TRUE about profitability ratios?Profitability ratios are designed to measure a business's ability to generate earningsProfitability ratios are designed to measure the quality of a company's operationsProfitability ratios are designed to measure a company's ability to cover its short term obligationsProfitability ratios are designed to measure the percentage of earnings paid to shareholdersQuestion No: 43 ( Marks: 3 )Define covariance. What does covariance shows?A statistical measure of the variance of two random variables that are observed or measured in the samemean time period. This measure is equal to the product of the deviations of corresponding values of thetwo variables from their respective means.Question No: 44 ( Marks: 3 )What is meant by Interest rate tradeoff"?Definition :An act of exchanging one thing for another as part of a business deal.Question No: 45 ( Marks: 3 )What is the difference between the spot market and the futures market?Question No: 46 ( Marks: 5 )Describe the general types of risk in detail.Question No: 47 ( Marks: 5 )Describe why an investor might purchase a call.Question No: 48 ( Marks: 10 )




121

What is meant by expected return? Describe how expected return of a portfolio is calculated.Question No: 49 ( Marks: 10 )Do you agree with the following statements? Justify your answer in each case with proper reasoning?a) Stock index acts as effective barometer, which gauge the prevalent market sentiments and behaviors.b) Stock market move randomly.FINALTERM EXAMINATIONSpring 2009(Session - 2)Marks: 81Question No: 1 ( Marks: 1 ) - Please choose oneShares of McDonald Corporation are an example of a (n):Standardized financial instrumentNon-standardized financial instrument since their prices can differ over timeStandardized financial liability instrumentOpen-end investmentReferenceQuestion No: 2 ( Marks: 1 ) - Please choose oneWhich of the following includes fixed income securities?BondsSharesDerivatives

OptionsQuestion No: 3 ( Marks: 1 ) - Please choose oneCompanies that have capitalization amounts of less than $500 million are known as_________.Small cap companiesMid cap companiesGrowth companiesLarge cap companiesQuestion No: 4 ( Marks: 1 ) - Please choose oneIn bar chart, which color indicates share prices are going down?BlueBlackWhiteRedQuestion No: 5 ( Marks: 1 ) - Please choose oneWhat will be the resulting figure,when gross profit is divided by net sales?Gross marginOperating marginNet marginProfit margin




122

Question No: 6 ( Marks: 1 ) - Please choose oneIn bottom-up approach of fundamental analysis, investors begin their analysis with:IndustryEconomyMarketCompanyQuestion No: 7 ( Marks: 1 ) - Please choose oneWhich of the following is EXCLUDED from Porter's competitive factors?Substitute products or servicesChanges in the economyBargaining power of buyersRivalry between existing competitorsQuestion No: 8 ( Marks: 1 ) - Please choose oneWhich of the following is defined as the gradual loss in value of equipment and other tangible assets overthe course of its useful life?AppreciationDepreciationRevaluationAmortizationQuestion No: 9 ( Marks: 1 ) - Please choose oneOn which of the following financial statements, revenues and expenses can be found?Balance sheetIncome statementStatement of cash flowsStatement of changes in equityQuestion No: 10 ( Marks: 1 ) - Please choose oneWhich of the following is an example of brokerage fee charged by a stockbroker?Margin profitInsurance premiumTransaction costCapital expenditureQuestion No: 11 ( Marks: 1 ) - Please choose oneTechnical analysis is NOT applicable in which form of efficient market hypothesis?Weak form efficiencySemi-strong form efficiencyStrong-form efficiencyWeak and strong form of efficiencyQuestion No: 12 ( Marks: 1 ) - Please choose oneWhich of the following suggests that people express a different degree of emotion towards gains thantowards losses?Prospect theory




123

Illusion of controlAnchoringLoss aversionRef from investopedia:Prospect theory suggests people express a different degree of emotion towards gains than towardslosses. Individuals are more stressed by prospective losses than they are happy from equal gains.Question No: 13 ( Marks: 1 ) - Please choose oneLSE 25 index was last reconstituted on _______ in line with the regular review policy.20th December, 20021st July, 2006

