Investments: Practice Exam I

Question 1

Stock A’s market cap is $167.71 million and the company has 3.1 million shares outstanding. What is Stock A’sprice?

A) $54.1

B) $58.6

C) $546.1

D) $38.5

Question 2

You observe that a stock’s price goes up by 45% in a week and try to interpret that using the present value relation. That is, prices are discounted values of expected future cash flows, like in the Gordon growth formula. Which of the following are potential drivers of this high return?

I.         Investors revised their cash flow expectations for the company upward upon a positive earnings surprise.

II.        Investors discount future cash flows from the company at a lower rate as the company has become riskier.

III.       The stock has become more valuable due to a decrease in risk.

A) Only I

B) Only III

C) I and III

D) II and III

Question 3

You are an entrepreneur who is deciding between offering a defined contribution (DC) or a defined benefit (DB) pension plan to your employees. Which of the following is a correct consideration for your decision?

A) A DC plan is riskier for your company due to fixed liabilities in the future.

B) With a DB plan, your company would take more investment risk while the employees take less risk.

C)  If you decide to offer a DB plan, your pension fund does not need to make portfolio choice decisions.

D) Investors are guaranteed to have a higher retirement income if you choose a DB plan.

Question 4

Suppose that new petroleum reserves are discovered in a country and oil extraction is expected to generate a substantial revenue stream for the government. The government wants to leave some of the accumulated wealth to future generations in the form of a diversified portfolio that is not strongly affected by oil price fluctuations.

Which one of the following strategies for using oil revenues would help achieve that goal?

A) Building a sovereign wealth fund that invests in international equity and bonds

B) Investing the revenues in equity shares of domestic oil companies

C) Relocating resources from other industries to the oil industry

D) Investing oil revenues into the domestic infrastructure

Question 5

Suppose that you are comparing two stocks: Stock A ranks high in terms of price-earnings ratio while Stock B has a much lower price-earnings ratio. Which of the following characterizations of Stocks A and B is correct on average?

A) Stock A is a value stock and Stock B is a growth stock.

B) Stock A is likely to have a higher dividend yield compared to Stock B.

C) Stock A’s price is driven by cash flow expectations in the longer run compared to Stock B.

D) Stock A and B’s prices have likely had a similar path in the recovery period from the Covid-19 crisis.

Question 6

The current order book (CLOB) is as follows:

Suppose you place a market order to buy 1000 shares. What is the average price you pay per share?

A) $84.0

B) $85.0

C) $85.6

D) $86.6

Question 7

The current order book (CLOB) is as follows:

Suppose you place a limit order to buy 100 shares at $82.2. What are the new bid and ask prices?

A) $82.2 and $84

B) $82 and $84

C) $81 and $84

D) $82.2 and $86

Question 8

You have deposited $250,000 into a new margin account. You buy 200 shares ofTSLA, which currently has a share price of $2,100. You are required to maintain a 25 percent maintenance margin. If TSLA’s share price drops to $1,000, how many shares (to the nearest integer) will you have to liquidate to be in compliance with your margin agreement assuming that you cannot deposit any additional funds? (Assume zero interest on the margin account.)

A) 60

B) 70

C) 80

D) 90

Question 9

You deposit $13,750 of your own funds into a margin account with the intention of buying shares of XYZ which is currently selling for $275 per share. How many shares can you purchase given an initial margin requirement of 50 percent?

A) 50

B) 20

C) 40

D) 100

Question 10

The best bid and best ask prices for the ARKK ETF are $82.00 and $82.50, respectively. 1000 shares are available at the bid price and 300 shares are available at the ask price. You decide to submit a market order to sell 450 shares. Just before you get your order in, another trader submits a limit order to buy 350 shares at a price of $82.45 or better.

What is the total price that you end up being paid (not including any brokerage commission) for your 450 shares?

A) $37,102.5

B) $37,057.5

C) $36,900.0

D) $34,567.5

Question 11

Which of the following statements is correct?

A)  Exchanges  provide   a  decentralized  market   structure  where  prices   are  determined  via bargaining.

B) The central limit order book lists all limit orders from best to worst from the perspective of investors that place market orders.

C) Most corporate bonds trade in centralized markets while stocks typically trade in decentralized markets.

D) The same security is more likely to trade at different prices at the same time in a centralized market than a decentralized market.

Question 12

Suppose you have $125,000 in a margin account with a 50% initial margin. You decide to use your entire buying power to purchase the Apple stock. The broker requires a maintenance margin of 40%. Now suppose that the Apple stock falls by 23%. What is the size of the margin call you will receive?

