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financial statement analysis
Financial Statement Analysis Equity Investments VOLUME 3 CFA Institute - Solutions
. Which one of the following statements best describes the semi-strong form of market efficiency?A. Empirical tests examine the historical patterns in security prices.B. Security prices reflect all publicly known and available information.C. Semi-strong-form efficient markets are not necessarily
. With respect to the efficient market hypothesis, if security prices reflect only past prices and trading volume information, then the market is:A. weak-form efficient.B. strong-form efficient.C. semi-strong-form efficient.
. An increase in the time between when an order to trade a security is placed and when the order is executed most likely indicates that market efficiency has:A. decreased.B. remained the same.C. increased.
. Which of the following market regulations will most likely impede market efficiency?A. Restricting traders’ ability to short sell.B. Allowing unrestricted foreign investor trading.C. Penalizing investors who trade with nonpublic information.
. Which of the following regulations will most likely contribute to market efficiency?Regulatory restrictions on:A. short selling.B. foreign traders.C. insiders trading with nonpublic information.
. With respect to efficient market theory, when a market allows short selling, the efficiency of the market is most likely to:A. increase.B. decrease.C. remain the same.
. Regulation that restricts some investors from participating in a market will most likely:A. impede market efficiency.B. not affect market efficiency.C. contribute to market efficiency.
. In an efficient market, the change in a company’s share price is most likely the result of:A. insiders’ private information.B. the previous day’s change in stock price.C. new information coming into the market.
. The market value of an undervalued asset is:A. greater than the asset’s intrinsic value.B. the value at which the asset can currently be bought or sold.C. equal to the present value of all the asset’s expected cash flows.
. The intrinsic value of an undervalued asset is:A. less than the asset’s market value.B. greater than the asset’s market value.C. the value at which the asset can currently be bought or sold.
. If markets are efficient, the difference between the intrinsic value and market value of a company’s security is:A. negative.B. zero.C. positive.
. The returns of hedge fund indexes are most likely:A. biased upward.B. biased downward.C. similar across different index providers.
. A unique feature of hedge fund indexes is that they:A. are frequently equal weighted.B. are determined by the constituents of the index.C. reflect the value of private rather than public investments.
. Which of the following is not a real estate index category?A. Appraisal index.B. Initial sales index.C. Repeat sales index.
. Which of the following statements is most accurate?A. Commodity indexes all share similar weighting methods.B. Commodity indexes containing the same underlying commodities offer similar returns.C. The performance of commodity indexes can be quite different from that of the underlying commodities.
. Commodity index values are based on:A. futures contract prices.B. the market price of the specific commodity.C. the average market price of a basket of similar commodities.
. In comparison to equity indexes, the constituent securities of fixed-income indexes are:A. more liquid.B. easier to price.C. drawn from a larger investment universe.
. Fixed-income indexes are least likely constructed on the basis of:A. maturity.B. type of issuer.C. coupon frequency.
. An aggregate fixed-income index:A. comprises corporate and asset-backed securities.B. represents the market of government-issued securities.C. can be subdivided by market or economic sector to create more narrowly defined indexes.
. Which of the following statements regarding fixed-income indexes is most accurate?A. Liquidity issues make it difficult for investors to easily replicate fixed-income indexes.B. Rebalancing and reconstitution are the only sources of turnover in fixed-income indexes.C. Fixed-income indexes
. Which of the following is an example of a style index? An index based on:A. geography.B. economic sector.C. market capitalization.
. Which of the following statements regarding sector indexes is most accurate?Sector indexes:A. track different economic sectors and cannot be aggregated to represent the equivalent of a broad market index.B. provide a means to determine whether an active investment manager is more successful at
. Uses of market indexes do not include serving as a:A. measure of systemic risk.B. basis for new investment products.C. benchmark for evaluating portfolio performance.
. Security market indexes are used as:A. measures of investment returns.B. proxies to measure unsystematic risk.C. proxies for specific asset classes in asset allocation models.
. Reconstitution of a security market index reduces:A. portfolio turnover.B. the need for rebalancing.C. the likelihood that the index includes securities that are not representative of the target market.
. Which of the following index weighting methods requires the most frequent rebalancing?A. Price weighting.B. Equal weighting.C. Market-capitalization weighting.
. Rebalancing an index is the process of periodically adjusting the constituent:A. securities’ weights to optimize investment performance.B. securities to maintain consistency with the target market.C. securities’ weights to maintain consistency with the index’s weighting method.
