WorksheetsTE10 Mock test 2 ss2
Total questions: 90
Worksheet time: 3hrs 0mins
Name
Class
Date
1.
Q. An alternative investment fund’s hurdle rate is a:
a)
A. rate unrelated to a catch-up clause.
b)
B. tool to protect clients from paying twice for the same performance.
c)
C. minimum rate of return the GP must exceed in order to earn a performance fee.
2.
Which of the following statements concerning different valuation approaches is most accurate?
a)
A. One advantage of the three-stage dividend discount model (DDM) model is that it is equally appropriate to young companies entering the growth phase and those entering the maturity phase.
b)
B. It is advantageous to use asset-based valuation approaches rather than forward-looking cash flow models in the case of companies that have significant intangibles.
c)
C. The justified forward price-to-earnings ratio (P/E) approach offers the advantage of incorporating fundamentals and presenting intrinsic value estimations.
3.
None
a)
A. $107.03.
b)
B. $105.65.
c)
C. $99.75.
4.
Q. Holding all other factors constant, the most likely effect of low demand and heavy new issue supply on bond yield spreads is that yield spreads will:
a)
A. widen.
b)
B. tighten.
c)
C. not be affected.
5.
Q. Which of the following is a type of external credit enhancement?
a)
A. Covenants
b)
B. A surety bond
c)
C. Overcollateralization
6.
None
a)
A. $812,920,131 .
b)
B. $815,383,474 .
c)
C. $817,846,817 .
7.
Which of the following statements concerning the use of industry analysis is most accurate? Industry analysis is most useful for:
a)
A. sector allocations in passive equity portfolios.
b)
B. portfolio performance attribution.
c)
C. evaluating market efficiency.
8.
Q. The potential benefits of allocating a portion of a portfolio to alternative investments include:
a)
A. ease of manager selection.
b)
B. improvement in the portfolio’s risk–return relationship.
c)
C. accessible and reliable measures of risk and return.
9.
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
10.
Q. A credit derivative is a derivative contract in which the:
a)
A. clearinghouse provides a credit guarantee to both the buyer and the seller.
b)
B. seller provides protection to the buyer against the credit risk of a third party.
c)
C. the buyer and seller provide a performance bond at initiation of the contract.
11.
If markets are only weak-form efficient, which of the following investment approaches is least likely to consistently earn abnormal profits?
a)
A. Exploiting of non-public information
b)
B. Buying and selling based on fundamental analysis
c)
C. Trading based on patterns of prices and volume
12.
Q. Risks in infrastructure investing are most likely greatest when the project involves:
a)
A. construction of infrastructure assets.
b)
B. investment in existing infrastructure assets.
c)
C. investing in assets that will be leased back to a government.
13.
If an issuer is required to retire a specified portion of the bond’s principal each year, the bond most likely:
a)
A. is callable.
b)
B. is a step-up note.
c)
C. has a sinking fund provision.
14.
Q. Which of the following corporate debt instruments has the highest seniority ranking?
a)
A. Second lien
b)
B. Senior unsecured
c)
C. Senior subordinated
15.
A hedge fund limited partnership agreement describes the general partner’s total fees for each year as follows: The general partner will measure the fair value of the fund’s assets at the beginning of the year (net of fees from the previous year) and the fair value of the fund’s assets at the end of the year. The general partner will receive 15% of any increase in fair value in excess of the 1-year US Treasury yield at the beginning of the year. This fee structure most likely includes a:
a)
A. hard hurdle rate.
b)
B. management fee.
c)
C. high-water mark provision.
16.
Q. With respect to competitive strategy, a company with a successful cost leadership strategy is most likely characterized by:
a)
A. a low cost of capital.
b)
B. reduced market share.
c)
C. the ability to offer products at higher prices than those of its competitors.
17.
Q. In a declining interest rate environment, compared with a CMO’s Class A tranche, its Class C tranche will be repaid:
a)
A. earlier.
b)
B. at the same pace.
c)
C. later.
18.
If the implied volatility for options on a broad-based equity market index goes up, then it is most likely that:
a)
A. the broad-based equity market index has gone up in value.
b)
B. the general level of market uncertainty has gone up.
c)
C. market interest rates have gone up.
19.