25th July, 20071st July, 2008Question No: 14 ( Marks: 1 ) - Please choose oneWhich of the following is considered to be a characteristic of an equity security?Fixed incomeDebtPriceOwnershipQuestion No: 15 ( Marks: 1 ) - Please choose oneWhich of the following statement is TRUE about yield to maturity?Yield to maturity is inversely related to bond priceYield to maturity is always less than the yield to callYield to maturity will be less than the current yieldYield to maturity tends to fall with a rise in durationQuestion No: 16 ( Marks: 1 ) - Please choose oneThe yield to maturity is equal to the realized compound return if all coupon interest payments:Are not reinvestedAre reinvested at the market rateAre reinvested at the bond's coupon rateAre reinvested at the bond's yield to maturityQuestion No: 17 ( Marks: 1 ) - Please choose oneWhich of the following measures the sensitivity of an asset's price to interest rate movements, expressedas a number of years?DurationYield to maturityConvexityImmunizationRef: In finance, the duration of a financial asset, specifically a bond, is a measure of the sensitivity of




124

the asset's price to interest ratemovements. It broadly corresponds to the length of time before the assetis due to be repaid.Question No: 18 ( Marks: 1 ) - Please choose oneWhich of the following statement is FALSE regarding bond duration?Duration is shorter than maturity for all bonds except zero coupon bondsDuration is equal to maturity for zero coupon bondsDuration is directly related to coupon yieldDuration is measured in yearsRef: The higher thecoupon rate of a bond, the shorter the duration .Question No: 19 ( Marks: 1 ) - Please choose oneWhich of the following statement is TRUE about duration of a bond?It is less than maturity for bonds paying coupon interestIt is directly related to coupon yieldIt decreases with maturityIt is greater than maturity for zero coupon bondsQuestion No: 20 ( Marks: 1 ) - Please choose oneWhich of the following statement is FALSE regarding bond duration?Bond duration is inversely related to coupon rateDuration of a zero-coupon bond equals its time to maturityHolding maturity constant, a bond s duration is higher when the coupon rate is lowerDuration is longer than maturity for all bonds except zero coupon bondsQuestion No: 21 ( Marks: 1 ) - Please choose oneWhich of the following is known as speculative bond?Government bondMunicipal bondSovereign bondJunk bondQuestion No: 22 ( Marks: 1 ) - Please choose oneWhich of the following is referred to as risk-free bond?Government bondMunicipal bondSovereign bondJunk bondQuestion No: 23 ( Marks: 1 ) - Please choose oneDiversification is the only way to protect investors from:Market riskNonsystematic riskSystematic riskGeneral riskRef: Also known as "specific risk", "diversifiable risk" or "residual risk".Question No: 24 ( Marks: 1 ) - Please choose oneThe excess return that an individual stock or the overall stock market provides over a risk-free rate isknown as _____________.




125

Equity risk premiumBond horizon premiumShare premiumLiquidity premiumQuestion No: 25 ( Marks: 1 ) - Please choose oneSystematic risk contains all of the following components EXCEPT:Purchasing power riskMarket riskBusiness riskInterest rate riskInvestopedia explains Systematic RiskInterest rates, recession and wars all represent sources of systematic risk because they affect the entiremarket and cannot be avoided through diversification. Whereas this type of risk affects a broad range ofsecurities.Business Risk: The risk that a company will not have adequate cash flow to meet its operatingexpenses.Question No: 26 ( Marks: 1 ) - Please choose oneWhich of the following bond redeems the principal amount at maturity and pays no periodic income?Municipal bondCorporate bondJunk bondZero coupon bondQuestion No: 27 ( Marks: 1 ) - Please choose oneWhich of the following measures deviation of returns from the mean?VarianceStandard deviationGeometric meanCorrelation coefficientQuestion No: 28 ( Marks: 1 ) - Please choose oneWhich of the following statement is FALSE?Each portfolio asset has a weight which represents the percent of the total portfolio valuePortfolio risk is not a weighted average of the risk of individual securities in the portfolioPortfolio risk is measured by variance or standard deviation of the portfolio's returnNone of the given optionsQuestion No: 29 ( Marks: 1 ) - Please choose oneWhich of the following is defined as a line that graphs the systematic, or market risk versus return of thewhole market at a certain time and shows all risky marketable securities?




