CFA EQUITY INVESTMENTS practice questions

Which of the following situations will most likely indicate a reduction of market efficiency? An increase in rules and regulations that promote financial disclosure An increase in arbitrage opportunities An increase in the number of market participants

An increase in arbitrage opportunities The opportunities show that there is ineffciency in the market

Formula needed for price margin

Equity/Share over Price/Share

Tony Harris is planning to start trading in commodities. He has heard about the use of futures contracts on commodities and is learning more about them. Which of the following is Harris least likely to find associated with a futures contract? Existence of counterparty risk. Standardized contractual terms. Payment of an initial margin to enter into a contract.

Existence of counterparty risk.

James Beach is young and has substantial wealth. A significant proportion of his stock portfolio consists of emerging market stocks that offer relatively high expected returns at the cost of relatively high risk. Beach believes that investment in emerging market stocks is appropriate for him given his ability and willingness to take risk. Which of the following labels most appropriately describes Beach? Hedger. Investor. Information-motivated trader.

Investor.

Which of the following statements concerning a security market index is most accurate? A) Estimated market prices of constituent securities are not used to calculate the index value. B) The divisor will be adjusted to prevent changes not related to prices of constituent securities. C) At inception, the total return version of an index will be greater than the price version of an index.

The divisor will be adjusted to prevent changes not related to prices of constituent securities.

Which of the following statements about exchange-traded funds is most correct? Exchange-traded funds are not backed by any assets. The investment companies that create exchange-traded funds are financial intermediaries. The transaction costs of trading shares of exchange-traded funds are substantially greater than the combined costs of trading the underlying assets of the fund.

The investment companies that create exchange-traded funds are financial intermediaries.

Which of the following is not a function of the financial system? To regulate arbitrageurs' profits (excess returns). To help the economy achieve allocational efficiency. To facilitate borrowing by businesses to fund current operations.

To regulate arbitrageurs' profits (excess returns).

A security market index that reports returns based on the reinvestment of income and the change in price of its constituent securities is best described as which type of index? Total return Float-adjusted Price return

Total return

If markets are only weak-form efficient, which of the following investment approaches is least likely to consistently earn abnormal profits? Exploiting of non-public information Buying and selling based on fundamental analysis Trading based on patterns of prices and volume

Trading based on patterns of prices and volume

Consider a mutual fund that invests primarily in fixed-income securities that have been determined to be appropriate given the fund's investment goal. Which of the following is least likely to be a part of this fund? Warrants. Commercial paper. Repurchase agreements.

Warrants.

A friend has asked you to explain the differences between open-end and closed-end funds. Which of the following will you most likely include in your explanation? A) Closed-end funds are unavailable to new investors. B) When investors sell the shares of an open-end fund, they can receive a discount or a premium to the fund's net asset value. C) When selling shares, investors in an open-end fund sell the shares back to the fund whereas investors in a closed-end fund sell the shares to others in the secondary market.

When selling shares, investors in an open-end fund sell the shares back to the fund whereas investors in a closed-end fund sell the shares to others in the secondary market.

Which of the following decisions most likely occurs as part of the index management phase of constructing and managing an index? How to identify which securities should be selected from the target market When to rebalance Which weighting method to use

When to rebalance

The Standard & Poor's Depositary Receipts (SPDRs) is an exchange-traded fund in the United States that is designed to track the S&P 500 stock market index. The latest price of a share of SPDRs is $290. A trader has just bought call options on shares of SPDRs for a premium of $3 per share. The call options expire in six months and have an exercise price of $305 per share. On the expiration date, the trader will exercise the call options (ignore any transaction costs) if and only if the shares of SPDRs are trading: below $305 per share. above $305 per share. above $308 per share.

above $305 per share.

An investor primarily invests in stocks of publicly traded companies. The investor wants to increase the diversification of his portfolio. A friend has recommended investing in real estate properties. The purchase of real estate would best be characterized as a transaction in the: derivative investment market. traditional investment market. alternative investment market.

alternative investment market.