In assigning credit ratings, the practice of notching by the rating agencies is least likely used to quantify the:
a)
A. probability of default.
b)
B. priority of payment in the event of default.
c)
C. potential severity of loss in the event of default.
20.
None
a)
A. 4.2702.
b)
B. 4.4180.
c)
C. 4.7785.
21.
Q. Which of the following market regulations will most likely impede market efficiency?
a)
A. Restricting traders’ ability to short sell.
b)
B. Allowing unrestricted foreign investor trading.
c)
C. Penalizing investors who trade with nonpublic information.
22.
Q. Jim White has sold short 100 shares of Super Stores at a price of $42 per share. He has also simultaneously placed a “good-till-cancelled, stop 50, limit 55 buy” order. Assume that if the stop condition specified by White is satisfied and the order becomes valid, it will get executed. Excluding transaction costs, what is the maximum possible loss that White can have?
a)
A. $800 .
b)
B. $1,300 .
c)
C. Unlimited.
23.
Q. Which of the following combinations replicates a long derivative position?
a)
A. A short derivative and a long asset
b)
B. A long asset and a short risk-free bond
c)
C. A short derivative and a short risk-free bond
24.
Q. Relative to traditional investments, alternative investments are least likely to be characterized by:
a)
A. high levels of transparency.
b)
B. limited historical return data.
c)
C. significant restrictions on redemptions.
25.
Q. For a swap in which a series of fixed payments is exchanged for a series of floating payments, the parties to the transaction:
a)
A. designate the value of the underlying at contract initiation.
b)
B. value the underlying solely on the basis of its market value at the end of the swap.
c)
C. value the underlying sequentially at the time of each payment to determine the floating payment.
26.
Q. A significant challenge to investing in timber is most likely its:
a)
A. high correlation with other asset classes.
b)
B. dependence on an international competitive context.
c)
C. return volatility compounded by financial market exposure.
27.
Q. Which type of sovereign bond has the lowest interest rate risk for an investor?
a)
A. Floaters
b)
B. Coupon bonds
c)
C. Discount bonds
28.
Q. Enterprise value is most often determined as market capitalization of common equity and preferred stock minus the value of cash equivalents plus the:
a)
A. book value of debt.
b)
B. market value of debt.
c)
C. market value of long-term debt.
29.
Q. The law of one price is best described as:
a)
A. the true fundamental value of an asset.
b)
B. earning a risk-free profit without committing any capital.
c)
C. two assets that will produce the same cash flows in the future must sell for equivalent prices.
30.
An analyst has prepared a table of the average trailing twelve-month price-to-earning (P/E), price-to-cash flow (P/CF), and price-to-sales (P/S) for the Tanaka Corporation for the years 2014 to 2017.
Year P/E P/CF P/S
2014 4.9 5.4 1.2
2015 6.1 8.6 1.5
2016 8.3 7.3 1.9
2017 9.2 7.9 2.3
Q. As of the date of the valuation in 2018, the trailing twelve-month P/E, P/CF, and P/S are, respectively, 9.2, 8.0, and 2.5. Based on the information provided, the analyst may reasonably conclude that Tanaka shares are most likely:
a)
A. overvalued.
b)
B. undervalued.
c)
C. fairly valued.
31.
Q. An analyst who bases the calculation of intrinsic value on dividend-paying capacity rather than expected dividends will most likely use the:
a)
A. dividend discount model.
b)
B. free cash flow to equity model.
c)
C. cash flow from operations model.
32.
Q. The creation of bond classes with a waterfall structure for sharing losses is referred to as:
a)
A. time tranching.
b)
B. credit tranching.
c)
C. overcollateralization.
33.
Q. An analyst wanting to assess the downside risk of an alternative investment is least likely to use the investment’s: (2020 Q34)
a)
A. Sortino ratio.
b)
B. value at risk (VaR).
c)
C. standard deviation of returns.
34.
Q. With respect to efficient markets, a company whose share price changes gradually after the public release of its annual report most likely indicates that the market where the company trades is:
a)
A. semi-strong-form efficient.
b)
B. subject to behavioral biases.
c)
C. receiving additional information about the company.
35.