126

Security market lineCapital market lineBudget lineValue lineRef: A line used to illustrate the relationship between risk and return for individual securities. The securitymarket line shows a positive linear relationship between returns and systematic risk as measured bybeta.Question No: 30 ( Marks: 1 ) - Please choose oneWhat is the other name used for optimal portfolio?Business portfolioMarket portfolioMutual fund portfolioSystematic portfolioQuestion No: 31 ( Marks: 1 ) - Please choose oneWhich of the following is FALSE regarding separation theorem?The firm's investment decision is independent of the preferences of the ownerThe investment decision is dependent on financial decisionRisky portfolios are not tailored to each individual s tasteIt is possible to separate investment decisions from financial decisionsQuestion No: 32 ( Marks: 1 ) - Please choose oneWhich of the following is a measure of securities volatility or systematic risk in comparison to the marketas a whole?BetaReturn on equityLiquidityRate of returnQuestion No: 33 ( Marks: 1 ) - Please choose oneA single-index model uses __________ as a proxy for the systematic risk factor.A market index, such as the S&P 500The current account deficitThe growth rate in GNPThe unemployment rateReferenceQuestion No: 34 ( Marks: 1 ) - Please choose one

The concept that two identical assets cannot be sold at different prices is associated with which of thefollowing theory?Prospect TheoryModern Portfolio TheoryDow TheoryArbitrage Pricing TheoryQuestion No: 35 ( Marks: 1 ) - Please choose one




127

Which of the following is NOT an anomaly related to efficient market hypothesis?Low PE effectThe small firm effectThe neglected firm effectCommon size effectQuestion No: 36 ( Marks: 1 ) - Please choose oneWhich of the following is defined as an obligatory agreement to transact in the future, based on futureprice expectations?Forward contractFutures contractAnnuity contractSpread contractA forward contract is a legally enforceable agreement for delivery of goods or the underlying asset on aspecific date in future at a price agreed on the date of contract. All the contracts for delivery of goods,which are settled by payment of money difference or where delivery and payment is made after a periodof specific days, are forward contracts.Question No: 37 ( Marks: 1 ) - Please choose oneWhich of the following is defined as a user of the market, who enters into futures contract to manage therisk of adverse price fluctuation in respect of his existing or future asset?SpeculatorBrokerHedgerArbitragerQuestion No: 38 ( Marks: 1 ) - Please choose oneS & P 500 future stock index closes at $ 300 and spot price is $ 325. What is its basis?-25-302530Question No: 39 ( Marks: 1 ) - Please choose oneIn which of the following situation, the writers of call options expect profit?When the stock price declinesWhen the stock prices remain the sameWhen increase in stock price is less than premiumAll of the given optionsQuestion No: 40 ( Marks: 1 ) - Please choose oneWhich of the following is defined as an option whose payoff depends on whether or not the underlyingasset has reached or exceeded a predetermined price?




128

Barrier optionForward start optionOver-the-counter optionsCompound optionsQuestion No: 41 ( Marks: 1 ) - Please choose oneAn over-the-counter market can be defined as:A network of dealers connected electronicallyAn illegal secondary market for stocks used primarily by those attempting toevade taxesA primary market for stocksA form of centralized exchangeExplanation: A decentralized market of securities not listed on an exchange where market participantstrade over the telephone, facsimile or electronic network instead of a physical trading floor. There is nocentral exchange or meeting place for this market.Question No: 42 ( Marks: 1 ) - Please choose oneWhich of the following is specifically a measure of a volatility of the stock or mutual fund?BetaStandard deviationCovarianceNone of the given optionsQuestion No: 43 ( Marks: 3 )What is the relationship between risk and return?Question No: 44 ( Marks: 3 )Define a zero coupon bond?Question No: 45 ( Marks: 3 )Describe how derivatives are used as a risk management tool.

Question No: 46 ( Marks: 5 )Bonds are 100% risk free investments. Do you agree with this statement? Justify youranswer in either case.Question No: 47 ( Marks: 5 )The key to maximize profits is diversification . Do you agree with this statement?Question No: 48 ( Marks: 10 )Explain the indicators used to measure the fluctuations in equity market.Question No: 49 ( Marks: 10 )What is diversification? Describe the impact of diversification on Risk?FINALTERM EXAMINATIONSpring 2009

Marks: 81Question No: 1 ( Marks: 1 ) - Please choose oneWhich of the following is EXCLUDED from the reasons of investing?




