Security Analysis and Investment Management MCQ set 1

1. A liquid asset may
A. be converted into cash
B. be converted into cash with little chance of loss
C. not be converted into cash
D. not be converted without loss

Answer

B. be converted into cash with little chance of loss

2. A negatively sloped yield curve suggests that
A. short-term rates exceed long-term rates, and the Federal Reserve is following a tight monetary policy
B. short-term rates exceed long-term rates, and the Federal Reserve is following an easy monetary policy
C. long-term rates exceed short-term rates, and the Federal Reserve is following a tight monetary policy
D. long-term rates exceed short-term rates, and the Federal Reserve is following an easy monetary policy

Answer

A. short-term rates exceed long-term rates, and the Federal Reserve is following a tight monetary policy

3. The market price of a bond depends on the
A. coupon rate, and terms of the indenture
B. coupon rate, and maturity date
C. terms of the indenture, and maturity date
D. coupon rate, terms of the indenture, and maturity date

Answer

D. coupon rate, terms of the indenture, and maturity date

4. While bond prices fluctuate,
A. yields are constant
B. coupons are constant
C. the spread between yields is constant
D. short-term bond prices fluctuate even more

Answer

B. coupons are constant

5. If interest rates rise, the price of preferred stock
A. is not affected
B. rises
C. falls
D. may rise or fall

Answer

C. falls

6. Municipal government debt
A. pays more interest than corporate debt
B. is often purchased by individuals with high incomes
C. is exempt from estate taxation
D. is not subject to interest rate risk

Answer

B. is often purchased by individuals with high incomes

7. The use of financial leverage by a firm may be measured by the
A. ratio of debt to total assets
B. firm’s beta coefficient
C. firm’s retention of earnings
D. ratio of the price of the firm’s stock price to its earnings

Answer

A. ratio of debt to total assets

8. An example of a depreciable asset is
A. Land
B. Cash
C. Accounts receivable
D. Equipment

Answer

D. Equipment

9. As the debt ratio increases,
A. Fewer assets are debt-financed, and the ratio of debt-to-equity increases
B. Fewer assets are debt-financed, and the ratio of debt-to-equity decreases
C. More assets are debt-financed, and the ratio of debt-to-equity increases
D. More assets are debt-financed, and the ratio of debt-to-equity decreases

Answer

C. More assets are debt-financed, and the ratio of debt-to-equity increases

10. The net asset value of a mutual fund investing in stock rises with
A. Higher stock prices
B. Lower equity values
C. An increased number of shares
D. Increased liabilities

Answer

A. Higher stock prices

11. Which of the following helps determine the relationship between the expected return and risk for individual securities?
A. Security market line
B. Capital market line
C. Markowitz model
D. (a) and (b)

Answer

A. Security market line

12. A call is an option to
A. Sell stock at a specified price
B. Buy stock at a specified price
C. Sell stock on a specified date
D. Buy stock on a specified date

Answer

B. Buy stock at a specified price

13. You own a large orange grove and will be harvesting from November through April. To hedge against price risks you should
A. sell orange juice contracts with a November delivery
B. buy orange juice contracts with a November delivery
C. sell orange juice contracts with delivery dates between November and April
D. buy orange juice contracts with delivery dates between November and April

Answer

C. sell orange juice contracts with delivery dates between November and April

14. Financial leverage may increase a corporation’s risk because
A. operating income may stabilize
B. the firm has fixed obligations to meet
C. more common stock is outstanding
D. dividends must be paid

Answer

B. the firm has fixed obligations to meet

15. What is the value of a call on the expiration date, if on that date the price of the stock is Rs.25 and the exercise price is Rs.26?
A. Rs.-1
B. Rs 0
C. Rs 1
D. Rs 25

Answer

B. Rs 0

16. Equity does NOT include
A. cash and paid-in capital
B. common stock and paid-in capital
C. paid-in capital and retained earnings
D. common stock, paid-in capital and retained earnings

Answer

A. cash and paid-in capital

17. What is the price of a stock estimated to pay a dividend of Rs.60 next year, if the dividend growth rate is 5% and the appropriate discount rate is 8%?
A. Rs.18
B. Rs.19
C. Rs.20
D. Rs.21

Answer

C. Rs.20

18. If you were confident that the price of stock X would drop dramatically within two Months ,which of the following investment transactions would yield the highest return on your investment?
A. Purchase stock X
B. Sell stock X short
C. Purchase a call on stock X
D. Purchase a put on stock X

Answer

D. Purchase a put on stock X

19. In a private limited company, the maximum number ofmembers are limited to:
A. 20
B. 50
C. 100
D. 200

Answer

B. 50

20. Shares which are not affected by market movements are known as:
A. Offensive shares
B. Growth shares
C. Defensive shares
D. Income shares

Answer

C. Defensive shares

21. Exposure indicates
A. Sensitivity to changes in risk
B. Sensitivity to changes in asset prices
C. Sensitivity to changes in portfolio
D. Sensitivity to changes in assets

