Security Analysis And Portfolio Management MCQ Quiz
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Are you ready for this security analysis and portfolio management MCQ quiz? Play the quiz, then. One way a company or a person uses their income or profit is by investing. The acquisition of shares is one of the essential methods people choose to use. When it comes to buying security, as taught during security analysis and portfolio management, there are some things we always need to consider. Take this quiz and test how well you understood the topic.
- 1.
The net wealth of the aggregate economy is equal to the sum of:
- A.
All real assets.
- B.
All financial assets.
- C.
All physical assets.
- D.
All real and financial assets.
- E.
None of the above
Correct Answer
A. All real assets.Explanation
The correct answer is "all real assets." This means that the net wealth of the aggregate economy includes the total value of all tangible and physical assets owned by individuals, businesses, and the government. Real assets can include land, buildings, machinery, equipment, and natural resources. Financial assets, such as stocks, bonds, and cash, are not included in the calculation of net wealth in this context.Rate this question:
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- 2.
Although derivatives can be used as speculative instruments, businesses most often use them to:
- A.
Hedge.
- B.
Offset debt.
- C.
Appease stockholders.
- D.
Attract customers.
- E.
Enhance their balance sheets.
Correct Answer
A. Hedge.Explanation
Firms may use forward contracts and futures to protect against currency fluctuations or changes in commodity prices. Interest-rate options help companies control financing costs.Rate this question:
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- 3.
Financial assets _____________.
- A.
Directly contribute to the country's productive capacity.
- B.
Are of no value to anyone.
- C.
Indirectly contribute to the country's productive capacity.
- D.
None
Correct Answer
C. Indirectly contribute to the country's productive capacity.Explanation
Financial assets indirectly contribute to the country's productive capacity because these assets permit individuals to invest in firms and governments. This in turn allows firms and governments to increase productive capacity.Rate this question:
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- 4.
In what roles do investment bankers perform?
- A.
Design securities with desirable properties.
- B.
Provide advice to the firms as to market conditions, price, etc.
- C.
All of them
- D.
None of them
Explanation
Investment bankers perform both roles mentioned in the options. They design securities with desirable properties, such as bonds or stocks, to attract investors. Additionally, they provide advice to firms on market conditions, pricing strategies, and other financial aspects. Therefore, the correct answer is "All of them."Rate this question:
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- 5.
Skewness is a measure of ____________.
- A.
The dividend yield of the distribution
- B.
The downside risk of a distribution
- C.
The normality of a distribution
- D.
A and C
Correct Answer
C. The normality of a distributionExplanation
Skewness is a measure of the normality of a distribution.Rate this question:
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- 6.
When a distribution is positively skewed, ____________.
- A.
Standard deviation overestimates risk
- B.
Standard deviation correctly estimates risk
- C.
Standard deviation underestimates risk
- D.
None of the above
Correct Answer
A. Standard deviation overestimates riskExplanation
When a distribution is positively skewed, standard deviation overestimates risk.Rate this question:
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- 7.
DFI, Inc. has the following probability distribution of holding period returns on its stock. State of Economy Probability HPR Boom .25 25% Normal Growth .45 15% Recession .30 9% The expected return on DFI's stock is
- A.
15.7%.
- B.
12.4%
- C.
16.5%
- D.
17.8%
- E.
11.6%
Correct Answer
A. 15.7%.Explanation
HPR = .25 (25%) + .45 (15%) + .30 (9%) = 15.7%Rate this question:
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- 8.
All things equal, diversification is most effective when...
- A.
Securities' returns are positively correlated.
- B.
Securities' returns are uncorrelated.
- C.
Securities' returns are high.
- D.
Securities' returns are negatively correlated.
- E.
A and C.
