Portfolio Management and Security Analysis

8/17/2019 Portfolio Management and Security Analysis

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Chapter-1 Introduction to Security Analysis

Self Assessment Questions

1. …………………………………are completely negotiable and entitle the holder to the rights under the security.

a.

Bearer securities

b. Registered Securities

c. Undivided Security

d. None of these

2. ……………………………..refers to the analysis of trading securities from the point of their prices, returns and

risks.

a. Registered Securities

b. Fungible

c. Security analysis

d.

None of these

3. Certificates bearing the name of the holder are issued, but these merely represent the securities is

known as………………

a. registered securities

b. Divided Security

c. Bearer securities

d. None of these

4. The ………………………is the value of the productive assets of the firm, not just its equity value, based on the

accounting identity

a. equity value

b. enterprise value

c. exact currency

d. net values

5. The security analyst must have a thorough understanding of financial statements, which are an

important source of this information.

a. True

b.

False

6. Which of the following portfolio statistics statements is correct?

a. A portfolio's expected return is a simple weighted average of expected returns of the

individual securities comprising the portfolio.

b. A portfolio's standard deviation of return is a simple weighted average of individual security

return standard deviations.


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c. The square root of a portfolio's standard deviation of return equals its variance.

d. The square root of a portfolio's standard deviation of return equals its coefficient of

variation.

7. Total portfolio risk is …………………………...

a.

equal to systematic risk plus no diversifiable risk

b. equal to avoidable risk plus diversifiable risk

c. equal to systematic risk plus unavoidable risk

d. equal to systematic risk plus diversifiable risk

8. ………………………….. is the variability of return on stocks or portfolios not explained by general market

movements. It is avoidable through diversification.

a. Systematic risk

b. Standard deviation.

c. Unsystematic risk

d.

Coefficient of variation.

9. ……………………….. is the variability of return on stocks or portfolios associated with changes in return on the

market as a whole.

a. Systematic risk

b. Standard deviation

c.

Unsystematic risk

d. Coefficient of variation

10. Which of the following indexes would be most the appropriate proxy to measure the return of the market

portfolio in the CAPM?

a. Dow Jones Industrial Index.

b. Standard & Poor's 500.

c. Solomon Brothers Bond Index.

d. Wilshire Gold Index.

11. The ……………………….describes the linear relationship between expected rates of return for individual

securities (or portfolios) and ……………………...

a. characteristic line; standard deviation

b. characteristic line; beta

c. security market line; standard deviation

d.

security market line; beta

12. The ……………….. describes the relationship between an individual security's returns and returns on the

market portfolio. The slope of this line is…………………………

a. security market line; beta


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b. characteristic line; beta

c. security market line; equal to +1.

d. characteristic line; equal to +1

13. Which of the following items describes an index measure of systematic risk?

a.

Beta.

b. Standard deviation.

c. Coefficient of variation.

d. Variance.

14. Which of the following items is a model that describes the relationship between risk and expected return

(in this model the expected return is equal to the risk-free return plus a premium based on the systematic

risk of the security)?

a. Beta.

b. Characteristic line.

c.

Capital asset pricing model.

d.

Efficient markets model.

15. Which form of market efficiency states that current security prices fully reflect all information, both

public and private?

a. Weak.

b.

Semi-strong.

c. Strong.

16. The weighted average of possible returns, with the weights being the probabilities of occurrence is

referred to as ………………………….

a. a probability distribution

b. the expected return

c. the standard deviation

d. coefficient of variation

17. Which form of market efficiency states that current prices fully reflect all publicly available information?

a. Weak.

b. Semi-strong.

c.

Strong.

18. A set of possible values that a random variable can assume and their associated probabilities of

occurrence are referred to as ………………….

a. probability distribution




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19. A statistical measure of the variability of a distribution around its mean is referred to as ……………………….



c.

the standard deviation


20. The ratio of the standard deviation of a distribution to the mean of that distribution is referred to as

………………….





Answers for Self Assessment Questions1. (a) 2.(c) 3.(a) 4.(b) 5.(a)

6. (a) 7.(d) 8.(c) 9.(a) 10.(b)

11. (d) 12.(b) 13.(a) 14.(c) 15.(c)

16. (c) 17.(b) 18.(a) 19.(c) 20.(d)


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Chapter-2 Valuation Of securities


1. Which of the following is another name for the required return on a stock?

a.

Value.

b. Retention ratio.

c. Discount rate.

d. Dividend payout ratio.

2. Which of the following is equal to the present value of all cash proceeds received by a stock investor?

a. Discount rate.

b. Retention ratio.

c. Value.

d. Dividend payout ratio.

3. Which of the following best describes the constant-growth dividend discount model?

a. It is the formula for the present value of a growing annuity.

b. It is the formula for the present value of a finite, uneven cash flow stream.

c. It is the formula for the present value of a growing perpetuity.

d. It is the formula for the present value of an ordinary annuity.

4. Which of the following do financial analysts consider least important when assessing the long-run

economic and financial outlook of a company?

a.

Prospects of the relevant industry.

b. Expected changes in EPS.

c. General economic conditions.

d. Expected return on equity.

5. Analysts commonly consider all of the following to be indicators that the market is overvalued except:

a. high average ratio of stock prices to corporate sales.

b. high average dividend yield.

c. high average price-to-book ratio.

d. high average P/E ratio.