129

To obtain capital gainTo supplement their moneyTo gather market informationTo experience an excitementQuestion No: 2 ( Marks: 1 ) - Please choose one__________ believe that securities are priced according to fundamental economic data.Fundamental analystsRatio analystsTechnical analystsResearch analystsQuestion No: 3 ( Marks: 1 ) - Please choose oneThe idea that money available at the present time is worth more than the same amount in the future iscalled:Present valueTime value of moneyFuture valueAnnuity conceptQuestion No: 4 ( Marks: 1 ) - Please choose oneWhich of the following statement is a characteristic of line charts?Can be used for comparing two or more valuesIt is efficient in showing more detailsIt is simplest and most familiar chartNone of the given choicesQuestion No: 5 ( Marks: 1 ) - Please choose oneWhat does gross margin represents?The quality of a firm's operationsThe percentage of earnings paid to shareholdersA company's capital structureThe percentage of revenue remaining after cost of goodsRef: It is a measure of how well each dollar of a company's revenue is utilized to cover the costs ofgoods sold.Question No: 6 ( Marks: 1 ) - Please choose oneIf ABC Furniture earned $5 million dollars of profit in a year, and the company had a market capitalizationof $85 million, what is the P/E Ratio?9141722Solution:P/E Ratio = Price/ Earnings= 85/5= 17


Somi

vu



130

Question No: 7 ( Marks: 1 ) - Please choose oneWhich of the following items will reduce stockholders' equity?Purchase of equipmentPurchase of suppliesReceiving a loanPayment of salariesRationale: Equipment is an asset and when we purchase an asset we debit(reduce) the capital accountwhich reduces the capital by that amount.Question No: 8 ( Marks: 1 ) - Please choose oneWhich of the following is the annual net income from an average investment expressed as a percentageof average amount invested?

Net asset valueReturn on equityReturn on average investment (ROI)Discounted valueQuestion No: 9 ( Marks: 1 ) - Please choose oneWhich of the following equity market indicator is price-weighted index?NASDAQ Composite IndexStandard & Poor's 500 IndexNikkie 225 averageNYSE Composite IndexRef: A stock index in which each stock influences the index in proportion to its price per share. The valueof the index is generated by adding the prices of each of the stocks in the index and dividing them by thetotal number of stocks. Stocks with a higher price will be given more weight and, therefore, will have agreater influence over the performance of the index.Currently, the Nikkei is the most widely quoted average of Japanese equities, similar to the Dow JonesIndustrial Average. In fact, it was known as the "Nikkei Dow Jones Stock Average" from 1975 to 1985.Question No: 10 ( Marks: 1 ) - Please choose oneLahore Stock of Exchange is _____ based market indicator.VolumeCapitalizationPrice weightingProfitQuestion No: 11 ( Marks: 1 ) - Please choose oneWhich of the following is defined as the transformation of illiquid, non-marketable risky individual loansinto asset-backed securities?Securitization




131

Sector rotationDiversificationRisk aversionRef:The Transformation of Illiquid Financial Assets into Liquid Capital Market Securities. A typicalexample of securitization is a mortgage-backed security (MBS), which is a type of asset-backed securitythat is secured by a collection of mortgages.Question No: 12 ( Marks: 1 ) - Please choose oneWhich of the following affects the price of the bond?Market interest rateRequired rate of returnInterest rate riskAll of the given optionsQuestion No: 13 ( Marks: 1 ) - Please choose oneBond is a type of Direct Claim Security whose value is NOT secured by __________.Real assetsIntangible assetsFixed assetsTangible assetsQuestion No: 14 ( Marks: 1 ) - Please choose oneWhich of the following measure that how much a bond price-yield curve deviates from a straight line?Bond durationBond convexityBond valuationAll of the given optionsRef: It measures the sensitivity of the yield to maturity (YTM) of a bond to changes in duration of thebond.Question No: 15 ( Marks: 1 ) - Please choose oneWhich of the following is known as speculative bond?Government bondMunicipal bondSovereign bondJunk bondQuestion No: 16 ( Marks: 1 ) - Please choose oneThe risk inherent to the entire market or entire market segment is known as:Systematic riskIssuer riskSpecific riskNonsystematic riskRef:Interest rates, recession and wars all represent sources of systematic risk because they affect the




132

entire market and cannot be avoided through diversification. The risk inherent to the entire market orentire market segment also known as "un-diversifiable risk" or "market risk."Question No: 17 ( Marks: 1 ) - Please choose oneThe excess return that an individual stock or the overall stock market provides over a risk-free rate isknown as _____________.Equity risk premiumBond horizon premiumShare premiumLiquidity premiumRef:This excess return compensates investors for taking on the relatively higher risk of the equitymarket. The size of the premium will vary as the risk in a particular stock, or in the stock market as awhole, changes; high-risk investments are compensated with a higher premium. Also referred to as"equity premium".Question No: 18 ( Marks: 1 ) - Please choose oneThe risk stemming from the lack of marketability of an investment that cannot be bought or sold quicklyenough to prevent or minimize a loss is known as:Interest rate riskMarket riskLiquidity riskDefault riskInvestopedia Says:Risk that a bank will have to sell assets at a loss to meet cash demands, for example, depositors'demands for funds. Liquidity risk is generally explained as a ratio comparing available liquidity to thedemand for funds.Usually reflected in a wide bid-ask spread or large price movements.Question No: 19 ( Marks: 1 ) - Please choose oneWhich of the following may be exchanged for common stock of the same corporation?WarrantExchangeable bondDebentureConvertible bondRef: A corporate bond, usually a junior debenture, that can be exchanged, at the option of the holder, fora specific number of shares of the company's preferred stock or common stock.Question No: 20 ( Marks: 1 ) - Please choose oneWhich of the following statement is FALSE?