Correct Answer
D. Securities' returns are negatively correlated.Explanation
Diversification is most effective when securities' returns are negatively correlated. This means that when one security's return is high, the other security's return is low, and vice versa. By investing in negatively correlated securities, the risk of the portfolio is reduced as losses in one investment can be offset by gains in another. This helps to achieve a more stable and consistent return on the overall portfolio.Rate this question:
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- 9.
When an investment opportunity set is formed with two securities that are perfectly negatively correlated, the global minimum variance portfolio has a standard deviation that is always.....
- A.
Equal to zero.
- B.
Greater than zero.
- C.
Equal to -1.
- D.
None of the above
Correct Answer
A. Equal to zero.Explanation
When two securities are perfectly negatively correlated, it means that their returns move in the opposite direction. This creates a situation where the risk of one security is perfectly offset by the other. As a result, when forming an investment portfolio with these two securities, the global minimum variance portfolio can be constructed in a way that eliminates all risk, resulting in a standard deviation of zero. This means that the portfolio's returns will have no variability or uncertainty, making the correct answer "equal to zero."Rate this question:
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- 10.
Portfolio theory, as described by Markowitz, is most concerned with
- A.
The elimination of systematic risk.
- B.
The identification of unsystematic risk
- C.
The effect of diversification on portfolio risk.
- D.
Active portfolio management to enhance returns.
- E.
None of the above
Correct Answer
C. The effect of diversification on portfolio risk.Explanation
Portfolio theory, as described by Markowitz, focuses on the effect of diversification on portfolio risk. Markowitz's theory suggests that by diversifying investments across different asset classes, the overall risk of the portfolio can be reduced. This is because different asset classes tend to have different risk and return characteristics, and by combining them in a portfolio, the negative impact of individual asset class fluctuations can be mitigated. Therefore, the theory emphasizes the importance of diversification in managing portfolio risk.Rate this question:
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- 11.
A statistic which measures how the returns of two risky assets move together is ______________.
- A.
Correlation.
- B.
Standard deviation.
- C.
Covariance.
- D.
Variance.
- E.
A and C.
Correct Answer
E. A and C.Explanation
The correct answer is "A and C." Correlation and covariance are both statistics that measure the relationship between the returns of two risky assets. Correlation measures the strength and direction of the linear relationship, while covariance measures the extent to which the returns vary together. Therefore, both A (correlation) and C (covariance) are correct answers to the question.Rate this question:
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- 12.
What is the relevant measure of risk according to the context of the Capital Asset Pricing Model (CAPM)?
- A.
Unique risk.
- B.
Beta.
- C.
Standard deviation of returns.
- D.
Variance of returns.
- E.
None of the above.
Correct Answer
B. Beta.Explanation
The relevant measure of risk according to the context of the Capital Asset Pricing Model (CAPM) is beta. Beta measures the sensitivity of an asset's returns to the overall market returns. It indicates how much an asset's price is likely to move in relation to the market. A beta of 1 means the asset moves in line with the market, while a beta greater than 1 suggests the asset is more volatile than the market, and a beta less than 1 indicates the asset is less volatile. Therefore, beta is a key measure of risk in the CAPM framework.Rate this question:
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- 13.
In a well diversified portfolio
- A.
Market risk is negligible.
- B.
Unsystematic risk is negligible.
- C.
Systematic risk is negligible.
- D.
Nondiversifiable risk is negligible.
- E.
None of the above
Correct Answer
B. Unsystematic risk is negligible.Explanation
In a well diversified portfolio, unsystematic risk is negligible. Unsystematic risk refers to the risk that is specific to a particular company or industry and can be reduced through diversification. By holding a variety of different investments across different sectors and asset classes, the impact of any one company or industry's performance on the overall portfolio is minimized. This means that the portfolio is less vulnerable to the risks associated with individual companies or industries, and therefore unsystematic risk is negligible.Rate this question:
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- 14.
Consider this example- Security is fairly priced and has an expected rate of return of 0.13. The market expected rate of return is 0.13 and the risk-free rate is 0.04. What will be the beta of the stock?