Q. An investor in a country with an original issue discount tax provision purchases a 20-year zero-coupon bond at a deep discount to par value. The investor plans to hold the bond until the maturity date. The investor will most likely report:
a)
A. a capital gain at maturity.
b)
B. a tax deduction in the year the bond is purchased.
c)
C. taxable income from the bond every year until maturity.
36.
Q. A characteristic of farmland strongly distinguishing it from timberland is its:
a)
A. commodity price-driven returns.
b)
B. inherent rigidity of production for output.
c)
C. value as an offset to other human activities.
37.
The return on a commodity index is likely to be different from returns on the underlying commodities because:
a)
A. data are subject to survivorship bias.
b)
B. indices are constructed using futures contracts.
c)
C. assets are not marked to market.
38.
Q. Which of the following circumstances will most likely affect the value of an American call option relative to a European call option?
a)
A. Dividends are declared
b)
B. Expiration date occurs
c)
C. The risk-free rate changes
39.
Q. Which of the following is a source of wholesale funds for banks?
a)
A. Demand deposits
b)
B. Money market accounts
c)
C. Negotiable certificates of deposit
40.
Q. Assume a call option’s strike price is initially equal to the price of its underlying asset. Based on the binomial model, if the volatility of the underlying decreases, the lower of the two potential payoff values of the hedge portfolio:
a)
A. decreases.
b)
B. remains the same.
c)
C. increases.
41.
Which of the following statements regarding the interest rate risk of a fixed-rate bond is correct?
a)
A. Coupon reinvestment risk and market price risk are positively related.
b)
B. All investors in a particular bond are exposed to the same interest rate risk.
c)
C. Market price risk matters more than coupon reinvestment risk when the investor’s time horizon is short relative to the bond’s time to maturity.
42.
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
43.
None
a)
A. $13.43.
b)
B. $22.35.
c)
C. $22.90.
44.
None
a)
A. $0 .
b)
B. $5 .
c)
C. –$5 .
45.
In futures markets, contract performance is most likely guaranteed by:
a)
A. the futures exchanges.
b)
B. regulatory agencies.
c)
C. clearing houses.
46.
An investor borrows the maximum amount allowed by the initial margin requirement of 40% to purchase 100 shares of a stock selling at $60 per share. If the investor sells the stock when its price increases to $70 per share, her return before commissions and interest will be closest to:
a)
A. 41.7%.
b)
B. 27.8%.
c)
C. 16.7%.
47.
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.
48.
None
a)
A. lower than the industry.
b)
B. higher than the industry.
c)
C. the same as the industry.
49.
Q. In comparison to other alternative investment approaches, co-investing is most likely:
a)
A. more expensive.
b)
B. subject to adverse selection bias.
c)
C. the most flexible approach for the investor.
50.
Q. Which of the following is not a limitation of the cyclical/non-cyclical descriptive approach to classifying companies?
a)
A. A cyclical company may have a growth component in it.
b)
B. Business-cycle sensitivity is a discrete phenomenon rather than a continuous spectrum.
c)
C. A global company can experience economic expansion in one part of the world while experiencing recession in another part.
51.
Q. If over a long period of time a country’s average level of educational accomplishment increases, this development would most likely lead to the country’s amount of income spent on consumer discretionary goods to:
a)
A. decrease.
b)
B. increase.
c)
C. not change.
52.
None
a)
A. $38.70.
b)
B. $31.57.
c)
C. $28.57.
53.
Q. An equity analyst has been asked to estimate the intrinsic value of the common stock of Omega Corporation, a leading manufacturer of automobile seats. Omega is in a mature industry, and both its earnings and dividends are expected to grow at a rate of 3 percent annually. Which of the following is most likely to be the best model for determining the intrinsic value of an Omega share?
a)
A. Gordon growth model.
b)
B. Free cash flow to equity model.
c)
C. Multistage dividend discount model.
54.
Which of the following is most accurate concerning key characteristics of different types of preference shares?
a)
A. The price of convertible preference shares tends to be more volatile than their underlying common shares because they do not allow investors to share in profits of the company.
b)
B. Preference shareholders rank above subordinated bondholders with respect to claims on the company’s net assets upon liquidation.
c)
C. Preference shares have characteristics of both debt and equity securities.
55.
