Module 1A financial mathematics (PV&FV)
1.You expect to earn $100,000 now and $130,000 in next year. If you decided to
consume $80,000 today and market interest rates were 10% p.a. compounded semi-
annually over the period, how much will you have in one year?
A. $130,000
B. $152,050
C. $150,000
D. $240,000
E. $240,250

2. Mr Rogers deposits $20,000 in a term deposit with BankEast Ltd for 10 years. If the
account is paying interest at a rate of 4% p.a. compounded quarterly, how much
interest will Mr Rogers earn in the final year?
A. $812.08
B. $977.73
C. $1,138.65
D. $1,161.90
E. $9,777.28

3. Which of the following give rise to the time value of money?
A. Negative interest rates and price discovery
B.Liquidity and positive interest rates
C.Liquidity and agency costs
D.Liquidity and inflation
E.Inflation and positive interest rates


Module 1B financial mathematics (Annuity)
1. Optus is considering a new investment opportunity. The investment will
generate $1m per year for 10 years with the first cash flow in one years'
time. The opportunity cost for this type of investment is expected to
be8%p.a.for years 1 to 5 rising to 10% p.a. for years 6 to 10. What will be
the present value of this investment?
A.$6.71 million
B.$6.57 million
C.$6.14 million
D.$6.42 million
E.$7.78 million

2. Volkswagen will invest in an asset to fund its change into electrifying cars.
It is expected to generate a quarterly cash flow forever that will grow at a
constant rate of 10% p.a. compounded quarterly. The opportunity cost of
capital is 15% p.a. compounded annually. How much would the first cash
flow be from such an asset if this asset is currently trading at $1.05 million?
A. $52,500.00
B. $11,085.98
C. $35,680.00
D. $23,876.54
E. $44,962.31

3. A housing loan for $400,000 is repayable over 15 years with monthly
instalments at 4.8% p.a. compounding monthly. Assuming the repayments
are made as scheduled, the amount of the loan outstanding after 5 years
is (choose the closest answer):
A. $211,212
B. $297,044
C. $166,225
D. $266,667
E. $233,775

Module 1C financial mathematics (Risk & return)
1. Given the following information about state of economy:
State Probability of
state
Proctor &
gamble
Expected
rate of
return
Contraction 55% 3.5%
Expansion 45% 18.2%
Calculate the risk (standard deviation of returns) for Proctor Gamble.
A.10.115%
B. Cannot be calculated with the information provided
C.9.158%
D.7.313%
E. 8.241%

2. You have a choice between investing in Asset X that yields 17% p.a. on
average and British Airways shares.
The following year end price and annual dividend data was found for
British Airways:

Which is your preferred choice and why?
A.British Airways shares as the expected return is 18.988%higher than Asset X
B.Asset X as the expected return of British Airways shares is lower at 16.248%
C.Asset X as the expected return of British Airways shares is lower at 13.480%
D.British Airways shares as the expected return is 16.157%higher than Asset X
E.Asset X as the expected return of British Airways shares is lower at 15.215%

3. Sony has an average historical return of 16.3%p.a.and a standard deviation of
5.3%. In which range do you expect the returns of Sony to fall approximately 68%of
the time?
A.5.7% to 26.9% p.a.
B.5.3% to 16.3% p.a.
C.11.0% to 21.6% p.a.
D.6.2% to 18.5% p.a.
E.12.7% to 19.9% p,a.
Module 4 Portfolio Theory
1. Which of the following statements is false? Beta is:
A.A measure of the stock's systematic risk
B.Able to be completely diversified away
C.Tells us how sensitive a stock is to market movements
D.A measure of the stock's market risk
E.Cannot be completely diversified away

2. Market risk is also called:
A.Diversifiable risk and industry risk
B.Systematic risk and diversifiable risk
C.Non-diversifiable risk and systematic risk
D.Unique risk and non-diversifiable risk
E.None of the options

3. Security betas are determined by:
A.overall cycle of the market
B.riskiness of the market
C.market risk difference
D.covariance of a security's returns with the market's returns
E.general direction of the market movement