- A.
1.25
- B.
1.7
- C.
1.0
- D.
0.95
- E.
None of the above
Correct Answer
C. 1.0Explanation
13 = 4 + β (13 – 4); β = 1.0.Rate this question:
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- 15.
Name the pricing model that provides no guidance concerning the determination of the risk premium on factor portfolios.
- A.
The multifactor APT.
- B.
The CAPM.
- C.
Both the CAPM and the multifactor APT.
- D.
Neither the CAPM nor the multifactor APT.
- E.
None of the above is a true statement.
Correct Answer
A. The multifactor APT.Explanation
The multifactor APT is the correct answer because it does not provide any guidance on how to determine the risk premium on factor portfolios. Unlike the CAPM, which provides a specific formula to calculate the expected return of an asset based on its beta, the multifactor APT does not specify how to determine the risk premium for each factor. Therefore, it does not provide any guidance on the determination of the risk premium on factor portfolios.Rate this question:
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- 16.
A zero-investment portfolio with a positive expected return arises when
- A.
An investor has downside risk only.
- B.
The opportunity set is not tangent to the capital allocation line.
- C.
A risk-free arbitrage opportunity exists.
- D.
The law of prices is not violated.
- E.
None of the above
Correct Answer
C. A risk-free arbitrage opportunity exists.Explanation
In a zero-investment portfolio, the expected return is positive, which means the investor can earn a profit without putting any money into the investment. This can only occur if there is a risk-free arbitrage opportunity available. Arbitrage involves taking advantage of price differences in different markets to make a profit with no risk. Therefore, if such an opportunity exists, it allows the investor to create a zero-investment portfolio with a positive expected return.Rate this question:
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- 17.
The APT differs from the CAPM because the APT...
- A.
Places more emphasis on market risk.
- B.
Recognizes multiple systematic risk factors.
- C.
Recognizes multiple unsystematic risk factors.
- D.
Minimizes the importance of diversification.
- E.
All of the above
Correct Answer
B. Recognizes multiple systematic risk factors.Explanation
The APT (Arbitrage Pricing Theory) differs from the CAPM (Capital Asset Pricing Model) because it recognizes multiple systematic risk factors. Unlike the CAPM, which only considers the market risk factor, the APT acknowledges that there can be multiple factors that affect the returns of an investment. These factors can include macroeconomic variables such as interest rates, inflation, or exchange rates. By recognizing multiple systematic risk factors, the APT provides a more comprehensive and flexible framework for pricing assets and assessing their risk.Rate this question:
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- 18.
The following factors might affect stock returns:
- A.
Interest rate fluctuations.
- B.
The business cycle.
- C.
Inflation rates.
- D.
A and B
- E.
All of the above
Correct Answer
E. All of the aboveExplanation
The correct answer is "all of the above" because all three factors mentioned - interest rate fluctuations, the business cycle, and inflation rates - can have an impact on stock returns. Interest rate fluctuations can affect borrowing costs and investment decisions, while the business cycle can influence overall economic conditions and company performance. Inflation rates can erode the purchasing power of investors and affect market expectations. Therefore, all three factors are important considerations for understanding and predicting stock returns.Rate this question:
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- 19.
Consider a well-diversified portfolio, A, in a two-factor economy. The risk-free rate is 6%, the risk premium on the first-factor portfolio is 4% and the risk premium on the second-factor portfolio is 3%. If portfolio A has a beta of 1.2 on the first factor and.8 on the second factor, what is its expected return?
- A.
7.0%
- B.
8.0%
- C.
9.2%
- D.
13.0%
- E.
13.2%
Correct Answer
E. 13.2%Explanation
6% + 1.2(4%) + 0.8((3%) = 13.2%.Rate this question:
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- 20.
If you believe in the ________ form of the EMH, you believe that stock prices reflect all relevant information including historical stock prices and current public information about the firm, but not information that is available only to insiders.
- A.