None
a)
A. $5 .
b)
B. $1 .
c)
C. –$1 .
56.
In a rising interest rate environment, the difference in effective duration between a callable bond and a non-callable bond would most likely:
a)
A. increase.
b)
B. decrease.
c)
C. remain unchanged.
57.
None
a)
A. 21 .
b)
B. 10 .
c)
C. 12 .
58.
Which of the following instruments is most likely to offer investors some protection against increases in the market interest rate?
a)
A. Inverse floating-rate notes
b)
B. Fixed-rate bonds
c)
C. Floating-rate notes
59.
Q. Relative to an otherwise similar option-free bond, a:
a)
A. putable bond will trade at a higher price.
b)
B. callable bond will trade at a higher price.
c)
C. convertible bond will trade at a lower price.
60.
Q. In an efficient market, the change in a company’s share price is most likely the result of:
a)
A. insiders’ private information.
b)
B. the previous day’s change in stock price.
c)
C. new information coming into the market.
61.
Given two otherwise identical bonds, when interest rates rise, the price of Bond A declines more than the price of Bond B. Compared with Bond B, Bond A most likely:
a)
A. has a shorter maturity.
b)
B. is callable.
c)
C. has a lower coupon.
62.
Q. At expiration, American call options are worth:
a)
A. less than European call options.
b)
B. the same as European call options.
c)
C. more than European call options.
63.
Q. Morgan Insurance Ltd. issued a fixed-rate perpetual preferred stock three years ago and placed it privately with institutional investors. The stock was issued at $25 per share with a $1.75 dividend. If the company were to issue preferred stock today, the yield would be 6.5%. The stock’s current value is:
a)
A. $25.00.
b)
B. $26.92.
c)
C. $37.31.
64.
Q. Which of the following statements regarding corporate shareholders is most accurate?
a)
A. Cross-shareholdings help promote corporate mergers.
b)
B. Dual-class structures are used to align economic ownership with control.
c)
C. Affiliated shareholders can protect a company against hostile takeover bids.
65.
None
a)
A. Security 1.
b)
B. Security 2.
c)
C. Security 3.
66.
Q. In his estimation of the project’s cost of capital, Sandell would like to use the asset beta of Kruspa as a base in his calculations. The estimated asset beta of Kruspa prior to the Trutan project is closest to:
a)
A. 1.053.
b)
B. 1.110.
c)
C. 1.327.
67.
The primary motivation of activist shareholders is to promote:
a)
A. improved shareholder value.
b)
B. environmentally sustainable business practices.
c)
C. consideration of human rights in employee relations.
68.
Which of the following best allows a board of directors to act in the interest of the company and shareholders?
a)
A. Independent board members are selected from outside the industry.
b)
B. Internal directors provide monitoring of the firm’s management.
c)
C. The board has the authority to select and terminate senior management.
69.
Q. A benefit of risk budgeting is that it:
a)
A. considers risk tradeoffs.
b)
B. establishes a firm’s risk tolerance.
c)
C. reduces uncertainty facing the firm.
70.
A factor that most likely measures a client’s ability to bear risk is his or her:
a)
A. time horizon.
b)
B. inclination to independent thinking.
c)
C. personality type.
71.
Q. Which of the following represents a responsibility of a company’s board of directors?
a)
A. Implementation of strategy
b)
B. Enterprise risk management
c)
C. Considering the interests of shareholders only
72.
Q. Portfolio managers, who are maximizing risk-adjusted returns, will seek to invest less in securities with:
a)
A. lower values for nonsystematic variance.
b)
B. values of nonsystematic variance equal to 0.
c)
C. higher values for nonsystematic variance.
73.
When dealing with mutually exclusive projects, the most reliable decision rule is:
a)
A. time-weighted rate of return.
b)
B. IRR.
c)
C. NPV.
74.
Q. Which of the following institutional investors will most likely have the longest time horizon?
a)
A. Defined benefit plan.
b)
B. University endowment.
c)
C. Life insurance company.
75.
