WorksheetsMockTest 1 ss2 TE8
Total questions: 90
Worksheet time: 3hrs 0mins
Name
Class
Date
1.
A hedge fund with $98 million of initial capital charges a management fee of 2% and an incentive fee of 20%. The management fee is based on assets under management at year end and the incentive fee is calculated independently from the management fee. The fee structure has a high-water mark provision. The fund value is $112 million at the end of Year 1, $100 million at the end of Year, and $116 million at the end of Year 3. The net-of-fees return earned by the fund in Year 3 is closest to:
a)
A. 14.15%.
b)
B. 12.33%.
c)
C. 11.87%.
2.
a)
A. $13.43.
b)
B. $22.35.
c)
C. $22.90.
3.
Q. A yield curve constructed from a sequence of yields-to-maturity on zero-coupon bonds is the:
a)
A. par curve.
b)
B. spot curve.
c)
C. forward curve.
4.
Illiquidity is most likely a major concern when investing in:
a)
A. real estate investment trusts.
b)
B. private equity.
c)
C. commodities.
5.
a)
A. 6.72%.
b)
B. 6.80%.
c)
C. 7.64%.
6.
The most likely impact of adding commodities to a portfolio of equities and bonds is to:
a)
A. increase risk.
b)
B. provide higher current income.
c)
C. reduce exposure to inflation.
7.
Q. An increase in the time between when an order to trade a security is placed and when the order is executed most likely indicates that market efficiency has:
a)
A. decreased.
b)
B. remained the same.
c)
C. increased.
8.
Q. A private equity fund desiring to realize an immediate and complete cash exit from a portfolio company is most likely to pursue: (2020 Q18)
a)
A. an IPO.
b)
B. a trade sale.
c)
C. a recapitalization.
9.
Q. If a call option is priced higher than the binomial model predicts, investors can earn a return in excess of the risk-free rate by:
a)
A. investing at the risk-free rate, selling a call, and selling the underlying.
b)
B. borrowing at the risk-free rate, buying a call, and buying the underlying.
c)
C. borrowing at the risk-free rate, selling a call, and buying the underlying.
10.
From the perspective of a CDO manager, an arbitrage collateralized debt obligation most likely differs from a traditional asset-backed security because it involves the:
a)
A. pooling of debt obligations.
b)
B. active management of the collateral.
c)
C. creation of a special purpose entity.
11.
Q. The value of a swap is equal to the present value of the:
a)
A. fixed payments from the swap.
b)
B. net cash flow payments from the swap.
c)
C. underlying at the end of the contract.
12.
A measure of a bond’s price sensitivity to a change in the benchmark yield curve at a specified maturity segment best describes:
a)
A. OAS duration.
b)
B. key rate duration.
c)
C. modified duration.
13.
Q. In auto loan ABS, the form of credit enhancement that most likely serves as the first line of loss protection is the:
a)
A. excess spread account.
b)
B. sequential-pay structure.
c)
C. proceeds from repossession sales.
14.
a)
A. leverage.
b)
B. interest coverage.
c)
C. operating profit margin.
15.
Q. The distribution method by which profits generated by a fund are allocated between LPs and the GP is called:
a)
A. a waterfall.
b)
B. an 80/20 split.
c)
C. a fair division.
16.
Security market indexes can be used to calculate alphas, which are best described as:
a)
A. the systematic risk of a security, using the index as a proxy for the entire market.
b)
B. a measure of market sentiment.
c)
C. the difference between the return of the actively managed portfolio and the return of the passive portfolio.
17.
Q. Angel investing capital is typically provided in which stage of financing? (2020 Q24)
a)
A. Later stage
b)
B. Formative stage
c)
C. Mezzanine stage
18.
Q. The government of a country whose financial markets are in an early stage of development has hired you as a consultant on financial market regulation. Your first task is to prepare a list of the objectives of market regulation. Which of the following is least likely to be included in this list of objectives?
a)
A. Minimize agency problems in the financial markets.
b)
B. Ensure that financial markets are fair and orderly.
c)
C. Ensure that investors in the stock market achieve a rate of return that is at least equal to the risk-free rate of return.
19.
Q. Hedge fund losses are most likely to be magnified by a:
a)
A. margin call.
b)
B. lockup period.
c)
C. redemption notice period.
20.
a)
A. Company A.
b)
B. Company B.
c)
C. Company C.
21.
Q. Which of the following statements is least accurate in describing a company’s market value?
a)
A. Management’s decisions do not influence the company’s market value.
b)
B. Increases in book value may not be reflected in the company’s market value.
c)
C. Market value reflects the collective and differing expectations of investors.
22.