Semistrong
- B.
Strong
- C.
Weak
- D.
All of them
- E.
None of them
Correct Answer
A. SemistrongExplanation
If you believe in the semistrong form of the EMH, you believe that stock prices reflect all relevant information including historical stock prices and current public information about the firm, but not information that is available only to insiders. This means that all publicly available information is already incorporated into stock prices, and it is not possible to consistently outperform the market by analyzing this information.Rate this question:
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- 21.
UiProponents of the EMH typically advocate:
- A.
A) an active trading strategy.
- B.
B) investing in an index fund.
- C.
C) a passive investment strategy.
- D.
A and B
- E.
B and C
Correct Answer
E. B and CExplanation
The proponents of the Efficient Market Hypothesis (EMH) typically advocate for investing in an index fund and adopting a passive investment strategy. Investing in an index fund involves buying a diversified portfolio of stocks that mirror a specific market index, such as the S&P 500. This approach aligns with the EMH belief that it is difficult to consistently outperform the market through active trading strategies. A passive investment strategy involves buying and holding investments for the long term, rather than trying to time the market or make frequent trades. This approach is also consistent with the EMH, which suggests that it is not possible to consistently beat the market by actively trading.Rate this question:
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- 22.
Name the analyst process that focuses more on past price movements of a firm's stock than on the underlying determinants of future profitability.
- A.
Credit analysts
- B.
Fundamental analysts
- C.
Systems analysts
- D.
Technical analysts
- E.
All of the above
Correct Answer
D. Technical analystsExplanation
Technical analysts focus on past price movements of a firm's stock rather than on the underlying determinants of future profitability. They use various tools and techniques such as chart patterns, trend lines, and technical indicators to analyze historical price data and identify potential future price movements. Unlike fundamental analysts who analyze financial statements and economic factors, technical analysts believe that all relevant information about a stock is already reflected in its price and focus solely on price patterns and trends. Therefore, the correct answer is Technical analysts.Rate this question:
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- 23.
_________ above which it is difficult for the market to rise.
- A.
Book value is a value
- B.
Resistance level is a value
- C.
Support level is a value
- D.
None
Correct Answer
B. Resistance level is a valueExplanation
A resistance level is a value above which it is difficult for the market to rise. This means that when the market reaches this level, it tends to face selling pressure and struggles to continue moving upwards. Traders and investors often use resistance levels as indicators to make decisions about buying or selling securities. It is an important concept in technical analysis and can help determine potential price reversals or areas of consolidation in the market.Rate this question:
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- 24.
The debate over whether markets are efficient will probably never be resolved because of ________.
- A.
The lucky event issue.
- B.
The magnitude issue.
- C.
The selection bias issue.
- D.
All of the above.
- E.
None of the above
Correct Answer
D. All of the above.Explanation
The debate over whether markets are efficient will probably never be resolved because of the lucky event issue, the magnitude issue, and the selection bias issue. The lucky event issue refers to the possibility that market outcomes may be influenced by random events, making it difficult to determine if market efficiency is the cause. The magnitude issue suggests that even if markets are efficient on a small scale, they may not be on a larger scale due to various factors. The selection bias issue implies that studies on market efficiency may be biased towards certain outcomes, leading to inconclusive results. Therefore, all of these issues contribute to the ongoing debate on market efficiency.Rate this question:
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- 25.
Conventional theories presume that investors ____________ and behavioral finance presumes that they ____________.
- A.
Are irrational; are irrational
- B.
Are rational; may not be rational
- C.
Are rational; are rational
- D.
May not be rational; may not be rational
- E.
May not be rational; are rational
Correct Answer
B. Are rational; may not be rationalExplanation
Conventional theories in finance assume that investors are rational, meaning they make decisions based on logical analysis and maximize their own self-interest. On the other hand, behavioral finance suggests that investors may not always be rational, as their decisions can be influenced by psychological biases, emotions, and other non-rational factors. This perspective recognizes that human behavior can deviate from the rational expectations assumed by traditional finance theories.Rate this question:
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- 26.