6. If the intrinsic value of a share of common stock is less than its market value, which of the following is the

most reasonable conclusion?

a. The stock has a low level of risk.

b. The stock offers a high dividend payout ratio.

c. The market is undervaluing the stock.

d. The market is overvaluing the stock.


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7. When the market's required rate of return for a particular bond is less than its coupon rate, the bond is

referred to as a …………………………..

a. premium bond

b. discount bond

c. par bond

d. face bond

8. If an investor may have to sell a bond prior to maturity and interest rates have risen since the bond was

purchased, the investor is exposed to ………………………….

a. the coupon effect

b. interest rate risk

c. a perpetuity

d. an indefinite maturity

9. Market interest rates and the prices of bonds in the secondary market:

a. generally move in opposite directions.

b. generally move in the same direction.

c. sometimes move in the same direction, sometimes in opposite directions.

d. have no relationship with each other (i.e., they are independent).

10. Which of the following best describes liquidation value?

a. The price a security "ought to have" based on all factors bearing on valuation.

b. The amount a firm could be sold for as a continuing operating business.

c. The amount of money that could be realized if an asset or a group of assets is sold

separately from its operating organization.d. The market price at which an asset trades.

11. Which of the following best describes intrinsic value?

a. The price a security "ought to have" based on all factors bearing on valuation.

b. The amount a firm could be sold for as a continuing operating business.

c. The amount of money that could be realized if an asset or a group of assets is sold

separately from its operating organization.

d. The market price at which an asset trades.

12. A difficult problem in using the dividend valuation model is the timing of cash flows fromdividends is known as…………….

a. Equity Valuation Model

b. Dividend Valuation Model

c. Price Ratio Analysis

d. None of these


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13. Which of the following describes account aggregation?

a. Consolidating overdrawn accounts with a single institution.

b. Using one PIN number for all your accounts.

c. Combining all of your current accounts and savings in one account with a single interest

rate.

d. Providing access to all your accounts on one website.

14. In variable income securities we include equity shares because return on equity shares is depend on the

volume of profitability after taxes.

a. True

b. False

15. A store card is what?

a. A type of credit card.

b.

A card that allows you to buy goods in any retail outlet.c. A savings plan with a retail group.

d. A type of debit card.

16. What is payment protection insurance?

a. A type of critical illness insurance.

b. A limited type of life cover.

c. A limited type of income protection insurance.

d. Insurance for the lender in case you default.

17. ……………………..are call options issued by the firm and that would require new shares to be issued ifexercised.

a. Project

b. Warrants

c. Share Buy-back

d. None of these

18. …………………….in fixed-income securities are typically looking for a constant and secure return on their

investment.

a. Investors

b.

Pricing Factors

c. Terminology

d. Derivatives

19. When rates are rising, market prices of existing debt securities will fall, as demand increases for new-

issue securities with the higher rates is known as…………………….

a. Interest Rate Risk


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b. Another Factor

c. Credit Risk

d. Purchasing Power Risk

20. A change in either the issuer’s credit rating or the market’s perception of the issuer’s business

prospects will affect the value of its outstanding securities is …………………………

a. Interest Rate Risk

b. Another Factor

c. Credit Risk

d. None of these

Answers for Self Assessment Questions

1. (c) 2.(c) 3.(c) 4.(c) 5.(b)

6. (d) 7.(a) 8.(b) 9.(a) 10.(a)

11. (c) 12.(b) 13.(d) 14.(a) 15.(a)

16. (c) 17.(b) 18.(a) 19.(a) 20.(c)


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Chapter-3 Markets and Brokers


1. Which of the following statements is true regarding full-service brokers?

a.

They typically seek clients with at least $10,000 in their accounts.

b. They derive only a small percentage of their revenues from commissions.

c. They compete primarily on price and services offered.

d. Less than 10 percent of U.S. households now use a full-service broker.

2. Which of the following statements regarding commissions charged by full-service brokers is

not true?

a. Commissions vary by product.

b. The more complicated the transaction, the higher the commission.

c.

The commission on many bonds is already built into the trade.d. There is no commission on U.S. Treasury securities.

3. Which of the following statements regarding discount brokers is true?

a. The number of on-line discount brokers is the largest type of discount broker.

b. Discount brokers only execute orders on stock transactions.

c. Discount brokers may offer little investment advice.

d. All of the above statements are true.

4. The exchange member in charge of limit orders is the:

a. commission broker

b. floor broker

c. specialist

d. delegate

5. The specialist is allowed to act as both a broker and dealer in order

a. to give commission brokers more competition.

b. to maintain a liquid and orderly market.

c. to give them more power.

d.

to follow SEC regulations.

6. If specialists “go against the market,” this means:

a. they are acting against exchange orders.

b. they are buying securities that have been taken off the exchange.

c. they are buying when most others are selling or vice versa.

d. they are selling off their inventory and maintaining a strictly cash position.


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7. Dealers in the over-the-counter market make their profits:

a. by commissions charged to customers.

b. from the bid-asked spread.

c. by fees charged for investment advice.

d.

All of the above are correct.

