Review Multiple Choice

Questions
(You should write your own comment on each question
based on your own knowledge/understanding)
1- Adding a security that has a low return to an existing portfolio will:

A. lower the overall variability of the portfolio.

B. increase the overall variability of the portfolio.
C. ensure the portfolio achieves a good rate of return
D. None of the above

Answer

Comment: (Please write what you understand)---------------------------------------------

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2- An analysis of domestic returns for the U.S. bond markets ranks fourth out of
six countries. When the impact of exchange rates is considered, the U.S. is the
lowest out of six. This means that the:

A. exchange rate effect for a U.S. investor who invested in foreign bonds was
always negative (i.e. the U.S. dollar was weak).
B. exchange rate effect for a U.S. investor who invested in foreign bonds was
always positive (i.e. the U.S. dollar was strong).
C. exchange rate effect for a U.S. investor who invested in foreign bonds was
always positive (i.e. the U.S. dollar was weak).
D. exchange rate effect for a U.S. investor who invested in foreign bonds was
always negative (i.e. the U.S. dollar was strong).
Answer
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3- Asset allocation is important in determining overall investment performance
because it:

A. helps determine the expected return of the portfolio.

B. determines most of the portfolio’s returns over time.
C. helps determine the risk of the portfolio.
D. None of the above

Answer

Comment: (Please write what you understand)---------------------------------------------

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4- When setting investor objectives in the investment policy statement,
expressing goals only in terms of returns can:

A. lead to inappropriate investment practices by the portfolio manager, such as

the use of low-risk investment strategies.
B. distort the expected outcome.
C. lead to inappropriate investment practices by the portfolio manager, such as
the use of high-risk investment strategies.
D. lead to a misleading outcome.
Answer

Comment: (Please write what you understand)---------------------------------------------

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5- When individuals believe they have sufficient income and assets to cover
their expenses while maintaining a reserve for uncertainties, they are most
likely in the ____________ phase of the investment life cycle.

A. Beginning.
B. Ending.
C. accumulation.
D. spending.

Answer

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6- If a firm increases its financial risk by selling a large bond issue that increases
its financial leverage:
A. investors will perceive its common stock as less risky
B. investors will perceive its common stock as riskier and the stock will move
down
C. investors will perceive its common stock as riskier and the stock will move up
D. None of the above

Answer

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7- The market portfolio is:

A. a completely diversified portfolio, which means that most of the risk unique to
individual assets in the portfolio is diversified away.
B. a portfolio in which both systematic and unsystematic risk has been diversified
away.
C. the portfolio that all investors invest their funds in.
D. a completely diversified portfolio, which means that all the risk unique to
individual assets in the portfolio is diversified away.

Answer
Comment: (Please write what you understand)---------------------------------------------
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8- The Rational model to be followed by financial managers when
making investment decisions should characterized by:

A. equilibrium model that predicts the expected return on a stock given the expected
return on the market and the stock’s correlation coefficient.
B. equilibrium model that predicts the expected return on a stock given the expected
return on the market and the stock’s covariance.
C. equilibrium model that predicts the expected return on a stock given the expected
return on the market and the stock’s beta coefficient.
D. equilibrium model that predicts the expected return on a stock given the expected
return on the market and the stock’s standard deviation.

Answer
Comment: (Please write what you understand)-----------------------------------------------------
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 T & F With Justification
9- The theory of risk-management is based on three basic concepts:
utility, regression and diversification.

10- Musharaka is an investment on the customer’s behalf by a bank.

11- Mudaraba is a project whereby the bank and an investor both

invest capital with both sharing the risks.

12- Inflation rate risk & exchange rate risk are two sides for the same
coin.
Identify whether the key characteristic describes common stock (CS) or
preferred stock (PS).

_____ 1. Source of financing which places minimum constraints on the firm.

_____ 2. Used often in mergers.
_____ 3. Potential dilution of earnings and voting power.
_____ 4. Fixed financial obligation.
_____ 5. Increases the firmʹs borrowing power.
_____ 6. May have cumulative and participating features.
_____ 7. May be convertible into another type of security.
_____ 8. Last to receive earnings or distribution of assets in the event of bankruptcy.
_____ 9. Frequently includes a call feature.
A firm must choose from six capital budgeting proposals outlined below. The
firm is subject to capital rationing and has a capital budget of $1,000,000; the
firm's cost of capital is 15 percent.

Required:
A) Using the internal rate of return approach to ranking projects, which projects
should the firm accept?
B) Using the net present value approach to ranking projects, which projects
should the firm accept?
 Review Multiple Choice Questions

(Select the best choice then write your own comment on each question based
on your own knowledge/understanding)
Three Short Essay Questions
 1- If you had EGP 1 million to invest
today, what would you invest in and
why?
2- What are key factors financial managers should
consider when evaluating prospective
investments?
3- From the investor point of view, there is a great
difference between expected rate of return &
Required rate of return. Explain?