__________ was the grandfather of technical analysis.
- A.
Harry Markowitz
- B.
William Sharpe
- C.
Charles Dow
- D.
Benjamin Graham
- E.
None of the above
Correct Answer
C. Charles DowExplanation
Charles Dow is considered the grandfather of technical analysis because he was one of the pioneers who developed the concept of analyzing stock market trends and patterns. Dow created the Dow Jones Industrial Average and the Dow Theory, which laid the foundation for technical analysis. His theories and principles are still widely used today in the field of technical analysis to predict future price movements and make investment decisions.Rate this question:
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- 27.
A long-term movement of prices, lasting from several months to years is called _________.
- A.
A minor trend
- B.
A primary trend
- C.
An intermediate trend
- D.
Trend analysis
Correct Answer
B. A primary trendExplanation
A long-term movement of prices, lasting from several months to years, is referred to as a primary trend. This trend represents the overall direction of the market over an extended period and can help investors and analysts make long-term investment decisions. The primary trend is significant as it provides insights into the overall market sentiment and helps identify potential opportunities for profit.Rate this question:
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- 28.
The Dow theory posits that the three forces that simultaneously affect stock prices are ____________. I) primary trend II) intermediate trend III) momentum trend IV) minor trend V) contrarian trend
- A.
I, II, and III
- B.
II, III, and IV
- C.
III, IV and V
- D.
I, II, and IV
- E.
I, III, and V
Correct Answer
D. I, II, and IVExplanation
The Dow theory suggests that the primary trend, intermediate trend, and minor trend are the three forces that simultaneously affect stock prices. These trends refer to the long-term, medium-term, and short-term movements in stock prices, respectively. The momentum trend, contrarian trend, and other options mentioned are not considered as part of the three forces according to the Dow theory.Rate this question:
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- 29.
What's the relation between ceteris paribus, the price, and yield on a bond?
- A.
Negatively related.
- B.
Positively related.
- C.
Sometimes positively and sometimes negatively related.
- D.
Not related.
- E.
Indefinitely related.
Correct Answer
A. Negatively related.Explanation
Ceteris paribus refers to the assumption that all other factors remain constant. In the context of bond prices and yields, when the price of a bond increases, the yield decreases and vice versa. This inverse relationship is due to the fact that as the price of a bond increases, the fixed interest payments it provides become relatively smaller compared to the price paid for the bond. Therefore, investors demand a lower yield to compensate for the higher price. Conversely, when the price of a bond decreases, the yield increases to attract investors. Hence, the price and yield on a bond are negatively related.Rate this question:
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- 30.
The most widely used monetary tool is:
- A.
Open market operations.
- B.
Altering the reserve requirements
- C.
Altering the discount rate.
- D.
Altering marginal tax rates.
- E.
None of the above.
Correct Answer
A. Open market operations.Explanation
Open market operations refer to the buying and selling of government securities by the central bank in order to control the money supply and interest rates in the economy. This tool is widely used because it allows the central bank to directly influence the liquidity in the financial system and adjust interest rates according to the prevailing economic conditions. By buying government securities, the central bank injects money into the economy, while selling securities removes money from circulation. Thus, open market operations are an effective and commonly used monetary tool to regulate the economy.Rate this question:
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- 31.
If interest rates decrease, business investment expenditures will ______ and consumer durable expenditures will _________.
- A.
Increase, increase
- B.
Increase, decrease
- C.
Decrease, increase
- D.
Decrease, decrease
- E.