. Which of the following index weighting methods is most likely subject to a value tilt?A. Equal weighting.B. Fundamental weighting.C. Market-capitalization weighting.
. A float-adjusted market-capitalization-weighted index weights each of its constit- uent securities by its price and:A. its trading volume.B. the number of its shares outstanding.C. the number of its shares available to the investing public.
. If the price return of an equal-weighted index exceeds that of a market-capitalization-weighted index comprised of the same securities, the most likely explanation is:A. stock splits.B. dividend distributions.C. outperformance of small-market-capitalization stocks.
. Which of the following index weighting methods requires an adjustment to the divisor after a stock split?A. Price weighting.B. Fundamental weighting.C. Market-capitalization weighting.
. An analyst gathers the following data for an equally-weighted index:Beginning of Period End of Period Security Price (¥)Shares Outstanding Price (¥)Shares Outstanding A 20.00 300 22.00 300 B 50.00 300 48.00 300 C 26.00 2,000 30.00 2,000 The return on the index over the period is:A. 4.2%.B.
. An analyst gathers the following data for a value-weighted index:Beginning of Period End of Period Security Price (£)Shares Outstanding Price (£)Shares Outstanding A 20.00 300 22.00 300 B 50.00 300 48.00 300 C 26.00 2,000 30.00 2,000 The return on the value-weighted index over the period is:A.
. An analyst gathers the following data for a price-weighted index:Beginning of Period End of Period Security Price (€)Shares Outstanding Price (€)Shares Outstanding A 20.00 300 22.00 300 B 50.00 300 48.00 300 C 26.00 2,000 30.00 2,000 The price return of the index over the period is:A. 4.2%.B.
. When creating a security market index, the target market:A. determines the investment universe.B. is usually a broadly defined asset class.C. determines the number of securities to be included in the index.
. An analyst gathers the following information for a market-capitalization-weighted index comprised of securities MNO, QRS, and XYZ:Security Beginning of Period Price (¥)End of Period Price (¥)Dividends Per Share (¥)Shares Outstanding MNO 2,500 2,700 100 5,000 QRS 3,500 2,500 150 7,500 XYZ 1,500
. An analyst gathers the following information for a market-capitalization-weighted index comprised of securities MNO, QRS, and XYZ:Security Beginning of Period Price (¥)End of Period Price (¥)Dividends per Share (¥)Shares Outstanding MNO 2,500 2,700 100 5,000 QRS 3,500 2,500 150 7,500 XYZ 1,500
. An analyst gathers the following information for a price-weighted index comprised of securities ABC, DEF, and GHI:Security Beginning of Period Price (£)End of Period Price (£)Total Dividends (£)ABC 25.00 27.00 1.00 DEF 35.00 25.00 1.50 GHI 15.00 16.00 1.00 The price return of the index is:A.
. An analyst gathers the following information for an equal-weighted index comprised of assets Able, Baker, and Charlie:Security Beginning of Period Price (€)End of Period Price (€)Total Dividends (€)Able 10.00 12.00 0.75 Baker 20.00 19.00 1.00 Charlie 30.00 30.00 2.00 The total return of the
. An analyst gathers the following information for an equal-weighted index comprised of assets Able, Baker, and Charlie:Security Beginning of Period Price (€)End of Period Price (€)Total Dividends (€)Able 10.00 12.00 0.75 Baker 20.00 19.00 1.00 Charlie 30.00 30.00 2.00 The price return of the
. When creating a security market index, an index provider must first determine the:A. target market.B. appropriate weighting method.C. number of constituent securities.
. Security market indexes are:A. constructed and managed like a portfolio of securities.B. simple interchangeable tools for measuring the returns of different asset classes.C. valued on a regular basis using the actual market prices of the constituent securities.
. The values of a price return index and a total return index consisting of identical equal-weighted dividend-paying equities will be equal:A. only at inception.B. at inception and on rebalancing dates.C. at inception and on reconstitution dates.
. One month after inception, the price return version and total return version of a single index (consisting of identical securities and weights) will be equal if:A. market prices have not changed.B. capital gains are offset by capital losses.C. the securities do not pay dividends or interest.
. A security market index represents the:A. risk of a security market.B. security market as a whole.C. security market, market segment, or asset class.