133

Securities move together only because of their common relationship to the market indexThe importance of each individual security s risk decreases as the number ofsecurities increasesRisk and return tends to be lowest for investors who trade frequentlyThe importance of covariance increases with an increase in number of securitiesRationale: There is rule of thumb more you trade more will be risk. Plus sometime a day trader makesmore money compared to an investor. (zh, )Question No: 21 ( Marks: 1 ) - Please choose oneThe average value of beta for all stocks in the market is:0.51.01.52.0Question No: 22 ( Marks: 1 ) - Please choose oneA single-index model uses __________ as a proxy for the systematic risk factor.A market index, such as the S&P 500The current account deficitThe growth rate in GNPThe unemployment rateRef: Confirmed from web quiz file.Question No: 23 ( Marks: 1 ) - Please choose oneThe anomalies literature ____________.Provides a conclusive rejection of market efficiencyProvides a conclusive support of market efficiencySuggests that several strategies would have provided superior returnsProvides a conclusive acceptance of market efficiencyQuestion No: 24 ( Marks: 1 ) - Please choose oneThe ____________ gives the number of shares for which each convertible bond can be exchanged.Conversion ratioCurrent ratioP/E ratioConversion premiumRationale: The conversion premium is the amount for which the bond sells above conversion value;the price of bond as a straight bond provides the floor. The other terms are not specifically relevant toconvertible bonds.Question No: 25 ( Marks: 1 ) - Please choose oneWhich of the following is a financial instrument that conveys the right, but not the obligation, to engage ina future transaction on some underlying security, or in a futures contract?OptionsFutures




134

SwapsForwardsRef: This is the definition of options. Traders use options to speculate, which is a relatively risky practice,while hedgers use options to reduce the risk of securities.Question No: 26 ( Marks: 1 ) - Please choose oneWhich of the following is an agreement to exchange two currencies on one date and to reverse thetransaction at a future date?Interest rate swapForeign currency swapTotal return swapCredit default swapRef: An agreement to exchange two currencies on one date and to reverse the transaction at a futuredate. Entering into a currency swap is equivalent to borrowing in one currency and lending in another,allowing management of cross-currency cash flows. The swap market can be a more efficient way ofborrowing and lending currency amounts than accessing the relevant currency money markets directly.Question No: 27 ( Marks: 1 ) - Please choose oneWhich of the following is a derivative in which one party exchanges a stream of interest payments foranother party's stream of cash flows?Foreign currency swapTotal return swapCredit default swapInterest rate swapRef from wikipedia: A swap is a derivative in which one party exchanges a stream of interest paymentsfor another party's stream of cash flows. Interest rate swaps can be used by hedgers to managetheir fixed or floating assets and liabilities.Question No: 28 ( Marks: 1 ) - Please choose oneWhich of the following is defined as a market for the immediate sale and delivery of assets?Forward marketLaissez-faire marketFuture marketSpot marketQuestion No: 29 ( Marks: 1 ) - Please choose oneWhich of the following is defined as a trader, who trades or takes position without having exposure in thephysical market, with the sole intention of earning profit?Hedger




