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www.modlin.org
Study Session 12
Asset Valuation
Global Markets and Instruments
P1. Selecting Investments in a Global Market
1.
American depository receipts can be described as:
A.
B.
C.
D.
options issued by a corporation that give the holder the right to
acquire a firm’s common stock from the company at a specified
price within a designated time period
options to buy the common stock of a company within a certain time
period at a specified price
an agreement which provides for the future exchange of a
depository receipt at a specified delivery date in exchange for a
specified payment at the time of delivery
certificates of ownership issued by a U.S. bank that represent
indirect ownership of a certain number of shares of a specific
foreign firm on deposit in a bank in the firm’s home country
Answer
D.
American depository receipts
American depository receipts can be described as certificates of
ownership issued by a U.S. bank that represent indirect ownership of a
certain number of shares of a specific foreign firm on deposit in a bank in
the firm’s home country
Reference
Investment Analysis and Portfolio Management, 6th edition, Frank K.
Reilly and Keith C. Brown (Dryden, 2000)
Study Session 12 2003, Selecting Investments in a Global Market, LOS
P1b
Study Session 12 Sample Questions
Asset Valuation: Global Markets and Instruments
2
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2.
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The characteristics of an investment company is/are:
A.
B.
C.
D.
the money provided by the investors is invested in stocks and bonds
rather than properties
that it sells shares in itself and uses the proceeds of this sale to
acquire bonds, stocks, or other investment instruments
that they are international company’s listed in a currency not native
to the country where the investments are made
that money provided by the investors is invested in properties rather
than stocks and bonds
Answer
B.
Characteristics of an investment company
The characteristics of an investment company is that it sells shares in
itself and uses the proceeds of this sale to acquire bonds, stocks, or other
investment instruments
Reference
Investment Analysis and Portfolio Management, 6th edition, Frank K.
Reilly and Keith C. Brown (Dryden, 2000)
Study Session 12 2003, Selecting Investments in a Global Market, LOS
P1d
3.
A real estate investment trust is different from a bond mutual fund in that:
A.
B.
C.
D.
the money provided by the investor’s is invested in stocks and
bonds rather than properties
it sells shares in itself and uses the proceeds of this sale to acquire
bonds, stocks, or other investment instruments
their returns are not contractual
the money provided by the investor’s is invested in properties rather
than stocks and bonds
Study Session 12 Sample Questions
Asset Valuation: Global Markets and Instruments
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Answer
D.
Difference between real estate investment trust and a mutual fund
A real estate investment trust is different from a bond mutual fund in that
the money provided by the investor’s is invested in properties rather than
stocks and bonds.
Reference
Investment Analysis and Portfolio Management, 6th edition, Frank K.
Reilly and Keith C. Brown (Dryden, 2000)
Study Session 12 2003, Selecting Investments in a Global Market, LOS
P1d
1A. Organization and Functioning of Securities Markets
1.
The characteristic of a regional exchange is such that:
A.
B.
C.
D.
it competes with and supplements the national exchanges
providing primary markets for the stocks of smaller companies
it competes with and supplements the national exchanges
providing secondary markets for the stocks of larger companies
it competes with and supplements the national exchanges
providing primary markets for the stocks of larger companies
it competes with and supplements the national exchanges
providing secondary markets for the stocks of smaller companies
by
by
by
by
Answer
D.
The characteristics of a regional exchange
The characteristic of a regional exchange is such that it competes with
and supplements the national exchanges by providing secondary markets
for the stocks of smaller companies.
Study Session 12 Sample Questions
Asset Valuation: Global Markets and Instruments
4
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www.modlin.org
Reference
Investment Analysis and Portfolio Management, 6th edition, Frank K.
Reilly and Keith C. Brown (Dryden, 2000)
Study Session 12 2003, Organization and Functioning of Securities
Markets, LOS 1A,d
2.
Consider the following information:
Assume an investor acquires 300 shares of a $40 stock for a total cost of
$12,000. There is a 50% initial margin requirement. If the stock price
increases to $50 a share, the equity is:
A.
B.
C.
D.
60%
70%
80%
100%
Answer
A.
Calculating equity
If the stock price increases to $50 a share, the equity is 60%
Total market value of position: 300 x 50 = 15,000
Initial margin = 50% x 12,000 = 6,000
Equity = 15,000 – 6,000 = 9,000
9,000/15,000 = 60%
Reference
Investment Analysis and Portfolio Management, 6th edition, Frank K.
Reilly and Keith C. Brown (Dryden, 2000)
Study Session 12 2003, Organization and Functioning of Securities
Markets, LOS 1A,i
Study Session 12 Sample Questions
Asset Valuation: Global Markets and Instruments
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3.