Jason Schmidt works for a hedge fund and he specializes in finding profit opportunities that are the result of inefficiencies in the market for convertible bonds—bonds that can be converted into a predetermined amount of a company's common stock. Schmidt tries to find convertibles that are priced inefficiently relative to the underlying stock. The trading strategy involves the simultaneous purchase of the convertible bond and the short sale of the underlying common stock. The above process could best be described as: hedging. arbitrage. securitization.

arbitrage.

Forward contracts are most likely to be attractive hedging vehicles to investors who: do not want to make an upfront outlay of cash. want to reserve the right to close out their position early. are not in a position to investigate the creditworthiness of their counterparties.

do not want to make an upfront outlay of cash.

When parties exchange fixed cash payments for payments that depend on the returns to a stock or a stock index, they are purchasing a(n): equity swap. index fund. stock option.

equity swap.

A book publisher requires substantial quantities of paper. The publisher and a paper producer have entered into an agreement for the publisher to buy and the producer to supply a given quantity of paper four months later at a price agreed upon today. This agreement is a: futures contract. forward contract. commodity swap.

forward contract.

The value effect market-pricing anomaly most likely occurs when stocks that have below-average price-to-earnings and market-to-book ratios, as well as above-average dividend yields, consistently outperform: large-cap stocks. growth stocks. stocks that have had negative earnings surprises.

growth stocks.

Lisa Smith owns a manufacturing company in the United States. Her company has sold goods to a customer in Brazil and will be paid in Brazilian real (BRL) in three months. Smith is concerned about the possibility of the BRL depreciating more than expected against the US dollar (USD). Therefore, she is planning to sell three-month futures contracts on the BRL. The seller of such contracts generally gains when the BRL depreciates against the USD. If Smith were to sell these future contracts, she would most appropriately be described as a(n): hedger. investor. information-motivated trader.

hedger.

Akihiko Takabe has designed a sophisticated forecasting model, which predicts the movements in the overall stock market, in the hope of earning a return in excess of a fair return for the risk involved. He uses the predictions of the model to decide whether to buy, hold, or sell the shares of an index fund that aims to replicate the movements of the stock market. Takabe would best be characterized as a(n): hedger. investor. information-motivated trader.

information-motivated trader.

A portfolio manager analyzes a market and discovers that it is not possible to achieve consistent and superior risk-adjusted returns, net of all expenses. This market is most likely characterized by: persistent anomalies. informational efficiency. restrictions on short selling.

informational efficiency.

The size effect market-pricing anomaly most likely occurs when stocks that have below-average price-to-earnings and market-to-book ratios, as well as above-average dividend yields, consistently outperform: large-cap stocks. growth stocks. stocks that have had negative earnings surprises.

large-cap stocks.

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: long. short. neutral.

long.

According to behavioral finance, observed overreaction in securities markets most likely occurs because of: disposition effect. loss aversion. gambler's fallacy.

loss aversion.

For portfolio managers of active funds, market indexes are least useful as: model portfolios. proxies to measure risk-adjusted performance. benchmarks.

model portfolios.

Compared with its market-value-weighted counterpart, a fundamental-weighted index is least likely to have a: momentum effect. contrarian effect. value tilt.

momentum effect.

A hedge fund holds its excess cash in 90-day commercial paper and negotiable certificates of deposit. The cash management policy of the hedge fund is best described as using: capital market instruments. money market instruments. intermediate-term debt instruments.

money market instruments.

If the number of financial analysts who follow or analyze a company increases substantially, then the market for this company's shares will most likely become: more attractive for active investors. overvalued. more efficient.

more efficient.

In comparison to the makeup of fixed-income indexes, the constituent securities of equity indexes are best described as: harder to price. drawn from a larger universe. more liquid.

more liquid.

An oil and gas exploration and production company announces that it is offering 30 million shares to the public at $45.50 each. This transaction is most likely a sale in the: futures market. primary market. secondary market.

primary market.

Which of the following statements concerning financial regulatory bodies is least accurate? Financial regulatory bodies: act to level the playing field for market participants. define minimum standards of competence for agents. require that regulated firms maintain optimum levels of capital.

require that regulated firms maintain optimum levels of capital.