. The government of a country whose financial markets are in an early stage of development has hired you as a consultant on financial market regulation. Your first task is to prepare a list of the objectives of market regulation. Which of the following is least likely to be included in this list of
. A financial analyst is examining whether a country’s financial market is well functioning.She finds that the transaction costs in this market are low and trading volumes are high. She concludes that the market is quite liquid. In such a market:A. traders will find it hard to make use of their
. A market has the following limit orders standing on its book for a particular stock:Buyer Bid Size(Number of Shares) Limit Price (£)Offer Size(Number of Shares) Seller Keith 1,000 19.70 Paul 200 19.84 Ann 400 19.89 Mary 300 20.02 20.03 800 Jack 20.11 1,100 Margaret 20.16 400 Jeff Ian submits a
. Zhenhu Li has submitted an immediate-or-cancel buy order for 500 shares of a company at a limit price of CNY 74.25. There are two sell limit orders standing in that stock’s order book at that time. One is for 300 shares at a limit price of CNY 74.30 and the other is for 400 shares at a limit
. Consider an order-driven system that allows hidden orders. The following four sell orders on a particular stock are currently in the system’s limit order book.Based on the commonly used order precedence hierarchy, which of these orders will have precedence over others?Order Time of
. A German publicly traded company, to raise new capital, gave its existing shareholders the opportunity to subscribe for new shares. The existing shareholders could purchase two new shares at a subscription price of €4.58 per share for every 15 shares held. This is an example of a(n):A. rights
. A British company listed on AIM (formerly the Alternative Investment Market)of the London Stock Exchange announced the sale of 6,686,665 shares to a small group of qualified investors at £0.025 per share. Which of the following best describes this sale?A. Shelf registration.B. Private
. In an underwritten offering, the risk that the entire issue may not be sold to the public at the stipulated offering price is borne by the:A. issuer.B. investment bank.C. buyers of the part of the issue that is sold.
. You own shares of a company that are currently trading at $30 a share. Your technical analysis of the shares indicates a support level of $27.50. That is, if the price of the shares is going down, it is more likely to stay above this level rather than fall below it. If the price does fall below
. Jim White has sold short 100 shares of Super Stores at a price of $42 per share.He has also simultaneously placed a “good-till-cancelled, stop 50, limit 55 buy”order. Assume that if the stop condition specified by White is satisfied and the order becomes valid, it will get executed. Excluding
. You have placed a sell market-on-open order—a market order that would automatically be submitted at the market’s open tomorrow and would fill at the market price. Your instruction, to sell the shares at the market open, is a(n):A. execution instruction.B. validity instruction.C. clearing
. Currently, the market in a stock is “$54.62 bid, offered at $54.71.” A new sell limit order is placed at $54.62. This limit order is said to:A. take the market.B. make the market.C. make a new market.
. Consider the following limit order book for a stock. The bid and ask sizes are number of shares in hundreds.Bid Size Limit Price (¥) Offer Size 3 122.80 8 123.00 4 123.35 123.80 7 124.10 6 124.50 7 A new buy limit order is placed for 300 shares at ¥123.40. This limit order is said to:A. take
. A market has the following limit orders standing on its book for a particular stock. The bid and ask sizes are number of shares in hundreds.Bid Size Limit Price (€) Offer Size 5 9.73 12 9.81 4 9.84 6 9.95 10.02 5 10.10 12 10.14 8 What is the market?A. 9.73 bid, offered at 10.14.B. 9.81 bid,
. The current price of a stock is $25 per share. You have $10,000 to invest. You borrow an additional $10,000 from your broker and invest $20,000 in the stock. If the maintenance margin is 30 percent, at what price will a margin call first occur?A. $9.62.B. $17.86.C. $19.71.
. 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
. Jason Williams purchased 500 shares of a company at $32 per share. The stock was bought on 75 percent margin. One month later, Williams had to pay interest on the amount borrowed at a rate of 2 percent per month. At that time, Williams received a dividend of $0.50 per share. Immediately after
. A trader has purchased 200 shares of a non-dividend-paying firm on margin at a price of $50 per share. The leverage ratio is 2.5. Six months later, the trader sells these shares at $60 per share. Ignoring the interest paid on the borrowed amount and the transaction costs, what was the return to
. An online brokerage firm has set the minimum margin requirement at 55 percent.What is the maximum leverage ratio associated with a position financed by this minimum margin requirement?A. 1.55.B. 1.82.C. 2.22.