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Consider the following information:
Assume an investor acquires 300 shares of a $40 stock for a total cost of
$12,000. There is a 50% initial margin requirement. The leverage factor is
equal to:
A.
B.
C.
D.
1
½
2
50
Answer
C.
Calculating leverage factor
The leverage factor is equal to 2.
Leverage factor = 1/margin % = 1/0.5 = 2
Reference
Investment Analysis and Portfolio Management, 6th edition, Frank K.
Reilly and Keith C. Brown (Dryden, 2000)
Study Session 12 2003, Organization and Functioning of Securities
Markets, LOS 1A,i
4.
Modlin has a margin account and deposits $20,000. Assuming the margin
requirement is 25%, commissions are ignored, and The Z Corporation is
selling at $30 per share.
How many shares can Modlin purchase using the maximum allowable
margin?
A.
B.
C.
D.
2,667 shares
667 shares
1,000 shares
none of the above
Study Session 12 Sample Questions
Asset Valuation: Global Markets and Instruments
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Answer
A.
Calculating number of shares using maximum margin
Modlin can purchase 2,667 shares using the maximum allowable margin.
The margin is 25%
Modlin has $20,000 on deposit.
$20,000 represents 25%
The total investment is thus: $20,000/0.25 = $80,000
The shares are priced at $30.
Modlin can therefore purchase $80,000/$30 = 2,667 shares
Reference
Investment Analysis and Portfolio Management, 6th edition, Frank K.
Reilly and Keith C. Brown (Dryden, 2000)
Study Session 12 2003, Organization and Functioning of Securities
Markets, LOS 1A,i
B.
Security-Market Indicator Series
1.
The DJIA is a biased measure and has been criticized. Which of the
statements below regarding the bias and criticisms of a price-weighted
series is false?
I.
II.
III.
Because it is price weighted, when companies have a stock split,
their prices decline, and therefore their weight in the DJIA is
reduced
The weighting scheme causes a downward bias in the DJIA,
because the stocks that have higher growth rates will have higher
prices
Because the series is price weighted, a high-priced stock carries
more weight than a low priced stock
Study Session 12 Sample Questions
Asset Valuation: Global Markets and Instruments
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A.
B.
C.
D.
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I only
II only
III only
none of the above
Answer
D.
The DJIA
The DJIA is a biased measure and has been criticized. The bias and
criticisms levelled at a price-weighted series include:
• Because it is price weighted, when companies have a stock split, their
prices decline, and therefore their weight in the DJIA is reduced
• The weighting scheme causes a downward bias in the DJIA, because
the stocks that have higher growth rates will have higher prices
• Because the series is price weighted, a high-priced stock carries more
weight than a low priced stock
Reference
Investment Analysis and Portfolio Management, 6th edition, Frank K.
Reilly and Keith C. Brown (Dryden, 2000)
Study Session 12 2003, Security-Market Indicator Series, LOS 1B,b
2.
A composite series of stocks and bonds makes it possible to:
A.
B.
C.
D.
examine the benefits of diversifying with a combination of asset
classes such as stocks and bonds in addition to diversifying with the
asset classes of stocks or bonds
examine the correlation among the various asset classes of stocks
or bonds
examine the benefits of diversifying with the asset classes of stocks
or bonds
examine the benefits of diversifying with a combination of asset
classes such as stocks and bonds
Study Session 12 Sample Questions
Asset Valuation: Global Markets and Instruments
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Answer
A.
Composite series of stocks and bonds
A composite series of stocks and bonds makes it possible to examine the
benefits of diversifying with a combination of asset classes such as stocks
and bonds in addition to diversifying with the asset classes of stocks or
bonds.
Reference
Investment Analysis and Portfolio Management, 6th edition, Frank K.
Reilly and Keith C. Brown (Dryden, 2000)
Study Session 12 2003, Security-Market Indicator Series, LOS 1B,d
3.
When analyzing the relationship among the high-yield bond indexes and
the investment-grade indexes, it is evident that:
A.
B.
C.
D.
the relationship among the high-yield bond indexes is stronger than
among the investment-grade indexes
there is a linear relationship between the high-yield bond indexes
and the investment grade indexes
the relationship among the high-yield bond indexes is weaker than
among the investment-grade indexes
no relationship exists between the high-yield bond indexes and the
investment grade indexes
Answer
C.
Study Session 12 Sample Questions
Asset Valuation: Global Markets and Instruments
9
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The relationship among high-yield bond indexes and investment-grade
indexes
When analyzing the relationship among the high-yield bond indexes and
the investment-grade indexes, it is evident that the relationship among the
high-yield bond indexes is weaker than among the investment-grade
indexes.
Reference
Investment Analysis and Portfolio Management, 6th edition, Frank K.
