Question 1

Which of the following portfolio construction methods starts with security analysis?

Accepted Answer

A)  Top-down 
B)  Bottom-up 
C)  Middle-out 
D)  Buy and hold 
E)  Asset allocation 
A)  Top-down 
B)  Bottom-up 
C)  Middle-out 
D)  Buy and hold 
E)  Asset allocation

Question 2

In 2016, ____________ was(were) the most significant financial asset(s) of U.S. commercial banks in terms of total value.

Accepted Answer

A)  loans and leases 
B)  cash 
C)  real estate 
D)  deposits 
E)  investment securities 
A)  loans and leases 
B)  cash 
C)  real estate 
D)  deposits 
E)  investment securities

Question 3

_______ are examples of financial intermediaries.

Accepted Answer

A)  Commercial banks 
B)  Insurance companies 
C)  Investment companies 
D)  Credit unions 
E)  All of the options 
A)  Commercial banks 
B)  Insurance companies 
C)  Investment companies 
D)  Credit unions 
E)  All of the options

Question 4

The value of a derivative security

Accepted Answer

A)  depends on the value of the related security. 
B)  is unable to be calculated. 
C)  is unrelated to the value of the related security. 
D)  has been enhanced due to the recent misuse and negative publicity regarding these instruments. 
E)  is worthless today. 
A)  depends on the value of the related security. 
B)  is unable to be calculated. 
C)  is unrelated to the value of the related security. 
D)  has been enhanced due to the recent misuse and negative publicity regarding these instruments. 
E)  is worthless today.

Question 5

New issues of securities are sold in the ________ market(s).

Accepted Answer

A)  primary 
B)  secondary 
C)  over-the-counter 
D)  primary and secondary 
A)  primary 
B)  secondary 
C)  over-the-counter 
D)  primary and secondary

Question 6

_______ are real assets.

Accepted Answer

A)  Land 
B)  Machines 
C)  Stocks and bonds 
D)  Knowledge 
E)  Land, machines, and knowledge 
A)  Land 
B)  Machines 
C)  Stocks and bonds 
D)  Knowledge 
E)  Land, machines, and knowledge

Question 7

Financial assets

Accepted Answer

A)  directly contribute to the country's productive capacity. 
B)  indirectly contribute to the country's productive capacity. 
C)  contribute to the country's productive capacity, both directly and indirectly. 
D)  do not contribute to the country's productive capacity, either directly or indirectly. 
E)  are of no value to anyone. 
A)  directly contribute to the country's productive capacity. 
B)  indirectly contribute to the country's productive capacity. 
C)  contribute to the country's productive capacity, both directly and indirectly. 
D)  do not contribute to the country's productive capacity, either directly or indirectly. 
E)  are of no value to anyone.

Question 8

Investors trade previously issued securities in the ________ market(s).

Accepted Answer

A)  primary 
B)  secondary 
C)  primary and secondary 
D)  derivatives 
A)  primary 
B)  secondary 
C)  primary and secondary 
D)  derivatives

Question 9

________ are, in essence, an insurance contract against the default of one or more borrowers.

Accepted Answer

A)  Credit default swaps 
B)  CMOs 
C)  ETFs 
D)  Collateralized debt obligations 
E)  All of the options 
A)  Credit default swaps 
B)  CMOs 
C)  ETFs 
D)  Collateralized debt obligations 
E)  All of the options

Question 10

The Sarbanes-Oxley Act

Accepted Answer

A)  requires corporations to have more independent directors. 
B)  requires the firm's CFO to personally vouch for the firm's accounting statements. 
C)  prohibits auditing firms from providing other services to clients. 
D)  requires corporations to have more independent directors and requires the firm's CFO to personally vouch for the firm's accounting statements. 
E)  All of the above. 
A)  requires corporations to have more independent directors. 
B)  requires the firm's CFO to personally vouch for the firm's accounting statements. 
C)  prohibits auditing firms from providing other services to clients. 
D)  requires corporations to have more independent directors and requires the firm's CFO to personally vouch for the firm's accounting statements. 
E)  All of the above.