Q. Rebalancing an index is the process of periodically adjusting the constituent:
a)
A. securities’ weights to optimize investment performance.
b)
B. securities to maintain consistency with the target market.
c)
C. securities’ weights to maintain consistency with the index’s weighting method.
23.
a)
A. $96.92.
b)
B. $54.78.
c)
C. $52.17.
24.
Holding all other characteristics the same, the bond exposed to the greatest level of reinvestment risk is most likely the one selling at:
a)
A. a premium.
b)
B. a discount.
c)
C. par.
25.
Q. As the loan-to-value ratio increases for a real estate investment, risk most likely increases for: (2020 Q19)
a)
A. debt investors only.
b)
B. equity investors only.
c)
C. both debt and equity investors.
26.
Q. A characteristic of forward commitments is that they:
a)
A. provide linear payoffs.
b)
B. do not depend on the outcome or payoff of an underlying asset.
c)
C. provide one party the right to engage in future transactions on terms agreed on in advance.
27.
Q. Which type of equity valuation model is most likely to be preferable when one is comparing similar companies?
a)
A. A multiplier model.
b)
B. A present value model.
c)
C. An asset-based valuation model.
28.
Q. The derivative markets tend to:
a)
A. transfer liquidity from the broader financial markets.
b)
B. not reflect fundamental value after it is restored in the underlying market.
c)
C. offer a less costly way to exploit mispricing in comparison to other free and competitive financial markets.
29.
Q. If the technology for an industry involves high fixed capital investment, then one way to seek higher profit growth is by pursuing:
a)
A. economies of scale.
b)
B. diseconomies of scale.
c)
C. removal of features that differentiate the product or service provided.
30.
Q. In contrast to a forward contract, a futures contract:
a)
A. trades over-the-counter.
b)
B. is initiated at a zero value.
c)
C. is marked-to-market daily.
31.
Q. Fran Martin obtains a non-recourse mortgage loan for $500,000. One year later, when the outstanding balance of the mortgage is $490,000, Martin cannot make his mortgage payments and defaults on the loan. The lender forecloses on the loan and sells the house for $315,000. What amount is the lender entitled to claim from Martin?
a)
A. $0 .
b)
B. $175,000 .
c)
C. $185,000 .
32.
Q. Currency swaps are:
a)
A. rarely used.
b)
B. commonly used to manage interest rate risk.
c)
C. executed by two parties making a series of interest rate payments in the same currency.
33.
a)
A. $10 .
b)
B. $5 .
c)
C. $0 .
34.
Q. The intrinsic value of an undervalued asset is:
a)
A. less than the asset’s market value.
b)
B. greater than the asset’s market value.
c)
C. the value at which the asset can currently be bought or sold.
35.
In futures markets, contract performance is most likely guaranteed by:
a)
A. the futures exchanges.
b)
B. regulatory agencies.
c)
C. clearing houses.
36.
In the context of commercial mortgage-backed securities (CMBS) which of the following mechanisms is most likely a structural call protection?
a)
A. Prepayment lockouts
b)
B. Yield maintenance charges
c)
C. Sequential-pay tranches
37.
Q. For a mortgage pass-through security, which of the following risks most likely increases as interest rates decline?
a)
A. Balloon
b)
B. Extension
c)
C. Contraction
38.
a)
A. step-up coupon bond.
b)
B. deferred coupon bond.
c)
C. floating rate bond.
39.
Q. Pierre-Louis Robert just purchased a call option on shares of the Michelin Group. A few days ago he wrote a put option on Michelin shares. The call and put options have the same exercise price, expiration date, and number of shares underlying. Considering both positions, Robert’s exposure to the risk of the stock of the Michelin Group is:
a)
A. long.
b)
B. short.
c)
C. neutral.
40.
High-yield bond analysis differs from investment-grade bond analysis in that high-yield:
a)
A. analysis is less likely to focus on an issuer’s liquidity.
b)
B. covenant analysis is more important than for investment-grade bonds.
c)
C. bond prices are more affected by interest rate changes than higher-quality bonds.
41.
The factor least likely to influence the yield spread on an option-free, fixed-rate bond is a change in the:
a)
A. credit risk of the issuer.
b)
B. expected inflation rate.
c)
C. liquidity of the bond.
42.
Arbitrage activity will most likely be higher in securities markets:
a)
A. with no restrictions on short selling.
b)
B. that are efficient.
c)
C. with high information acquisition costs.
43.
a)
A. $38.70.
b)
B. $31.57.
c)
C. $28.57.
44.
Q. Fundamental analysts assume that markets are:
a)
A. weak-form inefficient.
b)
B. semi-strong-form efficient.
c)
C. semi-strong-form inefficient.
45.
a)
A. 5.0%.
b)
B. 7.9%.
c)
C. 11.4%.
46.