8. The Securities and Exchange Commission is a division of the Department of Justice.

a. True

b. False

9. Insider trading often occurs when mergers and takeovers are imminent.

a. True

b. False

10. ……………….. financial asset(s).

a. Buildings are

b. Land is a

c. Derivatives are

d. U. S. Agency bonds are

e. C and D

11. An example of a primitive security is ………………………

a.

a common share of General Motorsb. a call option on Mobil stock

c. a call option on a stock of a firm based in a Third World country

d. a U. S. government bond

e. A and D

12. An example of a derivative security is ………………….

a. a common share of General Motors

b. a call option on Mobil stock

c. a commodity futures contract

d.

B and Ce. A and B

13. Master shares are quoted on the stock market and so can be bought or sold at any time.

a. True

b. False


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14. Important trends changing the contemporary investment environment are

a. Globalization

b. securitization

c. information and computer networks

d.

all of the above

15. A ……………….is a person or firm that buys and sells for his or her own inventory of

securities and for others.

a. broker

b. dealer

c. broker-dealer

d. None of these

16. A broker acts as a go between and, in doing so, does not assume any risk for the trade.

a. True

b. False

17. A …………………is an individual who has passed the NASD’s registration process and is

therefore licensed to work in the securities industry.

a. Other Broker Services

b. registered representative

c. Market Makers

d. None of these

18. ………………….are dealers who specialize in particular securities traded on the over the-

counter market.

a. Market makers

b. Specialists

c. Market Makers

d. None of these

19. Stock market indicators have revolutionized the way market participants trade the market.

a.

Trueb. False

20. The value of a derivative security ………………………

a. depends on the value of the related primitive security

b. can only cause increased risk

c. is unrelated to the value of the related primitive security


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d. has been enhanced due the recent misuse and negative publicity regarding these

instrument


1. (b) 2.(d) 3.(c) 4.(c) 5.(b)

6. (b) 7.(b) 8.(b) 9.(a) 10.(e)

11. (e) 12.(d) 13.(a) 14.(d) 15.(b)

16. (a) 17.(b) 18.(a) 19.(a) 20.(a)


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Chapter-4 Risk and Return


1. The following security has provided the best hedge against inflation in the long-run:

a.

Corporate Bonds

b. Treasury Bills

c. Common Stocks

d. U.S. Government Bonds

2. It is important to have a well diversified portfolio because:

a. It will help maximize returns

b. It will help eliminate market risk

c. It will help reduce or eliminate company-unique risk

d.

An investor cannot legally invest all his savings in one security

3. Beta measures:

a. The total risk of a stock

b. The total unsystematic risk of a stock

c. The systematic risk of a stock

d. The total risk of the market

4. An investor's required rate of return equals

a.

Risk premium – Risk free rateb. Return on market – Risk free rate

c. Risk premium

d. Risk free rate + Risk premium

5. No matter how large the number of stocks in the portfolio is, the risk that cannot be

diversified away is the:

a. company-specific risk

b. unsystematic risk

c. systematic risk

d.

unique risk

6. The market portfolio has a beta of:

a. 0.0

b. 2.0

c. -1.0

d. 1.0


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7. According to the capital asset pricing model, beta is a measure of:

a. standard deviation of returns

b. variance of returns

c. systematic risk

d.

inflation risk

8. According to the security market line, the expected return of any security is a function of:

a. total risk

b. diversifiable risk

c. unique risk

d. systematic risk

9. According to the capital market line, the expected return of any efficient portfolio is a

function of:

a. beta

b. total risk

c. unsystematic risk

d. unique risk

10. According to the CAPM, overpriced securities have:

a. zero alphas

b. negative alphas

c. positive alphas

d.

zero betas

11. According to the CAPM, the risk premium an investor expects to receive on any stock

increases:

a. inversely with beta

b. inversely with unsystematic risk

c. directly with beta

d. directly with total risk

12. The APT is an equilibrium model developed by:

a. Richard Roll

b. William Sharpe

c. Harry Markowitz

d. Stephen Ross

13. According to the single index model, the inflation risk is an example of:


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a. total risk

b. unsystematic risk

c. diversifiable risk

14. Which one of the following is not a factor identified by APT empirical studies?

a. Market portfolio

b. Unanticipated changes in bond default premiums

c. Unanticipated changes in inflation

d. Unanticipated changes in the growth rate of corporate profits

15. Which of the following is not an assumption of the APT?

a. Security returns are generated by a linear factor model.

b. Investors prefer more wealth to less.

c. Investors are risk averse.

d.

Short sales are allowed, and the proceeds are available to the short sellers.

16. Suppose you have 20 stocks, and you want to derive the efficient frontier. How many

covariances do you have to calculate?

a. 190

b. 20

c. 90

d. 200

17. In contrast to the CAPM, the arbitrage pricing theory:

(CFA related question)

a. requires that markets are in equilibrium

b. assumes that investors are risk averse

c. uses risk premiums based on micro-variables

d. does not require the restrictive assumptions of the market portfolio

18. Which of the following statements is true according to the theory of arbitrage?

a. Rational investors will arbitrage in a manner consistent with their risk tolerance.

b.

Low-beta stocks are consistently overpriced.c. Positive alpha stocks will quickly disappear.

d. Negative alpha stocks cannot be arbitraged.