Reilly and Keith C. Brown (Dryden, 2000)
Study Session 12 2003, Security-Market Indicator Series, LOS 1B,d
C.
Efficient Capital Markets
1.
According to the runs test of statistical independence, to test for
independence:
A.
B.
C.
D.
you would compare the number of runs for a given series to the
number in a table of standard deviation values for the number of
runs that should occur in a random series
you would compare the number of runs for a given series to the
number in a table of expected values for the number of runs that
should occur in a non-random series
you would compare the number of runs for a given series to the
number in a table of expected values for the number of runs that
should occur in a random series
you would compare the number of runs for a given series to the
number in a table of variance values for the number of runs that
should occur in a non-random series
Answer
C.
Study Session 12 Sample Questions
Asset Valuation: Global Markets and Instruments
10
© 2003
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The runs test of statistical independence
According to the runs test of statistical independence, to test for
independence, you would compare the number of runs for a given series
to the number in a table of expected values for the number of runs that
should occur in a random series.
Reference
Investment Analysis and Portfolio Management, 6th edition, Frank K.
Reilly and Keith C. Brown (Dryden, 2000)
Study Session 12 2003, Efficient Capital Markets, LOS 1C,c
2.
Cross-sectional returns studies contend that:
A.
B.
C.
D.
securities should not have equal risk-adjusted returns because
security prices should reflect all public information that would
influence the security’s risk
all securities should have equal risk-adjusted returns because
security prices should not reflect all public information that would
influence the security’s risk
securities should not have equal risk-adjusted returns because
security prices should not reflect all public information that would
influence the security’s risk
all securities should have equal risk-adjusted returns because
security prices should reflect all public information that would
influence the security’s risk
Answer
D.
Cross-sectional returns studies
Cross-sectional returns studies contend that all securities should have
equal risk-adjusted returns because security prices should reflect all
public information that would influence the security’s risk.
Study Session 12 Sample Questions
Asset Valuation: Global Markets and Instruments
11
© 2003
www.modlin.org
Reference
Investment Analysis and Portfolio Management, 6th edition, Frank K.
Reilly and Keith C. Brown (Dryden, 2000)
Study Session 12 2003, Efficient Capital Markets, LOS 1C,d
3.
In event studies tests, it has been shown that IPOs are:
A.
B.
C.
D.
on average overpriced by 15%, but this overpricing varies over time,
which supports the EMH
on average underpriced by 15%, but this underpricing varies over
time, which does not support the EMH
on average underpriced by 15%, but this underpricing varies over
time, which supports the EMH
on average overpriced by 15%, but this overpricing varies over time,
which does not support the EMH
Answer
C.
Event studies tests
In event studies tests, it has been shown that IPOs are on average
underpriced by 15%, but this underpricing varies over time, which
supports the EMH.
Reference
Investment Analysis and Portfolio Management, 6th edition, Frank K.
Reilly and Keith C. Brown (Dryden, 2000)
Study Session 12 2003, Efficient Capital Markets, LOS 1C,e
Study Session 12 Sample Questions
Asset Valuation: Global Markets and Instruments
12
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4.
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Fundamental analysis studies indicate that:
A.
B.
C.
D.
the bottom up approach to analysis will not yield superior results if
the analysis only looks at past and current information
the top down approach to analysis will yield superior results if the
analysis only looks at past and current information
the top down approach to analysis will not yield superior results if
the analysis looks at past, current and future information
the top down approach to analysis will not yield superior results if
the analysis only looks at past and current information
Answer
D.
Fundamental analysis studies
Fundamental analysis studies indicate that the top down approach to
analysis will not yield superior results if the analysis only looks at past and
current information.
Reference
Investment Analysis and Portfolio Management, 6th edition, Frank K.
Reilly and Keith C. Brown (Dryden, 2000)
Study Session 12 2003, Efficient Capital Markets, LOS 1C,g
5.
Index funds are:
A.
B.
C.
D.
on average underpriced by 15%, but this underpricing varies over
time, which supports the EMH
on average overderpriced by 15%, but this overpricing varies over
time, which supports the EMH
security portfolios designed to duplicate the composition and
therefore the performance of a selected market index series
funds that are indexed to the international stock exchanges
Study Session 12 Sample Questions
Asset Valuation: Global Markets and Instruments
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Answer
C.
Index funds
Index funds are security portfolios designed to duplicate the composition
and therefore the performance of a selected market index series.
Reference
Investment Analysis and Portfolio Management, 6th edition, Frank K.
Reilly and Keith C. Brown (Dryden, 2000)
Study Session 12 2003, Efficient Capital Markets, LOS 1C,i
Study Session 12 Sample Questions
Asset Valuation: Global Markets and Instruments