4. The beta of the risk-free asset is:
A.2
B.0.5
C.-1
D.1
E.0

5. Which of the following is an example of systematic risk?
A.IBM posts lower than expected earnings
B.GDP forecasts are revised downwards as the economy slows
C.Apple announces record sales growth
D.Trade disputes reduce Treasury Wines export sales
E.New regulations impact companies operating in the aged care sector

6. Which of the following statements about the market portfolio is false?
A.The market portfolio lies on the capital market line
B.The market portfolio contains both systematic and unsystematic risk
C.The market portfolio lies on the security market line
D.The market portfolio includes all risky assets in the world
E.The market portfolio is on the efficient frontier


7. What type of investor would prefer portfolios lower on the capital market line
(CML)?
A.Ambiguity-neutral
B.Risk-neutral
C.Risk-loving
D.Risk-averse
E.Variance-neutral

8. The tangency point between the capital market line (CML) and the efficient
frontier of risky assets, in equilibrium, will most likely identify the:
A.Security market line
B.Capital asset pricing model (CAPM)
C.the market portfolio
D. risk-free rate
E.Sharpe ratio

9. An investor can create a riskless portfolio of two risky stocks by using two stocks
with a correlation coefficient of what?
A.-1
B.+1
C.Anything that is less than 0
D.0
E.Anything that is less than +1

10. If the standard deviation of returns on the market is 18%and the beta of a well-
diversified portfolio is
1.65, calculate the standard deviation of this portfolio.
A.12.5%
B.16.5%
C.18.0%
D.29.7%
E.32.3%

11. A portfolio contains 3 securities:


There also exists a risk-free asset with an expected return of 6.7% p.a. Now the
investor wants to combine the original three-asset portfolio and the risk-free asset
into a new portfolio that provides an expected return of 24.3% p.a. Is this possible?
How?
A.No
B.Yes, invest an amount equal to 123.5%in the risk-free asset,and borrow 23.5%at the
risk-free rate
C.Yes, borrow(at the risk-free rate)an amount equal to 123.5%of their investment,so
that 223.5%can be invested in the risky three-asset portfolio
D.Yes, invest 12.35%in the risk-free asset,so that 87.65%can be invested in the risky
three-assetportfolio
E.Yes, borrow(at the risk-free rate)an amount equal to 123.5%of their investment,so
that 123.5%canbe invested in the risky three-asset portfolio

12. What shape is the utility of a risk-averse investor?
A.Convex meaning more risk increases the investor's utility
B.Convex meaning more risk decreases the investor's utility
C.Linear meaning higher risk will result in equal changes in utility
D.Concave meaning more risk decreases the investor's utility
E.Concave meaning more risk increases the investor's utility


13. As you add more and more stocks to your portfolio, which terms contribute most
to your portfolio’s variance?
A.individual stock’s mean terms
B.individual stock’s standard deviation terms
C.stock’s covariance terms
D.stock’s variance terms
E. stock’s covariance terms AND stock’s variance terms equally contribute


14. A portfolio consists of 40% BHP and 60% WOW

a. Calculate portfolio return & portfolio standard deviation
b. Calculate beta of BHP




Module 5 CAPM
1. When dealing with risky cash flows, the most appropriate discount rate is:
A.opportunity cost of capital
B.risk-free rate
C.effective annual rate
D.beta
E.bank interest rate

2. The beta of Microsoft is estimated as 1.58. The expected market risk premium is
10% with a risk-free rate of 3.5%.If you believe that Microsoft's stock will actually
return 21.4%,then according to CAPM:
A.Sell the stock because it is under-priced
B.Sell the stock because it is overpriced
C.This stock plots below the security market line (SML)and,thus, should be bought
D.This stock plots above the security market line (SML)and,thus, should be sold
E.Buy the stock because it is under-priced