19. ……………is a function of the operating conditions faced by a firm and the variability these conditions

inject into operating income and expected dividends

a. Business risk


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b. Financial Risk

c. Assigning Risk

d. None of these

20. To quantify the separate effects of each type of systematic and unsystematic risk is difficult

because of overlapping effects and the sheer complexity involved.

a. True

b. False


1. (c) 2.(c) 3.(c) 4.(d) 5.(c)

6. (d) 7.(c) 8.(d) 9.(b) 10.(b)

11. (c) 12.(d) 13.(b) 14.(a) 15.(c)

16. (a) 17.(d) 18.(c) 19.(a) 20.(a)


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Chapter-5 Stock Market Analysis


1. Which one of the following best describes the concept of stock market pricing efficiency?

a.

In a pricing efficient market the costs of buying and selling shares are very low

b. In an efficient market the current price of all shares accurately reflects the future

cash flows that will accrue to the shareholders

c. In an efficient market prices rationally reflect available information

d. In an efficient market it is possible to use inside knowledge to make abnormally

high returns on invested money

2. Which of the following is not an advantage of an efficient share market?

a. It gives correct signals to company managers

b.

It encourages share buyingc. It helps allocate society's resources

d. It ensures that investors can never achieve a return greater than that on a

broadly-based market index

3. To say that share prices move in random walk is to mean which of the following?

a. The share market is irrational and akin to a casino

b. Share prices at any one time reflect all available information and the price will

only change in response to new information; successive price changes will be

independent and prices

c.

Share prices respond to news events in a random fashion

d. Share price moves are determined in the same random fashion as the outcome of

tossing a coin - there is no underlying rationale for a particular move

4. Which one of the following is false?

a. Semi-strong form share price efficiency means that share prices fully reflect all

past price movements plus all the information released by the firm

b. Insider dealing can lead to abnormally high returns on share investments

c. Strong form efficiency means that all relevant information, including that which

is privately held, is reflected in the share priced. Weak form share price efficiency means that share prices fully reflect all

information contained in past price movements

5. Which of the following is false?


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a. Pricing efficiency refers to the extent to which the potential for abnormal returns

from stock market investment is removed because shares move instantaneously

in an unbiased manner to any news

b. Operational efficiency refers to the cost to buyers and sellers of transactions in

securities on the stock exchange

c.

Flexible efficiency refers to the responsiveness of share prices to new information

d. Allocation efficiency refers to the mechanism for allocating society's scare

resources to where they can be most productive

6. A bar chart is used to illustrate:

a. reversal in the direction of stock prices without consideration of time

b. high, low and closing stock prices on a daily basis

c. high, low, opening and closing prices on a daily basis

d. advances and declines of stock prices

7. According to the Dow Theory, daily fluctuations and secondary movements in the stock

market are used to identify the:

a. moving average

b. short-term trend

c. intermediate trend

d. primary trend

8. Which of the following indicates a sell signal to technical analysts?

a.

The advance-decline line is rising in a falling market.b. The amount of short selling done by specialists is high.

c. The resistance level is broken.

d. The majority of stock market newsletters are bearish.

e. Both b and d.

9. Which of the following indicates a buy signal to technical analysts?

a. The support level is broken.

b. Odd-lot buying exceeds odd-lot selling.

c. The advance-decline line is falling in a rising market.

d.

The stock breaks through the moving average line from below.

10. Which of the following highlights traders' opinions about the market?

a. Sentiment indicators

b. Moving averages

c. Breadth indicators


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d. Leading indicators

11. When odd-lot selling exceeds odd-lot buying, this is considered a:

a. bullish signal

b. bearish signal by some technical analysts and as a bullish signal by other

technical analysts

c. neutral signal

d. bearish signal

12. When technical analysts say a stock has good relative strength, they mean the:


a. recent trading volume in the stock has exceeded the normal trading volume

b. ratio of the price of the stock to a market index has trended upwards

c.

stock has performed well compared to other stocks in the same industryd. ratio of the price of the stock to a market index has trended downwards

13. A basic assumption of technical analysis in contrast to fundamental analysis is that:


a. financial statements provide information crucial in valuing a stock

b. security prices move in patterns, which repeat over long periods

c. a stock's price will approach its intrinsic value over time

d. the stock market is inefficient

14. A resistance level is the price range at which technical analysts would expect the:


a. demand of a stock to decrease substantially

b. demand of a stock to increase substantially

c. supply of a stock to decrease substantially

d. both b and c

15. Many people rightly believe that when you buy a share of stock you are buying a

proportional share in a business.

a. True

b. False

16. ……………….is the idea that you should buy stock in companies whose potential for growth

in sales and earnings is excellent.


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a. common stocks

b. Growth investing

c. businesses selling

d. None of these

17. Quantitative analysts view these things as subjective judgments, and instead focus on theincontrovertible objective data that can be analyzed.

a. True

b. False

18. …………………..is the process of looking at a business at the basic or fundamental financial

level.

a. Earnings per Share

b. Price to Earnings Ratio

c.

Fundamental analysisd. None of these

19. ………………..is one measure of how efficiently a company uses its assets to produce

earnings.

a. Book Value

b. Return on Equity (ROE)

c. Dividend Yield

d. None of these

20. The BSE has set various guidelines and forms that need to be adhered to and submitted by

the companies.

a. True

b. False


1. (c) 2.(d) 3.(b) 4.(a) 5.(c)

6. (c) 7.(d) 8.(b) 9.(d) 10.(d)11. (d) 12.(d) 13.(c) 14.(a) 15.(a)

16. (b) 17.(a) 18.(c) 19.(b) 20.(a)


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Chapter-6 Portfolio Management


1. According to Markowitz, rational investors will seek efficient portfolios because these

portfolios are optimal based on:

a. expected return.

b. risk.

c. expected return and risk.

d. transactions costs.