Q. An arbitrage transaction generates a net inflow of funds:
a)
A. throughout the holding period.
b)
B. at the end of the holding period.
c)
C. at the start of the holding period.
47.
Q. Which statement about covered bonds is least accurate?
a)
A. Covered bonds provide investors with dual recourse, to the cover pool and also to the issuer.
b)
B. Covered bonds usually carry higher credit risks and offer higher yields than otherwise similar ABS.
c)
C. Covered bonds have a dynamic cover pool, meaning sponsors must replace any prepaid or non-performing assets.
48.
Q. If the risk-free rate increases, the value of an in-the-money European put option will most likely:
a)
A. decrease.
b)
B. remain the same.
c)
C. increase.
49.
Q. A manufacturing company receives a ratings upgrade and the price increases on its fixed-rate bond. The price increase was most likely caused by a(n):
a)
A. decrease in the bond’s credit spread.
b)
B. increase in the bond’s liquidity spread.
c)
C. increase of the bond’s underlying benchmark rate.
50.
a)
A. $4 .
b)
B. $0 .
c)
C. –$1 .
51.
Q. What is the most significant drawback of a repeat sales index to measure returns to real estate? (2020 Q14)
a)
A. Sample selection bias
b)
B. Understatement of volatility
c)
C. Reliance on subjective appraisals
52.
a)
A. $5 .
b)
B. $1 .
c)
C. –$1 .
53.
Q. A commercial mortgage-backed security does not meet the debt-to-service coverage at the loan level necessary to achieve a desired credit rating. Which of the following features would most likely improve the credit rating of the CMBS?
a)
A. Subordination
b)
B. Call protection
c)
C. Balloon payments
54.
Q. Which of the following bond types provides the most benefit to a bondholder when bond prices are declining?
a)
A. Callable
b)
B. Plain vanilla
c)
C. Multiple put
55.
Q. Which of the following is least likely to be a reason for a company to issue equity securities on the primary market?
a)
A. To raise capital.
b)
B. To increase liquidity.
c)
C. To increase return on equity.
56.
Q. Relative to domestic and foreign bonds, Eurobonds are most likely to be:
a)
A. bearer bonds.
b)
B. registered bonds.
c)
C. subject to greater regulation.
57.
Q. A British company listed on AIM (formerly the Alternative Investment Market) of the London Stock Exchange announced the sale of 6,686,665 shares to a small group of qualified investors at £0.025 per share. Which of the following best describes this sale?
a)
A. Shelf registration.
b)
B. Private placement.
c)
C. Initial public offering.
58.
Equity valuation models that are based on a ratio of share price to some fundamental variable are best described as:
a)
A. multiplier models.
b)
B. present value models.
c)
C. asset-based valuation models.
59.
Q. Private equity funds are most likely to use:
a)
A. merger arbitrage strategies.
b)
B. leveraged buyouts.
c)
C. market-neutral strategies.
60.
Q. When creating a security market index, an index provider must first determine the:
a)
A. target market.
b)
B. appropriate weighting method.
c)
C. number of constituent securities.
61.
An investor who owns a mortgage pass-through security is exposed to extension risk, which is the risk that when interest rates:
a)
A. fall, the security will effectively have a shorter maturity than was anticipated at the time of purchase.
b)
B. rise, the security will effectively have a shorter maturity than was anticipated at the time of purchase.
c)
C. rise, the security will effectively have a longer maturity than was anticipated at the time of purchase.
62.
Q. Which of the following is a type of external credit enhancement?
a)
A. Covenants
b)
B. A surety bond
c)
C. Overcollateralization
63.
You are preparing an investment policy statement for a client who manages her own successful marketing consultancy. Her annual income is approximately $500,000. She describes herself as a finance novice. Most of her savings are invested in bank term deposits and short-term government securities. In her responses to the standard risk assessment questionnaire, she strongly agrees with the statements that she “feels more comfortable putting money in a bank account than in the stock market.” Also, she “thinks of the word ‘risk’ as being a ‘loss’”. Based on this information, your client’s ability and willingness to take risk can best be described as:
a)
A. low ability and high willingness.
b)
B. high ability and willingness.
c)
C. high ability and low willingness.
64.
a)
A. 3.5%.
b)
B. 3.9%.
c)
C. 4.0%.
65.
a)
A. 8% .
b)
B. 15% .
c)
C. 10% .
66.
a)
A. 10.52%.
b)
B. 19.91%.
c)
C. 28.95%.
67.
a)
A. 6.5%.
b)
B. 5.0%.
c)
C. 5.5%.
68.
a)
A. lower.
b)
B. the same.
c)
C. higher.
69.
a)
A. 10.7%.
b)
B. 11.3%.
c)
C. 12.1%.
70.