3. ANZ shares have an average return of 15%and a standard deviation of 3%. BHP
shares have an average return of 20%and a standard deviation of 8%. The risk-free
rate is 9%.Which of the two companies do you prefer?
A.ANZ as it has a lower Sharpe ratio of 1.375 compared to BHP with a Sharpe ratio of
2
B.ANZ as it has a higher Treyor ratio of 1.6 compared to BHP with a Treynor ratio of
1.2
C.BHP as it has a lower Sharpe ratio of 1.375 compared to ANZ with a Sharpe ratio of
2
D.ANZ as it has a higher Sharpe ratio of 2 compared to BHP with a Sharpe ratio of
1.375
E.ANZ as it has a lower Treynor ratio of 1.2 compared to BHP with a Treynor ratio of
1.6

4. According to the CAPM, the expected return of a security is:
A.positively and nonlinearly related to the security's beta
B.positively and linearly related to the security's beta
C.negatively and nonlinearly related to the security's standard deviation
D.positively and linearly related to the security's variance
E.negatively and nonlinearly related to the security's beta

5. A fund manager’s alpha is that part of the fund’s return that can be contributed to
A. luck
B. systematic risk
C. skill
D. diversification
E. market

6. We want to find the expected return of Coca-Cola. We have a two-factor APT with
the first factor being the stock market (CAPM factor) and the second factor being the
change in GDP. Assume the risk premium for the stock market is 7% and the risk
premium for GDP is 4%. The risk-free rate is 2%. If the CAPM beta is 1.2 and the GDP
beta is 1.5, what is the expected return of Coca-Cola?
A.10.4%
B.12.4%
C.14.4%
D.16.4%
E.18.4%

7. Consider the APT with two factors.Stock A has an expected return of 17.6%,a beta
of 1.45 on factor 1 anda beta of 0.86 on factor 2.The risk premium on the factor 1
portfolio is 3.2%.The risk-free rate of return is5%.What would be the risk premium on
factor 2 if no arbitrage opportunities exist?
A.3.564%
B.9.256%
C.7.751%
D.4.187%
E.9.797%

8. Which pricing model provides no justification for the risk factors selected?
A.Both the CAPM and APT
B.Arbitrage Pricing Theory (APT)
C.Capital Asset Pricing Model (CAPM)
D.Neither the CAPM nor APT
E.No pricing model currently exists that justifies the determination of the risk factors
on any portfolio

9. How does the security market line (SML) differ from capital market line (CML)?
A.CML has beta on x-axis rather than the standard deviation
B.SML has total risk on x-axis rather than systematic risk
C.SML and CML are the same
D.CML has systematic risk on x-axis rather than total risk
E. SML has systematic risk on x-axis rather than total risk

10. Which of following risk-adjusted performance evaluation measures depends most
on systematic risk instead of total risk?
A.Treynor ratio
B.Capital market line
C.Efficient frontier
D.Standard deviation
E.Sharpe ratio


11. Suppose risk-free rate is 3% p.a., which portfolio below has the highest sharpe
ratio?
Portfolios Expected return (%
p.a.)
Standard deviation (%
p.a.)
Portfolio A 4 5
Portfolio B 8 10
Portfolio C 10 16
Portfolio D 10 18
Portfolio E 15 22
A. Portfolio A
B. Portfolio B
C. Portfolio C
D. Portfolio D
E. Portfolio E

12. Suppose that expected market return is 10% p.a. and risk-free return is 3% p.a.
Assuming that the CAPM holds, which of stock below is most under-performing of
the expected return predictions of CAPM?
Stock Expected return (%
p.a.)
Standard deviation (%
p.a.)
Beta
A 15.25 25 1.75
B 10.50 20 1.00
C 7.45 13 0.65
D 9.70 17 1.1
A. Stock A
B. Stock B
C. Stock C
D. Stock D
E. not enough information to determine the result

13. You are a hedge fund manager and need to create a portfolio that will hopefully
outperform the stock market. The expected return and risk of your potential choices
are:
Asset
Expected
return
Standard
deviation
Variance-covariance Matrix
S&P500 8% 16%

S&P500
Real Estate
Fund (REITs)
International
stock fund
Real Estate
Fund (REITs)
12% 20% S&P500
0.0256 0.0128 0.0176
International
stock fund
14% 22%
Real Estate
Fund (REITs)
0.0128 0.0400 0.0088

International
stock fund
0.0176 0.0088 0.0484

The risk-free rate over this period is 3%. All given rates are annual rates.