135

ArbitragerSpeculatorBrokerQuestion No: 30 ( Marks: 1 ) - Please choose oneWhich of the following refers to the simultaneous purchase and sale in two markets so that the sellingprice is higher than the buying price by more than the transaction cost?HedgingArbitrageSpeculationBrokerageExplanation: A risk-free type of trading where the same instrument is bought and sold simultaneously intwo different markets in order to cash in on the difference in these markets.Question No: 31 ( Marks: 1 ) - Please choose oneWhich of the following is defined as the difference between spot price and future or forward price?BetaROIAlphaBasisRef: The difference between the price of the underlying asset in the spot market and the futures marketis called Basis. As spot market is a market for immediate delivery The basis is usually negative, whichmeans that the price of the asset in the futures market is more than the price in the spot market.Question No: 32 ( Marks: 1 ) - Please choose oneWhich of the following is TRUE regarding short hedge?Price realized=S2+ (F1 F2)Price realized= S2 (F1+F2)Price realized= S2 (F2 F1)Price realized= S2+ (F1+F2)Question No: 33 ( Marks: 1 ) - Please choose oneWhile calculating cost of asset under long hedge, what does F2 indicate?Initial asset priceInitial futures priceFinal asset priceFinal futures priceQuestion No: 34 ( Marks: 1 ) - Please choose oneS & P 500 future stock index closes at $ 275 and spot price is $ 230. What is its basis?40455055




136

Explanation:Basis is the difference between spot and future price. So,275$-230$=45Question No: 35 ( Marks: 1 ) - Please choose oneIn which of the following situation, the writers of call options expect profit?When the stock price declinesWhen the stock prices remain the sameWhen increase in stock price is less than premiumAll of the given optionsReferenceQuestion No: 36 ( Marks: 1 ) - Please choose oneWhich of the following contributes to the smooth operation of an option market?American Stock ExchangeOver the Counter OptionsChicago Board Options ExchangeOptions Clearing CorporationRef: OCC. The organization that handles clearing of the options trades for the variousoptions exchanges and regulates thelisting of new options.Question No: 37 ( Marks: 1 ) - Please choose oneWhich of the following is defined as an option whose payoff depends on whether or not the underlyingasset has reached or exceeded a predetermined price?Barrier optionForward start optionOver-the-counter optionsCompound optionsRef: An option that whose payoff depends on whether the price of the underlying asset crosses apredetermined barrier. There are two kinds of barrier options - Knock in and Knock out. Knock in optionsget activated only when the barrier is breached whereas knock out options get deactivated when thebarrier is breached.Question No: 38 ( Marks: 1 ) - Please choose oneWhich of the following is an option which is paid for now, but will start at some prespecified date in thefuture?Barrier optionForward start optionOver-the-counter optionsCompound optionsRef: An option which is paid for now, but will start at some prespecified date in the future. This date iscalled the issue date. At the issue date, a call or put option is issued with the strike price being




137

determined by the spot price of the underlying on this date. Generally such options are issued at themoney.Question No: 39 ( Marks: 1 ) - Please choose oneThe direct trade between large institutional investors takes place in which of the following market?Primary marketSecondary marketThird marketFourth marketExplanation: The direct trading of large blocks of securities between institutional investors througha computer network, rather than on an exchange.Question No: 40 ( Marks: 1 ) - Please choose oneWhich of the following statement is TRUE about value investors?They are patientThey seek rapidly growing companiesThey are speculatorsThey seek slow growing companiesRef from wikipedia: a value investor must be able and willing to be patient for the rest of the market torecognize and correct whatever pricing issue created the momentary value.Question No: 41 ( Marks: 1 ) - Please choose oneAn investor will purchase shares of companies in the development stage for:Current incomeCurrent income and capital gainsPassive losses to offset other incomeCapital gains onlyQuestion No: 42 ( Marks: 1 ) - Please choose oneWhich of the following items from the Income Statement is typically used to judge the success of acompany?Earnings from continuing operationsAfter-tax net incomeOperating incomeDiluted net income per shareRef: operations are usually the primary means by which revenues and cash are generated. Thus, resultsfrom continuing operations usually have greater significance for predicting future performance.Question No: 43 ( Marks: 3 )How an investor can use the value of beta for determination of risk involved in different investments?Question No: 44 ( Marks: 3 )What is meant by Coupon?Question No: 45 ( Marks: 3 )




138

Describe the primary objective of an investment portfolio.Question No: 46 ( Marks: 5 )Bonds and stocks are both securities but they are different in several aspects. Describe the differencesbetween them.Question No: 47 ( Marks: 5 )Describe why an investor might sell a put.Question No: 48 ( Marks: 10 )Being an investor, describe why would you prefer to invest in derivative markets?Question No: 49 ( Marks: 10 )What is the difference between futures and forwards?


Somi

vu

Documents

api.ning.comapi.ning.com/files/XBFuvuiJZm2e4mAvNN-rLGWc0GYUVacQT3Ara9dm7hNI83... · Come & Join Us at VUSTUDENTS.net For Assignment Solution, GDB, Online Quizzes, Helping Study material,