2. Under the Markowitz model, investors:

a. are assumed to be risk-seekers.

b. are not allowed to use leverage.

c.

are assumed to be institutional investors.d. all of the above.

3. A major assumption of the Markowitz model is that investors base their decisions strictly on

expected return and risk factors.

a. True

b. False

4. The Markowitz model assumes most investors are:

a.

risk averse.b. risk neutral.

c. risk seekers.

d. risk moderators.

6. Which of the following statements regarding indifference curves is not true?

a. Investors have a finite number of indifference curves.

b. The greater the slope of the indifference curve, the greater the risk aversion of

investors.

c. The indifference curves for all risk-averse investors will be upward sloping.

d.

Indifference curves cannot intersect.

7. When using the Markowitz model, aggressive investors would select portfolios on the left

end of the efficient frontier.

a. True

b. False


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8. Indifference curves reflect ………………..while the efficient set of portfolios represent

………………….-.

a. portfolio possibilities; investor preferences.

a. investor preferences; portfolio possibilities.

b.

portfolio return; investor risk.c. investor preferences; portfolio return.

9. According to Markowitz, an efficient portfolio is one that has the

a. largest expected return for the smallest level of risk.

b. largest expected return and zero risk.

c. largest expected return for a given level of risk.

d. smallest level of risk.

10. Portfolios lying on the upper right portion of the efficient frontier are likely to be chosen by

a. aggressive investors.

b. conservative investors.

c. risk-averse investors.

d. defensive investors.

11. A portfolio which lies below the efficient frontier is described as

a. optimal.

b. unattainable.

c. dominant.

d.

dominated.

12. The optimal portfolio is the efficient portfolio with the

a. lowest risk.

b. highest risk.

c. highest utility.

d. least investment.

13. Indifference curves:

a.

always curve to the left.b. have a negative slope.

c. cannot intersect.

d. all of the above.

14. The basis for constructing a portfolio should reflect the enterprise’s particular needs.

a. True


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b. False

15. Different investors will estimate the inputs to the Markowitz model differently because:

a. every investor has his/her own risk/return preferences.

b. every investor has access to different information about securities.

c. there is an inherent uncertainty in security analysis.

d. there is a random selection process used by individual investors.

16. Which of the following is not true regarding the Markowitz theory?

a. Markowitz portfolio theory is considered a three-parameter model.

b. Under the Markowitz model, no portfolio on the efficient frontier dominates any

other portfolio on the efficient frontier.

c. The Markowitz model is cumbersome to work with due to the large variance-

covariance matrix needed for a set of stocks.

d.

All of the above are true.

17. The Markowitz model selects the portfolio most appropriate for an individual investor.

a. True

b. False

18. The optimal portfolio for a risk-averse investor:

a. cannot be determined.

b. occurs at the point of tangency between the highest indifference curve and the

highest expected return.c. occurs at the point of tangency between the highest indifference curve and the

efficient set of portfolios.

d. occurs at the point of tangency between the highest expected return and lowest

risk efficient portfolios.

19. Markowitz derived the efficient frontier as an upward-sloping straight line.

a. True

b. False

20. Which of the following is not one of the assumptions of portfolio theory?

a. Liquidity of positions.

b. Investor preferences are based only on expected return and risk.

c. Low transactions costs.

d. A single investment period.


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1. (c) 2.(b) 3.(a) 4.(a) 5.(a)

6. (a) 7.(b) 8.(b) 9.(c) 10.(a)

11. (d) 12.(c) 13.(c) 14.(a) 15.(c)

16. (a) 17.(b) 18.(b) 19.(b) 20.(d)


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Chapter-7 Equity Valuation Model


1. ……………. is equal to the total market value of the firm's common stock divided by (the

replacement cost of the firm's assets less liabilities).

A. Book value per share

B. Liquidation value per share

C. Market value per share

D. Tobin's Q

E. None of the above.

2. High P/E ratios tend to indicate that a company will ……………, ceteris paribus.

A. grow quickly

B. grow at the same speed as the average company

C. grow slowly

D. not grow

E. none of the above

3. …………… is equal to (common shareholders' equity/common shares outstanding).




D. Tobin's Q


4. ………….. are analysts who use information concerning current and prospective profitabilityof a firms to assess the firm's fair market value.

A. Credit analysts

B. Fundamental analysts

C. Systems analysts


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D. Technical analysts

E. Specialists

5. The _______ is defined as the present value of all cash proceeds to the investor in the stock.

A. dividend payout ratio

B. intrinsic value

C. market capitalization rate

D. plowback ratio


6. _______ is the amount of money per common share that could be realized by breaking up the

firm, selling the assets, repaying the debt, and distributing the remainder to shareholders.




D. Tobin's Q

E. None of the above

7. Since 1955, Treasury bond yields and earnings yields on stocks were ……………….

A. identical

B. negatively correlated

C. positively correlated

D. uncorrelated

8. Historically, P/E ratios have tended to be ……………….

A. higher when inflation has been high

B. lower when inflation has been high

C. uncorrelated with inflation rates but correlated with other macroeconomic variables

D. uncorrelated with any macroeconomic variables including inflation rates



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9. The …………… is a common term for the market consensus value of the required return on a

stock.