a) If you choose to hold 25%of your wealth in the S&P500,50%in REITs, and the rest in
the international stock fund, what is the expected return of your portfolio?



b) What is the standard deviation of your portfolio?




c) Suppose the S&P500 is a good proxy for the market portfolio. What are the
individual betas for each asset in your portfolio? What is your portfolio beta?






d) If the actual returns of your portfolio over the last 10 years was 15%. Compare to
your expected portfolio return calculation from part(a), what is the alpha of your
portfolio?





e) Now you are having doubts as to whether the CAPM is the right asset pricing model
for your portfolio and now thinking about using an alternative model, such as the APT,
because your portfolio is exposed to more risk factors than you thought. The betas to
the risk factors and expected risk premium are:
Factor Beta Risk premium
CAPM
(market)
？ ？
Size 1.5 4%
Book-to-
market
0.5 6.5%


Module 2 Firm structure
1. An advantage of a corporation as a business structure is:
A.the potential loss of control for original owners
B.easier to raise capital
C.unlimited liability
D.harder to transfer ownership
E.greater regulation

2. A disadvantage of a company as a business structure is:
A.limited liability
B.an unlimited life
C.an increased ability to raise capital
D.difficulty in transferring ownership
E.greater costs and complexity in establishment and operation

3. Which of the following actions will BEST act to minimise the agency
problem?
A.Increasing the proportion of executive directors on the board
B.Appointing an executive director as chairperson of the board
C.Decreasing the proportion of non-executive directors on the board
D.Ensure executive directors comprise the remuneration committee
E.Increasing the proportion of non-executive directors on the board

4. The board of BankEast Ltd are attempting to align the new CEO's
remuneration with the goals of the company.In doing so they are trying to
help minimise the:
A.Financing problem
B.Agency problem
C.Liquidity problem
D.Dividend problem
E.Investment problem

5. Executive options can be used to address the agency problem in
corporations because:
A.managers must use the options to buy shares even if the share price has
fallen
B.they transfer wealth from managers to shareholders
C.managers must use the options to buy shares even if the share price has
increased
D.they punish managers for falls in the share price
E.they motivate managers to make decisions that will increase the share
price


6. Which of the following is not an example of the agency problem?
A.Executives who receive share options that can be very profitable if the
share price increases
significantly.
B.Managers are paid large bonuses even though the share price has fallen
considerably.
C.A manager who repeatedly awards lucrative supply contracts to a
business owned by his relatives.
D.Companies that have frequent and lavish staff parties and retreats.
E.A CEO who takes friends to dinner and pays with her company credit card.

7. Which of the following is consistent with the corporate objective?
A.To minimise risk
B.To maximise sales
C.To maximise short-term profits
D.To maximise the share price
E.To minimise debt

8. Which of the following is not an example of the investment decision?
A.ABC Ltd buys a new factory complex in Manila
B.DEF Ltd buys 80% of the equity in GHI Ltd for $20 million
C.JKL Ltd buys the patent for new 4G mobile phone technology for a
research centre
D.MNO Ltd repurchases 40% of its outstanding shares from existing
shareholders for $35 million
E.All of the above are investment decisions

9. Slater Surf Ltd recently opened the first wave pool in Sydney and now
plans to roll out wave pools across Australia. The company plans to
purchase $20 million of land in four states and source an $80 million loan
facility from a major bank. The financial decision(s)taken by the
management of the company can be categorised as:
A.Financing decision only
B.Investment and dividend decision
C.Investment decision only
D.Dividend decision only
E.None of these answers is correct

10. The agency problem will not be mitigated through:
A.an appointed board of directors
B.executive remuneration packages that reward managers when they maximise
shareholder wealth
C.well-qualified managers
D.monitoring by auditors, baners, security analysis, and credit agencies
E.the takeover market
11. The decision of choosing the appropriate types of debt and equity
instruments to be used by a firm can also be called:
A.payout decision
B.corporate valuation decision
C.investing decision
D.capital budgetong decision
E.capital structure decision