The Standard & Poor's Depositary Receipts (SPDRs) is an investment that tracks the S&P 500 stock market index. Purchases and sales of SPDRs during an average trading day are best described as: primary market transactions in a pooled investment. secondary market transactions in a pooled investment. secondary market transactions in an actively managed investment.

secondary market transactions in a pooled investment.

Which of the following statements concerning the objectives of market regulation is least accurate? Regulators: set standards to ensure that all agents acting in the market are skilled. promote fair and orderly markets. ensure that systems are in place to prevent fraud.

set standards to ensure that all agents acting in the market are skilled.

Which of the following statements about the forms of market efficiency is least accurate? If the form of market efficiency is: weak, then investment strategies based on fundamental analysis could achieve abnormal returns. semi-strong, then security prices fully reflect all past market data. strong, then prices reflect only private information.

strong, then prices reflect only private information.

An index provider launches a new index that will include value stocks in a specific country. This index will most likely be a: large-capitalization index. style index. fundamentally weighted index.

style index.

You can know what price an order will be fullfilled by...

taking the bid price and multiplying it by the market bid-ask spread

The behavioral bias in which investors tend to avoid realizing losses but rather seek to realize gains is best described as: mental accounting. the gambler's fallacy. the disposition effect.

the disposition effect.

Arbitrage activity will most likely be higher in securities markets: with no restrictions on short selling. that are efficient. with high information acquisition costs.

with no restrictions on short selling.

Which of the following most accurately describes the basis for construction of nearly all bond market indexes? Dealer prices Model prices Market prices

Dealer prices

Given the minimum margin, how do you find maximum leverage ratio

100% divided by the minimum margin

Which of the following is most likely one of the main functions of the financial system? Determining an equilibrium interest rate Ensuring that markets are informationally efficient Ensuring that all investment projects receive sufficient funding

Determining an equilibrium interest rate

A German company that exports machinery is expecting to receive $10 million in three months. The firm converts all its foreign currency receipts into euros. The chief financial officer of the company wishes to lock in a minimum fixed rate for converting the $10 million to euro but also wants to keep the flexibility to use the future spot rate if it is favorable. What hedging transaction is most likely to achieve this objective? Selling dollars forward. Buying put options on the dollar. Selling futures contracts on dollars.

Buying put options on the dollar.

Which of the following statements is least accurate with respect to fixed-income indexes? Many of the underlying securities in the index tend to be illiquid. The indexes are susceptible to turnover of the underlying securities. Compared with equity indexes, it is easier and less expensive to replicate fixed-income indexes.

Compared with equity indexes, it is easier and less expensive to replicate fixed-income indexes.

Which of the following is most likely associated with secondary capital markets? Continuous trading Lead underwriters Book building

Continuous trading

A university endowment fund is mandated to hold some of its value in alternative investments. Which of the following would most likely be included in the fund's alternative investments portfolio? Real estate securities Exchange-traded funds Convertible preferred shares

Real estate securities

Given a securities EPS, growth rate, price to earnings multiple and that it is undervalued by $4, how do you determine it's intrinsic value?

Multiply EPS by last year's earnings, then add the undervalued amount

The usefulness of a forward contract is limited by some problems. Which of the following is most likely one of those problems? A) Once you have entered into a forward contract, it is difficult to exit from the contract. B) Entering into a forward contract requires the long party to deposit an initial amount with the short party. C) If the price of the underlying asset moves adversely from the perspective of the long party, periodic payments must be made to the short party.

Once you have entered into a forward contract, it is difficult to exit from the contract.

Caroline Rogers believes the price of Gamma Corp. stock will go down in the near future. She has decided to sell short 200 shares of Gamma Corp. at the current market price of €47. The initial margin requirement is 40 percent. Which of the following is an appropriate statement regarding the margin requirement that Rogers is subject to on this short sale? She will need to contribute €3,760 as margin. She will need to contribute €5,640 as margin. She will only need to leave the proceeds from the short sale as deposit and does not need to contribute any additional funds.

She will need to contribute €3,760 as margin.

An investor writes a put option on FTSE 100 Index futures. Which of the following best describes the investor's position with respect to the put contract and her exposure to the underlying index future, respectively? Long, short Short, long Short, short

Short, long The investor has a long exposure to the risk of the underlying index future because she benefits when its quoted price increases