Financial Analysis Midterm Questions

Financial Analysis Midterm Questions

Assignment: Financial Analysis Midterm Questions

Sample Midterm Questions

1. Which of the following is true?

A. Asset allocation refers to choosing which securities to hold based on their valuation.

B. Top-down portfolio construction method starts with security analysis

C. Financial intermediaries exist only to help companies raise capital by selling securities.

D. Of all the capital market securities, Treasury bonds have the longest time to maturity.

E. The value of a derivative security depends on the value of the related security.


2. Suppose Kim and Susan care only about the mean and standard deviation of their portfolio return. Kim is less risk averse than Susan. Suppose that Susan holds the tangency portfolio. Which portfolio might Kim hold?

A. The risk-free asset

B. The tangency portfolio

C. Long the tangency portfolio and short the risk-free asset

D. Long the tangency portfolio and long the risk-free asset

Answer: C

3. You purchased 100 shares of common stock on margin at $45 per share. Assume the initial margin is 50%, and the stock pays no dividend. What would the maintenance margin be if a margin call is made at a stock price of $30? Ignore interest on margin.

A. 0.33

B. 0.55

C. 0.43

D. 0.23

E. 0.25

Answer E. 100 shares × $45/share × 0.5 = $4,500 × 0.5 = $2,250 (loan amount);

When the stock is at $30/share, margin = [100($30) – $2,250]/100($30) = 0.25.

4. One year ago you purchased a zero coupon bond and paid $725 for it. It now has 5 years remaining to maturity, and its yield to maturity is 8%. Its face value is $1,000. Find the change in dollar value of the bond in this period. Use semi-annual compounding.

A. $702.79

B. $–49.44

C. $680.58

D. $–44.42

E. $744.33

Answer B. 1000/((1+0.04)^10) – 725 = -49.435

5. Assume the variance of IBM is 0.16 and the variance of Microsoft is 0.25. If the variance of an equally weighted portfolio of these stocks is 0.0525, then the covariance between these stocks is:

A 0.10

B 0.20

C 0.25

D -0.10

Answer D A picture containing text Description automatically generated

0.0525 = (0.5^2)*0.16+(0.5^2)*0.25+2*0.5*0.5*Cov

Cov = -0.1

6. Suppose the expected return on stock ABC is 14%. Suppose Rf = 3%, E(Rm) = 10% and ABC’s β = 1.45. Then the CAPM stipulated α on ABC is

A. 3%

B. 7%

C. -0.5%

D. 3.85%

E. 0.85%

Answer E. α = [E(ri) – rf] – β [E(rm) – rf] = (14% -3%) – 1.45*(10% – 3%) = 0.85%.

7. According to CAPM, if the expected return on asset 1, E(R1), is greater than the expected return on asset 2, E(R2), then:

A. observed returns R1 must always be greater than R2

B. standard deviations σ1 must be greater than σ2

C. β1 must be greater than β2

D. all of the above must be true

Answer C

8. If prices reflect all publicly available information

A. the market is semi-strong efficient

B. stock price changes are unpredictable by public information

C. stock price changes are unpredictable by all information, including private information

D. one can profit from doing advanced security analysis based on public information

E. both A and B are true

F. All of A, B, C, and D are true

Answer E

9. The Fama-French three-factor model does not use ___ as one of the explanatory factors.

A. growth rate of industrial production

B. risk premium of market portfolio

C. Excess return of small stocks over large stocks

D. Excess return of high book-to-market stocks over low book-to-market stocks

E. None of the above.

Answer A

10. The risk-free rate is 5%. The expected market rate of return is 11%. If you expect stock X with a beta of 2.1 to offer a rate of return of 15%, you should

A. buy stock X because it is overpriced.

B. sell short stock X because it is overpriced.

C. sell short stock X because it is underpriced.

D. buy stock X because it is underpriced.

E. None of the options, as the stock is fairly priced.

Answer B. 15% < 5% + 2.1(11% – 5%) = 17.6%; therefore, stock is overpriced and should be shorted.