Q. Which of the following is an example of agency costs? In each case, management is advocating a substantial acquisition, and management compensation is comprised heavily of stock options.
a)
A. Management believes the acquisition will be positive for shareholder value but negative for the value and interests of the company’s debtholders.
b)
B. Management’s stock options are worthless at the current share price. The acquisition has a high (50%) risk of failure (with zero value) but substantial (30%) upside if it works out.
c)
C. The acquisition is positive for equityholders and does not significantly impair the position of debtholders. However, the acquisition puts the company into a new business where labor practices are harsh and the production process is environmentally damaging.
76.
Q. Bollinger Bands are constructed by plotting:
a)
A. a MACD line and a signal line.
b)
B. a moving-average line with an uptrend line above and downtrend line below.
c)
C. a moving-average line with upper and lower lines that are at a set number of standard deviations apart.
77.
Q. Catherine Ndereba is an energy analyst tasked with evaluating a crude oil exploration and production company. The company previously announced that it plans to embark on a new project to drill for oil offshore. As a result of this announcement, the stock price ran up by 10%. After conducting her analysis, Ms. Ndereba concludes that the project does indeed have a positive NPV. Which statement is true?
a)
A. The stock price should remain where it is because Ms. Ndereba’s analysis confirms that the recent run-up was justified.
b)
B. The stock price should go even higher now that an independent source has confirmed that the NPV is positive.
c)
C. The stock price could remain steady, move higher, or move lower.
78.
Q. A three-year investment requires an initial outlay of £1,000. It is expected to provide three year-end cash flows of £200 plus a net salvage value of £700 at the end of three years. Its internal rate of return is closest to:
a)
A. 10%.
b)
B. 11%.
c)
C. 20%.
79.
When constructing the optimal portfolios for investors with different risk preferences, the investor with the higher risk aversion is most likely to have a:
a)
A. lower expected return.
b)
B. steeper capital allocation line.
c)
C. flatter indifference curve.
80.
Which of the following statements is the most appropriate treatment of flotation costs for capital budgeting purposes? Flotation costs should be:
a)
A. expensed in the current period.
b)
B. incorporated into the estimated cost of capital.
c)
C. deducted as one of the project’s initial-period cash flows.
81.
Q. Dot.Com has determined that it could issue $1,000 face value bonds with an 8% coupon paid semi-annually and a five-year maturity at $900 per bond. If Dot.Com’s marginal tax rate is 38%, its after-tax cost of debt is closest to:
a)
A. 6.2%.
b)
B. 6.4%.
c)
C. 6.6%.
82.
Which of the following types of institutions is most likely to have a long investment time horizon and a higher level of risk tolerance?
a)
A. An endowment
b)
B. An insurance company
c)
C. A bank
83.
Which is most likely considered a “pull” on liquidity?
a)
A. Increased difficulty in collecting receivables
b)
B. Obsolete inventory
c)
C. Reduction in a line of credit
84.
Q. One principle of technical analysis is that a security’s price:
a)
A. tends to move in a random fashion.
b)
B. moves in patterns that tend to reoccur.
c)
C. does not reflect all known factor information relating to the security.
85.
Q. With respect to capital market theory, which of the following statements best describes the effect of the homogeneity assumption? Because all investors have the same economic expectations of future cash flows for all assets, investors will invest in:
a)
A. the same optimal risky portfolio.
b)
B. the Standard and Poor’s 500 Index.
c)
C. assets with the same amount of risk.
86.
Q. Which of the following typical topics in an investment policy statement (IPS) is most closely linked to the client’s “distinctive needs”?
a)
A. Procedures.
b)
B. Investment Guidelines.
c)
C. Statement of Duties and Responsibilities.
87.
Q. As the number of assets in an equally-weighted portfolio increases, the contribution of each individual asset’s variance to the volatility of the portfolio:
a)
A. increases.
b)
B. decreases.
c)
C. remains the same.
88.
Q. With respect to capital market theory, correctly priced individual assets can be plotted on the:
a)
A. capital market line.
b)
B. security market line.
c)
C. capital allocation line.
89.
None
a)
A. −5.0%.
b)
B. −1.3%.
c)
C. 0.0%.
90.
Q. A company increasing its credit terms for customers from 1/10, net 30, to 1/10, net 60, will most likely experience:
a)
A. an increase in cash on hand.
b)
B. a lower level of uncollectible accounts.
c)
C. an increase in the average collection period.
100 %