A) $14,250

B) $16,100

C) $18,400

D) $9,500

Question 13

You decide to purchase 700 shares of the ARKK ETF using 50% margin. The current price of the ARKK ETF is $310 per share. Assume that all interest rates are zero. If the price of the ARKK ETF falls to $280, what is the rate of return on your investment (assuming no distributions)?

A) -19.36%

B) -9.68%

C) 19.41%

D) 38.82%

Question 14

Consider a mutual fund that that has 15 shares outstanding and you are trying to calculate the NAV of the fund. The fund holds $3,400 in cash, 17 shares of Apple (AAPL) and 45 shares of JPMorgan Chase (JPM). AAPL is current selling for $121 per share, and JPM is selling for $98 per share. What is the NAV of the whole fund?

A) $9,867

B) $10,720

C) $6,467

D) $4,789

Question 15

Which of the following statements about investment funds is correct?

A) If the underlying assets of a mutual funds are illiquid as is the case for corporate bonds, the fund may face a high redemption volume by investors that exploit the difference between NAV and the underlying asset value.

B) Passive funds charge higher fees than active funds as compensation for portfolio research.

C) A hedge fund manager who observes the NAV of a fund being higher than the fair value of the fund’s portfolio would buy more fund shares.

D) The choice between two funds that have expense ratios of 0.4% and 2% typically only depends on the risk and return profile, and not on the difference in fees.

Question 16

Fund X’s total annual revenue originating from fees is $2.2 million and the fund’s assets under management (AUM) is $400 million. What is Fund X’s expense ratio?

A) 0.45%

B) 0.55%

C) 0.75%

D) 5.50%

Question 17

Which of the following statements is correct regarding ETFs and mutual funds?

A) ETF prices are determined in a centralized market throughout the trading day.

B) Mutual funds are more transparent about their portfolio holdings compared to ETFs.

C) An investor considers one active and one passive fund for his $1,000 investment, for which Fund A charges a $8 annual fee while Fund B charges  only $1.3. Fund B is more likely to be the active fund.

D) Investment funds lost their popularity among equity investors over the last seven decades.

Question 18

Suppose that Stock A has 3 million shares outstanding and the share price appreciates from $40 to $137. In the meantime, the stock pays a dividend of $1.5 per share. What is the total amount of profit that the investors make from holding the stock?

A) $296 million

B) $291 million

C) $551 million

D) $430 million

Question 19

Suppose that Stock A’s share price is $199 at the end of January and  $234 at the end of the following February. At the end of February, the stock pays a dividend of $12. What is Stock A’s monthly rate of return?

A) 23.6%

B) 17.6%

C) 6.0%

D) 12.1%

Question 20

An investment fund invests in three stocks: Stocks A, B and C. The fund’s allocation to A is $270 million, allocation to B is $230 million, and allocation to C is $170 million. Suppose the monthly return was     -20% for A, -37% for B, and 4% for C. What are the equally weighted and value- weighted monthly returns of the fund portfolio, respectively?

A) -15.0% and -9.4%

B) 18.3% and 14.2%

C) -17.7% and -19.7%

D) 18.3% and -9.4%

Question 21

Suppose that Stock A’s share price is $160 at the end of December and $220 at the end of the following January. At the end of January, the stock pays a dividend of $10. What is Stock A’s monthly capital appreciation rate?

A) 41.2%

B) 37.8%

C) 14.6%

D) 5.1%

Question 22

Suppose that Stock A’s share price is $160 at the end of December and $220 at the end of the following January. At the end of January, the stock pays a dividend of $10. What is Stock A’s monthly dividend yield?

A) 44.4%

B) 38.9%

C) 6.3%

D) 12.1%

Question 23

Suppose that the annual risk premium of a stock is 14% and the standard deviation of the stock’s annual returns is 31%. What is the stock’s Sharpe ratio?

A) 0.35

B) 0.45

C) 0.55

D) 0.65

Question 24

Which of the following ranking of asset classes from the least risky to the riskiest is correct where risk is measured by return volatility?

A) World stocks, Treasury bills, U.S. houses

B) Treasury bills, U.S. large stocks, U.S. small stocks

C) U.S. large stocks, U.S. long-term Treasury bonds, U.S. large stocks

D) Treasury bills, U.S. large stocks, U.S. long-term Treasury bonds

Question 25

You are assessing the Sharpe ratio of a fund and find that it is 0.64 based on historical data. The riskless rate is 2% and the fund’s annual return volatility is 18%. What is the fund’saverage annual return?

A) 7.5%

B) 9.5%

C) 11.5%

D) 13.5%