11. The intercept in one of the first-pass regressions in the Fama-MacBeth methodology to test CAPM is NOT

A. an estimate of α using CAPM as benchmark.

B. the intercept of the Security Characteristics Line (SCL)

C. the difference between the mean return and the CAPM expected return

D. the risk-free rate

E. all of the above.


Answer D


12. Which of the following statement is not true?

A. The CML is the best attainable capital allocation line.

B. The expected rate of return on a security increases in direct proportion to a decrease in the risk-free rate.

C. An underpriced security will plot above the security market line.

D. The (expected return)-beta relationship of the CAPM is graphically represented by the security-market line.


Answer B

Financial Analysis Midterm Questions

13. Suppose that the optimal risky portfolio P has 15% expected return and 22% standard deviation. The risk-free rate is 7%, but non-government investors can only borrow at 9%. If you have a margin account with your broker and you want to buy on margin to put your portfolio weight in risky asset to be 120%, what is the Sharpe ratio of your overall portfolio?

A. 0.36

B. 0.27

C. 0.41

D. 0.432

E. 0.682


Answer B

(simple solution) Sharpe ratio = (15% – 9%)/22% = 0.2727

(complicated solution) expected return of your portfolio = 120%*15%+(-20%)*9% = 16.2%

Standard deviation of your portfolio = 120%*22% = 26.4%

Sharpe ratio = (16.2%-9%)/26.4% = 0.2727


14. A subordinated bond issued in the United States by Repsol and backed by Spanish utility revenues has a yield to maturity on an APR basis of 10% but makes monthly payments. What is the effective annual yield to maturity?





Answer b

15. You own a stock portfolio invested 20% in Tibco (beta 1.3), 35% in Laservision (beta 0.5), 15% in treasury bills and 30% in the Vanguard Index Fund. What is the portfolio beta?

a) 0.25

b) 0.435

c) 0.735

d) 1.8

Answer c (Financial Analysis Midterm Questions)

16. You work for a Pension Fund. You are considering moving a quarter of your $400 million US equity portfolio into the Japanese stock market. The expected return and standard deviation of returns in the US market are 10% and 14% respectively. The expected return and standard deviation of the Japanese market’s returns, measured in US dollars, are 12% and 17% respectively. The correlation coefficient of returns between the two markets is 0.6.

If you moved the money, what would the fund portfolio’s standard deviation of returns be?

a). 1.81%

b). 13.49%

c). 15.5%

d). 14.75%

e). None of the above. The answers are way off!

Answer b

17. Which of the following is consistent with a random walk?

(a) Tomorrow’s stock price level is independent of today’s stock price level

(b) Tomorrow’s returns are independent of today’s returns

(c) News does not affect stock prices

(d) All of the above

Answer b

18. ABC Corp. has some bonds outstanding, currently with 2 years remaining to maturity. The coupon rate is 10%, and the interest is paid annually. The face value of the bonds is $10,000. What is the value of one bond today if the yield to maturity (discount rate) is 12%? Use annual compounding.

A. $5,650.22

B. $3,702.69

C. $5,650.22

D. $9,661.99

E. $3,219.73


Answer D.

Annual coupon = 10000*10% = 1000

Value of the bond = PV of coupon at 1 year + PV of coupon at 2 year + PV of face value

= 1000/((1+0.12)1) +1000/((1+0.12)2) + 10000/((1+0.12)2) = 9661.99

19. Holding other factors constant, the interest-rate risk of a coupon bond is higher when the bond’s

A. term to maturity is higher.

B. coupon rate is higher.

C. yield to maturity is higher.

D. All of the options are correct.

E. None of the options are correct.

Answer A. The longer the maturity, the greater the interest-rate risk. The lower the coupon rate, the greater the interest-rate risk. The lower the yield to maturity, the greater the interest-rate risk. These concepts are reflected in the duration rules; duration is a measure of bond price sensitivity to interest rate changes (interest-rate risk).

20. Suppose you bought a 2-year 4% coupon paying bond, with face value equal to $1000, and a YTM of 4%. You hold the bond until maturity. From year 1 to year 2, you reinvest the coupon at 8% interest rate. The annualized holding period return on that investment is

A. Equal to YTM at 4%

B. Greater than the YTM of 4%

C. Smaller than the YTM of 4%

D. There is not enough information to answer this question.


Answer B. If you can reinvest at YTM, annualized holding period return = YTM. Now that you can reinvest at higher rate of 8%, annualized holding period return should be higher than YTM. Using the formula

· At time 0, you buy the bond for P0

· You have been re-invest all coupons from time 0 to t

· At time t, you sell the bond and the reinvested coupons for a total price of Pt

1000*(1+ ann. HPR)2 = 40*(1+8%) + 1040

Ann. HPR = 4.077% > 4%

Financial Analysis Midterm Questions


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