12. The management of PC Ready Ltd had been poorly managing their
company for many years and as a result Smart Computer Co. successfully
acquired 100% of the outstanding shares of PC Ready Ltd at a substantial
premium to the current market price recently. They then fired the existing
management team and installed a new management team to run the
company. Which of the following mechanisms has best served to maximise
the wealth of PC Ready Ltd shareholders in this situation?
A.Intervention by company regulators
B.Ownership of shares by directors
C.Shareholder voting rights
D.The takeover market
E.Director's remuneration packages


Module 3 Financial markets
1. Rick and Morty are considering buying an apartment, but they would
need to get a home loan to make this possible. Which of the following
financial institutions could they approach for a home loan product?
A.A superannuation fund
B.An insurance company
C.A managed fund or hedge fund
D.A commercial or investment bank
E.A commercial bank,building society or credit union

2. An investment fund that has the purpose of providing the contributor
with funds for retirement and that features government taxation
incentives and compulsory contributions by employers on behalf of their
employees is known as a/an:
A.superannuation fund
B.insurance company
C.managed fund or hedge fund
D.commercial or investment bank
E.commercial bank,building society or credit union

3. What kind of funds exclusively use a passive portfolio management
strategy?
A.Hedge funds
B.Bond funds
C.Venture capital funds
D.Modern funds
E.Index funds

4. Shareholders are said to have a 'residual claim on the firm's assets. What
does this mean?
A.Shareholders can recover their investment first if the firm experiences
financial distress.
B.In the event of liquidation,shareholders do not receive any payoff from
the firm until all creditorsare paid.
C.Shareholders elect the Board of Directors
D.Shareholders have limited liability if the firm experiences financial
distress
E.Cash contributed by shareholders cannot be used to pay creditors

5. If a company goes bankrupt and is liquidated, proceeds from asset sales
are distributed to common shareholders:
A.after debtholders are paid but before preference shareholder claims
B.they have no claims from asset sale proceeds
C.after debtholders and preferred shareholder claims are paid
D.after preferred shareholder claims are paid but before debtholders
claims are paid
E.before debtholders and preferred shareholder claims are paid


6. You recently used your CommSec Broking Account to facilitate the
purchase of 1000 shares in the A2 Milk Company (ASX code A2M) when
they were trading for $18.94 each. This is an example of:
A.a primary market transaction
B.a secondary market transaction
C.a money-market transaction
D.an initial public offering
E.a tertiary market transaction

7. A trademark can be classified as:
A.a financial and intangible asset
B.None of the options
C.a financial and real asset
D.a real and intangible asset
E.a real and tangible asset

8. Mr Ed buys a $10,000 parcel of shares in Apple Inc. As a result, Mr Ed
owns:
A.a liability
B.a financial asset
C.a tangible asset
D.an intangible asset
E.an unreal asset

9. In your role as an investment analyst for Phoenix Capital Partners Ltd
you have gathered the following information about listed companies on
the Fictional Stock Exchange (FSX):
Company
code
No. of
shares
(million)
Stock
price on
1 Jan
2021
Stock price on
31 Dec 2021
AAA 10.5 $10.45 $11.25
BBB 8.8 $11.99 $13.55
CCC 16.9 $6.15 $6.88
DDD 2.7 $28.42 $30.25
EEE 21.3 $5.50 $5.80
Which company has the largest market capitalization on 31 Dec 2021?
A.AAA
B.BBB
C.CCC
D.DDD
E.EEE


10. A financial institution that assists in the initial sale of securities in the
primary market is:
A.mutual fund
B.hedge fund
C.commercial bank
D.investment bank
E.stock market

11. Compare and contrast the activities and client base of investment and
commercial banks

Solution:
The key differences between commercial banks and investment banks can
be seen from two factors: their clients and their operating activities.

Commercial banks:
• Clients: consumers, small-medium businesses, retail investors
• Main activities: accept deposits, make loans, offer basic financial
products.

Investment banks:
• Clients: large businesses, institutional investors, high net worth
individuals, governments
• Main activities: underwrite new debt and equity issues (IPOs), help
with selling shares, mergers and acquisitions, reorganisations, offer
more complex financial products.

It is important to note that some banks have both commercial and
investment banking arms.