Technical analysts most likely study trends and patterns in security prices to forecast a company’s:
a)
A. future price trends.
b)
B. earnings potential.
c)
C. intrinsic value.
71.
Which of the following is most consistent with good corporate governance practices?
a)
A. All stakeholders should have the right to participate in the governance of the firm.
b)
B. An audit committee that benefits from the direct guidance of management.
c)
C. Appropriate controls and procedures to effectively manage the firm should be in place.
72.
Q. The factors a risk management framework should address include all of the following except:
a)
A. communications.
b)
B. policies and processes.
c)
C. names of responsible individuals.
73.
Q. With respect to capital market theory, the optimal risky portfolio:
a)
A. is the market portfolio.
b)
B. has the highest expected return.
c)
C. has the lowest expected variance.
74.
Q. The business risk of a particular company is most accurately measured by the company’s:
a)
A. debt-to-equity ratio.
b)
B. efficiency in using assets to generate sales.
c)
C. operating leverage and level of uncertainty about demand, output prices, and competition.
75.
a)
A. 2, 3, and 4.
b)
B. 1, 3, and 4.
c)
C. 1 and 2.
76.
a)
A. is shorter, but its cash conversion cycle is longer.
b)
B. and cash conversion cycle are both longer.
c)
C. is longer, but its cash conversion cycle is shorter.
77.
Q. An example of a non-financial risk is:
a)
A. market risk.
b)
B. liquidity risk.
c)
C. settlement risk.
78.
a)
A. 17.25%.
b)
B. 21.00%.
c)
C. 24.30%.
79.
Under the stakeholder theory, corporate governance is most consistent with a system of:
a)
A. internal controls and procedures by which individual companies are managed.
b)
B. defined roles for management and the majority shareowner(s).
c)
C. checks and balances to minimize the conflicting interests among shareowners.
80.
a)
A. Investment 1.
b)
B. Investment 2.
c)
C. Investment 3.
81.
Q. Effective risk governance in an enterprise provides guidance on all of the following except:
a)
A. unacceptable risks.
b)
B. worst losses that may be tolerated.
c)
C. specific methods to mitigate risk for each subsidiary in the enterprise.
82.
Risk budgeting most likely:
a)
A. limits the cost of hedging a portfolio.
b)
B. can be defined by a measure such as beta or scenario loss.
c)
C. focuses on the appetite for risk and what exposures are acceptable.
83.
A firm’s before-tax costs of debt, preferred stock, and equity are 12%, 17%, and 20%, respectively. Assuming equal funding from each source and a marginal tax rate of 40%, the weighted average cost of capital (%) is closest to:
a)
A. 14.7%.
b)
B. 9.8%.
c)
C. 13.9%.
84.
Q. An investment of $100 generates after-tax cash flows of $40 in Year 1, $80 in Year 2, and $120 in Year 3. The required rate of return is 20%. The net present value is closest to:
a)
A. $42.22.
b)
B. $58.33.
c)
C. $68.52.
85.
Q. The Gearing Company has an after-tax cost of debt capital of 4%, a cost of preferred stock of 8%, a cost of equity capital of 10%, and a weighted average cost of capital of 7%. Gearing intends to maintain its current capital structure as it raises additional capital. In making its capital-budgeting decisions for the average-risk project, the relevant cost of capital is:
a)
A. 4%.
b)
B. 7%.
c)
C. 8%.
86.
An analyst observes that the historic geometric nominal return for equities is 9%. Given a real return of 1% for riskless Treasury bills and annual inflation of 2%, the real rate of return and risk premium for equities are closest to:
a)
A. 7.9% and 5.8%.
b)
B. 6.9% and 7.9%.
c)
C. 6.9% and 5.8%.
87.
a)
A. Concentrated portfolio positions
b)
B. Forgone opportunities to reduce risk by combining assets with low correlations
c)
C. Excessive trading
88.
a)
A. the percentage change in net income divided by the percentage change in units sold.
b)
B. the percentage change in operating income divided by the percentage change in units sold.
c)
C. the percentage change in net income divided by the percentage change in operating income.
89.
Q. Two analysts are discussing the costs of external financing sources. The first states that the company’s bonds have a known interest rate but that the interest rate on accounts payable and the interest rate on equity financing are not specified. They are implicitly zero. Upon hearing this, the second analyst advocates financing the firm with greater amounts of accounts payable and common shareholders equity. Is the second analyst correct in his analysis?
a)
A. He is correct in his analysis of accounts payable only.
b)
B. He is correct in his analysis of common equity financing only.
c)
C. He is not correct in his analysis of either accounts payable or equity financing.
90.
Which of the following scenarios can best be described as offering superior protection of shareholder interests?
a)
A. When common law is practiced
b)
B. When CEO duality is common
c)
C. When stakeholder theory prevails
100 %