B. intrinsic valueC. market capitalization rate

D. plowback rate


10. The ………………. is the fraction of earnings reinvested in the firm.


B. retention rate

C. plowback ratio

D. A and C

E. B and C

11. The Gordon model

A. is a generalization of the perpetuity formula to cover the case of a growing perpetuity.

B. is valid only when g is less than k.

C. is valid only when k is less than g.

D. A and B.

E. A and C.

12. Music Doctors Company has an expected ROE of 14%. The dividend growth rate will be

…………… if the firm follows a policy of paying 60% of earnings in the form of dividends.

A. 4.8%

B. 5.6%

C. 7.2%

D. none of the above


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13. Medtronic Company has an expected ROE of 16%. The dividend growth rate will be

…………. if the firm follows a policy of paying 70% of earnings in the form of dividends.

A. 3.0%

B. 6.0%C. 7.2%

D. 4.8%


14. High Speed Company has an expected ROE of 15%. The dividend growth rate will be

…………. if the firm follows a policy of paying 50% of earnings in the form of dividends.

A. 3.0%

B. 4.8%

C. 7.5%

D. 6.0%


15. Light Construction Machinery Company has an expected ROE of 11%. The dividend growth

rate will be ……….. if the firm follows a policy of paying 25% of earnings in the form of

dividends.

A. 3.0%

B. 4.8%

C. 8.25%

D. 9.0%

16. One of the problems with attempting to forecast stock market values is that

A. there are no variables that seem to predict market return.

B. the earnings multiplier approach can only be used at the firm level.

C. the level of uncertainty surrounding the forecast will always be quite high.

D. dividend payout ratios are highly variable.

17. The most popular approach to forecasting the overall stock market is to use


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A. the dividend multiplier.

B. the aggregate return on assets.

C. the historical ratio of book value to market value.

D. the aggregate earnings multiplier.

18. Which of the following would tend to reduce a firm's P/E ratio?

A. The firm significantly decreases financial leverage

B. The firm increases return on equity for the long term

C. The level of inflation is expected to increase to double-digit levels

D. The rate of return on Treasury bills decreases

19. Other things being equal, a low ………….. would be most consistent with a relatively high

growth rate of firm earnings and dividends.


B. degree of financial leverage

C. variability of earnings

D. inflation rate

20. The dividend discount model

A. ignores capital gains.

B. incorporates the after-tax value of capital gains.

C. includes capital gains implicitly.

D. restricts capital gains to a minimum.

E. none of the above.


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1. (d) 2.(a) 3.(a) 4.(b) 5.(b)

6. (b) 7.(c) 8.(b) 9.(c) 10.(e)

11. (d) 12.(b) 13.(d) 14.(c) 15.(c)

16. (c) 17.(d) 18.(c) 19.(a) 20.(c)


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Chapter-8 Active Portfolio Management


1. Unlike mutual funds, hedge funds

a.

allow private investors to pool assets to be managed by a fund manager.

b. are commonly organized as private partnerships.

c. are subject to extensive SEC regulations.

d. are typically only open to wealthy or institutional investors.

e. B and D

2. The risk profile of hedge funds ______, making performance evaluation ______.

a. can shift rapidly and substantially; challenging

b. can shift rapidly and substantially; straightforward

c.

is stable; challengingd. is stable; straightforward

3. Perhaps we have noticed all those mutual fund ads that quote their amazingly high one-year rates of

return.

a. True

b. False

4. Hedge funds are …………….transparent than mutual funds because of …………. strict SEC

regulation on hedge funds.

a. more; more

b. more; less

c. less; less

d. none of the above

5. Hedge funds may invest or engage in

a. distressed firms

b. convertible bonds

c. currency speculation

d.

all of the above

6. The mutual fund industry witnessed robust growth and stricter regulation from the SEBI after the year

1996.

a. True

b. False


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7. A hedge fund attempting to profit from a change in the spread between mortgages and

Treasuries is using a …………… strategy.

a. market neutral

b. directional

c.

relative valued. divergence

8. Hedge funds exhibit a pattern known as a

a. January effect

b. Santa effect

c. size effect


9. Which of the following was not suggested by John Maynard Keynes as a reason for holding

cash?

a. Speculative motive.

b. Investment motive.

c. Precautionary motive.

d. Transactions motive.

10. Which of the following statements most accurately describes the modern approach to cash

management?

a. Cash management involves the efficient disbursement of cash.

b.

Cash management involves the efficient collection and disbursement of cash.

c. Cash management involves the efficient processing, collection, and depositing of

cash.

d. None of these

11. Collection float is the ……………...

a. total time between the mailing of the check by the customer and the availability

of cash to the receiving firm

b. time consumed in clearing the check through the banking system

c.

time the check is in the maild. time during which the check received by the firm remains uncollected

12. Deposit float is the …………………………….





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c. time the check is in the mail

d. time during which the check received by the firm remains uncollected

13. Availability float is the ………………….




c. time the check is in the mail

d. time during which the check received by the firm remains uncollected

14. Which of the following is not a technique to speed up collections?

a. Expedite the preparing and mailing of the invoice to customers.

b. Replace a lockbox system with the direct mailing of payments to the firm.

c. Reduce the time it takes payments received from customers to be available as

usable funds to the firm.d. Accelerate how quickly customers mail payments to the firm.

