Level 2
Examination for The Degree(S) Of Bachelor of Science (Accounting And Economics with Finance) And Other Degrees
Financial Market Theory
Section A – ALL 15 questions are compulsory and MUST be attempted
Each question is worth 2 marks.
1. Investment is the current commitment of money for a period of time in order to derive
future payments that will compensate the investor for:
a. Time
b. Time and Inflation
c. Time, Inflation and Uncertainty
d. None of the above
2. An investor invests £5555 in a stock and sells it later for £8888. The Holding Period
Return HPR is:
a. 37.5%
b. 60%
c. 1.6x
d. 162.5%
3. In the above question what is the Holding Period Yield, HPY?
a. 62.5%
b. 60%
c. 1.60x
d. 160%
4. If the investment was held for five years what is the annual holding period yield?
a. 32%
b. 12%
c. 9%
d. 10%
5. Which of the following statements concerining investing in individual stocks and
bonds is correct?
1. No management fee
2. Realisation of capital gains or losses can be co-ordinated with investors’ personal
tax situations
3. A portfolio can be designed to investor’s specific risk profile
4. Capital gains tax and income tax arising from profitable sales and income is
deferred
a. None of the above
b. All of the above
c. 1 + 2 + 3
d. 2 + 3 + 4
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6. Which of the following statements refers to Weak-form Efficient Market Hypothesis?
1. Current stock prices fully reflect all security market information (including the
historical sequence of prices, rates of return, trading volume data) and other
market-generated information.
2. Security prices adjust rapidly to the release of all public information, including market
and non-market information.
3. Security prices fully react to all information from public and private sources.
4. If a market is weak-form efficent then it must also be semistrong-form efficient and
strong-form efficient.
a. 1
b. 1 + 2
c. 2 + 3
d. 3 + 4
7. Which of the following statements concerning the tests or exceptions to Semi-strong
form efficient market hypothesis are correct?
1. Momentum
2. Reversal
3. Earnings surprise
4. Size effect
a. None of the above
b. 1 + 2
c. 3 + 4
d. All of the above
8. Given a two security portfolio with weightings of 40% and 60% and standard
deviations of 10% and 20% respectively which of the following is the simple weighted
portfolio standard deviation?
a. 15%
b. 16%
c. 14%
d. None of the above
9. Given a two security portfolio with weightings of 33% and 67% and expected returns
of 7% and 12% respectively which of the following is the simple weighted portfolio
return?
a. 8.65%
b. 10.33%
c. 10.35%
d. None of the above
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10. Given a risk free rate of 2%, a Beta of 1.2 and a market return of 10 % which of the
following is the CAPM or SML expected return?
a. 14%
b. 11.6%
c. 9.6%
d. None of the above
11. Which of the following is the standard deviation of an equally weighted two security
portfolio where one security is cash and where the other security has a standard
deviation of 10%
a. 50%
b. 5%
c. 0.223
d. 25%
12. The efficacy of CAPM is easily challenged. Which of the following challenges are
correct?
1. Small firms outperform large firms
2. Stocks with low Price Earnings ratios (PE) outperform high Price Earnings ratio
stocks
3. Stocks with low book-to- market ratios (BTM) outperform high book-to-market
ratios
4. Hi Beta stocks outperform low beta stocks
a. 1 + 2
b. 1 + 3
c. 2 + 4
d. 3 + 4
13. The current or ‘Front-month’ Gold futures contract is trading at $1,320.00 per tonne.
The interest rate or ‘risk-free’ rate is 2% and the annual net convenience yield is -3%.
What is the expected price and basis of the 9 month Gold futures contract?
a. 1,369 and 49 points.
b. 1,386 and 66 points
c. 1,310 and -10 points
d. 1,330 and 10 points
14. Which of the following is a firm’s Free Cash-flow, FCFF, given Cash flow from
Operations is $5,475m, Capital Expenditure is $3,444m, Interest Expense is $141m ,
Income Before Tax is $506m and Income Tax Expense is $161m.
a. $2,070.29 m
b. $2,075.84m
c. $2,132.71m
d. $2,127.16m
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15. Which of the following is the Coefficient of Variation?
a. The return per unit of risk
b. The risk per unit of return and the return per unit of risk
c. The risk per unit of return
d. The return per unit of risk and the risk per unit of return
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Section B – ALL 15 questions are compulsory and MUST be attempted
Each question is worth 2 marks.
The following scenario relates to questions 16 – 20.
At the beginning of last year you invested £6750 in 90 shares of the Buydo Corp. During the
year Buydo paid dividends of £5 per share. At the end of the year you sold the 90 shares for
£95 a share.
16.What is the total HPY on these shares?
a. 25%
b. 33%
c. 18%
d. 30%
17. What percentage of the total HPY was due to the price change?
a. 26.7%
b. 6.7%
c. 80%
d. 20%
18. How much of the total HPY was due to the dividend income?
a. 6.7%
b. 20%
c. 15%
d. None of the above
19. The yield computed in Q16 is a nominal holding period yield. Assuming that the rate of
inflation during the year was 5 percent what is the real holding period yield on the
investment.
a. 5%
b. 20%
c. 125%
d. None of the above
20. What is the real holding period return if the rate of inflation was 3 percent?
a. 1.29x
b. 29%
c. 30%
d. None of the above
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The following scenario relates to questions 21 – 25.
The following information describes the expected return and risk relationship for two stocks.
Expected
Return
Standard
Deviation Beta
Stock X 12.0% 20 1.30
Stock Y 9.0 15 0.70
Market Index 10.0 12 1.00
Risk-free
rate 5.0
Using only the data shown in the preceding table and the following formula,
21. Draw and label a graph showing the security market line and position Stock X and Y
relative to it
22. What is the alpha for Stock X?
23. What is the alpha for Stock Y?
24. State whether the two stocks are undervalued or overvalued?
25. Assume that the risk-free rate increase to 7 percent with the other data in the preceding
matrix remaining unchanged. State whether the two stocks are undervalued or overvalued.