Answer

D. Sensitivity to changes in assets

22. Which of the following securities is most liquid?
A. Money market instruments
B. Capital market instruments
C. Gilt-edged securities
D. Index Futures

Answer

B. Capital market instruments

23. Which of the following goals will be considered by the individuals who invest in upcoming companies and wait till the companies to grow and then harvest their profits and move on to other company?
A. Short-term high priority goals
B. Money making goals
C. Long-term high priority goals
D. Lower priority goals

Answer

C. Long-term high priority goals

24. A purely passive strategy is defined as
A. One that uses only index funds.
B. One that allocates assets in fixed proportions that do not vary with market conditions.
C. One that is mean-variance efficient.
D. Both A and B.

Answer

B. One that allocates assets in fixed proportions that do not vary with market conditions.

25. Which of the following is on the horizontal axis of the Security Market Line?
A. Standard deviation
B. Beta
C. Expected return
D. Required return

Answer

B. Beta

26. An industry in the expansion stage of its life cycle is indicated by its
A. Low P/E Ratio.
B. High P/E Ratio.
C. High Dividend Pay-Out Ratio
D. High Default

Answer

D. High Default

27. Which of the following is true of municipal government debt?
A. It pays more interest than corporate debt.
B. It is often purchased by individuals with high incomes.
C. It is exempt from estate taxation.
D. It is not subject to interest rate risk.

Answer

B. It is often purchased by individuals with high incomes.

28. The net asset value of a mutual fund investing in stock rises with
A. Higher stock prices
B. Lower equity values
C. An increased number of shares
D. Increased liabilities

Answer

B. Lower equity values

29. Which of the following is not among the important categories of real assets?
A. Land and house property
B. Art objects
C. Units of UTI
D. Bullion

Answer

A. Land and house property

30. Which of the following statements is true of Insured Asset Allocation?
A. It is aimed at benefiting from short-term under pricing and over pricing of assets.
B. In this strategy the risk tolerance of the investor are ignored.
C. In this strategy long-term predictions regarding the capital markets are us

Answer

C. In this strategy long-term predictions regarding the capital markets are us

31. ___ are a fixed income security.
A. Equities
B. Forex
C. Derivatives
D. Bonds

Answer

D. Bonds

32. Which of the following is/are true if a firm has a required rate of return equal to the ROE?I. The amount of earnings retained by the firm does not affect market price or the P/E. II. The firm can increase market price and P/E by increasing the growth rate. III. The P/E ratio is inversely proportional to the ROE of the firm.
A. Only (I) above
B. Both (I) and (II) above
C. Both (I) and (III) above
D. Both (II) and (III) above

Answer

D. Both (II) and (III) above

33. Consider these two investment strategies: Strategy ___ is the dominant strategy because ___
A. 1, it is riskless
B. 1, it has the highest reward/risk ratio
C. 2, its return is at least equal to Strategy 1 and sometimes greater
D. 2, it has the highest reward/risk ratio

Answer

B. 1, it has the highest reward/risk ratio

34. Which of the following statements is/are not correct with respect to the ‘Constant Mix Strategies’ of asset allocation?I. Investors adopting these strategies tend to maintain an exposure to stocks that are in constant proportion of their wealth. II. The risk-tolerance level of the investors varies proportionately with the level of theirwealth. III. Reversals in stock markets oppose constant mix strategies over the buy and hold IV. strategies.
A. Only (I) above
B. Only (II) above
C. Only (III) above
D. Both (I) and (II) above

Answer

C. Only (III) above

35. The tracking error of an optimized portfolio can be expressed in terms of the ___ of the portfolio and thus reveal ___
A. return; portfolio performance
B. total risk; portfolio performance
C. beta; portfolio performance
D. beta; benchmark risk

Answer

C. beta; portfolio performance

36. A portfolio comprises of two stocks A and B. Stock A gives a return of 8%and stock B gives a return of 7%. Stock A has a weight of 60% in the portfolio. What is the portfolio return?
A. 9%
B. 11%
C. 10%
D. 8%

Answer

D. 8%

37. Price movement between two Information Technology stocks would generally have a ___ co-variance.
A. zero
B. positive
C. negative
D. none

Answer

D. none

38. The two types of investments that provide the highest and lowest yields in the Ibbotson study of Stocks, Bonds, Bills and Inflation are
A. Large company stocks; U.S. treasury bills
B. Large company stocks; Long-term government bonds
C. Small company stocks; U.S. Treasury bills
D. Small company stocks; preferred stock

Answer

B. Large company stocks; Long-term government bonds

39. Which of the following is not a form of a financial asset?
A. Commercial paper
B. Commodity futures
C. Warrants
D. Personal residence

Answer

C. Warrants

40. Historically, the real rate of return in the U.S. economy has been
A. 1-2%
B. 2-3%
C. 3-4%
D. 4-5%

Answer

D. 4-5%

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