15. the ……………………deals with a fixed portfolio designed to match the current market scenario.

a. Portfolio Management

b. portfolio manager

c. managing money

d. None of these

16. …………………refers to managing an individual’s investments in the form of bonds, shares, cash, mutual

funds etc

a. Portfolio management

b. portfolio manager

c. managing money

d. None of these

17. Mutual fund is an important segment of the financial system. It is non-fund based special type of

institution which acts as an investment conduit.

a. True

b.

False

18. A hedge fund pursuing a ………….strategy is attempting to exploit temporary

misalignments in relative pricing.

a. directional

b. non-directional

c. stock or bond


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19. The mobilization of funds and the number of players operating in the industry reached new heights as

investors started showing more interest in mutual funds.

a. True

b. False

20. Hedge funds are typically set up as ………….. and provide ………….. information about

portfolio composition and strategy to their investors.

a. limited partnerships; minimal

b. limited partnerships; extensive

c. investment trusts; minimal



1. (e) 2.(a) 3.(a) 4.(c) 5.(d)

6. (a) 7.(c) 8.(b) 9.(b) 10.(c)

11. (a) 12.(d) 13.(b) 14.(b) 15.(b)

16. (a) 17.(a) 18.(b) 19.(a) 20.(a)


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Chapter-9 Investment and Portfolio Strategies


1. Which of the following definitions explains what is meant by the corporate parent?

a.

The central head office of the organization.

b. The founder of the business.

c. The levels of management above that of business units.

d. The owner or major shareholder of the corporation.

2. The naive rule used to choose national portfolios was to invest equal amounts in each stock,

creating a type of market portfolio.

a. True

b. False

3. The global-local dilemma in international strategy means:

a. How many local people to employ in foreign subsidiaries.

b. The extent to which products and services may be standardized across national

boundaries or need to be adapted to meet the requirements of specific national

markets.

c. Whether to centralize strategic decisions in head office or to devolve decision-

making to subsidiaries.

d. The issues related to globalization and the alleged disadvantaging of developing

countries.

4. In terms of the corporate rationales of multi-business corporations, the synergy manager

seeks to add value by:

a. Becoming adept at employing its own corporate competences to add value to its

businesses.

b. Enhancing value across business units by managing synergies across business

units.

c. By developing ideas for how businesses can share activities and processes.

d. All of the above.

5. An investor whose risk-free rate did not exceed 1.5% per quarter would prefer the return risk

mix of the four-country portfolio.

a. True

b. False

6. The two generic international strategies are:


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a. Multi-domestic and global.

b. Export based and domestic.

c. Global and local.

d. Multinational and global.

7. The industry is not dominated by the institutional investors. Like hundreds of mutual funds,there are a number of asset management companies in India as well.

a. True

b. False

8. Which of the following best describes the relationship between the nature of diversification of

a firm and the financial performance of that firm?

a. The more unrelated a firm’s portfolio, the higher the financial performance.

b. The less diversified the portfolio the higher the financial performance.

c.

Related and limitedly diversified companies perform better on average than bothundiversified and heavily diversified companies.

d. There is no relationship.

9. In assessing the corporate portfolio it is important to evaluate the following:

a. Core competences, unique resources, threshold competences and threshold

resources.

b. Vertical integration, horizontal integration and backwards integration.

c. Product range, service range and geographical spread.

d.

Balance, attractiveness and fit.

10. The four segments of the Ashridge Portfolio Display (parenting matrix) are:

a. Dogs, stars, question marks and cash cows.

b. Heartland, Ballast, Alien and Value Trap.

c. Heartland, Ballast, Value Destruction and Value Creation.

d. Protect/build product development, market development, and diversification.

11. What are the key foreign market entry modes?

a. Shipping, rail, road and air.

b. Joint ventures, alliances, partnerships and networks.

c. Exporting, contractual arrangements through licensing and franchising, joint

ventures/alliances and foreign direct investment.

d. Partnerships, exporting and setting up subsidiaries.

12. Key types of political risk which an organization might face when doing business in a

country are:


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a. Sovereign risks and security risks.

b. Change of government and nationalisation.

c. Sovereign risks, absence of effective regulation and control, international risks

and security risks.

d. Military coups, government changes, nationalization and civil unrest.

13. Companies can improve their investment returns by strengthening their governance and

decision making models and processes.

a. True

b. False

14. An investment designed to explore a new and evolving product or service is known

as………………

a. Transformative Investments

b.

Venture Investments c. Value Investments

d. None of these

15. The Indian asset management industry has seen a steady asset growth over the past few

years, though there certainly have been some rough patches.

a. True

b. False

16. In terms of the corporate rationales of multibusiness corporations, a portfolio manager seeks

to add value by:

a. Seeking to manage a portfolio of businesses to achieve synergies between them.

b. By managing its constituent businesses by means of the growth share (or BCG)

matrix.

c. By acting as an agent on behalf of financial markets and shareholders.

d. By employing their own corporate competences to add value to business units.

17. The performances of the expost efficient portfolios dominate all single-country portfolios.

a. True

b.

False

18. In terms of the corporate rationales of multi-business corporations the parental developer

seeks to add value by:

a. Developing good relationships with shareholders and investors.


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b. Seeking to employ its own competences as a corporate parent to add value to its

businesses.

c. Managing synergies across business units.

d. By taking direct control of the strategic development of its businesses.