Be unaffected, be unaffected
Correct Answer
A. Increase, increaseExplanation
When interest rates decrease, it becomes cheaper for businesses to borrow money for investment purposes. This incentivizes businesses to increase their investment expenditures, leading to an increase in business investment. On the other hand, when interest rates decrease, it also becomes cheaper for consumers to borrow money for purchasing durable goods. This encourages consumers to increase their spending on durable goods, resulting in an increase in consumer durable expenditures. Therefore, both business investment expenditures and consumer durable expenditures will increase when interest rates decrease.Rate this question:
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- 32.
The goal of fundamental analysts is to find securities:
- A.
With high market capitalization rates.
- B.
Whose intrinsic value exceeds market price.
- C.
All of the above
- D.
None of the above
Correct Answer
B. Whose intrinsic value exceeds market price.Explanation
Fundamental analysts aim to identify securities whose intrinsic value is higher than their market price. This means they search for investments that are undervalued by the market, offering potential for future price appreciation. By analyzing various factors such as financial statements, economic conditions, and industry trends, fundamental analysts assess the true value of a security and make investment decisions based on the gap between intrinsic value and market price. This approach allows them to potentially profit from buying undervalued securities and selling them when their market price catches up with their intrinsic value.Rate this question:
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- 33.
Credit risk in the swap market
- A.
Is extensive.
- B.
Is equal to the total value of the payments that the floating rate payer was obligated to make.
- C.
Is limited to the difference between the values of the fixed rate and floating rate obligations.
- D.
A and C
- E.
None of the above
Correct Answer
C. Is limited to the difference between the values of the fixed rate and floating rate obligations.Explanation
The correct answer is "is limited to the difference between the values of the fixed rate and floating rate obligations." This means that the credit risk in the swap market is only the potential loss that can occur if there is a difference between the fixed rate and floating rate obligations. It is not equal to the total value of the payments or extensive.Rate this question:
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- 34.
Commodity futures pricing
- A.
Converges to spot prices at maturity.
- B.
Includes cost of carry.
- C.
Must be related to spot prices.
- D.
All of the above are true.
- E.
None of the above
Correct Answer
D. All of the above are true.Explanation
The statement "All of the above are true" is the correct answer because all three statements mentioned in the question are accurate. Commodity futures pricing does converge to spot prices at maturity, meaning that the price of a futures contract will align with the current spot price of the commodity when the contract expires. Additionally, commodity futures pricing includes the cost of carry, which accounts for the expenses associated with holding the commodity until the futures contract matures. Finally, commodity futures pricing must be related to spot prices since the two are interconnected in the market.Rate this question:
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- 35.
The __________ measures the reward to volatility trade-off by dividing the average portfolio excess return by the standard deviation of returns.
- A.
Jensen measure
- B.
Treynor measure
- C.
Sharpe measure
- D.
Information ratio
- E.
None of the above
Correct Answer
C. Sharpe measureExplanation
The Sharpe measure is used to assess the reward to volatility trade-off in a portfolio. It calculates the ratio of the average portfolio excess return (the return above the risk-free rate) to the standard deviation of returns. A higher Sharpe measure indicates a better risk-adjusted return, as it shows that the portfolio is generating higher returns for each unit of risk taken. Therefore, the Sharpe measure is the correct answer in this case.Rate this question:
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- 36.
The M-squared measure
- A.
Considers only the return when evaluating mutual funds.
- B.
Considers only the market risk when evaluating mutual funds.
- C.
Considers only the total risk when evaluating mutual funds.
- D.
Considers the risk-adjusted return when evaluating mutual funds.
- E.
None of the above
Correct Answer
D. Considers the risk-adjusted return when evaluating mutual funds.Explanation
The M-squared measure is a performance evaluation tool that takes into account the risk-adjusted return when evaluating mutual funds. It considers not only the return generated by the fund but also the level of risk taken to achieve that return. This measure is useful for comparing the performance of different mutual funds as it provides a more comprehensive assessment of their overall performance, taking into consideration both returns and risks.Rate this question:
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Current Version
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Jul 11, 2023Quiz Edited by
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Jan 28, 2011Quiz Created by
Kaushal Mandalia
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