Question 11

Which of the following are mechanisms that have evolved to mitigate potential agency problems? I) Using the firm's stock options for compensation
II. Hiring bickering family members as corporate spies
III. Boards of directors forcing out underperforming management
IV. Security analysts monitoring the firm closely
V. Takeover threats

Accepted Answer

A)  II and V 
B)  I, III, and IV 
C)  I, III, IV, and V 
D)  III, IV, and V 
E)  I, III, and V 
A)  II and V 
B)  I, III, and IV 
C)  I, III, IV, and V 
D)  III, IV, and V 
E)  I, III, and V

Question 12

Mortgage-backed securities were created when ________ began buying mortgage loans from originators and bundling them into large pools that could be traded like any other financial asset.

Accepted Answer

A)  GNMA 
B)  FNMA 
C)  FHLMC 
D)  FNMA and FHLMC 
E)  GNMA and FNMA 
A)  GNMA 
B)  FNMA 
C)  FHLMC 
D)  FNMA and FHLMC 
E)  GNMA and FNMA

Question 13

In 2016, ____________ was the most significant asset of U.S. households in terms of total value.

Accepted Answer

A)  real estate 
B)  mutual fund shares 
C)  debt securities 
D)  life insurance reserves 
E)  pension reserves 
A)  real estate 
B)  mutual fund shares 
C)  debt securities 
D)  life insurance reserves 
E)  pension reserves

Question 14

Which of the following is true about mortgage-backed securities? I) They aggregate individual home mortgages into homogeneous pools.
II) The purchaser receives monthly interest and principal payments received from payments made on the pool.
III) The banks that originated the mortgages maintain ownership of them.
IV) The banks that originated the mortgages may continue to service them.

Accepted Answer

A)  II, III, and IV 
B)  I, II, and IV 
C)  II and IV 
D)  I, III, and IV 
E)  I, II, III, and IV 
A)  II, III, and IV 
B)  I, II, and IV 
C)  II and IV 
D)  I, III, and IV 
E)  I, II, III, and IV

Question 15

A disadvantage of using stock options to compensate managers is that

Accepted Answer

A)  it encourages managers to undertake projects that will increase stock price. 
B)  it encourages managers to engage in empire building. 
C)  it can create an incentive for managers to manipulate information to prop up a stock price temporarily, giving them a chance to cash out before the price returns to a level reflective of the firm's true prospects. 
D)  All of the above. 
A)  it encourages managers to undertake projects that will increase stock price. 
B)  it encourages managers to engage in empire building. 
C)  it can create an incentive for managers to manipulate information to prop up a stock price temporarily, giving them a chance to cash out before the price returns to a level reflective of the firm's true prospects. 
D)  All of the above.

Exam 1: The Investment Environment

Which of the following portfolio construction methods starts with security analysis?

In 2016, ____________ was(were) the most significant financial asset(s) of U.S. commercial banks in terms of total value.

_______ are examples of financial intermediaries.

The value of a derivative security

New issues of securities are sold in the ________ market(s).

_______ are real assets.

Financial assets

Investors trade previously issued securities in the ________ market(s).

________ are, in essence, an insurance contract against the default of one or more borrowers.

The Sarbanes-Oxley Act

Mortgage-backed securities were created when ________ began buying mortgage loans from originators and bundling them into large pools that could be traded like any other financial asset.

In 2016, ____________ was the most significant asset of U.S. households in terms of total value.

A disadvantage of using stock options to compensate managers is that

Asset Classes and Financial Instruments

How Securities Are Traded

Mutual Funds and Other Investment Companies

Risk, Return, and the Historical Record

Capital Allocation to Risky Assets

Optimal Risky Portfolios

Index Models

The Capital Asset Pricing Model

Arbitrage Pricing Theory and Multifactor Models of Risk and Return

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Empirical Evidence on Security Returns

Bond Prices and Yields

The Term Structure of Interest Rates

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation Models

Financial Statement Analysis

Options Markets: Introduction

Option Valuation

Futures Markets

Futures, Swaps, and Risk Management

Portfolio Performance Evaluation

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the Cfa Institute

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