19. What are the three main criteria used for portfolio analysis?

a. Balance, attractiveness and fit.

b. The BCG matrix, the Ashridge Portfolio Display and the Ansoff matrix.

c. Synergies, geographical spread and diversification.

d. Spread of risk; range of products; range of services.

20. In purchasing the house, he has not an explicit range of liability choices in the form of

mortgage terms and amount.

a. True

b.

False


1. (c) 2.(a) 3.(b) 4.(d) 5.(a)

6. (a) 7.(b) 8.(c) 9.(d) 10.(c)

11. (c) 12.(c) 13.(a) 14.(b) 15.(a)

16. (c) 17.(a) 18.(b) 19.(a) 20.(b)


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Chapter-10 Portfolio Models


1. Which of the following is not a test of the semi strong form of the EMT?

a.

Stock price reactions to the announcement of stock dividends

b. Tests of the performance of mutual funds

c. Tests of serial correlation in stock returns

d. Stock reaction to merger announcements

2. Which of the following statements represents implications of EMT to investors?

a. Fundamental analysis can be used to earn abnormal profit.

b. Prior returns on an equally weighted portfolio of gold stocks predict gold

returns.

c.

Changes in variance are somewhat predictable from past data.d. If the price-to-book value ratio is low, then the stock tends to outperform.

3. The evidence that stocks with low price-to-earnings ratios tend to have higher returns is an

example of:

a. event anomalies

b. seasonal anomalies

c. firm anomalies

d. accounting anomalies

4. Which of the following is not an anomaly?

a. Volatility effect

b. Value Line rating changes

c. Closed-end mutual fund discounts

d. Market-to-book ratio

5. Arbitrage Pricing Theory (APT) is a factor model that was developed by Stephen

Ross. It starts with the assumption.

a.

Trueb. False

6. The weak form of the EMT contradicts:

a. fundamental analysis, but supports technical analysis as valid

b. technical analysis, but supports technical analysis as valid

c. both fundamental analysis and technical analysis


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d. technical analysis, but is silent on the possibility of successful fundamental

analysis

7. In an efficient market:

a. stocks with low P/E ratios tend to have higher returns

b. firms that are not followed by many analysts tend to yield higher returns

c. stock prices do not rapidly adjust to new information

d. security prices are seldom far above or below their justified level

8. A random walk occurs when:

a. the stock price level is random

b. stock prices respond slowly to new information

c. future price changes are uncorrelated with past price changes

d. stock price changes are random but predictable

9. A finding that …………….would provide evidence against the semi strong form of the EMT.

a. Technical analysis is worthless in determining stock prices.

b. Investors do not earn abnormal profits after merger announcement.

c. Earnings announcement reactions take considerable time.

d. The price decline of large secondary offerings is permanent when outsiders are

selling.

10. A finding that …………. would provide evidence against the weak form of the EMT.

a.

No abnormal profits can be made using technical trading rules.b. Changes in variance are somewhat predictable from past data.

c. About 50% of pension funds outperform the market in any year.

d. Changes in stock prices are random and unpredictable.

11. The banking industry has traditionally believed that credit risk management is primarily

about minimizing loss.

a. True

b. False

12. The new product strategy of a firm is:

a. Linked to the corporate and technology strategies

b. Independent of the corporate strategy

c. Dependent on the R&D strategy

d. Linked to the marketing strategy, technology strategy and the overall corporate

strategy


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13. The application of portfolio planning techniques to a firm's product platforms can lead to:

a. The creation of linkages between platforms

b. All of the above.

c. The rationalization of platforms

d.

The creation of new market offerings

14. The external environment constrains what can be done by a firm because of:

a. The lack of knowledge on the part of consumers

b. The competitive structure of an industry

c. The actions of competitors

d. All of the above

15. As consumer expectations change a consequence of this for product positioning is that:

a.

What was once an additional extra feature can quickly become a standard featureb. All of the above

c. There are usually many opportunities to add features and services to a product

d. Competitors compete to introduce new expectations

16. Differentiation strategy is pivotal if it:

a. Reaches forward to marketing strategy and reaches back to positioning strategy

b. Reaches back to positioning strategy and forward to core capabilities

c. Reaches forward to positioning strategy and reaches back to core capabilities

d. None of the above

17. The ………………..is a model to explain why capital assets are priced the way they are.

a. Assumptions of CAPM

b. Capital Asset Pricing Model (CAPM)

c. Market Portfolio

d. None of these

18. Which of the following statements represents an example of firm anomalies?

a. Returns on closed-end funds that trade at a discount tend to be higher.

b.

The more insiders buy a stock, the more likely it is to go up.c. If the dividend yield is high, then the stock tends to outperform.

d. Returns tend to be positive on the last trading day before a holiday.

19. The concept of a product platform is applicable when:

a. A family of products shares similar technology

b. A family of products require similar patents


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c. All of the above

d. A family of products are promoted together

20. The Arbitrage Pricing Theory (APT) is a one period model in which every investor believes

that the stochastic properties of returns of capital assets are consistent with a factor structure.

a. True

b. False


1. (c) 2.(c) 3.(d) 4.(a) 5.(a)

6. (d) 7.(d) 8.(c) 9.(c) 10.(b)

11. (a) 12.(d) 13.(b) 14.(d) 15.(a)

16. (a) 17.(b) 18.(a) 19.(a) 20.(a)

Portfolio Management and Security Analysis

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