. 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
. 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
. 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
. 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:A. futures contract.B.
. 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
. 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?A. Existence of counterparty risk.B. Standardized
. 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
. Which of the following statements about exchange-traded funds is most correct?A. Exchange-traded funds are not backed by any assets.B. The investment companies that create exchange-traded funds are financial intermediaries.C. The transaction costs of trading shares of exchange-traded funds are
. 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:A. primary market transactions in a pooled investment.B. secondary market transactions in a pooled
. 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
. 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?A. Warrants.B. Commercial paper.C. Repurchase agreements.
. 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:A. futures market.B. primary market.C. secondary market.
. 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:A. capital market instruments.B. money market instruments.C. intermediate-term debt instruments.
. 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:A. derivative
. Which of the following is not a function of the financial system?A. To regulate arbitrageurs’ profits (excess returns).B. To help the economy achieve allocational efficiency.C. To facilitate borrowing by businesses to fund current operations.
. 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,
. 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
. 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
. Candidate B asks Green if she had additional information on Horizon’s industry peers and competitors, to put the profitability estimates in a richer context. By asking for this additional information for their analysis, Candidate B is most likely seeking to mitigate which behavioral bias?A.
. Based on Exhibit 2, forecasted interest expense will reflect changes in Chrome’s debt level under the forecast assumptions used by:A. Candidate A.B. Candidate B.C. Candidate C.
. Based on Exhibits 1 and 2, Candidate A’s forecast for SG&A expenses in 2020 is closest to:A. USD23.8 million.B. USD25.5 million.C. USD27.4 million.
. Based on Exhibits 1 and 2, Candidate C’s forecast for cost of sales in 2020 is closest to:A. USD18.3 million.B. USD18.9 million.C. USD19.3 million.
. Based on Exhibit 2, the modeling approach used by Candidate B to project future net sales is most accurately classified as a:A. hybrid approach.B. top-down approach.C. bottom-up approach.
. Based on Exhibit 2, the job candidate most likely using a bottom-up approach to model net sales is:A. Candidate A.B. Candidate B.C. Candidate C.
. Based on Exhibit 1, which of the following provides the strongest evidence that Chrome displays economies of scale?A. Increasing net sales B. Profit margins that are increasing with net sales C. Gross profit margins that are increasing with net sales
. To validate the forecast for rapid growth in the electronic scooter market over the next 10 years, Fromm speaks to the management of Omikroon and investor relations of ZeroWheel, a competitor. Which behavioral bias is Fromm most likely subject to?A. Confirmation B. Conservatism C. Overconfidence
. Fromm’s estimate of growth capital expenditures included in Omikroon’s PP&E under Scenario 1 should be:A. lower than under Scenario 2.B. the same as under Scenario 2.C. higher than under Scenario 2.
. Fromm’s sensitivity analysis will result in a decrease in the 2020 base case gross profit margin closest to:A. 0.55 percent.B. 0.80 percent.C. 3.32 percent.
. Which factor best justifies the five-year forecast horizon for Omikroon selected by Fromm?A. Factor 1 B. Factor 2 C. Factor 3
. Based on Omikroon’s expectations, the gross profit margin of Omikroon’s electric scooter division in 2021 is most likely to be affected by:A. competition.B. research costs.C. cannibalization by petrol scooters.
. The metric used by Fromm to assess Omikroon’s performance incorporates:A. the degree of financial leverage.B. operating liabilities relative to operating assets.C. the firm’s competitiveness relative to companies in other tax regimes.
. Using Porter’s five forces analysis, which of the following competitive factors is most likely to have the greatest impact on Omikroon’s petrol scooter pricing power?A. Rivalry B. Threat of substitutes C. Threat of new entrants
. If the luxury electronic auto equipment industry is subject to rapid technological changes and market share shifts, how should French best adapt his approach to modeling?A. Examine base rates B. Forecast multiple scenarios C. Speak to analysts who hold diverse opinions on the stock
. The most appropriate response to Wright’s question about the technological development is to:A. increase the required return.B. decrease the perpetual growth rate.C. decrease the price-to-earnings multiple.
. French’s approach to forecasting Archway’s working capital accounts would be most likely classified as a:A. hybrid approach.B. top-down approach.C. bottom-up approach.
. Based on Exhibit 2, Archway’s forecasted gross profit margin for 2020 is closest to:A. 62.7 percent.B. 67.0 percent.C. 69.1 percent.
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